Commentary: The fiduciary rule can restore trust in financial services

It’s not like retirees and those preparing for retirement don’t already have enough headaches. But now they have yet another one, following last Friday’s announcement that Donald Trump had issued a presidential memorandum ordering the U.S. Department of Labor (DOL) to launch a review of its own new fiduciary rules. Scheduled to go into effect on April 10, the rules would require financial professionals who charge commissions to put their clients’ best interests first when giving advice on retirement investments.

Opponents of the rule thought Mr. Trump would delay their effective date by 90 or 180 days, but the memo’s actual wording didn’t contain an explicit delay and instead said the Trump administration is directing DOL to undertake a review of all the rule’s provisions before implementing them. 

The resulting confusion, together with the poor optics on this issue for those opposed to the rule, leads to the question: Whose best interests is President Trump trying to protect?

The DOL essentially has three choices: It could allow the fiducicary rule to become effective as drafted, make modifications to it or withdraw it completely. This range of possibilities only adds to the uncertainty.

This leaves financial institutions and advisers to decide whether they should continue their efforts to comply with the existing rule, with little time to spare. Some major players, such as Bank of America/Merrill Lynch (BAC), Blackrock (BLK), Financial Engines, the Garrett Planning Network, Morgan Stanley (MS), Schwab (SCHW) and Wells Fargo (WFC), are publicly supporting the rules and are already either complying or planning to comply with them.

If the DOL rules do go into effect, financial institutions and advisers would be required to act in their clients’ best interests when making recommendations on their retirement investments. Until now, these players needed to comply only with a “suitability standard,” meaning their recommendations simply had to be “suitable” for their clients’ goals and circumstances. 

In those cases, they could make recommendations that would make more money for themselves even if better-performing investments were available to the client.

The optics on this issue simply don’t look good for those against the fiduciary rule. Public mistrust of the financial industry is already very low, and a repeal, delay or watering down of the fiduciary rule will just exacerbate this mistrust. 

Here’s just a sample of the evidence of this pervasive public mistrust:

  • According to a recent survey by the CFA Institute, only 51 percent of the general population trust the financial services industry to do what’s right. This puts the industry second to the bottom in a trust ranking of 12 industries.
  • A recent survey by the Certified Financial Planner (CFP) board found that 60 percent of the population believe advisers put their companies’ interests ahead of their customers’. Almost two-thirds of survey respondents believe the current laws don’t protect consumers from those who would take advantage of them. Seventy percent agree that financial advisers should be regulated to protect investors and build consumer confidence in financial services.
  • More than 7 percent of advisers overall and up to 20 percent at some big firms have been disciplined for misconduct or fraud, according to a working paper by researchers at the University of Chicago and the University of Minnesota. The advisers were disciplined for unsuitable investments, unauthorized activity, omission of key facts, fraud, negligence, misrepresentations and excessive trading.
  • A recent survey by the National Association of Retirement Plan Participants found that only 8 percent of survey respondents had faith in their financial institutions.
  • According to a survey conducted by AARP, 77 percent of respondents indicate that they’re either “very concerned” or “somewhat concerned” by the fact that investment advice from 401(k) and 403(b) providers isn’t required to be in the best interest of individual plan participants.
  • Surveys conducted by both AARP and Financial Engines report that more than 90 percent of Americans believe it’s important that all financial advisers be legally required to put their clients’ best interest first when providing advice on retirement savings.

Restoring investor confidence is an important reason the major players mentioned above are moving ahead with serving as a fiduciary for their clients, and they’re using that commitment as a marketing edge. In addition, the legendary founder of Vanguard, John Bogle, strongly supports the intent of the new rules.

Two arguments opponents of the DOL rules put forward ring hollow:

  • Supposedly, the new rules will reduce options for Americans to receive financial advice. However, many major financial institutions are willing to act as a fiduciary for their clients.
  • The so-called “small” saver will have fewer retirement savings options. Since when did financial institutions really care about savers with a few thousand dollars? In fact, one of the best pieces of news for retirement savers who are just getting started is the U.S. government’s launch of the myRA account, a development many financial industry commentators panned.

It’s widely acknowledged that Americans haven’t saved enough for their retirement. While several factors contribute to this situation, one important challenge is the lack of trust among Americans in their financial institutions.

It now remains to be seen whether the Trump administration and the DOL will:

  • Confirm the goals and intent of the new rules, choose to act in the best interests of ordinary working Americans, support those financial institutions that are willing to act in the best interests of their clients and help restore Americans’ trust in financial institutions, or
  • repeal or water down the new rules, in effect choosing to act in the best interests of those financial institutions that don’t want to act in the best interests of ordinary working Americans, thereby exacerbating the retirement savings challenges of millions of citizens.

American consumers and workers are watching. Meanwhile, you have the option to vote with your money and your feet -- by giving your business to the institutions that want to act in your best interests. There’s a good chance the government won’t protect you in that regard, so you’ll have to take matters into your own hands.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.