Market Recap – The Fiduciary Rule’s Death Would Be a Sad Day

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Market Digest – Week Ending 2/10/2017

Global stocks started the week flat to slightly down, then rallied on Thursday and into Friday after the new administration promised major tax reforms are on the way. Defensive assets such as gold and bonds went the opposite route, rising through Wednesday then pulling back Thursday, but both were able to end the week positive. The dollar strengthened against the euro.

Weekly Returns:
S&P 500: 2,316 (+0.8%)
FTSE All-World ex-US: (+0.3%)
US 10 Year Treasury Yield: 2.40% (-0.06%)
Gold: $1,234 (+1.1%)
USD/EUR: $1.064 (-1.3%)

Major Events:

  • Monday – ECB President Maria Draghi commented that it was too early to stop its stimulus program, despite higher inflation figures from Germany
  • Tuesday – BP reported a 2016 net loss for the second consecutive year, following a string of disappointing earnings from other energy firms amidst lower oil prices
  • Wednesday – A federal judge ruled against health insurer Anthem’s proposed $54 billion takeover of Cigna, stating the market is already too highly concentrated
  • Thursday – The U.S. Court of Appeals for the Ninth Circuit in San Francisco declined to reinstate the President’s travel ban, stating it likely violated due process rights for travelers
  • After weeks, the U.S. president finally committed to China’s “One China” policy, in which the US won’t recognize Taiwan diplomatically

Our take:
Personal Capital’s CEO, Bill Harris, thoroughly covered how the outlook for the Department of Labor’s much-needed Fiduciary Rule got a lot bleaker. Following the president’s order for a review, yesterday the DOL has officially requested a delay of the rule’s implementation for 180 days while it seeks another round of public comments for consideration. Very tough to say where this leads, but it could result in a much more diluted version of the rule, or even its full repeal.

What would that mean for the state of the industry? It would certainly be a loss for investors, who have long been subject to extreme conflict of interests where brokers (who now call themselves “financial advisors”) are able to set their client’s best interests aside in order to pitch high commission-based products. These are often in the form of front-loaded mutual funds, annuities and expensive insurance products disguised as investment vehicles.

So a full repeal, or even dilution, of the Fiduciary Rule would be unfortunate as there were already some positive industry changes underway. A number of firms said they would stop offering commission-based retirement accounts, and would more clearly break out fees and broker compensation on statements. Many mutual fund companies even started offering “clean shares,” which are free of commissions advisors would normally receive from selling them. Are these perfect solutions that would eliminate all conflicts of interest? No. But they’re at least a step in the right direction. The big question is whether they’re maintained should the rule be shot down.

We know there is tidal wave of change in the financial services industry. More than ever, investors are demanding greater transparency on fees and commissions. But these aren’t the people the Fiduciary Rule was designed to protect. It was created for the unheard voices – those unaware of the rampant fees they’re paying, or severe conflicts of interest with their advisor. For them, the death of the Fiduciary Rule would surely be a sad day, even though they may not know it.

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

One Response

  1. John R Knox

    I agree. Over the time I’ve been doing tax returns I have seen too many unknowing people hurt by so called advisors.


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