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Fiduciary Rule Is Now in Question. What’s Next for Investors. Fiduciary Rule Is Now in Question. What’s Next for Investors.
(3 days later)
On Friday, President Trump signed an executive order seeking a review of an Obama-era rule that would have forced financial professionals to act in customers’ best interest when giving them advice about their retirement accounts.On Friday, President Trump signed an executive order seeking a review of an Obama-era rule that would have forced financial professionals to act in customers’ best interest when giving them advice about their retirement accounts.
The so-called fiduciary rule, the subject of years of intense debate and industry lobbying, was set to take effect in April, but the order removes that deadline, and the rule will likely disappear. Gary Cohn, the former Goldman Sachs executive who is now the director of the National Economic Council, told The Wall Street Journal that he wanted it gone. The so-called fiduciary rule has been the subject of years of intense debate and industry lobbying and was set to take effect in April. But the rule is likely to disappear, given that Gary Cohn, the former Goldman Sachs executive who is now the director of the National Economic Council, told The Wall Street Journal that he wanted it gone.
Wait, what? My investment professional doesn’t have to act in my best interests already?Wait, what? My investment professional doesn’t have to act in my best interests already?
Not necessarily. The technical terminology gets confusing, but a financial planner or investment adviser in a stand-alone firm may be required to act in your best interest or may pledge to in all instances. But some stockbrokers and many people who sell life insurance, annuities and other more esoteric investment products merely have to follow what’s known as the “suitability” standard.Not necessarily. The technical terminology gets confusing, but a financial planner or investment adviser in a stand-alone firm may be required to act in your best interest or may pledge to in all instances. But some stockbrokers and many people who sell life insurance, annuities and other more esoteric investment products merely have to follow what’s known as the “suitability” standard.
That leaves lots of room for shenanigans. Read the column I wrote about the county in the United States with the largest percentage of brokers with black marks on their disciplinary records for more on how badly things can turn out. Or read the Consumer Federation of America’s report on the topic. That leaves lots of room for shenanigans.
What was the Trump administration’s problem with the rule?What was the Trump administration’s problem with the rule?
Apparently, freedom of choice was paramount, including the ability to invest your life savings in a way that is indisputably risky or even harmful. “This is like putting only health food on the menu, because unhealthy food tastes good. But you still shouldn’t eat it because you might die younger,” Mr. Cohn told The Journal.Apparently, freedom of choice was paramount, including the ability to invest your life savings in a way that is indisputably risky or even harmful. “This is like putting only health food on the menu, because unhealthy food tastes good. But you still shouldn’t eat it because you might die younger,” Mr. Cohn told The Journal.
One concern in the industry was that some consumers would end up paying more for advice if firms responded to the rule by forcing them to pay fees based on the amount of assets they had with the company instead of commissions based on the number of trades their broker made. But companies, including UBS and Edward Jones, did not in fact get rid of commission-based accounts, though certain investors might have had to use other accounts to make more exotic investments.One concern in the industry was that some consumers would end up paying more for advice if firms responded to the rule by forcing them to pay fees based on the amount of assets they had with the company instead of commissions based on the number of trades their broker made. But companies, including UBS and Edward Jones, did not in fact get rid of commission-based accounts, though certain investors might have had to use other accounts to make more exotic investments.
So what happens now?So what happens now?
Chances are, we’ll go back to where we were, with investors not necessarily knowing what sort of help the friendly professionals intend to provide when we answer the phone to hear their pitch or go to their office for an initial meeting. It’s possible that the Securities and Exchange Commission or certain industry associations will step up with alternative standards or pledges, but there’s a good chance that in the current regulatory environment, these will be limited or watered down.Chances are, we’ll go back to where we were, with investors not necessarily knowing what sort of help the friendly professionals intend to provide when we answer the phone to hear their pitch or go to their office for an initial meeting. It’s possible that the Securities and Exchange Commission or certain industry associations will step up with alternative standards or pledges, but there’s a good chance that in the current regulatory environment, these will be limited or watered down.
How are the big brokerage firms responding?How are the big brokerage firms responding?
In preparation for the implementation of the fiduciary rule, Merrill Lynch in particular seemed to embrace the changes, seeing them as an opportunity to distinguish itself from firms that had fought hard against the new rules. It ran advertisements that read: “We’re committed to your best interest. Not the status quo.”In preparation for the implementation of the fiduciary rule, Merrill Lynch in particular seemed to embrace the changes, seeing them as an opportunity to distinguish itself from firms that had fought hard against the new rules. It ran advertisements that read: “We’re committed to your best interest. Not the status quo.”
Industry trade publications also snickered at gloating executives at UBS who seemed thrilled that they hadn’t made major changes in advance of the presidential election.Industry trade publications also snickered at gloating executives at UBS who seemed thrilled that they hadn’t made major changes in advance of the presidential election.
Merrill Lynch said this week that it would “continue to implement a heightened standard of care for delivering personalized investment advice, especially for investment advice about retirement accounts.” It added that it looked forward to working with the new administration to improve current rules and that some of its planned changes might now be subject to delay.Merrill Lynch said this week that it would “continue to implement a heightened standard of care for delivering personalized investment advice, especially for investment advice about retirement accounts.” It added that it looked forward to working with the new administration to improve current rules and that some of its planned changes might now be subject to delay.
JPMorgan Chase declined to comment on the order.JPMorgan Chase declined to comment on the order.
So how should consumers respond?So how should consumers respond?
The same way we’ve always had to, unfortunately — and, frankly, the same way we would have had to even if the fiduciary rule had gone into effect. The definitions of “suitability” and “fiduciary” have always been (and will always be) open to much interpretation, no matter who is in the White House or trying to decide what food you’re served on your retirement investments buffet.The same way we’ve always had to, unfortunately — and, frankly, the same way we would have had to even if the fiduciary rule had gone into effect. The definitions of “suitability” and “fiduciary” have always been (and will always be) open to much interpretation, no matter who is in the White House or trying to decide what food you’re served on your retirement investments buffet.
First, check the background of anyone who wants to do business with you. Look up their name on the internet and read past the first page of results, way past. Ask where you can find their disciplinary records. Check them yourself on Finra’s BrokerCheck website.First, check the background of anyone who wants to do business with you. Look up their name on the internet and read past the first page of results, way past. Ask where you can find their disciplinary records. Check them yourself on Finra’s BrokerCheck website.
Then, have a conversation. Demand that they take a fiduciary pledge to act in your best interest, like the one we’ve already written for you on our website. Then, ask your investment professional how compensation works. How does money flow from you to them? Is the firm paying them anything extra in exchange for pushing you toward certain investments? What about the company that created the fund or product? Then, have a conversation. Demand that they take a fiduciary pledge to act in your best interest. Then, ask your investment professional how compensation works. How does money flow from you to them? Is the firm paying them anything extra in exchange for pushing you toward certain investments? What about the company that created the fund or product?
Freedom, in this context, once again means license to push and sell things with less oversight and fewer restrictions. But your freedom to demand straight answers and plain English exists, as it always has. Use it.Freedom, in this context, once again means license to push and sell things with less oversight and fewer restrictions. But your freedom to demand straight answers and plain English exists, as it always has. Use it.