RIAs, Reps Plan to Drop Small Clients Under DOL Fiduciary Rule: Fidelity

Reps and RIAs alike expect added costs to comply, and a shift away from variable annuities

Both broker-dealer reps and RIAs believe the Department of Labor’s pending fiduciary rule will have a negative impact on their businesses, according to a survey by Fidelity Institutional.

Tom Corra, COO of Fidelity Clearing & Custody, said in an interview Friday that advisors see the DOL fiduciary rule as “more dramatic than any other regulation over the past five years.” In addition to the extra cost and time involved in complying with the rule, advisors expect a shift in the products they recommend to clients: 28% of advisors surveyed say they will recommend variable annuities less often, since “maybe 96% of VAs are sold with a commission today,” Corra said, while 43% said they will recommend managed accounts more often.

In addition to the products they will use, three-quarters of the respondents said the rule will force them to re-evaluate the types of clients they serve, while 62% said they expect to “let go of or transition” some of their smaller clients from their practices.

Business Impact of DOL Rule: Fidelity Survey

Source: Fidelity Institutional

The online, blind survey (Fidelity was not divulged as the sponsor) was conducted in January among 485 advisors from the insurance, bank, wirehouse, independent broker-dealer and RIA channels.

It found that 80% of those surveyed were aware of the rule, that 73% believed it would have a negative impact on their practice and that overall they expected fewer investors, especially smaller ones, would receive retirement advice. RIAs see the rule as a business challenge, too: 50% of those surveyed said they expected to spend more time on complying with the rule and that their overall cost of doing business would increase. Corra said the findings and Fidelity’s own experience serving its advisor clients shows that “this is a topic where advisors are looking for more information.”

Business Impact of DOL Fiduciary: Fidelity

However, 53% of those surveyed said they were waiting “to take any action” on responding to the rule, so Corra says “there’s an opportunity now for advisors to familiarize themselves on the rule and how to adapt” their business models.

“At a minimum,” Corra said, advisors should expect to have “a conversation with clients” and increased recordkeeping costs. While it’s possible, he said, that DOL “may delay implementation for some of the more onerous requirements” of the rule, advisors now should “find out how much of my business is in ERISA plans” and how much of their revenue “comes from commissions.”

Regardless of size or business model, Corra suggests that firms with a “planful approach” will be more successful in adapting to the rule, and he urged advisors to view the rule “through the lens of your clients and from your own business lens. Understand what your competitive advantage is and articulate that to clients, especially if you’re changing your compensation model.”

Corra brought up another topic of interest to advisors who receive commissions and trails. “The initial [DOL] proposal provided very little in the way of carve-outs for grandfathering current clients,” he said, and related how in a recent Fidelity webinar for advisors “a number of the questions had to do with ‘Can I continue to get trails on annuities, or on 12b-1 fees?’”

He also pointed out that the proposed rule’s BICE — the best interest contract exemption — “is a legally enforceable contract,” which means advisors could be liable to lawsuits by clients. 

In one of several white papers that Fidelity has published to help advisors plan for the rule — Six Ways to Help Prepare for the Proposed DOL Investment Advice Rule and Capturing Opportunities Created by the Proposed DOL Investment Advice Rule — Corra pointed out a section on a lifeblood of advisory firms: referrals. “If you’re referring clients to somebody else, then you are a fiduciary” by extension, Corra argued.

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