Conflicted Findings in Fidelity Fiduciary Rule Impact Study

Advisers with significant portions of their business in the individual wealth management segment are predicting some difficult choices ahead regarding the Department of Labor (DOL) fiduciary rule and the effort to comply with new prohibited transaction restriction.

In fact, according to new Fidelity polling data, as many as 10% of advisers with individual wealth business are considering exiting their current market segment. Important to consider, Fidelity explains the survey was blind (i.e., no providers were mentioned). The initial data was gathered before the final DOL rule was released, from January 5th through January 12th, 2016, and then again after the final rule was released, from August 17th through August 26th, 2016.

Participants included advisers who manage or advise upon client assets either individually or as a team, and work primarily but not exclusively with individual investors. Adviser firm types included a mix of banks, independent broker/dealers, insurance companies, regional broker/dealers, registered investment advisers (RIAs), and national brokerage firms, with findings weighted to reflect industry composition.

In this group, nearly a third (29%) see the DOL’s investment advice rule as having a positive impact on their businesses—a 17% increase since the first round of data was gathered in January. 

“On the other hand, as result of the rule, 10% of advisers are planning to leave or retire from the field earlier than expected, and 18% are reconsidering their careers as advisers,” Fidelity researchers explain.

The study further shows more than half (54%) of advisers have taken some action to prepare for the rule, compared to only 20% in January who indicated that they had taken some action.

“National brokerage advisers showed the most progress in their planning while other broker/dealers and RIAs showed significantly less planning,” Fidelity finds. “The study shows that many RIAs may not believe that they need to plan for the rule given that they are already fiduciaries. Only half of RIAs reported that they will re-evaluate how and when they recommend rollovers from 401(k)s to individual retirement accounts (IRAs), a key component of the rule that may lead an adviser to become a fiduciary under the Employee Retirement Income Security Act of 1974 or the Internal Revenue Code.”

NEXT: A career shift in store for many 

“We are seeing shifts in perspectives as well as shifts in plans as firms begin to chart their long-term strategies for growth in the post-DOL rule landscape,” says Tom Corra, chief operating officer, Fidelity Clearing & Custody Solutions. “For firms who haven’t started their planning, there are steps they can take today to get them on the path to readiness for April, including developing a fact base of their existing retirement business and exploring new business models and segmentation strategies.”

According to the study, half of advisers have started to determine which of their accounts may be appropriate for either a level-fee compensation model or a prohibited transaction exemption, like the Best Interest Contract Exemption (BICE).

“Advisers expect to manage two-thirds of their retirement assets via a level-fee compensation model,” Fidelity finds. “Nearly four in 10 advisers have already determined which accounts may be appropriate for the level-fee model. Advisers also anticipate a personal increase in their use of fee-based compensation by 10% to offset a 10% drop in commissions.”

Fidelity observes that advisers expect to manage about a third or less of their retirement assets by leveraging a prohibited transaction exemption, such as the BICE. Nearly one in five advisers has already determined which accounts may be appropriate for an exemption. The study finds that the BICE is “more popular with national brokerage and broker/dealer advisers, showing a 7% increase since January among national brokerage advisers in anticipated assets managed using exemptions and a 4% increase since January among broker-dealers.”

Converse to fears cited early on that the fiduciary rule could push small-balance clients out of the affordable advice market, the Fidelity poll shows two-thirds of advisers “plan to re-evaluate the types of clients they work with as a result of the rule, and 54% plan to let go or transition smaller clients; however, approximately 10% fewer advisers are feeling this way compared to January.”

Another positive, Fidelity concludes that half of advisers expect client engagement and collaboration to increase as a result of the rule, and 36% of advisers report that their firms added or plan to add an automated investment offering as a result of the rule to help service clients more efficiently.