Filed Under:Life Insurance, Life Planning Strategies

Will the Proposed Fiduciary Rule for Advisors Crush IRA Holders?

John Drzik, presdent and CEO, Oliver Wyman (AP Photo/Virginia Mayo)
John Drzik, presdent and CEO, Oliver Wyman (AP Photo/Virginia Mayo)

A new report by a consulting firm paints a dire picture of the potential impact of a proposed rule establishing a fiduciary standard for investment advisors selling products to IRA holders.

The study by management consulting firm Oliver Wyman  - "Assessment of the impact of the Department of Labor’s proposed “fiduciary” definition rule on IRA consumers" - says that if the rule proposed by the Department of Labor’s Employee Benefits Security Administration is imposed, small investors interested in opening an IRA would have less access to investment professionals for guidance and support, making it less likely that they would open an IRA.

The study also found that, under the proposed rule, many IRA holders would have reduced choice of investment professional, because over one-third of client-facing financial professionals in the industry would not be licensed to help retail investors with their IRA account needs.

Another finding was that the brokerage IRA investors who could be served in an advisory model would likely face increased costs as a result of the rule-driven change.

Other findings were that 18 million small IRA investors would lose access to their investment professional if a fiduciary standard was imposed.

The study found that nearly one million fewer new IRAs would be opened each year; that small businesses could stop setting up new 401(k)s.

The report estimated that the overall impact would the loss of $240 billion in lost retirement savings over the next 20 years.

EBSA, which oversees ERISA, called for expanding the definition of "fiduciary" for retirement-plan purposes, in a rule proposed last year. However, it withdrew the rule last September under withering pressure from industry and members of Congress from both parties.

EBSA officials requested access to the Oliver Wyman study as part of their efforts to include a comprehensive economic impact study as part of a revised proposed rule. They also asked other interested parties, including trade groups representing people who sold these products, to provide data as to possible economic impact of such a rule.

The report was first prepared by Oliver Wyman last April at the request of 12 financial firms who have retained Davis & Harman, a Washington law firm, to represent their interests on the EBSA issue.

Davis & Harman commissioned Oliver Wyman to do the study last April; it was revised and updated between January and April after EBSA officials asked for access to both the report and the data underlying it.

The report and the underlying data used as the basis for the report was submitted late Thursday to EBSA and the Securities and Exchange Commission, which is also attempting to establish a uniform fiduciary standard on sale of investment products.

Industry opposes the EBSA proposal. Representatives of the advisor industry contend that it would change the relationship they have with clients. They believe that under ERISA, unlike under securities laws, if the broker-dealer is a fiduciary then they would be prohibited from giving the investment services they give today to IRA investors.

In a letter transmitting the data to EBSA and the SEC, Kent Mason, a partner at Davis & Harmon, said the report was based on information on over 19 million IRA holders who hold $1.79 trillion in assets through 25.3 million IRA accounts.

The letter said this constitutes approximately 40% of IRAs in the United States and 40% of IRA assets.

In other interesting finds, the report said that nearly 40 percent of IRAs in the study sample had less than $10,000, and that small investors overwhelmingly favor brokerage relationships over advisory relationships. The report also found that 98 percent of investor accounts with less than $25,000 were in brokerage relationships.

Next page: What are the study's other major findings?

 

Other key findings from the report include:

 

  •  Nearly 40% of IRAs in the study sample had less than $10,000. Small investors overwhelmingly favor brokerage relationships over advisory relationships.

 

  •  98% of investor accounts with less than $25,000 were in brokerage relationships. The proposed rule could eliminate access to meaningful investment services for over 7 million IRAs.

 

  •  IRA investors would no longer be able to receive investment services and help from an investment professional as part of a brokerage relationship.

 

  •  Because of account minimums, 7.2 million current IRAs would not qualify for an advisory account with any firm in the study. The proposed rule could well result in hundreds of thousands of fewer IRAs opened per year.

 

  •  In 2010, firms in the study sample opened approximately 890,000 brokerage IRA accounts with assets of less than $10,000.

 

  •  Under the proposed rule, small investors interested in opening an IRA would have less access to investment professionals for guidance and support, making it less likely that they would open an IRA. Many IRA holders would have reduced choice of investment professional, as over one-third of client-facing financial professionals in the industry would not be licensed to help retail investors with their IRA account needs under the proposed rule. The brokerage IRA investors who could be served in an advisory model would likely face increased costs as a result of the rule-driven change.

 

  •  In the study sample, estimated direct costs would increase by approximately 75% to 195% for these investors.
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