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 reforms 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.