With the DOL fiduciary rule already delivering real benefits to retirement savers, will the Trump Administration give in to special interest pressure and snatch those benefits away?
SIFMA, the leading lobbyist for Wall Street, the Chamber of Commerce, the big business community’s anti-regulatory attack dog, and the rest of their financial industry cronies have a New Year’s resolution: to overturn the Department of Labor rule that requires brokers and insurance agents who provide retirement investment advice to rein in their most harmful conflicts and act in their customers’ best interests.
Despite President-elect Trump’s campaign promise to make Washington work for “the forgotten man,” these most privileged and powerful of special interests appear to have drawn new hope from the results of the presidential election. Although the DOL fiduciary rule enjoys strong support among Trump voters, a number of the president-elect’s advisers and transition team members have wasted no time in making their opposition known.
In doing so, they have repeated the same cynical messages that financial lobbyists deployed when they asked us to believe that they were spending millions to defeat the rule, not to protect their own self-interest, but out of a deep concern over the harmful impact the rule would have on retirement savers. 1) The best-interest contract exemption, or “BIC,” which sets the terms under which sales-based advisers can meet their fiduciary obligations, is simply “unworkable.” No firm could or would rely on the exemption to offer commission-based retirement advice. 2) Small accounts would lose access to advice if the rule were adopted, because the costs of serving those accounts and the litigation risk would be too high. And 3) Costs to investors would inevitably rise.
In short, where we and our pro-fiduciary allies saw enormous potential benefits for retirement savers, and particularly the small savers most likely today to receive non-fiduciary “advice,” Wall Street lobbyists saw looming disaster. Or so they would have us believe.
A year ago, when industry opposition to the rule was at fever pitch, those predictions could be explained away by the generous minded as representing different, but valid, viewpoints on the likely outcome of the not-yet-finalized rule. We’ve learned a lot in the interim, however, including a lot about how firms plan to implement the new rule. Today, it’s not just public interest groups who refute the trade associations’ anti-fiduciary arguments. It’s the actions of their own members that are challenging the lobbyists’ claims.
- While some firms, most notably Merrill Lynch, have announced plans to convert all Individual Retirement Accounts (IRAs) to fee accounts, a wide variety of firms have announced plans to rely on the best interest contract exemption in order to continue to offer commission-based retirement investment advice. These include firms as diverse in their business models as Ameriprise, LPL, Cambridge, Cetera, Morgan Stanley, and Raymond James. Apparently, the BIC is not so unworkable after all.
- Instead of fleeing the small account market, two firms that specialize in serving smaller accounts – Edward Jones and LPL – announced shortly after the rule was finalized that they would both lower the minimums on their fee accounts, to $5,000 and $10,000 respectively, and, in LPL’s case, reduce the fees on those accounts. As a result of developments such as these, smaller savers will both retain access to advice and gain greater choice on how to pay for that advice. This benefit comes on top of the fact that the advice they get will actually be advice, and not just a sales pitch dressed up as advice, as has too often been the case under the old rules.
- Since the rule was finalized, a number of major firms (Schwab, Blackrock, Fidelity and Prudential among them) have announced plans to reduce costs on certain investment products, such as ETFs and mutual funds, at least in part to be more competitive under the DOL rule. Similarly, when Merrill announced its plan to move all IRAs to fee accounts, it also clarified that it was giving advisers flexibility to reduce fees below existing minimums in order to ensure that customers’ costs did not rise inappropriately as a result of the conversion. In short, costs to retirement savers are going down, not up. As a result, they will get to keep more of their hard-earned money.
- Some of the most exciting changes taking place as a result of the rule come in the form of plans to level compensation to brokers across different investment products. This includes plans under discussion at the Securities and Exchange Commission to create mutual fund and annuity share classes that could be sold by brokers who charge a separate, level commission for their services. Such an approach would greatly ease compliance with the rule’s requirement that incentives to act against customers’ best interests be eliminated. These changes would retain the benefits of commission accounts while eliminating their most serious drawbacks.
So, with all this evidence piling up that the DOL rule is workable, that access to advice is being preserved for even the smallest accounts, and that costs are going down, not up, what possible reason could the Trump Administration have for overturning the rule? In particular, how could a President who campaigned on making Washington work for “the forgotten man” justify an action whose only beneficiaries would be members of the most powerful special interest groups in Washington?
Only time will tell whether President-elect Trump was sincere when he campaigned as a populist. What his administration does about the DOL conflict of interest rule will provide an early test.
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