Here’s the first of two articles written by Adam Bergman at Forbes.com about President Trump’s plan to rescind the fiduciary rules –
On February 3, 2017, President Trump announced that he will use a memorandum to ask the labor secretary to consider rescinding a rule, better known as the fiduciary rules, set to go into effect in April 2017 that orders retirement advisers, overseeing about $3 trillion in assets, to act in the best interest of their clients.
The fiduciary rule, rolled out by the Obama administration, took many years to develop. The fiduciary rule aimed to protect retirement savers from bad advice and keep more money in their pockets. It also sought to indirectly change the way the industry structures its products and advisor compensation policies.
Under the fiduciary rules, broker-dealers would be required to act in their clients’ best interest rather than encouraging money moves that directly benefit the broker’s bottom line. Among the requirements in the rule, brokers have to justify the varying compensation they can receive for recommending one investment product over another to a retirement saver. Brokers said that rule makes sales fees on some mutual funds, known as sales loads, and some funds’ differing share-class prices problematic for accounts that charge investors for each transaction made.
Currently, if you work with a financial advisor who is a registered broker, he or she only has to recommend investments that are “roughly suitable” for you. That means if your advisor has the option between two similar mutual funds, but one pays out a higher commission, he or she can put you in that one—even if the other fund has lower fees and would boost your portfolio in the long run. In rescinding the fiduciary rules, the Trump administration wants to keep this system in place, arguing that the fiduciary rule will limit investment choices and burden the industry with unnecessary regulations. According to The industry’s top lobby group, the Securities Industry and Financial Markets Association estimated the fiduciary rule would cost firms $5 billion to implement and another $1.1 billion annually to maintain.
The Obama Administration believed that fiduciary rules would help lower costs for American retirement account investors as well as better protect the average retirement investor from bad advice and unnecessary fees. On the flip side, the financial industry has attacked the rules as being overly burdensome as well as potentially limiting the type of investments and advice financial advisors can offer. To this end, in 2016, Edward Jones and some other financial advisors announced that it would stop offering mutual funds and exchange traded funds in IRA accounts that charge investors a commission and move to an account value fee based arrangement.
In the end, President Trump seemingly sided with the financial and securities industry that the fiduciary rules were overly burdensome and would limit investment options for IRA holders. In the end, it appears that President Trump was not convinced that any lower consumer costs associated with the enactment of the fiduciary rule would be enough to overcomes its perceived shortfalls. Because the fiduciary rules have not yet been enacted into law, President Trump’s executive order rescinding the rule will have no current impact on IRA investors, however, the long-term impact could be significant for both investors and financial advisors.