The Department of Labor's fiduciary rule led to "tremendous" losses for brokerage and other investment firms, causing billions of dollars to be shed from their market valuations as investors feared the rule would hurt profitability, according to a new report.
The report examines the stock prices of 36 publicly traded brokerage, mutual fund and life insurance companies, finding they lost a total $14 billion in value as a direct result of the fiduciary rule.
That correlates to a 2.5% loss in the group's overall market capitalization, which was $571 billion as of mid-February 2015, days before President Barack H. Obama
directed the Labor Department to propose its conflict-of-interest rule governing investment advice in retirement accounts.
The report 's four co-authors — Cliff Moll, Robert Kunkel and Bruce Niendorf of the University of Wisconsin Oshkosh, and Kristine Beck of California State University in Northridge — dub the fiduciary rule's market impact the "Obama Effect."
"We find a large Obama Effect," they said. "This result is not surprising, since the profitability and value of investment firms is reduced by the inability to collect conflict-of-interest fees."
The White House Council of Economic Advisers said investment companies collect $17 billion annually due to conflicted investment advice to retirement savers.
The report, titled "How Do Investment Companies Fare Under Obama and Trump Fiduciary Rules" and set to publish in an upcoming issue of the Journal of Accounting and Finance, adds together three events over 2015-16: Mr. Obama's call to action, publication of the proposed fiduciary rule in the Federal Register and publication of the final rule.
The report also quantifies the so-called "Trump Effect," measuring the positive market impact for investment firms of President Donald J. Trump's presidential election victory, coupled with Republican control of Congress.
As a candidate, Mr. Trump signaled his wish for broad deregulation, saying just a month before the election that he would slash
as much as 70% of federal regulations. Anthony Scaramucci, an adviser to Mr. Trump who subsequently served a short stint as White House communications director, said during the campaign that Mr. Trump
would "repeal" the fiduciary rule if elected.
The report authors found the Trump Effect to be much greater than the Obama Effect. Cumulatively, the three dozen investment companies, which included firms such as Morgan Stanley,
Raymond James Financial Corp. and TD Ameritrade Holding Corp., gained $56 billion in market value as a result of the election results.
The report calls this an "astonishing" increase.
"Given that Americans saving for retirement will likely continue to pay conflict-of-interest fees, the financial markets are optimistic about the future revenue streams of these investment companies," according to the report. "With the election of Trump, investment companies recovered all the losses from the Obama Effect and more."
Authors note, however, that investors priced in the
expectation of rollbacks to financial regulations in addition to the fiduciary rule.
Since his election, Mr. Trump also has
signed a rollback of some banking rules codified in the Dodd-Frank financial reform law. He also installed an ardent critic of the Consumer Financial Protection Bureau — Mick Mulvaney — to be the agency's acting director. In February 2017, months before the fiduciary rule was scheduled to take effect, Mr. Trump
directed the Labor Department to review the fiduciary rule, which
subsequently died in court.
