SEC Rules Could Cost RIAs $1 Billion: Schwab

SEC Rules Could Cost RIAs $1 Billion: Schwab

Schwab Estimates Harmonization Could Cost RIA Industry $1 billion

Registered reps are not the only ones facing significant cost increases if the SEC decides to go through with a uniform fiduciary standard and regulatory harmonization between RIAs and broker-dealers. In a letter to the commission, Schwab Advisor Services found that the cost of complying with a uniform standard could cost the RIA industry over $1 billion.

In response to the SEC’s March request for information on the impact of a uniform fiduciary standard and harmonization, Schwab calculated it would cost a RIAs total of $174,560 to implement in the first year and $117,153 annually after that. Schwab based the conclusion on data pulled from 834 firms in a May survey. Taking into account the approximately 10,500 RIAs registered with the SEC, Schwab estimated the rule change would cost the industry over $1.83 billion in setup and first-year costs, with another $1.23 billion estimated for each following year.  

Within the SEC’s request, there are really two major questions that people need to separate, says fi360’s general counsel Byron Bowman. The first is whether or not to hold brokers to a fiduciary standard. The second is the harmonization of the rules between broker-dealers and RIAs—which model should be used as the industry standard?

If the SEC implements a broker-dealer rules-based standard on the RIA industry, RIAs told Schwab that “the proposed requirements for licensing, registration and continuing education would have the greatest burden, followed by books and records and supervision requirements, and then duty of care. Client communications and marketing would have the least impact,” Schwab’s letter explained to the Commission.

Further, RIAs with at least $90 million in assets could face a 150 percent increase in compliance costs during the first year of a rule’s implementation, and a 101 percent increase in the following years, Schwab found.

“If you add it all up, it’s pretty hefty,” says Schwab's deputy general counsel Christopher Gilkerson. Most advisors will agree that they need to act in the best interest of the client, he added, but cumbersome rules could pose significant burdens on both RIAs and clients. Schwab found that 88 percent of advisors believe their clients would be negatively impacted by rule harmonization, and 63 percent of RIAs responded they would likely deliver less customized client service if the harmonized rules were implemented.

Meanwhile, on the broker side of the aisle, costs are high to implement a uniform fiduciary standard, industry group SIFMA says. Based on responses from nine large broker-dealers, the organization estimated it would cost a firm $5 million to create and maintain compliance training programs under a uniform fiduciary. SIFMA also noted in its July 5 letter to the agency that 12 of the 16 firms surveyed estimated it would cost about $2 million per year to update those systems, procedures and programs. As a point of reference, the 18 firms surveyed by Schwab reported they spent an average of $4.6 million to comply with FINRA’s suitability Rule 2111, which took effect in July 2012. 

A third of registered reps also believe that it would be very challenging to adhere to a fiduciary standard, according to March 2012 Aite report contained in the Financial Planning Coalition’s letter to the SEC last week.  The report also found nearly 50 percent of both RIAs and registered reps believed a rule would result in increased compliance work and increase in the cost of advice.

“It’s all in the way in which the SEC implements the rule,” Gilkerson says. “[A Fiduciary standard] has to be narrowly tailored.”


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