Impact of Financial Reform Bill on Advisors, Broker-Dealers and Banks

The broker-dealer community, he adds, isn’t intimidated by the concept of a fiduciary standard. “But the devil is in the proverbial details,” Brown said.

But broker-dealer Edward Jones, which classifies its 12,750 advisors as employees, is a bit more upbeat. “We believe the Dodd-Frank Act is a good effort toward putting important rules, regulations and guidelines in place to assure appropriate protections for the investing public and the proper functioning of the markets,” said Jim Weddle, a managing partner with Edward Jones in St. Louis, in a statement.

“We look forward to providing input, along with many other constituencies, as the SEC completes the prescribed study of the implications of a uniform standard of care, regardless of whether an individual is working with an adviser or a broker,” Weddle explained. “If properly defined and implemented, this legislation can assure (1) investor choice of pricing alternatives and (2) investor access to a full array of the products and services today’s financial services industry makes available.”

Wells Fargo, with some 15,000 advisors (most of whom are employees), is taking the shift toward a fiduciary standard for brokers in stride as well. “Wells Fargo Advisors believes that giving the SEC the authority to review fiduciary standards is the right decision. We will work closely with our regulators as they develop recommendations to harmonize the standard of care when providing advice to clients,” Wells Fargo said in a statement.

Financial advisors surveyed recently by the Aite Group believe the legislation could elevate the role of financial planning. When asked if a fiduciary standard will lead to the greater promotion of financial planning, the majority of planning-driven financial advisors, 56% of the 400 polled, said “yes.” Most advisors classified as planning challenged, 40%, said “don’t know,” though 38% said “yes.”

Trading and Derivatives

For large banks, such as J.P. Morgan, Goldman Sachs and Morgan Stanley, “The biggest impacts are on proprietary trading and derivatives,” said Chip Roame, head of the consulting firm Tiburon Strategic Advisors, in the Bay Area.

“Bank of America-Merrill Lynch and Wells Fargo will probably be most impacted by consumer-lending reforms on the banking side … not so much on the high-net-worth side,” Roame explained. “But, still, the banks are going to make less money, and then could try and gauge [advisors] more to keep up margins. Thus, these reforms could impact the private-client groups of these institutions, as well as J.P. Morgan.”

Barclays Capital concluded that the reforms would hurt big banks’ earnings via fee reductions, higher costs, new restrictions and tied-up capital.

However, for derivatives, interest rate and foreign-exchange swaps, the large banks won’t need to start up separate subsidiaries. Plus, for some credit-default swaps, commodities and equities, there will be a two-year phase-in for subsidiaries, Goldberg notes.

In terms of the Volcker Rule (aimed at restricting bank’s speculative investments), there will be a portion of private equity investments allowed, and banks can continue to hold inventory needed to facilitate client activity.

“We also don’t expect banks to stand still. We expect changes to existing products, new product innovation, and fee and cost adjustments,” wrote Goldberg.

More Details

These are among the reform “highlights” noted recently by Barclays Capital:

• Banks can continue to use derivatives to hedge their own risk, but other derivatives business must be conducted in separately capitalized subsidiaries of the holding company.
• Banks would be able to retain operations for interest-rate swaps, foreign-exchange swaps, and gold and silver swaps as well as credit derivatives relative to investment grade entities.
• Banks would be forced to push trading in agriculture, uncleared commodities, most metals, energy swaps, equities and non-cleared CDS to their affiliates.
• Certain types of proprietary trading are banned; this includes any account used for acquiring or taking positions in securities or other instruments principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements).
• The Durbin amendment directs the Federal Reserve to set debit-card interchange fees that are “reasonable and proportional.”
• The bill creates a new Consumer Financial Protection Bureau (CFPB) housed under the Fed with authority to regulate all consumer financial products sold by banks.
• Federal regulators have new authority to seize and break up large troubled financial firms without taxpayer bailouts in cases where the firm’s collapse could destabilize the financial system.
• The total cost of the legislation is estimated to be roughly $19 billion.