Retirement savings remain a persistent challenge for Americans, especially in an unpredictable economic landscape. Instead of expanding access to savings and investment options, many policymakers are advocating for legally questionable regulations that have already proven ineffective.
A prime example is the Department of Labor’s relentless push for the fiduciary rule over the past 14 years. This rule ostensibly aims to protect consumers by mandating that financial advisors act in their clients’ best interests. However, the reality is far more complex, and the rule’s consequences often harm the very people it’s meant to help.
Americans typically receive investment advice through two primary models: the brokerage model, which involves commissions on sales, and the advisory model, which charges a fee for advice. The Labor Department disfavors the brokerage model, arguing that commissions create inherent conflicts of interest. Yet, by this logic, countless other sectors, including critical services like healthcare, would be rife with conflicts.
This issue is often misunderstood, with media portrayals inaccurately suggesting that the current market allows advisors to prioritize their interests over those of their clients. However, under the U.S. Securities and Exchange Commission’s “Regulation Best Interest,” advisors are already legally required to act in their clients’ best interests when advising on securities. Additionally, 45 states mandate that advice on annuity products must also prioritize the client’s interests, with other states expected to follow suit.
The real damage of the fiduciary rule is its impact on low- and middle-income Americans, who predominantly rely on the brokerage model for financial advice. When a similar rule was briefly implemented in 2016 under President Obama, it led to a reduction in access to professional financial advice for less affluent individuals, as evidenced by Deloitte’s 2017 study. This study revealed that over 10 million retirement accounts, holding $900 billion in savings, were adversely affected.
Further analysis by the Hispanic Leadership Fund indicated that reinstating the fiduciary rule would reduce retirement savings by $140 billion for 2.7 million individuals earning less than $100,000, exacerbating the wealth gap for Black and Hispanic Americans by about 20%. Despite this, the Department of Labor has yet to provide a meaningful counterargument.
Recently, two U.S. District Courts ruled that the 2024 fiduciary rule, which mirrored the invalidated 2016 version, was illegal. The courts stayed the rule’s effective date, preventing its enforcement. While the appeals process may take time, it is likely that the Labor Department’s overreach will be curtailed once again.
Policymakers genuinely interested in aiding American families should prioritize expanding access to financial opportunities, rather than supporting regulations that disproportionately harm less affluent individuals by limiting their access to essential financial advice and information.