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Obama, Buffett or Trump: who's right about the cost of retirement investing advice?
MARKETWATCH 2:34 PM ET 5/23/2017
Fiduciary rule debate centered on how much money investors lose to fees from conflicted advice

In a stunning reversal, the Trump administration will not seek to further delay an Obama-era investment rule designed to put an end to costly, conflict-filled retirement advice.

The rule will require anyone selling retirement investment advice to put their clients' interests first and to plainly disclose fees (http://www.rebalance-ira.com/dear-advisor/?utm_source=marketwatch&utm_medium=column&utm_campaign=obama- buffett-trump-rule-2017-05-22&utm_content=mt). It was set to take partial effect on April 10, but the incoming Trump administration had forced a delay until June 9.

In an Op-Ed, Donald Trump's Labor Secretary Alexander Acosta gamely made the case for deregulation, as you might expect.

Nevertheless, he admitted that the law is not on the side of those who might prefer more delay, namely, retirement investment advisers who benefit from the status quo of murky disclosures and less-than-clear loyalties.

"We have carefully reviewed the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input," Acosta wrote (https:// www.wsj.com/articles/deregulators-must-follow-the-law-so-regulators-will-too-1495494029) in The Wall Street Journal. Full implementation is scheduled for Jan. 1, 2018.

Interestingly, the administration may have painted itself into a corner by seeking a delay in the first place. The law has been tested in multiple courts already, each time resulting in defeats for Wall Street.

Seeking a new delay might have pushed the matter right back into the courts (http://www.benefitspro.com/2017/05/16/ for-dol-killing-fiduciary-rule-easier-said-than-do?slreturn=1495562418) and set up yet another defeat.

True cost

Much of the debate centers on how much money investors lose to fees from conflicted advice, such as when financial advisers are paid by mutual funds to recommend those funds to clients.

Is it $17 billion a year (https://www.dol.gov/newsroom/releases/ebsa/ebsa20160406-0), as the White House contended while Barack Obama was in office?

Is it $10 billion a year (https://www.washingtonpost.com/news/get-there/wp/2017/02/27/warren-buffett-says-this-simple- mistake-has-cost-investors-more-than-100-billion/?utm_term=.62b2aeae3ae9), as Warren Buffett believes?

Or is it really $104 million a year (https://www.federalregister.gov/documents/2017/03/02/2017-04096/definition-of- the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice-best), as the Trump administration argued in favor of the initial 60-day delay?

The Obama White House number, $17 billion, is based on the idea that conflicted advice costs retirement savers 1% of their return a year. Plug that into $1.7 trillion in IRA savings and you get $17 billion a year paid out to retirement advisers and consequently lost to retirement savers.

Buffett's $10 billion number is the fees charged by active mutual fund managers vs. investing with low-cost index funds.

Buffett is leaving out the cost of financial advisers but it's still a lot of money, about 25% less in the typical retirement balance and more than $100 billion over 10 years, as Buffett put it, in total lost retirement savings.

At Rebalance IRA, my firm, we estimate that active mutual fund management costs retirement savers on average 1.27% of their assets per year.

Over 10 years, that comes to 29.6% of expected investment return, based on data from Vanguard Group.

However you slice it, money lost by investors is consequently gained by their financial advisers. Once out of your account those fees compound in value -- for your advisor, not you.

Law of the land

The administration's argument for delaying the rule was that more time was needed to understand the economic impact of the regulation.

An extended delay would have been based on the idea that the retirement industry needs more time to adjust. Yet the Trump administration previously had argued that the industry has made substantial accommodations to meet the fiduciary standard.

Both of these ideas cannot be true. Either the industry needs more time or it doesn't. Meanwhile, the rule has been delayed for two years, costing investors real money even if you accept the administration's much lower loss estimate.

The risk for Trump was that a court might hear that kind of bizarre, inside-out argument and instead immediately terminate the previously granted delay.

The Trump administration still has time to try to repeal or review the ruling before next year. Barring any last- minute moves, however, on June 9 the fiduciary standard will be the law of the land (http://www.rebalance-ira.com/u-s- secretary-of-labor-thomas-perez-showcases-rebalance-ira/?utm_source=marketwatch&utm_medium=column&utm_campaign=obama- buffett-trump-rule-2017-05-22&utm_content=mt).

-Mitch Tuchman; 415-439-6400; [e-mail]


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05-23-171434ET
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