Adviser fears abound for fiduciary rule fallout

Every corner of the advice business is expecting to incur extra burdens from the Labor Department’s new fiduciary rule, which requires that advisers to retirement accounts act in their clients’ best interests.

But advisers affiliated with independent broker-dealers, wirehouses and hybrids (which are currently held to a less-stringent suitability standard) are substantially more fearful than those at registered investment advisory firms (already acting as fiduciaries), according to an InvestmentNews survey of more than 1,000 financial advisers who were polled over the last two weeks. The survey was sponsored by Legg Mason Inc.

One of the advice industry’s greatest fears is that investors will have fewer retirement strategies available to see them through their later years, the survey found.

SHRINKING OPTIONS

About 71% of advisers affiliated with IBDs, and two-thirds of those with wirehouses and hybrids, believe the rule will negatively or very negatively impact retirement planning options for investors. Only about a quarter of RIA advisers share this fear.

“I’m very afraid of the government telling me that I’m limited in what I can offer to people,” said Gregory Marchand, principal of Marchand Financial and an adviser affiliated with an independent broker-dealer. “There will be fewer options for people.”

The DOL regulation is expected to result in fewer recommendations of historically more-expensive products, including variable annuities.

(More coverage: The DOL fiduciary rule from all angles)

Most financial advisers also are concerned that their compliance obligations will increase as the rule is implemented. Again, there is a wide gap between RIAs and other types of advisers.

About 83% of advisers with independent broker-dealers and hybrids, and 75% of those at wirehouses, fear increased compliance, while 39% of those at an RIA have such worries, the survey found.

“If I’m a small investment adviser, I’m not sure that I can handle the new compliance burden of this,” said John Blood, chief executive of Efficient Advisors, an RIA. “I think it will drive smaller RIAs to merge and become part of a larger shop.”

Another top concern is an increase to the cost of serving clients.

About three-quarters of advisers from IBDs, wirehouses and hybrids fear the rule will negatively or very negatively impact the cost of providing retirement services to clients, while a third of RIAs had the same worry, according to the survey.

REVENUE EFFECT

On the revenue side, most advisers at RIAs expect their take-in to remain consistent after the rule is implemented, and 20% even believe revenue will increase, the survey found. Meanwhile, about half of advisers at IBDs, wirehouses and hybrids believe revenue will decline because they’ll need to switch out of commission-based products or close certain small client accounts.

(More: Will the advice you give be subject to the DOL fiduciary rule?)

About 43% of the advice industry is “definitely” concerned about the potential for increased exposure to lawsuits, according to the survey.

“I think there will be more litigation in the future because of this rule,” said Nathan Bachrach, chief executive of Simply Money Advisors, an RIA. “There will be a lot of disgruntled consumers as they start to realize that looking back … they may have paid people that they didn’t know they were paying.”

Advisers also worry that the nation’s shortage of financial advisers will worsen.
About 67% think some of their older colleagues will retire early as opposed to adjusting their businesses to meet the new regulations. Half believe more advice professionals will switch careers and 60% expect that fewer individuals will be interested in pursuing careers in the advice business, the InvestmentNews survey found.