In April of 2016, the Department of Labor announced its intention to require brokerage firms to operate under a fiduciary standard, which meant they would henceforth be required to always act solely in the best interest of their clients when recommending investments. But that regulation, known as The Fiduciary Rule, appears to be Dead on Arrival, one of many rules undone as part of the Trump administration’s effort to pare back federal regulation of business.
And that might not be a bad thing.
As a CERTIFIED FINANCIAL PLANNER ™, my investment advisory firm already operates as a fiduciary, and I firmly believe money professionals should always prioritize their client’s best interests. But I’m not sure we need another federal regulation to enforce that standard, especially when the entire industry already seems to be headed in that direction.
Brokerage firms – UBS, Morgan Stanley, Merrill Lynch, Edward Jones, and countless smaller outfits – are currently held to a less stringent “prudent” standard, which means they can recommend things that are technically beneficial to the client, but not necessarily in that client’s best interest. This is important to brokerages because they derive significant income from sales commissions on various financial products. For example, under the prudent standard, a broker can sell a client into a high commission mutual fund or variable annuity even when a cheaper alternative could possibly accomplish the same goals. Brokers say the DOL’s fiduciary rule will increase their operating costs and make it less profitable to provide advice to smaller retirement account clients. Roughly $19 billion in revenue from IRAs could be affected by the new regs, with brokerage margins on IRAs falling as much as 30%, according to Morningstar data reported last year in The Wall Street Journal.
Despite their complaints about the Fiduciary Rule, most brokerage firms, mutual fund companies, annuity companies and others who would be impacted agree there needs to be a consistent fiduciary policy across the financial services industry. Their support stems, in part, from a realization that investors are growing increasingly wary of the advice they get from commission-driven money professionals and are seeking advice that eliminates the possible conflict of interest that various investment products with different pay structures can cause. Typically, RIA firms who operate as fiduciaries charge a percentage of the money under management and receive no compensation from the sellers of investment products.
The mutual fund industry has responded to this pressure by creating a new class of shares, “T shares,” that pay no compensation to the brokers who sell them. Others, like Vanguard and Blackrock (owner of iShares) have rolled out super-low-cost products with internal costs as low as 0.01% per annum.
Even as they adopt a de facto fiduciary standard, I expect most brokerages will maintain separate channels that will specialize in more complex, alternative investments that carry too much risk and/or cost to meet the fiduciary standard.
The DOL’ s Fiduciary Rule is currently in Washington’s version of purgatory. It’s in the middle of an 180-day “public comment period” and faces an uncertain future, given the White House’s opposition. But it all may be moot given the above.
Market pressure, not government regulation, is pushing Wall Street to always put investors first. And that’s a good thing for everyone.
Cover Image: Mark Van Scyoc / Shutterstock, Inc.