RIA Washington Watch: 5 themes to watch as the Trump era unfolds

RIA Washington Watch

"RIA Washington Watch" is an ongoing series featuring the observations, insights, and analysis of Michael Townsend, vice president of legislative and regulatory affairs for Charles Schwab & Co. Inc., regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the RIA industry.

Michael Townsend, V.P., Legislative & Regulatory Affairs, CS&Co.

President Donald Trump's inauguration heralded the start of a new and highly unpredictable era in Washington that is like nothing we have seen before. For the last several years, the focus has been almost entirely on regulation. With Republicans now controlling both chambers of Congress and the White House, it is difficult to overstate just how dramatically the landscape has shifted.

Trump and the Republican majority in Congress have big plans for sweeping policy changes in a variety of areas, including health care, immigration, taxes, and trade. Recent executive orders, with regard to Dodd-Frank law and the Labor Department's fiduciary rule, demonstrate the president’s ambitions with regard to deregulation. There is considerable uncertainty, however, in determining which policy proposals have a chance of becoming law and when any changes might take effect. There is a strong sense that the Trump administration would like to scrap the fiduciary rule and start over, but that remains to be seen. As yet, nothing has changed for advisors.

Key themes to watch as the Trump administration settles in

Confusion around the DOL fiduciary rule underscores the difficulty in speculating about details of specific policies and how they might affect the markets and the financial services industry. We think advisors should keep five broad themes in mind as the Trump administration settles in.

1. Trying to predict what the new administration will do is a fool's game. The first several weeks of any new administration are a whirlwind. Getting cabinet nominees confirmed, hiring hundreds of staffers and addressing myriad organizational decisions large and small can be overwhelming. Trump's unconventional style and penchant for moving from topic to topic are likely to give the impression of a White House still finding its footing in the coming weeks. As one analyst recently said: "Right now, reading this president is like sculpting fog." But, as with previous administrations, this one will eventually settle into its own groove. In the meantime, be wary of pundits who say they know how the administration will unfold.

2. The difference between proposing big ideas and turning those ideas into actual laws. Moving from the talking points of a speech to producing detailed legislation is very difficult: The hard choices and compromises are always in the details. Drafting legislation that can attract enough support to pass both the House and the Senate—even with Republican majorities in both chambers—will be a time-consuming and complex process. We are already seeing this as Republicans on Capitol Hill struggle to come up with a consensus plan for replacing the Affordable Care Act. Issues such as tax reform and an infrastructure spending plan aren’t likely to prove any easier. Legislation could take months to accomplish, and the finished product is likely to look very different at the end of the process than it did at the beginning. We caution against any overreaction to the early steps in a long process. Speculating on the final shape of legislation could lead to disappointment.

 Trump doesn't seem inclined to alter his free-wheeling style now that he is president, so expect the tweets—and the market reactions—to continue.

3. President Trump may be underestimating just how hard it is to "change" Washington. Trump was elected as an "outsider" who could take on the Washington bureaucracy. But getting things done in Washington usually means playing the game by Washington's rules—and at Washington's pace. Congress has its own timetable and processes. Trump and his advisors may be frustrated by how hard it is to get things done. How the president and his team react to the inevitable setbacks and delays will be revealing.

4. An interesting battle is looming over the impact of policy proposals on the federal deficit. Many of President Trump’s priorities are likely to increase the deficit, at least in the short term. But dozens of conservative Republicans in the House of Representatives have consistently opposed any legislation that increases the federal deficit. By contrast, the new president's real estate background makes him comfortable using debt and deficits as part of a business-management strategy. Some Republicans may be forced into a difficult choice between supporting a president from their own party and sticking to their deficit-reducing principles. It's a dynamic worth watching as the president seeks to build a working relationship with Capitol Hill Republicans.

5. This president has an unprecedented ability to affect the markets with his comments and tweets. Even before he was president, we saw evidence of how Trump's comments, particularly via Twitter, could affect the stock prices of companies, industry sectors, and the market as a whole. Trump doesn't seem inclined to alter his free-wheeling style now that he is president, so expect the tweets—and the market reactions—to continue.

Presidential tweets will be just one of many distractions likely to arise in the weeks ahead. We advise waiting to see how Congress develops legislative proposals on some of the new administration’s big priorities before drawing any conclusions about the longer-term impacts of policy changes on the markets.

This report is current as of February 3, 2017. Schwab Advisor Services is committed to keeping you abreast of the latest happenings in Washington. Look for future RIA Washington Watch updates on Schwab Insights Hub®. We also publish quarterly Compliance Review white papers, a definitive source of commentary on important regulatory issues that you may find useful. If you are not already on this distribution list, please contact your Relationship Manager or email ComplianceReview@schwab.com