The Department of Labor fiduciary rule, which may or may not go into effect April 10, has caused many broker/dealers to rethink their business models and move away from commissions towards a more fee-based approach. Yet nearly six in 10 (59 percent) investors who pay commissions say they probably won’t or definitely won’t be willing to stay with their current firm if they’re forced into a fee-based structure in their retirement accounts, according to a new study by J.D. Power.
Many b/ds are taking a big bet that investors will prefer to pay an asset-based fee for financial advice over the long term. Late last year, Merrill Lynch said it would stop offering commissions in retirement accounts, but the firm recently said the account conversions may not apply to all of its customers. Commonwealth Financial Network won’t allow commissions in retirement accounts, according to published reports.
As a result, investors will be faced with a choice, writes Michael Foy, director of the wealth management practice at J.D. Power. They will either choose to stay with their firm and switch to a fee-based model, move to another firm that will allow them to continue to pay commissions, move to a self-directed service model with a call center, or move to a robo advisor.
“The significant money-in-motion event will undoubtedly create winners and losers among industry firms, with the outcomes determined by how effectively they can communicate and deliver on the unique value proposition they provide to those segments of the market in which they choose to compete,” Foy writes.
In February, J.D. Power surveyed 1,000 full-service investors on their awareness and perceptions on the DOL rule. The research firm also wanted to get a better idea of the attrition risk faced by firms depending on how they respond to the rule.
High-net-worth investors—those with $1 million or more in investable assets—are even more averse to the fee model. A quarter of HNW investors say they definitely wouldn’t switch from commissions if forced to pay a 1 percent fee; 52 percent said they wouldn’t make the switch at a 2 percent fee.
Firms that offer alternatives to full-service, such as proprietary self-directed platforms, advisor call centers or robo advisors, are better positioned, according to Foy, because they may be able to direct some of those dislocated assets into one of these other models.
And the survey found that younger investors are open to those options. More than half (56 percent) of investors ages 52 or younger would consider a robo advisor as an alternative to traditional advice. 62 percent of these younger investors would also consider a self-directed option.
Full-service firms that choose to drop commissions should make sure they have buy-in from their financial advisors and that their advisors are proactively talking to clients about why the firm is making the change, Foy says. Such firms should also provide and promote those in-house alternatives to resistant clients.