In the wake of the recent presidential election, speculation abounds that President-elect Trump will kill the Department of Labor’s so-called fiduciary rule, set to take effect in April 2017. Wall Street hates the new rule, as it imposes significant obligations upon them when dealing with IRAs and other retirement accounts.
Prior to the new rule, broker-dealers liked to argue, in securities arbitrations and other lawsuits, that they had no obligation to clients other than the duty to make “suitable” investment recommendations to IRA investors. Brokers frequently argued they owed no “fiduciary” duty to their clients and had no obligation to act in the client’s best interest. This meant they could recommend whatever product they liked, usually the one that paid them highest commission, so long as it was otherwise suitable.
In 2015, President Obama’s Department of Labor issued a new rule, now set to take effect in April 2017, which clarifies that brokers who render investment advice to investors in retirement accounts such as IRAs are full-fledged “fiduciaries” with the obligation to act in the best interests of the investor.
Most investors are shocked to learn that Wall Street brokerage firms haven’t always had that obligation. Their television commercials and advertisements suggest they are always looking out for your best interest.
Not so. Wall Street has fought the new rule tooth and nail.
From Wall Street’s perspective, the problem with the new rule is that it imposes an obligation to act in the best interests of the client rather than in the best interest of the brokerage firm. This turns the entire business model upside down, which is based upon selling the highest commissioned products possible to investors. How will they make money if they have to treat people fairly and disclose how they are being paid?
Wall Street firms are celebrating Trump’s recent victory and salivating over the prospect that he will kill the new rule. This could happen in one of two ways:
First, the Republican-controlled Congress could simply pass legislation prohibiting the new rule. Such legislation would have been a non-starter under Obama, who would have vetoed it.
Second, Trump could kill the rule by simply delaying its implementation by way of the Department of Labor, which will be under his control once he takes office.
Either way, this would be bad news for investors.