If you needed any more proof that progressives stink at coming up with catchy names for things, consider that we’re now defending something called the “fiduciary rule.” But defend it we must.
I’m talking about a rule change from the late Obama era intended to reduce conflicts of interest between financial advisers and their clients saving for retirement. Most people are unaware that any such conflicts exist, but they do, and at significant costs to retirement savers. By requiring financial advisers to follow an established, fiduciary standard, the rule, which was slated to take effect in April, is simply intended to more closely align the interests and goals of those trying to do the right thing — save for retirement — and their advisers.
Last Friday, the Trump administration signed an executive order designed to undermine the rule before it takes effect. In an economy in which retirement security is already too precarious, doing so is a big policy mistake. But it is also a particularly blatant example of the phoniness of President Trump’s populism. His order is a gift to financial markets and a slap at some of the people who voted him into office, most of whom, according to a recent poll, support the fiduciary rule (65 percent support; 17 percent oppose).
The rule insists that those who advise clients on where to invest their retirement savings must put their clients’ interests ahead of their own profits. For example, when someone on the cusp of retirement rolls over their 401(k) into an IRA, the rule would generally prohibit the adviser from nudging the client into an investment product that gives the broker a kickback while hurting the investor’s long-term yield. It would prohibit unnecessary rollovers, overactive buying and selling that generates brokers’ fees at the expense of returns, and the kind of fee-generating overmanaging of funds that, with compounding, shaves real money off returns.
Over 35 years, a one-percentage-point-lower annual return will reduce your nest egg 25 percent. And that is, in fact, what academic research finds to be the annual hit from conflicted vs. non-conflicted advice.
A lot of claims about the rule’s unintended consequences are predictably being tossed about. Critics claim that it would reduce the amount of advice given to savers, hurt the sellers of certain products, crimp the paychecks of hyperactive advisers and cost the industry billions in lost profits (one consulting firm claims the rule will reduce the industry’s revenue by $20 billion just over the next few years).
To my ears, this says, “If we can’t overmanage and overcharge, then we’ll earn less!” These purported billions represent reduced costs for savers, a clear feature of the rule. I don’t see the problem.
Another big complaint is that the rule would force current activist advisers to push clients to more passive funds. In fact, the rule forces no such thing: Advisers can recommend any product as long as they’re not receiving conflicted compensation, such as commissions and bonuses, and even if they are getting such compensation, they can still recommend actively managed funds if doing so is in their client’s best interest (e.g., if their client prefers active management).
Still, to the extent that the rule reduces active management, research on long-term returns shows that to be a feature, not a bug. One recent study found that for longer-term investing, passive index funds beat actively managed funds in 29 different asset classes. Even when the study took out the impact of the fees charged by the active managers, the passive funds still dominated.
To point out Trump’s hypocrisy seems almost quaint. Yes, repealing the fiduciary rule is inconsistent with his alleged campaign against financial market abuses. (From an early Trump campaign speech: “I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us.”) But anyone who doesn’t by now realize that he never meant any of that a) isn’t paying attention and b) hasn’t kept up with his staffing choices.
At this point, we have two sources of hope. First, it will probably take many months for the administration to repeal the rule and/or issue an alternative proposal, either of which would require notice and comment procedures. On the other hand, according to this analysis, there are ways the administration could delay the rule’s April start date.
Second, many decent folks in the industry saw this rule change coming, and some large institutions, including Merrill Lynch and Morgan Stanley, have long prepared to, if not fully implement the rule, at least reduce conflicts of interest, regardless of actions by the new administration (here’s an informative fact sheet about these changes in action). And perhaps the dust-up over the fiduciary rule will prompt the 75 percent of consumers who mistakenly assume brokers must act in their clients’ best interest to ask their advisers about such conflicts.
But the bottom line is that despite their faux populism, Trump and his merry band of billionaires do not view it as the role of government to try to protect the interests, or the retirement accounts, of regular folks. As noted, that’s bad policy — almost half of families with members between the ages of 32 and 61 have no retirement account savings at all — and it should be bad politics, too. The fact that the new administration appears to care about neither of those problems is just plain scary.