The April 10, 2017 effective date of the DoL fiduciary rule will find advisors exposed to compliance and litigation risk if they do not comply with over 1000 pages of regulation.
In short, the rule requires advisors who give retirement-related financial advice to act in the best interest of their clients. Though this sounds simple, it has huge implications on all aspects of the business, including fee structures, the products one could recommend, back office operations, documentation and IT.
Pundits have poured much ink on what might, should or could happen once the rule goes effective. As April draws nigh, many players, though not all, are starting to adapt to the post-fiduciary world.
Here is a non-exhaustive list of what's actually being done.
Merrill Lynch enforces commission-based compensation for retirement savers
Just last week
Merrill Lynch told its more than 14,000 brokers that they would not be able to charge per trade commissions on retirement accounts. Brokers instead will have to charge a fee based on a percentage of assets.
Per trade commissions aren't considered fiduciary as they might incentivize advisors to recommend trades that might not be beneficial to the client, but that benefit the advisor. A flat fee eliminates that incentive by changing the relationship from a sales relationship to ongoing advice.
Morgan Stanley, in its initiating
coverage on four retail brokers, Charles Schwab, TD Ameritrade, E*Trade and LPL Financial, claimed shifting to the advice model would open a $22 trillion wealth pool for the brokers, driving revenues to $36 billion for the industry with mid-term earnings per share upside.
LPL standardizes commissions
LPL Financial also recently standardized its compensation structure. The firm set commissions on variable annuities to a
standard 5.5% in May and also made plans to limit mutual fund sales commissions to a range between 3 and 3.5 percent
In addition, the company is
phasing out direct ownership brokerage accounts, and ramping up advisory products, including a roboadvisor program with a $5,000 minimum that includes BlackRock funds.
Nationwide to acquire Jefferson National, expands footprint in fee-based advice.
In late September, Nationwide announced it will acquire Jefferson National, a distributor of tax-advantaged investing solutions for registered investment advisers, fee-based advisors and their clients.
“Partnering with the Jefferson National team will enable Nationwide to expand our distribution footprint and meet the needs of investors and retirement savers who want to do business in a fee-based advisor environment after implementation of the DOL fiduciary standard,” said Nationwide CEO Steve Rasmussen. “This will complement our strong brokerage distribution channel and allow customers to do business with us in the manner they prefer."
State Farm cuts agents from mutual fund and variable annuity sales
State Farm, which has more than 18,000 agents,
directed 12,000 of them to cease providing their clients with mutual funds, variable annuities and other investment products. After the effective date, clients will have to turn to a "self-directed call center" rather than their agents for help with their retirement accounts.
Many of the fiduciary rule opponents claimed that smaller retirement accounts may be orphaned, as lower fees will make them unprofitable for brokers. This move seems to strengthen their argument, though it is very possible new players will come in.
IMOs file for financial institution status under DoL Fiduciary Rule
Under the DoL Fiduciary Rule, only banks, insurance companies, broker-dealers and registered investment advisors are defined as financial institutions.
Recently, AmeriLife, an Insurance Marketing Organization,
filed for financial institution status that will allow its agents to keep selling retirement-related products under the new DoL rule. AmeriLife is the eighth IMO to file for such status. One main hurdle the IMOs will need to pass in order to qualify is convincing the regulators they are able to properly monitor and oversee their army of independent agents. Some restructuring will be needed.
BlackRock, expecting higher demand following DoL rule, slashes ETF prices
BlackRock is
expecting the DoL rule to increase demand for ETFs for their cost-efficiency. In order to take advantage of that demand, BlackRock is repricing its U.S. iShares Core ETFs
“This is another critical milestone to help advisors as they prepare for the major shift the DoL fiduciary rule requires – providing investors with quality index exposures at great value in the center of their portfolios,” said Salim Ramji, head of BlackRock's U.S. Wealth Advisory business. “These enhancements to the iShares Core are the latest innovation by BlackRock to help advisors build better portfolios for investors.”
Accenture, Fidelity launch software solutions to help wealth managers comply with DoL rule
One of the main challenges wealth advisors face when trying to comply with the new standards is implementing decisioning capabilities to ensure clients' best interests are taken into account. This process needs to be meticulously documented in order to be defensible in court in case of a lawsuit.
Accenture Wealth Management aims to do that with its Compliance Solution for Salesforce. The solution captures client data like investing experience, risk tolerance and investment goals to be used to support Department of Labor compliance. It also guides advisors through the product selection process, which can be used for a wide array of retirement and insurance products, and helps ensure that investment rationale suitability and client best interests are considered.
Similarly, Fidelity added compliance functions to its eMoney Advisor financial planning platform to help advisers meet the DoL requirements. More such solutions, like
Envestnet offers, are coming to the market in growing numbers.
