Private equity firms could expect a multibillion-dollar capital investment windfall if a rule requiring US financial advisors to act in their clients’ best interests is scrapped before it enters into force in April.
In the second of two executive orders signed last Friday, Donald Trump requested the Labor Department review the Fiduciary Rule, which was designed to prevent investment advisers from giving conflicted advice relating to retirement plans such as 401(k), including advising on high-cost investment products such as private equity funds.
Firms have been keen to tap into the lucrative 401(k) market, which traditionally shuns the asset class because of its illiquidity and the large minimum investment. The Carlyle Group, Blackstone and KKR have pioneered a series of 401(k)-specific products, which typically allow advisors to offer private equity stakes to investors as part of a “target fund,” in a diversified portfolio with other investments, and offer daily liquidity.
Scrapping the Fiduciary Rule would boost these firms’ access to the market, and others that follow suit, and could unlock a significant proportion of the estimated $6.8 trillion currently held in individual retirement plans. This means if advisors allocate the same proportion of capital to the asset class as other US retirement schemes, an average 7 percent, around $476 billion could be ploughed into private equity funds.
There is currently no timeline or deadline for a decision.