The Department of Labor’s rule to amend the definition of fiduciary on retirement accounts will cost the financial services industry close to $3.9 billion to implement — nearly 20 times DOL estimates — with projected startup costs of $1.1 million to $16.3 million per firm, depending on firm size, according to a just-released study commissioned by the Financial Services Institute.
The report, “Economic Consequences of the U.S. Department of Labor’s Proposed New Fiduciary Standard,” conducted with Oxford Economics, provides a “close reading and critique” of the DOL’s Regulatory Impact Analysis on its rule proposal.
The study also suggests that if the rule is implemented, only high-net-worth investors will be able to afford professional retirement investment advice.
FSI is a lobby group for independent broker-dealers.
The report predicts dire consequences for broker-dealers and small investors if the rule is implemented. For instance, the report says that industry consolidation will ensue, which will likely force smaller broker-dealers out of business.
Also, BDs and investment advisors would be “forced to either substantially change their current business models or navigate the challenging demands of a new best interest contract exemption (BICE).”
The rule would also result in less access to advice from advisors for small and medium-sized investors.
“This study shows that the DOL’s proposed fiduciary rule would be costly and burdensome to both the independent financial services industry and the investors that rely on the critical advice they receive,” said Dale Brown, FSI’s president and CEO, in a statement. “It also illustrates the unintended consequences the rule will have on hardworking Americans trying to save for retirement, particularly low and moderate-income investors who need advice the most.”
One unintended consequence, the report states, “may be that it will become harder for minority investors with small asset holdings to seek advice from financial advisors.”
But Kate McBride, chair of The Committee for the Fiduciary Standard, says that registered investment advisory firms “are already serving retirement plans and retirement investors as fiduciaries, in the best interests of the investors, across all account sizes, in retirement and non-retirement accounts.”
Data from Great Britain, which McBride notes required ”much more strict rules on advice years ago,” show how the UK transition to no commissions is going. The report states that regarding the availability of advice for investors: ”No significant reduction in availability of advice” and ”most advisors still willing/able to take on new clients”; and the ”average revenues and profitability of firms increased.”
The report notes that DOL estimates firm costs imposed by the proposed rules on RIAs and plan sponsors will be only $1,000-$10,000 per year, even for large firms. However, DOL’s calculations “admit that the burden on BDs will be much larger.”