Republicans and the Trump administration are signaling that the Department of Labor’s Fiduciary Rule – set to be implemented later this year, but already changing markets – may be postponed.
Government advocates claim that this rule ‘protects investors’ by forcing advisors to act in their client’s ‘best interest.’ Like all government interventions in the market, it has and will continue to provide the opposite of its intended impact. Below are a few reasons why the government should set this rule aside:
When you leave the threat that a law may or may not be implemented, you leave markets in a state of limbo and concern. Markets have changed how they offer products and services based on this law, and not always for the better. The financial advising marketplace has gone through massive changes with technology over the last several months and years. In my practice I have been postponing decisions on costs and services based on the threat of this law for new clients; thankfully, I don't believe it will force me to consider now to fire clients or provide a lesser service as it is with many other firms.
Governments can’t regulate what’s best. There is no consensus on what is best for every consumer. When governments punish those for having different opinions of what is right they kill innovation and risk-taking. I have heard concerning comments from proponents suggesting that fiduciaries cannot recommend ‘new and untested’ products or strategies. What if this idea was the best practice of a fiduciary in the 1980’s? We would not have seen retirement plans, exchange-traded funds, or the types of diversification strategies that have advanced with financial research. Government has tried to mandate what’s best for consumers in other fields, and consumers have overruled them – a recent example of this is the growth of Lyft and Uber over government mandated taxi services. The madness of trying to regulate what’s best for everyone is obvious in the text of the 1,023 pages that were this law, and the many, many more than will come in trying to explain it.
Postponement gives the proponents more time to make this rule even worse. One example of this are absurd steps suggested to financial advisors who recommend (or simply accept) rollovers of retirement funds to take prior to working with that client. The number of steps that would need to be performed and the costs of unnecessary labor and technology I estimate alone would cost advisors thousands of dollars per rollover, in addition to future costs. If a client comes to me and says, “I want to rollover my 401(k) to an IRA and that I want your advice on managing,” Morningstar, Vanguard, and others have put the value of an advisor at various amounts in the 1-5% range. There is no investment product that I could find in a 401(k) plan that would justify robbing the client of this value, and the peace of mind, of working with an advisor of their choosing, and as such these sorts of proposals are simply costs added to the advisory relationship.
By imposing these and future costs, some financial product providers are protected from competition and promoted by those who wrote this rule. Government should not be picking winners and losers and yet in their statements to Congress the Department of Labor mentioned specific companies who they thought provided quality services (ironically though, these companies don’t offer fiduciary advice). Government has hosted some providers to ‘help determine where to spend scarce government resources’ (as an economics instructor I can’t help but point out the irony that government doesn’t have resources that it doesn’t take from others and redistribute to winners, and those dollars are only scarce to the extent they can take them from others or print them). There is even more evidence that government is protecting product providers from independent advice from…
Exemptions are expected to be handed out to some of the worst offenders of conflicted advice – Equity Indexed Annuity (EIA) salespersons. This 220-page exemption comes with costs, but since all costs are passed on to consumers, these costs will simply make these products even worse.
Of all of the products and services on the market, I have seen by far the most consumer abuse in EIA sales. These products are black boxes, they are sold on unrealistic promises and consumer confusion, and have some of the longest and highest surrender penalties (10-15 years is not rare).
If the ‘good guys and gals’ – those financial advisors who choose to act as a fiduciary – who support the increased costs and the still unknown market impact of this rule can’t convince Washington to cover the worst of the worst in the financial world, then it’s clear this law is not about consumer protection. Exemptions simply raise costs on quality advice providers, while putting true fiduciary advisors at a disadvantage to those that need to be regulated the most.
Despite claiming the moral high ground, these supporters simply are ignoring the unintended – and in some case intended – consequences to the market and consumers.
The DOL Fiduciary Rule is based upon the same myth as the Affordable Care Act – that government control over a market will lead to lower costs and increased quality. The basis for the law is a report that the advice that consumers choose to pay for from advisors for comprehensive financial advice provides no benefits to consumers and can be eliminated. Consumers of financial advice clearly disagree when they choose to pay for advice.
As such, the law is based on simple disrespect and disdain for the choices consumers make when choosing an advisor. Today, consumers have far more choice to find quality financial advice, and to protect themselves against poor advice with second opinions. This rule threatens that choice and security for savers.
The Trump Administration and Congress do not need to wait for the inevitable results of this rule implementation and the harm that will come to consumers during a time when they will need more quality advice than ever. Government can and should find ways to end – not delay – the DOL’s fiduciary rule.