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How the DOL's Fiduciary Rule Will Affect Advisors, Investors

The new rule will affect more than $3 trillion in retirement assets and may influence taxable accounts, too, says Morningstar's Michael Wong.

Michael Wong: We recently updated our analysis on the Department of Labor fiduciary rule, and believe that the finalized rule that many see as more lenient than the initial proposal will nonetheless have substantial effects across the financial sector. We still believe in our initial assessment that the rule primarily affects approximately $3 trillion of advised IRA assets; that there’s approximately $19 billion of revenue related to these assets; operating margins on IRA assets could fall several percentage points; upwards of $1 trillion may move into passive investments; and in excess of $250 billion of full-service wealth management client assets will shift into different investment services offerings.

We have further quantified that over $200 billion of IRA rollovers will likely fall under the rule, which may reduce inflows to wealth management firms but benefit retirement plan platform providers, that reasonably $140 billion of assets will move into ETFs as broker-dealer advisors act more like registered investment advisors, and that upwards of $800 billion of private defined contribution plan assets that are receiving some form of advice needs to be checked for compliance against the new fiduciary rule.

Just as how the rule is made for advisors but its effect ripples out to product manufacturers and investors, we also see the potential for the rule to influence how taxable assets are serviced instead of just retirement assets. From the numerous discussions that we’ve been having with financial institutions, it’s apparent that they’re taking the rule seriously and are exploring ways to adapt to the rule, such as by developing digital advisory capabilities, more fee-based offerings, and determining how to substantiate that advisor recommendations are in the best interests of clients.