Around $3 trillion of advised, commission-based brokerage IRA assets will be subject to the Department of Labor's new fiduciary rule, reshaping the financial industry, Morningstar has concluded.
At the Morningstar Investment Conference in Chicago, panelists outlined a recent Morningstar report that shows the positive and negative monetary impacts the DOL fiduciary rule will have on the industry.
One of the panelists was Michael Wong, a senior equity analyst at Morninstar and the lead author of the report, "Final Department of Labor Fiduciary Rule's Effects Are Substantial."
"Through its 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," the report states.
According to Wong and the Morningstar report, here are the four biggest winners and three biggest losers under the DOL fiduciary rule:
WINNERS:
Passive Investments
Morningstar predicts there will be a shift to relatively lower-cost passive investment products from actively managed and says passive investments could gain more than $1 trillion of assets from the fiduciary rule.
"There are definitely some types of funds we think will be advantaged: passive investing products, relatively lower cost, any kind of asset management firms that cater to 401(k) retirement platforms as there might be less rollovers," Wong said during the Morningstar panel. "If you're in any of those spaces, you'll probably do pretty well."
Morningstar believes that passive investment share will accelerate thanks to "the reduction in potential conflicts of interest stemming from third-party payments, increased adoption of robo-advisors, and total-cost balancing," according to its report.
ETFs
Of passively managed products, Morningstar predicts that primarily index funds and exchange-traded products like ETFs will be the biggest beneficiaries of the rule.
According to Morningstar, changing financial product allocations among broker-dealer reps could lead to a large increase in ETF assets as BDs move to a fiduciary standard.
Digging down into just the shift of assets into ETFs, Morningstar estimates "a reasonable opportunity upwards of $140 billion based on the ETF product allocation difference between RIAs that are currently under a fiduciary standard and broker-dealer advisors under a suitability standard," according to its report.
'Conservative' Investments
According to Wong, funds that have relatively low drawdown or are relatively more conservative or less volatile will also have an advantage under the DOL fiduciary rule.
"Because … the enforcement mechanisms for this fiduciary rule [are] possible arbitration or litigation," he said. "When is this likely to occur? This is likely to occur if the client loses money. So how do you prevent that? You might want to put them in something – from a practical standpoint and if it's in the best interest of the client – into something that is relatively more conservative or lower drawdown."
Robo-advisors
From 2014 to 2015, the client assets at several of the leading robo-advisors increased over 150%, according to Morningstar. And Morningstar predicts that growth will continue thanks to the fiduciary rule.
"We continue to believe that the stand-alone robo-advisors, like Wealthfront, are a logical landing place for clients with low account balances who may be unprofitable for full-service wealth management firms," the report says.
Morningstar predicts that if these stand-alone robos captured just a fraction of the $250 billion to $600 billion of low-account-balance assets they would accelerate their growth by several years and bring them closer to a break-even point with wealth management assets.
While the fiduciary rule will be a needed boost to the robo-advisors that serve investors directly, Morningstar predicts it will be "an even greater accelerant" to robo-advisors or digital advice technology used by the established full-service wealth management firms.
