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Compliance Support for DOL Fiduciary Rule Next Big Advisor Need: Cogent

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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.

In an interview with BenefitsPro, Sharigian said the extent and quality of support in helping advisors comply with the rule could prove to be a new carrot in recruiting advisors.

“It certainly makes sense for the advisory firms that provide the best-in-class compliance support to use that as leverage as a potential recruiting tool,” she said.

While concern was noted from advisors across distribution channels, some registered investment advisors’ responses were welcoming of the rule. One respondent suggested the rule will ultimately lead to greater trust for the financial services industry. Other fee-based advisors expect the rule to push business their way.

One registered investment advisor’s response suggested greater clarity from the Labor Department is necessary as regulators tend not to clarify what the rules exactly are until they are broken; and one hybrid registered investment advisor respondent echoed a long-running criticism of the rule, claiming it will force small investors out of the advisory market.

Another hybrid registered investment advisor suggested those clients better served by a commission, or transactional-based relationship, will be forced to a fee-based structure, to the benefit of the advisor.

One respondent, an advisor with a wirehouse, echoed that sentiment, saying commission-based C-shares of retail investments would be cheaper for a $500,000 account than would an annual asset-based fee.

While advisors say regulatory concerns are certainly top of mind, ultimately, they are more concerned with the low-yield investment environment, which will limit investors’ returns, and ultimately advisors’ fee-based compensation.

One hybrid advisor noted that as yields are coming down, fees are not, meaning the cost to invest will account for a greater portion of an individual’s portfolio.

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