Fiduciary rules will cost millions in compliance

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.