The Department of Labor’s fiduciary rule is creating unprecedented levels of anxiety among financial advisors, suggests new data from Cogent Reports at Livonia, Michigan-based Market Strategies International.
The qualitative study, published as part of Cogent Reports’ “The Advisor of Tomorrow” report, shows that by and large, investment professionals are in agreement with the spirit of the Labor Department’s rule, which will require all advisors to IRAs and 401(k) plans with less than $50 million in assets to provide a fiduciary standard of care to investors.
But despite agreement with regulators’ intentions, advisors in all channels of distribution fear the rule will add to compliance burdens, encourage a fee-based model of compensation even in circumstances when a commission-based structure may best serve clients, and create the potential for “unlimited liability” among advisors.
While the rule does not prohibit commission-based compensation on investment recommendations — the rule’s Best Interest Contract exemption allows for commission-based sales so long as they are made in an investor’s best interest. Sonia Sharigian, senior product manager and author of Cogent’s report, said the commission-based advisors surveyed “overwhelmingly agreed the DOL is steering them into more of a fee-based comp structure.”
The report says advisors perceive the potential for “unlimited liability” under the rule, as they fear being found responsible for investment losses due to unintentional or unforeseeable events, such as a recession or a protracted low economic growth.
But under the rule, advisors will not be signatories to the Best Interest Contract exemption — the contract will be between their advisory firms and individual investors. That advisors perceive themselves as directly culpable under the contract — and not their firms —suggests to Sharigian “some level of confusion that is breeding a culture of fear” among advisors, and the need for firms to invest further in advisor education regarding the rule.
Advisors Want Clarity
Even before finalization of the rule, advisors were feeling the strain of compliance requirements, the report suggests, as advisors within the wirehouse, independent and registered investment advisor channels report feeling burdened by internal compliance departments.
(Related: A DOL Fiduciary Rule Compliance Checklist)
And independent registered investment advisors, who already operate under a fiduciary standard, do not expect to be exempted from the rule’s new compliance standards, as those independent firms will have to adopt new documentation standards without the aid of large, centralized compliance departments.