The Department of Labor’s proposed fiduciary rule will affect about $3 trillion of retirement assets and $19 billion of revenue in the financial services industry, according to analysis from Morningstar.
Morningstar’s report suggests that previous government and industry cost analyses of the rule are low.
Those estimates are focused on the expense of implementing the rule, writes Stephen Ellis, director of financial services equity research at Morningstar.
But simply focusing on the cost of implementing the proposed rule “vastly” underestimates the rule’s potential impact on the financial services industry.
“Investors and business analysts looking only at the more studied implementation costs of the rule are vastly underestimating the rule’s potential impact on the financial sector,” according to Ellis.
He says the high-end estimates put the rule’s cost to industry at $1.1 billion.
The actual cost of the rule will be in the neighborhood of $2.4 billion, twice what other analysis is projecting, says Ellis.
The report says investment managers—it names BlackRock—and wealth management firms—it names Morgan Stanley—could see their business models “drastically” altered.
To this point, the consensus of analysis says the proposal’s Best Interest Contract Exemptions will make commission-based sales of investment products unprofitable for providers.
If finalized as proposed, the rule will enforce a fiduciary standard of care on all investment advisors to the retail market, and on thousands of advisors to defined contribution plans.
Though the rule does not outlaw commission-based sales, the preponderance of experts say that complying with its prohibited transaction rules will be so costly that advisors of IRAs and 401(k)s will be incentivized to charge a fee for advisory services.