When President Trump signed the executive order delaying implementation of the Department of Labor fiduciary rule, he dealt a sharp blow to Americans who save for retirement through IRA and 401(k) accounts. He also jeopardized the years of hard work put into rebuilding trust in the investment profession since the global financial crisis.
Under the new rule, which is set to go into effect in April, investment professionals, including brokers, registered reps and financial advisors, who advise on 401(k) and individual retirement account (IRA) investments would be required to act in the best interests of their clients and divulge any potential conflicts of interest. The rule formalizes a standard that should be the bedrock principle for any investment professional dispensing financial advice.
According to the White House Council of Economic Advisers, retirement investors lose more than $17 billion annually in fees paid on products that are not in their best interests. Over 35 years, that's a whopping 25 percent reduction in retirement savings. Warren Buffett, in his annual letter to Berkshire Hathaway shareholders on Feb. 25, took this charge further by saying "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients."
How has this happened? Many investment advisors have convinced their clients to make high-cost, low-return retirement investments so they can line their own pockets at the expense of their clients. Hidden loopholes and pages of fine print disclosures create confusion and add to the distrust. As a consequence, families have, in the aggregate, spent millions in fees that should have gone toward securing their futures; and the reputation of the investment profession is at an all-time low.
The DOL fiduciary rule was created to put a stop to these practices.
Is the fiduciary rule perfect? No. Far from it, some would argue. But at least it's a stake in the ground, and an important step toward making things right and restoring confidence in the term "trusted advisor."
"The financial landscape is complex, and America's working- and middle-class families face many challenges as they try to save for retirement. The fiduciary rule is necessary to ensure that American retirement investors get the standard of care they deserve."
Most investment firms have already taken extensive measures to comply with the rule. They've developed new products, revised policies and procedures, created new marketing strategies and redesigned compensation structures to focus more on fees applied to assets under management rather than on commissions. Most importantly, they will require that any potential conflicts of interest be disclosed.
As a result, the jury's out as to how much impact the executive order to delay the fiduciary rule will have. For most firms, it would cost more to reverse course than move ahead with the changes already underway. The losses from any reversal would be more than financial. Firms understand that rolling back changes intended to benefit investors would suggest that the client's best interests are not a priority. These companies understand that when the client wins, the whole industry wins.
Moreover, the fiduciary rule has been challenged in federal court, but judges have upheld the rule in all three cases that have been heard so far.
We believe that the courts have made the right decision in upholding the fiduciary rule, but investor rights still hang in the balance. Investment professionals shouldn't need a legal requirement or a judicial ruling to do what is right and adhere to a standard that puts clients first. The inalienable rights of the investor extend beyond the whims of an industry, a legal framework (although we would prefer that the regulators support this immutable standard) or a political agenda. The financial landscape is complex, and America's working- and middle-class families face many challenges as they try to save for retirement. The fiduciary rule is necessary to ensure that American retirement investors get the standard of care they deserve. It is the most fundamental obligation of the investment management profession to put client interests first. Professional duty demands this, our clients expect it and we must deliver on this obligation.
Our industry may be imperfect, but there are many thousands of financial advisors around the world who go to work every day and do the right thing. These advisors take their responsibilities to their clients seriously. It's not the job of the regulators to make ethics the linchpin of the investment management profession. Rather, these client-centered advisors at the grass roots level must step forward to lead the charge in making ethics an imperative. Only then will we be able to maintain the public's trust and earn the right to call ourselves professionals.
Commentary by Paul Smith, a chartered financial analyst and the president and CEO of the CFA Institute. The institute promotes the highest standards of education, ethics, and professional excellence in the investment profession.
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