Friday morning, February 3rd 2017, just two weeks into the Trump administration, news outlets started reporting that President Trump was planning a major scaling back of financial regulations.
While I have my opinions on other actions President Trump has already taken, they are just that – opinions. Opinions that, no matter how well reasoned, are not fully informed as those of an expert.
I have not read the full text of the Trans Pacific Partnership (TPP) and cannot intelligently comment on whether it is or is not a good deal for America.
I don’t have access to classified security briefings to guide my opinions on immigrants entering the US from ‘high-risk’ countries.
Admittedly, I am not an expert on healthcare either, though one doesn’t need to be to see glaring problems.
I can, however, with certainty say that reversing the fiduciary rule would be a net loss for investors across the entire country. A loss that can be quantified in real dollars and cents and likely would be in the billions, if not trillions, of dollars.
The Department of Labor oversees corporate retirement plans – think 401(k)’s. The DOL is the government entity that makes sure your employer sponsored plan adheres to certain rules and that management and/or service providers to the plan are not stealing from it or otherwise harming plan participants.
The owner of your company, or maybe someone in senior management or human resources, is usually designated a fiduciary to the plan. A fiduciary is a legal term that states that this individual has the legal obligation to act in the best interests of the plan participants. That is, decisions they make regarding the plan must benefit you, the participant, not the plan sponsor, not the firm and not any service providers.
The so-called fiduciary rule requires service providers, like financial advisors, to also act in a fiduciary capacity. That is, act in your best interest, ahead of their own. That’s right, you may be shocked to learn that financial advisors are not necessarily required to act in the best interests of their clients. They can have conflicts of interest which cause them to recommend inferior investments because it benefits them more financially. The fiduciary rule, initially scheduled to go into effect in April of 2017, sought to do away with that conflict of interest, at least with regard to retirement plans.
Companies like Merrill Lynch, Morgan Stanley, UBS and Wells Fargo have been against the fiduciary rule since it was first proposed. The financial advisors at these firms are sales people, also known as brokers. They do not work in the best interest of their clients. They may say they do, but legally they are held to a much lower standard, called suitability, rather than fiduciary.
The implementation of the fiduciary rule would have drastically changed their business practices and likely caused them to cut prices, thereby hurting profitability. While these firms claim that investors costs would go up due to the increased burden of compliance with the law, they are missing a large part of the picture. They are omitting the fact that higher plan costs translate to lower returns for investors. Having abnormally high plan costs therefore could be viewed as a breach of fiduciary duty on their part. In other words they’d be paid less and have to provide a higher quality service. Both of those outcomes are good for the investor, bad for Merrill, Morgan et. al.
The argument that investors lose options is also false. Investors will no longer be pitched expensive and inferior products like annuities that lock investors into mediocre returns and high fees, while paying the advisor/broker/salesperson an obscenely large commission. The ones being hurt by this rule are the salespeople because they are being asked to be truthful in their recommendations.
Additionally, there are firms, Scale Investment Group is one such company, that already avoid conflicts of interest, that already act in a fiduciary capacity and that already focus on keeping costs down to maximize client returns. The argument that investors would lose access to advice is pure fantasy, made up by those who can’t or refuse to change. The reality is that the advice clients would be getting under a fiduciary rule would be cheaper, free of conflicts and tailored for their benefit, not that of the salesperson. This is a hard pill to swallow for those used to profiting off people who don’t know better and assume they are being given fiduciary advice.