How Not to Conduct a Legitimate Study on DOL Fiduciary Costs

And as you also might have guessed, the FSI/Oxford findings are indeed dramatic, showing that the proposed DOL rule will result in:

• Estimated startup costs ranging from $1.1 million to $16.3 million per firm, depending on firm size.
• BDs and investment advisors [being] forced to either substantially change their current business models or navigate the challenging demands of a new “best interest contract exemption” (BICE).
• Less access to advice for small and medium-sized investors.
• Industry consolidation likely to force small broker-dealers out of business.
• Expanded potential for systemic risk in the retirement savings market as savers are increasingly pushed into the same set of standardized “low-cost” assets.

Wow. Massive “startup costs,” forced business model changes, restricted access to advice, forced consolidation, and increased retirement system risk? Sure makes the DOL sound crazy, doesn’t it? Who would want all this mayhem? (As an aside, I’d like to give the FSI an “innovation of the week” award for inventing the notion that if brokers are forced to recommend only “low-cost products,” market diversification will suffer. You gotta admit: this is pretty creative stuff. What’s more, this same argument can be used to sell newly issued stocks in companies that can’t possibly survive, life insurance to single people with no dependents, and bonds in municipalities so far underwater they’re looking up at the Titanic.)

Still, the question remains: How did the FSI and Oxford manage to uncover these potential dire consequences? Here’s what the “study” says: “To inform this work, Oxford Economics conducted its own data gathering with the help of FSI. Specifically, Oxford Economics did the following:

• Conducted interviews with nearly three-dozen executives from 12 independent BDs that employ either directly or by contract BDs and RIAs who would be impacted by the proposed rules.
• Followed up with a group of six of these firms to obtain detailed cost estimates based on their expectations about the impact of the proposed rule.
• Interviewed executives from clearing firms regularly used by independent broker dealers and financial advisors to get information about pass-along costs connected to technology and disclosure upgrades that would be required under the new rule.
• Analyzed possible responses to and expense predictions related to the proposed rule using an online survey of FSI members.

Did you get that? FSI/Oxford surveyed BD and clearing firm execs to get their “cost estimates” for the DOL proposal, and then ran those “predictions” by other FSI member BDs. And when they added up these “estimates” they came out be (wait for it): “$3.9 billion — nearly 20 times the DOL’s cost estimate.”

Well, golly gee, that’s a lot of money, isn’t it? Maybe we ought to just scrap the whole DOL fiduciary thing. No, wait, here’s a better idea: maybe we should get an independent business consultant (and this time, just for diversification, maybe one that isn’t being paid by the brokerage industry) to analyze the actual costs of the DOL proposals, rather than just talking with executives in BDs that are members of the FSI, which is steadfastly opposed to the DOL’s idea that they should act in the best interests of their retirement clients (presumably out of fear of losing all that diversification from heavily loaded investments).

At the time of this writing, the FSI hadn’t responded to my request for a comment.

Next, I think I’ll survey, I mean, study active mutual fund managers about whether ETFs are a good idea.