Client-referral programs at the major custodian firms are being quietly revised in preparation for the Department of Labor's looming fiduciary rule, but some industry analysts still question whether the changes will be enough to
pass muster under the new rules.
Both TD Ameritrade and Fidelity confirmed changes this month to the fees charged advisers for client referrals from their
retail investor businesses.
At TD, the 150 registered investment advisers participating in the AdvisorDirect referral program have seen the fees they pay the custodian for client referrals altered from 25% of the annual fee they charge on referral assets to 25 basis points annually on those assets.
The fee drops to 10 basis points above $2 million, and to 5 basis points above $10 million.
The changes at Fidelity's referral program, Wealth Advisor Solutions, removed the option of paying 20 basis points on the referral assets for a seven-year period.
As of April, the 90 RIAs participating in Fidelity's referral program will be charged 25 basis points annually on equity assets and 10 basis points on fixed income. Previously, advisers could choose between the current fee schedule and the 20-basis-point schedule.
A spokesperson for Charles Schwab Corp. said there are 170 RIAs participating in the Schwab Advisor Network referral program, and that the fee structure has not changed since 2007.
Schwab's referral fee schedule is reportedly in line with TD's new schedule.
During an earnings conference call Wednesday morning, TD president and chief executive Tim Hockey described the fee schedule change as an attempt to "normalize" and create a "a flat fee across our RIA partners."
"It is more in line with some of the tenets of the DOL rule, and it's designed to remove any potential conflicts of interest," he added.
Kevin Duggan, vice president and senior business consultant of Fidelity Clearing & Custody Solutions, also cited the DOL rule in justifying the fee schedule changes.
"Wealth Advisor Solutions and other referral programs like it will be considered fiduciary investment advice under the new DOL rule," he said. "Because of this, we leveled the fee for all advisers and expanded the oversight and diligence for all firms to ensure we can operate (Fidelity's referral program) under the new fiduciary standard."
Despite the effort, there are questions about the future of such referral fees under the fiduciary rule, which was originally scheduled to
take effect April 10.
"This is one of those gray areas I would think a custodian would want to address with regulators under the new law," said Duane Thompson, senior policy analyst at fi360, a fiduciary training and consulting firm.
Jason Roberts, chief executive of the Pension Resource Institute, an ERISA compliance consulting firm, said the future of the referral fees could depend on exactly how the custodians are referring investors to RIAs.
"We're talking about some pretty astute firms with some very sharp counsel and compliance people, but the receipt of a third-party payment is a prohibited transaction under the new rule," he said. "I would be surprised if it was structured in a way where (the custodians) are giving fiduciary advice."
Because the fiduciary rule only covers qualified retirement account assets, Mr. Roberts said the referral programs might have to avoid specifics regarding which type of investor account is being referred.
"The cleanest path would be just referring the client and not getting into the types of accounts," he said. "One option would be to stay intentionally blind about the client."
Of course, as Mr. Thompson pointed out, being vague about an investor's needs defeats the purpose of a referral program that is designed to match investors with RIAs.
"It seems the (referring custodian) would have to know something about the investor in order to make the referral to an adviser," he said.
