May 2018

Here is an interesting article on the Conflict of Interest Rule

What’s at stake with the conflict of interest rule

By Heidi Shierholz and Ben Zipperer

When financial advisers are paid through fees and commissions that directly depend on which investment products their clients choose, the advice they provide is “conflicted”—what is best for the adviser may not be best for the client. This creates incentives for advisers to steer their clients into investments that provide larger payments to the adviser but are not necessarily the best choice for the investor. Every year, retirement savers lose $17 billion acting on advice from financial advisers who have conflicts of interest. Annual losses from conflicted investment advice range from $24.2 million in Wyoming to $205.3 million in Iowa to just over a billion in Texas and to nearly $1.9 billion in California.

This fleecing of retirement savers should be illegal. Financial advisers, like lawyers and doctors, should be required to act in the best interests of their clients. That’s what the “conflict of interest” rule—also known as the “fiduciary” rule—does. Set to go into partial effect June 9, the conflict of interest rule would require financial advisers to act in the best interests of clients saving for retirement.

But this rule is under threat from the Trump administration, which has demonstrated that weakening or rescinding the rule is a core priority. In the second week of his presidency, Donald Trump directed the Department of Labor to prepare an analysis concerning thelikely impact of the rule—despite the fact that the department had already completed a roughly six-year, exhaustive vetting process. This vetting process produced a nearly 400-page economic analysis on the likely impact of the final rule. The analysis was published one year before the rule would go into effect, and it incorporated feedback from four days of hearings, more than 100 stakeholder meetings, thousands of public comments, and a detailed review of the academic literature. The analysis found that “adviser conflicts are inflicting large, avoidable losses on retirement investors, that appropriate, strong reforms are necessary, and that compliance with this final rule and exemptions can be expected to deliver large net gains to retirement investors.”

To have time to conduct the additional examination, the Department of Labor delayed the implementation of the rule by 60 days, from April 10 to June 9. This delay hurt retirement savers, and not just during the period of the delay. In the proposal to delay the conflict of interest rule, the department noted that the losses that retirement savers would incur from being steered toward higher-cost investment products during the delay “would not be recovered, and would continue to compound, as the accumulated losses would have reduced the asset base that is available later for reinvestment or spending.” The 60-day delay will cost retirement savers $3.7 billion over the next 30 years—and this estimate is an undercount because it considers only individual retirement accounts, not other investment vehicles subject to potential conflicted advice, such as 401(k)s.

Alexander Acosta, who became Secretary of Labor on April 28, originally said that he was hoping to further “freeze the rule,” but has since said that he couldn’t find a legal way to do so, stating that while the department “should seek public comment on how to revise this rule,” department officials “have found no principled legal basis to change the June 9 date while we seek public input.” The fact that there will be no added delay in the near term is very good news. Further delay of the rule would have been a huge win for the financial industry and a huge loss for retirement savers all across the country, with every additional week of delay costing retirement savers $431 million over the next 30 years.

However, while the rule’s fiduciary standard will take effect on June 9, key compliance provisions built into the rule’s exemptions have been further delayed to January 1, 2018. Moreover, the department has stated that it will not enforce the rule between June 9 and January 1.8 This means the loopholes that allow financial advisers to take advantage of savers are not fully closed, and retirement savers will continue to be harmed.

Further, it is far from certain that the rule will in fact become fully applicable on January 1. The department has made it clear that—as requested by the financial industry—it is considering proposing additional changes to the rule and delaying it beyond January 1.9 Thus, we can expect further attempts to weaken and delay the rule in coming months. These actions would further harm retirement savers, who need a fully applicable and vigorously enforced rule to protect their savings from the large losses caused by conflicted advice. As the administration takes its next steps, the cost estimates provided in the map and the table show what is at stake for retirement savers.