Would Advisors Abandon The Market Over Fiduciary Rules?

By Cyril Tuohy

Investors should expect to see financial advisors stampede out of the market if fiduciary rules proposed by the U.S. Department of Labor (DOL) are adopted. That’s the view from industry lobbyists and executives representing insurance companies, broker/dealers, mutual funds and financial advisors.

Not so, insist consumer groups, labor unions, who are among the proponents of fiduciary standards in the management and investment of retirement accounts.

Now hear this: After sales commissions were banned in the United Kingdom, the number of advisors shrank - by about 11 percent to 31,000 advisors at the end of 2012 - before rising again. That’s according to information supplied to the DOL by British regulators more than a year ago.

Similar arguments about advisors abandoning the market arose at the time of the U.K.’s so-called Retail Distribution Review.

Is the financial services industry voicing a legitimate concern, or is it resorting to scare tactics to protect its own hide?

“Hindsight has shown that these warnings, at least from the point of view of policymakers, have been overly scaremongering,” said Ralph Hebgen, a London-based senior vice president with financial services investment boutique Keefe, Bruyette & Woods (KBW).

KBW, incidentally, is owned by St. Louis-headquartered Stifel Financial, whose chairman and CEO Ron Kruszewski, testified at the DOL hearings earlier this month.

He, too, said the DOL’s fiduciary proposal was unworkable and that smaller accounts would get short shrift as advisors left them for more lucrative clients. In the end, his company wouldn’t suffer because many of the accounts would be shifted to a fee-based model, he added.

Back to the U.K. market.

Yes, an advice gap opened up after banks withdrew from the advice market for people with fewer dollars to invest, according to David Geale, head of Savings, Investments & Distribution with the Financial Conduct Authority.

But retail investment advisors continued to serve clients with savings of between £20,000 ($30,000) and £75,000 ($115,000). In addition, more than one-third of advisors surveyed said they planned to continue serving clients with less that £20,000, Geale said.

Geale, who did not testify earlier this month, made his comments in a February 2014 letter to DOL Chief Economist Joseph Piacentitni, who attended the hearings.

Online advisors and the use of technology filled in the need for smaller investors, Geale also said in his letter.

In a KBW podcast distributed earlier this month, Hebgen said agent numbers and sales volume “fell only 10 to 15 percent during the conversion period rather than anything more dramatic.”

“In December 2014, the U.K.’s Financial Conduct Authority reported that the Retail Distribution Review had succeeded in reducing product advice, had improved the quality of advice and had done so without higher than expected compliance costs,” Hebgen also said. “The FCA does not see any evidence that consumers perceived themselves to be abandoned by advisors.”

If middle-market investors meet with their advisor only once a year to discuss holdings worth only few thousand dollars on which an advisor collect s few hundred dollars in income, who stands to feel the most “abandoned”?

Findings from the U.K. Retail Distribution Review add to the body of evidence that smaller retirement investors in the U.S. will continue to be served by intermediaries, said Marcus Stanley, policy director and investor advocate with the nonprofit American for Financial Reform.

“Organizations such as the Garrett Planning Network and XY Planning Networks provide face-to-face fiduciary investment advice for affordable hourly fees without any minimum asset requirements,” he said at the Labor Department hearings Aug. 10-13.

Decades of mutual fund returns, to “random variance” experiments in investment practices, to “mystery shopper” audits of brokers giving advice “have consistently found strong empirical evidence that advisor conflicts of interest lead to lower investor returns,” Stanley also said.

Critics say U.S. investors lose as much as $17 billion a year as commissions and fees erode market returns. However, the financial services industry says such criticism is misplaced as it doesn’t account for the service and the advice investors are receiving.

While the Retail Distribution Review banned independent advisors from collecting commissions from a product provider, the DOL isn’t proposing anything so draconian.

Under the DOL proposal, commission-based sales models remain intact, but advisors need to sign legally binding documents that commit them to working in the best interest of their clients. This is a standard many intermediaries say they already meet.

Although eliminating commissions isn’t on the table, perhaps a compromise is in the offing as the industry prepares its final push in the fall against the DOL and the industry’s worst-case fears rarely come to pass.

“The view from Europe also suggests that the DOL proposal may not be as damaging to the industry as some may fear,” Hebgen said. “It is precisely the experience we have in the U.K. market that is relevant in this regard.”

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

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].