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Industry Spotlight > Broker Dealers

Fiduciary rules will cost millions in compliance

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Huge changes – including millions of dollars in compliance costs to the brokerage industry and higher costs to investors – are in store if the Department of Labor and Securities and Exchange Commission decide to adopt a uniform fiduciary standard.

It may be weeks, if not longer, before that decision is finalized but the question has been hanging over the industry’s head most of this year.

In the most straightforward of terms, broker-dealers are worried that the proposed changes to the fiduciary standard could cost them up to $8 million to set up compliance systems and about $2 million a year to maintain. That’s per broker-dealer.

Broker-dealers have always operated under their own set of rules, but the proposed rule changes would force them to follow the same fiduciary rules as registered investment advisors.

They would not be allowed to recommend any of their own products to investors or make commissions on the investments they propose to their clients for fear of breaching their fiduciary duty. The agencies want to make sure investors are getting investment advice that is in their best interest and not tied to a commission.

A survey by the National Association of Insurance and Financial Advisors found that 84 percent of financial advisors believe their business costs will increase if the SEC raises its bar on financial advice. Nearly 44 percent of respondents to the survey said they would pass on the higher costs to their clients by increasing their fees, and another 48 percent said they would limit their practice to clients with a minimum amount of assets.

The survey was conducted in May of 2,419 NAIFA members, many of whom are registered representatives of broker-dealers and who sell retirement vehicles including variable annuities, life insurance and mutual funds.

The Securities Industry and Financial Markets Association, which represents the interests of securities firms, banks and asset managers, provided the government with its detailed estimates on the cost of implementing a uniform fiduciary standard for brokers-dealers this summer.

Its estimates were derived from a survey of 18 SIFMA member firms – 12 large broker-dealers and six regional broker-dealers.

Read also: Locking horns over the fiduciary standard

The responding firms said they would need to develop and furnish a broker-dealer relationship guide, which would include a disclosure form, to a combined total of approximately 50.6 million retail customers.

More than 75 percent of the broker-dealers said they planned to hire outside legal counsel to help prepare the guide.

The vast majority of the firms’ estimated costs fell into out-of-pocket expenses and employee and staff-related costs, which included:

  • $1.2 million to $3.9 million to initially develop the relationship guide and maintain it for the first year. The average cost was $2.6 million.
  • The average per annum cost of updating and maintain the relationship guide was estimated to be about $631,000.

SIFMA also examined the costs of developing and implementing a new, comprehensive compliance and supervisory system and procedures and related training programs to adapt to the uniform fiduciary standard.

The largest cluster of firms, a group of nine firms, estimated the total costs of initially developing the necessary infrastructure and maintaining and implementing it for one year would be between $1 million and $6 million. The average was about $5 million.

Those same firms estimated it would cost about $2 million per year to update, maintain and implement those systems, procedures and programs.

All of these new costs are why some in the industry have said they are afraid that many broker-dealers will simply exit the market if they are forced to comply with more stringent fiduciary rules.

“The easiest way for compliance will just be to not have conversations with any of their clients or investors,” said Lisa Bleier, managing director of SIFMA. “It would lock up the market.”

Bleier doesn’t believe broker-dealers will just leave the industry, however. “I am not sure that would necessarily be the result. The biggest result would be individuals lose out on their ability to work with a provider they want to work with.”

There are companies that might try to follow the Charles Schwab model, which works with both sides of the business.

“[Broker-dealers] will still exist, but because there will be less ability and incentive to provide the pure brokerage base, the pure revenue-sharing base, that part of the market will dry up and individuals will have to go to the advisory fee side or a firm that offers both,” Bleier predicted.

SIFMA supports the SEC’s fiduciary standard because it makes allowances for the broker-dealer model of operation. SIFMA is not as thrilled with the DOL’s proposed rules because of the compliance costs.  

In a letter to the SEC, SIFMA wrote that it supports the idea of a uniform fiduciary standard but that broker-dealers should not be subject to existing rules, guidance and legal precedent that registered investment advisors must follow.

The organization believes those rules should continue to apply to registered investment advisors but not to broker-dealers who operate under a completely different business model.

“We believe that a uniform fiduciary standard would result in a heightened focus on serving the best interests of retail clients. Our support, however, is predicated upon appropriate cost-benefit analysis and implementation of the standard in a manner that preserves investor choice, is cost-effective and business model neutral, and avoids regulatory duplication or conflict,” SIFMA said in its letter.


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