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Greater shift to robo-advisers for average savers may accompany fiduciary rule

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Greater shift to robo-advisers for average savers may accompany fiduciary rule

On theeve of the expected rollout of the Department of Labor's new fiduciary rule, a fullaudience gathered for a Life Insurance Conference panel in Las Vegas dedicated tothe new standard's implications for retirement planners and the wider investmentadvice industry.

Speakingduring the April 5 panel, Mark Smith, a partner at Sutherland Asbill & BrennanLLP, said $19 trillion in assets will be affected by the rule. While financial productmanufacturers and their distribution networks have done much in the past four toeight weeks to prepare for the regulation, he said, only so much can be done withoutthe final text of the rule, which is expectedto be released April 6.

The newstandards would require insurance brokers and financial advisers — any agent whohandles retirement planning — to hold a fiduciary responsibility to clients. Anagent would have to consider clients' financial goals first when offering them products.Critics of the current model argue that advisers are instead incentivized to sellproducts that generate the highest commissions, which are often the products manufacturedby the insurer an adviser works for. This system, the rule's backers say, presentsa clear conflict of interest between compensation and a client's best interest.

Conflicts of interest are covered through disclosures in allother legal matters, Smith noted, making the DOL's rule particularly strict. "Youdon't get a pass simply by giving a disclosure," he said.

The way advisers are compensated for certain products is lessat issue than the fact that the conflict of interest is not disclosed, a personin the industry who works in distribution said in an interview. The rule is aboutrevealing the relationship between commissions and products, he said. The best advisersalready disclose their compensation structures, he said, meaning that the rule willhave little to no impact on them but could force other agents out of wealth managementaltogether.

"There had to be [a] DOL-type intervention because thosedisclosures were so tucked away, in the sense that they were not to be seen or understoodby the general consumer," he said. "The best [advisers] will only continueto get stronger, and happily from a U.S. consumer perspective, it only enhancesmost advisers' value proposition."

Analysts,however, expect a direct hit to life insurers and asset managers over the next fewyears.  In a March 21 note, Morgan StanleyResearch summarized the rule's impact on life insurers as "disruption,"with an expected EPS hit of 2% for the sector in 2019. But for asset managers andretail investment advisories, the report's word was "destruction." Distributionfees could decline 20% and management fees could fall 7.5% annually, according tothe report, while up-front costs could lead to consolidation among smaller wealthmanagement firms.

Insurershave fought the rule tooth and nail since its proposal in April 2015. Comment letters to the DOL in July by , Prudential Financial Inc. and the American Council of LifeInsurers warned of radical change for the retirement product industry, includinga steep drop in annuitysales and the forced separation of in-house distribution adviser forces from productmanufacturing. In late February, the latter came to pass for MetLife, which its captive advisernetwork to for $300 million.

Questionsabout insurers' preparedness for the rule, and the extent to which the rule willharm performance, have recurred during earnings calls for several quarters. Executiveshave both widely denounced the rule and taken pains to ensure investors that theircompanies will continue to perform well in a post-rule world. Sen. Elizabeth Warren,D.-Mass., has argued thatthose positions are contradictory and has asked the SEC to investigate whether suchpublic statements have misled shareholders. 

Firmswith large books of business in IRAs and other smaller retirement accounts couldstruggle, panelists and others at the conference said. Smaller retirement accountstypically generate commissions, while wealthier clients' accounts are managedunder a fee structure. The rule could lead brokers to shift business away from commission-basedbusiness, leaving average savers who use comparatively small IRAs with fewer retirementoptions.

Robo-advisers, digital investment platforms that offer very lowfees but little, if any, personal contact with an adviser, could end up being theprimary way these savers plan for retirement, one audience member said during apanel. "Maybe millennials had better start getting used to robo-advice, becausethat may be the only advice they're going to be able to get," the person said.

But robo-advisers do provide objectivity with no room for externalpressures, said Jill Peckingham, a senior manager at Ernst & Young. Marcel Weiland,the director of enterprise solutions at Riskalyze, a technology consulting firm,noted that traditional planners' ability to provide qualitative advice isn't necessarilya good thing. "Qualitative translates to compliance risk," he said.

Several of the largest wealth management firms have recentlylaunched or plan to launch robo-adviser businesses. Fidelity Investments, a registeredservice mark of FMR LLC,was reported to begintesting its service March 30. LadenburgThalmann Financial Services Inc. opened its robo on March 21, while Chairman andCEO Mark Casady said Feb.11 that his firm is moving forward with its robo-advice service.