TRUMPED! Back to the Future for Consumer protections
By Brian Page
December 5, 2016
Donald Trump is a singular force that promises to reshape the economy in ways that every student would do well to understand. From tax policy to student loans to consumer protections, the personal financial world under a Trump administration will look nothing like it has under President Obama. Starting now, financial literacy teachers must adjust their lessons to reflect this new reality. In our series TRUMPED! award-winning personal finance school teacher Brian Page offers guidance. This is the first in the series.
THE FIDUCIARY RULE is dead on arrival. For eight years under the Obama administration, financial educators could point to a growing battery of consumer protections and focus lessons on how to understand and best use them. The crowning achievement in this vein was the fiduciary rule, passed only this year and set to take effect in April 2017. Trump hates the rule and will try to roll it back before then.
The fiduciary rule is a common-sense law that requires financial advisers to put their client’s interests ahead of their own when making recommendations or giving advice on a 401(k) plan or IRA. Financial education teachers on their toes may have modified their curriculum to reflect this once-imminent provision. Now they must hit rewind.
“It is extremely likely the Department of Labor fiduciary rule will not go into effect as planned,” according to a recent report in the Wall Street Journal. The goal was to eliminate conflicts of interest that may nudge advisers to put their own interests ahead of their clients by, say, steering them into higher fee mutual funds.
The new lesson, thus, may have been that you can trust such advice. Now, we may revert to the longstanding suitability standard, which requires only that your adviser have a reasonable basis for believing a security is right for you. But it might be even more right for the adviser collecting a fee. We are veering back to a world where individuals are on their own—and that should now be a central lesson, beginning immediately.
In my financial literacy classes I have seen first-hand how illustrating compound returns widens the eyes of students. They are amazed at how much wealth can be created simply by investing and letting the returns grow. Now I am showing them another lesson in compounding: how high fees over time cut into savings growth.
Consider an annual investment of $5,000 starting at age 22 and made until age 60. Let’s say this investment earns 8% a year. If you pay 1.5% in annual fees you will end up with about $750,000 but have paid fees totaling about $350,000. That same investment in a low-cost stock index fund charging just .14% or so would have cost less than $40,000 in total fees leaving you with more than $1 million. The New York Times recently reported on the perniciousness of compounding investment fees on teacher retirement products such as 403(B)s.
So here’s the scoop. It’s not certain that Trump will be successful rolling back the fiduciary rule. But so far he has shown no inclination to take no for an answer. There’s no harm in teaching kids that their financial future will be less protected if he does. The point to make: be skeptical and be armed with the right questions when making any financial decision. That’s at the heart of financial literacy anyway.