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Why the DOL Rule Might Be a Boon for Brokers

August 15, 2017

While the effect of the Department of Labor's fiduciary rule on investors remains unclear, it seems to be benefiting the brokerage industry — even those advisors who staunchly opposed it, according to the Wall Street Journal.

Critics of the rule, which purports to require retirement account advisors to put clients’ interests first, say the rule limits consumer access to financial advice while raising compliance costs for the industry, the paper writes. But so far data suggests wealth management firms are actually benefitting from trying to comply with the rule, according to the Journal.

Many large firms, including Merrill Lynch, have opted to reduce their brokers’ potential conflicts of interest by all but banning commission-based retirement accounts, the paper writes. But fee-based accounts also happen to be far more profitable and predictable in terms of revenue for most advice firms, according to the Journal.

Merrill Lynch had 38% of its wealth business client assets in fee-based accounts in the second quarter, up 19% from the year prior, the paper writes. Even at Morgan Stanley, which opted to continue offering both fee- and commission-based retirement accounts, fee-based assets now make up 43% of its wealth management assets, up 17% from a year earlier, according to the Journal.

Even discount brokerages stand to gain from the rule, the paper writes. TD Ameritrade chief exec Tim Hockey says the rule is behind the momentum that helped the firm reach a record $22 billion in net new client assets in the second quarter, compared to $13.6 billion a year prior. So financial firms complaining about the rule are “are crying crocodile tears,” Phyllis Borzi, former assistant labor secretary and an architect of the rule, tells the paper.

The DOL rule has even contributed to fee-based account growth at firms primarily focused on commission business, such as Stifel Financial, the Journal writes. But Stifel’s chief exec Ronald Kruszewski, a critic of the rule, tells the paper that fee-based accounts can cost clients twice as much as commission-based accounts.


Yet the rule’s long-term effect on the advice industry remains unclear. Increased potential liability and costs of complying with the rule can eat into profits, while the move away from higher-cost mutual funds and other relatively expensive products toward passively managed funds could drive down the profitability of fee-based accounts over time, Devin Ryan, an analyst with JMP Securities, tells the paper.

And it’s unclear how changes to the rule will affect the industry. The rule went into only partial effect in June, and last week the DOL proposed delaying the deadline for compliance from January 2018 to July 2019 to review it further.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here.