Today, the Financial Services Institute (FSI) released its study, “Economic Consequences of the U.S. Department of Labor’s Proposed New Fiduciary Standard.” The study was conducted with Oxford Economics and focuses on the economic impact of the Department of Labor’s (DOL) proposed fiduciary rule for retirement advice on the independent financial services industry and investors who rely on independent advice.
The study estimates the DOL’s proposed rule will cost the independent financial services industry and investors nearly $3.9 billion in total startup costs to implement the rule – nearly 20 times DOL’s preferred cost estimate. This amount does not take into account the cost of investors’ lost access to advice or the ongoing costs of maintaining compliance with the rule.
The evidence presented in the study also suggests that if the rule is implemented, only high net-worth investors will be able to access and afford professional retirement investment advice.
“This study shows that the DOL’s proposed fiduciary rule would be costly and burdensome to both the independent financial services industry and the investors that rely on the critical advice they receive,” said FSI President & CEO Dale Brown. “It also illustrates the unintended consequences the rule will have on hard-working Americans trying to save for retirement, particularly low and moderate-income investors who need advice the most.”
Other findings of the study:
- DOL has dramatically underestimated the compliance cost of the new rule and how difficult it will be for small firms to survive if it is implemented.
- The proposed rule will result in estimated startup costs ranging from $1.1 million to $16.3 million per firm, depending on firm size.
- BDs and investment advisers would be forced to either substantially change their current business models or navigate the challenging demands of a new “Best Interest Contract Exemption” (BICE).
- The rule will result in less access to advice from financial advisors for small and medium-sized investors. One unintended consequence may be that it will become harder for minority investors with small asset holdings to seek advice from financial advisors.
- The proposed rule will result in industry consolidation likely to force small broker-dealers out of business.
- An expanded potential for systemic risk in the retirement savings market as savers are increasingly pushed into the same set of standardized “low-cost” assets.
This report represents a close reading and critique of the Department’s Regulatory Impact Analysis, acknowledging the wealth of comments already published on this topic.1 To inform this work, Oxford Economics conducted its own data gathering with the help of FSI,2 the professional organization that represents independent financial services firms and independent financial advisors. Specifically, Oxford Economics did the following:
- Conducted interviews with nearly three dozen executives from 12 companies that employ either directly or by contract BDs and RIAs who would be impacted by the proposed rules. The companies were typically independent BD firms, and the individuals interviewed were all senior executives within these organizations.
- Followed up with a group of six of these firms to obtain detailed cost estimates based on their expectations about the impact of the proposed rule. The cost categories were developed collaboratively during the interview process,
- Interviewed executives from clearing firms regularly used by independent broker dealers and financial advisors to get information about pass-along costs connected to technology and disclosure upgrades that would be required under the new rule.
- Analyzed possible responses to and expense predictions related to the proposed rule using an online survey of FSI members.
- Reviewed the Department’s Regulatory Impact Analysis in detail, as well as other researchers’ existing work on this topic.
Interviews revealed that even very experienced securities lawyers are uncertain what the requirements of the proposed rules will mean in practice, and therefore have trouble estimating their likely costs. In having unanswered questions about the Department’s proposed rule, however, the interviewees are not alone: according to a Sutherland report,3 the Department of Labor itself has solicited responses to 170 questions related to its own proposed rule.
About the Financial Services Institute (FSI): The Financial Services Institute (FSI) is the only organization advocating solely on behalf of independent financial advisors and independent financial services firms. Since 2004, through advocacy, education and public awareness, FSI has successfully promoted a more responsible regulatory environment for more than 100 independent financial services firm members and their 160,000+ affiliated financial advisors – which comprise over 60% of all producing registered representatives. We effect change through involvement in FINRA governance as well as constructive engagement in the regulatory and legislative processes, working to create a healthier regulatory environment for our members so they can provide affordable, objective advice to hard-working Main Street Americans. For more information, please visit financialservices.org.
About Oxford Economics: Oxford Economics is a global leader in thought leadership, forecasting, and quantitative analysis, serving more than 850 international corporations, financial institutions, governmental organizations, and universities worldwide. Founded in 1981 as a joint venture with Oxford University, Oxford Economics is now a leading independent economic consultancy. Headquartered in Oxford, with offices around the world, it employs more than 200 people, including over 120 economists, and a network of 500 contributing researchers. Learn more at oxfordeconomics.com.
 It is important to note that this report is an economic analysis of the rule’s likely impacts. While Oxford Economics consulted with FSI lawyers and believe that the study is not misrepresenting the rule’s requirements, this is not a legal analysis. Where the study reports interpretations of the rule’s likely effects—frequently necessary because the Department does not make clear its own intended meaning—these reflect comments Oxford Economics received from knowledgeable individuals in their interviews.
 This work was conducted under contract with and financially supported by FSI.
 Sutherland (2015). “Legal Alert: DOL Has Many Questions About its Fiduciary Reproposal.” http://www.sutherland.com/NewsCommentary/Legal-Alerts/174358/