Some financial service firms are “freely acknowledging” theystand to make more money servicing fewer clients as a result ofthe Labor Department's fiduciary rule,which is expected to result in more retirement investors beingmoved to fee-based advisory accounts from commission-basedbrokerage accounts.

Rep. Bill Huizenga, R-MI, offered that claim during a HouseFinancial Services subcommittee hearing exploring the rule's impacton capital markets.

Huizenga claimed that representatives from several firms havetold him that fee-based advisory accounts, which charge apercentage of assets annually and are recognized as being favoredby the rule, will result in increased profits. The congressman didnot identify those firms by name.

The hearing was an attempt to establish what ramifications havebeen seen in the marketplace since June 9, the first phase of therule's two-pronged implementation schedule.

In a separate line of question, Rep. Huizenga's claim wassupported by testimony from Jerome Lombard, president of theprivate client group at Janney Montgomery Scott LLC.

Lombard said the average annual charge on fee-based advisoryaccounts at his firm is nearly double the 0.59 percent average coston commission-based brokerage accounts.

He also testified that up to 10,000 accounts with the firm, orone in eight clients, will be relegated to “no-advice service desk”by the end of the year, because they are too small to warrant thecost of servicing under the fiduciary rule's prohibited transactionexemptions.

“How that is in these clients best interest I will neverunderstand,” said Lombard, who called for the rule's January 1,2018 compliance date to be delayed at a minimum, and reiteratedcalls from other witnesses and lawmakers for the Securities andExchange Commission to craft a new fiduciary rule.

David Knoch, president of 1^st Global, aDallas-based advisory firms that specializes in partnering withCPAs around the country, testified that small investors are alreadylosing access to commission-based IRA accounts.

Moreover, direct business accounts, where investors purchasemutual funds directly from investment management firms for acommission, have dropped 10 percent this year and are expected todrop another one-third by the end of the year.

But the rule's most dramatic impact so far has been with smallbusiness owners, according to Knoch, who testified that Simple IRAaccounts serviced by his firm are down 20 percent in 2016, and areexpected to drop another 40 percent by the end of 2018.

He said the rule fails to account for a 2011 study by the LaborDepartment that estimated losses of $114 billion annually toinvestors' lack of access to advice, calling that the “singlebiggest flaw” in the Department's calculations behind the rule.

Mark Halloran, senior director and head of regulatory strategyat Transamerica, testified that the rule is skewed against annuityproducts, and that small investors are already not receiving adviceon annuities as a result of the rule.

The rule's preference for fee-based advisory costs is projectedto cost investors, said Douglas Holtz-Eakin, president of theAmerican Action Forum, a conservative think tank.

About three-quarters of IRA accounts hold less than $100,000 andare mostly in commission-based accounts. Transitioning to fee-basedadvisory accounts will result in an average of $800 a year inincreased costs, and $1,500 in average annual duplicative fees foraccounts charged a fee that have already paid commissions on mutualfunds. “The fee-based world is much more expensive,” saidHoltz-Eakin.

The lone witness supporting the full implementation of thefiduciary rule was Cristina Firvida, director of financial securityand consumer affairs for AARP.

Repealing the rule would be costly for retirement savers,testified Firvida. And replacing it with a disclosure-drivenalternative, such as the one advanced in a discussion draft byRep. Ann Wager, R-MO, at the hearing, would not provide enoughprotection for investors.

“The rule has resulted in lower fees and better advice,” saidFirvida. “Disclosure alone is not enough,” she said of Wagner'sbill, which, unlike the fiduciary rule, does not specify howconflicts should be managed.