Market-watchers have for months warned about an increase in compliance costs for insurance and financial services professionals stemming from the Department of Labor’s conflict of interest rule.
The forecast isn’t limited to prognosticators sitting in ivory towers.
New research from Cerulli Associates, a firm specializing in global asset management and distribution analytics, reveals that nearly two-thirds of advisors (64 percent) believe that their compliance and administrative costs will rise once the fiduciary rule is fully phased in by April 2017. The Cerulli report dovetails with other studies anticipating increases in business expenses, specifically in terms of dollars and resources allocated to:
Understanding the rule and practice implications;
Enhancing compliance and governance processes;
Investing in technology solutions and upgrades;
Revising disclosures and investor information; and
Educating advisors on how to run a DOL-compliant practice.
Just how much will advisors and their distribution partners have to dole out to institute these changes? The Cerulli report is mum on the amount, but other stakeholders have been circulating estimates.
One comes from the Securities Industry and Financial Markets Association (SIFMA), which in a recent survey polled 40 of its member firms, all large and mid-size broker-dealers. They peg the aggregate industry cost at $5 billion to implement, and an additional $1.1 billion in annual expenses. This exceeds the DOL’s own initial estimate: between $2.4 and $5.7 billion over 10 years. The SIFMA report offers, however, no average estimate on a per-firm level.
One difficulty in making such estimates is the rule’s phase-in remains a work in-progress. Advisors, broker-dealers, IMOs and other players are still wading through the regulations to determine how business operations will need to be overhauled.
However large the ultimate cost rise, this much is clear to Cerulli’s analysts: the size of one’s practice will be key to minimizing costs during the transition.
“It is likely that larger, multi-advisor practices will be in a better position than smaller practices to absorb additional compliance and administrative costs by spreading them over a larger asset base,” the report states. “It will be important for advisors to review, in as much detail as possible, how different cost scenarios could impact the profitability of their practice.”
Multi-advisor practices will be better positioned than smaller ones to absorb additional compliance and administrative costs, the Cerulli report states. (Photo: Thinkstock)
Although it is difficult to perform this exercise without knowing the DOL conflict of interest rule’s exact implications, a cost-benefit or scenario analysis should be useful in preparing to manage any associated operating overhead,” the report adds.