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DOL Fiduciary Rule to Trigger Big Asset, Revenue Shifts

A new report claims that by 2020, the DOL’s new fiduciary rule will result in a $2 trillion asset shift and roughly $20 billion in lost revenue. But there are winners as well as losers.

According to the A.T.Kearney DOL Fiduciary Rule Study, industry players will be affected at all levels. The report by the global management consulting firm outlines the following expected impacts by 2020.

Wirehouses, who are well positioned to do so, 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. The report says that targeted investments in key areas will help minimize losses to revenue and assets under management. That said, the authors’ expected impact by 2020: a 5% decline in assets ($300 billion), with an 8% decline in revenues ($4 billion).

Broker/dealers will see a significant sales impact as high-commission products (such as annuities) lose favor. Consequently, the report notes that targeted investments in key areas will help minimize losses to revenue and assets under management.

Additionally, the report predicts that consolidation will likely occur as smaller independent broker/dealers struggle to comply with the new fiduciary rule. The expected impact by 2020: a 6% decline in assets ($250 billion), with an 11% drop in revenues ($3 billion).

Biggest Disruption

The report’s authors predict that independent broker/dealers will face the largest disruption, in that the fiduciary regulation will strain the resources of smaller players, driving industry consolidation and the potential outflow of advisors to other distribution formats, such as dual RIAs. The expected impact on this segment by 2020 is an 11% drop in assets ($350 billion), and a 22% drop in revenues ($4 billion).

Dual RIAs will see their business model shift as “hybrids” focus in the near term on building their RIA businesses, and the authors of the report anticipate that, along with others in the industry they will accelerate the transition to more fee-based advisory. Moreover, the report says that dual RIAs will focus on growing the advisory business through attracting new advisors and targeted acquisitions, while marketing their scale and “deeper bench” vs. traditional RIAs as a key differentiator. By 2020, that could result in a 5% increase in assets ($100 billion), and a 3% boost in revenues ($0.5 billion).

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RIAs, who already operate under similar fiduciary standards, stand to gain significant market share, as many are already equipped to comply with the rule, according to the report. That said, the report cautions that RIAs should be cautious about certain rollover accounts. The expected impact by 2020: a 10% increase in assets ($250 billion), and a 5% boost in revenues ($1.5 billion).

Robos Rising?

The authors envision an acceleration in robo-advisory adoption as accounts flow away from broker/dealers and “undersized” accounts are dropped as fee-based advisory changes the economics for managed advice. Moreover, the report notes that targeted marketing efforts can further accelerate robo-advisor adoption. How much impact overall? The authors say that by 2020 an anticipated 15% increase in assets ($250 billion), and a 15% surge in revenues ($1 billion).

Self-directed accounts are seen as benefiting from these trends, as accounts that don’t flow into robo-advisory will go directly into mutual funds and exchange-traded funds. The report’s authors note that products will also likely be streamlined as high-fee, low-performance funds lose favor. The expected impact by 2020: a $150 billion increase in assets (4%), and a 4% bump in revenues ($1 billion).

Recordkeepers and Manufacturers

The report notes that retirement plan administrators will need to reconsider their business model as a significant revenue source (12b-1 fees for product placements) will come under pressure. The report notes that changes to fee structures will require some marketing and communication coordination — particularly emphasizing the rationale behind changes to the fee structure and the value distributors provide to plan participants. That said, the report estimates that this segment could see a 3% increase in assets by 2020 ($200 billion), but a 5% loss in revenues ($1 trillion).

Likewise, the report says that manufacturers will experience significant asset flow and will be motivated to streamline product offerings, lower fees and improve performance. That will combine for an expected impact on mutual funds by 2020 of a 6% decline in assets ($1 trillion) and an 11% drop in revenues ($14 billion). As for exchange-traded funds, the report says that by 2020 this asset class could experience a 45% increase in assets ($1 trillion), and a 30% increase in revenues ($1 billion).

Actions Recommended

Regardless of the segment assessments, the report’s authors says that in all cases, industry players can take targeted actions to both minimize disruption and position themselves for longer-term growth:

  • implement key compliance measures to ensure that the company and business model are ready for the rule to take effect with minimal disruption and risks; and

  • reposition strategy for the future to help seize the rule as an opportunity to enhance strategies.