Could mass market investors soon find themselves struggling to access financial advice in the US under new regulations?

Change is fast approaching for US financial advisors – this much we know for certain. On April 6, the Department of Labor (DOL) introduced a long-awaited ruling which requires advisors to put their clients’ interests above their own, adhering to a fiduciary standard for advice.

The Best Interest Contract (BIC) exemption allows advisors to receive commissions and other sales fees while still complying with the fiduciary standard. All of this means commission stays, but how easy this will be for advisors to implement is uncertain.

The rigidness of the BIC guidelines has substantially mellowed since its initial proposal. Originally, the exemption limited the scope of permissible assets to recommend and required extensive disclosures on fees and costs. The deadline for implementation of the rule has also changed, expanding to one year and not requiring full compliance until January 1, 2018.

These developments should ease some of the concerns over the regulatory costs of the rule, but will not extinguish them. The financial industry has warned the cost of the rule will make advice much more expensive and that consumers will be left with most of the financial burden, mirroring what has happened in other countries when similar regulation has been introduced. Opponents argue that smaller clients will be faced with fees that are unaffordable, therefore limiting access to advice to middle class investors.

While traditional brokers will have to make the biggest adjustments, the industry has been slowly moving toward fee-based models over the past couple of years. This new rule will undoubtedly cause more advisors to abandon commissions because not everyone will opt to apply the exemption.

Under the newly imposed rules, the BIC exemption heightens brokers’ liability risks, making the cost-benefit analysis of commission a tighter proposition. If advisors want to continue to earn commission, they must sign a legally binding contract with clients that details their fiduciary responsibilities, reveals any conflicts of interest and identifies firm policies to mitigate conflicts of interest. While the contract exists to hold guilty advisors accountable, the costs of preparing for and defending against litigation will rise, regardless of culpability.  These additional costs will not be welcomed by advisors.

This new regulation can be viewed as part of a wave of regulatory scrutiny that has swept over the financial services industry since the 2007-08 financial crisis. Now eight years along from the beginning of the market panic, public focus on the industry has only marginally subsided. And perceptions of the industry have been badly damaged.

Even though commission-based advice is covered in the new regulation, it makes sense for firms with revenues heavily derived from commission to look at redressing the balance between this and clients paying upfront fees. A revamp of fee-structures in the UK, courtesy of the Retail Distribution Review, is still being felt today more than three years after its introduction. Many advisors have either left the market or simply taken as much commission as possible until they could no longer ride the gravy train. Neither option is a good one for investors.

The DOL rule has been a long time coming and has shaped up to be a more tempered version of the original proposal. Even so, increased regulation and scrutiny of the financial industry should cause firms and advisors alike to reconsider their compensation policies for the long-term, instead of waiting on the other shoe to drop.