Saddle Up, Pardner
Deregulation, anyone? Previous financial deregulation created “Wild West” conditions at banks, according to Senator Elizabeth Warren. Congress and the Obama administration addressed those conditions in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank regulations were designed to both protect consumers and control risky financial behaviors of financial institutions that contributed to the housing crisis and Great Recession (not to mention taxpayer bailouts).
We now have a new sheriff in town, with a different interpretation of financial regulations (and the need for them at all). We may or may not be returning to the Wild West of Banking, but one thing is certain: changes are coming.
CFPB in the Crosshairs
President Trump has a Republican Congress willing to partially, if not completely, dismantle Dodd-Frank. Rep. Jeb Hensarling of Texas, the chairman of the House Financial Services Committee, created the blueprint through his Financial Choice Act proposed last year. The Washington Post reports that Hensarling released a memo outlining revisions to the Act, with an increased emphasis on weakening the Consumer Financial Protection Bureau (CFPB) created by Dodd-Frank.
Hensarling may have solid ground in that the DC Circuit Court of Appeals has ruled that CFPB’s unique structure is unconstitutional. The President appoints the CFPB director for five-year terms while CFPB funding comes from the Federal Reserve, bypassing Congress. Thus, CFPB director Richard Cordray operates outside the usual checks and balances by design. Hensarling’s objections are likely more practical than constitutional, but the effect will be the same: a diminished CFPB with limited ability to issue penalties to financial institutions.
Meanwhile, the Federal Reserve will change significantly during the Trump administration. There are currently two openings on the seven-member Federal Reserve Board of Governors for Trump to fill, and one of the most dovish remaining members, Daniel Tarullo, has announced his upcoming retirement.
Tarullo is known for the “stress tests” applied to banks to verify that they have sufficient capital to handle potential financial shocks. Banks consider this policy — along with the Volcker Rule that requires banks to use their own money (not customer deposits) for speculative investments — to be a serious restriction on their ability to use funds to create greater growth and maximize profit.
Banks are sending a mixed message. While they may be happy to be rid of Dodd-Frank/CFPB regulations, banks have spent millions adhering to it and may prefer tweaking as opposed to complete overhaul. Either way, banks will again have to adapt to a new set of rules — as will financial consumers.
In Your Best Interests? Maybe, Maybe Not
On February 3, Trump signed an Executive Order ordering the Secretary of Labor to review the fiduciary rule (issued under the Obama administration and set to take effect in April) and rescind the rule if it is found to produce harm to investors/retirees.
The fiduciary rule holds all givers of financial advice to the fiduciary standard of acting in their client’s best interest above their own. You may be surprised that isn’t already the case, but some brokers and advisors may apply the suitability standard — meaning that advice must be suitable to your situation, but not necessarily your best option. Such advisors and brokers can steer clients toward investments that meet client needs but disproportionately benefit themselves.
Why wouldn’t we want the fiduciary rule to apply to all? Republicans argue that consumer choices become limited, and that removing the suitability standard prices low-income consumers out of the market given the costs (i.e. potential losses of income) involved in meeting the fiduciary standard.
Trump’s action could potentially preserve the status quo regarding financial advisors. While that’s not his M.O. in many areas, the term applies here.
Trump’s actions are designed to stimulate economic growth. However, increased growth typically comes with increased risk. Understand that as you consider your finances and investments. With the possible loss of the fiduciary rule and loosening of consumer protection rules, you must take matters into your own hands.
Verify the standard to which your financial advisor is held, as well as how that advisor is compensated. Educate yourself on the finer points of your investments, and learn how to evaluate risk and spot investment vehicles that fit the financial institution’s/broker’s needs more than yours.
We suggest applying the same rules as in the Wild West: look out for yourself, apply common sense, and don’t put too much trust in any one individual or institution.
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