The presidential orders continue to come thick and fast from the Trump administration. One of President Trump’s most recent orders, titled Presidential Memorandum on Fiduciary Duty Rule, takes aim at deregulating those who invest your retirement funds. It does this by undercutting something we have discussed on this blog before–the Obama Administration’s changes to the duty somebody investing your retirement funds has to you.
Planning for retirement is always challenging. With that in mind, you always want the best possible advice. However, the standards the people giving you that advice are held to might surprise you–and not in a good way. The fiduciary duty rule was designed to make sure your always got the best advice possible. So let’s take a look at exactly what the rules being targeted do and how Trump’s new memorandum will affect them.
What Are the Changes Being Targeted?
Early last year, the Obama administration announced through the Department of Labor that they were changing the rules when it came to the duties a retirement investor owes their clients. As it was, retirement advisors generally owed their clients “suitable advice.” The new rule applied a higher level of obligation, known as a fiduciary duty, between client and retirement investor.
A fiduciary duty is a legal duty to put the interests of a person or party above all else; violating this duty leads to legal repercussions. Somebody who has a fiduciary duty is called a fiduciary. In 1974, the Employee Retirement Income Security Act (ERISA) was passed to help create standards and practices for retirement and health plans. The original act applied a broad rule, assigning fiduciary duty to those rendering investment advice regarding a retirement plan for compensation. However, one year after ERISA was passed, the act was amended so that the application of fiduciary duty to retirement advisors was substantially limited. Thus, the usual standard applied to retirement investors has been, as mentioned above, “suitable advice.” Suitable advice requires an advisor to provide investing suggestions which the adviser believes are, as the name of the advice suggests, suitable to the client’s interest. This is as opposed to providing advice that puts the interests of their client above all else–as per a fiduciary duty.
So just how much damage can entrusting your retirement to an advisor who is held to less than a fiduciary standard do? While there are certainly advisors who will provide non-conflicting advice regardless of the standard they are held to, the damage caused by conflicted advisors is substantial. Leading up to the rule change, the Obama administration issued a study estimating that conflicts of interest cost retirement plans about $17 billion a year. The Department of Labor estimated that conflicted investment advice “could cost IRA investors between $95 billion and $189 billion over the next 10 years and between $202 billion and $404 billion over the next 20 years.”
The way the lack of fiduciary duty might be costing you money is where an retirement advisor suggests investment opportunities that provide them better commissions instead of providing you better returns. It is very common for companies to offer percentage commissions or rewards to advisors on certain investments or types of investments. For example, the company Table Bay offered “a Maserati to advisers who sell at least $7.5 million in annuities in 2014 and a BMW, Range Rover, or Porsche to those with at least $6 million in sales.” These sort of deals can lead a retirement advisor to recommend investments with the best commissions as opposed to investments that are best for your retirement portfolio—leading to the costs described above.
Looking at these facts, this rule change certainly seems like it’s pretty beneficial to the public. However, it has had its critics since it was first announced. Those opposed to the rule have said that the changes may push some advisors out of the market by decreasing their profits. They have also argued that it will lead retirement investors to offer services to lower income individuals. While there hasn’t much evidence to indicate investors would abandon such a substantial market, it seems President Trump has been listening intently to the fiduciary duty rule’s detractors as he took the time to focus an entire memorandum on gutting the rule.
What Exactly Does the Presidential Memorandum Do?
A Presidential Memorandum has less formalities than an executive order, but carries similar force. This means that, because the fiduciary duty rule was an agency policy change by the Obama administration as opposed to a Congressional Act, the rule is the sort of thing Trump can target directly through executive orders.
As it is, his memorandum is slightly more measured in its approach. The memorandum states that the fiduciary duty rule is not consistent with the policies of Trump’s administration. With this in mind, the memorandum requires the Secretary of Labor to review the rule in order to ensure that three tenants apparently crucial to any regulation under Trump’s watch. First, the Secretary needs to determine is the rule, or any element of it, is likely to harm investors due to a reduction of access to advice–essentially ask advisors whether they will offer less services if they have to provide advice exclusively in the best interests of their client. Second, whether the rule, or any of its parts, has caused disruption in the retirement investment industry sufficiently to have a negative effect on investors or retirees. Third, the Secretary must determine whether the rule will cause an increase in litigation–an almost certain byproduct of holding investors to a higher standard of duty–as well as an accompanying increase in price for those seeking retirement services. If, after a review of the legal and economic impact of the rule, it is determined that any of the three points in the memorandum are at issue then the Secretary of Labor must get rid of–or at least revise–the fiduciary duty rule.
Is This the End of the Fiduciary Duty Rule?
Given how broad the three elements in the memorandum are, it’s a pretty good bet that the fiduciary duty rule will be done for in the next few months. At a minimum, we can expect a substantial delay before the rule takes effect. Unfortunately, this change is part of a trend of demanding deregulation even where it doesn’t necessarily make sense. What could have been a substantial step in consumer protection seems like it will, unfortunately, never materialize.