US Department of Labor headquarters building - Washington, DC USA
The US government may make further changes to the final sections of the fiduciary rule © Alamy

Financial advisers are counting the cost of complying with groundbreaking US regulations that compel them to put clients’ interests first. But with the final features of the rules still to come in, costs will continue to mount.

The US Department of Labor’s fiduciary rule has been in place since June. Yet the full implementation of the rule, which has been years in the making, has been delayed by 18 months.

Deloitte, the financial services group, says the 21 advisory companies it surveyed in the summer had already spent more than $595m in preparation for the rule’s June 9 launch. In addition, they will spend nearly $100m a year to comply with it. The survey was commissioned by the Securities Industry and Financial Markets Association* and those surveyed were all members of the trade body.

Using those survey results, Deloitte estimates that broker-dealer advisers have spent more than $4.7bn to comply and will spend an additional $700m annually.

Deloitte says spending has mainly been to comply with what is currently required in the partial implementation of the fiduciary rule. Estimates for future spending are based on only operational costs and do not account for potential risks, such as litigation, regulatory changes or market shifts.

Berthel Fisher & Company is one broker-dealer that lobbied against the fiduciary rule. It has around 350 independent contractor advisers and argued that the additional costs associated with the fiduciary rule would “most likely force” its smaller practices to either consolidate or close. “We have already spent over $300,000 in legal costs and staff hours to develop compliance procedures. We won’t survive,” the company said in a letter to the DOL.

Deloitte expects the average annual cost of complying with the DOL rule to be $1.1m for advisers that oversee less than $50m, and $5.9m for larger advisers with more than $1bn.

Many advisers have prepared for the fiduciary rule by reducing the services and products they offer investors to avoid any potential accusations that they are not acting in clients’ best interests.

Of the advisers Deloitte surveyed, 59 per cent dropped commission-based retirement accounts in favour of fee-based accounts or eliminated retirement advisory services altogether.

About 86 per cent of those companies reduced the number and types of mutual funds available, particularly those that cost more.

The 21 companies surveyed by Deloitte represent more than 130,000 advisers, or 43 per cent of all US advisers, and serve around 35m retail retirement accounts that have $4.6tn in assets.

Advisers who continue to offer more expensive products hope that they will be able to explain to clients why they are doing so and avoid potential litigation.

Higher-cost products “make a lot of sense” when a specific investment characteristic is needed to meet an investor’s goals, says Paul Miller, portfolio management director at Axial Financial, a broker-dealer. These include products with rising dividends, that produce regular income or with a more flexible asset allocation, he says.

Dennis Concilla, head of securities litigation and regulation at Carlile, Patchen & Murphy, a law firm, expects the fiduciary rule to be revised significantly. The DOL has received more than 500 letters from the advisory industry and the public in response to the rule.

Around 40 per cent of this year’s FT 401 retirement advisers single out regulations as their main challenge.

“I don’t think anyone really has a problem with the stated goal of the DOL, which is to ensure that advisers are acting in the best interest of investors. That is good practice and many advisers were already doing that,” Mr Concilla says. “It’s the execution of the rule that’s the problem.”

This article has been amended to clarify that the survey was commissioned by SIFMA.

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