Morningstar Outlines Costs of DOL Proposal

The Department of Labor’s proposed fiduciary rule will have effects on financial professionals and their clients that far exceed estimates made by government regulators and even the industry, according to an analysis by Morningstar.
 
Morningstar’s October 2015 “Financial Services Observer” says that the highest government and industry estimate of the rule’s annual cost is $1.1 billion. However, Morningstar estimates a minimum annual cost of $2.4 billion.
 
As a result, the report predicts that firms will move high-balance commission-based IRAs to asset-based fee IRAs. This would be a boon for fee-based advisors. The report says, “fee-based accounts can have revenue yields as much as 60% higher than commission-based accounts.” Also, under the DOL proposal, fee-based advisors should have lower compliance costs than those who receive commissions.
 
Smaller IRA investors are likely to fall by the wayside. The median balance for households owning IRAs is approximately $50,000, according to the Investment Company Institute, and half of all household IRA owners would not have enough investment assets to meet the minimum balances of fee-only advisory firms. The analysis concludes that financial firms will stop providing personal advisory services to owners of low-balance IRAs totaling $250 billion to $600 billion.
 
The IRA investors will be left with no access to personalized advice, having no choice but to move to roboadvisors or low-service discount brokerages.
 
The Morningstar analysis confirms NAIFA’s contention that the DOL proposal would reduce consumers’ options by highly restricting or even eliminating the ability of investors to choose commission-based accounts.
 
“The wealthy would still be able to afford valuable personalized advice that comes from developing a relationship with a trusted advisor,” said NAIFA President Jules Gaudreau. “People with lower account balances would be forced to enter their information into a computer and hope for the best. Many of them would lose access to advisors who have been helping them and their families for years.”
 
The Department of Labor has said its proposal will not deny consumers opportunities to work with advisors who are compensated with commissions. Morningstar, however, concludes the opposite.
 
The analysis says the DOL proposal would be just as restrictive as regulations in Australia and the United Kingdom that directly prohibit commissions. “While it may seem that the Department of Labor rule is more lenient then other best-interest standards, since it has a couple fewer requirements and doesn’t ban third-party commissions, it isn’t,” says Morningstar, “and the financial-services industry generally views its ability to make use of various safe harbors as unworkable.”


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