The Labor Department’s fiduciary standard rule is as good as dead, Ron A. Rhoades, fiduciary law expert, told ThinkAdvisor in an interview.
The assistant finance professor at Alfred State and a leading proponent of the rule, Rhoades has been grieving ever since Feb. 3, when President Donald Trump directed the department to analyze the rule to determine if it should be delayed or repealed. On that day, Rhoades blogged that the action betrayed not only Trump voters but all consumers and that it will permit “Wall Street to financially rape the American people.”
Mr. Trump’s memorandum negatively impacts individuals and will eventually harm the overall American economy, Rhoades insists. The only hope of putting a fiduciary rule in place is a change of administrations, he stresses.
Nevertheless, the longtime lobbyist to Congress on financial planner and investment advisor issues, and a leader of the Committee for the Fiduciary Standard, is continuing the fight for folks to be assured of obtaining investment advice that is in their best interest.
In the interview, Rhoades, a Certified Financial Planner and director of financial planning at Alfred, in Bowling Green, Kentucky, discusses the challenges faced by advocates of the DOL rule – which addresses FAs advising retirement accounts – in view of the new administration’s anti-regulatory stance.
Before co-founding an investment advisory firm, Rhoades was a business and estate planning attorney for 30 years. About six years ago, he began teaching and opened a small solo fee-only practice.
ThinkAdvisor recently talked by phone with the popular speaker, who appears at conferences held by firms and groups such as TD Ameritrade, the Certified Financial Planner Board of Standards and NAPFA (National Association of Personal Financial Advisors).
Fun fact: The professor worked his way through college performing as a variety of Walt Disney characters — from Goofy to Winnie the Pooh to The Big Bad Wolf — at Disney World in Florida and on road shows. He brings some of these colorful experiences into the classroom, where, he says, all his students are planning, upon graduation, to become fee-only advisors. Here are highlights of our conversation:
THINKADVISOR: You blogged that Feb. 3, 2017, was “Black Friday.” That’s when President Trump issued a memorandum to the Labor Department to analyze the fiduciary standard rule to see if it should be delayed or rescinded. Why was that a dark day?
RON RHOADES: Ever since President Trump was elected, I’ve had a real strong feeling that the rule would be killed, and I still have that opinion. Of course, he could somehow see the wisdom of the rule. But surrounded by Wall Street insiders who seek to protect the sell-side institutions, I don’t see how that will occur. What’s “the wisdom of the rule”?
It’s a win-win-win — good for individual Americans, good for advisors who were willing to be trusted advisors and good for the American economy. The only losers, in the short term, are the manufacturers of expensive investment products and the intermediaries who promote their sale.
What are the chances of the rule’s being watered down?
There’s a real danger of that, and [if so], you won’t recognize fiduciary for what it is. I hope the legal community rises up if they try to redefine a fiduciary. But it’s tough to be on the defensive after you’ve been on the offensive for years trying to get a strong rule through – and then there’s a change in administrations, and you’re playing a different game.
What do you think the future holds for the rule?
Four years from now, in all likelihood, we’ll have another shot at it. Given the fact that the current rule has been upheld by three courts, we have a foundation of getting it in place in the next administration pretty quickly. It’s not going to be a six-year process again, like it was this time.
Are consumers disappointed about what’s happening to the rule?
I doubt if they realize that President Trump just substantially impaired the retirement hopes and dreams of hundreds of millions of Americans. People don’t understand that what happens with the fiduciary rule is going to affect their future in retirement — whether they’ll live in a trailer or a nice house.
So, it appears that consumers are uneducated when it comes to fiduciary.
Most [who have a broker] don’t know they’re in an arms-linked relationship: They think they’re getting advice, when in fact their “financial advisor,” “wealth manager” or “financial planner” is selling a product. They expect they’re receiving advice in their best interest. Unfortunately, the majority of the time, that doesn’t happen.
What’s the matter with selling product?
When a firm is pressuring you to sell certain products that make the firm or you more money, over time those economic incentives are going to affect your judgement, and you’ll succumb to that temptation. The fiduciary rule is designed to eliminate conflicts of interest, to the extent possible, by levelizing compensation and removing those incentives.
