If the Labor Department's fiduciary rule is finalized later this month, not a lot may change on day one. But a period of widespread innovation of products and platforms may soon follow, as firms will be compelled to comply with new rules governing retirement advice, according to Cerulli Associates.
Bing Waldert, managing director, says the research firm "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."
The Labor Department's fiduciary rule, which it proposed a year ago, would apply a higher standard for certain kinds of retirement advice. While some features of the rule may change before it is finalized by the White House Office of Management and Budget later this month, under the current proposal firms will be required to disclose any variable compensation that advisors receive for advice and product sales to clients.
Changes brought on by the rule could transform the burgeoning retirement advice market, which Cerulli estimates will total about $28 trillion in assets by 2020.
Among the possible changes, Cerulli anticipates that brokerage firms will use new technologies to serve smaller accounts on a fee basis while insurance companies will be forced to lower variable annuity expenses and commissions.
"Digital advisor technology may provide a scalable solution for B-Ds to work with low balances in individual retirement accounts on a flat-fee and a fiduciary basis," the firm's latest report says.
Some industry insiders have also been speculating that necessity will spur firms to experiment with new products and tools to help their advisors stay compliant as the regulatory environment changes.
"I think the industry is going to adapt and will have to adapt pretty quickly," says Tim McCabe, national sales director of retirement at Stadion Money Management.
McCabe, who spoke with On Wall Street before Cerulli issued its report, says that firms and plan sponsors, who will also be affected by the rule, could be experiment with pre-packaged products that meet Fiduciary. Just as bowling alleys have bumpers to keep bowlers within their lane, firms may start using products and platforms to do the same, McCabe says.
"I refer to it as an investment lineup in a box. It'll keep the advisor from having to put themselves out there to pick those funds. An outside party will do it and the price will be baked in the product," he says.
'HIT' TO ANNUITIES
Cerulli also expects the rule to transform the variable annuity market.
"Annuities have traditionally been priced with an advisor commission and many manufacturers pay revenue sharing to distributors, putting the sale of this product squarely in violation of the DOL’s proposed rule," the research firm says.
As the report notes, insurance companies have been some of the most vocal opponents to the Labor Department's proposal.
Cerulli says it expects a short-term hit to variable annuity sales.
Andy Tasnady, a compensation consultant and head of an eponymously-named firm, also sees a likely drop in revenues related to annuities, particularly in the independent advisor channel.
"A higher portion of the advisors there get some of their business from the annuities, and other products," Tasnady told On Wall Street last month.
Tasnady adds that some advisors and firms may adjust more easily to the new regulatory environment.
"Firms that are selling a lot of annuitized based products and high fee products, then it will impact them a lot more. People who have shifted to more fee-based type pricing, it might not affect them much as well."
However, in the long-term it may not make that big of an impact on firms' performance, Tasnady suggests.
"It's the same issue that firms and advisors have faced as they moved to fee-based with all their existing clients. On the long run, it is a more reliable income stream. It also aligns the advisors and your clients interest because you're both trying to grow the assets," he says.
ASSET MANAGERS ADJUST
In its report, Cerulli says that asset management firms may experience stiffer competition in the defined contribution marketplace. Firms that promote defined contribution opportunities and provide additional education will have a leg up, and that in turn will increase demand for knowledgeable sales staff, the research firm says.
Compensation structures may also change as a result of the Labor Department's rule.
"Given the DC industry’s focus on low-cost products, asset managers will need to become even more creative in terms of feeding all of the proverbial mouths that may have contributed to a DC transaction," Cerulli says.
Cerulli also notes that in the 401(k) market, change tends to begin at the largest firms and cascade down from there.
- FINRA Vows Close Oversight of Digital Advice Tools
- Getting Ahead of DoL Rule, Cetera Rolls Out Retirement Platform
- Post Fiduciary, SEC May Have to Weigh In