Michael Wong: The Department of Labor is currently considering revisions to its proposed conflict-of-interest or fiduciary rule after a series of public-comment periods and hearings. Many expect the DOL to publish its new rule by spring of next year. There are three big-picture elements within the proposed rule that we believe people should keep in mind.
1) The DOL rule affects advised retirement accounts, such as IRAs, by requiring financial advisors under a suitability standard to move toward a fiduciary standard.
2) Under a fiduciary standard, it's more difficult for financial advisors to receive third-party payments, such as commissions and trail fees, from product manufacturers, such as mutual funds and insurance companies.
3) We believe that the DOL rule will have wide-ranging effects across the financial sector, from product manufacturers and wealth-management firms to individual financial advisors and investors.
We currently estimate that the rule will affect around $3 trillion of full-service wealth-management client assets and that publicly traded firms hold more than $1 trillion of those assets.
From an investment perspective, we believe that people should focus more on the revenue affected by the rule than the more studied costs of implementation. There have been several major studies on expenses with an annual high-end estimated cost of $1.1 billion for the industry. Our proprietary, low-end prohibited revenue estimate of $2.3 billion is more than two times the high-end cost estimate, and we roughly estimate that there's about $19 billion of revenue related to all of the affected client assets.
Our low-end estimate just includes mutual fund front-end loads and 12b-1 fees. There will be other revenue lines affected, such as annuity sales commissions and trail fees, general mutual fund revenue-sharing agreements, and alternative-product commissions like on public nontraded real estate investment trusts.
We believe that the beneficiaries of the DOL rule will be discount brokerages, index and exchange-traded product providers, moaty asset managers, and robo-advisors. There will likely be a mixed effect on full-service wealth-management firms, and we believe that certain alternative asset managers and life-insurance companies will be challenged.
The DOL rule should also accelerate existing trends in the financial sector, including the usage of robo-advisors, the move to lower-cost passive-investment products from relatively higher-cost actively managed products, and the shift to fee-based accounts from commission-based accounts.