The fiduciary rule's effect on recruiting

Many will be forced to merge or will shut down. The sacrosanct IBD 90 percent payout may be reserved for big producers.

Recruiting effect

The fiduciary standard will have far-reaching consequences for advisor recruiting. Over time, hiring firms will increasingly reward advisors with business models that dovetail with the new standard. Wirehouses have been offering their biggest deals to fee-based producers for a while, but now that trend will accelerate. Advisors who can’t or won’t wean their clients away from transactional business will continue to be out of favor and will receive smaller deals.

As advisors migrate their businesses toward larger fee-based accounts, their incomes may take a hit. Advisors who suddenly find themselves earning less will jump ship more. Recruiting bonuses from rival firms will help many advisors to recoup their losses.

The new standard applies only to a subset of the wealth management universe: commission-based assets held in retirement accounts. That’s a nice piece of business: Morningstar Research estimates that $3 trillion of the $7 trillion AUM in IRA accounts are transaction-based. They generate $19 billion in revenues, or 30 percent of client assets for full service firms.

The $64,000 question is to what extent the DOL’s new compliance regimen will ultimately affect rulemaking for all types of investment accounts. Some experts like Chris Winn, founder and CEO of compliance consultancy Advisor Assist, feel that changes in regulations governing investor accounts outside of the retirement area will be incremental. “The DOL’s fiduciary standard,” he says “might nudge things along a little bit.”

Broker-dealer revenues will be challenged in other ways. First, Morningstar estimates that prohibited transactions under the fiduciary standard currently generate $2.4 billion in revenue. It’s not clear what the revenues would be for these accounts under a fee-based regimen.

Breakaway brokers from wirehouses who opt for independence will continue to favor larger IBDs and larger RIAs that have the heft to handle increasing compliance costs.

Wirehouses and RIAs will remain destinations for advisors focused on the 401(k) marketplace. RIAs not only already are fiduciaries but have a business model that appeals to larger 401(k) plans. Deep pocketed wirehouses have the resources to dedicate to this marketplace. That includes the breadth of platform, technology and specialized training required to service these accounts.

This is the latest in a thousand cuts to Wall Street’s business model. First the Sarbanes-Oxley Act — a punishment for the Enron scandal. Next, the Dodd-Frank Act outlawed proprietary trading and forced firms to keep more of their capital in reserve. The fiduciary standard is the latest chapter in the story. Wall Street will survive but will not be as profitable as before.

Check out our coverage of the fiduciary rule here.

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