SIFMA Does Not Agree with DoL’s Reasoning

The Securities Industry and Financial Markets Association (SIFMA) had its turn Tuesday at the Department of Labor’s (DoL) hearing to address the proposed changes to the definition of fiduciary.

Ken Bentsen, Executive Vice President for Public Policy and Advocacy at SIFMA, spoke on behalf of the organization to the panel of regulators from the Employee Benefits Security Administration (EBSA).

SIFMA believes (in accordance with several previous presentations), that the new definition of a fiduciary is much too broad and seeks to impose fiduciary status on those who have no direct understanding of the plan.

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SIFMA’s statements also challenged the reasoning presented by the DoL as to how the new definition would support increased enforcement of the laws. In his testimony, Bentsen said:  “The Department also states that participants and beneficiaries would directly benefit from the Department’s more efficient allocation of enforcement resources by providing greater protections than are available under the current regulation. However, no example or explanation of this benefit is provided that would justify these sweeping changes. We believe there is no evidence that the proposed regulation will be more protective but a great deal of evidence that these “protected” accounts will suffer greater costs and fewer choices.”

He continued: “This proposed rule would reverse 35 years of case law, enforcement policy and the understanding of plans and plan service providers, without any legislative direction to depart from the Department’s contemporaneous understanding of the statute, in order to make it easier for the Department to sue service providers. That seems to us to be an inadequate basis for proposing such a dramatic change. And of course, this enforcement rationale cannot apply to IRAs, over which the Department has no enforcement authority.”

SIFMA’s complete statement can be seen here

Other organizations that have presented similar concerns at the hearings include: JP Morgan Chase,The SPARK Institute, American Benefits Council, and Great-West Retirement Services.

Pershing Publishes Study on Hybrid Platforms

Pershing LLC, a BNY Mellon company, says its independent study examines how a dually registered adviser can combine a fee-based and commission-based business.  

“The Economics of Constructing a Hybrid Platform,” developed with Advisor Growth Strategies, LLC, offers broker/dealers (B/Ds) guidance for creating a tactical plan for developing a hybrid platform. The study also looks at the growing trend of advisers to adopt a hybrid business model.

Pershing included case studies of three B/Ds—American Portfolios Financial Services, Summit Brokerage Services, Inc., and Capital Analysts Incorporated—to illustrate different and successful approaches to building a hybrid platform.The study also warns that independent B/Ds who choose to ignore the trend towards advisory and hybrid models may see their growth marginalized.

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The study makes the following suggestions:

B/Ds need to develop plans that suit their specific firms. The hybrid model takes a holistic approach to wealth management that leverages solutions from both sides of the business. Firms must understand the needs of the investment professionals they want to service in the future and develop a unique value proposition to attract and retain their business. B/Ds who do not carefully evaluate the hybrid opportunity run the risk of being at a competitive and economic disadvantage.

Compliance oversight must be factored into selection of a hybrid model. B/Ds have oversight responsibility for the actions of an independent registered investment adviser (RIA), even though they do not sponsor an advisory program or may not act as a custodian. By integrating hybrid business into a single technology platform, firms can create efficiencies to more easily manage compliance and simplify oversight.

Efficient, integrated technology is critical to the success of a hybrid model: Entrepreneurial investment professionals will likely prefer their own customized technology and regard the B/Ds’ platform as too homogenous. B/Ds need flexible, open architecture technology platforms with powerful capabilities that will be attractive to advisors and enable firms to integrate easily. A fully integrated platform can lower expenses and create new revenue streams, while simplifying oversight responsibility for all parties.

Varying hybrid models impact economics differently: The risk of introducing a different hybrid model may impact revenue streams with limited opportunity to make up the difference without lowering payouts on the commission business. At minimum, by allowing an investment professional to use his or her own RIA, B/Ds lose the ability to charge a program fee and may be under pressure to raise payouts on the advisory side of their business since the investment professionals are taking on the responsibility of running their own programs.

Hybrid models bring new expense considerations: Revenue is only one side of the equation when thinking through a hybrid platform. There will be increased compliance costs as the B/D is required to monitor the independent RIA, which likely will not be consistent with the firm’s corporate RIA. Investment professionals with their own RIA may also have their own internal technology, policies and procedures that are inconsistent with the broker-dealer.As the number of dually-registered advisers grows, an increased expense burden for the B/D can result.

 

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