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Why the Fiduciary Rule for Retirement Savers Is Here to Stay

No matter what Trump does, big financial firms have already made the transition.

In keeping with his deregulatory agenda, President Trump issued an executive order Feb. 3 delaying implementation of the fiduciary rule for brokers that offer financial advice to investors with retirement accounts. The rule was slated to go into practice April 10, but Trump ordered the Department of Labor to conduct further analysis. No matter what happens next, the financial services industry has made changes that will affect investors seeking advice about their IRAs and other retirement accounts.

Years in the making, the fiduciary rule was developed by the Department of Labor to address concerns that some securities brokers encouraged investors to roll their 401(k) plans into individual retirement accounts composed of high-cost or inappropriate investments. The fiduciary standard requires financial professionals to put their clients' interests above their own. Securities brokers adhere to a less stringent suitability rule. Investments they recommend must be suitable, given a client’s age and risk tolerance, but don’t have to be the lowest-cost alternative. Trump’s announcement was applauded by industry groups that opposed the rule. Critics, which include some securities industry groups, said the cost of compliance would discourage advisers from working with middle-income investors and those with small accounts.

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Nonetheless, brand-name financial services firms have already spent a lot of money making the transition to the fiduciary standard, and they’re unlikely to turn back now, says Sheryl Garrett, founder of Garrett Planning Network.

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For example, Merrill Lynch said late last year it will stop offering commission-based IRA accounts in order to comply with the fiduciary rule. Capital One Investing, the retail brokerage arm of Capital One Financial, also announced plans to scrap commissions on IRAs in favor of fee-based accounts.

Mutual fund companies have made changes, too, at least those that sell shares primarily through brokers, with a sales fee. Capital Group, which manages the American Funds, has received approval to offer fund shares that will let brokers set their own commissions. Competitive pressure should lead to lower commissions for other broker-sold funds, says Micah Hauptman of the Consumer Federation of America. And dozens of fund companies are planning to offer T shares, a new share class with an upfront cost of 2.5% (lower for large purchases), about half the cost of some traditional A shares. Unlike A shares, which apply different sales fees to different types of funds, T shares will impose the same sales charge for all fund categories—for example, stock funds will carry the same sales charge as bond funds. Brokers who sell T shares will no longer be rewarded for recommending one type of fund over another.

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The DOL rule is limited to retirement accounts. Taxable accounts fall under the purview of the Securities and Exchange Commission, which has debated a fiduciary rule for years. Given the Trump administration’s antipathy toward regulation, a broader standard is unlikely to emerge any time soon.

And Trump may have bigger fish to fry. He also called for a broad review of the Dodd-Frank law, which was enacted in the wake of the 2008 financial crisis. The law raised capital requirements for banks, restricted some trading activities, and created the Consumer Financial Protection Bureau, among other things. “Trump’s order is mostly symbolic as it merely tells Congress to review Dodd-Frank. Congress is the only body that can rewrite the legislation, so it could be months before we see any meaningful changes,” says Jamie Hopkins, co-director of the retirement income program at the American College of Financial Services. The law was intended to protect the economy from another financial crisis, but, according to critics, has instead impeded its growth.

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