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Trump would scrap rule forcing fiduciaries to act in clients' interests, insider says

Donald Trump
Mike Segar | Reuters
Donald Trump

A rule to be implemented next year that would require financial advisors to act in their clients' best interests may have a short life if Donald Trump is elected.

That's because the Republican likely would squash the controversial plan, according to one of his advisors.

"We're going to repeal it," Anthony Scaramucci, who runs the $12.4 billion SkyBridge Capital hedge fund firm, said recently, according to a report in Investment News. "It could be the dumbest decision to come out of the U.S. government in the last 50 to 60 years."

The Labor Department regulation known as the "fiduciary rule" takes effect April 10, 2017, and fundamentally alters the role of financial advisors. Instead of being able to maximize profits by putting clients into expensive investments with high fees, advisors would have to try to maintain low costs.

Scaramucci said its "like the Dred Scott decision" because it targets a single group.

Essentially, the rule is the latest salvo in the market battle between active and passive funds.

Advisors historically relied on mutual funds that provided them solid management fees. However, over the past decade or so, passively managed index funds have come into vogue.

There are two primary differences: Most mutual funds, with assets of $13.6 trillion, involve active stock picking and carry significantly higher fees, while index funds — mostly found in the $2.4 trillion exchange-traded fund space — simply follow market gauges like the S&P 500 and have substantially lower fees. The average fee for Lipper Large-Cap Core Funds is 1.1 percent, against 0.05 percent for the Vanguard S&P 500 Index ETF, according to S&P Capital IQ.

In recent years, most mutual fund managers have been underperforming their index benchmarks, adding to the consternation over fees and creating an exodus toward ETFs. In fact, just over the past 12 months actively managed funds have seen $294.6 billion in outflows, while passive funds have taken in $453.7 billion, according to Morningstar.

The net effect of the fiduciary rule, then, would be to direct more money to index funds, industry experts say. The rule seeks to eliminate conflicts of interests for advisors and specifically is geared at reducing costs for retirement plans.

Scaramucci, though, compared the rule to the Dred Scott decision in the case in which the Supreme Court upheld slavery.

"The left-leaning Department of Labor has made a decision to discriminate against a class of people who they deem to be adding no value," he wrote in an email to Investment News. "They are judging what should happen in a free market and attempting to put financial advisers out of work."

In an email to CNBC.com, Scaramucci softened his expectation that it was his "hope" that Trump would quash the rule. Scaramucci raised ,more than $100,000 for the Trump campaign, according to Federal Election Commission records.

The Trump campaign did not respond to a request for comment.

Democratic nominee Hillary Clinton favors the fiduciary rule and pledged to enact further reforms to the financial services industry.

"Wall Street shouldn't be allowed to put its own interests before those of American families and their retirement savings," Clinton said in a statement after the rule was enacted.