Trump/Republicans Deregulating Wall Street by Repealing Dodd-Frank

[Gilberto de Piento]

The last 8 years have been so boring. I miss a good recession.

http://www.businessinsider.com/trump-ex ... ule-2017-2

President Donald Trump is set to sign two executive orders on Friday that would roll back two major Wall Street regulations, according to the Wall Street Journal.

Trump will target the Dodd-Frank Act, which was written in the aftermath of the financial crisis to scale back risk taking at the country's largest financial institutions, as well as the fiduciary rule, which requires investment advisers to put client interests above their own when it comes to investment choices for retirement accounts, according to the Journal's Michael Bender and Damian Paletta.

[Chad]

They probably need to prune Dodd-Frank a little, but they always go to far.

For instance, one item Trump wants to eliminate is the fiduciary standard:

the fiduciary standard, basically charges advisers with putting their clients' best interest ahead of their own. For instance, faced with two identical products but with different fees, an adviser under the fiduciary standard would be compelled to recommend the one with the least cost to the client, even if it meant fewer dollars in the company's coffers -- and his or her own pocket.

http://www.bankrate.com/finance/investi ... ard-1.aspx

It's always this way. Clinton did it too, as he was the one that helped eliminate Glass-Steagall.

One easy fix would be to force all investment banks to be partnerships (how it used to be), as it would put the decision makers directly in the line of fire and make them take less risks. This would be more market influence and less specific regulation on what they could do.

[Tyler9000]

Yeah, I think eliminating the fiduciary standard is a bad idea. But one could argue that the fiduciary standard is a good idea only if one trusts it to be objectively enforceable -- an assumption I've approached skeptically. Otherwise it simply builds false faith.

The one good thing I've seen come out of this news is that the truly good financial advisers are loudly complaining about it and pointing out how repeal is not in clients' best interests. If you're paying for financial advice, I'd recommend reading their Twitter feed today. If they're not speaking up, consider that a sign to look for someone else even if the fiduciary standard ultimately remains in place.

[IlliniDave]

I don't know enough about Dodd-Frank to comment, but a lot of people feel it missed the mark. I like the fiduciary rule and saw it as one of the highlights of BO's tenure. My understanding is that it affects primarily/solely retirement accounts where a lot of employees of moderate and small sized companies get fleeced pretty bad by third party 401(k) administrators through lousy, high fee offerings and no "better" alternatives.

Unfortunately the new administration seems color blind when it comes to regulations--they want to kill good and bad alike.

[Chad]

Just lying through his teeth about the fiduciary rule.
https://www.yahoo.com/finance/news/rule ... 54501.html

Shit like this allowed my last company's crap 401k to exist and people like my dad have no ability to judge this type of thing on their own.

[Gilberto de Piento]

My parents went to an adviser to ask if they were on track to retire and came away with no answer to their question but newly invested in $10,000 worth of mutual funds with a big up front fee for the adviser as well as something like a 1% fee for the fund management. They've had the fund for a few years and it hasn't beat the index yet, even before fees. The worst part is for some reason they don't want to insult this adviser so they won't pull the money out and put it with the rest of their money in Vanguard. It's legalized robbery.

[Kriegsspiel]

Caveat Emptor.

[Gilberto de Piento]

Caveat Emptor.

I agree with you to a point in this case I think the adviser has abused the trust of their client. The adviser promises one thing (earnings performance) and delivers something else (earnings that underperform the market) by providing a biased description of the product being sold. If the buyer was fully informed (and more people should inform themselves) they would never choose to make the purchase. I think when a customer pays an adviser they have a responsibility to look out for the interests of that customer. There is precedent for this in other fields.

Maybe a compromise could be that the adviser should be able to be an adviser or a biased salesman but not both at the same time.

[Campitor]

@Giberto de Piento

+1

Repealing Dodd-Frank is a stupid, stupid, stupid idea. Did I mention it was stupid? Title IX within Dodd-Frank is sorely needed. A doctor would be excoriated for pushing a more expensive procedure that netted him more money if a less expensive procedure was available that guaranteed an equal outcome. Unscrupulous contractors have their licenses removed for taking advantage of elderly for home repairs that were unneeded or overly expensive. But giving intentionally biased investment advice that could harm a customer's financial standing or lead to a significantly lesser payout is okay? Screw that.

[Dragline]

No banker will be left behind: https://www.youtube.com/watch?v=ZXHckAFMzaw

Bed rock agenda item. No surprises here, especially considering the new slate of appointees and their backgrounds. The rich will get richer, just as drawn up.

