NEW YORK & CHICAGO--(BUSINESS WIRE)--Wealth managers will see differing costs and benefits from the introduction of the Department of Labor's (DOL) "fiduciary rule" as they roll out varying strategies in response to the new regulation, says Fitch Ratings.
The new DOL rule pertaining to conflicts of interest in retirement advice is due to begin to come into effect in April 2017 and will require wealth managers to maintain a fiduciary standard for clients' retirement accounts. This means that wealth managers who manage discretionary retirement accounts will be legally held to higher fiduciary standards and required to make full disclosures regarding conflicts of interest and fees.
Major banks and other players with material wealth management platforms have thus far differed in their strategies for the new rule. Bank of America and JP Morgan Chase have announced that they will move to a purely fee-based model for retirement accounts with set fees charged as a percentage of assets. In contrast, Wells Fargo recently announced that it would continue to allow brokers to charge per-transaction commissions. Morgan Stanley and Edward Jones have also announced that they would maintain commission-based compensation models for retirement accounts.
There will be varying advantages and disadvantages for wealth managers depending on whether they pursue a fee-only or commissions model in response to the DOL rule. Switching to fee-based compensation will mean a simpler product structure and would make revenue generated from these accounts more recurring and potentially more predictable. A fee-based structure could also mean less opportunity for brokers to overtrade client accounts, thus reducing potential legal liability from the introduction of the fiduciary standard. However, these financial institutions could risk losing brokers or smaller clients who do not benefit directly from the introduction of fees.
Those institutions sticking with commissions will see greater broker retention. It will be more cost-effective for clients who have limited trades per year. However, interactions and account orders will need to be well documented to ensure higher compliance standards are met, and this will come with greater operational, compliance and legal costs. Notably, the potential cost of noncompliance could be a significant legal liability.
The DOL rule could also have indirect effects on segments of the financial industry not directly targeted by the rule. Investment managers could face further outflows from actively managed products in favor of passive products deemed to more easily satisfy the fiduciary standard, which, in turn, could pressure investment managers' fee rates.
Insurers too could see an increase in compliance costs from the DOL rule as well as changes in some sales practices, although Fitch maintains that the rule is ratings neutral for that sector.
There is market speculation that the new US presidential administration may seek to modify or delay the implementation of the DOL rule, reflecting President-elect Trump's public statements to roll back some financial industry regulation. However, it remains too early to make any prediction on what specific regulatory changes will be implemented.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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