Putting the DOL's investor-protection rule into historical context sheds new light on what the future may hold for retirement savers.As originally published by Kiplinger, July 24, 2017
The Department of Labor's (DOL) fiduciary rule, a consumer-protection regulatory mandate, may seem like a recent addition to the financial landscape, but its roots run deep. The seeds of the current rule can be traced as far back as the 1930s, with the formation of the SEC, to the 1960s with the failure of the Studebaker-Packard Corp., which left more than half of its 11,000 workers with little or no retirement benefits.
In this second of a two-part story on the fiduciary rule, we take a look at where the fiduciary rule came from... and where it's headed.
The government has a vested interest in helping make sure people's retirement savings are secure. That's what the Department of Labor had in mind when it developed its current fiduciary standard.
The DOL rule requires anyone who advises people on their retirement accounts to offer clients the best options available for their needs. Previously, brokers and agents were only required to offer "suitable" choices, choices that may cost more or pay the adviser a higher fee or bonus. Such conflicts of interest are estimated to have cost consumers $17 billion per year, before the ruling.
After months of legal back-and-forth, the rule was implemented on June 9, 2017. But even before this development, history shows that the government has stepped in before to protect people's retirement savings over the years:
After the inauguration earlier this year, the newly formed administration of President Trump took exception to today's DOL rule and ordered a delay to its implementation to allow time for a thorough review.
Many financial lobbyists have made claims that the rule is unnecessarily onerous and costly, saying that its adoption would unduly impact brokerages and insurance firms, where commission-based products are an essential part of their offerings. With the proliferation of load-waived mutual funds and exchange-traded funds (ETFs) with lower annual expenses, such cries in favor of these fee-structures ring somewhat hollow and appear to be inconsistent with the changing tide of an industry moving toward a fee-for-service model.
Interestingly, many firms had already prepared to adhere to the anticipated new standards before the change was enacted. Investors and clients have come to expect their advisers or agents to take on more of a fiduciary role, as a matter of course, in recent years, and that has been reflected by the fact that more and more firms are began adopting that standard, unprompted by legislative or regulatory mandate.
The increased recognition in certification, such as the Chartered Financial Analyst (CFA) or Certified Financial Planner (CFP) designations, shows the groundswell in support for a higher ethical standard to go along with commensurately high standards for expertise and competency. Investors have spoken with their wallets in recent years about what they expect from the people managing their money: They value transparency and stewardship as much as the depth and breadth of investment choice.
Firms that acknowledge this shift in attitude and best adapt to this new environment of higher standards of duty to clients will likely stand to benefit most.
In the past, when markets were much less efficient and financial intermediaries provided a real value by creating investment opportunities, sales charges and commissions reflected that value. In the last couple of decades, with the proliferation of index funds and ETFs (two types of funds that seek to passively track and replicate the performance of an index, minus negligible fees) and discount brokerage firms, markets have become more and more efficient, and the old way of selling investment products makes less and less sense.
The battle raging now is not whether the financial services industry will be forced to change how it works, it's over who will drive those changes. Will government enforcement of the DOL's rule end adviser conflicts of interest? Or will consumers be the ones who enforce the changes themselves, by choosing financial advisers who have already pledged to act as fiduciaries, giving objective financial advice?
The old paradigm was much more transaction-oriented, and reflective of a time when investment costs were necessarily higher across the board. With the democratization and increased automation of the industry since the 1990s, the traditional commission-based model has increasingly given way to asset-based wealth management and compensation structures. The old suitability standard, which simply required brokers to "know their customer" and provide a "suitable" solution or product, seemed appropriate when the scope of what most brokerages provided was much more limited and almost purely transactional. Given the expanded roles of most brokers, where advisory solutions are now more important than the products themselves, a higher standard of care to clients is certainly warranted.
Marguerita M. Cheng, CFP®, CRPC®, RICP®, CDFATM, Chief Executive Officer at Blue Ocean Global Wealth, is a Certified Financial Planning Expert with 18 years of experience. Prior to co-founding Blue Ocean Global Wealth, she was a Financial Advisor at Ameriprise Financial and an Analyst and Editor at Towa Securities in Tokyo, Japan. Ms. Cheng serves as a Women's Initiative (WIN) Advocate and subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination. In 2017, she was named the #3 Most Influential Financial Advisor in the Investopedia Top 100, a Woman to Watch by InvestmentNews, and a Top 100 Minority Business Enterprise (MBE®) by the Capital Region Minority Supplier Development Council (CRMSDC).
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