A regulation that bans financial advisers in the United Kingdom from charging commissions has driven investors with small accounts out of the advice market, a mutual fund executive contends, something that opponents of the Department of Labor's fiduciary proposal warn could happen in the U.S.
The U.K. implemented the ban on commissions in 2013. Since then, an “advice gap” has developed, James Hammond, managing director for Europe at
Franklin Templeton Investments, told an audience Tuesday at the Investment Company Institute's Mutual Funds and Investment Management Conference in Orlando, Fla.
British independent financial advisers have shifted to a business model in which they charge their clients fees based on the amount of assets they manage, Mr. Hammond said. At the same time, big retail banks in the country have set minimum-asset requirements of 100,000 pounds ($166,338) or more for clients.
“The mass market has been left behind,” Mr. Hammond said.
While they're being shut out by big banks, investors with modest assets aren't showing any enthusiasm for forking over advice fees. Instead, they're turning to online self-directed accounts, he said.
“The concept of paying for advice hasn't permeated down to the mass market,” Mr. Hammond said.
The example of the British experience is resonating with Wall Street lobbyists in Washington who are opposing a pending rule by the Labor Department that would force more advisers to retirement plans to meet a fiduciary standard of acting in the best interests of their clients. While investment advisers adhere to that standard now, brokers don't have to; they need only sell investments that are suitable to their clients.
A study on the impact of the British rule has been circulating among lawmakers on Capitol Hill and was cited last week by Rep. Gwen Moore, D-Wis., in an
event focusing on the DOL fiduciary-duty rule. Ms. Moore pointed to the British experience as a cautionary tale that should give the DOL pause.
At the same event, Assistant Labor Secretary Phyllis Borzi said that the British investment advice regulation cannot be compared to what the DOL is considering, because the Labor rule would not ban commissions.
Although there is debate about whether the upcoming DOL rule is an immediate threat to commissions, another regulatory emphasis is highlighting the differing rules of conduct between investment advisers and brokers, Kelley Howes, of counsel at Morrison & Foerster, said at the ICI conference.
Ms. Howes pointed to the priority that the Securities and Exchange Commission has made of reviewing the migration of clients from brokerage accounts to advisory accounts. If clients who don't do much trading and don't generate high commissions are put in advisory accounts, a financial adviser will generate a more reliable revenue stream.
In a speech Monday at the ICI conference, Norm Champ, director of the SEC's Division of Investment Management, reiterated the agency's concern about the practice of investment advisers who also are registered as brokers' unnecessarily switching clients to an advisory relationship.
“We think dual registrants should consider whether the recommendation to move from a brokerage account to an advisory account is consistent with fiduciary obligations and whether the move is in the client's best interest,” Mr. Champ said.
