Warnings of billions in crippling costs and TV attack ads are the latest salvos from opponents of the Labor Department's fiduciary rule after hearings closed last week.
The industry's newest claim is that independent firms could get hit with a bill tallying up to $3.9 billion in startup costs alone should the rule go into effect, according to a study commissioned by Financial Services Institute, which is critical of the DoL proposal.
Looking only at independent firms, the FSI's $3.9 billion figure dwarves the comparable DoL estimate of $195 million in startup compliance costs – by a ratio of nearly 20.
FSI's study, conducted with Oxford Economics, a U.K.-based research firm, involved interviews with nearly three dozen executives from 12 companies as well as cost estimates from six of those 12 companies. The Washington, D.C.-based advocacy group did not disclose how much it paid for the study, but a spokeswoman said it has so far spent almost $430,000 on various lobbying efforts this year.
Industry groups have hotly argued the so-called best interest contract exemption is unworkable and the rule amounts to a war on the commission model that will inevitable compel brokers to raise fees, dump low-end clients and migrate others to higher-cost, fee-only accounts.
Since the Labor Department first floated its fiduciary proposal in 2010, opposing industry representatives began working overtime to discredit the economic analysis underpinning the framework. The DoL bowed to industry criticism when it withdrew the initial proposal in 2011, acknowledging that its economic analysis was not as rigorous as it might have been.
‘Could be costly’
With the re-proposal, that process has begun anew. The Financial Services Roundtable has suggested that some firms could spend up to $100 million to comply with the provisions of the fiduciary rule. SIFMA said in its comment letter that implementing the rule could cost firms nearly $5 billion in start-up costs alone, according to a survey it conducted.
The FSI's report, then, comes as the latest in a series of studies taking aim at the DoL's impact analysis.
"[T]he analysis is not surprising," says Duane Thompson, senior policy analyst at the fiduciary training firm fi360. "Industry critics have claimed real costs 10 times the DOL's estimates. Double that, as FSI claims, suggests someone's assumptions are way off.
"It seems to me the huge discrepancy in cost estimates will eventually be sorted out in a court of law if an industry group files an administrative challenge to the final rule, as is likely to happen," Thompson adds.
Sophie Schmitt, an analyst at Aite Group, says complying with the proposed rule will center on preventing conflicts of interest as much as possible and disclosure.
“Every BD has some kind of compliance system that can identify red flags," she says. "They already have that in place. So it is kind of just adding to that,"
But, Schmitt adds, “The brokerage industry is basically saying that if this rule gets passed then we might need to eliminate brokerage accounts [which is] a fundamental change in the whole structure. That, I imagine, could be costly.”
‘Alice in Wonderland report’
The FSI and other industry groups say litigation exposure from the best interest contract exemption would be a significant deterrent that would cause them to abandon the brokerage channel. Investor advocates like Knut Rostad, head of the Institute for the Fiduciary Standard, see those critiques as a red herring, another example of an industry trying to dodge commonsense consumer-protection regulation.
Rostad dismisses the FSI's study as "another Alice in Wonderland report that insults brokers and lacks any raw data or reason to be taken seriously."
"BICE requires brokers to promise in writing to tell the truth, disclose conflicts and expenses and mitigate conflicts' harms," he says. "Does FSI really believe doing so will be such a financial burden?"
But the FSI considers a number of other factors in its analysis, including those associated with collecting and disclosing compensation and performance data, projecting future returns and costs of investments, record keeping and implementing the BICE contracts. All told, the FSI analysis pegs the startup compliance costs at between $1.1 million and $16.3 million, depending on the size of the firm.
Rachel McTague, a spokeswoman for the Investment Company Institute, a mutual fund trade group, notes that the DoL's fails to address the question of whether investors fare better when their adviser is a fiduciary or not.
Further, McTague argues, the DoL's regulatory impact analysis "fails to consider that some investors, particularly those of modest means, may face increased costs if the proposed rule forces them to migrate to fee-based accounts – or to go without financial advice altogether."
Industry groups have been playing up the fear that less affluent investors, without access to a broker, would be driven to robo advisers that would be a pale substitute for human advice.
"Correcting for these problems, we find that the [DoL] impact analysis's claimed benefits of $44 billion over 10 years is totally unfounded," McTague says. "Indeed, even rather basic calculations, based on plausible alternative assumptions, suggest that the rule, if adopted, could cost investors $109 billion in lost returns and added fees over 10 years."
Laura McGinnis, a spokeswoman for the Department of Labor, declined to address criticism of the DoL's economic analysis directly, but offered the following statement:
"We've encouraged the industry to submit comments on the cost implications of the proposed rule, preferably with as much detail as possible. And we look forward to reviewing these comments as part of the rulemaking process."
‘Eviscerate the broker model’
During earnings calls this year, analysts have quizzed CEOs of major brokerage firms about the proposed rule's potential costs. Many executives have demurred on how big the impact might be.
"It's like any regulatory change. We work through it and figure out what things are appropriate," Ameriprise CEO Jim Cracchiolo said during an earnings call earlier this year.
However, Stifel CEO Ron Kruszewski has been more openly critical of the rule than some of his peers. "The rule is voluminous and is going to add significant costs," Kruszewski told analysts during the firm's earnings call earlier this month. "It will eviscerate the brokerage model that has served investors so well over many years."
Regardless of the methodology of either the DoL or FSI analysis, this is in some sense a battle of perception, some participants say.
"Basically, we have people throwing around numbers," asks Sheryl Garrett, a fiduciary supporter. "How do we know – honestly – how much it will cost until after the fact?"
FSI repeated a common criticism that the DoL proposal would limit access to financial advisers for smaller investors, adding that an additional consequence "may be that it will become harder for minority investors with small asset holdings to seek advice from financial advisers."
The comments mirror sentiments expressed in recent TV ads attacking the fiduciary proposal, which started airing last week. In one of the ads a middle-aged couple worries over "new regulations" in Washington, after dropping off their daughter at college.
"They want to make it really hard for us to get help from our financial adviser," the woman says, as the couple drives down the highway.
The ads have been paid for by Americans to Protect Family Security, a coalition of different groups representing financial advisers, brokers and insurance companies. Members include the Association for Advanced Life Underwriting, Insured Retirement Institute and National Association of Insurance and Financial Advisors.
Juli McNeely, president of NAIFA, was one of dozens of participants at the DoL's recent fiduciary hearings, where she said that aspects of the rule would be unworkable and confusing to clients.
Garrett, who is president of the Garrett Planning Network, doesn't think the ads will sway the Labor Department, but they may have an effect on public opinion.
"The public thinks they are getting objective advice in their best interest. And then you put out commercials saying that you are doing exactly that, but big government wants to come in and prevent us from doing that. That is a great sound bite, but it's virtually a lie," she says.
Advisers, on the other hand, may be informed, but they largely aren't too worried, says, Rob Blevins, a recruiter in Dublin, Ohio. "They're not worried about it because they are trying to do what is in the best interest of their clients," he says.
Blevins adds, however, that the regulatory environment may become too onerous for some.
"I think the industry is going to get to the point where some people just decide not to do this because they don't want to put up with it."
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