The data are in…and show that the fiduciary rule will help retirement savers

As the Trump administration considers weakening the long-awaited “fiduciary rule”, industry-backed groups continue to release transparently self-serving “research” purporting to show that the rule, which protects retirement savers against sales pitches disguised as financial advice, will do more harm than good.

Most recently, the U.S. Chamber of Commerce released a report misleadingly entitled, The Data Is [sic] In: The Fiduciary Rule Will Harm Small Retirement Savers. The data actually show nothing of the kind. As the Consumer Federation of America has pointed out, even comparing a partial estimate of the harm done to savers from conflicted advice with an inflated estimate of the cost of implementing the rule shows that the rule’s benefits vastly outweigh its costs.

This hasn’t prevented the Chamber and others from claiming that the rule will harm investors by restricting access to retirement services, limiting investment options, and increasing fees paid for investment advice. These claims are based on surveys of firms with an interest in weakening or overturning the rule, conducted by industry associations and conservative groups who are in many cases ideologically opposed to government regulation. As EPI Vice President Ross Eisenbrey recently told the acting Solicitor of Labor, affected industries invariably predict dire outcomes from regulations they oppose since they are rarely called to account when their predictions prove unfounded.

Even if the industry’s questionable predictions that the rule could cause some retirement savers to experience reduced access to investment products or advice are borne out, it doesn’t follow that investors will be harmed by the fiduciary rule. The rule’s purpose is to ensure that any retirement investment advice serves the investor’s best interest, not the adviser’s self-interest. The fact that salespeople masquerading as financial planners will no longer be able to offer conflicted advice that steers people to costly products doesn’t mean investors will be harmed—to the contrary. And since bad products and services crowd out good ones, the anticipated fiduciary rule—despite the Trump administration’s delay in implementing it—has already expanded the market for low-cost investment options.

There’s no evidence that the rule will cause investors to lose access to products or services that actually benefit them. For example, even if fewer IRAs will be opened, some of the worst abuses occur when salespeople passing themselves off as advisers convince retirees to roll over 401(k) balances into high-cost IRAs. This happens even to federal workers enrolled in the Thrift Savings Plan, which the Washington Post called “the gold standard of 401(k)-type programs for its rock-bottom fees.” So, while minimizing conflicts of interest will negatively affect “advisers” who are in the business of steering retirees from low-cost TSP accounts into high-cost IRAs, neither the loss of this so-called advice nor the reduction in the number of IRAs created from rollovers hurts investors.

The Chamber doesn’t back up its claims of harm to investors with serious research by experts who have reputations to protect. The few academic and think tank studies cited are either irrelevant, industry-funded, or both. Thus, the first study cited in the Chamber report is based on a survey of Canadians (not Americans, as the Chamber claims) conducted by an academic center that boasts Canadian banks and other financial institutions as “corporate partners.” Another is attributed to “economists from the Brookings Institution,” with no mention of the fact that co-author Robert Litan was asked to resign his Brookings fellowship after using the think tank’s name to lend credibility to the study, which was commissioned by an investment firm.

The Chamber does cite two academic working papers to make tangential points: first, that in recent years, mutual funds sold by brokers working on commission didn’t perform quite as poorly as in the past; and second, that the growing popularity of index funds could somewhat reduce the advantage of such passive investment strategies. While these studies suggest that the harm done to investors from conflicts of interest in the sale of high-cost actively-managed mutual funds may be declining somewhat, this is no more an argument in favor of delaying or weakening the rule than a decline in deaths caused by smoking is reason to weaken smoking regulations. In any case, estimates by EPI and others of the harm done to investors of delaying or blocking the rule are based on a subset of investment products sold by conflicted advisors and therefore likely understate, rather than overstate, the cost to investors.

What about the claim that eliminating undisclosed conflicts of interest will increase fees paid by investors? This is based on what-if scenarios cooked up by industry lobbies and conservative groups that assume that investors now paying commissions to salespeople posing as financial advisors will instead pay recurring fees to actual financial advisors with no effect on their investment decisions. While it is simple math that recurring fees can add up to more than a higher one-time fee over a long enough time span, these scenarios assume away the problem by presuming that salespeople offer equally valuable advice and steer investors to similar products as legitimate advisors, though the whole purpose of the rule is to prevent conflicted advisors from steering people to high-cost products that are not in their best interest.

A medical analogy may help illustrate this point. If you prohibit snake-oil salesmen from presenting themselves as medical professionals, some people may instead consult actual doctors and may pay more for medical advice. Trained and licensed doctors, unlike snake-oil salesmen, have invested in specialized training and have a duty of care to patients, so they can be sued for malpractice. They therefore have higher fixed costs and may charge more than most quacks. But it would be ludicrous to claim that preventing quacks from passing themselves off as doctors harms patients because doctors charge more than quacks for consultations. This not only ignores the fact that quacks aren’t actually providing useful advice but are selling high-priced snake oil.

Moreover, these scenarios assume that everyone now making investment decisions based on tainted advice needs, and will seek out, one-on-one advice. Just as many people who might be duped into buying snake oil really just need to buy aspirin at the drugstore, many people saving for retirement don’t need more than generic advice, which can be summed up in a book small enough to fit into your pocket, or even an index card. When in doubt, though, hire a fee-only certified financial planner, if only to protect yourself from snake-oil salesmen.