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.”