Shouldn’t our financial advisers be legally required to put our interests before their own? It’s a question raised by two very different people this week: Johnny Depp and Donald Trump. Unsurprisingly they have arrived at very different answers.
President Trump’s mission to deregulate the financial services industry got underway Friday with an executive order pledging to undo reforms designed to discourage excessive risk-taking in the banking and financial services.
White House press secretary Sean Spicer said the president had also ordered the Department of Labor (DOL) to review the so-called “fiduciary rule”, saying the department had “exceeded its authority”.
The rule, which is due to come into effect on 10 April, is an Obama administration measure intended to protect Americans’ retirement money from conflicted advice from financial advisers.
“The rule’s intent may be to have provided retirees and others with better financial advice, but in reality its effect has been to limit the financial services that are available to them,” White House press secretary Sean Spicer said.
“This is exactly the kind of government regulatory overreach the president was put in office to stop.”
But opponents of the Trump plan warned the roll-back of the still-unimplemented reforms would put investors at risk.
“There will be a shift backwards in terms of responsibility,” says Linda Rittenhouse of the CFA Institute. “It restores a lower standard. We will go back to the suitability rule that does not require advisors to put the client’s interests first.”
The fiduciary rule, which requires financial advisers to act in their client’s best interest with respect to retirement accounts such as IRAs and 401(k)s, has been publicly opposed Anthony Scaramucci, nominated to become Trump’s small business adviser.
Legals experts say the administration may be waiting for a ruling in the major lawsuit against the rule in a Texas district court.
In the Trump administration’s view the DOL’s fiduciary rule will cut independent broker-dealers and financial advisers out of the business of serving older investors by cutting out their ability to charge commission revenue and by raising the cost of compliance.
Scaramucci, who stepped down as co-managing partner of the $12bn SkyBridge Capital fund management company to be the Trump administration’s small-business adviser, has described the measure as an example of government overreach.
He accused the DOL “of judging what should happen in a free market and attempting to put financial advisers out of work”.
The new rules were introduced after a 2015 executive brand report found that conflicted advice leads to lower investment returns. Savers receiving conflicted advice earned roughly one percentage point lower each year, or an estimated annual cost of $17bn.
The likely delay in implementation comes against a backdrop of financial de-regulation the Trump administration has promised to implement.
Changes to the DOL’s fiduciary rule are seen as harbinger for further de-regulations, including Dodd-Frank.
Trump has said he believes Dodd-Frank has made it “impossible for bankers to function”. He told Reuters last May: “It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop.”
Scaramucci echoed that position during a panel at the World Economic Forum in Davos last month. “At the end of the day, Wall Street is a circulatory system of capital,” “If you’re constraining it through this excess regulation, you’re just going to get less growth.”
The question of fiduciary duty received new attention last week when Depp’s former business manager’s counter-sued him, alleging that his extravagant spending led to his recent financial problems.
The Management Group refuted claims they had mismanaged Depp’s affairs, and claimed Depp had created his own financial problems by purchasing 14 homes, a 150ft yacht and other indulgences, including spending more than $3m to blast the ashes of author Hunter S Thompson into the atmosphere from a cannon.
Depp had earlier accused the company of failing to file or pay his taxes on time, resulting in more than $5.6m in penalties and interest, allowing his properties to fall into foreclosure, and paying itself $28m in contigency fees outside of any formal agreement.
The disagreement has drawn attention to the issue of financial advisors that are not under a fiduciary oath or listed with the Financial Industry Regulatory Authority. Typically, the rules do not apply to taxable brokerage accounts and other kinds of investment advice, making it hard for Depp to make the claim that he was poorly advised.
While Depp’s travails serve to spotlight the larger issues of financial responsibility, the DOL fiduciary rules, had they been in effect during Depp’s spending spree, would not have affected that situation.
Currently, the financial services industry can do little but wait. It has spent months putting in place policies, procedures and technology in anticipation of the new DOL rules. Last week, Morgan Stanley told advisers it’s still enacting many pricing and product changes, including lowering stock commissions and reducing potential conflicts of interest.
“It’s a confusing picture. We’re in such a state of flux. We don’t know what were going to see, and we don’t have a preview because this administration is given to taking unexpected actions,” says Rittenhouse.
“So we’re just waiting to see what happens with the fiduciary rule and to see the legislation that’s going to be introduced to replace Dodd-Frank. Will we go back to a state that was so lacking in regulation that we left gaps for mis-selling and abuse? It’s hard to know.”
