The brokerage business fiercely fought the new retirement advice rule. But so far for Wall Street, it has been a gift.The rule requires brokers to act in the best interests of retirement savers, rather than sell products that are merely suitable but could make brokers more money. Financial firms decried the restriction, which began to take effect in June, as limiting consumer choice while raising their compliance costs and potential liability.
But adherence is proving a positive. Firms are pushing customers toward accounts that charge an annual fee on their assets, rather than commissions which can violate the rule, and such fee-based accounts have long been more lucrative for the industry. In earnings calls, executives are citing the Department of Labor rule, known varyingly as the DOL or fiduciary rule, as a boon.
Source: Who Is Winning With the Fiduciary Rule? Wall Street – WSJ
Donald Trump and the Department of Labor are delaying — and possibly killing — the fiduciary rule, which would have required investment managers to put their clients’ interests first instead of directing them to higher-fee options that benefit the money managers themselves. The White House’s Council of Economic Advisors found that the absence of this rule imposed as much as $17 billion in additional costs to retirees led to the Obama administration’s adoption of the rule over the massive efforts by the financial firms, including political contributions and lobbying. Money writes:
The Labor Department moved to delay the rule for two months, at the direct behest of President Donald Trump. President Trump signed a memorandum earlier this year in which he publicly came out against the rule and directed the Labor Department to review the impact of the regulation.
This setback comes at a time when the rule has a lot of support. Since the Labor Department proposed the delay a month ago and asked the public for comments, more than 178,000 letters poured into the Labor Department in support of the regulation, compared to just 15,000 letters in opposition. It required all financial advisors—including brokers with major firms like Merrill Lynch, Morgan Stanley and Wells Fargo—to act as fiduciaries, or in other words, in their clients’ best interest when advising people on their retirement savings.
While retirement plan beneficiaries say that they want their advisors to be fiduciaries and refrain from self-dealing, they do not want to pay for it, that is probably because they do not realize they are currently paying $17 billion for being sold products without full information about the fees. Whatever the fiduciary rule costs would be, they would be far less — and they would be disclosed.
Proponents of the rule have promised to challenge the delay in court. Stay tuned.
On Feb. 3 Trump also signed a presidential memorandum instructing the Labor secretary to evaluate a specific regulation placed on financial advisers.
Known as the fiduciary rule, it requires brokers in charge of retirement plans to act in their clients’ best interest.
The rule is set to take effect on April 10, but that may not happen now. Financial columnist Terry Savage thinks the average American investor, who puts their faith and money in the hands of investors, will suffer if the safeguard is scrapped.
“This fiduciary standard was so needed,” Savage said. “Doing away with it is like saying, ‘OK, go ahead and cheat little old ladies and little old men if they retire with these rollovers and are wondering what to do with their money.’”
Will Trump kick-start the engine of investment by cutting regulatory red tape or leave Main Street investors vulnerable by ditching consumer protections?
Watch a discussion of the fiduciary standard with two of our favorite experts, Terry Savage and William Birdthistle.
For years, many brokers have been allowed to push expensive or risky investments, even if there were cheaper alternatives, under what was known as the “suitability standard”: Investment recommendations needed only be “roughly suitable” for the client. In practice, that means if your advisor is weighing two similar investments, and one pays out a greater commission, he or she can put you in that one—even if the alternative would trim your fees and increase your overall returns.
The White House’s Council of Economic Advisers found this conflicted advice costs Americans around $17 billion a year. Put another way: If you’re a 45-year-old with $100,000 in retirement savings, you could lose $37,000 through these conflicts alone by the time you retire at 65, the Council found.
By last year, the U.S. government looked poised to start changing that. After an eight-year effort, the Department of Labor—which oversees retirement savings—developed a rule that would require any financial advisor managing a retirement account to put you in the best investments available. It’s arguably the biggest change in retirement savings law since the benchmark Employee Retirement Income Security Act of 1974.
That “fiduciary rule”—so named because it required retirement advisors to act as fiduciaries, in their clients’ best interests—was set to roll out in April. But under President Donald Trump’s administration, the fate of the new rule is now in serious doubt. On Friday, President Trump issued an executive order that directs the Labor Department to reassess the entire initiative. That is probably welcome news to Wall Street, which has waged a never-ending war around the fiduciary standard on legislative, judicial and public opinion fronts.
Source: Inside Wall Street’s War Against the Fiduciary Rule | Money
Be sure to watch Professor Jennifer Taub on the proposal she calls “The Madoff loophole.”
The Department of Labor has published its long-awaited fiduciary rule
Labor Secretary Thomas Perez said,
With the finalization of this rule, we are putting in place a fundamental principle of consumer protection into the American retirement landscape: A consumer’s best interest must now come before an adviser’s financial interest. This is a huge win for the middle class…Today’s rule ensures that putting clients first is no longer a marketing slogan. It’s the law.
Ted Knutson writes:
Final may not be final for the Labor Department’s fiduciary rule for pension plan advisors both proponents and opponents of the best interest standard are warning.
While praising the standard for promising to save workers billions, Labor Secretary Tom Perez and Consumer Financial Protection Bureau founder Senator Elizabeth Warren are cautioning the rule could still face withering assaults in the courts and Congress by Wall Street financial firms and their Republican promoters in the House and the Senate.
The Financial Industry Regulatory Authority (FINRA) announced today that it has ordered Barclays Capital, Inc. to pay more than $10 million in restitution, including interest, to affected customers for mutual fund-related suitability violations. These suitability violations relate to an array of mutual fund transactions including mutual fund switches. Additionally, the firm failed to provide applicable breakpoint discounts to certain customers. Barclays was also censured and fined $3.75 million.
via FINRA Sanctions Barclays Capital $13.75M for Unsuitable Mutual Fund Transactions, Related Supervisory Failures.
Another fine for JP Morgan. So far, no word of any consequences for board members or top executives.
JPMorgan Chase has agreed to pay $307 million to settle accusations that it improperly steered clients to the company’s in-house mutual funds and hedge funds.
From 2008 to 2015, brokers and financial advisers in several divisions of JPMorgan gave preference to investment products created by the bank’s asset management division when deciding where to put client money, regulators said on Friday.
In some cases, regulators said, the clients were put into products with higher fees, which earned JPMorgan more money, even when the same JPMorgan product was available for a lower fee.
via JPMorgan to Pay $307 Million for Steering Clients to Own Funds – The New York Times.
Note that the settlement will not prevent them from maintaining this conflict of interest; it will just require slightly better disclosure, though not enough for customers to evaluate the costs of the conflicted fund selection.
The Obama administration’s efforts to rein in Wall Street face opposition from members of the president’s own party. In June, the Democratic Senatorial Campaign Committee attacked a Republican senator for having “supported repealing Wall Street Reform.” But the DSCC’s chairman, Sen. Jon Tester of Montana, is one of dozens of Democrats in Congress seeking to block implementation of key reforms in the party’s 2010 law to increase the financial industry’s accountability.
The discrepancy between Democrats’ rhetoric and their actions could be crucial as Congress moves to close out the year with a flurry of bills designed to undermine regulation of the financial sector. Lawmakers may use unrelated, must-pass spending bills as vehicles to deliver legislative victories for Wall Street — while the financial industry sends cash to their campaign committees.
One package of deregulatory riders would allow more banks to receive exemptions from new mortgage rules. Another would reduce the number of banks subject to added oversight from the Federal Reserve. Lawmakers may also vote on a bill to reduce prosecution of white-collar crime.
via Wall Street: Democrats Work To Block New Regulations After Flood Of Campaign Cash.