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Regulation and Compliance > Federal Regulation > DOL

The DOL Rule(s): The 2016 Broker-Dealer Presidents Poll

By James J. Green, Liana Roberts

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Independent broker-dealers have successfully dealt with many business and regulatory challenges over the years, but as we sit at mid-year 2016, the latest regulatory challenge is its biggest business challenge. That’s not our editorial judgment — it’s how the leaders of 58 independent broker-dealers feel.

This is the sixth year that we’ve surveyed the presidents of independent BDs on their biggest challenges and opportunities in the same month we gather data from IBDs (data from 67 broker-dealers was received, including poll responses from 58 BD presidents) on the state of their businesses (see highlights of our annual Broker-Dealer Reference Guide). This year, we added three questions about the DOL’s redefinition of fiduciary under ERISA, and the BD presidents’ responses were illuminating (the poll was sent, and the great majority of those 58 responded, before the DOL rule was released on April 6).

As seen in the charts below, nearly 70% said they had already invested significantly to prepare for the rule, nearly a third said they were “actively monitoring” the rule, while only 1.7% — that’s one broker-dealer president — said they were taking a “wait and see” approach to the DOL rule. That makes particular sense when you consider how the presidents responded to other questions specifically on the DOL rule and on their overall business challenges in the short and long term.

Almost all — 96.5% — respondents said the rule will either “significantly change the industry,” with more consolidation in the ranks “likely,” or will have a big effect on their costs, though they think most IBDs will survive the rule. The solidarity on the rule’s impact disappeared when asked how it would affect their reps and their recruiting, and even their overall business model. While few expect to lose many reps to the RIA-only space, one-third of the presidents said they expect their businesses will become even more fee-based, while the same number of presidents said they expect to either spend more on recruiting or to lose some reps.How are IBDs preparing for the DOL's fiduciary rule?What do IBDs think is the most likely outcome of the DOL's fiduciary rule? How do IBDs think the DOL fiduciary rule will affect their rep force?

The rule’s significance became even greater when the answers to the standard questions in our poll are revealed. What do they see as the biggest short-term challenge to their firms? Nearly 83% said the DOL rule. What do they see as the biggest long-term challenge to their firms? Fifty-six percent said the DOL rule, and if you include the option “dealing with increased compliance costs,” that overall percentage rises to 83.6%. Even when asked what their reps’ biggest short-term challenge would be, 36% of the presidents wrote in that it would be dealing with the DOL rule.

What do IBDs see as their biggest short-term business challenge?What do IBDs see as their biggest long-term challenge?What do IBDs think is their reps' biggest short-term challenge?What do IBDs think is their reps' biggest long-term challenge?

The “suffocating, over-bearing regulatory environment” was one president’s answer to our question about the most important issue that the industry faces, while another cited “unknown and new regulation-driven product and fee compression.” Additional commenters worried about the value that their reps can continue to offer clients. (To encourage candor from recipients, we offer anonymity on the presidents’ comments.)

When asked where they will invest more money in the next year, technology, compliance and recruiting were the top choices of our presidents. Where will they spend less? Operations and staffing were mentioned by several presidents as areas where they will spend less, though one veteran BD president lamented, succinctly, “nothing ever decreases.” In a business where failing to grow can lead to business failure, another respondent seemed to capture the prevailing IBD zeitgeist in answering the investment question by saying she and her firm would be focused on “compliance and technology instead of growth initiatives.”

Which organization do IBDs believe best represents them and their interests?

For the first time in memory, 3.5% of the presidents polled said they were not confident of the ongoing viability of the independent broker-deal model. Yes, that was only two presidents, but does it represent a crack in the solidarity of the leaders of IBDs, who above all are evangelists for the independent model to both reps and end clients?

Are IBDs confident that the independent model will remain viable?

When asked what single issue is most important for end clients, the IBD presidents said they’re not happy with the amount of regulation BDs face, and not just for themselves — they feel “excessive regulation,” in one president’s words, will hurt the investing public by limiting their choices for advice due to regulation and consolidation in the industry.

On the more macro-economic and investing level, seven BD presidents listed interest rates as the most important issue for end clients, though they were split on what exactly worried them about rates. Several mentioned “continually low interest rates,” while others worried about rising interest rates. In a nod, again, to the DOL fiduciary rule, several presidents worried about the “ability of the investing public at large to receive affordable professional advice,” and investors being “adequately prepared for retirement,” while others suggested further consolidation in their industry might well yield the opposite intent of the DOL rule (and have an effect on individual reps’ careers as well): “decreasing choice due to consolidation.” As one president put it, the single most important issue to end clients is that “the government’s continual interference into this industry poses a huge threat to the investing public.”

Here’s one bright spot about the industry we discovered while conducting the survey, though it didn’t appear in our leaders survey or in the BD Reference Guide, but in a reflection of the leaders of the independent broker-dealer industry. For those worried about the lack of diversity in the IBD industry, nine of the 58 presidents who responded to our Presidents Poll were women, the highest number ever.

— Read the 2016 Broker-Dealer Reference Guide on ThinkAdvisor.

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