Your money’s at stake in the ‘fidu­ciary rule’

The Washington Post Sunday - - BUSINESS - MICHELLE SINGLETARY

I was re­cently in­volved in an in­ter­est­ing ex­change on Face­book.

Some of my friends were de­bat­ing the mer­its of the La­bor Depart­ment’s “fidu­ciary rule” slated to take ef­fect April 10 — although the Trump ad­min­is­tra­tion has sig­naled that it may de­lay the im­ple­men­ta­tion. It be­came clear to me that many peo­ple don’t un­der­stand what is at stake.

The rule would re­quire fi­nan­cial pro­fes­sion­als to put their clients’ best in­ter­ests first when giv­ing in­vest­ment ad­vice on sav­ing for re­tire­ment.

Con­sumer ad­vo­cates fa­vor the rule. Many fi­nan­cial com­pa­nies and as­so­ci­a­tions hate it.

By law, an in­vest­ment ad­viser who has a “fidu­ciary duty” must act in the best in­ter­ests of clients. But in­vest­ment pro­fes­sion­als who are not fidu­cia­ries don’t have to ad­here to this standard. In­stead, the law says they have to only make sure their ad­vice is “suit­able” for the client.

The dis­tinc­tion is im­por­tant be­cause there’s con­cern that back-door in­cen­tives may re­sult in an ad­viser making in­vest­ment rec­om­men­da­tions that make him or her more money but that are not in the client’s best in­ter­est.

This month, Pres­i­dent Trump is­sued a mem­o­ran­dum or­der­ing the La­bor Depart­ment to “ex­am­ine the fidu­ciary

duty rule to de­ter­mine whether it may ad­versely af­fect the abil­ity of Amer­i­cans to gain ac­cess to re­tire­ment in­for­ma­tion and fi­nan­cial ad­vice.” He di­rected the depart­ment to “pre­pare an up­dated eco­nomic and le­gal anal­y­sis.”

You re­ally think this rule hasn’t al­ready gone through years of anal­y­sis?

It’s been at least six years in the making. The La­bor Depart­ment re­ceived more than 3,000 com­ment letters. A 2015 re­port from the White House Coun­cil of Eco­nomic Ad­vis­ers, us­ing in­de­pen­dent re­search, es­ti­mated that con­flicted ad­vice costs in­vestors $17 bil­lion a year.

For the Color of Money Book Club this month, I rec­om­mend you read for your­self what the fidu­ciary rule will do. At dol.gov, search for “Con­flict of In­ter­est Fi­nal Rule.” You’ll find a link for the ac­tual rule posted in the Fed­eral Reg­is­ter. For an ex­pla­na­tion that will prob­a­bly make more sense, you can read two doc­u­ments from the La­bor Depart­ment, which ar­gued for the rule un­der Pres­i­dent Obama:

“Depart­ment of La­bor fi­nal­izes rule to ad­dress con­flicts of in­ter­est in re­tire­ment ad­vice, sav­ing mid­dle-class fam­i­lies bil­lions of dol­lars ev­ery year.” Go to: dol.gov/Pro­tec­tYourSav­ings/ Fac­tSheet.htm.

Find “FAQs: Con­flicts of In­ter­est Rule­mak­ing” at dol.gov/ fea­tured/pro­tec­tyoursav­ings/ faqs. The page in­cludes 22 ques­tions and an­swers, in­clud­ing an ex­pla­na­tion of con­flict of in­ter­est and what the new rule cov­ers. Be sure to read: “How can I know if my ad­viser is act­ing in my best in­ter­est?”

Next go to in­vesto­pe­dia.com, which has a good his­tory and sum­mary of the ar­gu­ments for and against the rule. On the home­page, click the link for “DOL Fidu­ciary Rule Ex­plained as of Feb 3, 2017.”

Many fi­nan­cial in­dus­try groups and com­pa­nies that op­pose the rule ar­gue that small in­vestors will be hurt. They con­tend it could make it more ex­pen­sive for them to pro­vide ad­vice to in­vestors.

But a fed­eral judge re­cently smacked down a chal­lenge to the rule jointly brought by the U.S. Cham­ber of Com­merce, the In­dexed An­nu­ity Lead­er­ship Coun­cil and the Amer­i­can Coun­cil of Life In­sur­ers.

Here’s how U.S. Dis­trict Judge Barbara Lynn for the North­ern Dis­trict of Texas summed up part of the case: “Plain­tiffs com­plain that fi­nan­cial pro­fes­sion­als are im­prop­erly be­ing treated as fidu­cia­ries and should not be re­quired to com­ply with height­ened fidu­ciary stan­dards for one-time trans­ac­tions.”

Lynn re­jected that ar­gu­ment and ob­jec­tions to the fidu­ciary rule, writ­ing in her opin­ion that “The DOL rea­son­ably found that in­sti­tu­tions and ad­vis­ers that are paid on a com­mis­sion ba­sis may very well make in­vest­ment rec­om­men­da­tions that ben­e­fit them­selves, at the ex­pense of plan par­tic­i­pants and ben­e­fi­cia­ries. Ad­vis­ers who are paid in as­set-based fee ar­range­ments are not faced with such a con­flict of in­ter­est.”

The or­der con­tin­ues: “Be­cause small dif­fer­ences in in­vest­ment per­for­mance will ac­cu­mu­late over time, those dif­fer­ences can have a pro­found im­pact on an in­vestor’s re­tire­ment in­come; as the DOL noted, an ‘in­vestor who rolls her re­tire­ment sav­ings into an IRA could lose six to 12 and pos­si­bly as much as 23 per­cent of the value of her sav­ings over 30 years of re­tire­ment by ac­cept­ing ad­vice from a con­flicted fi­nan­cial ad­viser.’ ”

I don’t ex­pect you to wade through Lynn’s full 81-page rul­ing (it’s very legally dense). But if you want to, you can find it at txnd.us­courts.gov. So who’s right in this fight? Once you un­der­stand the rule, you can de­cide whether some­one you hire for fi­nan­cial ad­vice should be re­quired to act in your best in­ter­est.

I’ll be host­ing an on­line dis­cus­sion about the rule and any new de­vel­op­ments on Feb. 23 at live.wash­ing­ton­post.com. Write Singletary at sin­gle­tarym@ wash­post.com. To read more, go to wapo.st/michelle-singletary.

Michelle Singletary THE COLOR OF MONEY

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