Analysts: DOL Rule Will Depress Client Fees

By Brian O'Connell

The Department of Labor has said its new fiduciary rules are intended to eliminate conflicts of interest created by high commissions.

But financial industry groups say overhead costs and, ultimately, fees are going to be affected as well.

“The Department of Labor’s fiduciary ruling is quite possibly the most significant regulatory action that financial advisors have faced in more than a decade,” stated Market Strategies, a Boston-based financial marketing services firm. “Many asset managers and distributors are spending millions of dollars in anticipation of the types of support advisors will need to adapt.”

The DOL rules, which were published in April, require all financial advisory firms to be compliant by Jan. 1, 2018. All told, the decision will impact an estimated $20 trillion in U.S. retirement assets, according to Vestmark, a financial/technology firm in Wakefield, Mass.

In an August 2016 study, Vestmark reports that only 9 percent of U.S. financial advisory firms are “prepared to address the DOL ruling.”

“The advisory role is becoming ever more precarious in the wake of increased volume and scope of internal and external regulations. Advisors report feeling increasingly monitored rather than supported by their firms,” said Sonia Sharigian, senior product manager and report co-author at Market Strategies. “Couple that with an aging advisor population and fewer advisors entering the profession, and it’s clear the industry is at a pivotal juncture. Providers must be sensitive to all the different forces at play.”

Client Fees an Issue

One area where money managers express particular concern is in client fees – specifically, how the ruling will impact their ability to draw fees on widely popular investment vehicles like exchange traded funds (ETFs).

“I would agree that the drop in ETF pricing we’re seeing right now is in part due to the DOL ruling, however, it is in an indirect way,” said Joseph Hosler, a money manager at Auour Investments in Wenham, Mass.

The DOL rules are causing many independent broker-dealers to move their commission-based reps to fee-based financial advisers and making those advisers move away from actively managing client funds, Hosler explained.

“Going forward, the independent broker-dealers are looking to embrace money managers to produce core strategies,” he said.

Those strategies include:

* Reduce compliance issues.

* Improve client returns.

* Add a new revenue source through firm based models.

* Increase the productivity of their reps by having them in front of clients more of the time. “To do this, we have seen, and benefited from, broker-dealers outsourcing the investment operations to ETF strategist as a lower cost and typically more robust investment offering,” Hosler said.

'Some Are Unclear'

Braden Perry, a financial planner with Kennyhertz Perry in Kansas City, said the investor migration from high-fee to low-fee products (like ETFs) “will be significant and advisors are being more active in the ETF market because of this. The DOL rule will likely have consequences on the market, and some are are unclear at this time.”

Others in the financial planning industry generally agree with that sentiment, but say fee changes will take on many forms.

“For instance, the DOL rule may have little impact on managed accounts, but could have an impact for qualified accounts because of the new fee benchmarking requirement,” said David Knoch, president of 1st Global, an independent wealth management firm in Dallas. “Even before the DOL rule was released, there was a trend of financial advisors competing on fees as opposed to value. Not all do this of course, but there is certainly a trend across the industry.”

The introduction of new digital advice solutions, or at least the popularization of these strategies, has caused increasing price competition, he added.

“This will cause pricing to bifurcate, with the commoditized investment management work causing advisor fees for these services to decline, and there will be a shift to using financial planning fees to price value or the comprehensive advice portion of the service model,” he stated.

The DOL rule's requirement for benchmarking of fees in IRAs will only serve to accelerate this shift, as many advisors will find it safer to be on the low side of fee ranges rather than prove the value for the higher side, Knoch said.

“Since financial planning is a fiduciary service, but not necessarily tied to a retirement account, advisors will continue to use financial planning fees as a way to price value, with the caveat that the service will actually need to be delivered,” he said.

Knoch does see opportunity for advisors, in an otherwise volatile business climate in 2016.

“Scale will be key for survival in this new world and we have that,” he said. “Lower (financial product and service) costs will attract more consumers, which will result in more sales, and everyone will win. If you take a customer-first approach you will be a market leader in the post-DOL ruling world.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].