Data & Research December 12, 2016

Broker/Dealer Evolution Ahead of Fiduciary Rule

Broker/dealers with less than $10 billion in assets account for a significant majority of overall industry volume but less than 10% of adviser-managed assets, according to data shared by Cerulli Associates. 
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A new analysis from Cerulli Associates warns the Department of Labor’s (DOL) Conflict of Interest Rule, should it still go into effect after the Republicans’ sweep of the Presidency and Congress, “will have an enormous impact on the asset management and adviser industries by enforcing heightened fiduciary standards and increasing the cost of doing business.”

Cerulli further suggests that boutique broker/dealers (B/Ds) are one of the segments that will be most impacted under the DOL rule. Sizing this portion of the market, Cerulli observes that B/Ds with fewer than $10 billion in assets account for more than 80% of overall B/D firm volume, but less than 10% of adviser-managed assets.

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“Small B/Ds without scale are at high risk under the DOL Rule,” warns Kenton Shirk, associate director at Cerulli. “It is likely that some of these boutique firms will be unable to support new regulatory costs, resulting in an increase in firm consolidations.”

Shirk adds that smaller broker/dealers may be acquired by larger ones, or choose to combine operations, or affiliate as an Office of Supervisory Jurisdiction with an independent firm to realize cost synergies. There are many approaches that can work moving forward, but under the new DOL rulemaking any firm touching retirement accounts governed by the Employee Retirement Income Security Act (ERISA) must double down on transparency and fairness.

“Cost reduction, decreasing business risk, and effectively leveraging time and resources remain the main focuses of the adviser industry in preparation for the implementation of the DOL rule,” Shirk observes. “The rule favors fee-based business, so the majority of advisers surveyed plan to increase its use in their practices.”

NEXT: Technology plays a determining role

As technology use continues to shape the adviser landscape, it is becoming a significant factor for advisers choosing a new B/D.

According to Cerulli, advisers increasingly recognize that technology solutions have already had a large impact on productivity and client experience, and thus forward-looking B/Ds have made technological innovation a strategic priority.

“The largest and well-capitalized B/Ds are best equipped financially to deliver strong technology experiences, whereas smaller firms may struggle to compete given associated costs," Shirk warns. “Cerulli believes that technology will become an increasingly important aspect of a B/D's value proposition over the long term as fewer advisers serve fewer, wealthier clients with the expectation of highly productive and integrated systems that are capable of delivering more sophisticated levels of client service.”

These findings are more are explored in Cerulli's newest annual report, “U.S. Broker/Dealer Marketplace 2016: Retooling for a New Competitive Landscape,” provides an in-depth analysis of B/Ds with financial advisers. More information is available at www.Cerulli.com. 

Compliance December 9, 2016

Progressive Proposal Offers One Take on Tax Reform

“Rather than taxing income, the Progressive Consumption Tax would generate reasonable revenue by taxing the purchase of goods and services,” suggests Senator Ben Cardin. 
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U.S. Senator Ben Cardin (D-Maryland), a member of the Senate Finance Committee, has reintroduced legislation that would eliminate income tax liability for most Americans and reduce corporate income tax rate to one of the lowest among industrialized nations.

While Cardin’s party remains in the minority in Congress, the senator says his proposal is structured in a way that can agree with both Democrats and Republicans. And it better be, because Cardin’s bill, known as “SB 3529” or the “Progressive Consumption Tax Act (PCTA),” is quite ambitious. It would fundamentally change the way the federal government raises revenue.

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“Rather than taxing income, the Progressive Consumption Tax (PCT) generates reasonable revenue by taxing the purchase of goods and services,” he explains. “Designed to be at least as progressive as today’s tax system, low- and middle-income families would be protected from unfair consumption taxation through a rebate, and important benefits would be retained in a much simpler income tax code.”

Cardin adds that a “revenue circuit breaker,” tied to gross domestic product (GDP), is built into the proposed system to “set reasonable limits on the amount of income generated by the new progressive consumption tax.”

According to Cardin, since the original introduction of the Progressive Consumption Tax Act in 2014, many policymakers, including in Congress, have become increasingly interested in moving to a border-adjustable consumption tax base.

“Our tax code should be fair for families and employers. It should help make American-based businesses more competitive and our nation’s economy stronger. And it should provide a way to responsibly and reliably collect reasonable revenues. Our current, 1980s-style tax code simply cannot accomplish these goals,” he argues.

According to Cardin, the PCT is “not simply an add-on tax.” The revenues generated by the new system would be used to eliminate an income tax liability for most American households.  The proposal’s income tax exemptions, called “family allowances,” are set at $100,000 for joint filers, $50,000 for single filers, and $75,000 for head of household filers.  The family allowances are indexed for inflation.

“Those who do still have an income tax liability would see a much simplified income tax with their marginal rates reduced—the top marginal individual income tax rate, applying to taxable income over $500,000 for joint filers, would be 28% versus the current top marginal rate (applying to taxable income over approximately $450,000 for joint filers) of 39.6%,” Cardin suggests. “Four important tax benefits remain: (1) the charitable contribution deduction; (2) the state and local tax deduction; (3) health and retirement benefits; (4) the mortgage interest deduction.”

In any case, the progress tax proposal comes at a time of deep uncertainty when it comes to the short-term prospects for tax reform. While Republicans technically control both the White House and Congress, it remains to be seen how the unconventional political style of President-Elect Donald Trump will impact the actual processes of governing according to a traditional Republican agenda. 

The text of SB 3529 can be found here.  

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