Advisors have been repeatedly polled and lectured about the now-uncertain Department of Labor new fiduciary standard. But how do clients feel?
A recent J.D. Power survey finds that a delay and even a weakening of the standard would suit most of them just fine.
Almost 60% of investors paying commissions say they either “probably will not” (40%) or “definitely will not” (19%) stay with their current firm if they must move to fee-based retirement accounts.
“While [J.D. Power’s] annual Full Service Investor Satisfaction Study supports the intuitive hypothesis that current fee-based investors are generally more satisfied with what they pay their firm than those who pay commissions, findings of J.D. Power’s DOL Special Report show there is significant resistance among those commission-based clients — especially the high net worth — to being forced to migrate to fees,” said Michael Foy, director of the research firm’s wealth management practice, in the report.
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In fact, the group’s February poll finds that a quarter, or 25%, of high-net-worth investors “definitely would not” switch to a fee-based account if it had a 1% fee. More than half, or 52%, of investors with $1 million or more in investable assets “definitely would not” move a fee-based account that charges 2%.
They are not alone. Many other, generally younger investors also are not likely to move to fee-based accounts. In fact, 61% say they are not likely to make such a move; 35% state they “probably would not” switch, and 26% state they “definitely would not” do so.
Among the large wirehouse firms, Morgan Stanley and Wells Fargo say they intend to keep commission accounts as options for retirement account investors. Merrill Lynch, which originally said it intended to abandon such accounts, is now reconsidering this stance.
IRA assets total close to $8 trillion, the Investment Company Institute says. The fiduciary rule is expected to affect about $3 trillion in client assets and $19 trillion in wealth management industry revenue, according to Morningstar research.
The new fiduciary standard is “a significant money-in-motion event [that] will undoubtedly create winners and losers among industry firms, with the outcomes determined by how effectively they can communicate and deliver on the unique value proposition they provide to those segments of the market in which they choose to compete,” Foy explains.
“While the ultimate fate of the DOL fiduciary rule as regulation now appears uncertain, many industry firms are making clear their intention to move forward — regardless of what happens on the regulatory front — with significant business changes originally initiated by expectation of the rule going live in April,” he added.
What to Do?
Investors who do not want to pay fees to broker-dealers ending commissions in retirement accounts can (of course) find other full-service firms to work with, the J.D. Power report says. They also can move to a self-directed or robo-service model that allows them to pay commissions or lower fees.
“The good news for firms that provide these alternatives is that many younger investors appear open to both, though older and more affluent clients may be more likely to seek another full-service firm that will continue to support commission-based retirement, of which there will be many, especially if the DOL rule is ultimately not implemented and the best interest contract exemption (BICE) requirement is dropped,” explained Foy.
Firms that do not offer investors alternatives “are likely to lose clients across the board, and in some cases their advisors may leave with them,” he said.
The J.D. Power survey, which includes the opinions of about 1,000 full-service investors, also reveals that more than half (56%) of Gen X and younger investors (ages 18 to 52) would be open to moving to a robo-advisor vs. just about one-fifth (19%) of boomer and older investors (ages 53 and older).
Close to two-thirds (62%) of Gen X and younger investors also would be amenable to considering self-directed IRAs vs. 36% of boomer and older investors wishing to remain in a commission-based account.