Make 401ks Great Again: Top Trump Advisor Scaramucci Sounds Off

The (former) RIA and host of 'Wall Street Week' has something to say about Elizabeth Warren, the fiduciary rule and more

Prior to Trump’s victory, Scaramucci was unconstrained and tossing red meat.Prior to Trump’s victory, Scaramucci was unconstrained and tossing red meat.

Talk about the ‘it’ man of the moment—the Mooch is in demand.

December saw Anthony Scaramucci center ring in the Trump Tower lobby circus, taking questions from the press scrum after yet another high-profile celebrity sighting. Early January and he was off to Davos to rub shoulders with George and Amal at the annual gathering of the world’s elite. Mid-January it was back to Washington for, of course, the inauguration.

A guy with enough time for leisurely (rambling?) interviews before the election is suddenly impossible to get on the phone to discuss issues important to 401k advisors, and it’s easy to see why.

The bigtime Trump backer and controversial founder of RIA SkyBridge Capital (since divested) was recently named a top advisor in the fledgling administration, tapped for his business-building bona fides.

When we say top, we mean top; think Valerie Jarrett in the Obama Administration or Karl Rove with Bush. However, the resulting sale of his firm, as well as its companion SALT Conference, triggered routine ethics reviews, and the delay threw his appointment into uncertainty.

Yet prior to Trump’s surprise/no-surprise victory, Scaramucci was unconstrained and tossing red meat—before the demands of his new position dictated a more diplomatic tone (even for a Trump guy).

So, just to avoid any trouble with his peeps, we’ll be clear and note this interview took place in November with the electoral earthquake still a few days away, even though seismometers were starting to click.

The target of Scaramucci’s ire was (what else?) the Department of Labor’s fiduciary rule, or in-fy-duciary rule, as he repeatedly and slowly emphasized, and what it meant for 401k advisors. It was abundantly clear from our conversation what would happen with a Trump win.

“You read my op-ed?” Scaramucci rhetorically asked at the interview’s outset, referring to his piece in The Wall Street Journal a week earlier. “It was a love letter to Elizabeth Warren, the one person in Washington that could single-handedly cost possibly one-half to 1 percent of GDP. She can do enough damage to the economy to regress growth in the United States.”

Claiming Warren, the Massachusetts senator and liberal gadfly, possesses a poisonous combination of “no real-world experience or understanding of how business works, but a very successful populist message from which she is deriving power,” Scaramucci said she “will hurt the people that she is trying to help.”

Was the timing of The Wall Street Journal piece, just weeks before the election, coincidence? Who knows? Yet speculation about what Trump would or would not do before the rule’s April 2017 deadline ran high following his victory, with every appointment and nomination viewed through the Conflict-of-Interest Rule prism. Scaramucci, for his part, wasn’t afraid to make his views known, in a decidedly Trumpian (read direct) manner.

“The Department of Labor, in its infinite wisdom, has decided that certain products are better for people in their 401k business than others,” he said. “In their infinite wisdom [again], they decided that lower-cost indexes and ETFs are in the fiduciary realm for your retirees. So if you’re a 401k advisor and guiding people towards those two types of instruments, then you’re ‘safe harbor’ as it applies to this new fiduciary rule.”

He called it the in-fy-duciary rule because it’s “curbing the ability to offer a full buffet and full range of products and services to people that they can plug and play into various market cycles.”

Comparing it to the Community Reinvestment Act’s impact on the mortgage and housing markets, he added the “great irony” is that the government will mandate decision-making, telling participants where and how to invest in the market at the absolute wrong moments.

“Every time the government does this, it creates a capital allocation distortion that wrecks the market. Five years from now, after the fiduciary rule fails, they’ll be holding Congressional hearings and wondering what happened. What happened was you took 401k advisors out of the business.”

His story is classic Horatio Alger, or at least marketed that way. The product of an Italian working-class family, the hyper-intelligent, Harvard-grad Scaramucci arrived for his first job interview in a polyester suit, but he quickly adapted.

A Tony Robbins-style entrepreneurial street-cred led to the founding of SkyBridge, an alternative investment firm (hedge fund) with roughly $12 billion in assets. Speaking of Robbins, the marketing giant was a guest on “Wall Street Week,” a reboot of the legendary PBS staple now on FOX Business Network with Scaramucci as host. General David Petraeus was also an early guest. As we said, entrepreneurial.

It’s all recounted in Scaramucci’s latest book, Hopping Over the Rabbit Hole: How Entrepreneurs Turn Failure into Success. It’s well worth a read for any 401k advisor that’s getting kicked around and looking for inspiration. It’s about building a thriving and sustainable business, something able to weather all storms, which SkyBridge, coincidentally, almost did not.

“You’re looking at a 53-year-old guy that’s fairly successful,” he modestly said. “But at age 45, you were looking at a middle-aged, Wall Street has-been that was failing. In 2009, SkyBridge Asset Management turned into Bridge-to-Nowhere Asset Management.”

