How Will Trump’s Focus on Deregulation Affect Asset Management?

By now, the world is well aware that Americans voted President-elect Donald Trump into office, and he’s making waves and promises to overturn many of the previous administration’s policies even before being sworn in this coming January.
During his election campaign, the business mogul turned politician made it very clear about his distaste for high taxes, exporting U.S. jobs to foreign countries, and stiff regulations on the financial industry—to name just a few.

Among the threats, and/or promises made by Trump (depending on which side of the advisory fence you sit): to overturn new fiduciary rules recently set by the Department of Labor (DOL) and the Dodd-Frank reform bill signed into law by President Obama in 2010.

Let’s address the new fiduciary rule first. It made it mandatory for professionals giving financial advice about retirement funds to put a client’s best interests first.
Its primary goal was to prevent investors from paying unnecessary high fees and commissions on actively managed mutual funds and annuities; and with the April 10, 2017 deadline looming most advisors were making serious headway toward complying. For some, that meant eliminating high-fee products completely or changing their fee structures.

For example, Edward Jones announced in August it would curtail access to high-fee funds for retirement investors and slash investment minimums. Commonwealth Financial Network, a leading independent broker-dealer, said in October it would stop offering commission-based products in individual retirement accounts and qualified retirement plans, although recently said it would go back to commission IRAs if the law was repealed.

The new DOL ruling also meant that the two-decade long trend toward passive/index funds and ETFs, and away from actively managed funds, would likely continue.
In the past 12 months alone, U.S. investors have taken out nearly $300 billion in actively managed funds while the low-cost index variety added $212 billion, according to Morningstar. Bond funds have also grown in popularity, with $337.5 billion flowing into them since January 2014 versus $171.9 billion into stock funds, according to the Investment Company Institute.

Up until Election Day, the consensus on Wall Street was that money would continue to flow into the largest fund companies with the lowest costs. As a result, the stock of those companies feeling the pinch of smaller expense ratios suffered.

T. Rowe Price (TROW) stock had fallen 8.72 percent from the start of the year through election eve. Invesco (IVZ) was down 12.7 percent and Legg Mason (LG) tumbled 24.4 percent.

Now that Trump is hinting at overturning the new DOL ruling, there are rumblings of a rebirth of broker-sold actively management funds.

“The planets are lining up for old-line money management firms,” wrote Erik Oja, research analyst for CFRA Research. “Investors are expecting fund companies to get some regulatory relief, and, with expectation of a faster-growing economy, they’re getting more of their animal spirits back to work.”

That, plus Trump’s vow to spend billions on infrastructure and that economic growth would lead to inflation and, consequently, higher interest rates, explains why $9.1 billion flowed out of bonds in the first week after the November election. Meanwhile, ETFs and mutual funds saw the largest inflow of assets—$25.4 billion—since December 2014, according to Bank of America Merrill Lynch.

As a result, shares of those same companies that struggled leading up to the election are rebounding sharply with the hope of reduced regulation. T. Rowe Price rose 17 percent in the month following Election Day, Legg Mason rose 8 percent; and Invesco’s bleeding stopped flat for that one-month period.

No one really knows if and/or how quickly President-elect Trump could loosen restrictions in regulation. The consensus is that a full repeal of the DOL fiduciary rule could take months or even years. During that time, investors will grow progressively fonder of lower fees and a sense of safety. So, for brokers and advisers celebrating the DOL rule’s demise better put down the champagne glass.

We might see fewer regulations and a loosening of others, but a complete trashing is highly unlikely. So, if you’re an adviser selling high-cost products in retirement accounts, you can still count on having to change your model or expect a decrease of assets.

The repeal of another regulation-heavy bill might not directly impact asset management, but it will have a profound effect on the overall financial industry. The highly controversial and criticized Dodd-Frank Wall Street Reform and Consumer Protection Act was designed to keep banks in check, protect consumers from a financial collapse similar to 2008, and boost the economy; however, the regulation has largely been a failure.

Big banks have only gotten bigger since the law’s implementation, with JPMorgan Chase, Citigroup, Bank of America and Wells Fargo now controlling about 45 percent of total bank assets. And because banks with more than $50 billion in assets were subjected to increased regulatory burdens, many small and regional institutions went out of business.

“There seems to be a general consensus that the Dodd-Frank bill has been overly burdensome on small community banks, with compliance costs through the roof and loan growth to small businesses and individuals (via mortgages) anemic,” Jeffrey Miller, partner at Eight Bridges Capital Management, told CNBC. “A revision or removal of some of the worst of the regulations, particularly for mortgages, will be very beneficial for consumers.”

According to the American Action Forum, Dodd-Frank has already imposed $36 billion in costs on the financial industry, and experts say that Trump could easily overturn nine Dodd-Frank regulations capable of consuming 1.2 million hours and $1.7 billion in compliance costs—a drop in the bucket, but it’s a start.

Ultimately, it’s up to President-elect Trump how much or little he changes the DOL’s rules and Dodd-Frank regulations. Until he actually begins crossing the T’s and dotting the I’s, we won’t know the exact impact on the asset management community.

One thing we know for sure: It’s in everyone’s best interest to stay current and be prepared for what promises to be a year of drastic change for advisers, brokers, banks, consumers and investors.