Published September 21, 2016
There’s been plenty of coverage of the DOL rules that will take effect on April 10, 2017, so no need to beat a dead horse. However, what isn’t much talked about is the economic impact those conflict of interest rules will have on advisor compensation. There’s no question that the amount of work required for Broker-Dealers to fully implement all aspects of the DOL rules will be costly. For example, it was reported by InvestmentNews on July 29 that Ameriprise and Cambridge had already spent $11mm and $10mm respectively on DOL implementation, which includes things such as revamping procedures, programming, staff additions, training and the like. And while the upfront investments are sunk costs, there will be ongoing, associated operational costs that will continue to increase over time.
But wait, it gets worse. There’s an additional side to this, which is that BDs will simultaneously be taking a modest hit on top-line revenues as end clients are moved from more expensive load funds (where BDs share revenue) to lower-cost institutional share classes and ETFs.
Imagine a chart where the cost curve is increasing and the revenue curve is decreasing. Quite simply, margins are getting squeezed, and they were already razor-thin, to begin with. So as resources contract (along with operating leverage), BDs will have to start making painful decisions on where to deploy capital. And from my experience, this is typically in the area of technology development and service.
Before BDs cut funding on infrastructure development, they’ll first look to make up the difference somehow, and that somehow is unfortunately on the backs of financial advisors. To be blunt, you should expect increasing fees and all sorts of new ones! Nickel and diming is alive and well and is set to become much worse. Look for those red flags such as “admin fees” or “program fees.” Adding insult to injury, I have heard it rumored that you may have to repaper certain retirement accounts. Of course, with 12b-1’s going away in retirement accounts, things only compound. To that end, industry observers have been prognosticating that this era of broker-dealers will be one marked by consolidations, acquisitions, and closures – a process that is clearly already underway. Only the strong will survive (i.e., those with a focus on fee-based advisory asset management).
Your Future as an Advisor under the New DOL Fiduciary Rules
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