The newly published fiduciary rule is, at first glance, a win for consumers and will result in some big changes for the industry. However, some of these changes will have negative side-effects for advisors, who will face more regulatory overhead costs which translate to lower profits.
Additionally, it may not actually benefit the client to switch to a fee-based account, and may exclude smaller clients from proper advice. These externalities of the rules that were intended to protect investors become particularly tenuous when a retiring client rolls over her 401(k) accounts.
Let’s first look at the options for financial advisors who have a broker registration:
- Keep the commission business with the BIC exemption, which requires complete transparency of compensation, individual client signature, and demonstrating the representation of a client’s best interest;
- Converting to fee-based, which means more responsibility as a fiduciary, but potentially lower profitability for smaller accounts;
- Drop smaller commission-based accounts and let them fend for themselves; or
- Just execute client-directed trades instead of providing advice.