President Trump has directed the Labor Department to review an Obama Administration rule requiring financial advisers to put their clients’ interests first. The directive will likely delay, and possibly derail, this conflict-of-interest rule (also known as the fiduciary rule), scheduled to take effect in April. Without it, brokers and other advisers may continue steering retirement savers to investments that provide higher compensation to the adviser but lower returns to the saver.
Retirement savers often seek professional advice on their investments, such as when they roll over their 401(k) balances into Individual Retirement Accounts (IRAs) upon switching jobs or retiring. They may not realize that their adviser may have a financial incentive to recommend investments that generate higher commissions or fees. Such conflicted advice costs retirement savers $17 billion a year, the Council of Economic Advisers estimates.
The Labor Department has already subjected the conflict-of-interest rule to exhaustive review. It issued a proposed rule in October 2010, held public hearings, received voluminous comments, issued a revised proposed rule in April 2015, and received even more public comments. The April 2016 final rule incorporated many suggestions from stakeholders. These changes aim to protect investors without overly burdening the financial sector. In particular, the final rule allows financial advisers to continue receiving commissions and many other types of fees, as long as they disclose all their conflicts of interest and mitigate any harmful impacts.
The additional review directed by President Trump is therefore unnecessary. It also could prove biased in favor of Wall Street and against the small investor because Trump’s memo that orders the review expresses more concern about possible dislocations to the financial services industry than workers’ return on their retirement savings.
Many financial firms have already taken steps to comply with the pending rule by changing fee structures and becoming more transparent. If the Labor Department review is even-handed, the conflict-of-interest rule will survive with little damage. But the Administration’s rhetoric suggests it won’t be, and delaying or changing the rule would slow or reverse the progress toward protecting investors and retirees.