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Why Financial Advisory Stocks Surged on Wednesday

Image source: Flickr user Gage Skidmore.

What happened

It's a great day for wealth management and financial advisory companies. Shares of Primerica (NYSE: PRI), Ameriprise Financial (NYSE: AMP), and LPL Financial Holdings (NASDAQ: LPLA) closed up 9% to 12% higher today as the markets digested what a Donald Trump presidential victory means for financial advisory businesses.

So what

Primerica, Ameriprise, and LPL Financial all make money by providing financial advice, mostly to mom-and-pop savers all around the country. On each sale of a mutual fund or other retirement product, they and their advisors collect up-front and recurring fees and commissions on each transaction.

In April, the Department of Labor published its final rule for fiduciaries, which was aimed at generally reducing and making more transparent the fees that financial advisors could earn by selling products to investors. The rule was intended to close the gap in standards between employer-sponsored retirement accounts like 401(k)s and individual retirement accounts (IRAs). Financial advisors had more freedom to encourage investors to purchase high-fee, high-commission products within their IRAs.

The companies on the move today have all pledged their loyalty to the commission-based business model. LPL Financial declared that it would stick to commission-based processes, and develop a mutual-fund-only IRA that would allow it to charge upfront fees of 3.5%, plus on-going fees of 0.25% per year. Primerica and Ameriprise also announced their intention to continue IRA commissions.

The rule doesn't outlaw commissions entirely. Advisers can continue to sell commission products so long as their clients sign a "best interest contract exemption," which outlines fees and potential conflicts of interest, and opens advisors up to lawsuits if clients believe that their interests were not put before the interest of the advisor. Ameriprise Financial executives had previously suggested that the final rule might be beneficial for advisory companies its size, as advisors flee smaller companies that find it difficult to navigate the rule's requirements.

Now what

Some expect a Trump administration to roll back the rule, which won't go into full effect until 2018. That would enable financial advisory companies to revert to their old practices, and push investors toward products that carry higher fees and commissions, even if it isn't in their clients' best interests.

Trump never made overturning the rule part of his campaign platform, but an advisor to his campaign, Anthony Scaramucci, was an outspoken critic of the rule. Republicans in Congress have proposed legislation that would weaken many of its provisions.

The market seems to believe that a Republican-controlled federal government could overturn many or all of the new fiduciary standards for financial advisors in what would be a certain boon for firms that rely on commissions to generate revenue from client accounts.

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