Market & Economic Commentary| Winter 2016/2017

By: Jim Scheinberg – February 22, 2017

TRUMPeting in a New Era! (or Huge Error?)5

Our last commentary was released hours after, as we put it, “the most shocking election in modern U.S. history.” What was even more of a shock is what unfolded in the days and weeks thereafter. Leading up to the election, markets were indicating that if Donald Trump were to upset Hillary Clinton, global equity markets would crash; and in the wee-hours of election eve, that’s exactly what appeared to be unfolding. Somehow, within one short day of the anointment of Mr. Trump as President-Elect, stock markets across the globe recovered and U.S. exchanges rallied. After our commentary was published, U.S. indices continued on to challenged all-time highs, shooting up nearly 10% in the five weeks that followed the pre-election lows. Yields on U.S. Treasuries, which are always a harbor of safety in uncertain times, reversed course and skyrocketed, as investors sold ‘security’ and embraced a new hunger for risk and appreciation. In my position, I am fortunate to regularly have conversations with peers who are some of the brightest portfolio managers, advisors and fiduciaries of pools of institutional capital in the world. There wasn’t one of them that wasn’t initially baffled by the rally.

Nonetheless, the financial ‘celebration’ has happened, regardless of its cause. What’s left is to sort out what a Trump Administration means for domestic and international capital markets and economies going forward… if it even means anything at all. As we sort through the massive amounts of data, policy and conjecture, I harken back to the most important thing I remember from the fog of the financial crisis: don’t speculate on the ‘what-ifs’… just continue to dig deep to find what it is that you are certain you know, and proceed accordingly. We attempt to do so in the following PIERspective.

How the Markets Fared6

There were a lot of sparks in the bond markets after the surprising Trump win. Interest rates, which had plummeted on election night as election results came in, reversed course and skyrocketed over the next several weeks, spiking one full percentage point from where they started the quarter. The bellwether 10-year Treasury rose to 2.45% at year’s close after starting Q4 at 1.60%. The massive sell off in high-quality fixed income led to 3% net losses in most intermediate-duration indices. When the dust settled, interest rates finished the year almost exactly where they started, leaving net returns of just their poultry two-and-change percent coupons.  Long-term government bonds saw double digit declines in Q4, which likely hit LDI fixed income portfolios in pension funds especially hard. The US dollar index, which had spent most of the year in negative territory rocketed up 6% following the election, leading to substantive losses in both developed and emerging international debt markets. These losses erased most of the recovery gains that were made during the year. The news was much better in the more credit sensitive areas of the bond markets, with high-yield posting modest gains for the quarter, capping a year that rivaled the returns of most equities. As confidence in the economy grew, so did appetites for risk.

7Investors piled into equities here in the United States immediately following the surprise results of the election. With an expectation that a Trump administration agenda would lead to a near term acceleration in the economy, value stocks vastly outpaced growth names during the quarter. This was a continuation of a trend that we saw as we emerge from the depths of the sell-off during the beginning of 2016. Both situations resulted in building economic confidence, that typically bolsters more cyclically, value-oriented companies more than steady growers.  Though the S&P 500 gained 12% for the year, value stocks outpaced growth stocks by 10 full percentage points. With the flood of new capital into equities, the effects of money-flow were much more magnified in the small cap space where gains nearly doubled that a large caps both for the quarter and the year. Here we saw even more lopsided performance from the value side of the spectrum, with value leading growth by 10 and 20 percentage points for the quarter and full-year-2016, respectively.

This dominance also played a factor in international developed markets, with value leading growth by 10 percentage points for the quarter and the year. Returns in the international markets were muted somewhat when measured in U.S. dollars, but realized gains similar to U.S. equities in their home currencies. Emerging market equities continued to be a tale of two cities (or rather continents) with Latin American stocks faring much better than those EM names in Asia. Latin America recovered handsomely from its 2015 commodity-based slide, adding nearly a third to stock values during the year. Asian EM equities gave back half of their gains in Q4, still managing respectable returns for 2016. This dynamic was logical due to the broad rebound in natural resources that occurred, which would play more strongly in Latin America than the manufacturing-based Asian economies.

8PIERing Ahead

Ultimately, that’s the crux of the conundrum. Clearly President Trump has policies that are likely to be near-term shots in the arm for the economy. A lowering of corporate tax-rates is likely in the first session of the new congress. That is always a near-term stimulus for growth. Repealing ACA mandates and creating more competition is likely to be additive as well. However, if President Trump starts a trade war, or incites a geo-political event (such as provoking a conflict near the Straits of Hormuz oil shipping lanes), all of the rosy present conditions that I have described above could evaporate very quickly. OR… perhaps Mr. Trump will bring savvy business efficiency to the bloat of government. It is impossible at this point to predict. What is most likely is that we will see grand examples of both. With a stock market that is trading at highly elevated valuations – valuations that are already pricing in uncertain future success, disappointments will surly lead to volatility. It’s bound to be quite a ride. I hope you packed you Dramamine.

Fiduciary Commentary | Winter 2016/2017

By: Brant Griffin – February 1, 2017

The DOL Fiduciary Rule… Here we go again…3

Like the UK’s Brexit vote in 2016, Trump’s stunning election upset demonstrates the political volatility and policy uncertainty of our day. Many laws and regulations put forward during Obama’s presidency now hang in jeopardy awaiting the new administration’s actions.

