With brokers disqualified, fee-only advisors may have 'phenomenal' opportunity to dominate $4.1 trillion IRA market

March 4, 2010 — 6:47 AM UTC by Sara Hansard


Brooke’s Note: You can’t hang around in the advisory community for long without hearing talk about the great opportunity represented by Baby Boomers rolling over their 401(k) plans into IRAs. Now imagine being a broker counting on that inevitable flow of assets and realizing that new rules could prohibit managing them. If the Department of Labor has its way, that appears to be the tectonic shift that is taking place. If you wonder why some brokers speak of “getting ahead of the curve” by breaking away to become an RIA, this turn of events would help to put their caution into perspective.

New regulations proposed by the Department of Labor could give fee-only RIAs a big leg up in serving the $4.1 trillion IRA market by, practically speaking, excluding dual registrants from giving advice on IRAs.

Most of the attention to the proposal has been devoted to its potential impact on advice for the $2.7 trillion 401k market. Read: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs.

That misses the point, some say.

“The bigger impact is on IRAs, not 401(k)s,” says Lou Harvey, president of Boston-based DALBAR, a firm that audits financial service firms, including investment advisers. “There are a heck of a lot more IRAs out there and advisers involved in IRAs.”

The market will grow even larger in coming years, as retiring Baby Boomers roll over their 401(k)s into IRAs.

Under the DOL proposal, issued Feb. 26, advisors who advise clients about their Individual Retirement Account investments, would for all practical purposes have to be fee-only advisors. The new regulation requires that an advisor either give advice generated by a computer model, or give advice and be paid on a level-fee basis, meaning that the fees don’t change based on the investments in an account.

Back door boost

The prohibition against advising on an IRA is triggered by commissions paid on any assets under management by an advisor. According to Harvey, the DOL is trying avoid situations in which an advisor gets a back-door boost from a mutual fund company or wirehouse for steering IRA assets to a particular investment product.

The same proposed rules would apply to the 401(k) market — but in that case, the regulations include a grandfather clause that allows advisors and brokers to maintain existing arrangements. Before now, the DOL has not issued regulations governing investment advice on IRAs.

Brokers who currently give advice on IRAs would be prohibited from doing so, Harvey says. He believes that impact would be significant. “Most brokers advise IRAs with impunity today,” he said.

Don Trone, CEO of Strategic Ethos, a fiduciary training company in Mystic, Conn., points out that brokers who have been steadily migrating into the wealth management market would be most affected. In order to advise clients on their IRA assets, brokers would have to register as investment advisors and act as fiduciaries.

Phenomenal impact

“For brokers it has a phenomenal impact, a huge impact,” he said.

Comments on the proposal are due by the end of the day May 5. The time frame for final approval is not set. DOL estimates that the regulation will affect 16,000 investment advisory firms and broker-dealers.

The proposal would prohibit an adviser on IRA plans from collecting any investment-related compensation, such as 12b-1 fees, commissions, or sales loads on assets in the IRA.

Ironically, the proposal would extend a fiduciary requirement to a burgeoning portion of the market for advisory services, just as it looks like the Senate Banking Committee is backing away from a legislative proposal that would have required broker-dealers to operate under the fiduciary standard while giving any advice.

Scale back

Legislation expected to unveiled as soon as this week by the Senate Banking Committee is likely to scale back that proposal by requiring the SEC to study adviser regulations before issuing new rules governing the two groups.

Share your thoughts and opinions with the author or other readers.


David Lucca said:

March 4, 2010 — 4:07 PM UTC

“In order to advise clients on their IRA assets, brokers would have to register as investment advisors and act as fiduciaries.”

Rightly so. If an advisor is not going to accept fiduciary duty, perhaps they shouldn’t be in the business anyway. After serving clients as a fiduciary for more than 20 years, I think I’ve seen it all. While not every RIA always acts in the client’s best interest, unfortunately, at least the client has legal recourse.



Joe Gordon said:

March 6, 2010 — 5:58 PM UTC

I am troubled by the power grab of the regulators because more regulations means more lawyer fees, more costs to comply, more ways to get into regulatory trouble, meanwhile, another Madoff will be scamming the world while the keystone cops at the SEC or DOL or FINRA stand by creating more rules for small business people. All of this is a conspiracy to harness more power in DC over our lives. Enough!

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