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Morningstar Details DOL Impact

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Morningstar analyst Stephen Ellis has taken a close look at the costs the financial services industry will have to cover and the adjustments it will make if — or most likely when — the proposed Department of Labor fiduciary standard goes into effect in 2016. Overall, Ellis says in an online article, the new rules are likely to impact some $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.

“We assess that the U.S. Department of Labor’s proposed conflict-of-interest, or fiduciary standard, rule could drastically alter the profits and business models of investment product manufacturers like BlackRock and wealth-management firms like Morgan Stanley serving retirement accounts,” explained Morningstar’s director of financial-services equity research.

Ellis says that the business analysts and government researchers, who have put a $1.1 billion price tag on what the overall industry will lose in business “are vastly underestimating the rule’s potential impact on the financial sector.” His team’s low-end estimate of transaction revenue prohibited under the fiduciary standard, “is more than double that at $2.4 billion,” he states, relying on Morningstar data.

Full-service wealth managers, such as the wirehouse broker-dealers (Morgan Stanley, Merrill Lynch, Wells Fargo and UBS) may be able to convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs, according to Ellis. “As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry,” the analyst said.

Under the new rules, full-service wealth shops are likely to rid themselves of clients with low account balances, which will benefit robo-advisors and other players to the tune of an estimated $250 billion to $600 billion of IRA assets, the Morningstar analyst states. “Capturing a fraction of these loose assets will bring stand-alone robo-advisors much closer to the $16 billion to $40 billion of client assets that we believe they need to become profitable,” he added.

The Morningstar analyst and his colleagues believe more than $1 trillion of assets could flow into passive investment products due to the DOL proposal. “The increase would be from higher adoption of robo-advisors, increased usage of passive investment products from financial advisors that formerly may have been swayed by distribution payments, the proposed ‘high-quality, low-cost’ exemption, and the effect of advisors trying to balance out higher explicit financial planning charges,” Ellis explained.

This shift will be beneficial to firms like Charles Schwab along with passive investment management firms such as State Street and robo-advisors. Some life insurance companies may be “challenged” by the pending fiduciary shift, Ellis says. This is because, he argues, they are poised to lose business to companies with more flexible “economic moats” that allow them to disrupt today’s investment-product distribution landscape.


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