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Stock Analyst Update

Key DOL Deadline Passes, SEC Best Interest to Forefront

We're maintaining our fair value estimates and moat ratings for investment service and wealth management firms, as much of the costs to prepare for the rule have already been incurred.

The investment services and wealth management companies will now have to closely follow the SEC's package of best interest regulations, as the deadline for the Department of Justice to appeal the vacating of the Department of Labor's fiduciary rule to the Supreme Court has passed. The 5th U.S. Circuit Court of Appeals now only has to issue the mandate putting its vacating of the DOL rule into effect for the DOL rule to effectively disappear. We are currently maintaining our fair value estimates and moat ratings for investment service and wealth management firms, as much of the explicit costs to prepare for the Department of Labor's fiduciary rule have already been incurred and some form of best interest standard for advisors will eventually be enacted.

While the Department of Labor's fiduciary rule governing retirement accounts should soon be vacated, the SEC's rule that regulates all investment advisors, whether they deal with retirement accounts or regular taxable accounts, is still being finalized. The scope of the SEC rule is larger then the DOL's rule, so it can have a greater effect on the financial sector than the DOL rule. However, it's arguable that the potential for class action lawsuits related to the DOL's rule was a better motivator of behavioral change at financial firms than the restitution and penalties that the SEC uses for enforcement. Regardless of any changes that are made to the SEC's rule package, we still believe that key investment service industry trends, such as increased use of passive investment products, adoption of digital advice technology, and more fee-based accounts will persist.

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