Winners and Losers in a Post-Fiduciary World
May 31, 2017 by Daisy Maxey
The Labor Department’s decision to let the fiduciary rule take effect in 2½ weeks will be a bane or a boon to a host of players from robo advisers and providers of index funds to brokerages and annuity providers.
Registered investment advisers and providers of index and exchange-traded funds are among the parties that stand to benefit from the rule. But the rule, which requires that stewards of retirement savings act in clients’ best interest, may pinch some full-service wealth-management firms, alternative asset managers and annuity providers.
Investors, depending on whom is asked, could benefit or suffer under the rule. Advocates say the rule will protect them from receiving conflicted advice that can weigh on returns and not be the best or most cost-effective solution. Opponents say small investors may be cut off from some forms of advice as firms look to comply with the rule.
“The jury is somewhat out on how much, if at all, investors will benefit,” says William Birdthistle, a law professor at the Chicago-Kent College of Law at the Illinois Institute of Technology who specializes in investment companies. “The Obama administration quantified the costs of conflicted advice by broker/dealers under the suitability standard at $17 billion per year, but I don’t think it’s likely that this change will immediately direct all that money back into investors’ hands.”
Still, the fiduciary rule “has wide-ranging effects across the financial sector—from product manufacturers and wealth-management firms to individual financial advisers and investors—and investors would be wise to keep it on their radar,” says MIchael Wong, a senior analyst with Morningstar Inc.
Fund companies that manufacture relatively low-cost index mutual funds and ETFs appear to be clear winners from the rule’s implementation, experts say. The fiduciary rule doesn’t say that an adviser has to choose the least expensive product for a client, but choosing a relatively low-cost index fund or ETF would be “the safest bet” for brokers adherence to a fiduciary standard, says Mr. Wong.
The fiduciary rule “puts more of a focus on cost, and generally, when you’re looking at active funds, it just complicates things—with the revenue sharing arrangements between the firms,” he says.
Vanguard Group, which is the heavyweight when it comes to assets in low-cost index funds, and BlackRock Inc., which offers index funds and the low-cost iShares ETFs, are two likely winners, says Greggory Warren, a senior stock analyst at Morningstar.
But those asset managers that focus more heavily on relatively higher-cost actively managed investments stand to suffer as the fiduciary rule will likely result in fewer sales of such investments. Waddell & Reed Financial Inc. may suffer as it has some funds with lackluster performance and higher fees, Mr. Warren says. And Gabelli Funds could also see reduced sales because the performance of some of its funds has been “pretty poor,” and its fees are relatively high, he says. Waddell & Reed and Gabelli Funds weren’t immediately available for comment.
Among wealth managers, registered investment advisers should benefit because they’ve always worked under a fiduciary standard, and with the fiduciary rule in effect, they’ll be working on a more even footing with brokers. “They won’t likely have to change their practice that much,” says Mr. Wong.
But the rule will also decrease the differentiation between registered investment advisers and the brokers who now receive commissions, he says.
“Before, RIAs could say that they were working under a [Securities and Exchange Commission] fiduciary standard, and were held to a higher standard,” says Mr. Wong. “Now, brokers, at least for retirement accounts, can say, ‘We’re held to a DOL fiduciary standard.’ To the extent that RIAs are using that as a point of differentiation, that will be somewhat diminished.”
For full-service financial advisers, such as Bank of America Corp.’s Merrill Lynch, Morgan Stanley , Raymond James Financial Inc. andWells Fargo & Co.’s advisory, those with more fee-based accounts will likely fare better.
How well these brokers fare will also depend on how well they adapt to the rule’s requirements. For those firms that move IRAs to fee-based accounts from commission-based accounts, it’s a positive, says Mr. Wong. Merrill Lynch, for example, is moving most retirement savers who pay a commission to accounts that charge a fee based on a percentage of assets or shifting them to Merrill Edge, where they can direct their own investments or use its new robo adviser.
When it comes to selling annuities, the bar will also be raised and many sellers stand to be hurt by the rule. Advisers will have to determine whether a specific annuity recommendation is prudent for a client, which will require an in-depth understanding of what can be complex products as well as the clients’ needs.
Annuity providers will likely launch new products that work with fee-based accounts, says Mr. Wong, noting that Nationwide Mutual Insurance Co. recently acquired Jefferson National Insurance Co., which specializes in fee-based products.
But the National Association for Fixed Annuities trade remains in opposition to the rule and is critical of its impact. “NAFA continues to be concerned with the adverse consequences that will result to everyday Americans and the entire annuity industry once this harmful rules takes effect,” said Chip Anderson, NAFA’s executive director.
Write to Daisy Maxey at daisy.maxey@wsj.com
