Over the past decade, the way that millions of Americans invest for retirement has changed. Money has fled from many high-priced investment products. Companies that built their businesses on armies of commission-based salespeople are scrambling for cheaper ways to deliver advice. A 500-word memo signed on Feb. 3 by President Trump may slow this trend, but it’s unlikely to reverse it.
Trump ordered the U.S. Department of Labor to reconsider the fiduciary rule, a regulation set to go into effect in April. It requires financial advisers to put their clients’ interests first when handling retirement accounts. The U.S. retirement market is about $25 trillion in assets, the Investment Company Institute says, so the rule goes right to the heart of the advice business. Many on Wall Street hate it.
Former Goldman Sachs President Gary Cohn, now director of Trump’s National Economic Council, told the Wall Street Journal that the fiduciary requirement limits investor choice, memorably comparing it to a menu with “only healthy food.” Trump didn’t explicitly say he’d try to scrap the rule, but Press Secretary Sean Spicer said in a news conference that “the rule is a solution in search of a problem.”
The problem the Obama administration had pushed the Labor Department to solve was conflicted investment advice. It argued many brokers and advisers act more like salespeople and have financial incentives to recommend expensive, inferior products to clients who don’t know the difference. But grant Spicer this: Even without the rule, many clients do know. “Prices are coming crashing down on money management,” says Sheryl Garrett, founder of the Garrett Planning Network.
Investors yanked $340 billion from actively managed funds last year, according to Morningstar, and poured $505 billion into index and exchange-traded funds, which typically cost far less and come without added sales fees. “Clients are savvier about hidden expense ratios and commissions than they were just a few years ago,” the research company Cerulli Associates warned the industry in a recent report. Six years ago a Cerulli survey found 65 percent of investors either didn’t know how much they were paying their financial adviser or incorrectly believed the advice was free. That fell to 44 percent by mid-2016.
It wasn’t just the magic of markets that did all this. A wave of lawsuits forced large employers to seek lower-cost options for retirement plans, encouraging investment companies to improve their products. “You can no longer have large market share in the 401(k) space if you have low-quality products,” says Jonathan Reuter, a Boston College finance professor.
A surprisingly broad public debate over the fiduciary rule, which was finalized in 2016, brought attention to how some advisers sell. John Oliver devoted one of his HBO episodes to the topic. People started coming to Garrett’s network of planners asking for a fiduciary—someone who’s already accepted a legal responsibility to put the client first. Garrett once believed it was a term the public wouldn’t use. “Nobody knows how to spell it or what it means,” she recalls thinking.
Some investment companies and insurers—which sell retirement products such as annuities—are ready. JPMorgan Chase and Bank of America Merrill Lynch have said they’ll stop charging commissions on individual retirement accounts. Moving from commissions to fees based on total assets lessens potential conflicts in choosing investments. It can also provide steady revenue and longer client relationships, says Michael Finke, dean of the American College of Financial Services, which trains advisers. “Many of these firms preferred the fee model and were hoping to eventually move advisers in that direction anyway,” he says.
Still, the rule has enemies for a reason. Asset managers may find it harder to market higher-fee products. It disrupts the practices of brokers and insurance agents in congressional districts across the country, who argue they can help less affluent savers that many fee-based advisers don’t work with. The rule also makes it easier for investors to sue financial companies.
Dennis Glass, chief executive officer of life insurance company Lincoln National, said in a Feb. 2 earnings call that he supported a delay to “improve” the rule and “remove some of the confusion in the marketplace that is contributing to the decline in annuity sales.” Some are waiting until the last moment to adjust. Raymond James Financial, with 7,100 advisers, has said it won’t announce changes to its sales practices until it knows if the rule is being implemented.
The trend toward low costs and transparency isn’t reaching everyone. The Investor Rights Clinic at the University of Miami School of Law helps a steady stream of investors, many elderly or disabled, who had their life savings put in complex, risky, or expensive products. In January it began representing a woman in her mid-70s whose broker locked up more than half of her $250,000 nest egg in nontraded real estate investment trusts and other illiquid investments. Teresa Verges, director of the clinic, says none of her clients knew that advisers aren’t always required to put the customer’s interests first: “When we explain that to them, they’re just shocked.”
The U.S. has always had two markets for investment products, one for clients who know the questions to ask and another for novices. Without the fiduciary rule, the difference between them may become even more stark.
—With Katherine Chiglinsky
The bottom line: Many investors will seek out unconflicted advice even without a fiduciary rule—but perhaps not those who need it most.