Financial advisory firms are hunkering down for another hit to their bottom line: The fiduciary standard is on its way. First stop: retirement accounts. And I predict a second stop is not far behind: everything else.
Once the camel’s nose is in the tent, the rest of the camel can’t be far behind. It’s not feasible for an advisor to service accounts with two different sets of standards.
Now this change from the Department of Labor has long been in the making. As I see it, there will be major consequences that will affect each advisory channel differently. There are definitely some winners and losers here:
Being in the fiduciary business, they will not have to dedicate resources to getting up to speed with the new requirements. Their ranks will continue to grow. Former wirehouse advisors will find them a welcome refuge from FINRA and DOL rulemaking.
Expect everyone to court them now more than ever. Fee-based advisors with mostly $250,000 plus relationships will be especially prized.
It’s official: they are now more of a burden to supervise and will have a harder time doing business.
Advisors loaded up with annuities and REITs paying 7 percent gross commissions.
These are soon to be obsolete products. Firms won’t pay up-front money for this business.
Smaller producers with less than $300,000 in gross will have a hard time finding a home. Too much risk; not enough reward. Many will exit the business and sell their books. The price of a book of business will dip.
Their technology costs to comply with regs will go up; and they will lose platform fees, that is, “pay to play” payments from asset managers on their platforms.
Many will be forced to merge or will shut down. The sacrosanct IBD 90 percent payout may be reserved for big producers.
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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