Two financial services trade groups have released studies detailing how the Labor Department’s fiduciary rule has impacted brokerage and advisory services so far.
A study commissioned by the Securities Industry and Financial Markets Association focuses on the experience at 21 member firms, and another commissioned by the Financial Services Roundtable surveys the experiences of 600 individual brokers, RIAs, and insurance agents.
Both SIFMA and FSR are a part of a lawsuit challenging the legality of the fiduciary rule. That case was recently argued before the 5th Circuit Court of Appeals after a lower court in Texas upheld the rule earlier this year.
According to SIFMA’s study, produced by the consultancy and accounting firm Deloitte & Touche, over half of the surveyed firms have eliminated or reduced customer access to brokerage accounts. Since June 9, when the rule’s impartial conduct standards were implemented, 10.2 million accounts and $900 billion in assets have been moved from the commission-based brokerage models to fee-based advisory accounts.
About a quarter of the firms have eliminated brokerage accounts; another 29 percent are limiting access by increasing account minimums, the study said.
Six in 10 of the firms are expanding access to fee-based advisory accounts by lowering account minimums.
Fee-based fiduciary advisory accounts are regulated by the Securities and Exchange Commission, the study notes.
Customers pay an annual percentage of the assets advised and receive services such as quarterly and annual allocation rebalancing that are not offered in brokerage accounts.
The study says the shift to advisory accounts will cost those investors previously in brokerage accounts more money.
The average annual cost of fee-based accounts among the firms that disclosed that information was 110 basis points, compared to an average cost of 46 basis points in brokerage accounts.
The shift to fee-based accounts was widely expected under the fiduciary rule, which requires more disclosure requirements under the Best Interest Contract Exemption and other prohibited transaction exemptions to charge front-loaded commissions on investments and insurance products.
In firms that are eliminating or limiting brokerage accounts, many customers are opting into self-directed accounts. Some investors are doing so out of a reluctance to pay higher advisory fees.
Others were moved into a self-directed account because an advisory account would not satisfy the best interest requirement under the impartial conduct standards. And others did not meet minimum investment requirements to access advisory accounts.
One-fifth of firms are prohibiting brokers and advisors from giving rollover advice on 401(k) assets, limiting them to an education-only role in order to avoid liability under the rule.
When firms are willing to give direct advice on rollovers, they are requiring investors to produce additional documentation on plan fees and services to determine if a rollover is in their best interest.
That information is proving difficult to access, as it does not exist in a single database, the study says.
Nearly all of the firms are paring some investment offerings in order to comply with the rule. Up to 28 million accounts and $2.9 trillion in assets will have less access to some investments, according to the study.
Almost 30 percent of firms are eliminating no-load mutual funds from brokerage accounts. Those funds often come at the lowest cost to investors in brokerage accounts, because they do not have a front-end commission charge.
One-quarter of firms are not allowing clients to directly hold mutual funds with asset managers. Directly held mutual funds come at lower cost to investors, as they do not have intermediary fees.
Half of the firms have reduced annuity offerings, and “a few” firms said they have or are considering eliminating all annuity offerings.
What individual advisors are saying
FSR’s study, authored by Harper Polling, explored the experiences of 600 fiduciary advisors, insurance agents, brokers, and dually registered investment professionals.
Half said the fiduciary rule is restricting them from serving their clients’ best interest; 12 percent said the rule is helping them deliver best interest advice; one-third reported the rule having no impact on their ability to serve clients’ best interests.
Three quarters of CFP and CFA fiduciary advisors said the rule has had at least some impact on their workload.
Eight in 10 advisors report more paperwork, and half said higher compliance costs are likely to be passed on to investors.
Nearly 70 percent said they will take on fewer smaller accounts, and nearly half said they will service fewer clients.
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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.
