When the average American decides to set up investments, there’s very little he can do on his own. With services like Fidelity, the power to be one’s own broker has become easier to attain, but what is someone to do who with their retirement account after quitting, changing jobs or going through a divorce? To properly roll his retirement investments from one account to another can be a daunting task, particularly if his new job doesn’t offer retirement investments as a benefit.
Therefore, the average American is likely to turn to a financial adviser. If he is somewhat financially savvy he has likely heard that he wants to keep his fees low, but he also realizes that there is no fee-free solution for investments. He may even be aware of the fact that financial adviser’s often prey on their customers, selling them investment plans that are intended to make them rich, rather than the customer they are “advising.” In this way, millions of Americans lose billions of dollars in fees — billions of dollars that should be going to work for their investments.
One of the few tools that our average American does have at her disposal is finding a fiduciary. An adviser who is a fiduciary is obligated to put his customers’ interests first. He works to do what is best for the customer, not what is best for his own bank account.
Former President Obama’s fiduciary rule was set to take place in April of this year and was designed to make it so that all advisers giving advice about retirement accounts were obligated to act as fiduciaries. This would allow customers access to better retirement accounts and would prevent the kind of preying upon them that fills the financial advisory field.
Senator Elizabeth Warren (D-MA), long known for her fight standing up to Wall Street in favor of Main Street, has released an enlightening report that details the ways in which the financial industry was taking advantage of customers and enjoying kickbacks like fancy vacations and lavish entertainment and prizes. According to Warren’s report, the Conflict of Interest Rule established by Obama and the Department of Labor (DOL)
prohibits financial firms from compensating their advisers in ways that encourage and reward them for making recommendations that are not in their clients’ best interest. This includes paying bonuses, providing prizes, having sales contests, using sales quotas, or creating other incentives that would cause advisers to put their own interests ahead of their clients’.
Unfortunately, President Donald Trump’s recent executive order/Presidential memorandum instructs the DOL to re-examine Obama’s new rule. Trump is asking DOL to determine whether the rule “has harmed or is likely to harm investors due to a reduction of Americans’ access” to retirement services, “has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees,” and “is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay” for retirement services.
In response to Trump’s executive order, Financial Services Committee Chairman Jeb Hensarling (R-TX) said, in part, “Republicans believe if you like your retirement planner, you should be able to keep your retirement planner. If you like your financial adviser, you should be able to keep your financial adviser.” This quote echoes the famous refrain from Obama and his White House on the Affordable Care Act (ACA): “If you like your doctor, you can keep your doctor. If you like your health care plan, you can keep your health care plan.”
However, unlike doctors, brokers are not currently obligated to act in your best interest. They are not required to keep you financially healthy. While, yes, some investment companies have been closing down certain commission-oriented funds and switching to general fee-based funds instead, the comparison to the ACA is not really apples to apples. The funds that are being shut down are disadvantageous to the customer or else they disproportionately benefit the adviser. Under Obama’s rule, such funds would not be allowed because they would not be in the customer’s best interest. So other funds, that are more in line with the customer’s financial benefit, are being created instead.
While the executive order has not overturned Obama’s fiduciary rule yet, it looks like that is the ultimate intent. It is important to note that this order was signed shortly after Trump met with Wall Street executives, the very people that would benefit from the fiduciary rule being rolled back.
Warren released the following statement on Trump’s executive order:
Donald Trump talked a big game about Wall Street during his campaign – but as President, we’re finding out whose side he’s really on. Today, after literally standing alongside big bank and hedge fund CEOs, he announced two new orders – one that will make it easier for investment advisors to cheat you out of your retirement savings, and another that will put two former Goldman Sachs executives in charge of gutting the rules that protect you from financial fraud and another economic meltdown. The Wall Street bankers and lobbyists whose greed and recklessness nearly destroyed this country may be toasting each other with champagne, but the American people have not forgotten the 2008 financial crisis – and they will not forget what happened today.