Ending the DOL Fiduciary Rule Won’t Change the Long-Term Trend

One industry benefiting from the election of Donald Trump is asset management. Specifically, active fund managers. Companies like T.Rowe Price (TROW) and Franklin Resources (BEN) have outperformed the broad index since election day.

Chart from WSJ. Click image to enlarge.

Chart from WSJ. Click image to enlarge.

The outperformance stems in part from the expectation that the new DOL Fiduciary rule and the legal pressure to move assets to lower priced index funds are over.

In simple terms, the Labor Department rule requires that financial advisers act in their clients’ best interest when guiding them on retirement-savings options, replacing a looser standard that their advice merely be suitable. In practice, this might steer more savings into cheaper passive investments. It also will favor fee-based investment products over those that pay advisers a commission.

Many interested parties, and at least one prominent member of Donald Trump’s transition team, want to step in before new rules take effect in April. The expectation they will succeed is one factor pushing up the shares of asset managers—particularly those that run actively managed funds. Active manager Franklin Resources, for instance, has rallied 16% since the election, while passive juggernaut BlackRock has risen just 5%.[emphasis added]

Investors Are More Aware of Fees

Assets are not shifting to passive strategies because of a proposed DOL rule. The shift has been ongoing for years. It’s why Vanguard has over $3.5 trillion in assets under management. Investors are more aware of the high costs and poor performance associated with active management. It was even a subject for Last Week Tonight with John Oliver.

And when active managers fail to outperform a passive index and charge more to do so, the assets will flow to index investing. It’s not rocket science.

Ending the DOL fiduciary rule will not end this trend. It is a small reprieve.

This is not to say active management is dead. Active management will have its place. But the long-term trend favors the passive investing firms and President-Elect Trump can’t change that.