Donald Trump’s electoral victory came in part because he appealed to Americans who feel left behind in the modern economy. These people seem to believe Trump will improve their financial prospects. With this in mind, I’ll be watching for policy changes that affect American taxpayers and retail investors. Two in particular are a fiduciary rule and bank leverage.
When brokers and other financial salespeople sell investments to the American public, mostly for their retirement accounts, they are allowed to sell grossly over-priced investments. The high fees can consume one-third to one-half of an investor’s savings over an investing lifetime (these fees are typically even higher in Canada). The Department of Labor has been moving toward a fiduciary rule, which means the salespeople would have to put their clients’ interests ahead of their own and choose lower-priced investments. We’ll see if this rule gets abandoned now that Trump has been elected.
If banks never borrowed money, their profit margins would be very slim. To make banks profitable, they borrow enormous sums of money. The amount they borrow is much more than the assets they hold. When the ratio is ten to one, profits and losses are magnified by a factor of ten. This ratio is often called the “capital-to-assets ratio.” When times are good, banks make good profits that enrich their owners and top management. If times are bad enough, such as during the 2008-2009 U.S. housing crash, banks can’t pay back their loans, and taxpayers bail them out. For bank management, it’s a case of “heads, I win”, and “tails, taxpayers lose.” This creates what is known as a moral hazard because banks have an incentive to take big risks. To combat this problem, U.S. laws such as Dodd-Frank and the Volcker rule are in place to limit leverage, which reduces the odds of banks being unable to pay their debts and protects taxpayers. However, these rules also limit bank profits and executive bonuses. It will be interesting to see what happens to these rules in a Trump presidency.
These are just two of the things that will test how serious Trump is about helping typical American people rather than helping the rich.