.jpg)
Retail investors would see reduced product and service availability and higher costs under a uniform standard of care for investment advisers and broker dealers that does not appropriately recognize the important distinctions among business models, according to a new study commissioned by SIFMA.
In an impact assessment conducted by consulting firm Oliver Wyman, retail investors were likely to see a negative impact on choice of advisory model, product access, and affordability of investment and advisory services should the SEC adopt the Investment Advisers Act of 1940 standard for all brokerage activity.
“Retail investors deserve strong protections from a new uniform fiduciary standard without sacrificing choice of products and services or facing higher costs,” said Ira Hammerman, senior managing director and general counsel for SIFMA. “In our efforts to inform the SEC in their study of this important issue, we have compiled a detailed analysis of how customer choice, product access and service costs would be affected should the SEC move toward implementing a standard that does not recognize the distinct business models within which financial advisors serve their clients.”
The study analyzed the potential impact of rulemaking on retail investors by focusing on three core areas: client choice, product access, and affordability of advisory services. Highlights of the study are below.
Client Choice
Access to an investor’s preferred ‘investment and advisory model’ would be reduced:
*95 percent of households in this study with investment accounts hold commission-based brokerage accounts today
*A fee-based advisory platform is far less popular (approximately 5 percent of households in the study)
*The ‘preference’ for commission-based brokerage accounts is evident across all wealth segments, but strongest for smaller investors with less than $250,000 in assets
Product Access
Access to investment products distributed primarily through broker-dealers would be reduced:
*Municipal and corporate bonds represent approximately 15 percent of assets held by retail investors and are primarily sold through brokerage channels
*Restricting principal or proprietary offerings will limit investor access to these products at current pricing (e.g. retail order periods for municipal bonds where markups are waived)
Affordability of Advisory Service
Access to the most affordable investment options would be reduced:
*On average, investors have historically paid 25-75% more for fee-based advisory services than commission-based brokerage, depending on asset levels
*For an investor with $200,000 in assets this would translate to $460 in additional fees annually paid for investment and advisory services
*Shifting small investors to fee-based pricing is estimated to reduce expected returns by more than $20,000 over a 20 year horizon (assuming 5 percent annual returns)
The study also showed that beyond the direct costs to consumers, the industry would face broader economic costs as a whole. Broker-dealers and investment advisory firms will face one-time and ongoing costs to comply with new fiduciary, disclosure, and regulatory oversight requirements which could be passed on to investors. In addition, potential limitations on products accessibility for retail investors would place constraints on capital formation and an issuer’s ability to finance at cost-effective rates.
To conduct its impact analysis, Oliver Wyman collected data from a broad cross section of retail brokerage firms that serve 38.2 million households and manage $6.8 trillion in client assets. The survey covered approximately 33 percent of households and 25 percent of retail financial assets in the US, based on estimates from the Federal Reserve Survey of Consumer Finances.
In addition to the study, SIFMA recently submitted comments to the SEC urging the commission to focus on these three core areas when conducting their study and possibly moving onward to rulemaking.
A copy of the study can be found at the following link: www.sifma.org/Issues/item.aspx?id=21853.
