Impact of Trump’s Fiduciary Rule Delay
President Trump today ordered that the Department of Labor’s Fiduciary Rule – scheduled to begin implementation on April 10th – be delayed pending a review by his administration. What impact is this expected to have on consumers?
Some background first. When it came to providing investment advice prior to 2016, Registered Investment Advisors (aka RIAs, such as Cognizant Wealth Advisors) had been required to meet a fiduciary standard of advice. Simply put, that meant they must put their clients’ needs ahead of their own. At the same time, other financial firms providing investment advice – brokers such as Merrill Lynch and insurance companies such as Mutual of Omaha, for example – only needed to show that their recommendations were “suitable.” Salespeople following the latter rule could sell higher-priced investments to their clients even when lower-priced equivalents were available.
To make it easier for consumers to get consistent and lower-cost advice regardless of the source, President Obama called on the Department of Labor (DOL) in 2011 to require all retirement advisors to follow the fiduciary approach. As he put it, “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.” It took nearly five years of work and lots of compromises before the DOL’s rule was approved in early 2016. Its purpose and benefit had been explained on the DOL’s website. Unfortunately the current administration has recently removed that page. But here is the first part of the text (which I had copied last year):
Today, the Department of Labor issued a proposed rulemaking to protect investors from backdoor payments and hidden fees in retirement investment advice.
- Backdoor Payments & Hidden Fees Often Buried in Fine Print Are Hurting the Middle Class: Conflicts of interest cost middle-class families who receive conflicted advice huge amounts of their hard-earned savings. Conflicts lead, on average, to about 1 percentage point lower annual returns on retirement savings and $17 billion of losses every year.
- The Department of Labor is protecting families from conflicted retirement advice: The Department issued a proposed rule and related exemptions that would require retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits.
- The Proposed Rule Would Save Tens of Billions of Dollars for Middle Class and Working Families: A detailed Regulatory Impact Analysis (RIA) released along with the proposal and informed by a substantial review of the scholarly literature estimates that families with IRAs would save more than $40 billion over ten years when the rule and exemptions, if adopted as currently proposed, are fully in place, even if one focuses on just one subset of transactions that have been the most studied.
With Trump’s pushback and possible elimination of this fiduciary standard rule, the biggest beneficiaries will be Wall Street brokerages and the insurance industry, the rule’s staunchest opponents throughout its development. And with Trump’s associated order to review the entire Dodd-Frank financial reform law of 2010, developed in the wake of the 2008 crash to protect consumers and the economy from irresponsible and unsound Wall Street banking activities, one could argue that this is the most hypocritical of all of Trump’s actions to date, since he campaigned strongly against Wall Street and its influence in politics.
White House National Economic Council Director Gary Cohn expressed the administration’s view of the fiduciary rule as follows: “We think it is a bad rule… for consumers. This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” I interpret that to mean that the Trump administration feels it’s better for consumers to have access to bad as well as to good retirement and investment advice. Are they serious?
Meanwhile, the insurance industry continues to push sales of high-priced, proprietary annuity and related products. Senator Elizabeth Warren tweeted a list of 24 insurance companies offering sales incentives for such products in 2016 or 2017. (Note that some types of annuities can be very useful, but almost never as the sole solution to a comprehensive retirement plan.)
The silver lining in this cloud is that the public dialog during the fiduciary rule’s long development period has served to raise the level of public awareness about this issue. Consumers today are probably more cognizant of the different types of advisors and the quality and bias of the advice they provide. And many financial firms have announced that they will continue their plans to shift to a more fiduciary-oriented advice model regardless of whatever changes Trump may bring to the regulations. We will have to wait and see the extent to which the current administration ultimately guts these regulations before assessing the long-term damage.