Fiduciary Rule Tab: Billions in Compliance Costs, Saver Disruptions

By Ted Godbout • August 15, 2017 • 0 Comments
Compliance with the Department of Labor’s fiduciary rule has reduced access to brokerage advice services and choice, cost billions, and disrupted retirement savers, according to a new study.

The study, commissioned by long-time opponent and fiduciary rule litigant SIFMA and conducted by Deloitte & Touche LLP, includes the experience of 21 financial institutions representing a cross-section of SIFMA members. The study analyzes how financial institutions responded to the fiduciary rule and the potential impact of those changes on retirement savers and the institutions themselves. It was released alongside SIFMA’s response to the Labor Department’s July 6, 2017, “Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions.”

Among the key findings:

  • Just over half (53%) of study participants reported limiting or eliminating access to brokerage services for retirement accounts, impacting an estimated 10.2 million accounts and $900 billion in AUM.

  • 95% of study participants indicated they had reduced access to, or choices within the products offered to retirement savers as a result of efforts to comply with the rule. The study noted that products affected include mutual funds, annuities, structured products, fixed income, private offerings, and more, affecting approximately 28 million accounts.

Compliance and Operational Costs

While the study only captured responses from 21 firms, those respondents were said to represent 43% of U.S. financial advisors and 27% of the retirement savings assets in the market. It further found that financial institutions’ responses and approaches to complying with the rule have varied, reflecting what the study’s authors described as the “wide ranging legal and compliance interpretations of the rule.”

The report notes that while many financial institutions had similar profiles before the rule, in terms of service and product offerings, they have “diverged considerably in their post-rule operating models,” some extensively and some in minor ways.

Those same authors said that the ongoing compliance and implementation efforts have caused significant operational disruption and that the uncertainty surrounding the rule’s future is forcing financial institutions to incur additional real costs, as well as ongoing opportunity costs. Moreover, the report notes that while the fiduciary regulation was the primary driver of the shifts in strategies, in certain cases, advice service and product changes were extended to non-retirement accounts as well, “broadening the impact of the rule.”

Survey participants indicated they spent approximately $595 million preparing for the initial June 9, 2017, deadline and anticipate spending an additional $200 million before the end of 2017. Multiplied industry-wide, the study projects the overall spending amount is in excess of $4.7 billion in compliance costs relating to the rule, in sharp contrast to the DOL’s 2016 estimated start-up costs for broker-dealers of $2 billion to $3 billion. In addition, the ongoing costs to comply are estimated at over $700 million annually, according to the findings.

Litigation Led?

The report notes that almost all study participants indicated that litigation risk has been a primary concern throughout their process to prepare for the fiduciary regulation, concerns that they say became “one of the most prevalent driving factors in the majority of business and compliance strategy decisions taken to date and the study participants stated that such concerns will continue to weigh heavily in compliance strategies for the Jan. 1st applicability date.” The report notes that financial institutions indicated that the unease over litigation risk was amplified because they felt it is virtually impossible to quantify this risk since:

1. there are no precedents of lawsuits or enforcement actions,
2. relatively minor compliance or reporting errors could lead to fiduciary liability, and
3. the litigation risk is perpetual.

These concerns “often” led to financial institutions taking conservative approaches to compliance that resulted in risk-based decisions to eliminate or limit services or products to retirement investors, according to the report. “Many financial institutions felt that products and services they chose to eliminate could have been offered in a way that complied with the spirit and letter of the rule, but that the risk of litigation was too great,” it says.

Delay in Applicability Date

The SIFMA/Deloitte study comes amid indications that the DOL intends to further push back to July 1, 2019, the full Best Interest Contract (BIC) applicability date, while also extending the transition period to that date, as we reported here.

The rule was originally scheduled to be phased in across two compliance dates with the first phase of compliance beginning on April 10, 2017. Following a Feb. 2017 presidential memorandum ordering an updated economic analysis of the rule, the DOL removed certain transition period requirements, delayed the initial applicability date to June 9, 2017, and postponed certain rule and exemption requirements until Jan. 1, 2018.

In a separate comment letter, SIFMA argues that the Jan. 1, 2018, applicability date should be delayed until the DOL can complete a comprehensive review of the rule and make revisions, if necessary, as directed by President Trump’s memorandum.

The American Retirement Association had previously in its July 18 letter in response to the DOL’s request for information (RFI) on its fiduciary regulation requested an extension of the applicability date and recommended a streamlined levelized fee exemption.