Always beware of the Law of Unintended Consequences. Worthy aims don’t always wind up resulting in beneficial outcomes.
Take the Labor Department’s fiduciary rule.
“The Obama administration’s new fiduciary rule is the latest example of onerous regulation that may have good intentions but will lead to disastrous outcomes,” warns Anthony Scaramucci, host of Fox Business Network’s Wall Street Week, in a Wall Street Journal op-ed [subscription required]:
The new rule requires financial advisers and broker-dealers handling retirement assets to either move to a fee-based compensation model or, if they want to continue receiving variable compensation such as commissions and 12b-1 fees, sign a Labor Department “best-interest contract exemption,” or BICE, with clients. The BICE stipulates advisers can only earn “reasonable compensation” on non-fee-based products.
With legal challenges and Tuesday's election results, the rule's future is up in the air.
Ensuring that savers’ and their financial advisors’ interests are aligned is a noble goal, but DOL’s regulations will actually make it harder for Americans to save for retirement.
As has been noted in a number of posts on Above the Fold, the fiduciary rule will limit access to retirement investment advice for small businesses and their workers, and both could see higher fees. Not good when the goal is about encouraging people to save for retirement.
It will keep savers from getting personal advice from financial advisers even though many prefer it to only having roboadvisers available.
What’s more, “The increased threat of litigation over commission-based accounts will cause most advisers to switch to fee-based systems that don’t make economic sense for accounts with low balances,” Scaramucci writes.
Far from where DOL regulators concocted this regulation, plaintiffs lawyers are licking their chops at the opportunity for new business.
As a consequence of lawsuit fears, “Advisers will drop smaller accounts, forcing less-wealthy individuals to use robo advisers, whose technology is unproven in more volatile environments,” Scaramucci writes.
What we'll end up with by limiting Americans’ retirement savings option is the creation of “two classes of savers,” cautions David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness:
Those who can afford to pay much higher fees to have someone help them manage their money, and those who will lose access to advice because their accounts simply aren't big enough to cover the costs imposed by the new rules.
No one wants that.
The Law of Unintended Consequences rears its ugly head.
Read all of Scaramucci’s piece to see the many ways this rule will hurt retirement savers.