How to Kill DOL’s Fiduciary Rule: Andy Friedman

Why is the fiduciary rule happening at all? Friedman said it was presidential support, which arose out of an “incendiary” speech given by Obama in February 2015 at AARP headquarters in Washington. The overriding message from that speech, Friedman said, was that “advice provided by financial advisors is not worth” what clients are paying for that advice.

Turning to the issue of the markets and economy and politics, Friedman said that if the decline in the markets we’ve seen since the beginning of the year continued, it will “hurt the Democrats,” particularly Hillary Clinton, the presumptive party nominee. That’s because Clinton has tied herself so closely to Obama and his economic policies. “You may argue that he had little influence” over the recovering economy, Friedman said, but you can’t dispute that economically the country is better off. One sign of the improving economy: “You don’t hear one word from the Republican contenders about jobs,” Friedman said.

Speaking of Republican contenders, Friedman suggested that if Donald Trump continues to do well in the primaries, “there’s a risk of more volatility in the markets.” The markets hate uncertainty, Friedman said, and “Trump is anything but certain” in what he will say or do.

Regardless of who wins the presidency or controls Congress in this election, the biggest issue will remain the country’s “growing deficit,” the Washington pundit argued. Moreover, that deficit will “accelerate as boomers age; all entitlements will keep rising,” citing as evidence the latest report from the Congressional Budget Office last week on the deficit. A continued increase in interest rates will quicken the pace of the deficit’s growth as well, he argued, since the U.S. will need to pay higher interest rates on its borrowings.

Friedman said advisors’ clients could expect higher taxes from the new Congress, though not in higher tax rates — “wealthier clients are paying more in taxes already,” he said. The higher taxes likely in 2017 and beyond will be more in the area of “loophole closers,” similar to what’s already happened with the phaseout of the file-and-suspend Social Security claiming strategy under the budget bill passed in December.

Among the popular loopholes that will be addressed, he predicted, will be the tax-free inheritability of stretch IRAs and 401(k)s, requiring that Roth IRAs be subjected to a required minimum distribution rule and treating all distributions from S corps and partnerships as ordinary income subject to income tax.

As a result, he suggested that advisors “give increased attention to ‘tax drags’ on investment vehicles,” such as harvesting tax losses more effectively. He also suggested that municipal bonds, master limited partnerships and real estate investment trusts should be thought of more favorably in such a higher-tax environment, and that advisors should use the principle of placing tax-inefficient investments inside tax-deferred structures.

– Related: Bills to Replace DOL Fiduciary Rule Pass House Panel