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DOL Rule Will Mean Cheaper Annuities, More Robo-Advice: Cerulli

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The U.S. Department of Labor’s proposed conflict-of-interest rule will likely result in unexpected changes to the retirement and wealth management industries, according to a new report from Cerulli Associates.

Big broker-dealers will seek to serve small balances in individual retirement accounts on a flat-fee and fiduciary basis using developing technology, the report predicts, while insurance companies will have to lower variable annuity expenses and commissions to be in line with other financial products.

“The primary concern of the DOL’s proposal is to expand the definition of fiduciary to cover more instances of providing advice,” Cerulli managing director Bing Waldert said in the report. “This expansion, in turn, is designed to protect consumers from sales practices that may be tainted by a conflict of interest.”

The industry’s resulting cultural evolution is in part what the proposed rule hoped to bring about, Waldert said.

The proposed fiduciary rule creates a best interest contract exemption, which is a contract that the advisor will have to present to a potential client. “Specifically, the financial institution must disclose any variable compensation that the advisor receives for the advice and resultant product sale, and comparative examples of compensation they would have received for other products,” Cerulli managing director Waldert said.

BICE’s fee and compensation disclosure requirements will cause insurance companies to re-evaluate annuity pricing. Cerulli said it expected these companies to introduce share classes with expenses and commissions comparable to other financial products.

According to the report, digital advisor platforms may provide a solution for broker-dealers to work with low balances in individual retirement accounts. Robo-advisors offer scalable trading technology, algorithmic portfolio construction and heavy use of low-cost exchange-traded funds.

They would comply with the DOL rule in that they charge a flat fee. And the consistent advice they deliver and their use of low-cost ETFs would also allay some regulatory risk.

Asset managers and providers have the opportunity to introduce innovative products that address a growing demand for retirement income solutions, the report said.

401(k) investment lineups, it noted, feature a wide variety of retirement income products, spanning fixed-income mutual funds, dividend-paying equity mutual funds and options with a guaranteed component. As yet, however, no single best solution has emerged.

“The true impact of the DOL’s proposed Conflict of Interest Rule may not be immediately felt, but will lead to a period of product and platform innovation at BDs and manufacturers,” Waldert said.

— Check out Cetera Expands Retirement Platforms on ThinkAdvisor.


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