Regulation: Healthy ETFs anyone?

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Brokers and insurance agents can still ignore Gary Cohn and shake off their reputation as cowboys.


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In February, president Donald Trump ordered a review of the fiduciary rule that is due to come into effect in April. 

The rule, introduced by former president Barack Obama, requires brokers and insurance agents to act in the best interests of their retirement account clients (what a notion) and holds them to the same standard as financial advisers. 

The rule is designed to close the loophole that allows some sectors of the finance industry to push investments and products that kick-back higher commissions – putting the client into potentially risky investments, or costing the client more in fees if not. 

The rule has been criticized by many Republicans and some financial institutions. Former Goldman Sachs president, Gary Cohn, who is now advising Trump as director of the National Economic Council, criticized the rule claiming it was like putting “only healthy food on a menu”: the assertion being that it would restrict investor choice. Now the rule has been placed under review, with Trump expecting “significant changes”.

Step backwards

It’s a step backwards for the US brokerage and insurance industries that have yet to shake their reputation as cowboys that don’t put their clients first. The rule was their opportunity to prove that they do – because they would now be held accountable. Indeed AIG and Morgan Stanley have both said they will comply with the rule despite the uncertainty of its implementation. 

Investors want greater transparency and lower fees – that’s been the story of the last 10 years – and a glance at the ETF market boom shows it to be true. According to John Bogle, founder of Vanguard Group, mutual fund investors have liquidated more than $800 billion of their holdings in actively managed equity mutual funds since 2008 and purchased about $1.8 trillion of equity index funds. 

To carry through Cohn’s analogy, people have asked themselves: ‘Why should I pay $100 for a meal that looks great on the menu, but you won’t tell me the ingredients, when I can pay $50 for a meal that will taste nice and definitely won’t have me reaching for the Pepto-Bismol?’ 

That notion may be lost on the millionaire/billionaire set who now run the White House. They can afford to take riskier decisions with their money – Cohn can enjoy a few burgers and easily cover the medical costs that ensue – but the majority of people cannot. 

Hopefully brokerage firms and insurance companies will continue implementing the rule regardless of Trump’s final decision. It would certainly be a reputational disaster for any institution that doesn’t.