Stifel's fiduciary solution for commissions

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As the industry has divided on whether to offer fee-based retirement accounts versus charging commissions under the fiduciary rule, Stifel has decided to do both.

CEO Ron Kruszewski said on Thursday that the fast-growing wealth management firm will transition smaller retirement accounts to a fee-based model, while retaining commission accounts for larger clients.

Kruszewski explained that he is trying to take a middle-of-the-road approach with the department's rule, and is expecting that advisers will invoke the best interest contract exemption for larger accounts that might warrant an extra level of care.

"Where it makes sense, we will utilize the BIC, but we believe this option is more weighted to larger accounts," Kruszewski told analysts in a third quarter earnings call Thursday. "We are mindful of the costs relating to adopting accounts to the new standard of care as well as the ongoing costs [that] relate to new systems, policies, procedures and controls."

There is perhaps no regulatory issue that is causing more consternation in the wealth management sector than the DoL's fiduciary rule. With a compliance date of next April, the new rule requires advisers working with retirement plans and investors to provide advice in their clients' best interest, and, in situations where they earn commissions or operate under other potential conflicts, to sign a contract with their client averring their fiduciary responsibilities.

Taken together, the compliance burdens, potential legal liabilities and other challenges have compelled firms like Merrill Lynch to abandon commission accounts in the retirement space altogether.

Kruszewski made it clear that Stifel isn't prepared to go that far, but he did indicate that the fiduciary rule will alter the way his firm operates.

"With respect to the Department of Labor's new fiduciary rule, we continue to implement and refine our business model related to retirement accounts," he says. "On one end of the spectrum, several firms have decided to eliminate commission-based accounts entirely, while others have indicated a business model which will more significantly use the best-interest contract exemption. ... At Stifel, we are taking a balanced approach which preserves choice while recognizing the new fiduciary requirements."

Kruszewski explains that Stifel remains open for business for smaller accounts, and has indeed lowered many of its minimum requirements and "welcome[s] the opportunity to provider early savers with professional advice."

However, from Stifel's perspective, the economics of the matter dictate that those clients move to the advisory side of the business.

"For a lot of smaller accounts, net-net, an adviser solution makes more sense. And from the firm's perspective, there's a difference in the way you have to look and monitor fee-based versus commission-based accounts, and ... what the BICE requires makes it extremely difficult to provide that service to small accounts," Kruszewski says.

"Before this rule came into effect we did not have an ongoing fiduciary standard of care, and to say that you're going to provide the same service as you would an episodic, commission-based transaction -- it's just not accurate," he adds.

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Kruszewski echoes the view of many in the industry that the compliance costs associated with the BIC exemption will drive up fees, making accounts covered under that provision of the fiduciary rule prohibitively expensive for smaller investors.

"I don't think that for small accounts that the BIC necessarily makes a lot of sense on either side of the ledger -- from the client choice or for the firm's perspective," he says. "But we're not going to be absolute in anything. We were going to have our programs that allow clients to have choice, and we'll utilize both the BICE and advisory solutions."

The effects of the Labor Department's rule are likely to be felt beyond clients and account selection, however. Firms will have to rejigger compensation grids and the payouts of recruiting bonuses to comply with the new regulations, and Kruszewski anticipates that the compliance challenges could mute activity in the mergers and acquisitions space, where Stifel has been a particularly active player.

"I think across the industry there's a lot of questions about implementing [the rule], and I think that is a general governor, if you will, or dampener on activity," Kruszewski says. "In general, I would say that the big item in front of most firms and the big question mark is the implementation of this rule and its impact on systems, and frankly how we're going to interact with clients."

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Fiduciary Rule Regional BDs Law and regulation Compliance Ronald Kruszewski Stifel Financial Merrill Lynch