The new Labor Department rule aimed at preventing conflicts of interest in retirement investment advice could stimulate growth in the use of exchange-traded funds, according to a report published Tuesday by BNY Mellon Corp.
“While the DOL Rule is likely to lead to greater interest in ETFs overall, this growth will require improvements to be made in platforms, education, and data analysis tools,” the paper said. “The future of ETFs is bright and, with the DOL Rule, will lead to significant and meaningful changes in the industry overall.”
The New York-based bank projected the growth in actively and passively managed ETFs, with mutual funds and annuities becoming some of the asset classes that will see declines in demand.
ETFs have cost and compliance advantages compared to these products, according to the paper. Still, ETFs and related products must undergo some infrastructure changes if they are going to be more widely used under the new fiduciary standard DOL established.
For example, defined contribution retirement plans are generally based on mutual funds, and elements of defined contribution (DC) plan infrastructure would have to change in order to better facilitate the use of ETFs.
“DC plans were set up with mutual funds as the basis and can handle fractions of shares, which ETFs are not set up to do as easily,” BNY Mellon said in the paper. “And, they were set up for end-of-day vs. the intraday trading of ETFs. The DOL Rule could accelerate the process to fix this as plan sponsors and advisors feel the pressure to promote lower cost investment products.”
The deadline for full implementation of the fiduciary rule is April 10. Several industry groups have mounted legal challenges to the regulation.