Commission Clients Don’t Want the DOL Rule
Despite U.S. government efforts to the contrary, most investors who now pay commissions don’t want to switch to fee-based payment structures in their retirement accounts.
That’s the main finding of a new J.D. Power report on investor reaction to the Department of Labor’s Conflict of Interest Rule for retirement accounts such as IRAs and 401(k)s, which is scheduled to take effect on April 10.
The market-research giant says polled 1,000 full-service investors last month to understand "their awareness and perceptions of the rule itself" and "to assess the relative attrition risk faced by firms depending on how they change their products and pricing in response to it.”
The DOL’s so-called fiduciary rule calls for financial advisors — whether or not they’re normally fiduciaries in the sense of having an ongoing obligation to put their clients’ best interests above their own or their employers’ — to act as fiduciaries when retirement accounts are involved. Unless specific permission is secured and recorded, the rule also requires that retirement-account holders be charged fees on a percentage of assets under management rather than on a per-trade or “commission” basis.
Fee-based and fee-only advisors have long touted fees as a better deal for investors because they reward them more as their clients’ accounts grow. But in some cases, commissions can be cheaper.
In response to J.D. Power’s question about their willingness to switch to fees, only 8% of investors who now pay commissions favor making the switch. Another 33% say they probably will.
But 40% of today’s commission payers say they probably won’t agree to pay fees, and 19% are definite in their refusal.
Aversion to fees gets more acute among high-net-worth investors and younger, highly engaged investors — J.D. Power calls them “validators” — who like to work closely with their FAs.
Among the HNW set, 25% say they definitely wouldn’t switch from commissions to paying 1% in fees on assets under management. That jumps to 52% against fees when the suggested rate is 2%.
Commission-paying validators are also quite inflexible. Of that group, 35% say they probably wouldn’t switch and 26% say no way.
J.D. Power says the point here isn’t to gauge whether fees or commissions are absolutely more popular, but to help wealth firms “assess the relative attrition risk” they face “depending on how they change their products and pricing in response to it.”
For J.D. Power, retail-brokerage clients who now pay commission on retirement-account activity have four choices. They can:
· Stay where they are and switch to a fee structure
· Find another firm that provides a compliant commission-based option
· Move to a self-directed service model and continue to pay commissions, potentially with access to some limited advice and guidance through a call-center representative
· Move to a robo-advisor that will provide automated portfolio management based on investor-provided goals and risk tolerance for a lower fee than a traditional advisor would charge
Against this backdrop, J.D. Power recommends that firms doing away with commissions in retirement accounts prepare FAs to start educating clients about their choices while being utterly transparent about potential new costs. These firms should also make it worth FAs’ while to recommend in-house options — like call centers — to clients who would be ill-served by fees.
For firms maintaining commission options under the DOL rule, J.D. Power suggests arming FAs to answer clients’ questions about the inherent conflictedness of commissions they might’ve picked up from media reports. They should also point their marketing squarely at investors — especially those of rival firms — for whom more choice may be appealing.