A new J.D. Power investor survey analysis, published by Michael
Foy, the ratings firm’s wealth management practice director, argues the uncertain
fate of the DOL fiduciary rule has not necessarily slowed the impetus for change
in the ERISA advisory industry.
“Some of these changes have the potential to significantly
disrupt the way investors save and plan for retirement,” Foy suggests. He warns
that data show advisory staff and leadership alike must “address
the attrition risk faced by firms,” which will be more or less severe
depending on “how they change their products and pricing.”
Similar to a significant volume of recent research, Foy
draws the conclusion that market forces may very well naturally drive some of the
the Department of Labor (DOL) sought to achieve under the Obama presidency.
Even with the likelihood of some or all of the Obama-driven rulemaking being halted by the
new administration, 33% of investors currently in commission-based accounts say they “probably will” use more fee-based approaches
in the near future, and 8% “definitely will.” While 40% “probably will not” and 19% “definitely
will not” shift away from commissions, Foy warns the group that is moving away
from commissions could just be the first wave.
Zooming in on the individual retirement account (IRA) market
is particularly revealing. According to Foy’s analysis, “IRA assets represent an overall
market of nearly $8 trillion in the United States and while the industry
has been directing more of those assets into fee-based accounts for years ... the rule would impact about $3 trillion
in client assets and [many billions] in wealth management industry revenue.”
Given the fact that many firms are continuing to review and shift their product and fee models, investors in IRAs may soon be faced with a choice, Foy
speculates. “Stay at their firm and switch to a fee-based model; find another
full-service firm that will continue to provide a commission-based full-service
option; move to a self-directed service model and continue to pay commissions,
potentially with access to some limited advice and guidance through a
centralized (e.g. call center) firm representative; or they can move to a
digital advice model … that will provide automated portfolio management based
on investor-provided goals and risk tolerance for a lower fee than a
traditional adviser would charge.”
Foy observes the “intuitive hypothesis that current
fee-based investors are generally more satisfied with what they pay their firm
than those who pay commissions” continues to ring true. But the findings of J.D.
Power’s DOL Special Report “also show there is significant resistance among commission-based
clients—especially the high net worth—to being forced to migrate to fees.”
Foy’s full analysis is available here.