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
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
"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
"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
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
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
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
"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
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.
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