Wealth Management
(Washington)
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.
(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 Vanguard has been the low cost leader for years, but some of their features now make them look slightly outdated.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.
(New York)
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.
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(Washington)
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.
(Washington)
One of the big concerns advisors should have right now is how the newly Democratic House might affect fiduciary regulation. Most will be aware that the SEC Best Interest rule was much lighter touch than the first version of the DOL rule. However, on top of the DOL rule making a return in 2019, the SEC could be derailed by the House. Maxine Walters, a staunch fiduciary advocate, will now head the House Financial Services Committee and it seems liklye the House will call SEC head Jay Clayton in for a questioning session where they press him to add a fiduciary element to the current Best Interest rule.
FINSUM: The exact path to derailing the SEC rule is still a little unclear. Because Trump has already appointed the heads of the relevant agencies, the House has an unclear ability to get in the way.
(New York)
The whole Fiduciary rule saga seemed to be over earlier this year, but now that couldn’t be further from reality. While the DOL seemed to gracefully fade from the limelight in March, the truth is that the rule is a “sleeping giant’ according to one industry lawyer. That giant has now woken up, as the DOL is set to release an updated version of its rule in September of next year. The big question is how the SEC rule will be affected, and whether the rules will work in tandem. In either case, advisors and brokers seem likely to see much more regulation within a year or so.
FINSUM: The other big question is whether the political changes in Washington mean the SEC rule might be scuttled in some way. We sense some big changes happening.