Welcome to Financial Advisor IQ
Follow

How Much Will the DOL Rule Cost Advisors?

By Rita Raagas De Ramos August 23, 2017

Among the loudest battle cries of advisory firms opposed to the Department of Labor’s fiduciary rule, as it stands, is resistance to what many of them have described as the burdensome cost of compliance.

Deloitte estimates broker-dealer firms and firms dually registered as broker-dealers and RIAs already spent more than $4.7 billion in preparation for the rule's June 9, 2017 partial applicability date and will be spending more than $700 million annually to maintain compliance.

Even with the “significant” amount brokers and dually registered advisors have spent on the DOL rule’s compliance requirements, Deloitte notes the expenditures have mainly been for “highly manual, stop-gap measures, which are unsustainable long-term.”

The ongoing annual cost estimates factor in only operational costs and do not account for “potential risk events" such as litigation, regulatory changes or marketplace shifts, factors that could “substantially” change the actual cost of compliance with the rule, Deloitte says in its report published this month. In an earlier report published in February, Morningstar analyst Michael Wong estimated the range of the long-term annual costs to the advisor industry from potential class-action settlements at $70 million to $150 million.

Deloitte extrapolated its spending estimates from the results of a survey commissioned by Sifma. Deloitte’s survey excluded independent RIA firms, which were already held to a fiduciary standard before the DOL rule was put in place but would nevertheless have to comply with the specific requirements of the rule.

The 21 broker-dealer and dually registered firms surveyed by Deloitte spent around $595 million for the people, processes and technology needed to prepare for the June 9, 2017 partial applicability date, and they expect to spend more than $200 million more before the end of this year, Deloitte says. Those firms expect to spend nearly $100 million annually to maintain compliance with the DOL rule, with the individual firm’s projections ranging from $125,000 to $15 million per year.

Those 21 firms represent 132,767 advisors, or 43% of U.S. financial advisors, according to Deloitte. And they serve around 35 million retail retirement accounts that have around $4.6 trillion in assets, or 27% of the $16.9 trillion in U.S. retirement savings.

Deloitte’s breakdown of the average spending for the DOL rule by the end of this year shows a range from $2.3 million for small firms with less than $50 million in net capital to $54.64 million for large firms with more than $1 billion in net capital. And it expects the average ongoing spending annually to range from $1.1 million for small firms to $5.89 million for large firms.

In their respective comment letters to the DOL in recent weeks, small firm Berthel Fisher & Company Financial Services and large firm Raymond James Financial provided a glimpse into their spending. For Berthel Fisher, it’s been more than $300,000 in legal costs and staff hours to develop compliance procedures, and potential spending for external technology solutions might add much more, citing a quote from Morningstar for one such solution at $1.014 million annually. Raymond James estimates the operational and IT changes needed to comply with the DOL rule will be in the “tens of millions of dollars” in addition to the millions the firm has already spent.

So far the biggest expense incurred by the 21 firms surveyed by Deloitte has been for the people needed to comply with the DOL rule – specifically the hiring of new full-time employees and the reallocation of existing employees for surveillance, supervision and compliance roles, including those needed to support requirements for adhering to the Impartial Conduct Standards. The personnel-related spending of those firms prior to the June 9 applicability date totaled $350 million.

Among other things, the DOL rule requires advisors to inform their investors of any potential conflicts of interest and have their clients sign a Best Interest Contract Exemption document if advisors receive variable compensation for providing retirement advice. But during the transition period until Jan. 1, 2018, retirement advisors who make use of the BICE are required to comply only with the ICS, which states BICE users must “adhere to basic fiduciary norms and standards of fair dealing.” The DOL has proposed the extension of the transition period until July 1, 2019, a request currently under review by the Office of Budget and Management.

The 21 firms have spent $57 million on changes needed to make their processes comply with the DOL rule, especially processes related to rollover recommendations, product due diligence, and financial institution and advisor compensation evaluation.

With the DOL rule, certain rollover recommendations are now subject to the ICS, so all 21 firms said they have been evaluating their rollover processes and whether rollover advice will be allowed going forward, Deloitte says. While some of the firms invested in technologies, most said their new processes are “highly manual and accomplished via forms populated through conversations with and documentation received from retirement investors.”

(Getty)

Nearly all the firms either changed or enhanced their internal and vendor research for certain products. Sixteen firms said they either revised or updated financial institution and advisor compensation evaluation processes, and the most common change was the leveling of compensation arrangements.

The 21 firms spent $188 million for technologies required to comply with the DOL rule, especially for rollover processes, principal trading controls, and disclosure requirements, including websites.

In addition to the direct costs of compliance with the DOL rule, there have also been opportunity costs, which Deloitte says are “difficult to quantify in terms of dollars.” The focus on compliance with the DOL rule has “led to the delay or abandonment of projects and initiatives” in the areas of customer experience enhancements, business development, and investor education, Deloitte says.

On the flipside, advocates of the DOL rule, including investors who submitted comments to the DOL in recent weeks, say the priority of all firms should be to protect investors, who are apparently losing $17 billion annually to advisors who do not uphold the best interests of their clients. That figure, cited by the Obama administration and based on its Council of Economic Advisers’ estimate, underscores the need for the rule, say proponents.