There are reasonable arguments for and against the proposed retirement advice rule that President Trump wants to halt. But make no mistake: If the so-called fiduciary rule is killed, consumers will pay the price.
In a nutshell, the fiduciary rule requires advisors to act in their clients’ best interests when offering advice about retirement funds, including individual retirement accounts and 401(k)s. Many people assume their advisors are already doing this, when in fact those advisors are typically held to a lower bar known as the “suitability standard.” That means the advisors can recommend inferior investments that pay higher commissions as long as those investments aren’t actually unsuitable for the client.
The proposed fiduciary rule has so far survived numerous legal challenges by financial firms and was set to take effect this year. Trump’s order, which directs the Department of Labor to figure out whether the rule should be revised or revoked, is a signal the rule is doomed. If nothing else, the new Labor Department head could simply refrain from enforcing it.
The good news is that some investment firms have recognized that a fiduciary standard is not just the right thing to do, but smart as well. These firms can tout their client-friendly strategies as a way to attract business.
The bad news is that plenty of firms will be delighted to return to business as usual. They’ll continue to offer advisors incentives to recommend investments that perform worse and cost more. The previous administration estimated such conflicted advice cost Americans $17 billion a year. A 1% difference in fees, for example, can cost an investor $28,000 over 20 years on an initial $100,000 investment, according to the Securities and Exchange Commission.
Clearly, unconflicted advice is better, and investors should be sure they’re getting it.
Those who use financial advisors should ask them to sign the fiduciary oath created by a group of advisors. If advisors can’t or won’t sign, investors should seek out those who will or consider the many automated investment options, also known as robo-advisors, that provide diversified portfolios at a fraction of the cost.