Fitch Ratings says that the proposed regulations from the U.S. Department of Labor “could drive significant revamps of business practices for many registered investment advisors and the financial advisors of broker dealers.”
The report goes on to say that the proposed rules raise the risk of regulatory enforcement and or trial bar litigation, “and will likely force RIAs to do more to prove that a client’s product choices indeed meet the individual’s best interests,” and that the new proposals could “curb the willingness of agents to promote complex and higher fee products.”
Fitch also explains that, under the proposal, asset managers and insurance companies would bear responsibility for examining distribution policies and commission structures paid to independent and affiliated distributors that sell many of the investment products reaching retirement accounts.
Moreover, the report claims that limitations on commission structures could have a disproportionate impact on the sale or fee structures of investment and retirement products sold in the middle market, which it says generally tend to have more fee-sensitive customers. “Effectively, the rules may encourage some brokers to adopt advice-for-fee models for their advisors as a means of compensating them for the compression (or elimination) of their commissions.”
The report goes on to note that annuity products, “arguably viewed by some investors as costly relative to lower priced products,” could see fees pressured and/or commissions reduced under greater scrutiny, and that an additional challenge lies in the complexity of annuities, “with guarantees that are difficult to value.” Fitch cautions that obtaining affirmations from clients that all features of any complex product are understood could become more common, but also burden the sales process and hurt volumes.
Acknowledging that the proposal provides exemptions that could keep many current practices in place, the report nonetheless concludes that, “The precise extent to which an advisor would be required to explain product solutions not offered in order to demonstrate serving a client’s best interest is not yet entirely clear.”
In what the report called “a sign of the political sensitivity of the issue,” Fitch noted that the House of Representatives’ 2016 appropriation bill for the Department of Labor included a provision that would block the agency from spending any of the annual funds on finalizing, implementing, administering or enforcing the proposed rules.
