Final Fiduciary Rule: Dave Ramsey May Get Relief, But the Rest of Us Don’t

I and others had pointed out that the Labor Department’s proposed fiduciary rule defined the term “fiduciary” so broadly that even financial broadcasters such as Dave Ramsey and Suze Orman could be ensnared. The final rule claims to give relief to Ramsey and Orman—though there is still some doubt even on this point—but hardly anyone else. There appears to be some minor grandfathering in financial professionals’ existing relationship with clients, but that likely won’t keep middle-class savers from losing access to brokers and insurance agents they like any more than Obamacare let patients keep the doctors they like.

The DOL rule creates a presumption against brokers taking third-party commissions from mutual funds they sell to savers in their 401(k)s. As a result, the forced shift to a fee-based model of investment management will raise costs dramatically for middle-class investors. And it will also likely result in similar effects to what happened in the United Kingdom when third-party commissions were banned. There, since some portfolios were too small to justify the cost of even a management fee, brokers stopped servicing them.

 A June 2013 study by the Cass Business School at City University London found that brokers had largely stopped serving British savers with portfolios below £150,000 ($240,000), because the fees alone would not pay for servicing the accounts. This study and other research estimates that this “guidance gap” will see 85 percent of British savers lose their brokers or get reduced services for their retirement accounts. Center-left economists Robert Litan and Hal Singer argue that similar effects would take place here if the mandates of the proposed rule, virtually unchanged by the final rule, take effect. They estimate that savers could lose $80 billion over 10 years because of it.

It is nice that the Labor Department now states in the preamble to the final rule that “even though on-air personalities may suggest that viewers buy or sell particular stocks or engage in particular investment courses of action, the Department does not believe that a reasonable person could fairly conclude that such communications constitute actionable investment advice or recommendation.” But the text of the rule still states that “advice” targeted by the rule does not need to be a formal recommendation, and that the speaker does not have to be directly compensated by the listener for it to fall under the fiduciary definition.

The final rule states, “the more individually tailored the communication is to a specific advice recipient or recipients about, for example, a security, investment property, or investment strategy, the more likely the communication will be viewed as a recommendation.” This could still ensnare financial broadcasters who give advice to individual callers. And private lawsuits against such speech would be enabled by the rule’s “private right of action” to sue under the law even if the Labor Department found no violation.

In short, the final rule is still premised on the Labor Department’s paternalistic statements in the proposed rule that individuals cannot “prudently manage retirement assets on their own,” and that they “generally cannot distinguish good advice, or even good investment results, from bad.” It does not answer the concerns of Republicans and 96 House Democrats that proposed rule would restrict access to investment advice and would reduce choices for lower and middle-income savers. Congress must act as a “fiduciary” for these savers and stop the rule by voting it down under the Congressional Review Act and/or defunding the Labor Department’s implementation and enforcement of this terrible rule.