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April 06, 2016 at 10:43 AM
After nearly six years of waiting, the broker-dealer industry is getting its first glance of the finalized fiduciary rule, released officially Wednesday by the Department of Labor.
Labor Secretary Thomas Perez, who spoke with reporters Tuesday, says the department has “streamlined” and clarified its conflict of interest rule — including the controversial Best Interest Contract Exemption (BICE).
Plus, the DOL has pushed out the initial compliance timeline for the fiduciary rule to one year from the original eight months and “phased in the implementation [of the entire BICE requirements] so firms will have until Jan. 1, 2018” to be fully compliant.
(Check out complete coverage of the DOL fiduciary rule on ThinkAdvisor.)
But while Perez insists that regulators “listened,” “learned” and “adjusted,” a survey of leaders in the broker-dealer industry by Investment Advisor magazine finds a high level of concern with the new rule and its impact on the business.
Results collected from the presidents of 27 independent broker-dealers over the past few weeks – before the final rule was released – reflect their varied views on the regulations and their lingering concerns on how it will impact their firms’ operations as well as their registered representatives.
These leaders support some 30,700 registered reps, about 1,600 of whom have their own RIA; about 17,400 use a corporate RIA to do business. This group of broker-dealers expects to have combined annual revenues in 2016 of $2.5 billion.
(More presidents are expected to weigh in on the matter in the next few weeks, and the poll results will be updated by June 1.)
Read on to see what IBD presidents think about the consequences of the new regulatory framework, which includes seven documents and 1,023 pages of information. (See the Federal Register website and look for new Employee Benefits Security Administration rules.)
The majority of broker-dealer presidents, 52%, see the new fiduciary standard as leading to “significant change” in the industry. Specifically, they agree that it will bring more consolidation – meaning that some IBDs will be forced to merge, sell or close operations.
A huge proportion of IBD heads, 48%, explain that the rule will sharply raise compliance and other costs, though these leaders expect “most IBDs” to survive.
Industry observers, like recruiter Jon Henschen, believe the rule will contribute the ongoing decline in the number of broker-dealers.
The field stood at 4,578 in 2010, he points out, but was down to 4,034. In the fourth quarter of 2015, 16 new firms appeared and 53 left the industry, 32 of which were equity trading firms.
“As discouraging as these statistics look, this could very well be the tip of the iceberg,” he explained recently in a ThinkAdvisor blog.
“The DOL fiduciary standard will also lower revenues for broker-dealers due to fewer product choices, lower commissions and higher rates of litigation.”
Nearly all independent broker-dealers, 93%, responding to the 2016 Investment Advisor Presidents’ Poll say that the DOL fiduciary rule is the most challenging issue they face over the next 18 months or so.
A minority, 7%, indicate that keeping and recruiting registered reps is their biggest focus.
This stands in marked contrast to the poll’s 2015 results, when just 32% of IBD presidents said the DOL rule was the most challenging issue and a whopping 45% were focusing on keeping and recruiting reps.
With the just-issued rules contained in 1,023 pages spread out over seven documents, the high level of concern appears warranted.
Still some firms are upbeat on their ability to meet the challenge.
“While our review is still in progress, with the rule in hand, we now have greater clarity and can begin quickly implementing solutions that will help investors retain access to the objective financial guidance they need,” said LPL Financial in a statement on Wednesday.
“As a result of LPL’s preparation over the past year, the firm has already announced several changes to position LPL and its advisors for growth by offering choice and flexibility to serve a range of investors seeking both ongoing and occasional advice,” the IBD explained.
