DOL fiduciary rule compliance costs exceed $4.7 billion: SIFMA study

Broker-dealers report paying hefty start-up costs and additional ongoing expenses, and are cutting the number of mutual funds they offer

Aug 10, 2017 @ 2:00 pm

By Bruce Kelly

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The brokerage industry will spend more than $4.7 billion in start-up costs relating to the Department of Labor's new fiduciary rule, far exceeding the DOL's estimated costs for broker-dealers of $2 billion to $3 billion, according to a study issued Thursday by the Securities Industry and Financial Markets Association, a trade group representing Wall Street.

Litigation risk has been a key driver in business and compliance decisions across the brokerage industry, according to the study, which was completed by Deloitte & Touche for SIFMA.

And, as widely reported previously, firms are cutting back on the number and types of products they have for sale. About two-thirds of the firms surveyed have cut the number of mutual funds they sell to investors, while close to a quarter have eliminated no-load funds and directly held funds, which are mutual funds clients have at the fund company directly rather than the brokerage. Directly held funds are popular with many independent contractor reps.

The 21 financial institutions who participated in the study represent 132,000 registered reps and advisers, or 43% of the registered sales people in the industry. The firms in the survey control $4.6 trillion — 27% — of the retirement savings in the market.

The future of the fiduciary rule appears up in the air at the moment; the DOL in a legal brief filed Wednesday indicated it wants to delay the remaining parts of the rule that were supposed to be implemented Jan. 1, 2018, until July 1, 2019.

Supporters of the Labor Department's fiduciary rule are calling an 18-month implementation delay too long, while opponents say the postponement is needed to give the agency time to review the rule.

SIFMA's study comes the same week as the DOL's deadline for comment letters in response to a Department of Labor request at the end of June soliciting suggestions from the public for streamlining major provisions of the rule.

Other trade organizations representing sections of the financial services industry have issued studies and letters this week that show the fiduciary rule in a negative light. For example, the Insured Retirement Institute earlier this week issued a comment letter that said the new rule is creating tens of thousands of "orphaned" investment accounts and limiting consumers' access to financial products and services.

Barbara Roper, director of investor protection at the Consumer Federation of America and a supporter of the rule, said SIFMA should release the names of the firms it surveyed and be completely transparent with the data it collected if it wanted the conclusions of the study to be verifiable.

"I could take this report and its findings and say, I've interviewed 21 firms and we see huge successes for investors," Ms. Roper said. "Firms are taking out high-cost products, beefing up compliance to support investors and giving best-interest advice."

A SIFMA spokesperson responded by saying: "Similarly to studies relied upon by the Department within its regulatory impact analysis, the study included underlying data that cannot be shared outside of the confines of the study. As you are aware, an assurance of confidentiality is frequently necessary to obtain parties' agreement to participate in studies involving the analysis of marketplace data."

The costs of the new rule to broker-dealers are high, according to the study. Large firms, or those with net capital reserves of greater than $1 billion, on average spent almost $55 million in start-up costs and expect ongoing costs of $5.9 million. Medium firms, with net capital between $50 million and $1 billion, reported average start-up and ongoing costs, respectively, of $16.4 million and $3.2 million. Small firms, with less than $50 million in net capital and the overwhelming majority of broker-dealers, reported $2.3 million in initial costs, and will spend, on average, $1.1 million to comply with the rule.

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