SIFMA Report: Retail Investors Would Lose Under a Uniform Fiduciary Standard

Fiduciary standard must recognize different business models, SIFMA says

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The Securities Industry and Financial Markets Association (SIFMA) released a study on Monday that says that retail investors would be harmed if the uniform fiduciary standard that the Securities and Exchange Commission (SEC) is currently crafting does not recognize different business models.

Tim Ryan, SIFMA's CEO, stated in comments after a recent speech that the uniform fiduciary standard that the SEC comes out with will likely be a "modified'40 Act standard" that incorporates additional disclosures. But, he said, it will be "disclosure that's understood." In addition to the study, SIFMA says it recently submitted comments to the SEC urging the Commission to focus on three core areas addressed in the study--client choice, product access, affordability of advisory service--when conducting the fiduciary study and as the SEC moves on to rulemaking.

According to the study commissioned by SIFMA and conducted by consulting firm Oliver Wyman, retail investors would experience "reduced product and service availability and higher costs" under a uniform standard of care for investment advisors and broker-dealers "that does not appropriately recognize the important distinctions among business models."

Retail investors under a universal standard were likely to see "a negative impact on choice of advisory model, product access, and affordability of investment and advisory services should the SEC adopt the Investment Advisers Act of 1940 standard for all brokerage activity," the report states.

Ira Hammerman, senior managing director and general counsel for SIFMA, said in a statement that in SIFMA's "efforts to inform the SEC in their study of this important issue, we have compiled a detailed analysis of how customer choice, product access and service costs would be affected should the SEC move toward implementing a standard that does not recognize the distinct business models within which financial advisors serve their clients." SIFMA says that Oliver Wyman collected data from a broad cross section of retail brokerage firms that serve 38.2 million households and manage $6.8 trillion in client assets. The survey covered approximately 33% of households and 25% of retail financial assets in the U.S., based on estimates from the Federal Reserve Survey of Consumer Finances.

Some highlights of the SIFMA study include.

Client Choice

Access to an investor's preferred 'investment and advisory model' would be reduced:

o 95% of households in this study with investment accounts hold commission-based brokerage accounts today

o A fee-based advisory platform is far less popular (approximately 5% of households in the study)

o The 'preference' for commission-based brokerage accounts is evident across all wealth segments, but strongest for smaller investors with less than $250,000 in assets

Product Access

Access to investment products distributed primarily through broker-dealers would be reduced:

o Municipal and corporate bonds represent approximately 15% of assets held by retail investors and are primarily sold through brokerage channels

o Restricting principal or proprietary offerings will limit investor access to these products at current pricing (e.g. retail order periods for municipal bonds where markups are waived)

Affordability of Advisory Service

Access to the most affordable investment options would be reduced:

o On average, investors have historically paid 25%-75% more for fee-based advisory services than commission-based brokerage, depending on asset levels

o For an investor with $200,000 in assets this would translate to $460 in additional fees annually paid for investment and advisory services

o Shifting small investors to fee-based pricing is estimated to reduce expected returns by more than $20,000 over a 20-year horizon (assuming 5% annual returns)

SIFMA's study also says the industry would face broader economic costs. "Broker-dealers and investment advisory firms will face one-time and ongoing costs to comply with new fiduciary, disclosure, and regulatory oversight requirements which could be passed on to investors," the study says. In addition, "potential limitations on products accessibility for retail investors would place constraints on capital formation and an issuer's ability to finance at cost-effective rates."

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