In Profile

A Conversation with Larry Greenberg

Trump: Bump or Thump?

by P.E. Kelley

Mr. Kelley is managing editor of Advisor Magazine. Connect with him by e-mail:

Since the November 8, 2016 election, and through the January 20, 2017 inauguration and into its first 100 days, the Trump administration has witnessed tremendous highs and lows, to say the very least. One constant, however, has been the Stock Market’s seemingly blithe reaction to it all.

Throughout a tumultuous transition of power, equities just kept chugging along. What did it all mean?Jefferson National, a ‘leading distributor of innovative tax-advantaged investing solutions for Registered Investment Advisors (RIAs), fee-based advisors and the clients they serve,’ released in March a survey on the administration’s impact on advisor sentiment and approach to investing. According to this report, most advisors believe that stocks will continue to rise… but it will be accompanied by an over-arching sense of volatility, real or imagined.

We sat down with JeffNat’s president, Larry Greenberg, and asked him to parse the deeper meanings of the survey and attempt to identify the sentiments of RIAs and Fee-Based Advisors. They are optimistic, he said, but bracing for turbulence…

PEK: I read a quote from David Kostin at Goldman this morning, and he stated: Cognitive dissonance exists in the U.S. equities market. S&P 500 is up 10% since the election, despite negative earnings per share. In light of this comment, do you think stocks are currently over-valued?
LG: I’m probably the worst person to ask that question because I would never hold myself up as a stock analyst, which is why I too use an advisor. But, what we do know is that advisors in general have a positive view on the market. You see that in our survey.

I think if you talk to anybody, you find that it’s very difficult to predict things in the short-term, the short-term being within a year. So many factors are mixed up into what markets do. And even then they’d say “I was right,” because it happened two years later, versus six months. It’s very tough to say.

PEK: What’s fueling this optimism?
LG: There are a couple reasons. Advisors, I think, align on indicators that business is going to be freed and markets are going to be loosened. I think all the talk around deregulation and tax is interpreted as ‘the economy will be opened up to grow.’ I think people have a positive reaction on that. They’re very business-focused. Now, as for what it will actually do, that you would have to ask someone much smarter than me.

PEK: The administration has taken a strong posture against what it perceives as ‘over regulation’, including Dodd-Frank. Had our industry become over-restricted?
LG: It depends on whom you ask. I would say that many things are cyclical. We have loose regulations and then issues arise and then regulations get tightened and people react against that. There’s an ebb and flow that’s always been there. What’s often missing is a long-term perspective, a strategic view that looks out ten, twenty years. This has been part of this country’s history for hundreds of years. You can go back to the banking crises of the 1800s, which triggered the need for regulation, only to then see it loosened again. A picture emerges, in retrospect, of consistent periods of financial crisis and instability followed by growth.

So, I don’t think this is anything new. To sound a bit boring, there certainly is a proper balance between regulation and freedom to grow. I would say there’s probably a difference between regulations and what’s viewed as bureaucratic red tape that sometimes gets confused. It doesn’t mean all regulation is bad, but there is a need to properly execute it. You can look at, for example, the DOL, and all that it tries to address in terms of protecting consumers. Our view is this: when you get down to the advisor level, what does the regulation mean for their practices? How does it effect their ability to do their job? It’s complicated… and very tough to effectively regulate.

Think of the tax code, if you really want to broaden it. Everyone agrees it needs to be fixed. It’s overly complex, and any adjustments you make in one place have impacts in another. It presents a convoluted implementation exercise. I think that’s often what you find with regulations. There’s obviously a need for balance. But could we have a world without regulation? I don’t think people would, at the end of the day, and in the long term, be particularly happy with that either.

PEK: Some are suggesting that a big part of the market’s current surge is coming from Mom & Pop investors, while institutional money, pension and insurance companies, may actually be reducing their exposure to equities.
LG: I have not seen that, but it’s not something that I look at all that often. It’s interesting, though; reminiscent of the Internet Boom back in the late 1990s. You could walk into a bar and order a beer and when you looked up on the TV it wasn’t a baseball game, but CNBC talking about IPOs. Investing had reached down to the everyman and it was almost like a sport.

Today I think the talk about taxes and regulations is so broadly conveyed in the media, and it’s on top of everyone’s mind, that I wouldn’t be surprised if this has really trickled down to everyman. The average person is now asking ‘what does this mean for the market? Is the market going up?’ Watching values increase over the last couple of months, people are naturally drawn in who may not have otherwise noticed a market that really didn’t seem to have this kind of rapid growth potential. I would say that’s probably not that surprising. But it’s common cycle: wWhen the mass market starts to get into the market the big money starts to think about getting out.

PEK: What in the Trump proposals resonates with the financial services industry?
LG: First and foremost, the individual investor, the client of the advisors, is concerned about taxes. For more than half of them, that’s the biggest thing, and that is going to trickle down to how they think about investing. If there’s going to be a different tax schematic in the future, that’s certainly going to have a really big impact on their investments.

If you meet consumers and then you look at our survey and you look at what advisors are focusing on, it becomes clear: while they may feel positive about the market, eighty-percent of advisors still expect volatility to continue. They’re not expecting a smooth climb, and they’re going to have to figure out how to manage volatility in how they build portfolios and create ease for their clients. One of the toughest things for an advisor is to manage a client’s emotions. So, they may be bullish, but they are just as cautious. They know they’ll have to balance things out to keep their clients in the market.

