The U.S. Department of Labor estimates the cost of implementing a fiduciary standard rule on retirement accounts at $1.1 billion annually. However, analysis from Morningstar says the hit to the industry, at least in the short-term, could be as much as $2.4 billion annually affecting $3 trillion in client assets.
Investor advocates in this country might scoff at the notion that implementation costs in this country would be similar on a per capita basis should such a rule be introduced in Canada need only remember that government and industry officials south of the border were fairly confident about their $1.1 billion estimate.
Not so says Morningstar.
“We assess that the U.S. Department of Labor'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,” wrote Stephen Ellis, Morningstar’s director of financial services equity research in a December article. “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.”
But full—service advisors needn’t worry too much because Morningstar suggests they will simply move commission-based investment retirement accounts (IRA) into fee-based accounts generating as much as 60% more revenue as a result.
Robo-advisors are expected to be another big beneficiary of the fiduciary standard, opines Morningstar.
“Robo-advisors stand to benefit from the Department of Labor rule, as they pick up a portion of our estimated $250 billion to $600 billion of low-account-balance IRA assets from clients let go by the full-service wealth management firms,” wrote Ellis. “Capturing a fraction of these loose assets will bring stand-alone robo-advisors much closer to the $16 billion to $40 billion of client assets that we believe they need to become profitable.”
Clients lose but regulators and governments look like they actually care about protecting the little guy.
Note: To read the entire Morningstar article click here