U.S. fiduciary rule will lead to innovation: report

“The primary concern of the DOL’s proposal is to expand the definition of fiduciary to cover more instances of providing advice. This expansion, in turn, is designed to protect consumers from sales practices that may be tainted by a conflict of interest,” says Bing Waldert, managing director at Cerulli, in the report. “Cerulli expects there will be unexpected changes to the retirement and wealth management industries, and, to a degree, this cultural evolution is what the proposed rule is hoping to effect.”

For example, the Cerulli’s research indicates that the DOL rule’s impact will vary based on size of the firm, and the sales channel it occupies. Firms that rely on both commissions and proprietary products will likely “face challenges” due to the new rule, the Cerulli report says, whereas independent investment advisors “are more likely to feel ready for the new regulations because they are accustomed to acting in a fiduciary capacity.” Additionally, large brokerage firms have the resources to hire additional compliance staff to prepare for implementation, the report notes.

At the same time, “digital advisor technology” may provide a way for broker dealers to serve low-value retirement accounts on a flat-fee, and a fiduciary, basis. “These platforms, also known as robo-advisors, offer scalable trading technology, algorithmic portfolio construction, and heavy use of low-cost ETFs,” the report says. It adds that two large asset managers, BlackRock, Inc. and Invesco Ltd., recently acquired digital advice providers in the U.S., which they are selling to existing brokerage firms, rather than as direct-to-consumer offerings.

The report notes that Royal Bank of Canada in the U.S. was one of the first adopters of BlackRock’s newly acquired platform, and the firm is rolling out the technology “to a handful of large advisor teams seeking to use it either to supplement their current service offering or to serve smaller balance accounts profitably.”

The platform would comply with the proposed DOL rule, the report adds, so that “the technology platform could be a strategic move for RBC to serve smaller-balance accounts … In addition, the consistent advice delivery and use of low-cost ETFs would also allay some regulatory risk.”

In the insurance business, the fee and compensation disclosure requirements of the DOL rule will cause companies to “re-evaluate annuity pricing”, the report says. As a result, Cerulli expects “insurance companies will introduce share classes with expenses and commissions comparable to other financial products.”

Currently, the DOL’s proposed rule is being evaluated by the Office of Management and Budget (OMB), which has 90 days to review it. Some expect the OMB to expedite the rule, the report says, and possibly finalize it as soon as March or April, with implementation coming in early 2017.

See: U.S. DOL fiduciary rule at OMB

“Cerulli believes that, while the proposed rule is a major event, its true effects may not be immediately felt,” the report says. “It may be that implementation of the DOL rule is a short-term non-event, but the effects will continue to creep into the retirement industry.”

In Canada, securities regulators are contemplating a possible “best interests” rule of their own, alongside possible reforms to investment fund fee structures. A policy decision in this area is expected in the first half of 2016; although, even if regulators decide to move ahead with reforms, it would likely kick off a prolonged consultation process.

See: OSC to propose introduction of “best interest” standard