Merrill Can’t Restore the Bad Old Days of Conflicts

The fiduciary rule is dead, but its spirit lives on.

The rule, which the Department of Labor first proposed in 2015, required brokers to act as fiduciaries — to put their clients’ interests ahead of their own — when handling retirement accounts. It sounded simple, but it meant that brokers would have to rethink the way they do business.

Mutual fund companies routinely pay brokers to sell their funds to clients. That payment is often an annual fee for as long as the client is invested in the fund — a particularly pernicious conflict of interest that gives brokers incentive to keep clients in high-priced and often poorly performing funds. As fiduciaries, brokers would most likely have to abandon the practice or at the very least disclose it to their clients.

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The SEC Just Did Brokers a Huge Favor

The Securities and Exchange Commission just threw brokers a lifeline. They should grab it.

Brokers’ troubles began in April 2015, when the Department of Labor first proposed its so-called fiduciary rule. The rule, which was issued a year later, requires brokers to act as, well, fiduciaries — or to put their clients’ interests ahead of their own — when handling retirement accounts.

It was a big departure from business as usual. Fund companies and other purveyors of financial products typically pay brokers to sell their wares, which means brokers are incentivized to recommend those that pay them the most, not necessarily those that are in their clients’ best interests. The naked conflict doesn’t exactly promote trust, so brokers aren’t quick to disclose it to clients.

All of that would obviously have to change under the fiduciary rule, and brokers fought back. They insisted they’re merely salespeople, dutifully executing orders for clients. And because they don’t give financial advice, there’s nothing wrong with selling the products that hand them the biggest bounty.

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