With federal regulators increasing scrutiny of asset managers and adopting a broken windows approach, a recent Cerulli Associates study suggests that the industry could be transformed by regulation designed to protect retiree portfolios from being drained by high fees and bad investments.

There are several key implications for asset managers in a continuing crackdown on financial products for retirees that began after the economic and financial crises of 2008 and 2009, writes Bing Waldert, a director at Cerulli.

"While this examination was largely designed to protect retail investors and prevent shocks to the economy, it also has the potential to impact the asset management industry, both in intended and unintended ways," Waldert writes.

A recently proposed expansion of the fiduciary standard to include rollovers and IRAs by the Department of Labor means authorities could give the industry more than just fines to worry about, according to Waldert.

"Given the dependence of the wealth and asset management industries on rollovers as a source of assets and revenues, these legislative changes present a secular risk," Waldert writes, adding that "IRAs account for 44% of an advisor's book of business, the largest of any component."

In order to duck rollovers, policymakers are pushing through changes encouraging a transition from defined benefit to employee-sponsored defined contribution plans, according to Waldert's report.

This, however, could mean higher fees and conflicts of interest when assets roll from a DC plan to an IRA, Cerulli says. There is also a risk of leakage, or when investors spend a cash withdrawal, losing the assets and future compounding to fund their retirement, the report adds.


"Staying on top of a complex, ever changing regulatory landscape has become a daunting task, especially for alternative managers and global investment organizations," says Steve Meyer, executive vice president of SEI Investments and head of SEI's investment manager services division.

There are nearly 500 financial regulators, exchanges and industry groups around the globe, each with their own set of requirements, according to SEI, a global provider of investment processing, management and operations solutions.

Leonardi attributes many factors like globalization and product convergence as the main factors that have turned regulatory and compliance issues into a significant facet of doing business for investment managers.

"Oversight of regulatory and compliance issues have become overbearing because [asset managers] have taken a more reactive versus a proactive approach due to regulatory changes in the marketplace," Leonardi says.

Eric Clarke, president of Orion Advisor Services, says he counsels nearly 600 advisory firms to take up mock-audits in an effort to better prepare for when SEC regulators knock on their door. "Our audit team is pretty busy throughout the year as those requests come in," Clarke says.

Clarke predicts the weight of compliance and regulatory oversight will one day force the solo practitioner to find a larger home, predicting additional operating costs of up to $100,000.

That amount will include everything from ensuring the firm has a dedicated chief compliance officer, outsourcing for audits to prepare for regulator review, even technical tasks, such as developing a hardware destruction policy.

"These can be things you wouldn't even think about normally, such as retiring a copier or a fax machine, and making sure you've disposed of them properly so you don't put any of your client's data at risk," he explains.

Since the momentum behind the push for further regulation shows no signs of losing force, Clarke suspects that smaller firms will soon be forced to scale up so they can spread compliance costs over more accounts.

"It changes the landscape," Clarke explains of the rising number of regulatory issues currently facing asset managers.

"I think that as these requirements increase for the solo practitioner, those costs will become so great, [possibly] \to the point where I think you'll see that business model go away over the next five years." 

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