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Retirement Planning > Retirement Investing

Under DOL Rule, Are IRA Rollovers Worth Advisors’ Time?

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The Department of Labor’s Conflict of Interest Rule, if implemented in its current form, will force advisors to choose between employer-sponsored retirement plan business and traditional wealth management, according to new research from Cerulli Associates.

If the April 2017 applicability date for the rule is unchanged by the incoming Trump administration, all advisors who serve the retirement market will become fiduciaries under the Employee Retirement Income Security Act. Notably, the rule brings individual retirement accounts under its jurisdiction and places heightened scrutiny on the recommendation to move assets from employer-sponsored retirement plans to IRAs.

In more than 20 qualitative research interviews with asset managers, recordkeepers, broker-dealers and advisors focused on the retirement industry, Cerulli finds that the consensus expectation is that more assets will remain in employer-sponsored defined contribution (DC) plans as a result of the DOL Conflict of Interest Rule in its present form.

According to Cerulli, industry constituents believe that the DOL wants participants to keep their assets in-plan because they are “safer” in DC plans and generally have access to lower-cost investments than they would in an IRA.

According to Cerulli, rollovers are a substantial source of growth in the $7.3 trillion IRA market. Cerulli questions whether this growth will be affected under the DOL fiduciary rule, concluding that the heightened scrutiny of the rollover transaction will likely impact many providers, asset managers and advisors in several ways.

For example, rollovers associated with new advisor relationships will also likely slow because participants may “bristle” at signing the Best Interest Contract without an established rapport with that advisor, according to Cerulli.

According to Cerulli, nearly half (45%) of emerging retirement specialist advisors – advisors that generate less than half of their revenue from retirement plans but explicitly express a desire to build the retirement component of their practice – focus on employer-sponsored retirement plans as a source of new potential wealth management clients.

“With the heightened focus on the recommendation to roll over, Cerulli contends that it will be problematic for advisors to approach defined contribution plans in this manner — specifically, with the objective of growing wealth management assets,” the report states.

In addition to new and emerging advisors, advisors overall who generate less than half of their revenue from retirement plans will also likely struggle under the new fiduciary rule.

The troubling fact is that these advisors make up a majority of the industry. According to Cerulli, the advisors that draw 15% to 49.9% of their revenue from retirement plans make up roughly three-fourths of advisors and those that generate less than 15% of their revenue from retirement plans comprise about one-fifth of the advisor industry.

“Advisors and their broker-dealers are forced to evaluate whether it is worth the additional time, effort, and, most importantly, fiduciary liability to continue pursuing rollover assets,” according to Cerulli’s report. “This evaluation process will necessitate decisions regarding which advisors will participate in the retirement market going forward.”

Cerulli states that the DOL rule will force another round of “in or out” for the population of advisors operating in the retirement market.

“Many advisors will be mandated by their [broker-dealer] or wirehouse to choose between DC plan business and traditional wealth management rather than operate in both channels,” the report states. “Others will arrive at this decision point on their own as they assess whether retirement assets are ‘worth their time and effort’ within the DOL Conflict of Interest regime and its new requirements.”

Despite these new requirements, Cerulli contends that participants with existing advisor relationships will, largely, continue to roll assets to IRAs due to the importance of trust and familiarity with their advisor. Established advisors who generate a minimum of half of their revenue from retirement plan business are also best positioned because they are well versed in trends impacting the retirement market and mostly accustomed to acting in a fiduciary capacity for DC plan sponsors, Cerulli concludes.

However, these advisors with more than half of their revenue from retirement plans make up only a small portion of total advisors in the DC market. Cerulli estimates that there are roughly 6,500 practices that draw greater than half of their revenue from retirement plans – which represents less than 7% of practicing advisors.

For the most part, according to Cerulli, the advisors that remain post-implementation of the DOL rule will either be established retirement specialists or advisors partnered with an outsourced fiduciary provider.

Cerulli believes that if the DOL Conflict of Interest Rule is implemented as is, demand for outsourced fiduciary services in the advisor-sold DC market will increase.

Cerulli expects that advisors will increasingly turn to fiduciary outsourcing providers either because their broker-dealers prohibit them from acting in a fiduciary capacity, or because they “lack the appetite or ability” to take on the greater fiduciary responsibility currently set forth under the new regulation.

One asset manager tells Cerulli that advisors who aren’t considered “retirement plan experts” will likely be mandated by their broker-dealers to use “guardrail” products that outsource fiduciary responsibilities to protect both the BD and the advisor.

This shift will create opportunity for outsourced fiduciary providers, such as Morningstar and Mesirow, to partner with advisors who lack the specialization to act as ERISA 3(21) or ERISA 3(38) fiduciaries for retirement plans, according to Cerulli.

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