How naïve are most clients about fees?
About a fourth to a third of [brokerage] clients believe that their broker doesn’t charge them anything. Nearly all the rest have no idea that, when they’re sold highly expensive products, the total fees and costs they’re paying often amount to 2% or more a year, and 4% or more for products such as variable annuities.
How will Mr. Trump’s fiduciary rule directive affect consumers?
His action has profound negative impact on both individual Americans and in the long term, the American economy. Tens of billions of excess dollars flow from [investors’] accounts to those of Wall Street and the insurance companies. The DOL rule would have changed that over time.
How, then, can consumers be assured that FAs will act in their best interest?
That will happen when there’s a new — Democratic — administration [that establishes a fiduciary rule]. Until then, even without legislative action or new rules, the marketplace will continue to evolve. The fiduciary movement has accelerated over the past decade or more, and advisors have come to realize that they want to be on the same side of the table as their clients. Many have left wirehouses and independent broker-dealer firms to launch their own registered investment advisory firms or join an existing one.
How exactly is the marketplace evolving?
The old sell-side business model is dying and being replaced by a fiduciary model in which the financial advisor steps into the client’s shoes. The commission-based, product-sales model is a dinosaur, the extinction of which should have happened a long time ago. It’s not what clients want; it’s not the life that advisors want.
To what extent are FAs in favor of the DOL rule?
The majority of fee-only advisors that I talk to are strongly supportive of it. There’s a minor subset that thinks otherwise.
Certainly on the broker-dealer side, where there’s selling on a commission basis, there’s more opposition to it. On the insurance agent side, there’s about 99.99% opposition to it.
What’s the RIA attitude?
About half or more see harm that is [inflicted] on [investors] every day, and they’re angry about it. But a subset doesn’t like the fact that [competitors] would be able to call themselves fiduciaries. Some of them don’t understand how tough the DOL rule is and think that the Best Interest Contract Exemption [BICE] is watering down the rule. It’s actually a very strong application of fiduciary. Others who use fiduciary as a marketing advantage would like to keep that marketing advantage.
What are proponents of the rule planning to do in light of this recent development?
If we can’t convince the Trump administration to change their course, which will be hard to do, we just continue the fight. We let consumers know that their advisors ought to be signing the fiduciary oath, a short, elegant statement [vowing to put the client’s interest first] created by the Committee for the Fiduciary Standard. They should insist that they sign it. If the advisor doesn’t, they need to get a second opinion from one who will.
Are you in favor of a fiduciary standard for advising on all accounts, not just retirement accounts; and what’s the likelihood of such a rule being established?
I am. But it won’t be under the Trump administration — not with the pressure that would be brought to bear by the Republican Congress. We have to wait for a new administration and possibly a change of control, at least in the Senate, before that can happen.
What do you think of Sen. Elizabeth Warren’s agenda of calling out Wall Street?
I applaud her greatly. She’s exceptional from the standpoint of identifying issues that really matter to consumers and in her ability to gather information about what’s going on out there and conveying it to people in a manner they understand. She’s been a terrific influence on the Democratic Party, which was getting very cozy with Wall Street. I hope that her influence continues for decades to come.
But isn’t there evidence that the Republican Party is cozy with Wall Street, too?
You know, money talks. Money influences people, and political contributions influence people and where senators and representatives are going to get a job after they leave office. There’s a cadre of Democrats called Corporate Democrats that arose over the last 20 years that seems cozy with Wall Street. We need to get money out of politics if we’re going to get back to the government that really represents the people as opposed to special interests.
What are the obstacles to raising consumer awareness about the DOL rule?
The problem is that we have a Republican Congress that’s very much pro-Wall Street. They’re putting pressure on the Trump administration to repeal or replace the rule. And Trump is surrounded by a Cabinet that, from the standpoint of understanding financial matters, is all from the sell side — the Goldman Sachses of the world and others that are opposed to the fiduciary standard because it would interfere with their profits. The only [recourse] is to raise public awareness. But the word “fiduciary” is a word that a lot of people don’t understand.