[F]or [SEC Chairman Jay] Clayton to truly fight for savers and uphold the principles from his speech, he should build upon last year’s Department of Labor fiduciary rule, rather than undermine it and start from scratch….Building from DOL’s rule should be music to Clayton’s ears under his sixth and seventh principles: “effective rulemaking does not end with rule adoption” — it requires rigorous analyses and detailed input — and “the costs of a rule now often include the cost of demonstrating compliance.”
Acting alone ignores the DOL’s extensive analysis and consultation, the significant compliance costs already borne by firms, and even the cost-benefit analyses conducted under Trump’s DOL that found the loss to investors by delaying the rule greatly exceeded reduced compliance costs for the interim.
If Clayton truly wishes to implement the principles he has laid out for the SEC to protect investors, he should start by endorsing the DOL rule as a solid, carefully crafted approach that has been thoroughly vetted and is well on its way to implementation.
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.
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.
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.
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.
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.
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.
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.
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.
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 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).