DOL

Winter Is Coming for Mass-Market Investors

A U.K. research firm finds U.S. advisors planning to drop small clients in wake of DOL rule "in an echo of what happened in the U.K." after that country banned certain commissions on advisor-sold funds.

Many advisors think the DoL’s fiduciary rule could leave mass-market investors out in the cold.

A recent study by CoreData research found 71 percent of financial advisors surveyed plan to drop some mass-market investors (meaning those with less than $125,000 in assets) once the DOL rule comes into effect. The respondents (552 U.S.-based financial advisors in total) estimate that they will stop servicing roughly 25 percent of their current mass-market clients.

Sixty four percent of advisors anticipate that the rule will have a negative impact on mass-market investors. Forty percent believe that financial advice will ultimately become too expensive for these investors.

“The rule could result in mass-market clients being left out in the cold, creating the prospect of an advice gap in an echo of what happened in the U.K. when the RDR came into effect,” said Craig Phillips, head of International for CoreData Research.

The “RDR” is the Retail Distribution Review, which arguably hurt smaller clients in the U.K. by banning commissions on some investment funds, thus, detractors say, increasing fees on advice to unaffordable levels and limiting their access to advice. A previous study by CoreData found more than half of U.K.-based advisors believed the regulations negatively impacted mass-market investors.

Perhaps the most interesting finding by the study however is U.S. advisors’ pessimistic view of what clients want. Forty-five percent of respondents believe investors would rather have cheaper, non-fiduciary advice than more expensive fiduciary advice. Advocates of the DOL rule, however, say the advice is not more expensive—the cost to the client has just moved from being buried in the asset management fees to the fees paid to advisors, who will need to prove their value with other, non-portfolio-management services like financial planning.

This lack of faith in clients’ desire for more expensive quality advice is also likely highly driven by fear, as a huge majority of advisors—94 percent—believe that smaller clients abandoned by advisors will turn to automatic investment platforms.

For many, the DOL rule is just the first step in a sweeping change. Seventy-four percent of advisors believe the fiduciary rule will ultimately be extended to non-retirement accounts, and a whopping 95 percent see the financial advice industry moving toward a model based on transparency and full disclosure.

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