Though the DOL conflict-of-interest rule may seem to be disrupting the DC market, it is arguably just highlighting changes and conflicts that have been festering for years.
Today nearly all advisors receive marketing, entertainment and practice management support from providers, with more coming from DCIOs over the past five years. So much so that a growing number of DCIOs are complaining about the extent and number of requests they get, going so far as to threaten to pull back due to the margin pressures they are facing as more money shifts to passive investments and asset allocation funds, such as target-date funds. The DOL rule may inhibit some of this support, especially to broker dealers.
Under a pure economic analysis, a portion of the money DCIOs receive from plan participants is budgeted for advisors, just as they allocate support to record keepers and broker-dealers. Though they complain, it gives DCIOs leverage. Advisors that pay for marketing and practice management themselves should be able to command a higher fee at the expense of DCIOs, who will theoretically be able to reduce expenses.
So if advisors do not rely on provider marketing and practice management support, and if more money goes into professionally managed investments and wrap accounts where the allocator (not the underlying funds are the distributor) selects the investments, what’s the role of the wholesaler? How do DCIOs and mutual fund companies market to advisors? DCIOs complain about the costs, but still want to enjoy the leverage.
Some interesting questions about conflicts have been highlighted by the DOL rule. But the shift from active to passive funds, and away from single fund selection by advisors to professionally managed investments, is the root cause of what could be a massive change to the way advisors and DCIOs conduct their business.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
