The surprise Trump victory in the Fall had people optimistic about the future of American jobs. While the general consensus is that a Trump administration will be positive for the banks because of deregulation, there is another side to that coin for some finance jobs.
We think there may be some risks for three job areas specifically- compliance, accounting and fixed income.
One area that we will need to keep an eye on is bank’s compliance departments. Readers to this site know we believe very strongly in the continuing demand for well-paying compliance officers and associated personnel at financial institutions. But a more business friendly atmosphere from the Trump Administration, not to mention a Republican controlled Congress, could take the heat off of major banks.
Several firms have implemented some type of Dodd-Frank reporting program to maintain compliance with federal regulators. After all, non-compliance can be very stiff. First-tier violations can result in a $75,000 company fine, second-tier violations of $375,000 and third-tier violations of $725,000- for each act!1
One area that has particularly onerous reporting requirements is in the derivatives space, particularly OTC swap dealers and participants.
A 2013 report by the Chicago Mercantile Exchange (CME) revealed that 71% of these swap dealers are investment banks, almost half being from North America.2 The largest swap dealers are the big boys-JP Morgan, Bank of America and Citigroup.3 These firms have already registered as swap dealers and had their operations become much more transparent. They also presumably hired extensive staff for all this reporting.
With a repeal of all or parts of Dodd-Frank could alleviate the need for extra staffing or future hiring in this area.
There will certainly be pockets of financial companies that will not need the extra staffing with a repeal. But our takeaway is that hiring for compliance officers overall shouldn’t drop off too much considering the punitive damages levied by the Department of Justice.
There could also be political wrangling going on for years regarding the law. And after all, any drop off in the compliance department could be made up in the risk management department (which may be necessary after deregulation!).
Trump has stated he wants to put H.R. Block out of business by simplifying the tax code.4 This is obviously not what you want to hear if you are considering a career in accounting. But the fact that he cites H.R. Block, speaks volumes. They specialize in the relatively straight forward individual customer, not the wealthy or businesses with complicated taxes.
Wealthy individuals find the services of more personalized tax professionals necessary considering the complexities of particular situations. Many wealthy Americans have large amount of investment income, which can be confusing to understand from a tax perspective. What is the tax rate on capital gains vs a dividend? Is the dividend or interest qualified? What about the additional 3.8% net investment income tax from Obamacare? What about all those K-1s? Trump wants to simplify the tax rate to three brackets: 12%, 25% and 33%.5 And he wants the top rate on capital gains and dividends to be a firm 20%. Finally, Trump wants to repeal the estate tax completely.
If taxes do become this simple, there could be something to worry about for individual tax preparers. But remember that a simplified tax code has been promised by almost every candidate we can remember so it may have been more of a populist move during election season.
For other corporations, Trump wants to lower the corporate tax rate all the way down to 15%. Trump has suggested that the individual owners of entities such as LLCs, S-Corps and partnerships would also qualify for the 15% rate.6 While this tax simplification may be a negative for accountants, it could be a boom for places like LegalZoom as wealthier Americans flock to form corporations to cash in on the 15% tax rate as owners.
For large corporations, remember Sarbanes Oxley is really the piece of legislation that deals with accounting requirements for publicly traded corporations, not Dodd-Frank. SOX was enacted after the scandalous accounting fraud that was undertaken by dotcom era companies such as WorldCom and Adelphi Communications. So while there is likely to be tax cuts, considering a Republican Congress, there will still be the necessity of Big 4 accounting and auditors to handle all the financial reporting to the SEC.
It all sounds great but will be very difficult to implement. We wouldn’t be too nervous for aspiring accountants.
Fixed Income Managers
One area that could be challenged is in the asset management space, namely the fixed income (bond) markets. Some big name bond managers including Jeffrey Gundlach and Masters of Finance series member Bill Gross have been warning of an overheated bond market for some time now.
Some point to the end of the great bull market in bonds which saw interest rates come down from almost 15% in 1981. Interest rates were raised that high by [then Federal Reserve chair] Paul Volcker in an attempt to ‘break the back of inflation’. It worked and interest rates eventually followed lower.
If inflation expectations ramp up with the new President-elect, as some believe it could with a recharged economy, it could spell trouble for major holders of bonds. This includes pension funds and insurance companies who are huge bond investors who try and match up their income streams to meet their benefit obligations (retirees and policy claims).
Inflation remains a major threat to bond prices. Inflation eats away at purchasing power, so holding longer-term bonds with future payouts will result in future payments that won’t be worth what they are today. The higher the inflation rate, the worse the problem is for bond investors.
Some experts use the yield on the U.S. 2-Year Treasury bond as a proxy for future inflation. If so, it’s sending a clear message, as the yield jumped from 0.80% before the election to a recent trading at a level of 1.27%. And the yield increases have been for all maturities, which is worrisome because bond portfolios have the most extended durations in history, meaning that their sensitivity to interest rates is the greatest.
But it should be noted that it’s not certain that inflation will overtake the forces of deflation that so worried investors over the last couple of years. Recall that deflation is a reduction of the supply of money and credit in the economy.
What does this mean for employment in the fixed income management space? If we do see a pickup in inflation and interest rates continue their recent rise, it could negatively impact hiring at some fixed income asset managers.
Finally, the popularity of risky fixed income products such as ‘Pay in Kind’ or ‘PIK Toggle’ bonds are especially worrisome. These are bonds which pay out their coupon payments not in cash or stock but in more debt.
That’s right, lenders are so convinced that borrowers will pay them back that they are willing to continuously take more IOUs as payment. PIK issuance for 2016 is estimated to be the highest since 2008.7 It is these types of exotic products that signal real trouble and should get decimated if inflation causes a major bond bubble to pop.