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.
RIA firms, especially smaller ones, have often had a big problem when recruiting new staff. That issue is that they have trouble matching the salary and payout figures that big wirehouses provide to top advisors. This makes senior hires very hard to come by, and fact which has at least partly hamstrung the admittedly strong growth of the sector. However, one RIA tried a new approach with a broker. Instead of offering him a fixed salary and production figure, he offered him a cut of the gross revenue the whole firm created, making him feel more like an owner.
FINSUM: This is an interesting WSJ anecdote, as the deal worked not by having the RIA try to match rivals in terms of payouts, but by offering a completely different structure.
The fiduciary rule is set to go into partial effect tomorrow, June 9th. However, the DOL has just announced that a final review of the rule is underway. The DOL is awaiting approval from the Office of Management and Budge (OMB), to conduct its full analysis, a piece of work many hope will be the backdrop to rescinding the rule before its full implementation date in January. DOL chief Acosta confirmed the review was underway in a Congressional meeting on President Trump’s budget proposal Wednesday.
FINSUM: We have always thought Acosta’s end game would be to let the rule go into partial effect now before trying to revise or rescind it later. But given how the DOL has more options to delay the rule now (given the SEC’s coming involvement), we are starting to doubt if Acosta really wants the rule gone.
The implementation of the fiduciary rule has turned into nothing short of a political debacle, all driven by the DOL, an organization which has usurped the regulatory right to even make such a rule. Forbes has just put out an article showing why the whole mantra of the DOL’s rule is a lie. The idea that fee-only advisers are free of conflicts is false, as they have them just like commissioned brokers. For instance, since fee-based advisors make money from total assets managed, they would have a major conflict of interest when advising whether to pay off a mortgage or roll over a 401(k) to an IRA managed by the advisor, both very common situations. Furthermore, fee-based advice is hugely expensive, costing retirees much more over the life of the relationship than commissions would.
FINSUM: We fervently agree with Forbes’ take on this. Yes, brokers with commissions have conflicts, but so do more-expensive fee-based advisors. We should not have a rule that falsely idolizes the latter.