Data and Research

DOL Fiduciary Rule Will Force Product Innovation

Cerulli anticipates a continuing move to robo-advisers and changes in insurance company product fees.

By Rebecca Moore | March 17, 2016
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The Department of Labor’s (DOL’s) proposed conflict-of-interest rule (fiduciary rule) will force a period of product and platform innovation in the United States, according to Cerulli Associates.

Cerulli anticipates large broker/dealers (B/Ds) will use developing technology to serve smaller accounts on a flat-fee basis, and insurance companies will be forced to lower variable annuity expenses and commissions to be in line with other financial products.

The DOL’s proposal creates a new type of prohibited transaction exemption, referred to as the best interest contract exemption (BIC), which is a contract that the investment advice provider must present to a potential client in the case that the adviser will have an opportunity to earn a variable commission or fee in servicing that client. Specifically, Cerulli notes in its first quarter 2016 issue of The Cerulli Edge – Retirement Edition, the financial institution must disclose any variable compensation that the adviser receives for the advice and any resultant product sales, whether by the adviser or a colleague in the firm, along with comparative examples of compensation they would have received for other products.

Cerulli anticipates there will be unexpected changes to the retirement and wealth management industries and, to a degree, this cultural evolution is what the proposed rule is hoping to affect. According to Cerulli, in a speech at the Brookings Institution, Secretary of Labor Thomas Perez said, “I believe, in fact, that the new rule will be a catalyst for further innovation in the industry, as more firms devise new tools and strategies—assisted by modern software and new technology-based tools—to accommodate even those with only a few thousand dollars to invest.”

The continuing move to robo-advisers will be a result of the DOL’s proposed rule, Cerulli believes. These platforms offer scalable trading technology, algorithmic portfolio construction, and heavy use of low-cost exchange-traded funds (ETFs). “Digital adviser technology may provide a scalable solution for B/Ds to work with low balances in individual retirement accounts on a flat-fee and a fiduciary basis,” Cerulli says in its report.

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