Study: Fee-Based Advice to Soldier on Regardless of Rule Outcome

Regardless of the long-term fate of the Department of Labor’s fiduciary rule, advisors in broker-dealer channels will continue shifting to fee-based products and passively managed investments, a new survey found.

Broker-dealer advisors are also expected to disengage from smaller, less profitable clients. Likewise, these advisors say they expect changes in how they manage rollovers from employer-based retirement plans, concluded the survey published Tuesday by the consulting firm Practical Perspectives.

Trends toward fee-based products and on relying on passive investment strategies aren’t new, but the fiduciary rule gives further impetus to the shift, said Howard Schneider, president of Practical Perspectives.

“The DOL rule seems to propel them even more” to fee-based products, and index and exchange traded funds (ETF) Schneider said.

Results were published in a 30-page report titled “Financial Advisors and Insights on Implementation of the DOL Fiduciary Rule, Q3 2017.”

IBD Advisors Underprepared

Siding with many advisors, the Trump administration has delayed key parts of the rule until July 1, 2019, pending further review.

But the delay, which came after the industry had prepared for months to implement the rule, has only managed to inject uncertainty and sow a divide across distribution channels, the report found.

Advisors working through independent broker-dealers, or IBDs, and who view the rule with trepidation, seem unsure of how to proceed during the hiatus, the report said.

Registered investment advisors (RIA) and advisors who work through regional or nationwide broker-dealers, however, face less of an inconvenience due to the delay in implementation, Schneider said.

That’s because fee-based and fee-only RIAs already follow a fiduciary standard and because advisors working through big broker-dealers and nationwide distributors receive more compliance support than IBD advisors.

Only 31 percent of IBD advisors say they are well prepared for the rule’s implementation, compared with 50 percent of advisors in the full-service and RIA channels, the survey found.

Many RIAs, in fact, welcome the fiduciary rule and had already structured their business around fee-based advice.

Nearly one in two advisors surveyed – 47 percent – said the rule would cause them to use more fee-based or advisory programs. In addition, 43 percent of respondents said they would change how they work with clients rolling over assets from an employer plan.

Twenty-six percent of advisors said they would increase their use of passively managed investment products and 21 percent said they would increase their use of fee-based or low-cost annuities, the survey found.

About 300 advisors submitted online responses in early August.

Fiduciary rule proponents say it protects retirement investors, but many advisors say the rule is too complicated, unnecessary and may cause them to drop less profitable clients.

Fee-Based Products Present Own Challenges

Even so, fee-based products aren’t without their challenges, Schneider said.

Advisors questioned if they should accept a fee from a fee-based income annuity, for example, since there’s no active management involved.

“They have questions around that and looking around for guidance from firms or regulators” to make sure they won’t run afoul of the rule, Schneider said.

Fee-based annuity sales make up a tiny portion of overall annuity sales, but with insurance companies releasing dozens of fee-based annuities over the past year, it’s only a matter of time before advisors warm to them, he added.

Whether the rest of the fiduciary rule goes into effect in 2019, or even if lawmakers decide to gut the rule, a fiduciary framework is taking hold and advisors who work through BDs recognize it, Schneider said.

As a result, many broker-dealers of are deeply involved in offering advisors fee-based products and implementing fiduciary procedures.

Research Conducted Before Rule Delay

The survey was conducted before Labor Department regulators announced an 18-month delay to the second phase of the rule, Schneider said.

The second phase, delayed until July 1, 2019, deals with exemptions that regulate the sale of annuities sold with retirement funds. Phase two includes the Best Interest Contract Exemption, which advisors consider burdensome.

The exemption requires a financial institution to accept liability for each contract and gives clients the right to sue over investment advice.

A delay was widely expected and considered a win for the financial services industry.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].