I will be interested to hear about how this will help create manufacturing jobs in the Midwest, though.

[Riggerjack]

Wait, what does

The rich will get richer, just as drawn up.

have to do with fiduciary responsibility of financial advisors? It's not like the rich are hiring these crooks. These jerks prey on the middle class. Who damn sure aught to know better.

Honestly, I don't know why that fiduciary responsibility clause would be removed. I just can't see a lobby which the pull and motivation to push for it. Maybe it is stage 1 to removing the whole bill, by getting rid of the only part anyone can really get behind?

[Dragline]

This is an old story, but more important now because its more lucrative. "Where Are the Customer's Yachts" was written in 1941. As for the the financial industry, it is more true today simply because only about 5% of the population invested in the stock market then (the idea of "retirement" really had not been invented), while its around 50% today, mostly through 401(k) plans managed by people looking for high fees and no responsibility.

"Humorous and entertaining, this book exposes the folly and hypocrisy of Wall Street. The title refers to a story about a visitor to New York who admired the yachts of the bankers and brokers. Naively, he asked where all the customers' yachts were? Of course, none of the customers could afford yachts, even though they dutifully followed the advice of their bankers and brokers. Full of wise contrarian advice and offering a true look at the world of investing, in which brokers get rich while their customers go broke, this book continues to open the eyes of investors to the reality of Wall Street."

Its been pretty much like the mafia since 1995. Pay off Wall Street and then they won't bug you about what else you do. But otherwise, they'll bust you out and burn down your restaurant/administration. This is the payment to Paulie. Best to do it early.

[jacob]

@Riggerjack - Asset managers benefit from lifting the fiduciary rule. At the end of each month, between the 25th and the 30th, payrolls all over the country sends these companies a lot of money in the form of 401k contributions to all those employees who are diligently saving their recommended 5 or 10% for their retirement---That whole dollar-cost-averaging scheme people have been sold on. Very predictable source of cash. This money gets exchanged for stock. The sellers have money and they go out and spend it in the economy where it makes it back into the companies as revenue. It's like blood circulating in the body. If managers can siphon off an extra 1% in fees from this ginormous market-moving cash flow ...

The other source of revenue is in the form of "churn" in crappy mutual funds---typically what smaller companies offer as the only choices. That creates a lot of commissions for brokers (which are mainly exchanges and big banks).

Dodd-Frank benefits big banks (changes capital reserves, so they can lend out more, so higher ROE) and IBs who are allowed to take bigger risks (also higher ROEs) ...

Look here before Monday (when it resets) to see who benefits: https://finviz.com/map.ashx

[BRUTE]

DCA != saving 5-10% for retirement every month, it's usually used as the opposite of lump-sum investing - hardly an option the average employee has.

[IlliniDave]

DCA != saving 5-10% for retirement every month, it's usually used as the opposite of lump-sum investing - hardly an option the average employee has.

Yeah, I hardly think saving a little out of every paycheck is some sort of nefarious "scheme". There was a time when people traded in whole shares and it became common for regular interval investors to buy integer X shares of company Y every month or quarter or whatever. Some people still did that as times changed and fractional purchases became possible (so you could specify a purchase amount in dollars rather than integer shares). Someone showed that specifying purchases in constant dollar amounts could be advantageous over time when compared to purchasing in constant share numbers and it came to be called "dollar cost averaging". In more recent times it has come to be frequently compared to "lump-sum" investing. The typical scenario is someone winds up with a large pot of cash (inheritance, bonus, sale of a significant asset, etc.) and wants to invest it. DCA then becomes a risk mitigation strategy of sorts for the investor who fears the markets will tank the day after he invests. With DCA his investment would be spread over time and some of his money would get invested at the lower future prices if his fears came true. The obvious trade off being that should markets rise during the period the investment is spread over the investor will make less on his total investment over time.

The fiduciary rule is a department of labor thing and only affects workplace retirement accounts. Fortunately this is only a 90-day (I think 90, maybe 60-day) delay of the day it comes into effect (this isn't a case where they're potentially undoing something that's been on the books for years, it's a new, pending rule). Hopefully they will see its merit and allow it to move forward.

I'm lucky in that I have an outstanding workplace 401k plan. If I roll it all over to Vanguard when I retire, my fees would increase. Further I have the option to invest in instruments outside the plan via a linked brokerage account (good for investors who don't want to be coddled by plan trustees). What I'd like to see is uniformity where all workers had access to a plan as good as mine. The fiduciary rule would be a step in the right direction.

