Broker-dealers are waiting to see whether the Department of Labor softens its stance on the best-interest standard in the proposed fiduciary rule. If so, then it could quell industry threats to cut loose their smallest brokerage retirement client accounts.

Also hanging in the balance are questions about the impact on advisers of required documentation for qualified retirement plans, as well as how their compensation is being characterized by regulators.

Mark Casady, CEO of LPL Financial, raised during an Oct. 29 conference call the possibility that it no longer would be cost-effective to work as a fiduciary for accounts with $15,000 in assets or less. That amounts to about 3% of all accounts at the nation’s largest independent broker-dealer as measured by total revenue.

Many other brokerages, as well as fund companies, have voiced similar concerns.

The department’s 2010 quest to change the definition of fiduciary under the Employee Retirement Income Security Act was re-proposed last spring. Since then, there have been four days of hearings, meetings with numerous representatives of the financial service industry and consumers, and thousands of comments submitted over several months. An expanded field of individuals who are considered fiduciaries is expected with the new rules.

Lawmakers may delay the DOL’s proposal further into 2016 by attaching a rider to the omnibus spending bill, which would require the DOL to respond to the comments it collected about the fiduciary rule and hold another comment period before issuing the final regulation. However, the fate of the rider is uncertain, as Congress has yet to pass the spending bill, and is slated to adjourn at the end of the week.  

Direction in debate

“Based on what our broker-dealer is telling us, there are still a number of things that are not decided upon, and the exact direction of the final standard is still in debate,” reports Tim Olson, managing partner with the Olson Group and EBA’s 2015 Adviser of the Year.

There’s also uncertainty about how new fiduciary rules would affect his benefit agency. For example, Olson has heard conflicting stories about whether a signed fee disclosure agreement would be required for each qualified retirement plan participant.

“I can’t imagine having to go to 20,000 participants and get everyone to sign one of these agreements,” he says. “That’s the enormity of this new DOL fiduciary standard that we’re facing.” His average qualified retirement plan has about $7 million in it, while the largest is approximately $100 million.

In contrast, he says LPL Financial and similar firms are focusing on individual investors. Friends of Olson who own wealth management companies and oversee advisers are moving toward the registered investment adviser model to handle individual investors.

What’s particularly disconcerting about the DOL’s fiduciary rules to Olson is how certain industry practitioners are unfairly portrayed relative to others. “When we had our convention earlier this year, it was really all about that if you operate as an RIA and fees are disclosed upfront, you’re a good guy,” he explains. But Olsen says he’s seen as “a bad guy” for charging 25 basis points on retirement plans “because it’s called a commission.”

A DOL spokesman says the proposal clearly states that commissions are not banned, adding: “Our objective is not to outlaw compensation models — it is to realign incentives so that advisers are working in their clients’ best interests.”

Olsen’s concern was mentioned in Morningstar’s Financial Services Observer, which noted that the conflict-of-interest rule primarily targets “advised, commission-based IRA assets.” The report suggested “full-service wealth managers may convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs of the Department of Labor rule. As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry.”

Morningstar believes the new fiduciary rules will generally help the financial services industry, noting that robo-advisers could be the biggest beneficiaries for picking up “a portion of our estimated $250 billion to $600 billion of low-account-balance IRA assets from clients let go by the full-service wealth management firms. Capturing a fraction of these loose assets will bring stand-alone robo-advisers much closer to the $16 billion to $40 billion of client assets that we believe they need to become profitable.”

LPL Financial reportedly is piloting its own robo program with 20 advisers to service small clients. The firm also has held frequent talks on the proposed rules with the White House and DOL, to which it submitted two comment letters. In addition, it has vetted its concerns to members of Congress.

“Ultimately, the issue centers around what’s the right way to help Americans with investment advice,” explains Peggy Ho, EVP of government relations at LPL Financial.

“Our goal,” she adds, “is to help the DOL do the smart things, such as reduce conflicts as much as we can and provide better transparency for investors, in a way that works. The rule has the potential to do a great deal of good by protecting investors.”

Regarding smaller accounts, she says that “the first lens for any potential transition from brokerage to advisory is always to determine if it is appropriate for the client. We believe it is very important to provide access to investment advice to all investors, regardless of the size of their account.” 

Adds the DOL’s spokesman: “The proposed rule will benefit small savers first and foremost by helping them realize higher investment returns both before and after fees. It may also encourage more of them to seek out investment advice by enabling them to build up trust in financial advisers and could potentially increase their access to quality investment options.”

Shutan is a Los Angeles-based freelance writer. 

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