New Year’s Resolutions and Revolutions – Part 1

Predictions are all the rage at the artificial divisions carved by our Gregorian calendar, but they are also a stern master. I wish I had the qualities of a seer, but on topics like the economy and what advisor business will be like next year, the best minds will often be off target.

Albert Einstein once said: “When the number of factors coming into play in a phenomenological complex is too large, scientific method in most cases fails. One need only think of the weather, in which case the prediction even for a few days ahead is impossible.”

The U.S. economy fits well within the realm of Einstein’s phenomenological complex. The factors involved in seeing the future make it difficult to see what’s ahead even in general terms. That makes it easy to understand why one’s biases, ideology, and beliefs often intrude and obliterate any application of scientific method or general reasoning. A classic example is the eminent Nobel prize-winning economist, but politically left-tilting Paul Krugman’s quote immediately following the stunning election of Donald Trump to the Presidency. “If the question is when markets will recover, a first-pass answer is never,” due to putting in office “a regime that will be ignorant of economic policy and hostile to any effort to make it work.” He closed his New York Times opinion column: “So we are very probably looking at a global recession, with no end in sight.” “But on economics, as on everything else, a terrible thing has just happened.” Of course, he’s been wrong on so many predictions; this example is too easy. Every significant measure of our economy has improved since then. No “mea culpa” from Krugman, though, which ought to impact the weight we put on anyone’s opinions who can’t learn why they were so wrong.

I’ll admit a career-long belief that normal distributions, central mean tendencies, and reversion to means. Therefore, I often disagree with catastrophic, once in a lifetime predictions. Black swans occur, but they are notoriously difficult to foresee, much less predict with any reasonable probability of success. Nevertheless, permit me a few opinions, though I don’t claim Paul Krugman’s predictive invincibility.

Economy

According to a recent Wall Street Journal article on a survey of American economists, 2018 will see solid growth and declining unemployment rates. Tax cuts and other administration policies are given credit. Presumably business investment and consumer spending increases. While interest rates are projected to rise (10 year treasury well into the 3s) many don’t see significant inflation until 2019.  These and factors below and a world now almost synchronically rising finally from the last Great Recession, will lead to better FIA interest crediting factors and less zig-zag equity markets.

This sounds like more of the same over the past few years, with a brighter outlook. For your businesses and the support from CreativeOne, this forebodes increased consumer confidence and a boon for equity-oriented investments. Even as of this writing, the full benefit of the corporate tax reforms are probably not baked in to prices.

Bonds and their funds finally begin their bear market, but not with a vengeance. Rising rates drive improved insurance budgets for interest credits making products more competitive, but still fighting the lure of stocks. Fixed indexed annuities (FIAs) will continue to fight equities for share of consumer savings, but benefit from their equity-based interest. Advisors should have had an increase in assets under management due to markets beyond client net fund flow, but can’t get complacent. LIMRA actually expects a smaller decline in annuity sales, primarily variable annuity based. Increases in FIA sales in bank, broker-dealer and RIAs in 2018 should offset any small declines in independent distribution.

While the blockchain process will continue to expand into more applications leading to good secondary investment opportunities, direct or tracking investment of the cryptocurrencies will remain a risky outlier. I invested during 3 – 2 week periods in a tracking EFT and made a total of 70 percent return, pretty good, not quite the Winklevoss twins, of course. It seems so easy, it’s like cheating to buy on the downturn, as the eventual zag following the zig seems inevitable if you wait a short time. It’s not. Big risk lies there, especially as more neophytes pile in and regulators scramble to constrain it. Our vice president at ChangePath says: “Don’t try to catch a falling knife!”

Regulation and Legislation

The tonnage of new legislation and regulation in the U.S. at all levels of government is staggering. The Trump administration has vowed to dismantle the thicket, revisit actual economic effects, and has delivered so far in some areas affecting your business. The Department of Labor (DOL) was instructed by the incoming administration to revisit the impending implementation of the Fiduciary Rule for qualified recommendations and sales. DOL under new Secretary Acosta “split the (President’s directive) baby” and let the guts of Impartial Conduct Standards go into effect June 10, 2017, but postponed the liability hammer until July 1, 2019, or never, if they decide after review, comment, etc. to alter or scrap the Rule. This limbo period is nothing to overlook.

Anytime you make a recommendation that a client should move funds from a 401(k), or make a sale involving qualified funds, you are a fiduciary. You must (provably) act in the client’s best interest and not your own. Make appropriate disclosures of that duty, compensation you receive (must be reasonable, whatever that is), and possible conflicts of interest, and retain documentation to substantiate. These are the guts of the 84-24 Exemption for qualified business. This is why CreativeOne and other IMOs, broker-dealers and RIAs have been educating advisors on the required responsibilities. There is no current requirement for financial institution oversight, and no right for clients to sue in state court on the basis of fiduciary duty failure due according to this rule. Note, a recent development: Though they did not want to see them initially, a number of large FIA carriers are spot requesting and checking advisors’ 84-24 disclosure. Make sure you are getting them signed and documented and stored.

I won’t predict the DOL’s final determination on the Rule before July 1, 2019, nor the outcome of the 5th Circuit appeal in the Chamber, et. al. lawsuit, though I would bet despite opponents elation over the presiding judges comments at trial, most of these cases go the government’s way. Nevertheless, it is imperative that you fulfill the prescribed duties now. The NAIC, SEC, and state legislatures through their securities regulators are now in process of defining what and when fiduciary duties apply under their respective authorities. Most predict that the current of expanded advisor duty is inexorably flowing downstream.

In a niche area, DOL has avowed they will audit all 401(k)s for violations of fiduciary duty with respect to revenue sharing, fees and fund selection by 2020 and trial lawyers are pursuing damages for employees in a growing number of cases. This is why CreativeOne and Client One Securities have partnered with the fastest growing firm of its type whose business is to solicit and remove liability from small to medium sized corporations, most of whom don’t realize the severity of the liability. They are educating and training advisors on our behalf and generating 401(k) appointments with firms.

Coming Soon: New Year’s Resolutions and Revolutions – Part 2

Read about: Effect of social media and “fake news” on clients, insurance sales, marketing, business development, annuity product development and insurance carriers, technology, and the changing distribution of financial services.

Mike Tripses

Partner, CreativeOne

FOR FINANCIAL PROFESSION USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

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