Something very odd is happening at both the DOL and SEC. Ever since the fiduciary rule was killed by the courts earlier this year, a renewed sense of purpose seems to have washed over both agencies. While many thought complacency and a light hand would be the guiding approach of both regulators in the Trump era, somehow the opposite has happened. Now, industry lawyers say both regulators are pursuing enforcement at “epic levels of tenacity”. The focus has increasing been on the 401(k) business, but attention and activity has expanded across the board.
FINSUM: When the DOL declined to push its rule further, and the SEC stopped short of using the word “fiduciary”, most somewhat suspected there was going to be a lighter touch approach. Something has really changed.
The DOL’s fiduciary rule may be gone for now, but it is a long way from dead. The rule will be taking a new form in 2019, and even now, its spirit lives on in the form of a number of state-based fiduciary rules. One such is in New Jersey. However, Wall Street is putting up a massive fight to block the rule. Financial Advisor Magazine puts it this way, calling it a Battle Royale and saying it is “pitting the nation’s largest Wall Street and broker-dealer associations against comparatively tiny fiduciary advisor and financial planning associations”.
FINSUM: We think if NJ passed a comprehensive fiduciary rule, it would probably give momentum to not only the DOL, but a number of other states which are working towards this or are on the fence about it.
The Fiduciary Rule is supposed to be dead, right? Well that seems to be more of a myth than reality, as the rule has taken on a life of its own in many forms. Not only is the DOL planning to issue a second version of the rule in 2019, but many states are now creating out their own fiduciary rules. For instance, New Jersey is poised to become one of the first states to adopt a uniform fiduciary standard. Many others already have various fiduciary standards that were put in place after the demise of the first rule. Those that have or are considering changes incude Nevada, Connecticut, California, South Carolina, and South Dakota.
FINSUM: There is a definitely a strong fiduciary undercurrent slowly pushing across the country. However, some states have definitively ruled that a fiduciary relationship does not exist between a client and broker, including New York.
Vanguard appears to be taking action on one it its biggest weaknesses. Others in the industry, notably Fidelity, have been making moves to try to make their funds ever more accessible and cheaper. Vanguard has been the low cost leader for years, but some of their features now make them look slightly outdated. Perhaps no longer. For its Admiral Shares class, its cheaper option, Vanguard has lowered the minimum investment from $10,000 to $3,000, a significantly lower threshold for younger and less wealthy investors. The changes will apply to 38 of their index mutual funds.
FINSUM: This is a good move but we are surprised they didn’t just change it to no minimums.
Merrill Lynch’s new compensation plan is not being received well by brokers. Many are angry about certain aspects of the plan and are pushing back. In particular, brokers don’t like that the plan incentivizes them to tell clients to take on more debt during a period when interest rates are rising. Around 15,000 advisors have complained to Merrill Lynch management. Management responded by saying it was a good incentive and was designed so that it didn’t heighten conflicts of interest.
FINSUM: This seems like it will just create misaligned incentives, especially given that it is being put in place when it is very unfavorable to be adding debt.
Few would argue that the tax cut passed in late 2017 was one of the main drivers of the strong economy we saw this year. Corporate earnings have been stellar, the economy is expanding at a good clip, and the labor market is tight. However, the IRS looks about to undermine the benefit of the tax cuts. The agency just announced a new policy for 2019 regarding how it accounts for inflation. The move will undermine much of the value of the tax cuts by raising tax bills for almost all Americans. The new policy will increase tax revenue for the government by $133.5 bn over the next decade.
FINSUM: This is the kind of policy that is going to hurt more over time. That said, the current deficit is huge, so from a fiscal responsibility view it is hard to argue this is unnecessary.