Survey: Most advisors expect rise in DOL compliance costs
November 2, 2016 by Warren Hersch
Advisors will need, among other things, to enhance governance processes and implement new technologies as they seek to comply with the DOL rule.
Market-watchers have for months warned about an increase in compliance costs for insurance and financial services professionals stemming from the Department of Labor’s conflict of interest rule.
New research from Cerulli Associates, a firm specializing in global asset management and distribution analytics, reveals that nearly two-thirds of advisors (64 percent) believe that their compliance and administrative costs will rise once the fiduciary rule is fully phased in by April 2017. The Cerulli report dovetails with other studies anticipating increases in business expenses, specifically in terms of dollars and resources allocated to:
• Understanding the rule and practice implications;
• Enhancing compliance and governance processes;
• Investing in technology solutions and upgrades;
• Revising disclosures and investor information; and
• Educating advisors on how to run a DOL-compliant practice.
Just how much will advisors and their distribution partners have to dole out to institute these changes? The Cerulli report is mum on the amount, but other stakeholders have been circulating estimates.
One comes from the Securities Industry and Financial Markets Association (SIFMA), which in a recent survey polled 40 of its member firms, all large and mid-size broker-dealers. They peg the aggregate industry cost at $5 billion to implement, and an additional $1.1 billion in annual expenses.
This exceeds the DOL’s own initial estimate: between $2.4 and $5.7 billion over 10 years. The SIFMA report offers, however, no average estimate on a per-firm level.
One difficulty in making such estimates is the rule’s phase-in remains a work in-progress. Advisors, broker-dealers, IMOs and other players are still wading through the regulations to determine how business operations will need to be overhauled.
However large the ultimate cost rise, this much is clear to Cerulli’s analysts: the size of one’s practice will be key to minimizing costs during the transition.
“It is likely that larger, multi-advisor practices will be in a better position than smaller practices to absorb additional compliance and administrative costs by spreading them over a larger asset base,” the report states. “It will be important for advisors to review, in as much detail as possible, how different cost scenarios could impact the profitability of their practice.”
Although it is difficult to perform this exercise without knowing the DOL conflict of interest rule’s exact implications, a cost-benefit or scenario analysis should be useful in preparing to manage any associated operating overhead,” the report adds.
Another useful exercise will be preparing an estimate as to an expected dip in revenue resulting from the fiduciary rule. Cerulli’s report makes no estimate, but another outfit firm has: A.T. Kearney.
In a recent study, the research firm predicts a whopping $20 billion dip in revenue by year-end 2020 ($4 billion for independent broker-dealers, a 22 percent decline from 2015). Key reason: a precipitous decline in compensation, due both to a levelizing and overall decline in commissions in fees.
On this point, both the A.T. Kearney and Cerulli findings are in alignment. Nearly three-quarters (73 percent) of national sales managers at asset management firms polled by Cerulli agree that the fiduciary rule will result in a dip in compensation.
“Expectations of fee compression heighten looming uncertainty regarding the DOL conflict of interest rule’s actual implications, reinforcing the need for advisors to take a close look at their operations,” the Cerulli report states. “Regulatory uncertainty and fee compression will likely come at a cost to the overall profitability of most practices.”
The report adds that advisors should look to distribution partners — home offices, independent marketing organizations, technology providers, among others — to help make their practices more “efficient and scalable” as they implement DOL-compliant business processes.
