the fiduciary rule

Trump's New Assistant Could Fuel the Fiduciary Rule's Ultimate Demise

the fiduciary rule
SkyBridge Capital founder Anthony Scaramucci

Goldman Sachs Group Inc. (NYSE: GS) alum and SkyBridge Capital hedge fund founder Anthony Scaramucci will soon be an advisor to President-elect Donald Trump.

This new appointment could bring with it the ultimate demise of the Department of Labor's controversial new fiduciary rule.

The fiduciary rule, expected to go into effect in April, would require retirement brokers to put clients' best interests first when making recommendations. It puts more responsibility and accountability on the brokers.

This might seem like a positive (if not plain logical) regulation change were it not for the hidden fees involved.

You see, it will cost brokerage firms millions of dollars to readjust their operations, software, and business models to abide by the rule, and those costs will likely fall back on the clients. The estimated costs for financial institutions to comply with the fiduciary rule start at about $1 million per month into 2018, then range from about $5 million to $10 million a year after that, according to Principal Financial Group.

Scaramucci's hedge fund in particular has a lot at stake, even though he has, as of yesterday, officially divested from it in order to officially take up his position in Washington.

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Here's why he's likely to fight hard to get this turned over - which matters to all of us with retirement advisors...

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How the Fiduciary Rule Could Kill the SkyBridge Business Model

Scaramucci's SkyBridge Capital is essentially a fund of hedge funds -- a firm that takes investors' money to invest in other hedge funds.

The firm's clientele are "well-off" individuals who aren't quite rich enough to invest directly in hedge funds on their own. So they access them via SkyBridge with a $100 minimum initial investment for individual retirement accounts.

SkyBridge then pays banks like Morgan Stanley (NYSE: MS) and Citigroup Inc. (NYSE: C) to sell its funds, basically rewarding them for directing clientele in their direction. It's a simple back-and-forth: MS and Citigroup sell SkyBridge's funds, and SkyBridge pays MS and Citigroup back for their business.

The fiduciary rule puts this very business model - using a big bank's plethora of financial advisers as a sales force for hedge funds - at risk. This is especially true for fund-of-funds brokerages like SkyBridge because of the distribution fee restrictions involved with the DOL's rule.

If brokers must act in their client's best interest, banks may soon be hesitant toward, if not outright prohibited from, accepting these kickbacks from hedge fund managers.

Stay tuned to Money Morning for updates on what Washington decides on the fiduciary rule before April 2017.

Up Next

Under the watchful eye of Congress, the government will soon be implementing a controversial plan that threatens the retirement of millions of Americans. And they’re using an obscure loophole buried in Title 29 of the US Labor Code to do it. If you have a 401(k), IRA, or any type of retirement account, this could cause you to miss out on $68,870 or more. Get the details here...

For the latest news on the DOL fiduciary rule's fate, follow us at @moneymorning or on Facebook.

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