As we’ve written several times on the NAIFA Blog, imposing a fiduciary standard of care on broker-dealers would very likely do more harm than good for consumers. Now, a new study confirms our arguments. According to an impact assessment done by the management consulting firm Oliver Wyman for the Security Industry and Financial Markets Association (SIFMA), a uniform standard of care (i.e., a universal fiduciary requirement) that doesn’t protect broker-dealers’ current commissions-based business model will significantly increase investors’ costs for products and services, while reducing their choices.
Analysts suggest that a universal fiduciary standard would force broker-dealers to switch to a fee-based, rather than commissions-based, business model. The SIFMA study found that investors have a strong preference for commissions-based products — approximately 95% of the households surveyed held commissions-based brokerage accounts, while only 5% held fee-based accounts. And those fee-based accounts aren’t cheap! Households with the fee-based accounts pay 25-75% more for services than those with commissions-based accounts, according to the study. SIFMA notes that for a consumer with $200,000 invested, that amounts to $460 in additional fees each year. Over 20 years, switching to a fee-based brokerage would cost the investor more that $20,000 in lost returns.
The study also predicted that a universal fiduciary standard would reduce clients’ choices, limiting access to such investments as municipal and corporate bonds as well as proprietary products offered by brokerage firms. These are products most popular among middle-market investors.
We believe investors should have the freedom to choose which financial products they want to buy and how they want to buy them. Any effort by the SEC to limit these choices would be bad for consumers. The SIFMA study confirms that imposing a fiduciary standard on broker-dealers would certainly limit these choices.
NAIFA President Terry Headley told National Underwriter magazine, “The best way to enhance consumer protection is through strong and effective supervision within financial services firms, and regular, periodic inspections by the SEC and other regulatory bodies.”
The SEC is conducting a study of the current standard of care model and based on its conclusions could impose a universal fiduciary standard as early as next year.