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Bending the truth on the fiduciary rule

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Attacks on the Labor Department’s fiduciary rule have been renewed even as it begins to take effect.

Labor Secretary Alexander Acosta made headlines by conceding his willingness to follow the regulations to phase in. Unlike other Trump administration officials, Acosta deserves praise for his grasp of the rulemaking process and commitment to the rule of law. Still, Acosta signaled a sour view on the substance and announced that he would reopen the process to allow reconsideration of the rule.

Regrettably, Acosta’s respect for the process does not extend to the individuals protected by the fiduciary rule. In a Wall Street Journal op-ed, Acosta alleged that he would seek to rollback the regulation with two core principles in mind: respect for individuals and respect for the rule of law. Yet weakening the fiduciary rule shows neither.

Much of the opposition to the fiduciary rule disrespects retirement savers. Many financial advisers now profit by selling them financial products with embedded commissions and fees. To justify this flawed system, these advisers often advance the contemptuous claim that their clients are too stingy to pay fair value for financial advice. They argue that obscured and conflict-ridden compensation via embedded fees and commissions actually benefits investors by making it palatable to pay for their valuable guidance. And without these fees, financial services firms might offer less advice to a wide number of investors.

Wirehouses, broker-dealers and banks unveiled client-friendly policies while asking the agency for further delays.
June 8

The truth is, many investors would be horrified to learn the true extent of the fees they pay. One analysis found that, after 10 years, a $100,000 portfolio invested in a high-fee index fund would have earned $41,139 less than it would have earned in a low-fee fund tracking the same index.

Under a suitability standard, advisers may sell the higher-fee fund that kicks compensation back to a financial adviser. For the retirement saver, this tainted financial advice will cost more than $4,000 per year. Financial firms rightly fear that investors would not see value in paying this price.

Yet the financial industry will insist that financial advisers are adding value. Sales-focused advisers may appear smart to many unsophisticated retirement savers because they wield color-printed pie charts and rosy financial projections — not because they actually perform analytically difficult tasks. In truth, the task of selecting an appropriate portfolio for a saver’s situation is not difficult. Established automated investment tools provide this basic assistance at significantly lower costs than traditional advisers. To the extent that financial advisers generate value, a free and fair market should set prices for their compensation.

The financial industry also disregards the value that the class-action mechanism provides to investors, instead characterizing the mechanism as nothing more than a boon for trial lawyers. For decades, many disputes between aggrieved investors and financial advisers have been funneled into arbitration processes overseen by FINRA. The rule may make it possible for courts to correct the worst and most common abuses through class-action lawsuits, improving the market and protecting investors. Class actions make it profitable for attorneys to address small but widespread harms that do tremendous collective damage. Importantly, class actions may make it possible for courts to set the clear and binding precedents that FINRA’s arbitrators cannot. Cutting these legal remedies out of the rule disrespects the role courts play in investor protection.

Ultimately, the fiduciary rule should improve savings decisions because it requires financial advisers to do their jobs honestly. American investors seek assistance from advisers because of a basic information asymmetry problem: investors know less about financial markets than advisers. Laws allowing advisers to exploit this asymmetry by recommending products that are not in the best interests of investors enshrine the freedom to fleece and to be fleeced.

Instead of standing up to those who seeks to swindle savers, Acosta argued that “trust in Americans’ ability to decide what is best for them” led him to conclude that the fiduciary rule should be reconsidered. Acosta should explain his curious view that investors who are asking for help somehow already know how to make the best decisions for themselves. Sadly, the new administration’s tone sends a signal that Labor will greenlight grift after its review.

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