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The Fiduciary Rule Lives On in Texas, Only to Die in Washington, DC

Two days ago, there was a shootout at the OK Corral. Except this one didn’t involve gunslingers; it involved big bank lobbyists and the U.S. District Court for the Northern District of Texas.

Chief U.S. District Judge Barbara Lynn issued a “stinging court defeat” to the U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute, and Securities Industry and Financial Markets Association by upholding the Department of Labor’s “Fiduciary Rule.” Today, administrators in Washington announced it would delay implementation of the rule by six-to-12 months and then seek to repeal it altogether.

Justice was done in Texas. As one of the only financial firms advocating for working families and retirees by supporting the Fiduciary Rule, Personal Capital applauds this courageous ruling. I was not there in Texas to witness the rule’s heroic survival, but I am here in Washington witnessing it’s quick and efficient execution. And with it’s presumed death, so goes the retirement prospects of families across the nation. The only thing that gives me hope is paraphrasing Mark Twain’s famous quip: “Rumors of the Fiduciary Rule’s death are greatly exaggerated.”

The Fiduciary Rule requires firms providing retirement accounts to do so in the best interest of the customers, not of the firms themselves. The Department of Labor, which has jurisdiction over the retirement accounts of American workers, developed this “no conflict of interest” rule over six years with input from consumers and financial firms. It is scheduled to go into effect this April.

[pullquote]”At worst, the only speech the rules even arguably regulate is misleading advice.”[/pullquote]

Chief U.S. District Judge Lynn upheld the rule, shooting down each of seven challenges. One of the challenges argued the rule limits free speech, to which she replied in her 81-page ruling: “At worst, the only speech the rules even arguably regulate is misleading advice.”

Nevertheless, because of changing objectives in Washington, the Labor Department quickly reversed course and attacked it’s own rule – first requesting a stay of the Texas ruling and then announcing it would delay the rule’s implementation. The Labor Department – once a mighty gunfighter for the nation’s 125 million workers – turned tail and ran in the face of Wall Street’s artillery.

This isn’t the first time I’ve spoken out before in support of the Fiduciary Rule and the benefits of Section 1033 of the Dodd-Frank Act. So have the customers of Personal Capital, over 1,000 of whom have expressed strong opinions on the necessity of a rule protecting their financial future.

Fiduciary Rule Could Save 30% of Retiree’s Nest Egg
Without the Fiduciary Rule, conflicts of interest will cost investors their hard-earned savings in commissions and high, often hidden, fees. Specifically, Wednesday’s ruling quotes the Federal Register Fiduciary Rule definition:

“Today’s marketplace [commissions give]…advisers a strong reason, conscious or unconscious, to favor investments that provide them greater compensation rather than those that may be most appropriate for the participants…an ERISA plan investor who rolls her retirement savings into an IRA could lose 6% to 12% and possibly as much as 23% of the value of her savings over 30 years of retirement by accepting advice from a conflicted financial adviser.”

Based on a study of Personal Capital users’ own data and the fees they are currently paying, unnecessary fees and conflicted advice leads to over 30% fewer assets for their retirement. For the average Personal Capital user, this means hundreds of thousands less in retirement savings and a substantial reduction in retirement readiness.

Fiduciary Rule Protects Workers and Retirees
The Fiduciary Rule is also necessary to protecting investors who must make complex decisions about their own investments where the onus of securing a well-funded retirement is largely placed on the individual. Wednesday’s ruling quotes the DOL in saying:

“[A]t the same time as individual investors have increasingly become responsible for managing their own investments, the complexity of investment products and range of conflicted compensation structures have likewise increased. As a result, it is appropriate to revisit and revise the exemption to better reflect the realities of the current marketplace.”

Broker Incentives Must Be Changed

The bottom line is that without an appropriate fiduciary responsibility, most financial institutions have no reason to stop exploiting their customers inability to cope with the increasing complexity of investment products. The DOL has specifically reviewed studies conducted around mutual funds to assess the conflicts to consumers without a Fiduciary Rule:

“Broker-sold mutual funds provide an incentive to brokers to sell their products, but the record reflects that conflicted brokers “reinforce erroneous beliefs about the market” and “guide people towards high-fee funds.”

Personal Capital has always been a fiduciary of its customers’ money. I urge every financial institution with responsibility for a consumer’s life savings to stick up for the customer’s best interest, not for their own bottom line.

On with the good fight for the Fiduciary Rule!

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1 Comment

  1. Glenn

    Good job! Hopefully the new administration wants to improve the rule, as things have indeed changed since it inception. However, they will need to be watched closely…