page contents

The Department of Labor (DoL) Fiduciary Rule requires financial advisors to meet a fiduciary, rather than a suitability, standard when recommending investment products for their clients’ retirement accounts. This will significantly impact asset managers, wirehouses, and insurers, given that over 50% of US financial assets are held in retirement accounts. The rule mandates that advisors look out for the “best interest of their clients”, and gives clients legal recourse if this “best interest standard” (BIC) is violated.

The guidelines expand the reach of the existing fiduciary rule that governs advisors working with 401(k) plans to include 403(b) plans, Savings Incentive Match Plans for Employees (SIMPLE), Employee stock ownership plans, Simplified Employee Pension (SEP) plans, Individual Retirement Accounts (IRAs), and defined-benefit plans.

In drafting the legislation, the DoL estimates that investors are charged $17B annually in excessive and unwarranted fees and commissions. Firms serving retirement investors will have to document their policies and procedures to ensure their investment recommendations and compensation practices are compliant.

While the presidential memorandum signed on February 3, 2017 was widely reported to delay implementation of the legislation, this is not the case. Rather, the memorandum directs the Secretary of Labor to “undertake a new economic and legal analysis to evaluate whether the looming applicability date of the fiduciary rule has harmed investors”.

The rule impacts the entire wealth management ecosystem to varying degrees:

REGISTERED INVESTMENT ADVISORS (RIAs): Already held to a fiduciary standard, RIAs providing advice on retirement plans and IRAs will have to make minor compliance changes to verify and document that clients are obtaining unconflicted investment advice. Activities requiring extra scrutiny for RIAs include retirement account rollovers, recommendations to take plan distributions, or any recommendation that would result in increased compensation for the advisor.

“While it applies more directly to wealth managers, the DoL Fiduciary Rule will accelerate several current trends in asset management, including the demand for passive strategies and ETFs, the shift from brokerage to advisory programs, and a culling of asset  management partners by wealth managers.”

Thriving in the New Abnormal: North American Asset Management 

McKinsey & Company

WIREHOUSES & INDEPENDENT BROKER-DEALERS (IBDs): Under a provision known as the BICE (Best Interest Contract
Exemption), brokers can still sell high-fee proprietary products to clients provided additional paperwork is completed.
This documentation discloses commissions paid and states that the broker is meeting the fiduciary requirement even
though they are receiving a commission.

The wirehouses — Bank of America, Merrill Lynch, Morgan Stanley, UBS Group AG and Wells Fargo & Co. – will have to maintain benchmarking data on advisor compensation and implement policies to ensure compliance and oversight of their combined 50,000 advisors. Smaller IBDs will have greater difficulty implementing the guidelines due to resource and cost constraints and could drive further industry consolidation.

FINANCIAL ADVISORS: Operating as both RIAs and brokers, these firms are most impacted by the Fiduciary Rule, and will be required to implement all the procedural changes facing RIAs and wirehouses.

Industry Impacts

RETIREMENT ACCOUNTS Even high net worth investors tend to maintain IRAs in order to take advantage of tax-deferred savings. This will require broker dealers, advisors, and RIAs managing non-retirement assets alongside IRAs to comply with two sets of rules and product lists.

401(k) rollovers are also impacted. A client switching jobs would typically transfer their 401(k) assets to an IRA with the help of their advisor. Retirement plan subaccounts are typically low-fee “I” share products. If the advisor moves clients funds into
a higher fee share class this will have to be documented and communicated to the client.

MOVING FROM COMMISSIONS TO FEES Although commissions aren’t prohibited by the DoL ruling and might even be advantageous for some products and investors, most of the top wirehouses have migrated to a fee-based model of assets under management (AUM). Fee-based models are thought to produce more reliable revenue streams, instill greater investor confidence, and invite less regulatory scrutiny. Morningstar estimates that fee-based account models can yield revenue as much as 60% higher than commission-based models.

FROM ACTIVE TO PASSIVE The DoL focus on unsuitable investments and excessive costs is accelerating investors’ preference for low-fee passive investment products, as high priced products such as variable annuities and non-traded REITs lose favor. Likewise, model portfolios are seeing increased use at the expense of advisors focused on picking individual stocks.

Charles River: Preparing Wealth Managers for Significant Change

The wealth management industry is already undergoing significant change, and the DoL Fiduciary Rule would only accelerate those changes. As an industry leading provider of institutional and wealth management solutions, Charles River helps enable wealth managers, advisors, and wirehouses to adapt to this rapidly changing landscape and maintain competitive advantage.

FACILITATING THE TRANSITION TO FEE-BASED MODELS Charles River provides wirehouses with a complete platform to roll out Rep-as-Portfolio Manager programs and the requisite scalability to add large numbers of accounts. The platform streamlines deployment of advisor-driven strategies with centralized portfolio management, central overlay, performance measurement and attribution, and multi-custodial position management and reconciliation. Advisors can efficiently implement high conviction investment themes across their entire book of business and benefit from the same portfolio and order management capabilities available to top-tier wealth management firms. Managers can offer products suitable for each client’s account size, investment objectives, and risk tolerance. Charles River’s global multi-asset instrument coverage helps to ensure full support for even the most sophisticated investment products.

COMPLIANCE AND SURVEILLANCE Charles River helps advisors and wealth managers meet demands for more stringent risk management and surveillance with centralized compliance monitoring and management capabilities. Approved security lists helps ensure advisors make appropriate product recommendations for both retirement and non-retirement accounts. Integrated surveillance lowers operational risk by supporting implementation and enforcement of client and firm mandates.

Advisory services utilize an extensive library of built-in rules for worldwide regulatory requirements and mandates, including US SEC 1940 Act and Rule 2a-7, UCITS and CESR, Dodd-Frank, KAGB and global shareholder disclosure (GSD) regulations. The Charles River Wealth Management Solution automates the compliance workflow and provides enterprise-level capabilities and scale, including advanced compliance rule-building, testing and maintenance, customizable reporting, and a complete audit history.

ENABLING PRODUCT INNOVATION The DoL Fiduciary Rule provides wealth managers with an opportunity to differentiate their firms by offering innovative retirement investment products. Firms can implement their entire investment process on Charles River for all products and strategies, including multi-asset, total return, smart beta, and risk parity. All business units and product groups use the same portfolio management, trading, risk, and compliance backbone, providing firms with significant operational efficiencies.