There was an important article in today's WSJ about the Labor Department's forthcoming rules under ERISA that will dramatically change how investment advising for IRAs and other retirement vehicles works:
The idea of the regulation, which could be released this month by the Labor Department, seems unobjectionable enough—that brokers would follow a “fiduciary” standard when making investment recommendations. Currently, brokers’ advice only has to be “suitable,” which critics say is a weaker standard that allows the sale of expensive products that eat into returns.
The rule’s opponents, including many in the brokerage industry, say it will increase their costs and make providing investment advice to small-balance retirement accounts less profitable. ...
The rule, provisions of which would be phased in over time, could add costs at industry giants such as Morgan Stanley, which has nearly 16,000 brokers, and Bank of America Corp.’s Merrill Lynch, with more than 14,000. But it is expected to weigh far more heavily on small and midsize firms, which make up the bulk of the industry. ...
Brokerage-industry executives and analysts say the rule is likely to accelerate brokerages’ shift toward fee-based accounts and away from commissions, a trend in which smaller firms generally lag behind their bigger rivals. Smaller firms also tend to have more small accounts that might be uneconomical to serve in a fee model, and they have fewer clients across whom to spread added compliance costs.
This is a classic example of federal government regulation of the stock market and financial services: It screws small business and the middle class, while benefiting the wealthy and the largest firms. (Which leads one to wonder why people like Lucian Bebchuk are so eager for federal regulation of corporate law, but that's an issue for another day.) Because the costs apparently do not scale, the largest brokerage houses will be better able to bear them and wealthy investors will not lose access to professional advice.
But then it gets worse. Forbes reports that:
Popular financial radio show host Dave Ramsey caused a firestorm on Twitter last week when he weighed in against the “fiduciary rule”—the controversial pending Department of Labor regulation that would impose new restrictions on a vast swath of financial professionals who handle IRAs and 401(k) accounts. Yet, Ramsey was only echoing concerns about the costs of the rule already expressed by Members of Congress from both parties. ...
Fittingly, even before Ramsey came out against the rule, one of his critics called for using the rule against Ramsey, supposedly for providing advice said critic deemed harmful to savers. In an October article in LifeHealthPro, an online trade journal for insurance agents and financial advisers, Michael Markey, an insurance agent and owner of Legacy Financial Network, called for Ramsey to “be regulated and to be held accountable” by the government for the opinions he gives to listeners. Markey hailed the Labor Department rule as ushering a new era in which “entertainers like Dave Ramsey can no longer evade the pursuit of regulatory oversight.”
Classic. Markey wants to use regulation to shut down a competitor, which is a primary function of the DC bureaucracy these days.
Experts both for and against the rule I have talked to agree its broad reach could extend to financial media personalities who offer tips to individual audience members, a group that includes not just Ramsey but TV hosts like Suze Orman and Jim Cramer, as well as many other broadcasters who opine on business and investment matters. They would be ensnared by the rule’s broad redefinition of a vast swath of financial professionals as “fiduciaries” and its mandate that these “fiduciaries” only serve the “best interest” of IRA and 401(k) holders.
I admit that I am not an expert on First Amendment law--especially the complexities of commercial speech regulation--but this strikes me as a classic infringement on free speech. But as Forbes notes:
Such limits on financial discussion may seem to violate the First Amendment on its face. But a lawsuit against such restrictions would not be a slam dunk, as this is largely uncharted legal territory. Courts have tread lightly on financial regulation that may harm free speech. In Lowe v. SEC, 472 U.S. 181 (1985), the Supreme Court did strike down a ban by the Securities and Exchange Commission on an investment newsletter published by a convicted felon. But the opinion did not touch upon constitutional issues, as the Court ruled that the law itself – different from the Employee Retirement Income Security Act that governs the Labor Department – applied only to person-to-person, rather than general, advice.
It's these sort of issues that make it so essential to have judges and justices committed to liberty as opposed to being enablers of the nanny state.
