During his presidential campaign, Donald Trump repeatedly accused Hillary Clinton of being in the pocket of the big banks and brokerage houses. He suggested that, unlike himself, she would act as president in the banks’ favor and against the interests of ordinary Americans. That made her “Crooked Hillary.”
So it’s at least very surprising that in his first flurry of activity as President, Trump is advocating changes in government policy that are very favorable for big bank profits, while potentially harming customers and the financial system as a whole.
eliminating fiduciary responsibility
His first action has been to derail implementation of the mandate, recently instituted by President Obama, that financial advisers handling individuals’ retirement investments act as “fiduciaries.” Put in the simplest terms, fiduciaries have a legal obligation to act in the client’s best interest rather than in their own. This implies not recommending products that have a history of bad performance, but which pay high sales commissions to the salesman. Apart from the Obama exception about pension assets, stockbrokers and insurance salesmen have no such requirement today. (Congress has repeatedly refused to enact the necessary legislation.)
Donsider three investment products:
–Product A is a Vanguard index fund. It charges 0.08% of the assets per year as a management fee.
–Product B is an XYZ brand fund that is for all practical purposes the same as an index fund. Buyers pay a commission of 5% of the assets invested to acquire shares. The fund charges 1% of assets as a management and pays your broker 0.50% of your assets yearly as what amounts to a retention fee.
–Product C is just like Product B, except that its managers have underperformed the index by 2 percentage points for each of the past ten years.
Of these three, a fiduciary can legally only recommend A. Because a broker or other financial adviser must only do things that are good for you, not what’s best for you, he can likely recommend both B and C if he believes you won’t lose money from them. That’s even though C will likely perform 3.5 percentage points worse than A each year.
In a world where stocks gain an average of 8% a year, the holder of C makes 4.5%. In nine years, the holder of A will have doubled his money. The holder of C will probably be up by 40%.
the Trump rationale
Trump administration official Gary Cohn, formerly a high executive at Goldman Sachs, explains that Mr. Trump believes the Obama rule is bad. Why? …because it may reduce consumer choice by potentially driving the purveyors of high-cost, poor performance products out of business. That is, the Obama rule somehow “hurts” people by increasing the amount of money they’ll have at retirement. This is sort of like saying we should eliminate car safety inspections because they prevent used car dealers from selling autos with no brakes–thereby limiting consumer choice. Media reports say the analogy Cohn actually used is that the Obama rule is like having supermarkets that can only sell food that’s good for you. Huh?