Compliance January 7, 2020

A Progressive State’s Fiduciary Showdown With the SEC

Critics of the Massachusetts fiduciary rule say it will interfere with the implementation of the SEC’s Regulation Best Interest; proponents say that’s exactly the point.

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With a deadline of 5 p.m. January 7th for submitting comments to the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth regarding its proposed uniform fiduciary conduct standards for advisers and brokers, the agency held a public hearing, at which both support and opposition to the proposed fiduciary standard was voiced.

By way of background, Massachusetts Secretary of the Commonwealth William Galvin recently signed off on the forthcoming proposal of a rule that would impose a fiduciary conduct standard for broker/dealers, agents, investment advisers and investment adviser representatives providing financial advice to clients in the Commonwealth. At that time, Secretary Galvin said his approval of the rulemaking process allowed for a formal (though short) comment period and then for the actual rule text to be promulgated.

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Since that development in December, several dozen comment letters have been received and published on the Securities Division website. The vast majority of the published comments are critical, though many of these negative responses use identical language seemingly provided by a third party, the National Association of Insurance and Financial Advisors. Still, other letters are unique.

One clear theme to emerge in the skeptical letters from broker/dealers and insurance agents is vexation that Massachusetts would continue down the path towards a uniform fiduciary standard while at the same time the U.S. Securities and Exchange Commission (SEC) is implementing a national set of standards that treats fiduciary “advisers” differently from broker/dealers and other sales-focused entities. For their part, some fiduciary advisers and consumer advocates have commented that a uniform fiduciary standard is required to alleviate investor confusion and ensure the best interest of investors is kept front and center by all types of financial services professionals.

One comment letter summarizes the skeptical argument nicely: “The SEC’s recently adopted Regulation Best Interest (Reg BI) establishes a workable national best interest standard of conduct that provides a significant strengthening of the standard of care for broker/dealers and their representatives while also preserving the existing business models (advisory and brokerage) that consumers want and need. In addition, the National Association of Insurance Commissioners is in the final stages of amending its model regulation on annuity recommendations and sales to include a best interest standard that aligns well with the SEC’s Reg BI.”

State-based fiduciary rule skeptics say these national regulatory actions by the SEC and the NAIC will accomplish both the regulator and industry goal of protecting clients while also preserving a business model that is appropriate for brokers, agents and advisers.

The same comment letter restates another frequently cited argument among skeptics of state-based uniform fiduciary standards: “Since most fee-only advisers have minimum asset requirements of $250,000, $500,000 or more, small and mid-level investors will lose access to financial products as well as the advice and services of financial professionals. Where will these consumers get needed advice and service from? Even if firms expand their offerings consumers will now need to pay for an ongoing fiduciary obligation that they may not want or need to pay for.”

Another comment letter speaks about a larger concern that individual state regulations will create a patchwork of inconsistent, conflicting or duplicative rules that will significantly impair consumers’ access to valuable financial products and professional assistance.

“Perhaps more than any other industry,” the letter argues, “the securities markets are national or global in nature. There are hundreds of millions of investors, hundreds of thousands of financial advisers, and tens of thousands of investment products, all operating in the same markets with the goal of generating investment returns. As the Division deliberates on whether and how to move forward, we respectfully urge that it consider how the proposal fits within the broader scheme of regulations governing the conduct of financial professionals.”

The Markets January 7, 2020

Predictions of Growth and a ‘Status Quo’ Presidential Election

Are earnings estimates too high? Is the trade progress substance or show? How long can a recession be avoided? What might the election mean for the economy?

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Continuing an annual tradition, Bob Doll, senior portfolio manager and chief equity strategist at Nuveen, aired his 2020 market predictions during a conference call with reporters.

Doll noted that eight of his 10 predictions for 2019 panned out, though he emphasized that he and others did not foresee the magnitude of growth enjoyed by U.S. markets.

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“For 2019, we had the direction right for the equity market, but we didn’t predict the magnitude of growth,” Doll said. “2019 delivered double the U.S. market return that we expected, fueled by a massive pivot by the Federal Reserve.”

Looking to 2020, Doll said, the U.S. economy is “OK, probably a little better.” He said the most common client questions for the year are as follows: “Are earnings estimates too high? Is the trade deal between China and the United States more substance or show? How long can a recession be avoided? What might the impeachment or the election mean for the economy?”

Doll said he expects U.S. GDP will grow over 2% during 2020, while global GDP growth could top 3%.

“Not the strongest numbers, but it’s a sign of a good economy, and especially improvement outside the U.S.,” Doll noted. “Inflation and interest rates will creep higher, to potentially 2% to 2.5% for both.”

Doll argued there will be no cheap asset classes in 2020. Bonds are fairly expensive. Stock valuations are fairly high relative to history.

“Non-U.S. stocks could outpace U.S. stocks,” Doll posited. “That prediction has been made, wrongly, for some years now. Last year, we predicted that shift for the first time, and got it wrong—but we are repeating the prediction for 2020. The U.S. dollar must weaken for this prediction to come true.”

Sector-wise, Doll said, financials will be attractive, even after improvements in price late last year, in part because bank balance sheets are strong and improving. Tech stocks will be attractive but volatile, and health care stocks may outperform as well.

Another notable prediction Doll made was that the majority of active managers will outperform their index for the first time in a decade. He pointed to various factors supporting this hypothesis, for example the improved outlook for small cap stocks and the rosier conditions in emerging markets.

Stepping back from the markets, Doll offered some detailed predictions about what may happen in the 2020 federal elections—including the race for President.

“I believe we will see a status quo election, meaning the reelection of President Trump, Democrats holding the House and Republicans controlling the Senate,” Doll said. “This is simply a historic call, rather than being based on some special insight. When an incumbent U.S. President is running for reelection and there is no recession and no strong opposition within his own party, that candidate has basically always won, historically. This time could be different, of course, and the polls will be all over the place leading up to the election.”

Lessons from 2019

In separate commentary shared with PLANADVISER, John Lynch, chief investment strategist, LPL Financial, said 2019 was a difficult one to forecast, after 2018 ended with the worst December since the Great Depression. 

“While our positive stock market outlook proved too conservative, we are pleased to report we got more right than wrong for 2019,” Lynch said. “Now we know our 3,000 target [for the S&P 500] was overly conservative. We ended up taking risk down by reducing our equities allocation recommendation from overweight to market weight in March and April 2019. In retrospect, staying aggressive would have captured additional upside in model portfolios. Nonetheless, we consider maintaining a market-weight equities allocation since March as stocks surged a victory.”

Lynch pointed out that, “though the path on trade was longer and bumpier than anticipated,” the large cap Russell 1000 Index has outperformed the small cap Russell 2000 Index by a substantial margin. Furthermore, favoring the most economically sensitive, or cyclical sectors, worked in 2019, Lynch said, particularly technology, which so far has topped all S&P 500 sectors.

The next-best performers—communication services, financials, and industrials—also are cyclical and have each posted 2019 returns near 30%.

“Not favoring 2019’s worst performing sector—energy—was also helpful, though we did maintain limited exposure to underperforming but higher-yielding master limited partnerships in income-oriented portfolios during the year,” Lynch said.

Citing other lessons learned form 2019, Lynch said trade tensions escalated further and lasted longer than his firm had anticipated, “which put emerging markets in the miss column—although the 18% year-to-date return is certainly respectable.”

“Although this was clearly a miss, credit-sensitive positioning of our fixed-income allocations within portfolios was beneficial and provided an offset to our decision to emphasize short- and intermediate-term rather than long-term bonds,” Lynch concluded.

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