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Department of Labor's Fiduciary Rule Will Have Substantial Effect

Morningstar analyst Michael Wong examines the impact on the financial sector.

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The U.S. Department of Labor has released its finalized conflict of interest rule for financial advisors. We believe this fiduciary standard will disrupt many business models in the industry. We've already seen the exit of several foreign banks ( Barclays (BCS),  Credit Suisse (CS),  Deutsche Bank (DB)) from U.S. wealth management, sale of life insurance retail advisory businesses ( American International Group (AIG),  MetLife (MET)), and restructuring of wealth management platforms (LPL Financial, RCS Capital,  Waddell & Reed Financial (WDR)) in anticipation of the rule. The finalized fiduciary standard is in many ways more lenient than the initial proposal, especially in terms of the operational feasibility of the best-interest contract exemption. That said, a couple of areas of the rule were made even more restrictive, and the rule still has teeth through the best-interest contract as a litigation-based enforcement mechanism. We believe compliance with some of the rule's provisions may cause changes not only in how financial advisors service retirement accounts, but also in how they serve taxable accounts.

Through the fiduciary rule's ability to influence the policies and procedures of wealth management firms and the behavior of financial advisors to many tax-qualified accountholders, the entire value chain from financial product manufacturers to financial product distributors and investors has to be reconceived.

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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.