Post-election, the fate of many regulations governing the financial sector are now in question and Trump’s victory has given new momentum to the opponents of these laws. The DOL’s update to the 40-year old fiduciary rule is among the highest profile regulations whose outcome is now uncertain. This law was designed to elevate the standards of care in handling retirement accounts and eliminate conflict of interest by those providing advice to retirement savers. The far-reaching rule is one of the most transformative financial regulations in decades and would dramatically alter the investment practices of Wall Street and the management of the nation’s $3 trillion of retirement assets.

The DOL’s controversial advice regulation has provoked intense debate by those threatened by a law that seeks to require the interests of investors to come first, before their own. Affected parties face significant risks to their profitability if the law moves forward as planned. Despite resistance to the DOL’s efforts for expanded fiduciary standards, financial firms have been preparing for its implementation with sizable investments in compliance, technology, and revised business practices.

The New Administration’s Alternatives

So now what? The industry is assessing the effect of Trump’s win on the future of fiduciary rule set to take effect on April 10, 2017, with a phase-in period that ends December 31. 2017. The Trump camp has voiced its discontent with the Obama administration’s strict regulation of the nation’s financial institutions repeatedly on the campaign trail. Trump’s advisor Anthony Scaramucci went so far as promised to repeal the DOL fiduciary rule stating, “We’ve got to get rid of this”.

The new administration and the GOP’s Congressional majority has caused many to speculate on the new rule’s future. Supporting an effort to dismantle the fiduciary regulation is that the Republicans maintained control of Congress. With Republicans having stated its intent to repeal the DOL’s investor protection regulation, they could presumably draft legislation to kill the rule and President Trump could sign it.

However, even if the new administration wants to kill or radically change the final rule, it would prove particularly difficult given the law has been on the books for over eight months and its effective date is just a few short months away. To eliminate the law, the legislation would have to be proposed through the statutory process, which includes the lengthy comment period before it could be finalized. Furthermore, it is not likely that there will be any new legislation until a new DOL secretary is installed and possibly a new assistant secretary of the DOL’s EBSA (Employee Benefits Security Administration) is appointed, which is not anticipated until February.

A more likely scenario is that Trump will delay the DOL law through its executive authority. A stay for the advice rule’s compliance deadlines would provide the administration time to evaluate its next moves which might include nullifying, amending the rule or using it as a political bargaining chip to further Trump’s agenda.


In October, the DOL issued its first of three FAQs to help guide firms in their compliance efforts with the new law.  The first FAQ addressed the law’s exemptions, such as BICE (best interest contract exemptions, and the principal transaction exemptions. A particular focus of the fall’s FAQs was how brokers would be able to continue selling investment products while receiving variable compensation and 12(b)(1) fees without running afoul of the new law.

The second round of FAQs was released mid-January to provide additional guidance to the upcoming rule. However, given that the election results and new political realities of a Republican-controlled government that has maintained a hostile stance towards the incoming fiduciary rule, some might understandably wonder why the DOL even bothered to issue further support on the rule. Despite this looming threat of the law being dismantled, the DOL has said, “We are moving forward with implementation as planned.”

The second round of FAQs on the DOL fiduciary rule cleared confusion on a common compensation practice for 401(k) advisers. The DOL gave a thumbs-up to a long-standing and commonplace compensation method used by retirement plan advisers. The practice, explicitly approved by the DOL in an Advisory Opinion 97-15A (frequently referred to as the “Frost letter”), clarified that an adviser charging clients a level asset-based fee for providing advice to a retirement plan may use revenue-sharing payments to offset part or all of that level fee. This now common, almost obligatory mid and large market compensation arrangement was clarified by the DOL in its answer to question 7 of the FAQs stating, “Nothing in the Rule or the Exemption alters the analysis of Advisory Opinion 97-15A.”

The DOL also covered non-fiduciary forms of communication in its FAQs. The concern that non-fiduciary communications can often be just a brief step away from fiduciary investment advice was highlighted citing how communication can progress into investment advice.

The discussion on the slippery-slope of how communications can evolve into advice seemed to support the use of technology-enhanced communication alternatives. Communication technology, of the fiduciary or non-fiduciary sort, will not deviate from its programmed objective, thus eliminating the risk of “off-script” exchanges that may meander into the fiduciary lane. To those organizations concerned about piercing the fiduciary veil, programmable technology producing the analysis of investment alternatives to be communicated to investors and rollover considerations would be considerably more reliable than depending on members of a sales force staying on script. The marketplace is already begun to adopt these tech-heavy alternatives and the DOL seems likely to support it.


It’s difficult to argue the merit of protecting workers and retirees from conflicted advice. Numerous studies have shown the cost of non-fiduciary advice in the billions of dollars each year. Thus, the DOL’s Fiduciary Rule is the logical advancement of advisory services that supports the interests of plan sponsors and retirement success of savers.

Despite the uncertain outcome of the DOL’s new rule in the Trump-era, the DOL is proceeding with the rule’s implementation with the April 2017 effective date of the law. Though nearly everyone anticipates the rule will not survive in its current form or maintain its schedule to the effective date, most financial firms are moving forward to comply with the rule – and for good reason. Financial firms have already invested millions of dollars in retooling their operations to meet the requirements of the law and publicly embraced (appear more investor-friendly I suspect) an elevated standard of fiduciary care to their clients. To backtrack from that position would appear hypocritical.  With higher consumer awareness of the benefits of an elevated fiduciary standard since the rule’s passing, these firms may march forward with implementation after all.

The full impact of a Trump administration on the DOL’s transformative advice rule will be revealed over time. After two prior failed attempts to put forward an expanded fiduciary rule, the DOL’s contentious rule is now law. Let’s hope it sticks this time.