The large wealth management firms that we cover should be fine regardless of whatever changes occur in the Department of Labor’s fiduciary rule for financial advisors to retirement assets. The definition of who is a fiduciary to retirement assets and the impartial conduct standards went into effect in June 2017 and remain in effect. However, the best-interest contract, which was the primary enforcement mechanism of the rule via the potential for class-action lawsuits, has had its implementation delayed to July 1, 2019. Many of the financial service firms that we cover have already made adjustments to their business models in anticipation of greater fiduciary obligations in the United States, so we don’t anticipate material beneficial or adverse consequences from changes to the rule. We are currently maintaining our fair value estimates and moat ratings for the affected firms.
While the specific best-interest contract enforcement mechanism has been delayed, there are still multiple ways that advisers to retirement assets can be held liable for violating impartial conduct standards, so it makes sense that firms continue to change their business models. The Department of Labor’s fiduciary rule’s major change was in the treatment of IRA assets. However, corporate retirement plan assets, such as 401(k)s, are still under current ERISA rules, so rollovers from 401(k) plans to IRAs can be subject to lawsuits if done imprudently. The additional enforcement mechanism of the best-interest contract is class-action lawsuits, which we previously estimated could add $70 million-$150 million of costs to the wealth management industry. However, providers of imprudent advice could still face individual arbitration and excise taxes. While the best-interest contract added another layer of protection to investors and compliance to financial firms, investors still have avenues for restitution should financial advisors not act in their clients’ best interest.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.