On Recruiting

How the DOL fiduciary rule could affect financial adviser recruiting

Here are some ramifications the new rule may have on adviser movement in the industry

May 9, 2016 @ 4:33 pm

By Danny Sarch

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As everyone in the industry knows by now, the Department of Labor issued a 1,023 page document in April which defines a new fiduciary standard for broker-dealers who have clients with assets held in retirement accounts. All of the brokerage firms are studying the document and figuring out what they will have to do at both the corporate level and at the adviser level to comply. Definitive communication from the top to the adviser level about what will be expected of the adviser under the new regulation has yet to happen. What will be the new rule's effect on adviser movement and recruiting?

1. Advisers who are already considering making a move are paying attention to time deadlines that will be forced upon them by their current firm.

Critics and proponents of the new regulation are arguing over many things, but no one disputes that firms, their advisers and their clients will have new paperwork for their clients to sign. This paperwork on new accounts (even if the paperwork is digital) is arduous for everyone. It makes sense then that advisers who are changing firms want to make a move before their current firms make them do more paperwork because moving after will require their clients to sign an entirely different document. Said one wirehouse adviser with whom I am working: “I will not ask my clients to sign a bunch of new documents while I'm still here [at his current firm] and then ask them to sign new docs at my new shop. That's just dumb.”

2. The computation of the gross production generated in an adviser's book just got more complicated.

Advisers have told me that wealthier clients often are active traders in an IRA account, since they do not have to worry about tax consequences of gains and losses. IRA accounts are also often the place where a client keeps a concentrated position, often the stock from their former employers. Are advisers now going to be charging a fee for watching a portfolio that formerly generated no revenue? Said another wirehouse adviser: “I've had several clients tell me that they were offended by the regulators thinking that they were naïve rubes who were being taken advantage of by greedy brokers. They want to continue to pay commissions in their retirement accounts.” It remains to be seen to what extent the new rule will affect the revenue generated from a given adviser's book; there are scenarios which would make the revenues go up and some that would make the revenues go down.

(More coverage: The DOL fiduciary rule covered from every angle)

3. How sophisticated will best interest contracts be? How different will they be from firm to firm?

If the Best Interest Contracts (BIC) will vary from firm to firm, it could affect the ability of advisers to transfer from firm to firm. On the other hand, a firm with a very restrictive BIC would drive an adviser to a firm that has a BIC that better fits his or her practice. Also, many sophisticated wirehouse advisers price their services based on the size of their entire relationship, often using the non-ERISA accounts to subsidize the lack of fees generated in IRAs. Will BICs be able to reflect this type of arrangement?

4. What new policies and procedures will firms put in place in order to comply with the regulation? How different will those policies be from firm to firm?

The firms are fully studying the 1,023 page document. Just because a given product is not banned from an IRA account does not mean a given brokerage firm will still allow that type of transaction. The new regulation will give clients the right to seek damages for violations in court, not just in arbitration as has been standard before. Does this mean that advisers and their clients have a new level of liability? How burdensome will policies and procedures get at big firms to mitigate this liability? Several branch managers at different firms told me that advisers will be expected to document every conversation they have with their clients.

5. Are firms anticipating similar rules for non-retirement accounts, and are commission-based advisers therefore going to be less attractive to suitors?

As I've written before, I believe that a fiduciary standard for all types of accounts is on the horizon. Even in a pre-DOL rule world, many brokerage firms were already discounting the value of commission based advisers if they wanted them at all. If the brokerage firms also believe that a broader fiduciary mandate is coming, then the advisers who have already adapted their practices to a fee-based, fiduciary standard world will be much more attractive to other firms than their colleagues who have stuck with a traditional commission based structure. More importantly, commission-based advisers possibly will not be seen not revenue generators but as potential liabilities.

Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.

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