Current government and financial industry reports peg the high-end annual cost estimate for the implementation of the Department of Labor’s proposed fiduciary rule at $1.1 billion. That’s wrong, according to a year-end review by Morningstar.
“Even our low-end prohibited transaction revenue estimate, arrived at using Morningstar Direct data, is more than double that at $2.4 billion,” writes Stephen Ellis, director of financial services equity research for the Chicago-based research and consulting firm. “The rule’s financial repercussions also extend far beyond wealth management firms.”
The reason, according to Ellis, is that “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. Based on our proprietary estimates, we believe that the rule will affect around $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.”
Additionally, the firm think’s that investors and business analysts looking only at the more studied implementation costs of the rule are vastly underestimating the rule’s potential impact on the financial sector.
“Full-service wealth managers may convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs of the Department of Labor rule. As fee-based accounts can have a revenue yield upwards of 60 percent higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
