With the Department of Labor’s (DOL) fiduciary rule in place, it’s natural to ask how it will affect financial services companies and advisors’ businesses once it’s fully implemented. How much commission revenue might the industry lose and can fees replace that loss? Could the rule cause financial advisors to leave the business?
The short answer is that reliable data to measure the rule’s impact accurately won’t be available it’s been fully implemented. That lack of solid information led companies approached as sources for this article to decline sharing their internal projections. Similarly, industry analysts are waiting for post-implementation financial results.
The U.K. Experience
For a possible preview of upcoming changes, John Anderson, director, practice management solutions with SEI Advisor Network in Oaks, Pennsylvania, cites a May 2016 SEI report that highlights the United Kingdom and Australia’s recent transitions to fiduciary status. Those countries’ products and distribution channels differ from their U.S. counterparts but their experiences could offer insight into what U.S. companies and advisors might encounter.
The U.K. began implementing fiduciary regulations through its Retail Distribution Review (RDR) in January 2013, after a six-year development period. According to a June 2014 report from the London-based Association of Professional Financial Advisers (APFA), the regulation culled advisors’ ranks. There were 40,566 advisors in January 2011; by January 2014 that number had fallen to 31,220. In the bank and building society sectors, the drop was approximately 60 percent. When advisory firm owners were asked about their plans for recruiting new staff, 60 percent reported no plans to hire new advisors or paraplanners within the next two years.
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.”