Investors “shouldn’t be fooled by the word ‘fiduciary’” in the Labor Department’s new rule, says SkyBridge Capital’s Anthony Scaramucci.
In summary, this rule impacts retirement accounts by requiring brokers to uphold a fiduciary duty and put clients’ interest ahead of the firm by going with the most cost-effective means of providing a product or solution.
“Any time you put the word fiduciary in something, that’s a really good red herring. How are you going to be defending that? How are you going to be going against something that’s a quote-unquote fiduciary. What’s wrong with this thing is it’s the government overreaching once again and making a decision for investors about what are good products and what are not necessarily good products,” Scaramucci tells Yahoo Finance.
Scaramucci noted that in the investment community, professionals are already held to a fiduciary standard. This is just “another additional layer” that’s “designed to move clients away from certain products.”
He believes the rule will have unintended consequences, including pushing investors to more passive indexing and passive investing.
“The index funds have done quite well in low interest rates and a declining interest rate environment. There’s no question about that. And there’s a big role for those passive investments in clients’ portfolios, but we have to be very very careful because we’re in a cyclical industry. When interest rates start to normalize, clients are going to need things that have a lack of correlation to the stock and bond market and this rule sort of prevents them from being offered those products. It’s a bad rule.”
Scaramucci believes that the government’s role as a regulator is to be a referee, and that the bad businesses and bad actors will get “washed away” by the free market.
“Why not let the marketplace allow that to happen as opposed to a government mandate?”
He added: “What I fear is rates are going and everyone’s going to be trapped in these passive index funds and there’s going to be a race out the door and all the elephants will be leaving the tent at the same time. We’re going to have a debacle. And we’re going to have a congressional hearing and someone in Congress is going to blame somebody, probably Wall Street. And you’ll say ‘OK, why didn’t you let more people have more diversity in their portfolios?’ This DOL fiduciary rule is killing the 401(k) businesses and it’s going to ultimately hurt the end user.”
Scaramucci, an economic adviser to Donald Trump’s presidential campaign, expects that the rule might be appealed in a Trump administration.
Julia La Roche is a finance reporter at Yahoo Finance.