Independent broker-dealers prepare for the reality of the DOL fiduciary rule

Firms are already girding for what they say will be the high costs and compliance complexities

Jan 24, 2016 @ 12:01 am

By Mark Schoeff Jr.

Independent broker-dealers are already girding for what they say will be the high costs and compliance complexities of a Labor Department proposal that would raise investment-advice standards for retirement accounts.

A final version of the regulation — which has the backing of the White House and survived an attempt to kill it in recent government-funding legislation — is likely to be released in the spring, so that it can go into effect comfortably before the end of the Obama administration. As proposed, it has a tight eight-month implementation period.

The measure includes a legally binding requirement for brokers to act in the best interests of their clients and mandates a long list of fee disclosures. Right now, brokers need only make sure the investments they recommend are suitable for their clients.

The financial industry has been fighting the proposal, saying that it would significantly increase liability risk and regulatory costs for brokers and make giving and receiving advice much more expensive.

(More: Top Independent Broker-Dealers 2016 special report)

But some IBDs are preparing for the reality of advising clients in individual retirement accounts under the new rule.

“It is time to stop feeling sorry for ourselves and get proactive on it, otherwise, we're going to get behind the eight ball,” said Amy Webber, president of Cambridge Investment Research Inc.


Clearing and custody services provider Pershing has held more than two dozen meetings about the rule with brokers and advisers and recently conducted a webinar for more than 300 clients of its platform.

“Sitting back is not the best strategy,” said Rob Cirrotti, managing director and head of retirement solutions at Pershing.

The first thing that IBDs are realizing is that the DOL rule will be costly to put into practice. Cambridge estimates it will have to spend $15 million to $17 million to upgrade its technology and make other operational changes.

Commonwealth Financial Network estimates that implementation will cost $6 million. That would include building a compliance infrastructure and bringing 479,000 IRA accounts into compliance.

“That's nuts, when you think about how much manpower and resources it's going to take to accomplish,” said John Rooney, Commonwealth managing principal.

(Related read: Fiduciary rule could decimate number of IBDs)

Pershing also anticipates high costs.

“The answer is pretty fluid,” said Jim Crowley, Pershing chief relationship officer and managing director. “It's going to be in the tens of millions [of dollars].”

LPL Financial is bracing for the rule, too.

“While much uncertainty remains as to what the final rule will look like, LPL has dedicated significant resources toward planning for several different scenarios,” LPL spokesman Brett Weinberg said in a statement.

The DOL rule is causing some independent advisers to rethink the investment products they offer.

Under the measure, advisers must sign a so-called best-interest-contract exemption, a legally binding document that requires them to act in their clients' best interests, in order to accept commissions or third-party payments for investment products.

Instead of dealing with the contract, some independent advisers are abandoning products with varying adviser payments, such as variable annuities, and embracing products with level compensation.

“We put annuities in a wrapper or we don't sell them at all,” said Tony LaJeunesse, owner of TL Financial Group, with $140 million in assets under management.

Instead of collecting 7% commissions for business development companies and nontraded real estate investment trusts in a brokerage account, the firm is now earning the 1.2% wrapper fee.

Mr. LaJeunesse's gross dealer concessions declined from $1.9 million in 2014 to $1.6 million last year.

The DOL rule is “already putting downward pressure on commissions,” he said. “The industry and the government want everyone to go into a fee-type model. The writing is on the wall.”

But the move to entirely fee-based accounts hasn't been all bad. The model attracts clients, Mr. La-Jeunesse said, and the firm captured $18 million in new assets in 2015.

Cambridge is working with clearing firms and product sponsors to ensure that conflicts that would trigger the DOL rule are avoided.

“We have been transitioning into an asset-based levelized pricing structure,” Ms. Webber said. “A lot of revenue-sharing agreements have to be unwound.”

Annuity providers are taking the hint.

“A number of our members have begun their internal processes of looking at their product suites,” said Cathy Weatherford, president of the Insured Retirement Institute, a trade group for the retirement income industry.

Several firms said they're encouraging their commission-based advisers to become dually registered as brokers and investment advisers so that they can charge clients an asset-based fee.

“If we can get all of our advisers to be dually registered, then I think we're in the best position to go with the fiduciary standard,” said David Hoff, president and chief executive of First Heartland Capital Inc.

The DOL rule also is causing advisers to take a hard look at their client rosters and make tough decisions about whether they can maintain fiduciary relationships with clients in small accounts.

In testimony before Congress last year, Dean Harman, owner of Harman Wealth Management, said that approximately $10 million of the firm's approximately $200 million in assets is held in 331 accounts with an average of $30,211.

“If it becomes a regulatory burden or a liability, we may have to pare those clients out of the firm,” Mr. Harman said in an interview.

(Continue reading: More on what 2016 has in store for indie broker-dealers)


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