How the fiduciary rule is favouring big brokers

Author: John Crabb | Published: 20 Sep 2017
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The US Department of Labor’s (DoL) fiduciary rule is damaging small businesses and broker-dealers, as larger firms will be less likely to provide much needed advice to their smaller counterparts following full implementation.

According to IFLR’s fiduciary rule survey, as many as 38% of respondents are planning to change the arrangements through which they distribute new issues of their affiliates, and no longer intend to sell new issues to retail retirement accounts.

The remaining 62% of respondents said that they will not be making any changes.

The survey also found that many broker-dealers are yet to make wide scale changes, and those that have tend to be the larger firms. This suggests that the rule has created an imbalance for smaller firms that are unable to make the necessary adaptations, but that the DoL is less concerned for smaller parties.

"Small investors are going to be left in the dark and they are not going to get the true financial advice that they really need"

"The problem is that it is a lot of the big firms have already made a lot of changes to systems and processes, and any kind of changes now are going to cost them," said Donna DiMaria, chief executive officer of Tessera Capital Partners, a broker-dealer. "If you think about the unlevel playing field for different types of investor classes, the securities industry and government agencies goal is to really protect these larger players."

In an interview following the survey, another broker-dealer agreed, suggesting that the fiduciary rule, and indeed all similar legislations, is designed with market makers in mind, which could also have a negative impact on smaller, less financially strong brokers with greater access to resources.

"I think when people write rules, they write for the big firms," he said. "In the financial services industry, there are so many sub-groups of business models that I don't think they even take into account the impact that these kind of things have will have, or the unintended consequences it could have created."

Most respondents were in agreement that the basic principles of the rule are correct, and that firms of all sizes should always put clients’ interests before profit. However, as another broker who chose to remain anonymous suggested that the way that the fiduciary rule has been set up allows for class action lawsuits to be brought very early and very easily.

The threat of future litigation could also be damaging to smaller, less protected broker-dealers. This imposes greater liability for all advisers and investment firms, so consequently it is actually damaging for the smaller investors who will be less likely to want to take on a bigger liability.

A lack of advice trickling down from larger firms to smaller counterparts could result in smaller firms having to drop out of the industry altogether, which could be directly damaging to the consumer.

"If I have to take on a bigger liability, I have to make it worth my time," said one respondent. "Small investors are going to be left in the dark and they are not going to get the true financial advice that they really need."

Investors will not get the ultra-high net worth advice that they could get at consumer levels. Because of the liability, said the broker, it is likely that most will be able to cater to large accounts only.

In practice, DiMaria knew investors that have been notified by managers to say that they are too small, and that their choice is either to go unmanaged, or find another adviser.

"It’s not fair," she said. "Especially if you don’t know anything about the market or have resources to find somebody that can help you. What will they do then?"

Another respondent said that they have come across firms who have increased their account size as a direct result of the rule, and because these same firms have changed some of their product offerings are giving institutional investors less access to a lot of different products.

"Certain individuals, especially smaller investors, are getting more limited options," they said.

"This is kind of true to what the fiduciary rule says in that it is in the clients’ best interest. Except if the client now has less options, then obviously the actual effect is going to be the opposite."

The survey, conducted over the last month in coordination with Morrison & Foerster, will be featured in the October edition of IFLR magazine.

See also

IFLR/MoFo - fiduciary rule poll

SEC poses biggest threat to DoL fiduciary rule