Fiduciary Rule Delayed, Not Dead
To us, the actual text and tone of the Department of Labor’s 60-day delay of the applicability date of the fiduciary rule indicate that the Department still believes that its rule benefits retirement investors and that financial industry firms should be ready for the new June 9 applicability date. While acknowledging that conducting an updated legal and economic analysis will likely take more than 60 days, the Department writes on page 19, “Applying the Rule and the Impartial Conduct Standards after a 60-day delay, however, means that much of the potential investor gains predicted in the Rule’s regulatory impact analysis published on April 8, 2016, will commence on June 9, 2017, and accrue prospectively while the Department performs the examination mandated by the President and considers potential changes to the Rule and PTEs.” The text also mentions numerous times the harm to retirement investors from an extended delay of the rule and that much of the initial implementation cost of the rule to financial institutions now comprises sunk costs, with little to be saved from changing the rule. We believe that the fiduciary rule will live on, and we are currently maintaining our fair value estimates and moat ratings for affected firms.
We believe that the costs of the rule will be manageable for most financial firms. We estimate that the implementation and potential class-action lawsuit settlement costs decrease the intrinsic value of the wealth-management firms that we cover by 0.5%-6%. Operationally, wealth-management firms are scrutinizing the financial products that they distribute and exploring new ways to service investors. Changes among wealth-management firms are also having knock-on effects at product manufacturers that accelerate trends, such as an emphasis on performance compared with price, the shift to passive from active, distribution-channel changes, and industry consolidation.
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