The Department of Labor's proposed fiduciary rule will cost the financial services industry and investors $3.9 billion in startup costs, according to a new study published by the Financial Services Institute.
That projection is almost 20 times as much as the DOL estimated in its own cost analysis of the rule.
FSI's analysis, produced in conjunction with Oxford Economics, a consultancy, does not attempt to factor the potential cost to investors if the rule causes them to lose access to advice, or the ongoing costs financial services firms will incur complying with the rule.
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FSI, a trade organization that advocates of behalf of independent broker-dealers, has been deeply invested in opposing the DOL's efforts to finalize the proposed rule.
For the study, Oxford researchers interviewed executives from 12 broker dealers and clearing firms that support them, as well as the DOL's cost analysis and the critiques of it yielded from the agency's comment period.
According to the report, estimated startup costs will range from $1.1 million to $16.3 million per firm, depending on the size of the firm.
Those costs will contribute to a consolidation of broker dealers, as small firms will be forced out of business, speculated researchers.
New recordkeeping requirements will run firms on average of $200,000. Implementing the disclosure requirements under the proposal's Best Interest Contract Exemption, which allows broker dealers to receive commission compensation on investment products so long as pre-sale and post-sale disclosure requirements are met, will cost and average of $4.5 million.
Implementing compliance structures will cost another $210,000, training advisors will tally an average of $800,000, and the study says other disclosure costs will reach $870,000.
New technology required to implement the rule will mean $570,000 in average costs, according to the study.
Then there is the cost of private action litigation opponents of the rule say it will spawn.
Even though FSI and Oxford arrive at real figures—all in, the rule could cost the largest broker dealers up to $28 million—a news releases suggests that attempts to surmise accurately may be a fool's errand.
"Interviews revealed that even very experienced securities lawyers are uncertain what the requirement of the proposed rules will mean in practice, and therefore have trouble releasing their likely costs," according to a release from FSI.
Last week, Dale Brown, president and CEO of FSI, was one of about 75 stakeholders to testify at an open public meeting on the fiduciary rule hosted by the Department of Labor.
Regarding the new study, Brown said it shows the proposal will be costly not just to financial services firms, but also ultimately to investors.
"It illustrates the unintended consequences the rule will have on hard-working Americans trying to save for retirement, particularly low and moderate-income investors who need advice the most," said Brown in a statement, echoing the long-established position the brokerage industry has offered in opposition to the rule.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
