The big Wall Street firms are taking different strategic approaches in response to the U.S. Department of Labor’s forthcoming fiduciary rule for retirement accounts coming into effect in April 2017, which will likely have a divergent impact on clients, advisors and firms themselves, according to a new report from Fitch Ratings Inc.
The credit-rating agency reports that wealth-management firms such as Bank of America Corp. and J.P. Morgan Chase & Co. are planning to move to a purely fee-based model whereas Wells Fargo & Co., Morgan Stanley Inc. and Edward Jones & Co. LP will continue to allow commissions-based compensation models for retirement accounts.
There are advantages and disadvantages to these approaches, the Fitch report says: “Switching to fee-based compensation will mean a simpler product structure and would make revenue generated from these accounts more recurring and potentially more predictable. A fee-based structure could also mean less opportunity for brokers to overtrade client accounts, thus reducing potential legal liability from the introduction of the fiduciary standard. However, these financial institutions could risk losing brokers or smaller clients who do not benefit directly from the introduction of fees.”
For firms that are planning to continue allowing commissions, they will enjoy greater broker retention and the model will be more cost-effective for clients who don’t trade very much, the Fitch report says.
“However, interactions and account orders will need to be well documented to ensure higher compliance standards are met, and this will come with greater operational, compliance and legal costs,” the report notes. “Notably, the potential cost of noncompliance could be a significant legal liability.”
Meanwhile, asset managers could see a shift to passive products from actively managed products while insurers could see an increase in compliance costs, although the rule is ratings neutral for that sector, the Fitch report says.
Finally, the Fitch report acknowledges that there’s speculation the incoming U.S. presidential administration may seek to modify, or delay, the rule’s implementation. “However, it remains too early to make any prediction on what specific regulatory changes will be implemented.”