As the independent broker-dealer community braces for the U.S. Department of Labor’s finalized fiduciary rule, companies are contemplating the potential ramifications for the industry at large and for their firms in particular.

“I think training will be a huge, complex component related to this particular initiative,” said Paul Sankovich, chief compliance officer at Wells Fargo Advisors Financial Network. He spoke at this winter’s Financial Services Institute’s OneVoice conference in Orlando, Fla., on a panel focused on handling orphaned accounts in the post-DOL world. 

Orphaned accounts are customer accounts—typically smaller ones—unassigned to a particular advisor either because the advisor has left his or her company; has passed away; or simply wants to get rid of smaller, less productive accounts. In the context of the panel discussion, the premise was that the Labor Department’s proposal, which would apply a fiduciary standard to all financial advisors providing investment advice for a fee to a retirement account plan or participant, could result in advisors dumping some of their small accounts because compliance costs under the new standard would make them too expensive to service. 

The question, then, becomes how to find a home for those accounts. “As it gets down to the small accounts, the greatest challenge we have is how do we come up with a business or service model that maintains service levels for comprehensive financial solutions for smaller clients—probably the clients who need the advice most—in a way where we still have margins and make it a sustainable business model,” Sankovich said. He added that Wells Fargo will try to redistribute orphan accounts by trying to find another local branch to service that client. If that doesn’t work out, the firm has a solutions center, essentially a call center, set up with several hundred reps where the account gets some advice, but not a full suite of advice. 

Joe Terry, chief supervision officer at AIG Advisor Group, said advisor firms need to be proactive rather than reactive to the proposed rule. “Are you as an organization going to adopt best-interest contract standards?” he asked. “Is that a path you’re willing to go down to maintain some of your existing compensation arrangements? Once you understand the service level you want to provide, you need to figure what kind of support you’ll need from the standpoints of people, systems and the dollars associated with that. Even before the DOL [rule] is finalized, having those types of discussions now will provide firms with a sense of where you stand.”

At times, the panelists veered from voicing concerns about the DOL’s pending fiduciary rule and the prospect of having another regulator in their lives to offering hopeful notions that the rule might actually have a few benefits. 

One of the big negatives is the cost issue. “The cost of trying to get everything done to keep our advisors in the right area and off any regulator’s radar could be quite costly,” said Kevin Manz, vice president of operations at Cambridge Investment Research. 

Terry echoed that thought. “We think advisors will start doing a cost-benefit analysis of their own book, and some will say it’s not worth working with these smaller accounts when they start looking at what their obligations and risk profile might be,” he said.

Terry voiced concerns about the definition of education versus a recommendation, and what to allow somebody on a phone call to do. “The documentation of that process will become infinitely more important as you move into a DOL world versus a suitability world,” he said, referring to the suitability standard that governs broker-dealers, which differs from the fiduciary standard applied to registered investment advisors. “While the documentation of the suitability standard is high, in a DOL fiduciary environment your [obligation] for process, due diligence and [showing] that you were acting in a client’s best interest grows significantly, so the documentation of that will be a challenge. That’s not something we deal with on that scale today.”

On a positive note, some panelists posited the proposed DOL rule could ultimately bring some good things to the table. “I think there will be a lot of innovation among product developers and manufacturers,” Sankovich said. “How do you build a product in a fiduciary environment under DOL that’s easy to understand, is reasonably priced and is still effective? I think it’ll wean out a lot of complex securities we have today that don’t have transparency, that FAs get paid an awful lot to sell but may not be right for the client.”

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