As I indicated in my blog post last week, most of the investing advice featured in the financial media about how to react to the new administration is wrong-headed. Efforts to select stocks or sectors likely to benefit from new policies are unlikely to be successful. If you are concerned about the short-term effects of the election, you have no business having any exposure to stocks.
There's a better way to deal with this uncertainty. It doesn't involve picking stocks or sectors or trying to guess the direction of the market. It's totally within your control, easy to implement and likely to improve your expected returns.
Deregulation is coming
If there's one thing almost everyone agrees upon, it's deregulation is likely to occur at an accelerated pace. This is especially true in the financial services area.
According to recent reports, the policy of the new administration toward the financial services sector is being strongly influenced by Paul Atkins, a former member of the Securities and Exchange Commission, where he earned a reputation for minimizing regulation.
Atkins opposed stiff penalties on companies for allegedly fraudulent conduct, defended the practice of backdating stock options and warned of the dangers of "enacting regulations that supplant the market's judgment."
It seems likely Atkins would support axing or gutting the landmark Department of Labor rules requiring financial professionals to act as "fiduciaries" when advising retirement plans, although some have noted doing so would be procedurally complex.
The new administration is also unlikely to support limiting the use of mandatory arbitration in disputes between investors and brokers. At present, these arbitrations are administered by the Financial Industry Regulatory Authority. Many believe (and I am one of them) this process is biased and rigged against investors.
How to protect yourself
If the government rolls back its efforts to protect investors, there's still plenty you can do to insulate yourself from predatory practices. Here are some suggestions:
1. Even if advisors to retirement plans may no longer be required to put the interest of plan participants ahead of their own, you should insist your employer retain an advisor who agrees to do so. This means retaining a registered investment advisor. These advisors are required by law to act as fiduciaries to their clients.
If your employer resists this suggestion, you might gently remind it that class action lawsuits against plan sponsors are increasing. Employers using advisors who accept fiduciary responsibility can limit their exposure to lawsuits alleging plan sponsors failed to carefully monitor costs in their plan.
2. Follow the same process with your individual investments. If you need the services of an advisor, limit your choice to registered investment advisors. Focus on keeping costs low, globally diversifying your portfolio using low management fee index funds and deferring or eliminating taxes.
Consider whether you can invest directly with a low-cost provider of index funds, like Vanguard or use a robo-advisor like Betterment or Wealthfront. Most robo-advisors agree to act a fiduciaries, and place your interest above their own. The cost of using a robo-advisor is significantly less than the cost of traditional advisors, but they are not right for every investor.
It's time to confront reality. The government is not going to protect you from a greedy, ethically challenged securities industry. You need to become more self-reliant.
The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.
Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.
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