Should advisers be required to put clients first?

Executive Summary

Should financial industry professionals be required by law to put their clients’interests ahead of the size of their fees and commissions? That’s the thrust of a U.S. Labor Department regulation, known as the fiduciary rule, that was scheduled to take effect in April. The Trump administration called time-out and ordered a review just before the rule was to be implemented, leaving its status in question. Consumer advocates assert that the rule is necessary to protect investors from advisers who recommend products that pay a high commission or fee but may not be the best for their clients. The financial industry counters that the rule would hurt small investors more than help them.

Among the key takeaways:

  • Only about 1 percent of U.S. financial professionals are “registered investment advisers” who are legally obligated under current law to put their clients’ interests first. The rest are required only to recommend “suitable” investments.

  • “Conflicted advice” – recommendations from advisers who suggest investments because they pay higher commissions or fees – costs investors $17 billion annually, according to the Obama administration.

  • The fiduciary rule could cost brokerage houses that work on commission $11 billion in revenue over the next three years, a study by a financial consulting firm found.

Resources for Further Study

Bibliography

Books

Olen, Helaine, “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry,” Portfolio, 2012. A financial journalist aims to dispel myths behind many of the pitches of the financial-services industry.

Articles

Frankel, Matthew, “The Fiduciary Rule: Pros and Cons,” USA Today, Feb. 3, 2017, http://tinyurl.com/km5ddlh. A journalist explains what the Department of Labor’s fiduciary rule means and why many in the financial industry oppose it.

Hackbarth, Sean, “How the Labor Department’s Fiduciary Rule Will Be Disastrous for Those It’s Intended to Help,” Above the Fold, U.S. Chamber of Commerce, Nov. 10, 2016, http://tinyurl.com/mqrx8ee. A blogger for the U.S. Chamber of Commerce argues that the fiduciary rule will make it harder for Americans to save for retirement.

Kelly, Bruce, “DOL fiduciary rule to cost the securities industry $11B by 2020: study,” InvestmentNews, Sept. 21, 2016, http://tinyurl.com/lwx7a9w. Various studies and estimates say the fiduciary rule will cost the brokerage industry billions of dollars over the next several years.

Norton, Leslie P., “The DOL Fiduciary Rule Still Has Momentum,” Barron’s, Feb. 4, 2017, http://tinyurl.com/mcxgad6. A financial columnist argues that reforms prompted by the fiduciary rule may stick even if the rule does not.

Reish, Fred, “The Department of Labor’s fiduciary rule: Where are we now?” InvestmentNews, March 14, 2017, http://tinyurl.com/m6ugf8e. An attorney offers an overview of the legal uncertainty after the Trump administration placed the fiduciary rule under review.

Reports and Studies

“The Effects of Conflicted Investment Advice on Retirement Savings,” White House Council of Economic Advisers, February 2015, http://tinyurl.com/lnrp8ng. A fiduciary-rule ban on “conflicted advice” would save investors $17 billion per year, this report from the Obama administration’s Council of Economic Advisers argues.

“6 Ways the DOL Fiduciary Rule Improves Protections for Retirement Savers,” Consumer Federation of America, May 2016, http://tinyurl.com/ldvgh3a. A group that supports the fiduciary rule offers examples of how investors might be treated differently under it.

Hauptman, Micah, and Barbara Roper, “Financial Advisor or Investment Salesperson? Brokers and Insurers Want to Have it Both Ways,” Consumer Federation of America, Jan. 18, 2017, http://tinyurl.com/mj389nr. A comparison of how major broker-dealer and insurance firms present themselves and their services on their websites and how they describe those same services in their legal challenge to the Labor Department rule, done by a consumer group that favors the rule.

Litan, Robert, and Hal Singer, “Good Intentions Gone Wrong: The Yet-To-Be-Recognized Costs of the Department Of Labor’s Proposed Fiduciary Rule,” Economists Incorporated, July 2015, http://tinyurl.com/hfwj83h. Two economists challenge the study by the Council of Economic Advisers that argues a fiduciary rule ban on “conflicted advice” would save investors $17 billion per year.

The Next Step

Reform Plans

Corbin, Kenneth, “Fiduciary advocates strike back after rule delay,” Financial Planning, April 5, 2017, https://tinyurl.com/mhf5ceq. Fiduciary rule advocates created a “Retirement Ripoff Counter,” a running clock that tallies the money retirement investors lose – $532 per second, according to the counter – during the Labor Department’s delay in implementing the rule.

Iacurci, Greg, “Tax reform could be ‘way worse’ for retirement industry than Department of Labor’s fiduciary rule: Graff,” InvestmentNews, March 20, 2017, https://tinyurl.com/l6w53pj. A retirement plan adviser says proposed tax cuts could cost the government trillions of dollars in revenue and force politicians to increase retirement plan taxes to reclaim the lost money.

Lynch, Sarah N., “Trump Administration to Delay Fiduciary Rule by 60 Days,” Insurance Journal, April 6, 2017, https://tinyurl.com/lxsl7fj. The U.S. Department of Labor announced a 60-day delay on implementation of the fiduciary rule after President Trump ordered the department to review the rule’s effectiveness.

Robo-Advisers

Anderson. Tom, “Man vs. machine: How to figure out if you should use a robo-advisor,” CNBC, March 13, 2017, https://tinyurl.com/jchqx23. Sixty-nine percent of American investors want a combination of human and digital financial guidance, according to a survey by the brokerage firm Capital One Investing, and many financial service companies are racing to launch these automated advising systems.

Irrera, Anna, “Charles Schwab launches hybrid human-robo financial advice,” Reuters, March 14, 2017, https://tinyurl.com/ln29hkj. Charles Schwab’s new service, called Schwab Intelligent Advisory, combines human advisers and computer algorithms to provide clients with financial and investment plans.

Padalka, Alex, “JPMorgan is Rolling out a Robo-Advisor This Year,” Financial Advisor IQ, April 6, 2017, https://tinyurl.com/kj9og7g. JPMorgan CEO Jamie Dimon wrote to shareholders that the financial services company will be introducing an automated advice service sometime this year, but how the service will operate remains unclear.

Organizations

Consumer Federation of America
1620 I St., N.W., Suite 200, Washington, DC 20006
1-202-387-6121
www.consumerfed.org
Consumer advocacy group that has argued strongly for the fiduciary rule.

Financial Industry Regulatory Authority
1735 K St., N.W., Washington, DC 20006
1-301-590-6500
www.finra.org
An independent, not-for-profit organization authorized by Congress to protect America’s investors.

Public Investors Arbitration Bar Association
2415 A Wilcox Drive, Norman, OK 73069
1-405-360-8776
www.piaba.org
An international bar association whose members represent investors in disputes with the securities industry.

Securities Industry and Financial Markets Association
120 Broadway, 35th Floor, New York, NY 10271
1-212-313-1200
www.sifma.org
Trade group that represents broker-dealers, banks and asset managers.

U.S. Chamber of Commerce
1615 H St., N.W., Washington, DC 20062-2000
1-202-659-6000
www.uschamber.com
Membership organization that represents businesses before Congress, government agencies and the courts.

U.S. Department of Labor
200 Constitution Ave., N.W., Washington, DC 20210
1-866-4-USA-DOL (487-2365)
www.dol.gov
Federal department that oversees laws and regulations related to employment; crafter of the fiduciary rule.

U.S. Securities and Exchange Commission
100 F St., N.E., Washington, DC 20549
1-202-942-8088
www.sec.gov
Federal agency whose mission includes protecting investors.

DOI: 10.1177/237455680312.n1