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ICI, IRI: Fiduciary Rule Already ‘Orphaning’ Accounts

By Joe Morris August 9, 2017

The Labor Department’s fiduciary rule is already cutting into smaller accountholders’ access to investment products, underscoring the need for intervention by the Securities and Exchange Commission, according to the Investment Company Institute and Insured Retirement Institute.

The two trade groups were among scores of commenters weighing in ahead of the DOL’s deadline this week for comments on "more streamlined compliance options" for the rule.

The IRI said its members have reported that approximately 155,000 clients have been "orphaned" by the rule, and "far more" are expected to be as implementation proceeds.

"Sadly, we now have significant evidence that our fears have been realized," the IRI letter states.

Seventy-one percent of advisors plan to stop providing advice to at least some of their current small accounts due to the risk and increased costs of the rule, while 35% intend to stop serving accounts under $25,000, and 25% will raise their minimum account thresholds, the IRI survey results also show.

The ICI letter similarly cites member data suggesting a retreat from serving smaller clients.

"These so-called ’orphaned’ accountholders already number in the hundreds of thousands and will be left without access to advice (and industry participants indicate that the numbers will climb substantially as implementation efforts proceed)," the letter reads. "In short, there is now clear evidence that the rule is already harming, and will increasingly harm, investors in a number of ways."

Meanwhile, fund industry costs are compounding, the ICI said.

Disputing DOL estimates of $5 billion in first-year implementation costs, the ICI said the projection fails to consider the money asset managers would spend in developing products to assist brokers, such as T and clean shares, which the ICI puts at a minimum of $111 million.

"The move toward T shares is a primary example of the inadvertent market disruption that the fiduciary rulemaking has caused," the letter says.

Both trade groups reiterated earlier calls for the applicability date for the full rule to be postponed until Jan. 1, 2020, and for the SEC to develop a best interest standard for broker-dealers in collaboration with the DOL. The ICI stressed that the SEC should "take the lead" in the new rule process, while keeping the current fiduciary standard for registered investment advisors "solidly in place."

"We urge the SEC to coordinate closely with DOL so that DOL explicitly recognizes the best interest standard of conduct in a new, streamlined prohibited transaction exemption for financial services providers that are subject to an SEC-governed standard of conduct," the letter says.

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