Advisors can look forward to continued scrutiny this year from the SEC for the costs of investments they recommend to clients, said panelists at a Charles Schwab conference Wednesday. The agency might also take some action on third-party advisor exams, panelists said.

The SEC has made clear that it intends to examine for excessive product costs, and examiners have followed through with a “laser focus” on costs, said Michael Townsend, vice president in Charles Schwab’s office of regulatory affairs.

“The regulators want to make sure in the exam process [that you] can justify why you didn’t recommend the lowest cost option,” such as the cheapest fund share class, Townsend said Wednesday at Schwab’s Impact conference in San Diego. There may be reasons for some higher cost recommendations, but advisors need to be able to document those reasons.

The SEC’s fee fixation comes as a number of universities have been sued by employees over alleged excessive fees in their retirement plans.

“The claims are that they used actively managed funds that were more expensive than other passive investments,” said Jeff Brown, head of Schwab’s regulatory affairs unit. “Once the trial bar is on to something, you know regulators will look at it.”

When the DOL rule comes into effect, investors will have a private right of action to sue for similar damages in retirement accounts, Brown added.

That’s why some firms have decided to restrict IRAs to fee-based accounts.

For smaller balances, “the revenue from them doesn’t pay for the legal liability that attaches to them,” Brown said. “We will see [more] of that in size,” with $200 billion to $300 billion moving out of traditional IRA accounts.

Brown said Schwab is not going to mandate fee accounts for IRAs.

Despite these moves, don’t expect action anytime soon on a related issue—the SEC’s creation of its own fiduciary rule that would apply to all accounts.

SEC staff are themselves “skeptical” about coming up with a plan, Brown said. And any action on a uniform fiduciary standard by the SEC will have to wait for a new administration and a new chairman.

That ongoing delay could give the securities industry a chance to push again for a uniform fiduciary standard, essentially imposing the costly Finra rule book on advisors, Brown said. “I would keep my eye out for that.”

Meanwhile, it’s possible the SEC could move forward on a new advisor exam program.
“We know a rule has been drafted [by the SEC] to authorize third-party examiners,” Brown said. Putting the plan out for comment this year could start the ball rolling, he added.

But details would have to be worked out. What would the exam standards be? How would examiners qualify? What would the scope of exams be?

“It’s going to be a long process” before any advisor exam rule goes into effect, Townsend said.
It’s possible the agency could propose something this year, “but we’re looking at multiple years before” an exam scheme could be implemented, Townsend said.