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Morningstar: Cost Estimates of DOL Fiduciary Rule Way Off

A new Morningstar analysis suggests that the Department of Labor’s proposed rule could affect around $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.

The analysis, by Stephen Ellis, director of financial services equity research for Morningstar, says that the DOL’s proposed conflict-of-interest (or fiduciary standard) rule could “drastically alter the profits and business models of investment product manufacturers like BlackRock and wealth management firms like Morgan Stanley that serve retirement accounts.” The report goes on to note that those “looking only at the more studied implementation costs of the rule are vastly underestimating the rule’s potential impact on the financial sector.” The report notes that while current government and financial industry reports have a high-end annual cost estimate of $1.1 billion, that falls well short of Morningstar’s “low-end prohibited transaction revenue estimate” of $2.4 billion. Moreover, it says that the rule’s financial repercussions extend far beyond wealth management firms.

As for the implications of the rule, Ellis explains that full-service wealth managers may convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs of the rule, and that since fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry.

Robo Ready?

Another beneficiary? So-called “robo-advisors,” which the analysis anticipates will pick up a portion of an estimated $250 billion to $600 billion of low-account-balance IRA assets from clients who are “let go” by the full-service wealth management firms. Capturing a fraction of these loose assets could bring those stand-alone robo-advisors “much closer to the $16 billion to $40 billion of client assets that we believe they need to become profitable,” according to the report.

Ellis also expects that more than $1 trillion of assets could flow into passive investment products from the DOL rule, a result of several factors, including:


  • higher adoption of robo-advisors;

  • increased usage of passive investment products from financial advisors that formerly may have been swayed by distribution payments;

  • the proposed “high-quality, low-cost” exemption; and

  • the effect of advisors trying to balance out higher explicit financial planning charges.


Ellis cites other likely beneficiaries as discount brokerages, companies tied to passive investment management and, of course, robo-advisors. The report notes that some life insurance companies will “probably be challenged,” and that companies with “economic moats” will be the winners of the resulting “disruption to the investment product distribution landscape.”

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