Advisory firms face headwinds from DOL fiduciary rule
March 25, 2016 by Nick Thornton
A stock analyst from UBS says the wealth management unit of Wells Fargo faces headwinds from the impending finalization of the Department of Labor’s (DOL) proposed fiduciary rule.
Brennan Hawken, senior analyst at UBS Investment Bank, told CNBC that DOL’s fiduciary rule will impact Wells Fargo’s wealth management unit more than other wire houses. Wells’ wealth management unit is “mass-affluent oriented,” said Hawken.
“Over 40 percent of assets are in retirement accounts,” he added. If finalized as proposed, DOL’s rule will impose a fiduciary standard of care on all IRA accounts and 401(k) plans with fewer than 100 participants.
The proposal’s Best Interest Contract Exemption provision requires extensive new disclosures for brokers selling investment products on commission. While the proposal does not outlaw commission-based sales, industry experts expect complying with the proposal’s BIC Exemptions to be costly and onerous, and will encourage brokerage accounts to transition to fee-based models of compensation, as is common under current fiduciary advisory arrangements.
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Overall, Hawken said Wells Fargo could experience a 3 percent hit to firm-wide revenue from the rule, one of the contributing factors to the analyst’s downgrade of the stock.
Employee Retirement Income Security Act lawyers have said the DOL’s rule will vastly impact the IRA market.
Last year, ERISA attorney Fred Reish of Drinker Biddle wrote that an advisor recommending a rollover to a higher-cost IRA from a 401(k) could trigger new prohibited transaction rules under DOL’s rule.
Recommendations to take a 401(k) plan distribution, or to rollover plan assets to an IRA, will be considered a fiduciary act, said Reish. To date, some broker dealers have begun rearranging business models, even before the rule’s finalization, which is expected in the coming weeks.
American International Group recently announced the sale of its Advisory Group to Lightyear Capital and PSP Investments.
San Diego-based LPL Financial, which oversees $459 billion in advisory and brokerage accounts, has recently announced lowered fees on IRA accounts, and lowered its minimum investment requirement to $10,000.
“While we continue to advocate for a thoughtful resolution to the fiduciary issue — one that preserves investor choice — LPL recognizes that the DOL rule will have implications for financial advisors and investors,” said LPL President Dan Arnold in a statement.
