Oxford Economics study: DOL fiduciary rule price tag is $2.7B in year one

A study commissioned by the Financial Services Institute finds that the Department of Labor fiduciary rule proposal would cost firms $2.7 billion in the first year.

FSI opposes the fiduciary rule and hired Oxford Economics to do the study. The cost of the rule would be 11 times the department’s estimate of ongoing costs, the study concluded. The rule will continue to cost $2.5 billion each subsequent year, the study says.

"The study confirms our concerns about the DOL's proposed Retirement Security Rule and its negative impact on the accessibility of financial advice for Main Street Americans as they prepare for retirement," said FSI President and CEO Dale Brown. "If approved, the rule would impose unnecessary and expensive requirements on our members, further restricting Main Street American investors' access to professional financial advice, products, and services."

A DOL spokesman asked for a copy of the study, but did not respond to further requests for a comment.

The study counters a blog post by the Council of Economic Advisors released by the White House in conjunction with its fiduciary proposal. The CEA claimed that products like fixed indexed annuities are costing investors a significant amount of lost savings for retirement.

The total assets held in FIAs have grown rapidly, from $185 billion in 2010 to $559 billion at the end of 2021, the CEA wrote, quoting from a 2022 Cerulli report on annuity sales.

"Even if this market doesn’t continue to grow, the amount paid by consumers in return caps could be as high as $7 billion annually and the amount lost to conflicted investment advice could be as high as $5 billion annually with respect to just this one category of investment," the CEA authors wrote.

Advisors surveyed

Oxford Economics was founded in 1981 as a commercial venture with Oxford University’s business college, and provides economic forecasting and modelling to companies and financial institutions in countries around the world.

Together with FSI, Oxford Economics surveyed independent financial services firms about the potential cost implications of the fiduciary rule proposal. Fifteen FSI member firms responded to the survey, representing over 26,000 financial advisors with a total revenue of $14.5 billion, the report states.

All respondents answered questions about their potential initial costs and ongoing costs related to the fiduciary rule as proposed.

"Based on the survey responses, we estimate that the upfront cost for the proposed 2023 fiduciary rule will be approximately $238 million, over six times the DOL’s estimate of upfront costs ($37 million)," the report executive summary states. "Our estimate of the ongoing annual cost of the rules, $2.5 billion, is almost 11 times the DOL’s estimate ($216 million)."

The added costs are related to "upgrading software, external legal and consulting costs, and staff time," the report reads. And benefits from the proposed rule, those "non-securities investments purchased for retirement accounts in states which do not already have regulations imposing a fiduciary or best interest standard," is small, the report concludes.

"The burden of the proposed regulation is expected to fall primarily on the small, relatively less sophisticated investors who rely on investment recommendations in commission-based retirement accounts," the report says. "These investors are likely to see higher fees and reduced product choice."

More impacts cited by Oxford

The fiduciary proposal is 494 pages and would add significant liability to producers, while eliminating many compensation streams. The DOL received more than 20,000 comments on the proposal, which is expected to be finalized by the spring.

The Oxford Economics' study cited several additional impacts:

• In addition to electronic disclosures, FSI members expect advisors to print approximately 120 million pieces of paper annually to comply with the proposal.

• In its analysis, the department relied solely on data collected before the Securities and Exchange Commission's Reg BI and a new prohibited transaction exemption put in place in 2020 went into effect.

• The DOL’s regulatory impact analysis too lightly dismisses the proposal’s impacts on small investors.

• The DOL claims there will be alternative options for small investors, failing to mention that those options have limitations in terms of costs, conflicts, personalization, product shelf, etc.

• The DOL has pointed to only purported qualitative benefits in support of the rule, which are negated by a reasonable quantitative analysis of the costs:

The literature cited by the DOL to support these benefits is outdated, preceding the effective date of Reg BI, the study says. FSI members produce compliance costs that are greater than the costs estimated in the regulatory impact analysis.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.