By Cyril Tuohy
In the wake of tighter regulations on investment advisors in the United Kingdom, an analysis has determined that about 11 million U.K. investors who manage their own accounts say financial advice has become too expensive. This finding was cited by a Securities and Exchange Commissioner as a cautionary tale for advocates of a uniform fiduciary standard in the United States.
“There is a real-world example now playing out that further reinforces why we should exercise extreme caution as we consider any change to the standards of care,” SEC Commissioner Michael Piwowar said in remarks at a recent forum sponsored by the National Association of Plan Advisors.
Piwowar was referring to the U.K.'s Retail Distribution Review (RDR), which in 2013 set new rules on financial advisors and the fees they charged for services. The RDR banned financial advisors from taking commissions for selling investment products and instead imposed a fee-based structure agreed upon with the client in advance — which critics warned would result in millions of investors tumbling into an “advice gap.”
A study conducted by Deloitte before the RDR went into effect projected that as many as 5.5 million investors, or about 11 percent of U.K. adults, would be affected by the new rules. The study projected that this would occur as advisors would either leave the industry, find they could no longer serve certain clients profitably or would be laid off by their employers.
That study was followed by an analysis conducted by the start-up online advisory service Wealth Horizon that said at least twice the number of investors cited by Deloitte — 11 million —were being forced to manage their investments themselves because advisor costs were too expensive.
“It turns out the effects were even worse than predicted,” Piwowar said at the advisors forum.
Piwowar is one of two SEC commissioners who favor alternatives to a uniform fiduciary standard of care for retail investors, which is under consideration by the SEC. Three members of the five-member commission favor a uniform standard of care.
Piwowar said that while the benefits of implementing a uniform fiduciary standard were still up for debate, he had no doubt that costs associated with such a standard would rise. He said he had not yet decided whether to support uniform fiduciary standards but “it is important to note that, based on the data available to me now, the potential benefits seem elusive and the potential costs sky-high.”
“I am not aware of any evidence that retail investors are systemically being harmed or disadvantaged under one regulatory regime as compared to the other,” Piwowar said.
Piwowar said Deloitte researchers, in a separate report published after the RDR took effect, found that the new regulations had substantial negative effects on competition, with a reduction of more than 44 percent in bank advisors and a 20 percent shrinkage in independent financial advisors.
In the United States, advocates of uniform standards of care say investors would be better served if brokers and financial advisors were required to meet the fiduciary standard already required of SEC-registered financial advisors. Opponents say a uniform standard would raise costs and limit investment choices for millions of middle-market investors. They content that advisors would abandon the market or access to financial advice would be available only to well-heeled clients.
Currently, brokers and advisors not registered with the SEC must follow a suitability standard developed by the Financial Industry National Regulatory Authority.
The U.S. Department of Labor (DOL) is also looking at implementing a fiduciary standard of care with regard to professionals providing advice on retirement plans. The SEC and DOL are moving on different timetables.
Meanwhile, 29 members of the Congressional Black Caucus, along with members of the Congressional Hispanic Caucus and a member of the Congressional Asian Pacific American Caucus, have warned the DOL that narrow, more restrictive definitions of a fiduciary would make it harder for people to access qualified retirement planning services, Piwowar said.
A bill sponsored by Rep. Ann Wagner, R-Mo., called the Retail Investor Protection Act, would prohibit the SEC from issuing a uniform standard of conduct without first showing that harm would come to retail investors without it. The bill would also block the DOL from acting on a standard of care until the SEC issued its final ruling on standards governing the conduct of brokers.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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