Unclear Fate of DOL Fiduciary Rule Is a Clear Win for Wall Street

DOL Fiduciary RuleOne of the first policy questions that came up after Donald Trump won the Nov. 8 presidential election was what would happen to the U.S. Department of Labor (DOL) fiduciary rule. Recent action from President Trump intended to give us that answer - but instead left us with conflicting details...

The DOL's fiduciary rule requires particular financial advisers who handle retirement accounts to "act in their client's best interest." It's set to start April 10, 2017. It stems from a February 2015 request from then President Barack Obama to update the rules to be fairer for clients. [Go here to read about the difference between acting in a client's best interest and the standard brokers are held to now...]

Donald Trump, during his campaign, called to halt or dismantle the DOL's fiduciary rule. It was part of his push to ban new regulations from federal agencies.

This critique was further pushed by House Speaker Paul Ryan (R-WI), who has criticized the fiduciary rule's complexity and cost to small retirement savers. And according to the Director of Investor Protection at the Consumer Federation of America, Barbara Roper, the Republican-led Congress will "try and make good on its threat to repeal the rule."

That was three months ago. So where are we now?

DOL Fiduciary Rule Finally Gets Delay from Trump - but Not as He Planned

On Friday, Feb. 3, 2017, a draft memorandum the White House intended to send to the secretary of labor made the rounds in media. It stated the Department of Labor was to delay the implementation of its fiduciary rule for 180 days.

It also called for the DOL to conduct a legal and economic review of the law. If the DOL concludes the rule is out of line with the administration's policies, it should take steps to rescind it, according to Reuters.

However, the final executive order President Donald Trump signed that Friday did not include the "delay for 180 days" statement. Since the DOL fiduciary rule is already an effective law - it was published in the Federal Register in June 2016 - it's an overreach of the president's power to enforce such a delay.

Instead, President Trump can direct the DOL to prepare an updated economic and legal analysis of the rule to address three things: whether the rule has harmed or is likely to harm investors due to its provisions; in which ways it has resulted in disruptions within the retirement service industry that may also affect investors or retirees; and whether it is likely to cause an increase in litigation and prices for retirement services.

In response, the DOL filed a notice on Feb. 9, 2017, with the Office of Management and Budget (OMB) to delay the implementation of the fiduciary rule in order to complete its analysis.

According to The National Law Journal, the "OMB reviews generally take 10 to 14 days to review a proposed rule... the notice does not say how long labor regulators plan to delay the fiduciary rule's April 10 compliance day, though 180 days has been widely discussed."

And if after the 180 days the DOL's analysis finds that the rule does affect investors with higher costs, they will publish a proposed rule rescinding the fiduciary rule.

With our initial analysis, it's likely that will be the case...

We Beat the DOL to the Analysis, and the Numbers Aren't Pretty

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The financial industry would have to spend a lot of money to be compliant with the fiduciary rule. As Shah Gilani told us a few days ago, the stricter fiduciary standards are expected to cost the industry about $2.4 billion per year due to fees brokers will lose when they act in a client's best interest.

As Gilani said, "To advisers whining over this - tough luck! Why should inappropriate adviser compensation ever be allowed, especially when it comes to retirement accounts?"

Unfortunately, to offset the costs, Wall Street will likely pass down those expenses to account holders. Economist Incorporated magazine wrote in its summer 2016 issue that the fiduciary rule's cost to investors would be over "$5.6 billion a year."

Part of that cost will come in a "wrap fee," where brokers charge clients based on a percentage of assets. This poses a problem for the average retiree: What if you have a small retirement account and can't afford these wrap fees?

A survey done by GoBankingRates on March 14, 2016, noted that 21% of men and women between the ages of 35 and 54 have less than $10,000 saved for retirement, while 17.3% of those 55 or older have less than $10,000 saved. An InvestmentNews survey found 40% of advisers said "they will not, or probably will not, continue to service small individual retirement accounts - those less than $25,000" under this new rule.

And those retirees not holding enough money for their broker to continue working with them may find their money being handled by a robo-adviser...

A robo-adviser is an automated investment service that manages your stocks and bonds using computer algorithms. It's hard to imagine an automated investment advising service that doesn't offer human contact but is successfully able to act in its clients' best interest, or help clients navigate markets during a downturn, when panic often drives investors away from profit.

So the DOL could easily come back and say that the fiduciary rule does "harm investors" in its provisions. But will the government be able to come up with an alternative that doesn't leave investors reliant on brokers who do not look out for their best interests?

"I'm all for short, transparent, simple rules," said Gilani. "But I'll quickly become a detractor if the new president makes deregulation about making money for Wall Street as opposed to protecting and fulfilling his promises to hard-working Americans desperately in need of a promising path towards a good and bountiful retirement."

More on Retirement

401(k)s will be driving the markets in the near term, but there's another retirement investment our Chief Investment Strategist Keith Fitz-Gerald wants our Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click here to learn more...

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