But not if President Trump and his deregulation army have their way. They want to delay - and ultimately kill - the new rules.
I've written a lot recently about Trump's deregulation agenda. And as you know, I'm a big proponent of targeted deregulation efforts that remove regulatory burdens while also leaving behind smart, effective rules that protect the American people.
When it comes to deregulation, it makes sense to cut endless pages of superfluous prose.
But throwing the baby out with the bathwater is worse than having a dirty monster child.
And the Labor Department's pending "fiduciary" rules governing retirement accounts are a perfect example of a well-intentioned regulation in need of some pruning.
If you are looking to understand these new rules in simple terms - as well as the impending fight over whether or not they'll actually be implemented - you've come to the right place.
The Suitability Standard vs. the Fiduciary Standard
The Labor Department found its way into the mix by virtue of the 1974 ERISA laws, which give the DOL authority to regulate retirement accounts. Old ERISA regulations were never revised to reflect changes in retirement savings trends - most importantly, the shift from defined benefit plans to defined contribution plans, and the huge growth in IRAs.
Urgent: An $80 billion cover-up? Feds use obscure loophole to threaten retirees… Read more…
The DOL proposed reforms in 2010, but withdrew them in 2011 after being attacked by the financial industry regarding regulatory costs, liability costs, and client concerns.
On Feb. 23, 2015, President Obama declared, "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisers put the best interests of their clients above their own financial interests. It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."
The DOL's fast-tracked rules were issued on April 6, 2016, and became known as the fiduciary standard.
Registered investment advisors (RIAs) are registered with and regulated by the Securities and Exchange Commission (SEC), a state securities regulator, or both. They mostly work for fees, as opposed to working on commission. RIAs operate on a "fiduciary" standard of care with their clients. That simply means their investment recommendations must be in the best interest of the client and the client's interests must come first.
Brokers, on the other hand, are overseen by the SEC and the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization for broker/dealers. Brokers operate on a "suitability" standard, which means their recommendations must be suitable for the customer.
But just because an investment is suitable doesn't mean it's in the customer's best interest - in fact, there's a monumental difference.
Let me give you an example...
An adviser (and I'm using "adviser" from now on to mean a broker or an RIA) has two essentially similar investments to recommend. Both are suitable, but one is a heavily front-end loaded recommendation, meaning you pay a fee up front out of the investment capital you're applying. It might be in the broker's best interest, and not yours, to put you into the investment that pays him first.
The DOL's new regulation applies the fiduciary standard - acting in the best interests of their clients - to brokers, and to anyone else giving personalized financial advice.
This is a great idea designed to protect consumers from slippery brokers selling them complex financial products they don't understand just to line their pockets with commission.
Unfortunately, its implementation has been a bureaucratic nightmare...
What 1,023 Pages Mean for Your Money
The Labor Department's new fiduciary rulebook governing retirement accounts is an absurd 1,023 pages long.
The fact that it takes more than a few pages of plain English to demand brokers and advisers act in the best interest of their clients is itself incomprehensible (for what it's worth, I just explained them in less than 500 words).
Cutting insanely long rules and regulations is prudent deregulation.
Saving Wall Street firms and brokers from the cost of understanding all that's in the DOL's 1,023 pages is appropriate and smart. The rules should be cut back to a few pages that everyone understands. It will spare a lot of time, effort, and money that would be wasted on figuring out what they mean, how to get around them, how to implement them, and how to comply with them.
The fiduciary rule, or standard, is simple enough. Put your client's interest ahead of your own, always. Retain that client and continue to prosper.
How hard is that?
A 2015 report by the White House Council of Economic Advisers found that biased advice drained $17 billion a year from retirement accounts.
The CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA) support the new rule because they say "it should increase and streamline transparency for investors, make conversations easier for advisers entertaining changes, and most of all, prevent abuses on the part of financial advisers, such as excessive commissions and investment churning for reasons of compensation."
The High Cost of Higher Standards
Now, the stricter fiduciary standards could cost the industry an estimated $2.4 billion per year by eliminating conflicts of interest like front-end load commissions and mutual fund 12b-1 fees paid to wealth management and advisory firms.
To advisers whining over this - tough luck! Why should inappropriate adviser compensation ever be allowed, especially when it comes to retirement accounts?
But that $2.4 billion price tag - and the ridiculous 1,023-page rulebook - makes the DOL's pending fiduciary rules the perfect target for President Trump and his deregulatory army of ex-Wall Streeters who want to delay implementation of the fiduciary standard for retirement account advisers... and ultimately kill the whole idea.
Whether or not the DOL's rules can be sidelined before they're implemented remains to be seen, let alone whether or not they can be killed and buried along with upcoming SEC rules. The president may not have the statutory authority to delay implementation of already approved laws, but this is a far cry from halting new regulations in the works.
If this is what the president has in mind when he calls for deregulation, it's not right. If the fiduciary standard isn't implemented in April, brokers will continue to siphon billions each year from American retirement accounts.
I'm all for short, transparent, simple rules. Deregulation should be about stripping down overcomplicated regulations (which are mostly written by lobbyists so their clients can get around them) down to: "Do this, don't do that, or else this will happen to you."
I support Donald Trump the exact same way I supported President Obama when he first took office in 2009.
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.
An $80 Billion Cover-Up? 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 U.S. 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. Learn more…
The post Making Wall Street "Great" Again: The Fate of the Fiduciary Rule appeared first on Wall Street Insights & Indictments.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.