Fiduciary duty boosts revenue, not compliance costs: FPC

Jul 8, 2013 @ 3:59 pm

By Mark Schoeff Jr.

Financial advisers who operate under a fiduciary duty achieve stronger asset and revenue growth without taking on additional compliance costs, according to a group of adviser advocates.

In a comment letter to the Securities and Exchange Commission on Friday, the Financial Planning Coalition argued that the agency should adopt a uniform fiduciary standard for retail investment advice, which would raise advice requirements for brokers.

It supported such a move by including in the letter an Aite Group LLC survey showing that 55% of registered investment advisers and 46% of registered representatives acting as fiduciaries experienced more than 10% in annual asset growth from 2007 to 2011. Those numbers compared with 29% for registered reps who are not fiduciaries and charge commissions.

In revenue, 50% of fiduciary registered representatives and 38% of RIAs achieved more than 10% growth, while 31% of non-fiduciary registered reps reported the same outcome. Aite Group surveyed 498 financial advisers in March 2012.

The study also demonstrated that 64% of registered reps who work on a fee basis and 65% of investment advisers increased by 5% or more annually the amount of their clients' assets that they managed, versus 46% for registered reps charging a commission.

The Financial Planning Coalition — comprising the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors — released its letter today.

Friday was the deadline for a request for information for a cost-benefit analysis the SEC is conducting of a potential uniform fiduciary standard. The agency will use the study to determine whether to proceed with a rule.

The Dodd-Frank financial reform law gave the SEC the authority to require that anyone providing advice act in their clients' best interests, which investment advisers must already do. Brokers currently adhere to a less stringent suitability standard that requires that investment products they sell fit an investor's financial needs and risk profile.

In its letter, the FPC said that research shows that brokers moving from commission-based accounts to fiduciary accounts do not experience an increase in compliance expenditures.

“We believe this data supports the adoption of a uniform fiduciary standard,” the coalition wrote. “Such a standard will be a substantial net benefit both to retail customers and to the financial advisers who serve those retail customers, at little or no additional costs.”

The coalition's claim about the price tag for harmonization contrasts sharply with letters submitted to the SEC last week by several groups. The Securities Industry and Financial Markets Association, which represents securities firms, banks and asset managers, wrote that nine of its member firms estimated that it would cost each of them $5 million annually to upgrade their compliance, supervision and training systems.


Another seven firms, SIFMA noted, estimated that if brokers were to adopt disclosure forms similar to those that investment advisers use at the beginning of a client relationship, it would cost about $3 million per firm annually.

In another letter submitted last week to the commission, the National Association of Insurance and Financial Advisors cited a poll of 2,419 NAIFA members showing that 84% said that their compliance costs would go up under a fiduciary-duty standard.

If those costs jumped by 15% or more, 43.9% of respondents said they would pass the increase along to clients. Nearly half said that they would limit their practices to clients with a minimum amount of assets.

In its letter, NAIFA argued that the vast majority of its members serve middle-income investors with less than $250,000 in their investment accounts. Those clients, NAIFA said, would be hurt by the increased fiduciary compliance costs.

But the FPC said that the Aite study shows that only 16% of RIAs and registered reps who transitioned from commissioned-based to fee-based businesses in the last five years dropped “mass-market” clients who have less than $100,000 in investible assets.

“While access to investment advice for middle-income clients is an issue in both fiduciary and non-fiduciary business models, the evidence does not support any conclusion that a fiduciary standard would make that issue worse,” the FPC letter states.

In a separate comment letter, Schwab Advisor Services told the SEC that compliance costs for RIAs would increase substantially, if the agency applied to advisers the rules for licensing, registration, continuing education, books and records, supervision and client communications that apply to broker-dealers.

In its March 1 request for information, the SEC said it was considering so-called harmonization of broker and adviser standards.

Schwab said that a survey of more than 800 of its investment advisers between May 28 and June 7 showed that they anticipated a 63% increase in time spent on compliance and a $175,000 increase in first-year compliance costs and $117,000 in each following year. Overall, the harmonized rules could cost the approximately 10,500 SEC-registered investment advisers $1.83 billion in the first year and $1.23 billion annually thereafter.

“Schwab respectfully suggests that, given the data from the Schwab Survey, the commission take no further action in terms of harmonizing rules outside of a uniform standard of care, and de-couple its consideration of the uniform standard of care from other potential rule areas for harmonization,” Christopher Gilkerson, Schwab's deputy general counsel, wrote.

The Investment Adviser Association also asked the SEC to back off of harmonization.

“We are aware of no data demonstrating that the broker-dealer regulatory regime is more protective of clients than [investment-adviser regulation],” wrote David Tittsworth, IAA executive director. “On the other hand, converting advisers to the broker-dealer regulatory regime would impose substantial costs on advisers, most of which are small businesses and do not engage in broker-dealer activities, at the expense of investor protection.”


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