DOL’s New Rule Should Be A Win For Consumers

It seems everyone has an opinion about what effect, if any, the DOL’s Conflict of Interest Rule will have on consumers. Opponents of the rule insist it will raise costs and reduce access to adequate retirement advice, while proponents argue the increased transparency will be a win for the investor. So, who is correct?

While it is true that financial firms have had to spend millions of dollars to comply with the new rules, it is unlikely that this will lead directly to higher costs for the end-user, at least not in the long run. Most of the accounts that will be affected by the new rule are commission-based accounts serviced by brokers or insurance company representatives. These types of transactions leave the investor to pay a front-end, or ongoing commission on their investment (or both). The investments are usually higher-cost mutual funds or annuities.

The new rule will not eliminate commissions, but it does increase the amount of paperwork and disclosures that the broker will need to provide in order to continue receiving those commissions. Consequently, many such agencies are likely to transition to fee-based accounts. In these accounts, investors are charged a percentage of assets instead of a commission. The investments in these fee-based accounts would be less expensive share-classes of mutual funds. So, while the advisor’s fee might be slightly higher and certainly more transparent, the total cost to the consumer should stay relatively close to what it is now.

An exception may be very small commission-based accounts. In some situations, brokers may not want to offer fee-based accounts to small investors. This would likely drive these small investors to robo-advisors — online service providers that provide electronic advice to clients. These services can be fairly inexpensive, but lack the personal attention that a regular financial advisor can provide. It’s certainly plausible that some broker dealers may even start their own robo-advisor firms.

Over the years, financial services firms have always adapted to change. They might go kicking and screaming, but they have always changed. This new rule represents a dramatic shift for many brokers, but it is the way that most fee-based Registered Investment Advisors have been operating for years.

Overall, the new rule (when and if it is finally implemented) should be a win for consumers.