Last week, just before heading off to Florida for the weekend, President Trump took a couple of executive actions designed to begin the process of cutting regulation on banks and Wall Street firms.
The first of these orders, “On Core Principles for Regulating the United States Financial System” directs the Secretary of the Treasury to review “existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies” … and is widely understood to be a request to undermine the Dodd-Frank Act, the law suggested and signed by President Obama in 2010, which imposed a number of new regulations on banks and Wall Street firms.
“We expect to be cutting a lot out of Dodd-Frank,” Trump said during a meeting with business leaders Friday morning. “Because frankly, I have so many people, friends of mine, that had nice businesses, they just can’t borrow money . . . because the banks just won’t let them borrow because of the rules and regulations in Dodd- Frank.” (Washington Post)
It’s not at all clear which parts of the law the Trump administration wants to eliminate, or how they might do that without requesting or requiring new legislation from Congress. But it does seem clear that the big banks, and Trump’s “friends”, will profit from whatever de-regulation ends up taking place. And it will put the still-fragile recovery we have seen since 2009 at substantial risk — after all, when you tear down the system installed to prevent another Great Recession, you increase the future probability of just such an event.
It may sound like a good idea to reduce regulations on banks, in the hope that it will spur lending. In the short term, the shares of big banks have risen dramatically since the election, buoyed in part by this promise of looser regulation. But in the longer term, the regulations that will probably prove easiest to remove will serve to weaken those banks, and so will most likely lead to credit downgrades … and, yes, higher risk of failure for the “too big to fail” banks.
The second of Trump’s actions, formally a “Presidential Memorandum on Fiduciary Duty Rule”, more directly affects our business and client relationships. It directs the Department of Labor 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.” The “Fiduciary Rule” is the result of a great deal of regulatory wrangling between 2009 and today, so the details are complex — but the fundamental idea is simple. Any investment professionals who offer advice regarding your retirement accounts needs to ensure that the recommendations they make are as free of conflicts of interest as possible.
The Department’s conflict of interest final rule and related exemptions will protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard — putting their clients’ best interest before their own profits.
For a lot of investors, this is a little confusing: most of us presume that our financial advisors are acting in our best interest! But the reality is that most investment professionals — the brokers at the big Wall Street firms, say — are normally only held to a “suitability” requirement. The recommendations they make, and the investments they sell, only need to be suitable to their clients, given the client’s situation and circumstances.
But let’s say that a financial professional is considering two possible investments for the Rollover IRA account of his new client, Mr. Ecks: Investment A and Investment B. Both are “suitable” for Ecks, let’s assume, and at first glance the two are generally comparable. But let’s also assume that Investment A is ever so slightly less desirable for Ecks, all things considered … but Investment A would pay a 5% commission to the broker, and Investment B would pay nothing to the broker. An advisor who is held only to the suitability standard could choose either without hesitation; an advisor who is held to the fiduciary standard must pick Investment B, because (a) it’s marginally better for Mr. Ecks, and (b) because the choice avoids even the hint of a conflict of interest.
If the Fiduciary Rule comes into full force in April this year, anyone offering advice to Mr. Ecks about his Rollover IRA account would be held to the fiduciary standard, and would have to document that their recommendations do not violate their “client’s best interest” obligations. Naturally enough, there have been a lot of disagreements over the last few years about how much of an impact any such rule would have, especially once the “costs of compliance” are factored in to the calculations. And it’s not clear whether President Trump’s Executive Order can kill the Rule, or even do much to delay it: many experts anticipate that the Rule will continue to move toward full implementation despite Trump’s instructions.
Most companies involved in providing investment advice to clients have already spent significant time and money setting up systems to deal with the Rule, on the presumption that the Fiduciary Rule would be implemented sooner or later. Some firms have decided that all they need to do is amend their clients’ contracts, in order to make commission-based investment accounts comply with the letter of the Rule. Other firms have chosen to change their clients’ monthly statements, so that the fees being charged are more clearly documented. In the next few months, we think that a lot of investors will be asked to sign new contracts that help their advisors skirt the rules, and that a lot of others will find out that they’re paying far more in fees than their advisors had ever admitted.
These advisors, and the companies they work for, are trying hard to gut the Rule, so that they can go back to business as usual. But firms such as ours have made our fiduciary duty to all of our clients a cornerstone of our business all along. We’ve made this commitment in prominent parts of our website, and in our official disclosure documents:
We are fiduciary advisors and we accept all the duties that this implies. Associates of our firm have earned the Accredited Investment Fiduciary® (AIF®) designation, reflecting our commitment to fiduciary principles.
Our processes are designed to put the good of our clients first — and not just for their retirement accounts, but for all of their accounts, and in all the aspects of our relationship. We meet and exceed the requirements of the Fiduciary Rule, as a matter of course. It’s who we are, and how we work.
In its latest commentary on the new Rule, the Department of Labor recommends that every investor ask their advisors this key question: “Will you acknowledge in writing that you are a fiduciary when you make investment recommendations to me?” We already have.