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DOL fiduciary rule changes not one size fits all

Broker-dealer changes affect how advisers can do business

Mar 29, 2017 @ 6:33 pm

By Jodie Papike

There is no denying the uncertainty that has been felt by broker-dealers and advisers as a result of the DOL fiduciary rule. Broker-dealers have been playing a balancing act trying to figure out the best way to prepare for a rule that may or may not ever come to fruition. Larger firms, for the most part, have been more proactive in laying out specific changes and implementation dates for their advisers, while most small- to mid-sized firms have taken more of a wait-and-see approach.

(More: DOL sends final fiduciary rule delay to Office of Management and Budget)

As the industry continues to anticipate how or if the rule will be rolled out, many broker-dealers have taken steps towards implementation that most likely won't change regardless of what happens. For example, the issue of levelized compensation has received a mixed response from broker-dealers. While select firms have proactively developed new platforms to absorb all the client costs into one fee and are pushing product sponsors to advance new products, others have sat back, waiting for their peers to make the first move.

"The industry has responded in a broad range of ways in an effort to remove any conflict of interest. Many firms have been addressing the DOL rule holistically, embracing the concept that level fees make sense to consumers and reps alike," said Lisa Roth, president of Monahan & Roth, a regulatory and compliance consulting firm. "I see a number of companies going in that direction regardless of what happens with DOL."

All of this change can be troubling for advisers who have always done business a certain way. For example, some firms are making a shift to no longer allow direct mutual fund or variable annuity business. Some broker-dealers are forcing this change because of what they feel is a lack of control when assets are off their platform. Their interpretation of the DOL rule solidifies this fear.

"Broker-dealers worry about unknowns. The unknown about how a plaintiffs' bar would attack these accounts is enough for some firms to say they can no longer allow off-platform assets," Ms. Roth said.

On the flip side of this argument is the adviser who enjoys the simplistic, straightforward ability to do direct business away from brokerage accounts. For many advisers, this shift in policy is pressing them to either change their way of doing business or analyze whether their current broker-dealer is a good fit for them.

(More: DOL rule blamed for massive hit to variable annuity sales)

Another area of the DOL rule that's received a polarized reaction from broker-dealers is an adviser's ability to do commission business in retirement accounts. While most broker-dealers decided to allow this business and to move forward with a best-interest contract exemption, others responded by pushing their advisers to place those assets into managed accounts.

"Broker-dealers are interpreting the DOL rule differently, relying on consultants and outside counsel to advise on changes they need to make," said Terry Lister, founder of THF Consulting, which advises broker-dealers on regulatory issues. "Broker-dealers have found themselves in a tough spot over the DOL rule, with potential backlash from advisers depending on the decisions they make."

Now more than ever, it's challenging for advisers to asses whether their broker-dealer is a good fit or if potential changes will disrupt their business to the point where they are forced to make a move. In almost every conversation I have had with advisers over the past year and a half, uncertainty about how their firm is handling the DOL rule has come up. Advisers worry their broker-dealer is overreacting to the rule and implementing changes that will dramatically affect the structure of their practice in a time frame they feel is not reasonable. On the opposite side of the spectrum, there is concern from advisers that their firm isn't being proactive enough and that they are not educated on how they should be positioning their practice going forward.

(More: Merrill Lynch and Morgan Stanley: A tale of two fiduciary 401(k) business models)

Jodie Papike is the executive vice president of Cross-Search, a third-party, independent broker-dealer recruiting firm that connects advisers with broker-dealers.

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