The Department of Labor’s (DOL) new fiduciary rule is already making its presence felt in the retirement planning industry as firms and advisors scramble to restructure their businesses so that they will be in compliance when the rule takes effect next April. There is no one-size-fits-all method of achieving compliance, but broker-dealers are footing the largest bill when it comes to making this adjustment. They are feeling the pinch in their budgets for informational technology and are also doing product evaluations to see what commission-based options they will have to remove from their offerings.
A Costly Revision
Fred Reish, a partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group, told ThinkAdvisor in a recent interview that broker-dealers are facing some hard and expensive choices in their effort to comply with the pending regulations. This statement is backed by a report from Oxford Economics that was commissioned by the Financial Services Institute and published last fall, and was based upon interviews with senior executives from independent broker-dealers and clearing firms. It warned the Department of Labor that it was substantially underestimating the real cost that broker-dealers would face in their efforts to become compliant. (For more, see: How Advisors Can Plan for Fiduciary Rule Changes.)
The cost will, in fact, make it difficult for some smaller firms to stay in business once the rule takes effect. The estimates in the report indicate that the cost per firm for compliance could range anywhere from $1 million to $16 million per firm, depending upon its size. Needless to say, this will dramatically impact the bottom lines of smaller players, as all firms will have to substantially restructure their business models and navigate the complexities of the Best Interest Contract Exemption (BICE).
Although industry opinion on the true cost of compliance with the rule still varies, Oxford has stated that nothing in the final version of the rule that was released has lowered their cost estimate. The report estimates that the average cost to train employees for the new rules will be about $800,000 per firm. And its estimate seems to be right on target. Ameriprise stated that it has spent over $11 million this year in compliance costs, and has had to devote over 400 employees to this task.
LPL Financial joined Ameriprise in announcing that the firms will no longer sell A-share mutual funds, and their advisors will no longer be collecting 12b-1 fees in fee-based accounts. These actions will still be permitted in commission-based accounts as long as the BICE requirements are met. (For more, see: How SEC and DOL Fiduciary Standards Could Differ.)
The IT cost for broker-dealers is also a major concern. David Lyon, CEO and founder of Oranj, told ThinkAdvisor that there is “additional information that they need now under the rule — additional types of reports, adding in more steps to an already lengthy process. It’s ultimately driving up their IT costs. Technology is not a one-time cost; you have to maintain and adopt and make changes over time. So [BDs] are weighing the compliance risk of staying in [a certain] business line.”
Reish is likewise concerned about the plight of smaller broker-dealers that lack the resources of their larger counterparts. He also told ThinkAdvisor that, “This [compliance] work is very difficult and somewhat expensive, and the smaller RIA firms … might not be seeking legal advice, and they need it. They can’t just rely on going to conferences.”
The Bottom Line
Time will tell how compliance with the new fiduciary rule affects the bottom lines of broker-dealers and financial planning firms. The pending regulations have already made a substantial impact on the duties of firms and advisors as they gear up to deal with BICE requirements and other elements of this rule. Advisors need to stay in touch with the DOL in order to ensure that their efforts have the necessary effect. (For more, see: DOL Fiduciary Rule: RIAs See Negative Impact.)