Cui Bono? By: Gabriel PotterMBA, AIFA® 2017.02.06

Pop quiz:  What types of stocks are doing best since the election of Donald Trump? 

Answer:  Financial stocks.  President Trump has made it clear that he intends to make life easier for Wall Street.  Last week, he got the ball rolling. 

On Friday, citing his wish to undo the handcuffs of the Dodd-Frank act, he issued an executive order asking for reduced regulations for the banking and investment community.  Regulations do two things:  first, they restrain behavior and second, they create additional burdens of time and money on institutions to demonstrate and document compliance to the law.  Let’s ignore the type of regulation that limits institutional action and just focus on the burdens of compliance for a moment.   Here’s something good that could come out of this drive to simplify business:  after Dodd-Frank, many regional banking players felt pressured to merge with competitors (and get larger) or withdraw from the market because of the additional compliance burdens.  In other words, an unintended consequence of the Dodd-Frank act was to create fewer (but larger) players in a consolidated industry. This is a potential recipe for limited competition or outright collusion.  Limiting the regulatory burden on small and mid size banks could even out the playing field.  So, that’s a potentially positive outcome both for the industry and consumers. 

In contract, we could easily come up with bad outcomes as a result of deregulation.  The social contract which allows for the creation and enforcement of regulation didn’t occur spontaneously by power-hungry, palm-rubbing bureaucrats.  There are historical reasons for regulation, and they are usually created in response to a hitherto unregulated behavior which negatively affected the economy.  Pushing for lower regulations could benefit the industry, but who might lose out?  It will depend on which regulations get cut, and which actions are now sanctioned.

Let’s consider another action Trump took last Friday: his suspension of the fiduciary rule.  This action signals more than a delay; most analyst suspect the legal application fiduciary rule is DOA under President Trump.  We’ve spoken a lot about the fiduciary rule in blog posts, Confero articles, and monthly newsletters before.  Put simply, the fiduciary rule is an investor protection which states, if your advisor is working with your retirement money, your advisor has to work solely in your benefit.  What’s the problem with working to this standard?  Well, many big investment banks and broker / dealers have been taking advantage of operating at a lower standard as salesmen, and not fiduciaries.  They primarily work for their own benefit, and not their clients.  Many brokers are not used to putting their clients’ best-interests first and many bank and broker/ dealer business models are not currently structured that way.  These banks would have to change how they do business to accommodate the law.

President Trump wants to reverse the investor protection and allow brokers to continue charging commissions and getting kickbacks – business as usual.  So, who benefits from President Trump’s suspension and likely dismissal of the fiduciary rule?  The suspension will reduce the burden on these banks, brokers, and broker / dealers – Wall Street.  Who loses?  Any retiree who uses their services. 

That’s the magic point.  Retirees are not forced to use their services.  The fiduciary standard, regardless of what the law allows, is still the highest standard and best practice.  Retirees will continue the trend of moving away from traditional industry salesmen and move towards fiduciary counselors for advice.    

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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