The Department of Labor’s Fiduciary Standard – A Win for Consumers

One of the more absurd claims Wall Street brokers have long been able to make is that they weren’t really offering advice to clients when they recommended investments. Making this claim allowed them to avoid acting as fiduciaries, and this, in turn, allowed them to sell any number of high cost, opaque products that a fiduciary – who is required to act in the best interest of the client – very likely would not be able to sell.

The idea of closing this loophole and requiring all who offer investment advice to act as fiduciaries has been a goal of some in Congress, but given the impact such a standard would have to their bottom lines, Wall Street firms have been adamantly opposed. Their opposition and deep pockets have been effective in preventing the SEC from rolling out a uniform fiduciary standard, so several years back, the Department of Labor began developing a fiduciary standard that would apply to all retirement accounts (both employer retirement plans and IRAs). There was pitched opposition to the DOL’s plan, and Congressional Republicans continue to fight a rearguard action to derail implementation, but barring the unexpected, enforcement of the rule should begin in April 2017.

The rule benefits consumers in a number of ways. Among the most important impacts are:

  • 401k to IRA rollovers are covered under this rule, so a financial advisor involved in such a transaction is deemed to be acting as a fiduciary, and must acknowledge her fiduciary status. In addition, advisers must disclose fees, compensation and material conflicts of interest.
  • Advice provided by the fiduciary must be prudent. While the idea of prudent advice is somewhat nebulous, I suspect I’ll see far fewer spam e-mails touting retirement annuities that pay commissions of 10% or higher.
  • Firms must implement policies and procedures to prevent violations of the fiduciary standards, and they must refrain from giving or using incentives that might cause brokers to act contrary to their clients’ interest. Sales contests to push particular products and payout schemes based on hitting certain levels of sales are likely to become relics of the past (and Wall Street becomes a bit less like Glengary Glenn Ross).
  • Consumers now retain the right to pursue a class action lawsuit in court as opposed to being forced into mandatory arbitration.

The rule will undoubtedly require tweaks post-implementation and the fact that the rule only applies to retirement accounts is disappointing. Nevertheless, the expansion of the fiduciary standard represents real progress for investors.


The Markets and the Upcoming Election

by Micah Porter

Every 4 years, as coverage of the Presidential election gathers intensity, interest inevitably turns to how the election might impact the markets. Historically, in the election year itself, there hasn’t been much impact. Researchers at Deutsche Bank studied markets since 1960 and found that if one excludes 2008 (when the S&P dropped 38.5%) the average return for the S&P was 9.1%, versus an average return for all years of 8.8%

Sam Stovall at Capital IQ examined a longer time frame, and found that S&P returns were a bit lower in election years, at 6.1%, versus the average annual return of 8.8%. While election year returns were a bit below average, the returns themselves were positive in over three-quarters of all election years. In other research, Barry Ritholtz widens the timeframe a bit further and examines how the S&P 500 has done in situations in which the second-term incumbent is not running for re-election. In those instances, he found that the S&P lost 2.8% on average, but he points out that the sample size – there have been just 6 elections since World War II that meet the criteria above – is far too small to produce statistically significant results.

One thing that is nearly certain about the upcoming election is that the Democrats will nominate Hillary Clinton and the Republicans will nominate Donald Trump. Both candidates will, hopefully, roll out detailed economic platforms whose potential impacts on the economy and the markets can be analyzed. In the meantime, for those of you who want to follow the race, there are a couple of things to keep in mind:

  • The most accurate results are typically given by averaging the results of polling, and both Huffington Post and Real Clear Politics aggregate polls (sites are hereand here).
  • At this point in the Presidential contest, polling is typically well off the mark and will be off the mark until the conventions are concluded. Polls are much more informative beginning in August, and accuracy of the polling averages vis-à-vis the final result increases from that point forward.
  • If you are interested in following the election using a statistical framework, the Upshot at the New York Times, 538 and the Princeton Election Commission are all excellent sites.