While advisors and broker-dealers are realizing there’s no one-size-fits-all solution to complying with the Department of Labor’s impending fiduciary rule, it’s the BDs that are feeling the biggest financial pinch — specifically regarding their information technology budgets and purging commission-based products that run afoul of the rule.
“Broker-dealers have to make a lot of very difficult, and in some cases expensive, decisions” regarding DOL fiduciary rule compliance, Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group, told ThinkAdvisor in a recent interview.
The Oxford Economics report commissioned by the Financial Services Institute and submitted to the DOL last fall warned that Labor has “dramatically underestimated” the cost to comply with the new rule and that smaller firms would find it difficult to stay in business once the rule takes hold, which occurs in April.
The report estimated the rule would result in startup costs ranging from $1.1 million to $16.3 million per firm, depending on firm size. BDs and investment advisors would be forced to either substantially change their current business models or navigate the challenging demands of a best interest contract exemption, it said.
While at least some of those cost predictions seem to be bearing out as advisors and BDs work to get up to speed with the final rule, released in April, industry officials opine that cost of compliance varies.
Chris Paulitz, senior vice president of membership and marketing at FSI, says that “Oxford has confirmed that nothing in the final rule would lower their cost estimates.”
(The 2016 Broker-Dealers of the Year discussed the cost of DOL rule compliance at our annual editorial roundtable.)
Ameriprise, for instance, said in its most recent earnings report that it had spent north of $11 million this year to comply with the rule, and announced earlier this year that it had devote about 400 people to compliance efforts and has increased training for staffers.
Both Ameriprise and LPL have also recently announced that they’ll prohibit sales of A-share mutual funds and bar advisors from collecting 12b-1 fees in fee-based advisory accounts. Brokers will be able to sells such shares and get 12b-1s, however, in commission-based accounts if they use the BICE.
Edward Jones announced Thursday that it would create a “grandfathered account“ to serve existing IRAs with investments acquired before the April 2017 compliance date, saying that “investments in existing IRAs, as well as systematic investment plans that are in place before April 10 of next year can continue as long as they remain in the best interest of your client.”
However, new investment purchases “won’t be allowed in a grandfathered account after the rules become effective with the exception of mutual fund exchanges, variable annuity subaccount reallocations, and systematic investment plans agreed to prior to implementation,” Edward Jones said.
The firm also plans to create a transaction-based IRA option using the BICE. Initially, the IRA will include stocks, bonds, CDs and variable annuities, Edward Jones said, but “for now,” the IRA will not include exchange-traded funds, unit investment trusts or mutual funds.
“Right now, because there is such pricing variability within and between mutual funds, it is difficult to align mutual funds with the requirements” of BICE. Edward Jones believes “in the future the mutual fund industry will need to align around common pricing and common structures in order to meet the DOL fiduciary standard.”
The Oxford survey, which was based on interviews conducted with independent broker-dealer and clearing firm senior executives, estimated an average training cost of $800,000 per firm, and a median cost of $580,000.
DOL’s rule is the latest regulatory threat to the independent BD “legacy business model,” says Matthew Lynch, managing partner of Strategy and Resources LLC, and for BDs with a significant amount of commission business that involves ERISA accounts, “something has to change” in terms of compliance and coming to terms with BICE.
BDs and advisors are now having to “prove” that they’re complying, which involves not only increasing technology processes, but also developing “compliance guidelines, training and [justifying] why certain products are on your shelf.” The true difficulty for indie BDs has been in getting a handle on the BICE, he says. In consulting with financial services firms, Lynch says he’s seen compliance cost range anywhere from more than $10 million to “others getting it done for a fraction of that.” The real “evidence” as to whether a firm’s compliance process “is actually working” will come in April, however, when the rule kicks in and DOL starts assessing what’s been put in place.
Timothy Hauser, chief operating officer of DOL’s Employee Benefits Security Administration, has warned broker-dealers and advisors at industry conferences to get in touch with DOL if they have questions about compliance. Firms “should not be spending enormous amounts of money on compliance systems if you don’t know how to comply” with the rule, he said at an IMCA event in mid-July. “We very much encourage firms to come and talk to us and raise issues. …You shouldn’t be afraid to ask the question and get the answer. Better to get the answer than spend the money and find out we’re not happy.”
Hauser said at the event that DOL has “drafted” further guidance in question-and-answer form and is “working on” such guidance, but couldn’t provide a timeline on when it would be released.