The Department of Labor’s proposed fiduciary rule will cost advisors $2.7 billion in the first year, significantly more than what the agency is telling lawmakers and stakeholders, according to a new survey commissioned by the Financial Services Institute, an independent broker-dealer trade group that opposes the proposal.
The total is "11 times the department’s estimate of ongoing costs,” the group said in a report released today. The findings were based on survey responses of 15 FSI member broker-dealers representing 26,000 independent registered representatives with a total revenue of $14.5 billion.
“The rule will continue to cost $2.5 billion each subsequent year. In addition to electronic disclosures, FSI members expect advisors to print approximately 120 million pieces of paper annually to comply with the proposal," FSI said. The survey was conducted by Oxford Economics.
The proposed rule, which President Joe Biden said was necessary to rid the industry of “junk fees,” would significantly expand the strictest fiduciary standards of conduct under trust and federal benefits laws to those making any recommendation or solicitation to a qualified plan or IRA customer.
At the same time, the package would make it tougher to take advantage of exemptions that insurance agents and registered reps have historically used to earn commissions or fees on what they’ve said are one-time recommendations. For the first time, most annuities recommendations would be blanketed by the rule.
But observers and critics, including the FSI, have asserted that the proposal fails to distinguish between advice and sales and will likely be subject to the same legal challenge that derailed the DOL’s 2016 Obama-era rule, which was struck down by the Fifth Circuit Court of Appeals in 2018.
The proposed rule “would result in significant costs, impose undue burdens, and adversely affect Main Street American investors’ ability to access professional financial advice, products, and services,” FSI said.
The proposed rule will most profoundly impact “smaller, less relatively sophisticated retirement investors in commission-based (rather than fee-based) accounts who rely on incidental advice and recommendations, education, and guidance from their registered representatives,” the survey report said.
Small investors are likely “to lose access to needed support and recommendations, education, and guidance, while those in somewhat larger accounts may only be shifted into fee-based services when the investor may have been better served by a commission-based account. Investors who remain in commission-based accounts with investment recommendations are likely to see increased costs and reduced investment product choices,” FSI said in the survey.
DOl estimates have put the cost to advisors as $253 million to implement in the first year and $216 million each subsequent year, FSI said in the report.