Study Suggests Fiduciary Rule Will Hurt Retirement Investors

More than half (53%) of financial institutions reported limiting or eliminating access to advice in retirement brokerage accounts, impacting an estimated 10.2 million accounts and $900 billion in assets under management (AUM), according to a study of a cross-section of SIFMA members, commissioned by SIFMA and performed by Deloitte & Touche.

The 21 financial institutions that participated in the study represent 43% of U.S. financial advisers and 27% of the retirement savings assets in the market. The study results were presented to the Department of Labor (DOL) along with SIFMA’s comment letter responding to a request for information (RFI) from the DOL about its new fiduciary rule.

According to the study results, in order for investors to retain access to advice on retirement accounts from the study participants who eliminated or limited advised brokerage access, investors would have to move to a fee-based option. To accommodate clients leaving advised brokerage, 62% of study participants broadened access to advice through fee-based programs by lowering account minimums, launching new offerings, or both.

The study report notes that fee-based accounts are fiduciary accounts regulated by the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. While fee-based accounts offer a higher level of service than brokerage accounts and often include automatic rebalancing of accounts, comprehensive annual reviews, enhanced reporting to account holders, and access to third-party money managers, its fees are generally an “all-in” asset-based fee that is generally higher than the fees paid in an advised brokerage account (to compensate for the additional services). Out of the subset of study participants that provided their average advised brokerage and fee-based account fees, it was observed that annual fee-based account fees were 64 bps higher than advised brokerage fees, on average (110 bps versus 46 bps).

Sixty-three percent of study participants that limited or eliminated access to advised brokerage had retirement investors elect to move to a self-directed account. These investors lost access to personalized advice for any assets transitioned to the self-directed model.

Study participants indicated that many retirement investors moved into a self-directed brokerage account for one or several of the following reasons:

• The retirement investor did not want to move to a fee-based account;
• It was not in retirement investor’s best interest to move to a fee-based account;
• The retirement investor did not meet the account minimums required for a fee-based account;
• The retirement investor wished to maintain positions in certain asset classes which were not eligible for a fee-based account.

The study also found 19% of study participants limited or eliminated rollover advice for retirement investors, restricting advisers to an education-only capacity when discussing rollovers with retirement investors.

Nearly all (95%) study participants reduced access to or choice within the products offered to retirement investors regardless of the level of sophistication of the retirement investor. Products affected included, but were not limited to, mutual funds, annuities, structured products, fixed income, and private offerings. The study report says the limitation of products available to retirement investors potentially impacted 28.1 million accounts and $2.9 trillion in AUM of study participants.

Cost of compliance for study participants is high. Respondents indicated that they spent approximately $595 million preparing for the initial June 9, 2017, deadline and expect to spend more than $200 million more before the end of 2017.  Multiplied industry-wide, that equates to a projected spend in excess of $4.7 billion in start-up costs relating to the rule, far-exceeding the DOL’s 2016 estimated start-up costs for broker-dealers of $2 billion to $3 billion. The ongoing costs to comply are estimated at more than $700 million annually.

In its comment letter, SIFMA also provided an explanation of why it is unnecessary to create a new private right of action to change the standard of conduct in the financial services sector; changes to the regulatory language needed to help make the rule work for retirement savers; comments regarding the exemptions; and a proposed new principles-based exemption that protects investors and provides certainty to service providers seeking to comply with the rule’s intent.

And, as did other commenters, SIFMA stressed the need to delay the January 1, 2018, applicability date, at least until the DOL can complete the comprehensive review of the rule as directed by President Donald Trump in February.

Just days after the final RFI comments were due, the DOL submitted a "notice of administrative action" to the Office of Management and Budget (OMB) indicating it will extend the transition period preceding full implementation of the expanded fiduciary rule to 2019.

“This proposed delay represents an important step in protecting Main Street Americans’ access to retirement planning advice, products and services. While the delay is significant, it is critical that the DOL uses the 18 months to coordinate with regulators, in particular the SEC, to simplify and streamline the rule,” Financial Services Institute (FSI) President and CEO Dale Brown said in a statement. “We are already seeing the effects of the rule limiting investor choice and pushing retirement savings advice out of those who need it most. We stand ready to work with the DOL, SEC and others to put in place a best interest standard that protects investors, while not denying quality, affordable financial advice to hard-working Americans.”

Professor Jamie Hopkins, Retirement Income Program co-director at the American College, said “The proposed delay was entirely expected. The delay is really more about giving the DOL time to rework the rule rather than companies really needing more time to prepare.”

Hopkins indicated there is an expectation that the private right to action through class action lawsuits will be removed from the rule, some product-specific changes will likely be built into the rule, and more and expanded exemptions from the general rule will allow many companies to keep doing business as they do today without significant change or interruption.

“The expanded fiduciary rule is likely here to stay, but its impact could be significantly reduced over the next few years if exemptions from the rule are significantly expanded. That is really what requires close attention and watching moving forward,” he said.