The Department of Labor's new fiduciary rule has inspired plenty of doom-and-gloom predictions from critics who warn that industry profits will suffer and small investors will lose their access to financial advice.
But for RIAs, it’s becoming clear the new rules may actually present significant growth opportunities.
When the new rule takes effect next April, the DoL will extend to IRAs the kind of best interest protections that have long governed 401(k)s and other workplace-sponsored retirement plans. The new rule also makes advice about rolling workplace retirement assets into an IRA as investment advice subject to best interest protections.
These changes, which come as tens of millions of retiring baby boomers face the decision of what they will do with their retirement plan nest eggs, could result in some important benefits for RIAs. Among them:
· Recent regulatory changes favor RIAs.
Fee-disclosure regulations finalized in 2012, combined with the new DoL conflicts rule, strengthen the wind in the sails of RIAs looking to compete in a $5 trillion marketplace, while creating a higher hurdle for commissioned brokers to advise retirement plans.
· RIAs can attract a greater share of 401(k) plan business.
We believe there is enormous, untapped opportunity for RIAs to advise 401(k) and other workplace retirement plans. Fewer than 10% of RIAs are actively involved in the retirement plan space, according to Cerulli & Associates. When you consider that some plans have tens of millions of dollars, with new money coming in with every paycheck, what’s not to like?
· RIAs can capture more IRA rollovers from 401(k) clients.
The DoL rule not only provides a clearer path for advising retirement plans, but also for advising employees on how to roll assets into IRAs managed by your firm when they leave an employer. If you can justify and document why a rollover is in their best interest, you have a better chance of providing a long-term experience for that client.
· Advisers can gain other business from plan participants.
If an RIA advises the workplace plan of an employee, and is able to retain that relationship when the individual leaves the employer, that RIA has a greater opportunity to discuss and, possibly, oversee assets outside the retirement account.
· Deeper relationships create a competitive advantage.
By developing a broader, more holistic relationship with retirement plan participants, RIAs can create a moat around the client that competitors will find more challenging to break through.
There are also potential challenges for RIAs, however.
Many commissioned brokers, for example, likely will continue serving retirement investors through a best interest contract exemption established under the new DoL rule. Discretionary RIAs have no need for such an exemption, but that important distinction may be lost on most investors.
IRA rollovers, meanwhile, will require some more work.
Before advising a retiree to roll over a 401(k) plan to an IRA account their firm would manage, RIAs will need to compare the investor’s current fund lineup, costs, services and other factors with their own offerings and then determine whether a rollover is truly in the investor’s best interest. And they must fully document that assessment.
Even so, RIAs providing comprehensive financial planning services would still have an advantage in this new world:
· RIAs can be the better choice for the retirement investor.
Compared with the typical workplace plan, RIAs can offer more education and investment services. They also tend to offer access to a wider menu of funds through their custodian.
· More talent and clients shifting to the RIA channel.
RIAs may also benefit from increased movement of broker teams to the RIA world. There have been reports the new DoL rule is prompting more commissioned brokers to break away from their firms to become independent RIAs, creating an opportunity for RIA firms to grow by acquiring firms or tucking in breakaways.
· Consolidation opportunities.
By the same token, smaller RIA firms buckling under the weight of regulation may decide to sell. These firms can become acquisition targets that help other RIAs grow.
Ultimately, the DoL is trying to do the right thing by mandating stronger protections for the millions of Americans responsible for managing their own retirement savings outside the workplace protections of ERISA.
And that’s why I believe that over time, the DoL rule can spell opportunity for RIAs, a group of professionals that have been putting their clients’ interests first for decades under the Investment Advisers Act of 1940.