The Labor Department would like to delay a rule that would require financial advisors to act in the best interest of their customers and their retirement accounts.
The federal court filing, made on Wednesday, said the department wants to delay implementation of the rule to July 2019. The full implementation of the rule is currently set for January 2018.
In February, President Donald Trump ordered a review of the Obama-era regulation. Financial companies and lobbyists representing them have opposed the rule. On the same day of the order, White House advisor Gary Cohn, who is a former Goldman Sachs executive, told the Wall Street Journal he thought it was a “bad rule.” Congress has introduced bills trying to kill the rule on multiple occasions.
Right now, there are two standards investors must be aware of — the fiduciary standard and suitability standard. A financial advisor operating under what is called the “suitability standard” is only required to make sure a client’s investment is suitable for the client’s finances, age, and risk tolerance at that point in time, but they don’t have a great legal obligation to monitor the investment for the client.
But under the fiduciary standard, an advisor has to keep monitoring the investment as well as the customer’s overall financial picture. Under the fiduciary standard, advisors also must disclose all of their conflicts of interest, fees, and commissions. Essentially, this makes it more difficult for advisors to push investments that will make them money but may not be in the best interest of their clients.
Retirement plans have changed a lot since the 1970s, when more private workers were enrolled in defined-benefit plans funded by their employers that promised a certain monthly benefit once they retired. Now more people have defined-contribution plans, which don’t promise a specific benefit for people when they retire, requiring them to contribute money to an account they are responsible for. Only 10 percent of workers older than 22 have a traditional pension and only 6 percent of Millennials do. Most workers have to choose how to invest these contributions and manage their own retirement savings but most Americans aren’t knowledgeable on investment decisions.
A 2016 Prudential Investments survey of more than 1,500 Americans showed 42 percent of Americans surveyed didn’t know how their assets were allocated in their portfolios, and 40 percent said they didn’t know how to prepare for retirement. Investment terms are often difficult to understand and investors may be overwhelmed by choices.
The financial industry argument against the rule is essentially that a commission system is necessary to pay for financial advice for the average investor, despite the adverse incentives it creates. Gary Burtless, an economist and senior fellow at the Brookings Institution, has disputed this argument.
“This claim does not seem terribly compelling. There are alternative ways to compensate financial advisors that do not create an obvious conflict between the interests of advisors and retirement savers,” Burtless writes.
The financial industry tried to persuade the public that investors were up in arms over the rule. The Financial Services Institute claimed that consumers sent over 100,000 letters with opinions on the rule. But Money reviewed 100 of the letters FSI claimed were from investors, and found that 64 percent came from financial advisors and people involved in financial companies.
The Trump administration would have to jump through numerous hoops to reverse the progress made on the rule, however, just as Obama officials did when they first wanted to advance the rule. The final rules were issued last year, but first the department took thousands of public comments, held four days of hearings, and 100 stakeholder meetings. The administration would have to field all of these comments and go through this process again to justify whatever changes it would make. It took about six years for the Obama administration to advance the fiduciary rule.