Execs See Fiduciary Proposal as Complicated, Costly

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Early assessments of the Department of Labor's fiduciary proposal find the new rules will be complicated to implement and costly for the industry, according to wealth management executives.

Answering questions during recent earnings calls, industry CEOs and other leaders found themselves peppered with questions from analysts asking about the impact a new rule may have on the bottom line.

Their responses were hesitant, because the proposal is still early in the approvals process, but showed how the intricacy of the business, the rules -- both proposed by the DoL and expected from the SEC -- and the unknowns in general are bedeviling firm leadership and analysts.

"The law is 800 pages, it's very complex and people are still trying to understand it," Raymond James CEO Paul Reilly said during an earnings conference call. "We are studying it like crazy."


Ruth Porat, CFO of Morgan Stanley, in another earnings call, said that there could be an uptick in expenses. "We do expect increased compliance costs," Porat told analysts.

In a research note, analysts at investment banking firm Keefe, Bruyette & Woods said higher expenses will follow the rule's implementation. According to the report, which focused on several major broker-dealers including Morgan Stanley, Raymond James, LPL Financial and Ameriprise,compliance and monitoring costs can be expected to rise at all four firms.

"Brokers appear to be able to generate commissions and fees from their historical business lines, but we expect that increased regulations will lead to lower sales and higher compliance costs," they wrote.

The authors estimated that the DoL's proposal could be a 2% drag on Morgan's earnings, which the authors described as modest. For Raymond James, the analysts estimated "roughly $2,400-$4,800 in increased compliance and litigation cost per advisor which equates to roughly $15 million to $30 million of incremental expenses."

Todd Cipperman, principle at Cipperman Compliance Services agrees that the rule could result in "a significant cost uptick" for firms. "This sort of fiduciary conflict of interest is more RIAish if you will, and that's not really what they do. That's going to really change their game."


Reilly, whose firm has both employee and independent advisors, was asked if the rule changes would have a more muted impact because the firm has advisors operating as RIAs.

"We have a lot of RIAs. But that is not the issue. If you look at the definitions of fee disclosures and payments, it's pretty complex," Reilly said. "If it was as simple as having an RIA then we'd have a lot of people unaffected."

Reilly also took aim at the critics who claim that fee-based compensation is better for clients than commission-based compensation, saying that the latter might in fact be better and cheaper for clients who have small accounts. He said that being fee-based does not automatically mean that an advisor acts in the best interest of his or her clients.

"I think the headline from the administration and DoL that fee-based is good and commission is bad just isn't true," Reilly said.

He added, "I believe [the proposed rule] will honestly leave millions of people without advice."

Another concern, raised by an analyst during Ameriprise's earnings conference call, is whether a new rule may affect proprietary products.

"To meet the various standards of FINRA and the SEC, we sell our products like every other product on the platform. Compensation is exactly the same," Ameriprise CEO Jim Cracchiolo said.

He remains confident that Ameriprise will be able to continue selling its own proprietary products regardless of fiduciary rule changes.

"We feel very comfortable because we fully disclosure everything today, as we should," Cracchiolo told analysts.

In a sense, this may seem like déjà-vu for the industry as it has already been forced to adapt to more intense regulatory scrutiny following the financial crisis. But Cracchiolo and other executives cited the overlapping nature of the potential rule changes from the DoL and SEC as well as the general uncertainty as to what the regulatory regime will finally require of advisors and firms.

"It's like any regulatory change. We work through it and figure out what things are appropriate," Cracchiolo said. "But we have to get clear on what exactly that is." --Maddy Perkins contributed reporting.


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