Who Wins, Who Loses With New DOL Rule? $3 Trillion in Play

Morningstar analyst looks at the costs and benefits the financial services industry may face in ’16.

Morningstar analyst Stephen Ellis has taken a close look at the costs the financial-services industry will have to cover and the adjustments it will make if – or most likely when – the proposed Department of Labor fiduciary standard goes into effect in 2016.

Overall, Ellis says in an online article published on Tuesday, the new rules are likely to impact some $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.

“We assess that the U.S. Department of Labor’s proposed conflict-of-interest, or fiduciary standard, rule could drastically alter the profits and business models of investment product manufacturers like BlackRock (BLK) and wealth-management firms like Morgan Stanley (MS) serving retirement accounts,” explained Morningstar’s director of financial-services equity research.

1. Financial Sector: Loss

Ellis says that the business analysts and government researchers, who have put a $1.1 billion pricetag on what the overall industry will lose in business “are vastly underestimating the rule’s potential impact on the financial sector.”

His team’s low-end estimate of transaction revenue prohibited under the fiduciary standard, “is more than double that at $2.4 billion,” he states, relying on Morningstar data.

2. Full-Service Firms: Win

Full-service wealth managers, such as the wirehouse broker-dealers (Morgan Stanley, Merrill Lynch, Wells Fargo and UBS) may be able to convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs, according to Ellis.

“As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry,” the analyst said.

3. Robo-Advisors: Win

Under the new rules, full-service wealth shops are likely to rid themselves of clients with low account balances, which will benefit robo-advisors and other players to the tune of an estimated $250 billion to $600 billion of IRA assets, the Morningstar analyst states.

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