Meanwhile, Trump officials have issued a presidential request to DOL to “reconsider” that they hold off on the laws for now, virtually leaving many in the fiscal industry in the dark about what might happen next.
The delay also highlights the recent regulation-slashing binge the new administration carried out in the two months since it took office. The administration, according to recent media reports, cut 90 significant regulations within its first 60 days and more are on the cutting board. The fiduciary rule, however, hasn’t been cut, not yet at least. Instead, the rule has been delayed for six months.
“In principle, the [DOL] could have further delays … put in place an altered version of the rule, or just nix it altogether,” said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank. “My guess is that they are leaning toward the last option, but I have no idea what sort of timeline they would be on.”
The fiduciary rule would elevate all financial professionals who work with retirement plans to “fiduciaries,” meaning they will be ethically and legally required to put client interests before their own. The 1,023-page regulation is expected to leave wealth managers – a large number of which already are fiduciaries – but will strongly impact insurance agents and others who rely on commission-based products. The regulation originally was to be rolled out slowly, with parts of it slated to go into effect on April 10, and other pieces delayed until January, 2018.
The “fiduciary” requirement puts commission-based professionals under more scrutiny than the previous “suitability” standard. Suitability meant that advisors could recommend an investment as long as it met a client’s goals. Now, advisors also must consider whether the investment is the best product for the client, period.
The Obama administration sought a new fiduciary rule for six years before the DOL unveiled the regulation last year. The previous administration – which strongly backed the creation of a fiduciary rule – first leaned on the Securities and Exchange Commission, which declined to produce a fiduciary rule. The administration turned to the DOL instead, which produced the rule over opposition from segments of the financial industry who described it as too costly, complex, and ultimately ineffective.
The Trump administration, however, saw things differently. His top economist described the rule as “completely misintended (sic)” during a February CNBC interview.
“They thought they were trying to protect investors in their retirement accounts. But by ‘protecting investors,’ they highly limited their choices,” explained Gary Cohn, director of the White House Economic Council, and a former second-in-command at Goldman Sachs, told the network. “I don’t think you protect investors by limiting choices.”
Those choices might be doing more harm than good, however. The financial world is complex, investors often struggle with financial literacy, and many advisors feel pressure to keep their commissions high. Put all of that together and it’s a recipe for poor performance.
“The basic story is that now it is legal for an advisor to deliberately steer a client into an inappropriate investment, just to get a commission,” Baker told The Suit Magazine.
Baker asserted that the new administration’s slash-and-burn approach to regulation could end up hurting the economy in the long run.
“The existing regulations all went through cost-benefit analyses,” Baker said, pointing out that these calculations can be uncertain, but are accurate on average. “Trump is almost certainly increasing costs more than benefits.”
Several wealth managers contacted by The Suit noted that education is key for clients. The fiduciary rule might require advisors to disclose everything, but that’s useless if the client doesn’t understand anything.
“Very little time is spent [on financial literacy] from kindergarten through the 12th grade or even at the university level,” said Deborah Stavis, CEO of Stavis & Cohen Financial. “Fifty-six percent of people who like to retire are working still today, simply because they were not well-prepared. We need to take the bull by the horns and start training people at a young age.”
New tools such as robo-advisors might boost millennials’ engagement with the financial system, but the technology is no substitute for understanding personal finance.
“It’s a little naïve to believe that a robo-advisor strategy will achieve the results that people want,” said John Goott, CEO of Investec Wealth Strategies.
A DOL spokesman did not return emails requests for comment by deadline on whether the rule is likely to be rescinded or whether the department will take steps to reconsider revamping the regulation.
Baker believes, however, that torpedoing the rule will harm investors considerably, even if the rule is complex and imperfect.
“There are many people who are getting bad investment advice because their advisor is being paid to give them bad advice,” Baker said. “The rule is not going to make this stop altogether, there will still be dishonest people, but it certainly will make this sort of corruption less common.”
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