Implementing the proposed fiduciary rule will cost independent financial services firms $3.9 billion in startup costs,
according to a study by the Financial Services Institute (FSI) and Oxford
Economics. This is nearly 20 times the estimate that the Department of Labor
(DOL) gave and does not take into account the ongoing costs of maintaining
compliance with the rule.
Further, according to the report, “Economic Consequences of the U.S. Department of Labor’s Proposed New Fiduciary Standard,” the rule will limit advice to high-net-worth individuals alone, as they will be the only people who will be able to afford it.
“The study shows that the DOL’s proposed fiduciary rule would be costly and burdensome to both the independent financial services industry and the investors that rely on the critical advice they receive,” says FSI President and CEO Dale Brown. “It also illustrates the unintended consequences the rule will have on hard-working Americans trying to save for retirement, particularly low and moderate-income investors who need advice the most.”
Startup costs will range from $930,000 to $28 million per firm, depending on size, according to the study. Broker/dealers (B/Ds) would have to substantially change their business models from commissions to fees to be in compliance with the Best Interest Contract Exemption (BICE). As a result, smaller B/Ds might go out of business. And investors may not see the returns they are now getting as they will be pushed into low-cost assets, FSI says. Furthermore, the BICE would open the door to unforeseeable litigation costs, FSI contends.
Recordkeeping will cost firms an average of $200,000, FSI
says. Implementing BICE contracts will cost an average of $4.5 million.
Training will cost an average of $800,000. Compliance and legal oversight will
cost an average of $210,000. Disclosure will cost an average of $870,000.
Setting up new system interfaces will cost an average of $570,000. And
litigation costs will be substantial, FSI says.
NEXT: The impact on advice
And investors will miss out of many services that advisers
provide, FSI says, not least of which are: encouraging investors to save at a
higher rate, preventing investors from taking withdrawals from their retirement
savings, providing objective advice in times of market fluctuations, creating
an investment plan, balancing portfolios, helping investors feel more
confidence about retirement, and helping them with their overall financial
“The reduction in advising that will almost certainly follow adoption of this rule will result in significant qualitative and quantitative losses to all retirement investors, including and especially small investors,” the report says. “The added structures of the new rule will likely lead B/Ds to curtail their offerings, leading to less overall choice for most investors. A good example is the case of variable annuities, which are an important product to many investors concerned about retirement planning.”
PwC’s Financial Services Regulatory Practice also circulated new fiduciary rule research this week—reaching similar conclusions about the likely impacts of the proposed DOL rulemaking.
Based on its staffers’ interactions with the DOL, PwC says it anticipates the new rule “is set to transform the competitive landscape” for retirement plan service providers and “disrupt current business models, particularly for financial institutions that are reliant on traditional broker/dealer activities which are currently not covered by the existing ERISA fiduciary standard.”
Further, PwC says it believes that the rule “will be finalized early next year with the proposals’ core framework intact.”
PwC suggests this puts a huge amount of pressure on DOL to
get the carve-outs provided for in the rulemaking language into proper working
order. “The first exemption, and in our view the most critical, is the Best
Interest Contract Exemption, which would allow financial institutions to
continue to receive commissions,” PwC explains. “The second, the Principal
Transaction Exemption, would permit a financial institution to engage in the
purchase and sale of certain debt securities on behalf of a retirement
NEXT: “Requirements are … ambiguous.”
The report concludes that, whether or not to utilize the Best Interest Contract Exemption and the Principal Transaction Exemption, represents an important choice for financial institutions: “The requirements are strict, complex, and in many cases ambiguous. Businesses relying on the exemptions can expect to incur significant costs to maintain their existing commission-based compensation arrangements.”
PwC believes many companies will not choose to regularly rely on these contracted exceptions, and will instead move to adopt a fee-based compensation model or a more self-directed model for clients.
“In addition to these new regulatory requirements,
competitive market shifts are underway, as a number of new low-cost competitors
are emerging to challenge the traditional adviser business model,” PwC
FSI’s study is based on interviews with nearly three dozen executives at 12 companies that employ B/Ds or registered investment advisers (RIAs) that would be impacted by the rule. The full report can be downloaded here.