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Quarter-End Insights

Financial Services: Fiduciary Standard Rule Could Have Drastic Impact

The Department of Labor's proposed rule could affect around $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.

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  • Our overall financial services sector valuation remains attractive at a price/fair value ratio of 0.90. Similarly, the real estate sector remains undervalued at a price/fair value ratio of 0.97.
  • We assess that the U.S. Department of Labor's proposed conflict-of-interest, or fiduciary standard, rule could drastically alter the profits and business models of investment product manufacturers like  Waddell & Reed Financial (WDR) and wealth management firms like  Morgan Stanley (MS) serving retirement accounts.
  • In Australia, against the backdrop of a slowing economy, we have been surprised by recent strength in specialty retail sales performance.
  • We expect REIT prices generally to move inversely with changes in long-term government bond yields. Higher interest rates would take some time to show up in REIT financial metrics, but eventually higher rates could cause higher debt financing costs, put pressure on traditional after-interest expense measures of REIT cash flow (such as funds from operations, adjusted funds from operations, and funds available for distribution), and lead to higher cap rates, which could pressure investment spreads. 

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.