What’s the “fiduciary rule”?

President Trump has begun rolling back Obama’s efforts to regulate Wall Street, including what’s called the “fiduciary rule.” That rule requires investment advisors to act in their clients’ best interests, especially in tax-advantaged retirement savings accounts.

Aren’t investment advisors already supposed to act in their clients’ best interests? In theory yes, but legally they’re only required to provide advice “suitable” for a retirement investor. The fear with the suitability standard is that it leaves room for conflicts of interest, like recommending investments strategies that drive commission revenue for the advisor (or their firm) rather than more cost-effective strategies.

The Obama administration argued that these conflicts cost American families $17 billion a year in costs. The financial industry says this figure is inflated, predicts the fiduciary rule will cost the industry $20 billion in lost revenue, and has lobbied hard to have the rule relaxed or removed. Since some firms may respond to the rule by closing their commission-based accounts in favor of fee-based accounts, the finance lobby also argues the rule will hurt small investors who don’t trade very often.

What does this all mean for you? Trump’s administration has instructed the Labor Department not to enact the fiduciary rule in April as planned, so the rule itself may or not come to pass. Either way, it highlights the impact that fees and commissions can have on your investment returns in the long run. As John Bogle, founder of Vanguard and pioneer of index funds, wrote in an op-ed supporting the fiduciary rule, “Investment wealth is created by our public corporations and reflected in stock prices. Stock market returns are then allocated between the financial industry (Wall Street) and shareholders (Main Street).” It’s a zero-sum game, and there’s a strong incentive for financial advisors to push high-cost investment products that erode their clients’ returns.

Fortunately, consumers are becoming more and more aware of the impact of fees and commissions on their investments, and are moving their money to index funds and other low-fee options. In the long run, this is likely to be far more impactful to the industry than whether or not the fiduciary rule exists.

43 of 100