Editor’s note: This article first appeared in Human Capital, a newsletter by Washington Bureau Chief Melanie Waddell about the people who shape the financial regulatory space.
While the industry is weighing in on — and in many cases still digesting — the Securities and Exchange Commission’s advice standards package, academics are reviewing the upside and downside of the now-defunct Labor Department fiduciary rule.
Four professors — Cliff Moll, Robert Kunkel and Bruce Niendorf of the University of Wisconsin-Oshkosh, and Kristine Beck of California State University in Northridge — unpacked in a recent paper the Labor rule’s effect on firms’ market capitalization under President Barack Obama, when the rule was in ascendance, and President Donald Trump, when it died a slow, inevitable death.
“The paper shows how public policy — and even election results — affect the financial markets (and financial firms, in this particular case),” Moll relayed to me via email.
The paper, “How Do Investment Companies Fare Under Obama and Trump Fiduciary Rules?” is set to be published in the Journal of Accounting and Finance.
The Obama Effect
According to the paper, investment companies, on average, experienced “a large decrease in market capitalization” under Obama, when the rule took hold.
Conversely, after the 2016 election of Trump, which signaled a future of deregulation and the continuation of pre-Labor rule business models, investment companies, on average, “experienced an astounding increase in market capitalization.”
Under the Obama-era rule, the 36 investment companies assessed — which include broker-dealer, insurance and mutual fund companies — lost $14 billion in market capitalization.
Why? The results imply that due to changes in fee structure, “the revenue stream and, ultimately, profits are reduced until the firm is less valuable to investors,” the professors wrote.
The Trump Effect
Under Trump, the same 36 investment companies experienced “tremendous gains” of $56 billion in market capitalization.
Why the boost? Fees that were considered conflicted under the rule are kicking back in, which means “the revenue stream and profits will be greater and the firm is more valuable to investors.”
Bottom line: Investment companies clearly “have much to gain with the Trump administration killing” Labor’s fiduciary rule.
— Check out Ric Edelman: Retirement Crisis Is 14 Years Away on ThinkAdvisor.