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Morningstar Report Predicts DOL Fiduciary Rule Winners and Losers

A report from Morningstar predicts that the DOL’s final fiduciary rule will be disruptive to many segments of the financial industry even though aspects of the final rule were more lenient than the proposal.   According to Morningstar, more than $3 trillion in advised, commission-based brokerage assets will be impacted the rule. In addition, providers to $4 trillion private, defined contribution plan assets will have to determine that assets are being managed in compliance with the rule.  IRA rollovers represent another segment of the market where the rule likely will change behavior.  Because the rule requires documentation regarding why a rollover is in the best interests of the client, Morningstar predicts that more assets may remain in 401(k) plans rather than transitioning to IRAs.  In addition, the report expects that the changes will not be confined to the retirement market as companies may find it inefficient to have separate systems for tax-advantaged and taxable accounts and firms may be reluctant to even give the appearance of giving different clients different levels of service.

Against that backdrop, the report identifies likely beneficiaries – and those likely to lose out – of the rule.  Among the likely winners are robo-advisers, both stand-alone entities a well as those associated with wealth management firms.  Morningstar believes that robo-advisers will gain traction in the low balance account segment of the market.  According to Morningstar, managers that sponsor passive products and exchange traded funds will continue to gain assets under the rule.  The report predicts that financial technology companies are other likely beneficiaries of the rule as they can help wealth managers streamline workflow and offset the rule’s compliance costs.  Finally, discount brokers also will likely benefit from the rule as traditional wealth managers would no longer be available to clients with small account balances.

According to the report, the outcome for active managers under the rule is less clear.  Morningstar predicts that managers with higher quality products and niche managers with excellent performance will likely gain market share from their lower-rated peers.  The report also finds a mixed outcome for traditional wealth managers.  Morningstar expects consolidation in the industry.  It also warns that the litigation that may arise from the best-interest contract exemption is a danger to firms.  However, the report also predicts that some firms may gain assets as clients put more money into one firm to meet account minimums.  Further, the report notes that fee-based accounts “have upwards of a 60% higher revenue yield than commission-based accounts.” 

The report predicts that the rule will have a more uniformly negative impact on both alternative managers and insurance companies.  Even though alternative products are not prohibited by the rule, that advisers will use them less often according to Morningstar because of alternative products typically have higher fees than other products.  Similarly, the report finds a number of challenges for insurance companies under the rule.