A new paper exploring where financial advisory firms will have to spend money after tomorrow’s release of the Department of Labor’s fiduciary rule says ERISA-qualified accounts represent about 50 percent of a typical wealth management firm’s asset base.
That translates to a considerable amount of potentially impacted revenue for advisor firms, according to research of broker-dealers and RIAs from Beacon Strategies, a Denver-based consultancy to the financial services industry.
Going forward, offering fee-based advice will be the best way for advisors to demonstrate their adherence to the rule’s Best Interest Contract Exemption, which imposes costly disclosure requirement on commission-based sales and potential civil and class action costs for failure to comply.
Beacon suggests, “all firms will confront reduced revenue flows and significant margin compression in the first three years after the rule is in effect.”
And all advisors will have to adopt new systems or amend existing ones to monitor conflicts of interest, as well as implement a new support system for the BIC Exemption.
Existing accounts will have to be re-papered, with lower account balances being moved to completely self-directed robo-offerings, says Beacon. The firm says plans with less than $25,000 in assets will be moved to robo-platforms.
That level of bifurcated customer support systems—one for lower value accounts, one for higher value accounts—will also cost firms money, and create new complexities for advisors and support staff, as firms will likely see a surge in new non-retirement account clients.
Firms not working with a platform provider that can handle varying levels of service will see revenue from smaller accounts, with $25,000 to $100,000 in assets, migrate elsewhere, says Beacon, as customers experiencing slow or complicated transitions are likely to move on.
Choosing the right platform provider will be central to offsetting compliance costs and potential revenue disruptions, argues Beacon. The most sophisticated platforms will help previously commission-centric brokers transition by supporting fee-based asset allocation models.
Outsourcing new responsibilities to third-party providers can actually prove to regulators that advisors have adequate compliance structures in place, advises the consultancy.
“A greater degree of turnkey support for actual investment activity demonstrates to FINRA that a firm has established a culture of compliance; where conflicted investment preference or hidden compensation or manufacturing fees are structurally eliminated,” says Beacon.
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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.
