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Congress must act as investment fiduciary battle shifts to states

Congress must act as investment fiduciary battle shifts to states
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States are nicknamed “laboratories of democracy” for their trailblazing reputation for innovative policy ideas, but recently, a disturbing trend has developed. Lawmakers in several states have sought to implement regulatory schemes mirroring the Labor Department’s fiduciary standard, which is the Obama era regulation that has made it harder for average Americans to access investment advice. Nearly 33 percent of Americans have nothing saved for retirement, and this roadblock across states is likely to exacerbate the retirement savings crisis.

With the fiduciary rule facing an uncertain future at the federal level, state politicians have become emboldened to take action. This sets up the possibility of a patchwork of 50 different regulatory systems overseeing investment advice. While thus far only a handful of states have enacted their own standard, it appears the 2019 legislative session is shaping up to be a battleground for fiduciary expansion.

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The rule requires brokers and other financial professionals offering retirement advice to operate under a “fiduciary” standard when advising individual retirement accounts (IRAs) and 401(k)s. Marketed with the noble goal to eliminate potential conflicts of interest from advisers, the rule has actually severely hampered the ability for advisers to interact with their clients. The rule in essence has placed the government between retirement savers and their own dollars.

Expensive compliance costs will raise the cost for consumers to get financial advice and lead firms to deal only with big money investors, pushing many small dollar retirement investors out of the market. Estimates indicate seven million IRA holders could lose access to investment advice and lead to 400,000 fewer IRA openings annually.

Most, if not all of the burden will fall onto low income and middle income Americans. For remaining investors, their accounts could be susceptible to annual fee increases of more than $800 per account, an amount that many cannot afford. It is likely that state regulations will bear similar results as the federal statute, including higher consumer costs, fewer investors, and less money saved for retirement.

The rule has tremendous implications for businesses, not only in terms of profitability, but also in their ability to offer quality investment service. By the Labor Department’s own conservative estimates, compliance will top $31 billion, have an annual cost of $2 billion, and add nearly 60,000 paperwork hours. As a result, firms will need to dedicate more resources into their compliance department instead of client services. For brokers operating in 50 states, 50 different regulatory systems will add more complexity and higher costs just to service their clients.

As harmful as the fiduciary rule has been for investing, replacing such standard with a patchwork of state requirements would have an even more detrimental effect on the economy. Nevada and Connecticut so far are the only states in the country to have enacted a fiduciary standard. In Nevada, however, the law is stricter than the federal rule as it applies to all brokers, not just those work with retirement accounts.

Maryland, Massachusetts, New Jersey, and New York have introduced their own fiduciary standards for broker dealers, but to different degrees of severity. While the measures in Maryland, Massachusetts, and New Jersey all died in session, they are likely to be resurrected in next year with more momentum. In New York, the government proposed a rule that could begin in March and give insurers only six months to comply. Lawmakers in other states have also expressed interest to duplicate the flawed rule.

This could create a costly patchwork of rules that is not good for consumers or advisers. A state by state regulatory environment would, according to the Securities Industry and Financial Markets Association, “subject financial professionals and firms to a confusing and potentially contradictory array of requirements and further muddy the waters for consumers trying to determine their relationship with their broker.”

The proper solution is a more uniform standard that balances the costs and benefits of regulation while still defending consumers from fraudulent practices. This equilibrium is achieved in a bill sponsored by Rep. Ann WagnerAnn Louise WagnerEnergized by polls, House Democrats push deeper into GOP territory Democrats, GOP fighting over largest House battlefield in a decade Republican fears grow over rising Democratic tide MORE (R-Mo.) known as the Protecting Advice for Small Savers Act. In addition to repealing the rule, the legislation reaffirms Securities and Exchange Commission authority to craft a best interest standard and includes language that preempts state laws that pass their own standard.

A homogenous fix is the only option to ensure businesses are not overburdened from state specific regulations and to protect investors who may relocate across state lines into a new regulatory fiefdom. If nothing is done, states will only complicate matters for business and cause more headaches for consumers. Congress should greenlight this bill to provide certainty to businesses and everyday savers.

Thomas Aiello is a policy and government affairs associate with the National Taxpayers Union, a nonprofit focused on fiscal policy.