Half of registered investment advisers perceive there will a negative impact on their business as a result of a proposed Labor Department rule to raise investment-advice standards on retirement accounts, according to a new study conducted by Fidelity Investments.
That 50% proportion is perhaps higher than some would think — the Department's fiduciary rule is envisioned to affect brokers much more than RIAs, because RIAs are already held to a fiduciary standard under Securities and Exchange Commission rules while brokers are currently held to a less-stringent suitability standard.
“That's still higher than maybe some would expect that number to be, given the conventional wisdom is RIAs are already operating in a fiduciary model today,” according to Tom Corra, chief operating officer of Fidelity Investments' clearing and custody solutions unit.
The fiduciary model under SEC regulation is different than it would be under the DOL rule, so RIAs will effectively have to manage two different types of fiduciary duty, which would lead to higher costs overall, Mr. Corra said.
Just over half of RIAs — 55% — anticipate increased time required for compliance-related tasks, and 45% expect an impact in terms of time spent on compliance training, according Fidelity's study. Four in 10 believe there will be an increase in the cost of doing business.
RIAs, unlike brokers, typically take a fee on assets rather than a commission. Those receiving variable compensation — through commissions and 12 b-1 fees, for example — would be greatly affected under the proposed rule because of extra compliance steps associated with that compensation when compared to a level-compensation arrangement.
“The biggest impact here will be on advisers that have commissions as part of their compensation,” Mr. Corra said.
As such, a large number of broker-dealers — 77% — are concerned the rule will have a negative impact on how they do business, according to the Fidelity study.
The study polled 485 advisers who manage client assets either individually or as a team, and work primarily with individual investors. Adviser firm types included 22 banks, 140 independent broker-dealers, 69 insurance companies, 108 regional broker-dealers, 63 RIAs and 83 wirehouses, with findings weighted to reflect industry composition.
All advisers surveyed expect a 10-percentage-point increase in the use of fee-based compensation as a result of the DOL rule, and a resulting decline in use of commissions. Two-thirds of respondents anticipate using a level-compensation model for both retirement and non-retirement assets following a final rule, which is expected to be released this month or in April.
The majority of advisers — 66% of all respondents — also plan to re-evaluate products they recommend, with 28% saying they expect to recommend variable annuities less often and 26% saying they'd recommend alternative investments less frequently.
“Given emphasis on level fees, alts are called out specifically as a product line in the ERISA rule, and variable annuities, given they're sold with commissions, are likely to be recommended less,” Mr. Corra said.
Brokers who do continue selling variable annuities would most likely do so in a fee- rather than commission-based capacity.