Trump puts brake on ‘client first’ fiduciary rule

The $16tn US retirement savings industry faces renewed uncertainty after the Trump administration said it would review a “fiduciary rule” that forces retail brokers to put their clients’ interests first.

The decision prompted dismay from backers of the rule, including Jack Bogle, the founder of Vanguard, who criticised the administration for having Gary Cohn, the former Goldman Sachs president, front the rollout of the new policy.

It also throws into doubt nearly a year’s worth of preparation that the industry has put into complying with the complex regulation, which is due to go live in just nine weeks.

Shares in several broker-dealer firms, whose commission income is under threat from the rule, rose on news that President Donald Trump had told the Department of Labor to reconsider the change.

Insurance companies, whose lucrative variable annuity products are going to become harder to sell in the US under the new regime, also rose. Shares in Ameriprise Financial were up almost 3 per cent on Friday, and in the UK, Prudential closed up 3.1 per cent.

Mr Trump ordered that the DoL “revise or rescind” the rule if it determines that it will limit American savers’ access to retirement products or financial advice; cause dislocations in the industry that will harm savers; or cause an increase in litigation against advisers or costs for savers.

His memo was silent on whether the DoL should delay enforcement of the rule whilst it is under review, as opponents in the industry want, and had expected. “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum,” acting Labor secretary Ed Hugler said.

Mr Cohn, director of the White House national economic council, had attacked the fiduciary rule in an interview earlier on Friday, saying it was wrong to limit choice for retirement savers.

“This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger,” he told the Wall Street Journal.

Mr Bogle said Mr Cohn “should disclaim any commentary” on the fiduciary rule. “He has a conflict of interest. His whole background is in the brokerage business and brokers, of course, do not like this rule. They say it is ‘clients first’ at Goldman Sachs, but everyone knows that it is ‘Goldman first’. He shouldn’t even get a vote.”

However, Mr Bogle said many of the intended benefits of the rule were already in effect, and “the arc of investing is bending in the direction of fiduciary duty”.

Broker-dealers, insurers and asset managers have spent almost a year readying complex new compliance systems, and in some cases upending their business models.

Merrill Lynch said it would stop accepting commissions on retirement products and switch to charging wealth management clients fees directly; other brokers, such as Morgan Stanley and Wells Fargo, signalled their intention to continue commission-based business.

Meanwhile, many broker-dealers, such as Edward Jones, launched new fee-based accounts that have crimped profits as clients switch over.

Michael Spellacy, global wealth management leader at PwC, said there was already “significant sunk cost”.

“The vast majority of the industry has spent a lot of time and money changing their business models,” he said. “More importantly, being conflict free and customer focused first is a strategic business advantage — which wealth managers ignore at their peril.”

Many industry players also expected the rule to accelerate a shift to using low-cost index funds instead of actively-managed mutual funds.

This story has been updated to reflect details released by the White House, which included no reference to delaying enforcement.