The recent mid-term election results have many in the financial services industry cheering, especially with the Republican takeover in the House of Representatives, as the move is expected to create political gridlock. In Tuesday’s election, the Republicans swept the House, taking 60 seats to bring their total to 239 seats, while the Democrats retain a razor thin majority in the Senate with 51 seats. (Eleven races in the house were too close to call and three races were still too close to call.)
But the big Republican wins in Tuesday’s election could also influence who plays top cop for investment advisers with assets of $100 million and up. With Republicans taking control of the House, Spencer Bacchus (Ala., R) will take over chairmanship of the financial services committee from Barney Frank. And that may determine whether the SEC will get more funding to police investment advisers or designate an SRO to help it oversee them instead—and what group takes on the SRO role. (Many will be unhappy if it's FINRA. For more on that, go here.)
“We see the change from a democratic House of Representatives to a conservative House of Representatives as a good thing,” said a UBS advisor speaking on background. “It immediately creates gridlock, and markets love gridlock.” With gridlock the two parties will wrestle each other to a standstill, making any sweeping changes more difficult. If you believe in the “politicians-are-idiots” theory, you’ll love gridlock.
Charles Zhang, managing partner and president at Zhang Financial, is also pleased with the results, as he says a more divided government has historically been better for the economy. The markets will likely see an increase of 6 to 7 percent in the next six to 12 months, he said.
“Equity markets have practically jumped for joy at political division,” says the American Enterprise Institute. “Since 1970, the Standard & Poor's 500 Index has increased at a median rate of 13.5 percent per year in divided times and 9 percent per year under one-party rule. That spread grew (14.6 percent vs. 9 percent) since 1981 and even more so since 1993 (19.5 percent vs. 9 percent).”
The UBS advisor notes that the current Congress has been characterized by runaway spending and created worry within the industry over massive regulation. She hopes the new tone in Congress will stop the diatribe against Wall Street and bring an end to rampant regulation, which has “done nothing to help our clients.” In fact, her clients have expressed “nothing but disdain for all the things coming out of Washington.” Financial regulation has created confusion and additional paperwork for her clients, with the exception of credit card regulation.
However, members of Tiger21, a peer-to-peer networking organization of about 140 ultra-high net worth investors, believe the political gridlock may not bode well for the markets.
“Historically, a mid-term election turnover of the party in power is good for the stock market, and some even feel a more paralyzed government may also be good for the stock market,” said Michael Sonnenfeldt, founder of Tiger21, who’s investors manage more than $10 billion collectively. “But many of our members feel that government gridlock in a time of growing deficits will be far more dangerous than good.”
PIMCO CEO Mohammed El-Erian also believes the gridlock will not be beneficial this time around because of the amount of uncertainty in how financial policies will play out, according to a report by CNBC.com. With unemployment and household debt still high, the economic outlook remains unknown.
“We recently polled our members and they are deeply concerned about risks they are facing in unprecedented number,” said Tiger21’s Sonnenfeldt. “Among the highest risk factors they cited were political gridlock, instability in Washington and unsustainable deficits run by the U.S. and other western governments.”
Clarity On Tax Strategy
Still, financial advisors say the Republican win can only mean good things when it comes to tax strategy. In particular, it will likely mean tax cut extensions for the wealthy next year; the tax cuts, put in place under George W. Bush, are set to expire at the end of the year. While Obama announced this summer he would endorse extending some of the tax cuts, some advisors are waiting with baited breath on whether all the tax cuts will go through.
“That’s the big elephant in the room,” said Tom Bartholomew, president of Bartholomew & Company.
Republican John Boehner, set to take over as Speaker of the House, has been pushing for tax cuts extensions for all income classes for two years.
“The election was clearly a mandate for a more conservative fiscal policy,” said Doug Regan, president, The Wealth Management Group, Northern Trust. “It will have direct implications on tax policy and the litmus test will be what will happen to the Bush tax cuts: Will all tax cuts be repealed? Will they all be extended, or just repealed at the upper end?”
Despite the uncertainty related to the tax cuts, Gerry Klingman, president of Klingman & Associates, believes the election shed some light on what the tax rules will look like next year, so he can start helping clients make decisions. For the long-term, however, the push and pull of taxes versus spending is less clear, he said.
The UBS advisor is planning for the worst, telling clients to expect a 10 percent decrease in their paychecks and taxes to increase considerably. In particular, she said capital gains taxes are likely to rise next year. To mitigate this, she is taking capital gains this year to advantage of lower rates.
The Next Spitzer?
While the House change may make financial advisors cheery, the election of New York Attorney General Eric Schneiderman, who campaigned on a promise to keep the heat on financial services firms, may not.
“Certainly there are unscrupulous people in our industry and they need to be investigated and prosecuted,” said Klingman. “However, I sense that the New York Attorney General position has become one used by politicians to further future political ambitions by pursing high profile prosecutions whether or not they are merited. I hope for the best, but fear the worst.”