A controversial rule which will expand oversight of investment advisors in the United States is set to come into effect next month.
The so-called Fiduciary Rule is set to move forward in June, the Secretary of Labor, Alexander Acosta, announced in an op-ed in the Wall Street Journal.
“We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input,” Acosta said.
The fiduciary rule, which requires investment advisors to act “in the best interest of their client”, will now be expanded to include anyone managing retirement accounts: 401K, Individual Retirement Accounts, 403B’s, etc.
While no one argues with the idea that investment advisors should provide advice which is in the best interest of their clients, critics of the rule believe that implementing it will lead to burdensome regulations and to a reduction in the number of investment advisors.
“Already, we are seeing the types of services those with fewer savings depend on begin to diminish,” said Tim Walberg, Republican from the State of Michigan and Chairman of the House Education, Health, and Workforce Committee, where he was speaking about the rule earlier this month. “As this trend continues, many individuals will no longer be able to afford retirement advice. They’ll be left with robo-advisors or forced to fend for themselves.”
Brad Campbell, an attorney testifying at the same hearing, said it would add a layer of unnecessary regulation.
“This incredibly broad and far-reaching regulation makes the Labor Department the primary regulator of conduct and compensation of financial professionals to roughly $15 trillion in IRA (Individual Retirement Accounts) and retirement assets, effectively trumping the traditional role of more experienced and effective regulators like the SEC [Securities and Exchange Commission].”
Supporters of the rule say that requiring investment advisors to act in their client’s best interest is simply common sense.
Massachusetts Democratic Senate Elizabeth Warren, one of Wall Street’s most vocal critics, has been vigorous in her support of the rule; in February, she sent a letter to the Department of Labor.
The overwhelming voice of financial firms is clear: they support the goals of this rule; they have invested in this rule; they have planned for this rule – said Warren in the letter.
401k’s are retirement accounts set up by companies for their employees, 403Bs are retirement accounts set up by government agencies for their employees, while IRAs are retirement accounts set up by individuals for themselves.
While trading in 401Ks and 403Bs is nearly non-existent because of strict rules on the type of investment – often mutual funds – which are allowed, IRA’s can often be a place where trading is advantageous.
In traditional IRAs, income taxes are not paid until the money is withdrawn, while with the Roth IRA, first created in 1997, the income tax burden is eliminated altogether.
President Trump has put the rule in his crosshairs.
In a February executive order, the President noted the deleterious nature of the rule: “The Department of Labor’s (Department) final rule entitled, Definition of the term ‘Fiduciary’; Conflict of Interest Rule-Retirement Investment Advice, 81 Fed. Reg. 20946 (April 8, 2016) (Fiduciary Duty Rule or Rule), may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my Administration.”
In that order, he directed the implementation of the order to be postponed from April until June, but since then he has said nothing more on the subject.
The rule is currently scheduled to be implemented on June 9.