One of the many parts of the wealth-management industry that are facing an uncertain future in the fiduciary era are small broker-dealers. How will their model, now becoming outdated, fit into the new landscape? Girard Securities out of San Diego may be an example. The $7.7 bn firm will lose its broker-dealer status and become a fiduciary and part of the Cetera Advisors Network. The move follows $800m firm HBW, who also got rid of their broker-dealer status.
FINSUM: Transactional business and dealings which are not under fiduciary status seem to be on their way out (even, perhaps, if the current DOL version of the rule becomes obsolete), so broker-dealers are likely going to have to shift models.
Most will know that the DOL has applied for a lengthy delay of the implementation of the full fiduciary rule. The existence of the delay was first known through disclosure in a court case against the DOL, but it was soon confirmed by the Office of Budget and Management on their website. Advocates of the rule have been outraged by the delay proposal, while opponents have embraced it. One of the key reasons why is that experts say the length of the delay is highly significant in that the DOL wants a great deal of time, which indicates that it may be seeking major changes. The length also seems to improve the chances that the DOL will work in tandem with the SEC to craft a new comprehensive package.
FINSUM: We think this delay is very promising as it shows that the new leadership of the DOL has a real commitment to improving this rule. The exact way they will do that is not clear, but we do believe major changes are on the way.
The fight over the fiduciary rule has been years long and has no clear winner. We do have an in-spirit version of the rule currently in place, but there are numerous efforts to overturn the whole package, and the full implementation of the rule will be delayed another 18 months. Despite this though, there is a clear winner with the DOL rule: Wall Street. However much firms protested the rule early on, the reality is that the DOL’s push has caused a massive migration of clients into fee-paying accounts, which offer more than double the revenue of commission only accounts. This has led to a surge in revenue for big brokers, but has actually led to lower pay for advisors themselves, as they are the ones losing out on commission Dollars and are not getting a slice of the bigger revenue pie.
FINSUM: The house is keeping a bigger cut than they use to, while brokers and their clients have less pay and less options. Hopefully the SEC will join up with the new leadership of the DOL and rethink this whole rule.
One of the factors that seems to have kept big wirehouses on the sidelines during the fight to overturn the fiduciary rule was that fact that they stand to gain a great deal of revenue from the new regulation. The DOL’s rule basically mandates a shift from commission-based charges to AUM-based fees, which by some estimates means 50%+ more in revenue. Well, the forecasted transition in fees is happening, with Merrill Lynch and Morgan Stanley both reporting big gains in fee-based accounts. The former’s fee-based accounts grew 19% in the second quarter, while Morgan Stanley saw its grow 17%.
FINSUM: There is a lot of money to be made for the big wirehouses, which is very likely why they have not gotten behind the push against the fiduciary rule. Will it be as beneficial for wirehouse brokers?
On paper the battle between ETFs and mutual funds in the post-fiduciary world seems like a foregone conclusion. Fiduciary standards seem to indicate that money will need to flow into passives, which have the benefit of appearing to have no vested interest for the advisors (especially because the lack of commissions). “For an adviser under a fiduciary standard to justify not using an ETF, they’ll need to make the case that any additional cost or uncertainty around performance is justified, and that’s a pretty tough case to make”, says the CEO of ETF.com. However, actively managed mutual funds, long a staple of the wealth management industry, are punching back by developing new classes of shares with new types of fees that help brokers in the new regulatory regime.
FINSUM: ETFs have been running away with the product market. Can mutual funds truly find a way to fight back? So far the contest has been a rout.