Short-term pain, long-term gain?

The DOL fiduciary rule is likely to particularly challenge new advisors in the U.S., says Anderson. Front-loaded commissions historically helped this group earn a living in their early careers as they established themselves. But level fees, although more valuable in the long run, are much lower initially than commissions. “It’s much harder to make a living in the early stages of being an advisor when you’re charging, maybe call it, 100 basis points versus getting that 5 percent upfront,” he points out.

U.S. Industry Impact

There is some good news from the U.K. market. The APFA study found that while the number of advisors fell, regulated financial advisory firms’ revenue held steady and profits grew over the three years. In the U.S., firm size could determine which firms survive and prosper. An August 2015 report from the Financial Services Institute and Oxford Economics stated that larger firms that can more absorb compliance costs more readily and make required technology and infrastructure investments will fare better than their smaller competitors. The report’s outlook for independent broker-dealers was pessimistic, citing relatively higher operational costs, unavoidable conflicts of interests in their product lines that will require Best Interest Contract Exemptions (BICE) and disproportionate service of small retail investors.

Other analysts are projecting revenue declines based on companies’ current business lines. Keefe Bruyette & Woods Inc. analyst Ryan Krueger is reported as forecasting earnings declines of 1 percent at the largest variable annuity sellers, including Lincoln Financial Group, MetLife and Prudential Financial.

Anderson notes that financial product manufacturers will be forced to redesign existing products and create new ones to meet the DOL rule. Consequently, distributors such as brokerage firms will experience short-term declines in commission revenue followed by longer-term increases as fees replace commissions, he maintains: “I don’t have any statistics … but my overall feeling is that for the next two or three years you’re going to see a major drop in revenue until the firms figure it out. Then you’re going to start to see that revenue building up again as they start to increase their business, as they start to grasp their arms around how they can make money or how they make profits in the future.”