The fiduciary rule: OMG or massive yawn?

by Joan Warner

When the White House Council of Economic Advisers last year recommended a fiduciary standard for professionals who supervise retirement accounts, the general public shrugged. Much of the financial services industry, on the other hand, went batsoid. You can see why some people took offense. The CEA said conflicted advice costs American retirement savers $17 billion a year, and it essentially accused non-fiduciaries of stealing that money.

Today, despite intense lobbying by securities dealers and insurance companies, the Department of Labor announced a new regulation aimed at preventing conflicts of interest in retirement advice. The rule requires advisors to act in their clients’ best interests — that is, to behave as fiduciaries — rather than merely recommending “suitable” investments, as current regulations require. Even registered investment advisors, whom the SEC regulates and who are already subject to a fiduciary standard, will have to exercise more care when advising clients on rollovers. That’s because the DOL’s fiduciary standard is stricter than the SEC’s. (Think ERISA.)

But it’s not as strict as some in the industry had feared. “Wall Street dodged a bullet,” an independent advisor known as Downtown Josh Brown wrote in Fortunea couple of hours after the rule came out. Brokers and insurers can still sell proprietary products, provided they can demonstrate those products are in clients’ best interests. And they can sell any type of asset, with the same proviso. Perhaps most important, the rule’s implementation period stretches all the way into 2018, giving firms plenty of time to adjust — and opponents plenty of time to sue the government.

Which they will probably do, experts say, despite the significant concessions to the industry the DOL ultimately made. The Securities Industry and Financial Markets Association, a trade group, issued a statement saying it’s still “concerned” that complying with the rule will be so expensive that firms will stop serving smaller accounts. The U.S. Chamber of Commerce and the American Council of Life Insurers have both vowed to challenge the regulation in court. That was before the DOL issued its final, more lenient version — but as of this writing, neither group has said it’s mollified by the changes.

Frankly, I’m puzzled by consumers’ indifference, because even the watered-down fiduciary rule will improve their financial health. Aggressive sales pitches for expensive products like variable annuities will probably grow rarer. Mutual-fund company reps will make fewer cold calls trying to get people to roll old 401(k) accounts into a new IRA at their firm. And robo advisors, which can manage IRAs at low cost, are likely to benefit from the new regulation. That’s because rollovers are what rule is really all about. Nearly 60% of Americans who leave a job take their 401(k) money with them, and the DOL wants to ensure that they don’t stick it in an IRA whose fees are twice as high as their old employer’s plan.

Bottom line: The new fiduciary regulation won’t turn the retirement advice business upside down, and it will protect retirement savers from the most flagrant conflicts of interest. I’ll join Merrill Lynch CEO John Thiel and the Consumer Federation of America, and give it a “like.”