Would the Fiduciary Rule Sink Advisers? California Suggests Not

Fiduciary Rule: How It Impacts Financial Services

The finance industry scored a victory on Friday when President Donald Trump suspended an Obama administration rule that would have required investment advisers to put the interest of retirement savers ahead of their own. The winning argument: The so-called fiduciary rule would force many advisers out of business, leading to a shortage.

California’s experience suggests otherwise.

The advisory business is as vibrant in California as it is in the rest of the country, even though advisers there have operated under sweeping fiduciary rules for several decades.

The number of personal financial advisers as a percentage of California’s population was roughly on par with the national average in 2015, according to data from the Bureau of Labor Statistics. There were 22,620 advisers in all, equating to one adviser for every 1,680 residents. That compared with an average of 1,609 nationwide. (New York, home to Wall Street, was No. 1 with one adviser for every 741 residents.)

Adviser pay in California averaged $130,780 that same year, slightly higher than the national average and not drastically lower than in New York, which tops the list at $148,450.

The Labor Department rule, approved by President Barack Obama last year, was scheduled to take effect in April. Trump’s directive gives the new administration time to review the change, effectively scrapping it for now. California’s fiduciary requirements, which resulted from a series of court decisions since the 1980s, cover virtually all types of assets.

Last summer, business groups led by the U.S. Chamber of Commerce filed a legal challenge claiming that the additional liabilities would force advisers to “limit the options and guidance they provide to retirement savers” and in many cases quit the business.

The rule “will leave Americans with fewer retirement choices, higher costs and reduced access to professional financial advice,” the chamber warned.

Even if the Obama rule is never enacted, its effects are likely to linger. Many firms that had already changed their product mix and lowered their commissions -- including Morgan Stanley and the American International Group Inc. -- say they will move ahead as though the rule will take effect.

It’s an acknowledgment that retirement savers are wising up about costs -- for example, by shifting to lower-cost investment vehicles like index funds -- and that the market is often mightier than the government in effecting change.

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