Exchange-traded funds will be among the products the Department of Labor zeroes in on to make sure they can pass fiduciary muster.
While ETFs aren’t likely “the primary [or] the most obvious place for the Department of Labor and regulators to scrutinize” under the new DOL fiduciary rule, “ETFs are an evolving financial innovation,” as the recent Morningstar ETF Conference in Chicago highlighted, Michael Wong, a senior equity analyst at Morningstar, told ThinkAdvisor.
“Actively managed ETFs, strategic beta ETFs and a proliferation of thematic ETFs mean that there’s potential for bad apples worth investigating,” Wong said.
Indeed, in a Thursday panel discussion Wong moderated about the DOL rule, Joe Craven, managing director at BlackRock, told attendees that compliance with DOL’s rule is akin to the second-most famous line from the blockbuster hit, “Jerry Maguire”—“You had me at hello.”
“As soon as you say hello, you’re a fiduciary,” Craven said.
Craven, who spoke on the panel with Gib Watson, vice chairman of Envestnet, said he’s spent “60% to 70%” of his time over the past 10 months pouring over the DOL fiduciary rule.
He warned registered investment advisors that just because they are already fiduciaries doesn’t mean there are “no worries” for them. IRA rollovers, he said, are now a fiduciary recommendation. “That’s the biggest difference for an RIA, and the litigation risk is going to be higher” regarding these recommendations.
Also, he said, RIAs need to be assessing the mutual fund share classes they offer to clients, as well as reassessing “their business model.”
Wong noted that DOL’s rule will also “ripple out” to other segments of the advisory community—to mutual fund providers, distributors like wealth management firms, insurance companies as well as individual investors. “Very large companies have made some pretty dramatic moves already” because of what DOL’s rule is going to do to their sector, he said.