Despising what he calls he sanitized versions of success, where a career trajectory moves at a perfect 45 degree rising angle, Scaramucci instead included the anxiety, self-doubt and the fear over the “loss of status” that failure brings, for a very honest, open book about what happens to people climbing and clawing for entrepreneurial success.

His hardscrabble roots fuel Scaramucci’s contrarian streak, something we noted in his remarks about regulation and the fiduciary rule; we “know what he’s against,” we bait him, “but what is he for?” From a fiduciary standpoint, should we really scrap it and let the free market sort it all out?

“Let’s talk about that,” Scaramucci gamely bit. “It’s not an unregulated market now. Everybody that gets a series 7 license or is an RIA is abiding by a very standard series or code of ethics. Every one of these people already has an imposition of a fiduciary standard, in terms of their practice and care of their clients.”

It’s something about which he recently spoke with former SEC chair Harvey Pitt (whom he simply calls Pitt, seriously).

“Pitt and I had this conversation about the need for a standard review or audit process. There are only 500 people at the SEC to audit all of the registered investment advisors.”

His suggestion is to have the SEC grant accreditation to outside auditing firms for financial compliance, as well as fiduciary responsibility.

“If you want to be a registered investment advisor, like I am, I should have to subject myself to audited financials on behalf of my investors. Just as we have generally accepted accounting principles (GAAP), we should have generally accepted fiduciary principles. One of them should have a fee component, but it should not be mandated from the government.”

Noting that people “rail against” hedge fund management fees, he argued they forget to mention investors must be qualified and have some level of institutional sophistication, and that the prospectus clearly and boldly states the fees schedule.

“I don’t understand, in a free-market system, if someone wants to go to [hedge fund manager] Steve Cohen and say, ‘Hey how are you? Here’s my money,’ why someone in Washington is telling me I’m not allowed to do that?”

Likewise, he said, if a 401k advisor has a really good product that, net of fees, could reduce risk and help the client or participant reach their actuarial goals, the advisor is potentially not going to put the client in the investment because they’ve been “demotivated and de-incentivized by the DOL,” who’s opened them to potential legal exposure.

“What I hate about it is that they put the word ‘fiduciary’ in there, which is a red herring. If you say fiduciary, then who wouldn’t say, ‘Of course I’m for this fiduciary nature for my client.’”

In addition to financial planning performance, 401k advisors should be evaluated for the “mental conditioning” they provide their clients that keeps them in a long-term investment portfolio.

“And who’s to say commissions are always worse anyway?” he added. “You would typically buy a municipal bond ladder for a taxable account, but let’s say it’s for a 401(k). You charge a commission (which is the spread) and then put the bond in the client’s portfolio. The bond ladder could last 10 years but there would be, at that point, no fees.”

What will happen now, he predicted, is that those same investors will be put into wrap accounts that charge “1.5 percent, rather than what was originally a 10 or 15 basis point commission smoothed over 10 years. This is the problem with academics, and the crowbar they’re taking to our industry.”

Enter Donald Trump and his expected deregulation push. How far and how fast it will happen is yet to be seen, but as much of the country recently realized, it’s not wise to underestimate the new president, something Scaramucci experienced firsthand during the campaign cycle.

“We’ve always had a good relationship, but I am on record as being against him when I was supporting Jeb Bush,” he conceded. “I didn’t take his political instincts or his candidacy seriously, for which I was wrong. I was making classic conventional wisdom decisions about Mr. Trump. I should have seen—as a self-declared entrepreneur—what he was seeing, which was an opportunity to disrupt and hack the system in a way that could be very valuable and beneficial to the country, so I got that wrong. But when the facts change, so should your decision-making.”

Which easily applies to the DOL in the wake of Trump’s win. As for the fiduciary rule itself, Scaramucci ends back where he began.

“You’re taking weapons away from the financial advisor to deliver a well-rounded product to individual investors, and you are going to crush these people’s retirement through your good intentions.”

2 Comments on "Make 401ks Great Again: Top Trump Advisor Scaramucci Sounds Off"

  1. Fantastic. Keep up the good work showing both sides of this. It’s already harming companies and investors.

  2. Quoting from the article” “Let’s talk about that,” Scaramucci gamely bit. “It’s not an unregulated market now. Everybody that gets a series 7 license or is an RIA are abiding by a very standard series or code of ethics. Every one of these people already has an imposition of a fiduciary standard, in terms of their practice and care of their clients.” Not quite…

    Conflating those who are series 7 licensed with RIAs is problematic as Michael Kitces explains in “Why Series 7 Brokers Legally CAN’T Be Client Fiduciaries Without DoL Fiduciary” found here:https://www.kitces.com/blog/fiduciary-duty-broker-dealer-series-7-license-general-securities-representative-exam/

    Given how many financial institutions have changed their business models to comply with the DOL’s conflicted advice final reg, even if it’s killed by the Trump administration it’s impossible to put the tooth paste back into the tube.

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