A Possible Trump Target: The Fiduciary Rule

A hard-won federal rule designed to protect retirement plan investors from high-commission sales may not survive a Trump presidency.

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There will be plenty of winners and losers in the new normal of the impending Donald Trump presidential administration. One potentially big loser: the so-called fiduciary rule.

The rule, created earlier this year by the Department of Labor (DoL) and set to go into effect in April 2017, was designed to protect retirement plan participants from conflicts of interest that can arise when high-commission financial products are sold to investors by stockbrokers and insurance salespeople. Eight years in the making, the rule was meant to address a lack of investment sophistication among most 401(k) and IRA investors by offering these additional protections. Now the rule is in danger, as high-level advisers to Trump’s campaign have publicly vowed to stop its passage — most vocally SkyBridge Capital founder Anthony Scaramucci.

With Scaramucci’s prompting, Trump, who has promised to eliminate most recent financial regulations, may target the fiduciary rule, despite his campaign pledge to make Washington work for average citizens and not special interests. “There’s no question it’s in play now,” says Michael Kreps, a partner at the Groom Law Group in Washington, D.C.

The fiduciary rule — or conflict-of-interest rule, as it is sometimes known — arose after years of complaints from both damaged investors and chief investment officers like Robin Diamonte, who heads up the pension fund for employees of United Technologies Corp., and financial planners like Sheryl Garrett, founder of the Garrett Planning Network. Stories abound of plan participants being sold inappropriate products, being coerced into rolling their 401(k) plan into a more expensive IRA without proper explanation, or being advised to select as many as 12 actively managed mutual funds in a 401(k) plan menu.

Since the rule’s announcement in April, the financial services industry has revolted against the new controls. There are currently seven separate lawsuits filed against the DoL by the U.S. Chamber of Commerce (on behalf of small broker-dealers and insurance agents) and six insurance and other fund trade organizations (one suit was rejected by a federal judge earlier this month). In its November report on the state of asset management, “Thriving in the New Abnormal,” consulting firm McKinsey & Co. wrote, “The DoL fiduciary rule constitutes one of the largest shocks to the wealth management industry in over 40 years. It strikes at the core of the business model — financial adviser compensation, the range of products, and the nature of advice itself.”

Doubts over the fiduciary rule’s future grew when Scaramucci stepped into the fray, eager to defend the financial services industry against DoL regulation. In a November 2 Wall Street Journal op-ed entitled “Your 401(k) Doesn’t Need a Babysitter,” Scaramucci, managing partner of fund-of-hedge-funds firm SkyBridge, defended the financial industry’s ability to police itself.

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Calling the rule “a case study in government overreach,” Scaramucci, who is also the founder of the annual Las Vegas–based SkyBridge Alternatives Conference (the hedge-fund confab known as SALT), makes liberal use of the industry’s basic defense: that small investors will be hurt when stock brokers, deprived of their once-lucrative sales charges, refuse to take them on as clients. Scaramucci is also concerned that the rule is causing passive investing to take over the world, to the detriment of active managers. In an interview with InvestmentNews, Scaramucci went so far as to compare the fiduciary rule to the 1857 Dred Scott Supreme Court decision that reinforced the legality of slavery.

The administration has broad authority to change policy, according to Kreps. The rule could be stopped by issuing delays to its applicable April 2017 date or instituting a non-enforcement policy.

It is anybody’s guess where a reversal would leave the financial services industry, which has spent millions getting ready to comply with the rule. Broker-dealer Edward Jones, for example, has said it would stop selling mutual funds on commission to retirement investors and reduce investment minimums on fee-based accounts to make them more attractive to IRA investors. Raymond James and Merrill Lynch have said they would continue to offer commission-based transactions on IRA accounts and make use of an exemption provided by the DoL to help brokerages, wirehouses, and insurance companies comply with the new rule when selling to retirement plan investors.

With or without the fiduciary rule, John Bogle, founder of the Vanguard Group, says the industry is moving away from expensive, complex products. Speaking with Institutional Investor last week, he predicted, “I can see indexing going to 50 or 60 percent of the market — today it’s about 30 percent — with not much happening except Wall Street is not as wealthy at the end of that trend.”

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