If there’s doubt about how the imposition of a new uniform fiduciary standard rule will impact broker-dealers, insurance agents, financial advisors and consumers, there’s even more uncertainty regarding the potential costs of these new rules. At stake is both the weight of such costs, and where they will fall.

If there’s doubt about how the imposition of a new uniform fiduciary standard rule will impact broker-dealers, insurance agents, financial advisors and consumers, there’s even more uncertainty regarding the potential costs of these new rules. Numerous voices have weighed in on the ultimate cost, including the federal Securities and Exchange Commission, consumer rights organizations, and fiduciary standard opponents and proponents - but clarity is noticeably absent from the debate.

At issue is whether changes that are likely to require any persons dispensing financial advice to the public, including financial advisors, broker-dealer representatives, insurance agents and others, to act in their clients’ best interest will increase costs for those parties and, ultimately, consumers receiving financial advice and services. The Dodd-Frank Act required the SEC to weigh in on the fiduciary standard debate and to write rules around new requirements for those parties.

Currently, broker-dealers, insurance agents and other financial advisors not subject to the fiduciary standard are required to operate under a separate suitability standard, which means that they must recommend suitable investments to clients, rather than those in that client’s best interest. Fiduciary standard proponents argue that too often investors receive recommendations that are marginally suitable and not in their best interest. Fiduciary standard opponents retort that the suitability standard allows consumers to receive financial advice at a lower cost than under the fiduciary standard because they can get investment products via commissions and other compensation structures.

In a study released on the fiduciary standard in May, the SEC stated, “The costs associated with possible regulatory outcomes are difficult to quantify.” Ultimate costs depend on what form the ultimate rule takes and potentially impacts: broker-dealers; consumers; and regulators, including the SEC and any self-regulatory agencies (SROs) that may be involved in regulating this standard.

Because Registered Investment Advisors are already covered by the fiduciary standard, changes in the rules are not expected to impact this group. Here are some of the arguments surrounding the potential costs of imposing a fiduciary standard on these various stakeholders.

Broker-dealers:

By far the most contentious debate surrounds whether imposing a fiduciary standard on broker-dealers would increase their costs. Blain Aikin, chief executive of fi360, a company that provides training education and practice management around fiduciary education located in Bridgeville, Pennsylvania, believes that services can be provided at a reasonable cost under the fiduciary standard because many RIAs are already do so.

“This isn’t a hypothetical argument,” he says. “We have many people today providing services under the fiduciary standard in a very economical way.”

On the broker-dealer side, the SEC notes that there are likely to be costs associated with broker-dealers converting to an assets-under-management model from a commission model. In the report, the SEC stated, “Eliminating the broker-dealer exclusion would likely result in broker-dealer that provide investment advice having to registered as investment advisors and consequently incurring the associated regulatory costs…”

The SEC isn’t sure if the broker-dealer exclusion will be eliminated, but it’s a possibility. If this is the case, broker-dealers who convert to investment advisors would incur one-time costs to register as well as ongoing costs related to custody, advertising, best execution, soft dollars codes of ethics and principal trading regulations, according to the SEC.

Even if the broker-dealers have to comply with a uniform fiduciary standard, the cost burden will likely be less if the broker-dealer exemption is not eliminated. That’s because broker-dealers would be able to continue to offer brokerage accounts while complying with a new fiduciary standard. Potential costs include filing amended disclosures, preparing new account documents, amending office training, policies and procedures, according to the SEC.

Consumers:

Just as with broker-dealers, the impact on consumers is uncertain. While it’s likely that any costs of complying with new regulations will be passed on to consumers, there is disagreement about whether those costs are material or not.

Keith Hickerson, senior strategy consultant for The American College in Bryn Mawr, Pennsylvania notes that one potential outcome, depending on how the standard is applied in rules, is whether consumers will have more or less choice. “There are some issues about what the costs will be longer term, how the shake out of the various business models will work and whether consumers will have fewer choices in terms of being able to work with advisors who offer different compensation models,” he says.

“Currently, you have the assets under management model, a fee-based model, and you have the commission-based model, but will the commission-based model gradually go away?” he asks. “Nobody knows, because it depends on what the new rules look like.”

Barbara Roper, director of investor protection for the Consumer Federation of America, a consumer rights organization based in Washington, DC wrote to the House of Representatives Financial Services Committee stating that, “The SEC proposal, as outlined in the Section 913 study, should allay [fears of an increase in cost or loss of access to valued products] to rest.”

“We believe there is a powerful economic argument to be made in favor of holding brokers to a fiduciary duty when they give investment advice,” she wrote. “Specifically, an effectively enforced fiduciary duty could save investors tens of billions of dollars in excess costs and reduced payouts by forcing brokers to make recommendations based on the best interests of the investor rather than their own bottom line.”

Regulators:

While it hasn’t yet determined which regulator will enforce the fiduciary standard rules on broker-dealers, several potential regulators are in the mix, including the SEC, the Financial Industry Regulatory Authority or another SRO. State securities regulators will also likely be affected.

If the broker-dealer exemption is eliminated, “increases in the number of investment advisor registrants resulting from the elimination of the broker dealer exclusion would add strain to the Commission and state resources dedicated to the examination of investment advisors and representatives of registered investment advisors and to related enforcement efforts,” the report stated.

Should regulation of broker-dealers under a new fiduciary standard fall to FINRA or a new SRO, regulatory costs are likely to fall on broker-dealers, insurance agents and others who will be regulated under the new standard because that is the financing model of SROs – the regulated parties pay fees to the SRO, which covers the cost of regulation.

This is the second in a series of features on the fiduciary standard, to view the first, on the various regulatory options, click here.