News and Events that Profoundly Impacted Financial Services in 2016

The most significant event of 2016 was arguably the U.S. presidential election. Aftereffects have immediately and materially impacted the financial sector and will continue to do so for the foreseeable future.

Entering 2016, the U.S. stock market was on shaky ground. Election season volatility left many investors, analysts and financial services professionals questioning how the year would close, and to the surprise of many, Donald J. Trump’s unexpected triumph triggered an equally unanticipated upswing. After Trump took the election on Nov. 8, markets dipped briefly before starting to climb. The post-election “Trump Rally” on Wall Street pushed markets up in what is expected to be the fifth-best post-election “honeymoon” period we’ve seen.

The S&P 500 jumped about 100 points between election day and the end of 2016. Meanwhile the Dow Jones Industrial Average sprinted closer to a 20,000-point milestone as 2016 ended, ultimately crossing the threshold five days after the presidential inauguration. Similarly, the Russell 3000 Index ended the year on a high note with a 12.7 percent return. Amidst an election year fueled by emotion, uncertainty and at times, sheer shock and awe, the Chicago Board Of Exchange’s Volatility Index (VIX) dropped to its lowest point since 2015. Used to measure fear in the stock market, the VIX is a telling sign of investor perception and future action in the short term.

As the 2016 election proved, the future is unpredictable, but indications point to President Trump being less rigid about bank regulations and ready to repeal the ground-breaking Dodd-Frank financial reform act. The Department of Labor’s fiduciary rules, tax regulation, health care reform laws and entitlement reform also are under scrutiny by the incoming administration, Investment News reports. Financial planners must realize that business will likely be anything but usual as the new administration makes significant changes and shifts to current policies that will affect the way advisors conduct business.

Election aside, 2016 generated several other noteworthy stories that made and will continue to make an impact on the financial services profession. Here are four stories that may influence your practice, your growth strategy or your clients this year:

1. The DOL Rule

The Department of Labor Conflict of Interest Rule was finalized in 2016, and Phase One compliance implementation is scheduled for April 10, 2017. As explained by The American College of Financial Services professor Dr. Craig Lemoine, CFP®, the DOL rule mandates that any financial advisor providing advice in 401(k) plans, individual retirement accounts or other qualified retirement accounts will be known as fiduciaries and must act in the best interest of their clients. This shift is no less than revolutionary and will forever change the landscape of the financial services profession.

Advisors who continue to seek compensation for certain investments or transactions must sign a Best Interest Contract Exemption (BICE), justifying the value and/or advantage of their financial advice. Some senior financial planners may exit the market instead of investing time and money to learn and comply with new DOL rules, but for younger and mid-career advisors, the regulatory changes are an opportunity to establish a more contemporary business structure, moving away from a traditional commission-based model and creating a fee-based practice.  

2. Interest Rates On The Rise

After much anticipation, the Federal Reserve raised interest rates by 0.25 percent in late December 2016, only the second time in a decade, reports CNN Money. Higher interest rates accompanied by lower unemployment rates indicate that the economy is on the rise. Rate hikes may continue in 2017. Motivated by a healthier economy showing continued signs of stability, Fed officials predict three or more hikes this year. However, nothing is definite. World events and dictates from the new administration could affect the decision for increasing interest rates in the future.

While an increasing interest rate can be positive for fixed income and stock investments, the value of existing bonds, CDs and other vehicles with locked-in interest rates go down. The Fed’s decision came as no surprise, but it did create an immediate need for financial advisors to revisit their clients’ portfolios and investment strategies to avoid or limit potentially detrimental impacts created by higher rates.

3. Voters Demand “Brexit” 

As with the recent U.S. presidential election results, the U.K.’s vote to exit from the European Union in June was a surprise. Since the “Brexit” announcement, which doesn’t go into effect until 2019, the British pound decreased in value against the U.S. dollar, ending the year at a historically low valuation of $1.23. To boost the U.K. economy, the Bank of England cut interest rates in half from 0.5 percent to 0.025 percent last August, which remained frozen through the year. A rate cut may temporarily ease the economic impact of the pound’s lowered value, but many analysts and experts are reluctant to believe in the tactic’s long term benefits. Britain’s financial sector as well as financial markets worldwide are closely monitoring the Bank of England’s next moves and what they’ll mean for the overall global economy.

How do the effects of Brexit play out domestically? At first, major U.S. indices declined by about five percent as investors moved from equities to safer treasuries, but, a short time later,the S&P 500 index reached an all-time high. While Brexit appears to be having less of an impact on the U.S. economy, uncertainty remains in capital markets. For financial planners, this incredible event provided yet another reason to proactively communicate with clients in an effort to calm fears or hesitancy amidst a year of political and economic significance.

4. Robo-advisors Everywhere

The explosion of financial technology and tools that support the financial services profession, frequently referred to as Fintech, continues to shake up traditional standards of the financial services profession. Robo-advisors, in particular, are disrupting investment management practices. Providing investment advice through the use of sophisticated algorithms at reduced costs rather than through fee-driven, brick and mortar financial institutions, robo-advisors appeal to a vast range of consumers from first time investors to those with limited assets. Business Insider’s 2016 BI Intelligence report forecasts that robo-advisors will manage $8 trillion, or 10 percent of global assets under management by 2020.

Some financial professionals are worried about losing business to this automated technology that operates within new fiduciary rules outlined by the Department of Labor. A Fintech survey conducted by the CFA Institute last April found that asset management is at highest risk for disruption by financial technology. But despite its growing popularity, robo-advisors are under scrutiny for their inherent lack of personalization, sophistication, and thoroughness in providing comprehensive financial planning, especially for investors with more complex financial requirements.

Some larger investment firms are using robo-advisors to complement and streamline, but not replace, their practice processes. And for smaller or independent practices, Fintech has provided a competitive edge against larger or more brand-recognized firms. Rather than looking at robo-advisors as a threat, financial planners should consider where using them can elevate the practice – such as addressing the desire for technology by investor groups such as millennials.