If your doctor prescribed only brand-name medications because he received a kickback from the pharmaceutical company, he’d probably end up in jail. But when financial advisors put your money in investments that pay juicy commissions? The picture hasn’t been quite so clear cut—and the biggest effort to change the rules is facing an uphill battle.
For years, many brokers have been allowed to push expensive or risky investments, even if there were cheaper alternatives, under what was known as the “suitability standard“: Investment recommendations needed only be “roughly suitable” for the client. In practice, that means if your advisor is weighing two similar investments, and one pays out a greater commission, he or she can put you in that one—even if the alternative would trim your fees and increase your overall returns.
The White House’s Council of Economic Advisers found this conflicted advice costs Americans around $17 billion a year. Put another way: If you’re a 45-year-old with $100,000 in retirement savings, you could lose $37,000 through these conflicts alone by the time you retire at 65, the Council found.
By last year, the U.S. government looked poised to start changing that. After an eight-year effort, the Department of Labor—which oversees retirement savings—developed a rule that would require any financial advisor managing a retirement account to put you in the best investments available. It’s arguably the biggest change in retirement savings law since the benchmark Employee Retirement Income Security Act of 1974.
That “fiduciary rule”—so named because it required retirement advisors to act as fiduciaries, in their clients’ best interests—was set to roll out in April. But under President Donald Trump’s administration, the fate of the new rule is now in serious doubt. On Friday, President Trump issued an executive order that directs the Labor Department to reassess the entire initiative. That is probably welcome news to Wall Street, which has waged a never-ending war around the fiduciary standard on legislative, judicial and public opinion fronts.
Here’s a rundown of the many weapons the industry has been using to take down what was to be the most significant investor protection in a generation.
It Rebranded the Fight
Saying that they don’t want to serve the customers’ best interest makes financial advisors sound like the bad guys. So Wall Street reframed the discussion early on: Severely limiting commissions and restricting sales of certain high-risk (but high revenue) products like liquid alternatives and non-traded REITs, they say, would force financial firms to charge average investors prohibitively high costs, parting individuals from the professional advice they sorely need.
They even commissioned new research to make the argument for them, countering the CEA’s $17 billion cost estimate. One study, co-authored by former Brookings Institute economist Robert Litan, found the fiduciary rule would reduce smaller investors’ access to human financial advisors. But the study was paid for by mutual fund firm Capital Group: Litan’s consulting group got $85,000 for the study, of which he took home $38,000. And as a result of the ensuing uproar, Litan eventually resigned from his position with the Brookings Institute.
The feds were not impressed. “Most of the industry-commissioned research reaching the opposite conclusion does not meet equally rigorous analytical standards,” former Labor Secretary Thomas Perez said in a speech to the Brookings Institution.
It Launched ‘Grass Roots’ Campaigns
Taking a leaf from the Tea Party’s playbook, industry lobby groups formulated a “grass roots campaign” to get the word out to consumers and mobilize them against the rule. The Financial Services Institute, which represents the interests of independent brokerage firms like LPL Financial, Ameriprise Financial and Raymond James Financial. in July 2015 rolled out a website that advisors could use to have their clients send form letters to lawmakers. The group claims consumers sent a combined total of more than 100,000 letters expressing their opinion of the rule to their senators, local congressman and Labor Secretary Perez.
The Department of Labor released over 14,000 of these form letters from investors addressed to Perez. But when MONEY reviewed the first 100 of these so-called investor letters, 64% were from financial advisors and those related to financial companies. Only about 30 were from investors with no immediately discernible ties to financial companies, while the remaining six letter writers chose to withhold their identity.
It Strong-Armed Congress
Throughout the Labor Department’s rulemaking process, financial companies and their lobbyists have attempted to get Congress to block the rule. And indeed, lawmakers rolled out over half a dozen bills in both the House of Representatives and the Senate to block the rule—although none have so far managed to make it into law.
Some of the most vocal opponents of the rule, as it happens, were also recipients of big financial services industry contributions. Rep. Jeb Hensarling (R-Texas), who chairs the House Financial Services Committee and backed the legislative efforts to block the new rule, received over $800,000 in the 2016 election cycle from groups or individuals associated with the securities, insurance and banking industries, according to campaign contribution tracking firm the Center for Responsive Politics.
And Rep. Ann Wagner—a lifelong Republican politician from Missouri who introduced several pieces of legislation in the last two years designed to block the fiduciary rule Labor Department’s rules—got her biggest contributions from brokerage firm Edward Jones and insurance giant Northwestern Mutual, both of which directly contributed almost $50,000 to her campaign during the 2016 cycle. Both companies are on the record opposing the fiduciary rule.
It Went to Court
When all else failed to stop the rule, the industry has turned to the legal system. Over the course of four months last fall, financial companies, lobby groups, and individual brokerages filed half a dozen lawsuits attempting to strike down the rule.
Several early rulings came out in favor of the Labor Department, with judges in D.C. and Kansas refusing to block the fiduciary rule’s upcoming rollout on April 10, 2017. But the biggest case—lodged by the U.S. Chamber of Commerce, lobby group the Financial Services Roundtable, the FSI and others—is still being litigated in Texas. And if Trump cuts funding for the rule’s defense, as reports indicate he is contemplating, the case could effectively kill the rule.
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… And It’s Not Over Yet
While both Wall Street and the GOP would be behind him, Donald Trump can’t just have his incoming Labor Secretary dismantle the rule unilaterally. (Nominee Andrew Puzder, CEO of Carl’s Jr., has yet to be confirmed for the role.) It would require drafting a new regulation, rescinding the current one, and allowing time for a comment period.
Rep. Joe Wilson (R-S.C.) jumpstarted Congress on the process in January by introducing the Protecting American Families’ Retirement Advice Act. Ironic name aside, the bill aims to push back the fiduciary rule’s April implementation by two years, a move several industry groups immediately applauded.
Yet President Trump’s order on Friday will likely delay the fiduciary rule from going into effect as scheduled. The order is set to spur a new, and likely extensive, cost-benefit analysis of the regulations, and the result may be a rule that doesn’t do as much to protect consumers—or no fiduciary rule at all.
In the end, it seems that while Obama’s Labor Department and consumer advocates won the battle, the financial industry is poised to win the war.
Updated Feb. 3 to include additional information about President Trump’s executive order