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Forget the Fiduciary Rule

But there still will be ways investors can require their advisers to put their interests first.

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So much for the fiduciary rule—a signature achievement of the Obama administration that is designed to eliminate conflicts of interest in the brokerage industry and help investors achieve higher returns. The incoming Trump administration is almost certain to scuttle the rule as part of its war on regulation. But even if the rule is killed, its mere injection into the public’s consciousness will still likely turn out to be a plus for investors.

President Obama’s Department of Labor issued the rule. It would require all financial firms to act as fiduciaries when providing products and services for clients’ retirement accounts. Fiduciaries must treat each client’s account with the same care and judgment as they would treat their own investments.

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The rule would prohibit brokers from providing advice that lines their pockets instead of looking out for clients’ interests. Under the rule, for example, it would be difficult for a broker to justify selling a client a high-fee mutual fund when an identical or similar fund is available at a much lower price. Particularly alarming to financial services firms is that the rule would permit class action lawsuits against firms that violate its provisions.

About the only question remaining is whether Republicans in Congress will kill the rule through legislation or whether the Department of Labor under Trump defangs the rule by issuing new regulations. The regulatory approach would probably be easier because it wouldn’t face a potential filibuster by the Senate’s Democratic minority.

Although the rule covers only IRAs, 401(k)s and other retirement accounts, these accounts are so ubiquitous that many financial services firms have been revamping their business models so that all their operations—those involving taxable accounts as well as retirement accounts—comply with the new regulations, which are scheduled to begin taking effect on April 10.

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The new rule would end a long-standing division in the financial services industry. Registered investment advisers, who are supervised by the Securities and Exchange Commission and state regulators, have long been required to adhere to a fiduciary standard.

But Finra, an industry-funded self-regulatory organization that used to be known as the Financial Industry Regulatory Authority, supervises traditional brokers. Brokers need only provide recommendations that are “suitable” for their clients. There’s no prohibition, most importantly, on brokers recommending house-brand products or high-priced products, such as mutual funds, with stiff sales charges and high ongoing fees, when identical, lower-cost products are readily available.

Consider: The American Funds—which in my view are the nation’s best actively managed funds—offers its funds in a bewildering array of share classes. The funds are all identical, except in the amount they charge investors—and compensate brokers. (The American funds recently began offering their F1 shares directly to individual investors through the Fidelity and Schwab online brokerages, but even these shares levy a 0.25% annual fee, which is used to compensate the brokerages.)

Take Growth Fund of America, the nation’s largest actively managed fund, with assets totaling $144.3 billion. A broker might sell a client the Class A shares (symbol AGTHX), which carry a sales commission of 5.75% and charge annual expenses of 0.66%. The 5.75% sales charge and 0.24 percentage point of those annual expenses go to the broker and his or her firm. Alternatively, the broker could sell the Class C shares (GFACX), which carry no front-end load but charge annual expenses of 1.46%. Under that arrangement, the broker, claiming the lion’s share of the annual fees, pockets 1% of the amount invested per year.

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What about a registered investment adviser? As a fiduciary, the RIA would have a difficult time justifying investing client assets in anything other than Growth Fund of America’s F2 shares (GFFFX), which are available only through advisers and which charge just 0.44% annually. None of those fees would go to the adviser.

Let’s be clear: No one in the investment business works for nothing. RIAs typically charge their clients a percentage of assets under management, generally 1% annually. But that fee must be disclosed and is often open to negotiation. My strong hunch: Just as the costs of investing in stocks and mutual funds have been falling, so too will the fees advisers charge.

As far as I can divine, the alphabet soup of mutual fund share classes has no other purpose than to keep uninformed investors in the dark about how much they pay to whom for advice. Why else would American’s cheapest funds be the F2 shares, while many other firms charge their lowest fees on their ADV, or adviser, shares (and some charge their highest fees on adviser-class shares!)? Still other firms charge the least for their institutional-class shares.

I mention these share class distinctions for a reason. If you’re an investor who employs a broker and invests in funds, you need to know how to distinguish the most expensive shares from the least expensive. And you should always know the expense ratio of a fund—and whether share classes with lower annual fees are available.

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Before Election Day, brokers were overhauling their businesses to comply with the fiduciary rule. Several brokerages announced that their brokers would no longer be allowed to accept commissions from mutual funds. Instead, because they were going to become fiduciaries, they would charge clients a percentage of assets annually—and fully disclose those arrangements.

But with the surprising triumph for the Republicans on November 8, that’s all behind us. That’s too bad. The fiduciary rule would have been great for consumers. For brokerages, not so much.

But here’s the silver lining: The fiduciary rule attracted tons of publicity during the past year. A lot of people who had no idea of the difference between a broker and an investment adviser now understand the distinction.

Consequently, I believe, a lot of those people who plan to hire help with their investments will choose advisers rather than brokers. Investors don’t need a rule from Washington, they can require fiduciary responsibility as part of working with an adviser. What’s more, many brokerages, having already switched to the fiduciary standard, won’t change back. My guess is that these brokers will ultimately benefit, too.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

SEE ALSO: How to Find a Financial Adviser You Can Trust