What’s often missing is a long-term perspective, a strategic view that looks out ten, twenty years. This has been part of this country’s history for hundreds of years. You can go back to the banking crises of the 1800s, which triggered the need for regulation, only to then see it loosened again. A picture emerges, in retrospect, of consistent periods of financial crisis and instability followed by growth.

PEK: How does this change the advisor’s approach?
LG: It’s one of the biggest challenges. It means they’re going to continue to see a focus on products that protect against volatility. That could be income-protection products, it could be products that have floors or products that have an upside share in the market. I think those are still going to thrive because it’s still, in the advisor’s mind, a volatile market. In the big picture, I think the reason they’re positive on the market is they see very positive macro trends. They see taxes coming down, which, in their minds, I’m just extrapolating, will provide growth.

PEK: Are taxes coming down?
LG: If I were a betting man, I’d say I think you’ll see taxes coming down. Who’s taxes will come down? That’s still an open question. And simplifying the tax code is another one. As you know, when federal taxes go down then payments to states goes down, so the states have to increase them. Have they reached a limit of what they can be? That’ll be interesting to see.

PEK: So, as advisors grapple with volatility in both the market and with the new political realities, what are they telling their clients in a macro-sense? What is the big picture?
LG: I think they are learning to take a very holistic view of what they’re doing for their clients. It’s not all about investing. It’s not all about financial planning. It’s really all about being that financial partner to their advisors, about managing client needs and emotions and how you build a long-term plan for that. Probably one of the worst things you can do is just focus on the short-term. You have to align what you think is right for the client with the client’s emotions. This is where we’ve definitely seen the growth of more holistic planning coming into practice.

Here again, we’re seeing the use of solutions that speak right to volatility. It could be the growth of alternative investment products, or the growth of products that protect portfolios on the downside. And we’ll see a gradual shift from strategies used during the low-rate market, as the Fed increases rates. It will be gradual, though. I don’t think you’re going to see rates skyrocketing in the next year.

The bottom line for advisors is this: they have clients who need income. What do you do? How do you manage for that? Do they start to think a little differently about fixed income? They begin to see an interest in tactical investing.

PEK: So, how does that look on the street? How does that look when the advisor is sitting down with his client?
LG: I think what you see is advisors really making adjustments due to different industry sectors that they think are going to be tied to the new administration’s policies. They’re looking at what they think the administration will do. There were promises of huge infrastructure investments in the country; talk of deregulation in oil and gas. I think advisors are looking at different industries and looking to where those industries are going to have accelerated growth or revenue opportunities and making adjustments in those sectors. It’s tactical and very sector specific. Looking at sectors and then looking at where they want to be more aggressive. The policy level of the new administration is directly impacting different parts of the economy and they want to be there where they think that’s going to create more growth. I think you’re going to see a bunch of advisors adjust portfolios accordingly.

I can’t tell you what percent are moving into one sector versus another sector. At this point, they’re making bets on where you’re going to see growth in the economy. They’re making bets on interest rates.

PEK: Having partnered with Nationwide, how are you now responding to what advisors are relaying to you; information coming up from their clients?
LG: In the simplest sense, we’re providing a platform for advisors to basically execute the strategy they develop. We’re not advising them. But, there are two things we do. We certainly look and listen to advisors all the time, and figure out what funds we need to add within Monument Advisors that address the needs they have to manage portfolios. We get constant feedback from advisors to add funds and try to find ones that are available in a variable insurance trust form to do that. Over the past two years, we’ve just added a lot of alternative strategy funds based on advisor demand. Again, that speaks directly to the question of volatility.

The second thing is, now that we’re part of Nationwide, what we’re actively working on is coming up with additional solutions that get to advisor’s needs, focused on solutions that help in income protection, in response to volatility. It’s something, as Jefferson National we were limited to, in terms of both our rating and capital. Now, as part of Nationwide, those are no longer issues.

Also, we can now focus greater attention to income generation, not just income protection. We’ve always felt strongly that we’re not here just to provide products, but we’re trying to understand client needs, and the advisor’s needs, and really offer them solutions that can be part of their plan. Our greatest opportunity lies in the fact that we were built to serve RIAs and fee based advisors. When we’re looking at new solutions, they must be filtered through three prime directives. They have to have simplicity, they have to have transparency, and they have to have a strong consumer value, because that’s what an RIA and a fee based advisor is demanding as part of the way they manage their practices for their clients.

PK: What can you tell us about the cultural merge between Jefferson National and Nationwide? How does it support your concept of strategic and holistic planning?
LG: Well, they have very deep capital, they’re A plus rated and they have a broad product development capability. But the cultures are quite similar: they’re focused on serving advisors, in the way they want to be serviced, and how they want to be serviced for them and their clients.

What we add is access and relationships with RIAs and fee based advisors, where it’s not necessarily been a place that they’ve had as strong an access as us. By bringing that to them it really opens up a whole new distribution channel and allows them to serve a different set of advisors and clients in the way those clients want to be served.◊