The Department of Labor’s fiduciary rule backed by President Barack Obama’s administration in Congress could put an end to hidden fees and conflicts of interest in the investment market, potentially driving more assets out of actively managed investments and into low-cost, transparent exchange traded funds.
A controversial new regulation for investment advisors is due to arrive in April, reports Madison Marriage for the Financial Times.
The Obama administration has calculated that the new fiduciary rule, which will require money managers offering retirement advice to put their clients first, could result in $17 billion in cost savings per year for American workers and retirees.
The new rule could deter investment advisors from recommending funds based on big commissions and encourage broker-dealers and other intermediaries to suggest alternative investment options that provide investors the best bang for their buck.[related_stories]
“I am very cynical about the active fund industry. A lot of it is smoke and mirrors and stories, not performance. Institutions that have detailed knowledge and experience do not buy the same funds individuals do,” Lee Kranefuss, chairman of passive investment specialist Source, told the Financial Times. “A lot of active funds get sold because of the commercial arrangements, not because of their performance.”
Many observers,including Moody’s and Fitch rating agencies, believe the rule change could be a catalyst that would drive more money out of active funds and into cheaper passive alternatives, such as index-based ETFs. Active funds charge an average 0.8% expense ratio, according to Morningstar. In contrast, the average non-leveraged, index-based stock ETF has 0.50% expense ratio, according to XTF.
“Under the new regulation, advisers are expected to ensure investments are in the best interests of their clients, rather than merely suitable for them,” Stephen Tu, senior analyst at Moody’s, told the Financial Times. “In practice, it will become more difficult for advisers to place their clients into higher-cost investment products.”
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