Schwab Survey Reveals Rules Harmonization Costs

Harmonization of rules for broker/dealers and RIAs could more than double compliance costs for independent RIAs in the first year of implementation—with little benefit to clients, a survey finds.

In response to the Securities and Exchange Commission (SEC)’s efforts to develop a uniform fiduciary standard when registered investment advisers (RIAs) and broker/dealers (B/Ds) give advice, Schwab Advisor Services conducted a survey to investigate the potential burden RIAs would face if broker/dealer rules in areas such as licensing, supervision, and books and records were imposed on them.

On average, Schwab found, RIAs estimate a 63% increase in time spent on compliance-related issues and an increase of $175,000 in first-year compliance costs and $117,000 every subsequent year. The higher costs and time requirements could cause some advisers to raise their fees or decrease client services, according to Schwab.

Based on the data, the potential rules outlined by the SEC could result in more than $1 billion in additional costs for the RIA industry. Additionally, many advisers (88%) believe their clients would be negatively impacted by rule harmonization. The majority of RIAs (85%) have indicated they would have less time to spend with their clients, 71% believe their clients would end up paying more for investment advice, and 63% believe they would deliver less-customized client services if the rules are implemented.

In its letter to the SEC, Schwab observed that “most RIAs are small businesses in the commonsense use of that term, and such a significant increase in regulatory burden would have to be justified,” and asked the commission to “de-couple its consideration of the uniform standard of care from other potential rule areas for harmonization.” The SEC will use the data and analysis in Schwab’s letter, along with the input from others, to decide whether to propose new harmonized rules in the future.

More than 800 advisers participated in the survey, which was conducted for Schwab Advisor Services by Koski Research between May 28 and June 7, 2013.