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.
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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.