DOL Rule Affects More Than Advice, Execs Say

A revised fiduciary standard for retirement accounts will affect more than the way advice is given to clients, according to corporate executives from the financial services industry. They say the rule would have an imprint on everything from product development to information technology to the revenue volume generated by individual business segments.

The statements from executives were gleaned from an early batch of earnings calls with analysts. Their comments provide a glimpse of how the sweeping rule — if approved — would affect the operational “nuts and bolts” of companies in the financial services advisory business.

“The problem is, if you read the rule on face value, the disclosure and the estimating that you would have to do on every single product and how you disclose it would take time from an IT (information technology) perspective and be very costly,” Paul Reilly, CEO of Raymond James, said in response to an analyst’s comments.

The U.S. Department of Labor’s proposed fiduciary rule has generated so much industry comment that nearly no one expects it to pass in final form at “face value.” But even a compromise on the rule will have important effects on companies that manage retirement assets.

With as many as 100 million people — just under one-third of the nation — saving for retirement through employer-sponsored plans and individual retirement accounts, the rule will affect just about every company in the financial services industry.

But taking the proposed rule at face value for the time being, DOL regulators are asking for so much precision and detail in how fees are allocated toward one transaction or another that there’s even a danger that companies could report fees inaccurately, Reilly said.

“We think there are much more cost-effective ways of displaying those types of fees, which we already do in general terms,” he said. Reilly added that in order to meet DOL’s requirements on displaying fees, “you’d have to be so precise you would be inaccurate on how these costs and fees were allocated.”

Implementation lead times proposed by the DOL are unreasonable for many companies, said James M. Cracchiolo, chairman and CEO of Ameriprise Financial.

Based on what the DOL has proposed, “you're talking about extensive changes that would be required from a client, a disclosure, a change in what they're looking at, a level of information, down to account holder,” he said.

“I mean, so all of that provided, it’s a little mind-boggling,” he said in response to a question from Credit Suisse analyst Thomas G. Gallagher.

Ameriprise has about 50 percent of its assets in qualified retirement plans — an amount similar across the industry, Cracchiolo said.

He also said that once the DOL’s final regulations are published, the question will become how those rules mesh with separate conflict of interest standards under review by the Securities and Exchange Commission.

The SEC plans to release its own regulations in the coming months.

Would a fiduciary standard of care favored by the DOL and the SEC tilt an individual advisor’s revenue streams toward a fee-based model and away from commissions?

Insurance and annuity sales are driven by commissions, but painting fee-based models as good and commission-based models as bad is misplaced. “We went through a (Bernie) Madoff incident and he was fee-based,” Reilly said.

Those who look at the rule from the perspective of corporate compliance, information technology integration and balancing the mix of products and services have their own view of the fiduciary rule’s effect on the industry. They believe that rising levels of regulatory complexity raise the risk of companies having to deal with the unintended consequences of rules conflict.

What matters most is to give clients choices because in some cases the commission model is better and cheaper for many clients, Reilly said.

For the moment, there’s no sense in overreacting to the proposal. “I think it has to get sorted out, it has to be rational, it has to have the ability to serve the client,” Cracchiolo said.

Regulators, President Barack Obama, labor unions, consumer watchdogs and fiduciary-based financial advisors and planners back the DOL proposal. They argue that the need for conflict-free unvarnished advice has never been greater as tens of millions of boomers ride off into retirement on a gradually building wave of defined contribution plans.

Industry groups representing insurance agents, broker/dealers, life insurers and mutual funds oppose the proposal as written on the grounds that it will restrict retirement choices for small businesses and individuals. Opponents have called for major modifications to the DOL proposal, with some groups urging that it be scrapped entirely.

Labor Secretary Thomas E. Perez and his staff will spend much of the fall reviewing tens of thousands of comments that have come into the department over the past several months. A final version of the rule is expected to be published early next year.

Whatever the final outcome, company executives said “revenue momentum” generated by advice and wealth management and fee-based asset management business lines will be affected as advisory firms alter their product mix, depending on sales.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].