The forgotten victims of the DOL Fiduciary Rule fallout are likely to be new financial advisors, older advisors reaching succession age, and advisors with small commission-oriented practices. This group of professionals will likely become a significant cost and liability to their broker-dealers.
New financial advisors, who traditionally enter the industry by generating commissions and collecting assets to validate their broker-dealer contracts as well as make an income, will now find it significantly more difficult to meet their income and business goals. Let’s use a $100,000 IRA rollover as an example. Under the commission model it is reasonable to assume the financial advisor made between $3,000 and $7,000 up front on the rollover. In the fee-based model, the advisor will be at the high end of their income potential if they were to make $135 per month on the same account, and this is before the broker-dealer takes their cut. In an industry already struggling with abysmal retention rates due to lack of salaries or hourly-based compensation structures, new financial advisors (likely) will not financially survive long enough to build a practice.
Small commission-oriented practices might see revenues drop as much as 80%. Even if they transition assets into fee-based accounts, the fees generated by the assets they manage may not be high enough to meet their broker-dealer quotas. It is unlikely that a broker-dealer will continue to take on the expense and litigation risk of small producers.
Succession-aged advisors potentially just saw their largest asset’s resale value get decimated. It is customary to use a multiple of a trailing 12-month revenue number for a buyout price. If that same income can no longer be generated in the same way, the resale value of the business goes down substantially, and the entire client list must be rebuilt.
The financial services industry in a post-DOL Fiduciary Rule world will struggle with profit margins and risk mitigation. This will drive firms to focus mainly on larger producers, which spells trouble for smaller producers and less valuable practices. To survive, these financial advisors will need to find organizations with a strong “teaming” culture.