Client anxiety, national debt and other recent election news affecting wealth managers

Client anxiety, national debt and other election news affecting wealth managers

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With the first presidential debate occurring on June 27, election season is officially ramping up. The tight race will undoubtedly focus in part on taxes and the economy, and these issues, which are top of mind for voters, are impacting wealth managers and their approach to supporting clients.

On June 13, Wall Street donors heard from both frontrunners' campaigns, with Treasury Secretary Janet Yellen traveling to New York City to speak at the Economic Club of New York and former President Trump meeting with CEOs at the Business Roundtable in Washington, D.C. The Trump campaign is promising deregulation and continued lower taxes for financial firms and other corporations, while Yellen and the Biden camp are making the case that stability, combined with investments in critical areas like infrastructure and positive results on inflation and unemployment, will fuel long-term economic growth.

"We have learned through experience that heavy-handed central planning through government dictates is not a sustainable economic strategy," Yellen said. "But neither is traditional supply-side economics, which ignores the importance of public infrastructure, education and workforce training, and government-supported basic research. Traditional supply-side economics wrongly assumes that policies such as tax cuts for those at the top and deregulation will fuel growth and prosperity for the nation at large."

A recent Financial Planning survey revealed that 48% of financial advisors see the nation's debts as the "most urgent" policy area "for the next administration and Congress to address."

"Financial advisors constantly look at the economy, and if one of our clients had the balance of income and expenses that the U.S. government has, they would be broke," Rob Schultz, a senior partner at NWF Advisory in Encino, California, recently told Financial Planning.

Some American safety net programs — especially those for retirees — depend directly on the federal government's ability to keep paying its bills. Social Security, for example, is already on financially shaky ground; the federal trust fund for Old-Age and Survivors Insurance is currently expected to go insolvent after 2033.

Most experts expect Congress to eventually take action to shore up the program, even if it's at the last minute. But if for some reason the national debt made this impossible, millions of retirees' incomes would be at risk.

"Advisors realize … that the ability to pay obligations, especially Social Security, can negatively impact our clients' financial lives," Schultz said.

For nervous clients thinking of dumping their stocks if the "wrong" candidate wins, a new study from the financial research platform YCharts offers a hypothetical scenario: If a stockholder only invested in the S&P 500 during Democratic presidencies from 1950 to today, they'd get an annualized return of 5.1%. If they only invested during Republican presidencies, that return would be 2.8%.

Or, if the person stayed invested the whole time, under both Democrats and Republicans, their return would be 8.1%. The lesson is clear: It does not pay to play politics with one's investments.

"Making investment decisions based on who's in office usually hurts portfolio performance," Andrew Herzog, a wealth advisor at The Watchman Group in Plano, Texas, recently said. "Let's not assume the executive branch has more power than it really does to control markets."

Read more about election news affecting wealth managers.

Trump and Biden campaigns hit Wall Street

Both the Biden administration and former President Donald Trump have recently presented their competing economic pitches to Wall Street.

"The Trump pitch is a lighter regulatory touch, keeping corporate taxes low," Brian Gardner, chief policy strategist at Stifel, recently said. "The Biden pitch is stability, steady hand, you may not love us but we're not populists and we can get along."

For the Biden administration, Treasury Secretary Janet Yellen traveled to New York City on June 13, giving a fireside chat at the Economic Club of New York and privately meeting with over a dozen CEOs and business leaders. On the same day, Trump met with CEOs at the Business Roundtable in D.C., a group that includes JPMorgan's Jamie Dimon, Bank of America's Brian Moynihan and Citigroup's Jane Fraser. The Biden administration sent chief of staff Jeff Zients to the roundtable meeting in lieu of the president, who was in Italy for the G7 meeting.

Read more:

Trump and Biden court Wall Street with very different visions

Addressing clients’ election anxiety as an advisor

As we approach November's presidential election, advisors are facing the inevitable question from their clients: "Will my investments be OK?"

History can help quell their worries. The U.S. stock market has proven remarkably resilient under both Republican and Democratic leadership. In fact, since 1961, the S&P 500 has only lost ground under two presidents: Richard Nixon and George W. Bush.

As for the transition period between presidents, stocks climbed during even the most volatile successions. In the two months between Donald Trump's victory in November 2016 and his inauguration in January 2017, the S&P 500 gained 6.2%. And in the period between Joe Biden's election and inauguration — a phase that included a violent insurrection — the S&P gained 14.3%.

Read more:

How to soothe clients' election anxiety

Advisors note how disputed election could negatively affect their business

In an election year, many financial advisors are worried that the results will be contested, with 45% of wealth managers saying a disputed election would have a negative effect on their business, according to a recent survey by Financial Planning.

"Election years often bring out a client's worst enemies: fear and emotion," Austin Marrs, co-founder of TSA Wealth Management in Houston recently told Financial Planning's Nathan Place. "We are constantly told if our candidate or party does not win, then the economy, the country and even the world is doomed."

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Almost half of advisors worry about contested presidential election

National debt a concern for advisors during election season

Nearly half — 48% — of financial advisors said the nation's debts were the "most urgent" policy area "for the next administration and Congress to address," according to Financial Planning research.

What is it about this issue that makes it so worrying for wealth managers? One reason may be the debt's sheer size: According to the U.S. Treasury Department, the federal government currently owes $34.6 trillion — and that number rises every second.

"The national debt affects wealth management in that the U.S. is the baseline for the global financial system," Noah Damsky, a principal at Marina Wealth Advisors in Los Angeles, recently told Financial Planning. "The global financial system is built on the United States' financial stability, so a high debt-to-GDP ratio could, one day, stress the markets and the wealth management business."

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Half of wealth managers see national debt as America's 'most urgent' problem

Andrew Harrer/Bloomberg

Updated tax brackets and their impact on taxes

Every year, the IRS tweaks income tax brackets to keep up with inflation, with the latest adjustments assigning the top rate of 37% to individuals earning at least $609,350 a year or $731,200 for couples. President Joe Biden's State of the Union speech and his administration's budget proposal, both in March, repeated the president's position that people with incomes of at least $400,000 can and should pay higher taxes. Former President Trump has signed on to a policy blueprint calling for a simplification of the tax code that would, intermediately, start the top bracket at $168,600 while lowering other taxes and shifting over time to a consumption-based system.

Neither of their proposals stand much chance of being adopted as law in their current forms. But they offer a glimpse into potential future policies, with much of the Tax Cuts and Jobs Act expiring at the end of 2025. The complexity of the tax code, and complications like the difficulty of ensuring the solvency of Social Security without raising taxes on those earning less than $400,000, illustrate why it's tricky to label someone as "rich" based on a specific number.

"There is unlikely to be one single metric that defines who is 'rich' in the United States, so a combination of indicators are likely to be more helpful, including measures of income and wealth, along with broader socioeconomic indicators like educational attainment or type of work," Garrett Watson, a senior policy analyst and modeling manager with the nonpartisan Tax Foundation, recently told Financial Planning's Tobias Salinger. "That of course is less directly relevant for the purposes of tax policy, which is partly why making the definition of 'rich' central to one's tax policy vision can be challenging to execute on."

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The definition of 'rich' — and its impact on taxes