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Report: DOL Rule May Force Advisors to Abandon Small Investors

Report: DOL Rule May Force Advisors to Abandon Small Investors

U.S. investors with less than $100,000 in assets may soon have an even harder time getting a financial advisor.

According to a report by Cerulli Associates, only 8 percent of advisors consider the 71 percent of American households with less than $100,000 in investable assets as their core cohort.

And once the new Department of Labor conflict of interest rule goes into effect, even fewer advisors may be interested in servicing these small investors.

“It is not that advisors are unwilling to help small investors,” said Tom O’Shea, associate director at Cerulli Associates. “Rather, they cannot figure out how to make money when working with them, leaving investors to go it alone or rely on guidance provided by direct-to-consumer firms.”

Financial industry lobbyists believe the fiduciary rule will make it even less profitable for financial advisors to work with small investors, making it difficult to sell mutual funds charging sales loads to retirement account holders. “Without the income from these commissions, so the thinking goes, brokers will abandon the small investor,” the report states.

O’Shea said the effect of the DOL rule will likely depend on the type of advisor; whereas an insurance broker/dealer is likely to get out of the small investor market, “it’s a real opportunity if looked at the right way” for others in the industry. It all comes down to scalability.

“[Traditional financial advisement firms] need to look more like direct-to-the-consumer firms.” O’Shea added, “The reality is that there are so many new technologies that allow firms to scale their advice, but that involves giving up some things, like asset allocation or asset modeling.”

In the meantime, small investors may look to more cost-effective options, like robo advisors, but there is concern about that as well. Apart from doubts over whether a robo advisor can actually take the place of a living, breathing person, many of these firms cannot build a large-enough clientele to stay afloat, the Cerulli report states. And this leaves small investors financially abandoned.

“We have created a world where people no longer have pensions, and they are cast adrift to figure out their financial future themselves,” he said. “There’s a great societal need here that we need to address as an industry.”

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