Applying fiduciary rule to IRAs would be especially painful: Report

Detailed data based on an earlier independent report on the costs associated with the Labor Department expanding the definition of fiduciary to cover IRAs paint a fairly bleak picture. The study, commissioned by law firm Davis & Harman and conducted by consulting firm Oliver Wyman Group, looked at 25.3 million IRA accounts and $1.79 trillion in assets, accounting for 40% of the U.S. IRA market, and found that not only would account costs rise, the level of service would decrease and access would be limited. The DOL is expected to re-propose a rule to expand which financial professionals must operate under a fiduciary standard of care under the Employee Retirement Income Security Act of 1974. It sought out information from the industry on the likely impact of such a change. For starters, the report found that of the 22.4 million brokerage IRAs in the study sample, just 11.7 million would have enough assets to migrate to a fee-based channel. The brokerage industry opposes an expanded fiduciary definition, arguing that such a standard cannot be applied to brokers who make commissions on sales — forcing account holders to switch to advisers instead. Fees would skyrocket for investors, jumping by as much as 196% after migration to a fee-based model, according to the report. While small accounts worth $25,000 to $10,000 were paying $80 in 2010 in direct per-account costs under a brokerage model — exclusive of marketing, distribution and shareholder services — that fee would climb to $135 under an advisory model. The increase is even more dramatic for the largest accounts: IRAs with more than $250,000 in assets were shelling out $1,070 in brokerage fees in 2010, compared to $3,165 in advisory fees. “The elimination of the brokerage model with respect to IRAs would have significant adverse effects on retirement security,” Kent A. Mason, a partner at Davis & Harman, wrote in a Jan. 27 letter to the Labor Department. This would result in “millions of IRAs losing access to the services of an investment professional and hundreds of thousands of fewer IRAs being opened each year,” Mr. Mason wrote. The report also pointed out that small IRAs — those with balances of $10,000 or less — almost all are brokerage accounts. Small investors without a relationship with a broker would miss out on support, including access to investment information and research, according to Oliver Wyman's findings. In addition, discussions of investments held within an IRA, as well as talks clients have with brokers about other investments that aren't tied to the IRA but “may be considered” by the client for use in an IRA account, could expose brokers to fiduciary risk, according to the study. "We received the materials, and we are reviewing them," said DOL spokesman Jason Surbey.