U.S. Labor Secretary says fiduciary rule to take effect on June 9 | Reuters

Despite massive efforts to stop it, the Department of Labor’s fiduciary rule will go into effect June 9. When you read the report from Reuters below, please note that the “concerns it may make investment advice too costly” reference should be read as follows: “concerns that the diversion of fees, often undisclosed, made possible by conflicts of interest, also undisclosed, will have to stop, returning to the customers the money that should have been theirs in the first place.”

The U.S. Labor Department will implement its fiduciary rule on June 9 with no further delays, U.S. Labor Secretary Alexander Acosta said on Tuesday.

The department’s rule, which requires brokers offering retirement investment advice to act in the best interest of their customers, has been heavily criticized by Republicans and Wall Street amid concerns it may make investment advice too costly.The rule has faced a rocky time becoming effective, with President Trump last month delaying its enactment date, originally April 10, for 60 days. Trump has also ordered a review of the rule.

Acosta, in an opinion piece for the Wall Street Journal, which was also shared with Reuters, said there was “no principled legal basis to change the June 9 date while we seek public input”.

Calling the fiduciary rule a “controversial regulation”, Acosta said while courts have upheld the rule as consistent with Congress’ delegated authority, it may not align with Trump’s “deregulatory goals”.

He also said the department was seeking “public comment” on how to revise the rule, leaving open a possibility of repealing the rule in future.

Source: U.S. Labor Secretary says fiduciary rule to take effect on June 9 | Reuters

Trump Wants to Do to the Fiduciary Rule What He’s Doing to the Climate

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.

Why the Fiduciary Rule is Essential for the Economy

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.

Are Fund Managers Asleep at the Wheel? Which Funds Enable Excessive Pay?

Excessive executive compensation is a core contributor to America’s extreme and growing income inequality. CEOs have come to be grossly overpaid, and that overpayment is bad for the companies, the shareholders, the customers, and the other employees. The 100 Most Overpaid CEOs 2017, the third in a series from As You Sow, is designed to provide investors an overview of companies that overpay their CEOs, and a look at which pension and mutual funds too often vote to approve pay. The webinar, featuring report author Rosanna Landis Weaver of As You Sow and other leading compensation experts, will present the report findings and offer attendees the opportunity to pose questions to the panelists.

Register here.

Inside Wall Street’s War Against the Fiduciary Rule | Money

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

Fiduciary Rule Announced, Challenges Expected

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.

JPMorgan to Pay $307 Million for Steering Clients to Own Funds – The New York Times

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.

Ron A. Rhodes has an excellent article on the importance of maintaining the fiduciary standard

The entire article is well worth reading, with a call to action at the end. Here is a brief excerpt.

In my nearly 30 years as an estate planning and tax attorney, and in my nearly 15 years as a fiduciary investment adviser, I have possessed the opportunity to review hundreds of clients’ investment portfolios. When the clients’ investment portfolios were advised upon by either broker-dealer firms, by dual registrants (firms and individuals with both securities broker/dealer licensure and registered investment adviser licensure), or by insurance agents, the allure of high-fee investment and insurance products was nearly always too strong to resist. Over 95% of the time, in my reviews of hundreds of clients’ portfolios, I discerned high-cost investments, tax-inefficient portfolios, or both.

The high costs of Wall Street’s services and products not only engender the retirement security of individual Americans, but also impair the American economy. As the role of finance has grown ever larger, instead of providing the oil that ensures the American economic engine churns efficiently, the peddling of expensive investment products to Americans has led to a sludge that impairs the vitality and threatens the future of not only our fellow Americans, but Americans itself.