[jacob]

I'm talking about the ways DCA benefits the fund-managers, not the ways DCA benefits the retail side. The key point with DCA from the traders' and brokers' perspective is its predictability and volume. The "scheme" lies in exploiting this predictability. Eliminating the fiduciary rule makes this easier. It also allows for bad execution---if you don't have the best interest of your client at heart, you can fire the block traders... I mean who cares about getting fair prices if you don't have to... and so on.

To avoid it as a retailer, one can either
1) See if it's possible to make the contribution at some other day than day 25-31-5(*)
2a) Stick with index funds in some of the BIG indexes (like DJIA, SPY) ... because trading futures is much cheaper commission-wise for the fund company that doing 500 or 3000 block trades (one for each security in the index). Also prefer big fund companies over small ones. Big ones will set up internal matching/exchanges so that if their fund A needs to buy share X and fund B needs to sell, they can just transfer internally instead of going through the market.
2b) Look even more detailed at the fund fees---this is asking a lot of the average consumer, but in the pf-sphere, it's the first thing people look at these days. However, as mentioned, small companies (<500 employees) might only offer crappy funds (high fees but no performance.)
3) Self-administrate via a brokerage.

(*) Because of this effect ... it's also best NOT to trade in the last few days of the month nor in the first few unless you're aware of it. It's a consistent inefficiency in the market.

[Dragline]

We are fortunate to have a "self-directed" option -- essentially an attached brokerage account where you can buy or sell whatever you want. Commissions aren't great ($8-10 per trade, mostly), but it takes you out of the "limited fund options with high fees" world that most get stuck with. But I don't think that many employers offer the self-directed option. Of course, they also offer "advice" services with additional fees attached.

I've always made all contributions to cash/money market and then moved it and invested it sometime later.

There are many other insidious ways of charging fees against 401(k)s, so look at your statements carefully. I found out I was being charged for "insurance" (basically would make my contribution if I became disabled) last year and it took several hours to figure out what it was and then several more trips through bureaucracy to get rid of it.

[IlliniDave]

I'm talking about the ways DCA benefits the fund-managers, not the ways DCA benefits the retail side. The key point with DCA from the traders' and brokers' perspective is its predictability and volume. The "scheme" lies in exploiting this predictability. Eliminating the fiduciary rule makes this easier. It also allows for bad execution---if you don't have the best interest of your client at heart, you can fire the block traders... I mean who cares about getting fair prices if you don't have to... and so on.

So really, it's simply the phase (relative to calendar months) of periodic purchases you are talking about, not DCA per-se. Got it. I think most people are stuck with payday contributions (fortunately many are paid weekly or biweekly), but I think most would have the option to direct contributions to a money market or stable value fund and could manually avoid buying on the handful of days surrounding the new month, but I'd guess that is far more trouble than most people would be willing to go to. I'm surprised that phenomenon hasn't been "arbitraged away" by now seeing as these plans have been around nearly 40 years.

Better fund companies often assign preferred shares (e.g., lower cost "institutional" versions) to retirement plan investors because of that inflow predictability and relative stability of people's holdings. That is, if the plan administrator cares and negotiates for it.

There is no fiduciary rule today, nor has their ever been one applicable to retirement accounts. Elimination of the pending rule would only allow business as usual to continue unhindered.

I don't know if retail mutual funds would be directly subject to the standard anyway. The onus falls more on plan administrators and trustees in the selection of the palette of options that employees have available in their retirement plans. Relatively crappy options can still exist in plans as long as there are good options alongside them. Of course that would cause more competition in the retirement plan market space, which should drive any manager who wants part of that market to behave better.

The nice thing about outfits like Vanguard is that anything they can exploit via trading is passed to the shareholder as increased return/lower fees.

[bryan]

So far discussion is on the fiduciary rule. But what about the "SECTION 1033. CONSUMER RIGHTS TO ACCESS INFORMATION"

The battle of ownership versus access of user data. The blog post makes it to sound like aggregation services like Personal Capital, Future Advisor, Mint, etc will no longer work with some corporations (unless they cut a deal w/ that corp..). I agree it seems the JP Morgans of the world are seeking to "protect theirs" and wish to limit start-ups from accessing that sweet, sweet user data (which the user obviously would like to allow, given that they sign up for the start-ups service).

So I guess my short position in Intuit will take a beating on Monday.. (time to double down?).

[Farm_or]

The fiduciary repeal is unfortunate for the uninformed.

The Dodd Frank repeal is especially worrisome with the current bubble conditions. It's so large and complex, it's hard to predict how they go about it. I will be watching with particular interest in making more (shaky) loans possible and probable.

"The road to hell is paved with good intentions."