As US wealth managers await the outcome of the mid-term elections, Paul Golden asks what have been the effects of the Trump presidency on the sector and how might the midterms impact wealth management.
Two years ago Donald Trump won a presidential campaign on the promise to ‘drain the swamp’ and re-distribute wealth to ‘rust belt’ states. However, there is increasing evidence that the US wealth management industry is happy with what he has done since taking office.
A recent survey of US financial advisors by Wealthmanagement.com found that almost half (49%) approved of his handling of the economy and his administration’s policies relating to financial planning, with one in three expressing disapproval.
There was particular enthusiasm for tax reform, although it was tempered by recognition that while the Jobs Act might benefit wealthy individuals, reforms could lead to increased complexity for larger businesses.
Of all the international and domestic wealth managers contacted by PBI for this article, the most forthcoming was David Young, founder of Utah-based Paragon Wealth Management, who suggests that investors across the board are much more confident about the future since Trump was elected.
“Going into the election, our indicators were showing significant weakness – we were expecting to see some sort of sell off,” Yong recalls. “In the month after the election the negative indicators reversed and the market has been strong ever since.”
Young observes that the US president embraces capitalism, free markets, low taxes and less regulation and describes this as a recipe for higher economic growth, which in turn drives stock prices up.
“Almost everything you see in the media about Trump is negative but the markets continue to go up.
“That is because the people who actually place bets with real money have a positive outlook because they understand and see what is really going on. The people who make lots of negative noise either don’t understand economic fundamentals or have nothing to invest – or both.”
Dennis Gallant, an analyst at Aite Group agrees that advisors are happy with the growth of the economy and its impact on the Dow. “There was particular relief when it came to the demise of the Department of Labor’s Fiduciary Rule,” he says. “Under the previous administration the rule was coming and while it is good that there is a move toward fiduciary standards in the finance industry, maybe the Fiduciary Rule wasn’t the best means of implementing that.”
During the election there was recognition that if Trump won there was a good chance the rule would be postponed or even eliminated. Firms want to understand where the line in the sand is regarding compliance and regulatory standards relating to taxes and other policies and what it means for the market.
What effect will the midterm elections have?
“Right now you have a lot of advisors contemplating what is going to happen to tax plans and tariffs if the Republicans win the mid-terms,” says Gallant. “They are trying to plan for clients who have horizons that go well beyond a single administration so they are looking to shelter certain assets, move to new markets and lock in capital gains.”
Under the Obama administration there were low yields and rates so it became a real struggle for advisors to develop income, he continues. “But political uncertainty creates delays amongst advisors while they wait and see what direction to go in. Once you have clarity on regulatory and tax policies, you can take appropriate action and service your clients.”
One of the biggest potential dividends from the Trump presidency may not come to fruition depending on the midterm results. Earlier this year Trump suggested that his administration could use executive branch powers to force through a reduction in capital gains tax through amending the calculation to account for inflation.
Aaron Anderson, senior vice president and head of research at Fisher Investments, observes that in 1992, President George HW Bush investigated whether his Treasury Department could unilaterally act. Two different administration legal investigations (one conducted by Treasury, the other by the Justice Department) concluded that the former did not have legal authority to index capital gains for inflation by means of regulation.
A positive result in the mid-term elections could embolden the Republican administration to attempt a re-interpretation of this position, but Anderson suggests that anyone hoping for some marginal relief on capital gains from a re-interpreting of the tax should not hold their breath.
Trump and Tariffs
Gallant says there is a great concern around the potential impact on inflation of trade wars and what to do with portfolios in the event that inflation goes up.
Bryson Milley, a financial advisor and director of Vancouver-based RGF Integrated Wealth Management, observes that widespread tariffs only ever slow economic growth and the instigator generally bears the brunt of the downturn.
He is of the opinion that if the tariff battle continues, the US is likely to fall into a recession. “President Trump seems to be convinced that the short term pain will be worth a long term gain, but history does not share this view. I do not believe President Trump will come off his tariff kick easily and this does not bode well for the North American economy.”
Pensions and retirement reforms on the horizon
Pensions saving is another area the US president appears keen to reform. In late August he signed an executive order directing the Treasury and Department of Labor to review current policies and consider regulations that would make it easier for small businesses to offer 401(k)-type plans. However, even the creator of the 401(k) says it is not always the best option for small businesses.
A number of US states have introduced retirement programmes designed to make it easier for employees of small businesses to save for their retirement, although some experts have suggested that since state-sponsored plans oblige participants to set up their scheme through a specific vendor, they may not be getting the best value for money.
“There are so many studies out there about how ill-prepared and underfunded people are for their retirement, so anything that puts more dollars into their accounts will find favour,” concludes Gallant. “Whatever saving mechanism you are dealing with, people want more assets to fund their retirement.”