The growth of the financial services industry has grown to an extraordinary proportion of the overall U.S. economy. As stated in a recent article by Gautam Mukunda appearing in the Harvard Business Review: “In 1970 the finance and insurance industries accounted for 4.2% of U.S. GDP, up from 2.8% in 1950. By 2012 they represented 6.6%. The story with profits is similar: In 1970 the profits of the finance and insurance industries were equal to 24% of the profits of all other sectors combined. In 2013 that number had grown to 37%, despite the after effects of the financial crisis. These figures actually understate finance’s true dominance, because many nonfinancial firms have important financial units. The assets of such units began to increase sharply in the early 1980s. By 2000 they were as large as or larger than nonfinancial corporations’ tangible assets …. ” Gautam Mukunda, “The Price of Wall Street’s Power,” Harvard Business Review (June 2014).

The result of this excessive rent extraction by Wall Street is impairment of the growth of the U.S. economy. As Steve Denning recently noted in Forbes:
The excessive financialization of the U.S. economy reduces GDP growth by 2% every year, according to a new study by International Monetary Fund. That’s a massive drag on the economy–some $320 billion per year. Wall Street has thus become, not just a moral problem with rampant illegality and outlandish compensation of executives and traders: Wall Street is a macro-economic problem of the first order … Throughout history, periods of excessive financialization have coincided with periods of national economic setbacks, such as Spain in the 14th century, The Netherlands in the late 18th century and Britain in the late 19th and early 20th centuries. The focus by elites on “making money out of money” rather than making real goods and services has led to wealth for the few, and overall national economic decline. ‘In a financialized economy, the financial tail is wagging the economic dog.’
Steve Denning, “Wall Street Costs The Economy 2% Of GDP Each Year,” Forbes (May 31, 2015).  

via SFP.

New Study Shows Skewing of 401(k) Investment Menus to Benefit Mutual Fund Executives, Not Plan Participants

Those involved in managing 401(k) plans are expected
to make decisions for the exclusive benefit of plan
participants and beneficiaries. This study provides evidence
that mutual fund companies involved in plan
management often act in ways that appear to advance
their interests at the expense of plan participants.
Where mutual fund companies serve as plan trustees
– indicating their involvement in the management of
the plan – additions and deletions from the menu of
investment options often favor the company’s family
of funds. More significantly, this bias is especially
pronounced in favor of affiliated funds that delivered
sub-par returns over the preceding three years. And
participants do not shift their savings to undo this
favoritism, especially the favoritism shown to subpar
affiliated funds. The study also found that the
lackluster performance of these sub-par funds usually
persists. These findings thus suggest that, with
respect to setting 401(k) menus, mutual fund companies
tend to influence decisions in ways that appear to
adversely affect employee retirement income security.

Elizabeth Warren Nails GOP Financial Exec

Many thanks to Elizabeth Warren for pushing for a fiduciary standard that would limit self-dealing by money managers like this guy.

“We all agree that we must act in a client’s best interests,” Schneider said, before arguing that the Obama rule requiring managers to do just that would ultimately force Primerica to abandon its single-mother clientele.

Warren presented Schneider with a Huffington Post article detailing lawsuits against the company filed by Florida workers. According to the complaints, Primerica encouraged workers nearing retirement to trade in their government-guaranteed pensions for much riskier assets — a move that would jeopardize their savings while giving Primerica the opportunity to profit from managing their funds in the future. Had they stayed in their pensions, retirees would have simply received regular payments, leaving no fees for Primerica reps.

The lawsuits describe exactly the kind of activity that the Obama rule is designed to prevent, and suggest that Primerica hasn’t always acted in its clients’ best interests. Primerica set aside $15.4 million in 2014 to settle lawsuits from 238 such workers.

“Mr. Schneider, I just want to understand your company’s advice in these cases,” Warren began. “Do you believe that people like these firefighters from Florida who are near retirement and have secure pensions with guaranteed monthly payments should move their money into riskier assets with no guarantees, just before they retire?”

Almost no one who understands personal finance would give such advice in good faith. And Schneider never really answered the question, after being pressed by Warren three separate times. He said that regulators had signed off on the activity, that “each situation is very different,” and that it could make sense for someone on the verge of death.

“I’m sorry, are you suggesting that these 238 people were weeks away from dying, and that’s why they all got this advice?” Warren asked.

via Elizabeth Warren Nails GOP Financial Exec.