In April 2016, after years of fits and starts, the Obama administration’s Department of Labor issued its “fiduciary rule,” set to become effective on April 10. Self-styled consumer activist groups and the plaintiff’s bar hailed the decision as a victory, but for consumers themselves as well as taxpayers, the outcome will be far less pleasant. Thankfully, the Trump administration has the opportunity to change course.
Currently, financial advisers are held to a suitability standard. That is, a financial adviser must provide guidance and offer investments that are suitable for the needs of the individual investor. If a financial adviser provides unsuitable products or advice based on the individual needs of the investor, the investor has a cause of action against the adviser and can recover their losses.
In other words, the financial adviser world isn’t the unregulated Wild West where the elderly on fixed incomes are routinely duped into investing in exotic, opaque derivatives by unscrupulous Wall Streeters.
The current version of the rule, written by the Obama administration, would heighten the legal standard from one of suitability to that of a fiduciary, which would require financial advisers to essentially provide advice and products that they themselves would buy if they were in the investor’s position.
While this sounds fine on paper, as currently drafted, the fiduciary rule is unworkable and far too costly.
By the Labor Department’s conservative estimates, the fiduciary rule could cost up to $31.5 billion to comply with and require nearly 60,000 hours of paperwork. This alone is incredibly burdensome, especially for smaller and independent financial advisory firms, yet there are other significant problems with the fiduciary rule.
By raising the legal standard of care for financial advisers, the rule would also limit investment advice, especially for Americans with lower account balances, which tend to be commission-based as opposed to fee-based for the adviser.
There are numerous news stories about the rise of so-called “robo advisers” that provide one-size-fits-all investment advice to American investors and retirees. This problem will be exacerbated if the proposed fiduciary rule stands.
According to the American Action Forum, a nonpartisan think tank, numerous companies are withdrawing from the market or switching from commission-based services to fee-based services for investment advice – meaning financial advisers will be unlikely to continue to provide services to those with lower investment account balances.
These developments are troublesome not only for consumers but also for taxpayers. If investment advice becomes less personalized and less accessible to Americans, the type of prudent planning that can grow financial assets and reduce future dependence on government-funded retirement programs may be in shorter supply. This will unnecessarily create additional strain on entitlements, which are already facing massive liabilities.
Thankfully, the Trump administration is aware of the practical problems posed by the fiduciary rule. On February 3, President Trump issued a Presidential Memorandum directing the Labor Department to examine the fiduciary rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.”
In addition, the memorandum directs the Labor Department to perform “updated economic and legal analysis” as to whether the fiduciary rule, as currently proposed, “has harmed or is likely to harm investors” through decreased access to products or information; whether the rule would lead to “dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees”; and whether it would lead to an increase in litigation, which could raise prices for investors and retirees.
These are all valid concerns, which the Labor Department must have time to analyze and advisors must have breathing room to process. That’s why the department’s proposed pushback of the rule’s effective date by 60 days makes sense.
In an ideal world, the fiduciary rule would never see the light of day, at least not in its current form. Unfortunately, it is now a matter of just three weeks before this costly edict becomes a harsh reality. The clock is ticking on taxpayers, and it’s time for an immediate reset.
Clark Packard (@clarkpNTU) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is counsel and government affairs manager for the National Taxpayers Union.
If you would like to write an op-ed for the Washington Examiner, please read our guidelines on submissions here.
