Fiduciary Rule May Push Advisers Out of DC Business

As implementation of the DOL’s fiduciary rule approaches, advisers may have to choose between remaining in the DC business and pursuing traditional wealth management.

If implemented as it stands in April 2017, the Department of Labor’s Conflict of Interest Rule would expand fiduciary responsibility to virtually all advisers servicing the retirement market, either through providing investment advice to plans and participants or consulting about health savings accounts (HSAs).

The rule will also instill the role of fiduciary, as defined by the Employee Retirement Income Security Act (ERISA), on advisers serving individual retirement accounts (IRA)s. This move places heightened scrutiny on the decision to recommend rolling over assets from employer-sponsored retirement plans into IRAs.

“Advisers accustomed to parlaying defined contribution (DC) plan assets into traditional wealth management relationships via IRA rollovers face new obstacles,” explains Dan Cook, associate analyst at research firm Cerulli Associates. “To justify that an IRA rollover is in the best interest of a DC plan participant, advisers will face additional compliance and operational work.”

Similar regulatory responsibilities under the fiduciary rule could trigger major changes to the way advisers do business, and some may leave the defined contribution (DC) plan space entirely—a topic explored in a new report by Cerulli.

“Cerulli asserts that the hurdles that the DOL Conflict of Interest Rule creates will force another round of ‘in or out’ for the population of advisers operating in the employer-sponsored retirement plan market,” says Jessica Sclafani, associate director. “Some advisers will be mandated by their B/D or wirehouse to choose between DC plan business and traditional wealth management rather than operate in both channels.”

NEXT: Specialist advisers in a good place

However, the firm believes that retirement specialist advisers earning most of their revenue from employer-sponsored retirement plans are in good shape to handle the regulatory shifts as they are experienced in serving as fiduciaries to DC plan sponsors, and are versed in trends impacting the retirement space. Cerulli predicts that advisers that lack this experience will find the new regulatory environment too burdensome and exit the market. Those left will have to gather specialized knowledge of the market in order to continue servicing DC plans.

The firm states this trend will open doors of opportunity for defined contribution investment-only (DCIO) asset managers and outsourced fiduciary providers.

"Cerulli expects that advisers will increasingly turn to fiduciary outsourcing providers either because their B/Ds prohibit them from acting in a fiduciary capacity, or because they lack the appetite or ability to take on the greater fiduciary responsibility currently set forth under the new regulation," explains Cook.

The firm also notes in its report that the boutique DC consultant or a group of less than 100 mid-market consultant or adviser practices have expanded their influence in the DC market in the past three to five years. “Within the mid-sized plan asset segment of the DC market, boutique DC consultants are highly influential, targeting plans with $25 million to $250 million in assets.”

Cerulli adds, “Specifically, in 2016 proprietary surveys of defined contribution investment-only (DCIO) asset managers and DC plan recordkeepers, the mid-market plan asset segment is identified as the greatest opportunity for DC business expansion during the next few years.”

Notably, the fiduciary rule is entering a new realm of uncertainty with the victory of President-elect Donald Trump, Republican domination of Congress, and Trump’s recent nomination of Andrew Puzder as DOL secretary. Any drawbacks to the rule, however, are not likely to take effect prior to the rule’s current implementation date.

Industry experts and researchers including Cerulli urge advisers to keep their eyes focused on meeting compliance requirements under the DOL rule as they enter the New Year.

These findings are from the fourth quarter 2016 issue of “The Cerulli Edge - Retirement Edition.” Information about purchasing the report can be found at