When most people think of President Barack Obama’s legacy, the fiduciary rule is doubtfully the first thing to come to mind. That might be a mistake, however—although healthcare reform was the rallying cry of his first term, the entire Obama presidency was defined in many important ways by the issue of financial regulation.
A financial sector run amok bequeathed to him an economy with 7.8 percent unemployment and enough brewing social discontent to spark both the Occupy movement and the Bernie Sanders candidacy.
The 2010 Dodd-Frank Act aimed to curb the risky lending and betting practices that were the causes of the 2008 financial crash, but the legislation was rushed. While the rules it lays out are important, it remains an imperfect piece of legislation.
More important than any single piece of legislation is the attitude that the government should protect consumers from any predatory behavior on the part of big businesses, in general, and the financial services sector in particular. That’s where the fiduciary rule comes in.
In 2010, consumer activists proposed the fiduciary rule during the discussions surrounding the Dodd-Frank Act. The objective of the rule is simple: it requires investment brokers who manage 401(k) retirement accounts to give financial advice that is in their client’s best interests.
Without the rule, retirement account managers are free to serve their own interests by urging clients to invest in funds or companies that give that manager kickbacks.
Such abuses were much more common than one might think; the Department of Labor estimates losses of $17 billion per year to consumers as a result of intentionally misleading financial advice.
The reasons investment managers might not act in their clients’ best interests are complicated; the rule that tries to prevent them from doing so is also complicated.
The Department of Labor spent six years working to issue and to enact a full version of the fiduciary rule. Now President Donald Trump stands poised to rescind it.
He issued an executive order instructing the Department of Labor to explore eliminating the rule on Feb. 3.
While Dodd-Frank is a piece of legislation that requires input, compromise and consensus from many parties, the fiduciary rule directly reflects the commitment of the current administration to the principle of consumer protection. Trump’s executive order shows the flimsiness of his commitment, despite the populist overtones of his campaign.
A sophisticated financial system is as necessary to a modern economy, but that does not mean that consumers should be expected to understand its ins and outs so well that they can protect themselves from exploitation.
On the contrary, the complexity of modern finance makes it necessary for the government to intervene in the market at times to protect its citizens from financial sophisticates who often have every incentive to exploit them.
While it sounds boring, the fiduciary rule brings up questions that are at the heart of many of the struggles currently engulfing our society: what is the purpose of an economy? What is the purpose of a financial services sector? If we want each of these things to serve our needs, they must be actively shaped.
If the only thing keeping the greed of the financial services sector in check is Trump’s commitment to protecting innocent people, I’d say anyone who ever plans to retire someday has cause to get politically active.