PhotoThe U.S. House of Representatives appears close to voting the Fiduciary Rule out of existence, but it will need the support of the Senate to make that happen.

The Fiduciary Rule was drawn up by the Obama Administration and has a seemingly simple premise. Financial advisors must put their clients' financial interests above their own.

The rule had not yet taken effect when President Trump took office, and his Labor Department quickly announced plans to delay implementation of the rule.

It should be pointed out that the financial services industry is adamantly opposed to it and was successful in persuading the Trump Labor Department to delay key enforcement elements for 18 months.

If House Republicans have their way, however, that would be a moot point since the entire rule would be overturned, thanks to a rider that was attached to a spending bill in the House. Lawmakers there are expected to pass it.

Why so controversial?

It might be constructive to examine how such a simple sounding rule -- that financial advisors should give their clients the advice that would boost their wealth, regardless of the consequences for the advisor -- could be so controversial.

In the latter years of the Obama Administration, AARP was a major supporter of the proposal, claiming that retirees were losing money in their retirement savings because they were being steered into questionable investments that carried high fees. When investments were made in certain mutual funds, for example, the advisor might get a nice commission, even though there might be other investment options more favorable to the client but less favorable to the advisor. The Obama Administration decided that posed a conflict of interest.

Heidi Shierholz, Policy Director of the Economic Policy Institute (EPI) has told the Labor Department that just delaying the key elements of the rule would end up costing retirement savers $10.9 billion over 30 years.

Shierholz arrives at that figure by assuming the delay of the enforcement provisions will result in about a 50% compliance rate. The numbers, she says, could actually range from $5.5 billion to $16.3 billion, based on actual compliance with the rule.

“Delaying this common sense rule will cost working people who are saving for retirement billions of dollars—dollars that will end up in the pockets of unscrupulous financial advisers,” said Shierholz. “Anyone who wants the American people to get a fair return on their hard work should oppose this delay.”

Industry's reasons

But it's not quite that simple to the financial services industry, which appears to universally oppose the rule. Various industry groups have said the rule would prove costly and force companies to alter their business models.

They also maintain that implementing the rule would deprive most middle income investors of any financial advice, since financial advisors would have to charge large fees to work with middle income clients.

Some of the strongest pushback to that position has come, not from consumer advocates, but Wall Street trader Josh Brown, who last year attacked that argument in the pages of Fortune.

"For the first half of my career, I was a cog in the machine, working at third-tier broker-dealers and selling products to the masses," Brown wrote. "I saw these conflicts firsthand. Over the years since, I've tried to get the truth out there about what I'd seen when Wall Street and Main Street collide. But the incentives that create bad behavior are still there."

Brown charged that brokers are routinely given the most compensation for selling the products that cost their clients the most in fees.

Backers of the Fiduciary Rule say the regulation is down but not out. Even if the House votes to kill the rule, they say the Senate -- where the Republicans have only a two-vote majority -- is not likely to go along.

Also this week, The Wall Street Journal reported that several states are getting in position to increase investor protections in case the Fiduciary Rule goes down in flames.


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