Until Friday, it seemed like millions of retirement savers would soon be forced to suffer the indignity of getting investment advice that was actually in their best interest. It was all the fault of the Obama administration. Financial advisers had long had the freedom to offer investment guidance that favored their own financial interests, so in 2016 the Department of Labor issued a rule that was set to take effect this April, one that would have ordered advisers to put their clients first.
But no worries! President Donald Trump signed on Friday an executive order ordering further study of the regulation, known as the fiduciary rule. The Labor Department told Reuters that it was studying its “legal options” for delaying implementation of the measure.* It’s now very reasonable to assume the measure will never happen, or will be realized in extremely watered-down form. Many in the financial services industry, not to mention the Republican legislators who have carried water for them on this issue for the better part of a decade, are jubilant:
But for the rest of us, it’s just another reminder that Trump is a creature of that swamp he promised to drain.
Making it harder for financial services firms to profit at the expense of their clients should be a no-brainer. It is such an easy call, in fact, that many of the criticisms of it amount to gibberish. Gary Cohn, the former Goldman Sachs president who now directs Trump’s National Economic Council, told the Wall Street Journal this week that expanding the fiduciary standard “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.” Huh?
While many of us assume our financial advisers only offer the best possible advice, most actually work to something called the suitability standard, which allows them to give less-than-perfect advice and not say so. The Obama administration thought such behavior was costing Americans $17 billion a year. The new rule was going to force the more stringent fiduciary standard to apply to all advice governing retirement savings, like IRAs.
The concern of the wealth-management industry was that the financial razzamatazz that earns them the most money in commissions and fees is rarely in clients’ best interests. Less than 1 percent of investors are able to outguess the markets year in and year out, and that includes professional money managers. As a result, they’ll do best placing clients’ money in low-fee, passively managed index funds, ones that simply seek to replicate the results of such market measures as the S&P 500. The new rule would have forbidden financial advisers from, say, selling their clients more expensive and (to borrow Cohn’s weird analogy) less nutritious mutual funds and other investments without telling them about the benefits of simpler, cheaper, and healthier options. But you still could have put your retirement funds in the financial equivalent of tasty junk food. It’s just that the Obama administration was guessing you wouldn’t want to do so once this was all explained to you.
So what now? The administration can change a regulation, but it almost certainly needs to open the proposal to public comment first. And it’s also quite possible someone will take the administration to court. The fiduciary rule was, after all, a finalized rule. Even if that happens, Friday’s action by Trump gives the Republican-dominated Congress time to pass legislation rolling back the Obama-era retirement savings initiative, something it’s tried to do in the past.
To be fair, many financial services firms have already made changes to be in compliance or near-compliance with the now-stalled standards. Merrill Lynch, for one, announced it would soon no longer allow its advisers to take commissions for retirement account investments. But that’s a small comfort. There’s nothing to stop the financial services industry from backsliding over time.
Moreover, just as not all bosses offered raises or salary changes in advance of the Obama administration’s now-stalled overtime regulations, not all financial services firms assumed the enhanced retirement guidelines were a done deal. Last month, Paul Reilly, the chief executive officer of Raymond James Financial, said it’s possible his firm was “lucky” that it hadn’t announced any changes to customers. “We certainly don’t want our advisers to have to make changes they’ve already made … to go back and undo them,” he told financial analysts.
In particular, many in the variable and indexed annuities industries had held out hope for a delay of the rule or even full outright revocation. Sen. Elizabeth Warren released an updated version of a report Friday morning of her 2015 look at the industry, documenting the goodies companies offer up to insurance agents for selling their wares. Assurity Life Insurance Co., for instance, rewards its top sellers with a stay in a Dublin hotel in the spring of 2017 right now. Not shockingly, the flier promoting the gimme warns recipients that it is “NOT TO BE FORWARDED TO CONSUMERS.” No kidding!
One last point: It’s easy to say “Democrats good, Republicans bad” here, but things aren’t so simple. Yes, Trump is directly and primarily responsible for the action, but the Obama administration and congressional Democrats played a role too.
The Department of Labor initially proposed buffing up the standard during Obama’s first term only to encounter fierce pushback from the financial industry, which lined up both Democratic and Republican members of Congress to back it. Even Sen. Bernie Sanders signed a letter early in the process questioning the impact of a revised version of the rules. Momentum behind the effort didn’t pick up until Warren began speaking out about the rule.
Trump clearly took a lesson from this. He’s not waiting around to take action. He’s been in office for two weeks and he’s signed more than a dozen executive orders, albeit somewhat sloppily. Still, the next Democratic president, whoever he or she is, should take note.
*Correction, Feb. 5, 2017: This post originally misstated that the executive order delayed implementation of the fiduciary rule for 180 days. The final order instructed officials to conduct further study of the rule.
