Ron Insana believes the Department of Labor’s (DOL) fiduciary duty rule is history.
An executive order postponed the rule’s implementation until June, and it likely will be “left to die,” he noted during his keynote address at BISA’s 2017 Annual Convention, titled “Trump 2017: From Washington to Wall Street.” But the idea behind the fiduciary rule — advisors acting in clients’ best interests — may prove more
durable, Insana told BISA Magazine
in a subsequent interview.
We’ll have to see if brokers go back to a “suitability” standard, the CNBC and MSNBC contributor said. Firms like Merrill Lynch and J.P. Morgan are already setting the bar higher and embracing the fiduciary standard (before the executive order postponing the DOL rule), the result mainly of pressure from the marketplace, he said.
Last year, Merrill Lynch announced that it would no longer offer new, advised commission-based IRAs. J.P. Morgan followed suit in November 2016, after the election of the regulation-averse Trump administration.
Nor is the idea of a fiduciary standard so radical. “I would always say put the client’s needs first,” Insana said. It is unlikely to hurt a brokerage firm’s retirement business. Indeed, if an advisor is allowed to earn 1 percent annually based on assets under management, that can easily become a self-sustaining business model, he added.
Why did the industry push so hard against the rule then? Fear of class-action lawsuits was a big concern, Insana said. The rule’s best interest contract exemption attaches a fiduciary obligation to the financial institution itself, including the potential for a classaction lawsuit against the institution for failing to meet its fiduciary obligations. “The industry much prefers arbitration,” he said, which is the likely alternative to resolving client/provider disputes if the DOL rule is scrapped.
Yes, some firms may have engaged in aggressive pricing and generated high margin products that were threatened under the rule; those players may receive a reprieve under the Trump administration. But that wasn’t the main issue with the rule.
Many advisors had feared they would be pushed into offering the lowest cost alternative in all cases, and the fiduciary duty rule’s lack of flexibility was troubling.
Banks should prosper
Under the Trump administration, Insana sees a stronger net position for banks and financial services institutions generally. Regulations may be loosened, and banks may enjoy less stringent capital requirements.
As for the Trump administration’s impact upon the economy, Insana noted: “Trump inherited a fairly stable and accelerating economy.” Job growth looks good, consumer confidence is at record levels, and the United States should see faster growth — close to 3 percent — though the Fed may raise interest rates several times this year, which could put a damper on things.
Firms like Merrill Lynch and J.P. Morgan were already "setting the bar higher" and embracing the fiduciary standard because of "pressure from the market place" — not the DOL.
Rising interest rates should be good for banks, though, as long as they don’t dull the bull stock market or slow GDP growth.
Politically, Trump may be on shakier ground. Had he stuck to his four initial stimulative measures: tax reform, deregulation (up to a point), rebuilding infrastructure and defense spending (up to a point), “That could have won him a second term.”
Instead he is threatening a trade war with China and Mexico, has a battle on his hands with the repeal of Obamacare, and has to manage a Russian hacking/influence buying allegation that does not look like it is going away. Politically, there has been nothing like it since the Nixon years, Insana said.
Absorbing the ‘robo’ technology
Returning to financial services, do financial advisors have other worries — above and beyond the DOL’s fiduciary duty rule? For example, robo-advisors?
Most big banks already have a stake in robo-advisor platforms, Insana said. Banks will continue to absorb the technology. At a minimum, it will help with things like administration and documentation. Indeed, it might leave advisors more “face time” with clients, which is arguably a good thing. Companies like Charles Schwab are already using robo-advisors extensively to attract more self-directed investors.
What about the millennial generation? Has an aging sales rep cohort come to grips with the younger client generation — one that some say is fundamentally different from its predecessors?
Boomers vs. millennials: "We ate time. They eat data."
Insana doesn’t see enormous generational differences. Every generation rebels in its youth and grows conservative with age, he said. Youth has always been unfathomable to older generations — just read the ancient Greek dramatists. Sure, some adjustments will need to be made. Older advisors are used to spending hours on the phone with clients. The younger generation tends to avoid phone calls; they embrace more concise means of communication like texting.
“We ate time,” commented Insana, who was born at the tail end of the baby boom generation. “They eat data.”
Stick with ‘plain vanilla’
Overall, do banks have a future as distributors of non-depository products? “They have a future, though I’m not sure it will help them,” Insana said. Banks would do well to avoid the more esoteric financial products. As long as they stick with “plain vanilla products,” like mutual funds or simple annuities, they will be seen as “revenue enhancers.” But “if derivatives get out of control again,” then the non-traditional products will prove to be a trap.
“I have no inherent bias against the one-stop shop” — e.g., banks offering insurance and securities in addition to traditional banking services, he said. But some prudence is required. “When banks go too far afield, they usually get into trouble.”
Overall, Insana urged perspective. In his keynote address, he noted that the U.S. remains politically stable and demographically healthy (unlike Japan, say, which is projected to lose 20 percent of its population in coming decades).
The European Union (EU), by comparison, is not so politically sound. A rapid UK exit from the EU could be economically disruptive for Europe. So could the growth of nationalism and populism in France and other European nations. Russia has been allegedly meddling in U.S. politics, and potentially in Europe’s affairs as well. Putin’s Russia, for its part, is suffering from low oil prices. Elsewhere, Japan is “moribund,” Brazil is in the dumps, and on and on.
For decades, “The U.S. has been the [world’s] best bet,” Insana told BISA convention attendees. A change of administrations in Washington, D.C., is unlikely to alter that.