DOL Fiduciary Rule Will Cost Firms $3.9 Billion: FSI Study

Unexpected costs will come from BICE, the report contends.

Under the DOL’s proposal, any transaction in which an advisor, or his or her firm, has a conflict of interest (i.e., would receive more compensation if the investor were to make the transaction) would be labeled a Prohibited Transaction, the report explains. “In order to go forward with such a transaction, an advisor would require a Prohibited Transaction Exemption (PTE), the most significant of which under the proposed rules is” BICE.

Essentially, BICE would require the advisor and the client “to enter into a contract where the advisor promises to act in the undefined ‘best interest’ of the client (including vague provisions like not receiving ‘excessive’ compensation),” the report states. “Importantly, these contracts would be enforceable through state contract law courts, opening the door to unforeseeable litigation costs.”

Making use of the BICE would also impose myriad other duties on firms, including recordkeeping and reporting requirements and forecasting investors’ cost burden over the following decade, the report argues.

In its regulatory impact analysis, Labor “never explains precisely what firms would have to do to comply with the rule. This, coupled with the Department’s creation of a new enforcement mechanism through the state courts has generated a great deal of concern.”

The proposed rule, the report argues, envisions two paths for firms: “either shift their business practices entirely to avoid any material conflicts, or bear the heavy costs of implementing BICE contracts.”

Avoiding prohibited transactions “would seem to require those firms currently operating (any part of their retirement business) under a commission structure, in which customers pay per transaction performed, to shift entirely to a fee-based compensation system, in which customers pay a fixed amount based on their assets under management,” the report states.

 “It is not clear that this shift is truly in the interest of small investors even if all commission-based transactions were eliminated other firm-level conflicts would remain because of the prevalence of payments received by BDs from vendors and other product providers.”

Eliminating these payments, the report continues, “would substantially reduce the ability of BDs to fund the supervisory, training and compliance functions needed to maintain integrity in the market. Ultimately this would either restrict asset choice or raise costs to retirement account investors as firms trim their catalogs to ease compliance burdens.”

The report notes that many of the firms interviewed for the study, especially in the “independent market,” have “unavoidable conflicts relating to certain classes of assets that they sell directly from originators, especially insurance and annuity products.”

Says the report: “In many cases, these products are a core differentiator of a BD firm from its competitors, and reflect a core piece of the BD’s business, that can also involve managing clients’ other retirement, and possibly nonretirement, savings. These assets are sold today by different firms both under suitability and under existing fiduciary standards. However, they appear to be fundamentally incompatible with the Department’s proposed new fiduciary standard, and under that regime, their sale would require a BICE.”

— Check out Don Trone Blasts DOL Fiduciary Plan: Still Wouldn’t Stop Madoff on ThinkAdvisor.