DOL Fiduciary Rule’s Cost for 9 Investment Advice Players: From IBDs to RIAs

By April 2017, investment advisory firms will have to be in compliance with the Department of Labor's new fiduciary rule requiring them to adhere to a "best-interest standard" in advising their customers.

A new study by A.T. Kearney, "The $20 Billion Impact of the New Fiduciary Rule on the U.S. Wealth Management Industry," estimates that the overall effect on the wealth management industry could amount to $20 billion in lost revenues by 2020, some 7% of the industry total, and up to $2 trillion in shifted assets across industry players and formats.

In 2015, total wealth management assets stood at $28 trillion and revenues at $300 billion, according to A.T. Kearney, a global management consulting firm.

The final version of the new fiduciary rule, released this past April, will expand fiduciary responsibility to advisors of IRAs and 401(k) plans, requiring them to adhere to new compliance protocols, an increased level of scrutiny on fees and advisor compensation and accelerated product shifts to fee-based and robo-advisory.

The study said industry players can take targeted actions to both minimize disruption and position themselves for longer-term growth.

In particular, they can implement key compliance measures to ensure the firm and its business model are ready for the rule to take effect with minimal disruption and risks. In addition, they can reposition strategy for the future to help seize the rule as an opportunity to enhance strategies, challenge business models and accelerate many of the ongoing efforts already taking place across the industry.

Following are nine key types of wealth management industry players, listed in order of biggest potential losers to biggest winners in asset gains or losses by 2020, and some of the changes they will have to make.

Biggest Loser

9. INDEPENDENT BROKER-DEALERS

IBDs will face the largest disruption, as the rule will strain smaller players' resources. This will drive industry consolidation and the potential outflow of advisors to other distribution formats, such as dual RIAs.

Expected impact by 2020:

Assets: -$350 billion, -11%
Revenues: -$4 billion, -22%

8. BROKER-DEALERS

BDs will experience a big sales impact as high-commission products, such as annuities, lose favor. In addition, consolidation will likely occur as smaller IDBs struggle to comply to the new rule.

Expected impact by 2020:

Assets: -$250 billion, -6%
Revenues: -$3 billion, -11%

7. WIREHOUSES

Wirehouses will accelerate their ongoing transition to fee-based advisory, while capitalizing on their ability to continue to sell high-fee proprietary products following the most recent rule revision.

Expected impact by 2020:

Assets: -$300 billion, -5%
Revenues: -$4 billion, -8%

6. RETIREMENT PLAN ADMINISTRATORS

Retirement plan administrators, most of which play other roles in the value chain, will need to reconsider their business model as 12b-1 fees for product placements, their significant revenue source, come under pressure.

Expected impact by 2020:

Assets: +$200 billion, +3%
Revenues: -$1 trillion, -5%

5. DUAL RIAs

Dual RIAs' business model will shift as "hybrids" focus in the near term on building their RIA businesses. Along with other industry players, they will speed up the transition to more fee-based advisory.

Expected impact by 2020:

Assets: +$100 billion, +5%
Revenues: -$500 million, -3%

4. MANUFACTURERS

Manufacturers will experience significant asset flow and will be incentivized to streamline product offerings, lower fees and improve performance.

Expected impact by 2020:

Mutual fund assets: -$1 trillion, -6%
Mutual fund revenues: -$14 billion, -11%
ETF assets: +$1 trillion, +45%
ETF revenues: +$1 billion, +30%

3. SELF-DIRECTED

Self-directed will benefit from these trends, as accounts that do not flow into robo-advisory will go directly into mutual funds and exchange-traded funds. Products will also likely be streamlined as high-fee, low-performance funds lose favor.

Expected impact by 2020:

Assets: +$150 billion, +4%
Revenues: +$1 billion, +4%

2. RIAs

RIAs, which already operate under similar fiduciary standards, stand to gain significant market share as many are already equipped to comply with the new rule.

Expected impact by 2020:

Assets: +$250 billion, +10%
Revenues: +$1.5 billion, +5%

Biggest Winner

1. ROBO-ADVISORY

Robo-advisory adoption will accelerate as retirement accounts that advisors consider too small to profitably provide conflict-free advice to shift digital advice providers and self-directed models.

Expected impact by 2020: