Firms taking part in an industry survey have spent almost $600 million on getting ready for a rule requiring them to act in their clients’ best interests, according to the report’s authors.
Compliance with the US Department of Labor’s (DoL) fiduciary rule for brokers offering retirement advice has required major investment and resulted in operational impacts across people, processes and technology, Deloitte officials write in a paper commissioned by the Securities Industry and Financial Markets Association (Sifma).
The 21 Sifma member firms that took part in the study have together spent more than $595 million on preparing for the initial implementation deadline this summer, and expect to spend more than $200 million on top of that by the end of 2017 in terms of start-up costs. The combined continuing annual spend by study participants to support compliance is estimated to be nearly $100 million, with annual estimates ranging from $125,000 to $15 million per firm.
‘Even with the significant spend to date, study participants noted that many of the operational changes put in place for June 9 are highly manual, stop-gap measures, which are unsustainable long term,’ the Deloitte authors write. ‘Additionally, study participants highlighted that ongoing spend estimates cannot account for potential risk events such as litigation, regulatory changes or marketplace shifts which could substantially change costs.’
Deloitte surveyed 21 Sifma member firms whose businesses include providing individual investors with financial advice and related services. The industry group submitted the report to the DoL last week as part of its response to the department’s request for a new round of feedback on the rule.
President Donald Trump has directed the DoL to reexamine the rule, amid strong criticism of the fiduciary standard from the financial services industry. The department last week extended from January 1, 2018 to July 1, 2019 the deadline for complying with the rule’s requirement to give retirement savers new contracts detailing the fees brokers make on certain investment products or transition them into accounts that charge a flat fee based on assets.
CLIENT CHOICES
The Deloitte paper includes findings that appear to support industry critics of the rule, who argue it will limit client choice. For example, the report states that as of June 9, 53 percent of respondent firms reported limiting or eliminating access to advised brokerage for retirement investors, affecting 10.2 million accounts and $900 billion in assets under management (AUM).
The study participants that Deloitte classifies as having eliminated ‘advice in brokerage’ did so by removing advised brokerage services for retirement investors, and others limited advice in brokerage by increasing account or household minimums required to continue to receive such advice.
Sixty-three percent of study participants that limited or eliminated access to advised brokerage had retirement investors elect to move to a self-directed account, the study states. ‘These investors lost access to personalized advice for any assets transitioned to the self-directed model,’ officials write.
Nineteen percent of firms in the study limited or eliminated rollover advice for retirement investors, restricting advisers to an education-only capacity when discussing rollovers with retirement investors. Of the 81% that retained access to rollover advice, firms added requirements for investors to produce additional documentation around plan fees and services. This documentation is not easily accessible and does not exist in a single database or source, according to the report.
Among other things, the study states that 95 percent of respondents reduced access to or choice among products offered to retirement investors. The limitation of products available to retirement investors potentially impacts 28.1 million accounts and $2.9 trillion in AUM at firms taking part in the research, according to Deloitte.
Products affected included mutual funds, annuities, structured products, fixed income and private offerings. ‘It was also noted that study participants had to limit asset classes for which a prohibited transaction exemption was not available,’ the authors say.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
