This past weekend, while waiting in a bank, I happened to overhear a broker from one of the country’s largest firms try to explain to his client why the U.S. Department of Labor’s new fiduciary rule was so terrible. It was an unpersuasive exercise in self-interest and the client was having none of it. “Why can’t you put my best interests first?,” he asked.
The fiduciary rule, which requires financial advisers to place the interests of clients with retirement-saving accounts ahead of their own, will be implemented sometime next year, assuming there are no additional delays. That also assumes that Donald Trump — now polling on average about 7 percent behind Hillary Clinton — doesn’t win the presidential election.
But if he does win, one of the voices that might be the loudest in opposition to the fiduciary rule would be that of Anthony Scaramucci, an economic adviser to Trump.
Scaramucci is a managing partner at Skybridge Capital, which according to its website “specializes in funds of hedge funds.” He believes the rule, according to an article, “is an example of government overreach.” I disagree, and that is the subject of today’s discussion.
Before we dive into this, I want to say that I believe the best policy is always to put clients’ interests first. No conflicts, much easier compliance, portfolios do better, everyone wins.
Why did the Labor Department, which sets the rules governing retirement accounts, shift to the so-called fiduciary standard? One reason is that the U.S. is poised for a financial retirement crisis. The math is inescapable: We have failed individually and collectively to save enough money for our golden years. This will be a huge issue during the next few decades.
The problem with the present system is that advisers don’t have to put clients’ interests first. They are perfectly free to recommend investments that pay them the highest commissions provided they are considered suitable for the investor. By some estimates, this deprives retirement savers of as much as $17 billion a year. And given the scale of the gap between how much America and Americans have in retirement savings versus how much retirees will need to survive, every little bit helps.
Of course, the $17 billion is money that isn’t going to the financial industry, which goes a long way toward explaining the fervor of the opposition.
But with Trump trailing by a wide margin in the polls, you might wonder why bring this up now? For the answer to that question, let’s turn to what Scaramucci was quoted as saying at the Securities Enforcement Forum last week in Washington — that the rule “could be the dumbest decision to come out of the U.S. government in the last 50 to 60 years. … It’s about like the Dred Scott decision.”