AdvisorHub Q&A about elections impacting investment decisions
By AdvisorHub
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AdvisorHub Q&A about elections impacting investment decisions:
Many retirees spend the day watching the news on TV and they’re very concerned about how the upcoming elections could impact their portfolios. What are some of the best ways to calm clients and keep them focused on their financial plan?
Many advisors believe that it’s taboo to talk politics with clients, but I have a different take: I believe that advisors absolutely need to discuss politics with clients from the right perspective. Our focus shouldn’t be the sensational and divisive commentary on TV, or shocking clickbait headlines that get people stirred up online. Advisors shouldn’t talk about political or social issues with clients, but they absolutely should discuss candidates’ proposed policies – such as tax laws, social security and Medicare – because those will impact client lives. Advisors should never be reactive with clients – we should strive to proactively put policy matters on the table and discuss them. Advisors need to help clients look beyond election day, even when there’s an election surprise. For example, when Barack Obama defeated Mitt Romney in 2012, the markets had priced in a Romney win and proceeded to drop. Many of our clients used that as an opportunity for Roth conversions because we felt it was irrational for the market to decline significantly just because Obama won, when he didn’t even have control of the House or the Senate. Right now, our job is to talk with clients about the kinds of policies that could impact their lives and help them prepare for those scenarios. To keep clients calm through uncertain times, it’s absolutely necessary to stress test their portfolio to show how it will perform in a worst-case scenario. Once they see we’re prepared for that, they’re more confident and a lot calmer. No one can prepare for truly catastrophic situations like 9/11, but we can prepare for difficult circumstances and ensure our clients that we’re ready to adjust if necessary.
How do you handle hypothetical questions from clients, such as how the election winner could impact personnel and policy decisions at the Fed, SEC, IRS and elsewhere?
When I discuss the possible impacts of public policy, and what we might expect depending on who’s in the White House, I make it very clear to clients that we don’t live in a pure democracy, but rather America is a democratic republic. For any president to get their agenda through, they need the House and Senate to cooperate. All presidents get frustrated when they can’t get policies through a split Congress, and even when one party controls Congress, there are always members who will cross party lines and vote for or against a policy proposal. In other words, outcomes are rarely clear-cut, and that system of checks-and-balances is always there. When it comes to governmental agencies, especially the Federal Reserve, I tell clients that I believe whoever wins this next presidential election will make reasonable choices about who they appoint to key roles. And even with the Fed itself, there’s more than just the Fed chair. There are other Fed board members and committee that have a say in policy, so it’s never clear-cut. That said, especially when I’m talking with clients who are afraid of a bear market, I remind them that bear markets happen because of poor fiscal or monetary policies, and that’s why we watch very closely who’s appointed to these key roles and what their approach might be.
As a veteran financial advisor and CPA, what have you learned from the election cycles throughout your career?
Throughout my life, it seems like every election has been “the most important election,” and there’s always a lot of uncertainty, which is why our clients get scared. That’s never been truer than today with a 24/7 news cycle and unlimited opinions on every social media platform that’s literally in the palm of your hand. I’ve learned that most people assume the stock market and Wall Street in general are more married to election outcomes than they really are, and, as advisors, we should be proactive about explaining this to clients. For me, it comes down to helping clients understand how the market works. First, let’s forget the President for a moment. Our government is trying to create conditions where our economy grows, thrives and prospers, and where companies that create value are rewarded by having their stock price increase. Just like we all go to work every day and create value, earn money, pay off our debt and contribute to our 401(k), companies do the same thing. If companies are all creating value, then in theory, the market would never go down.But the reality is there are all kinds of factors that influence perceptions and performances of companies, and therefore impact their valuation – whether there are fundamental reasons or not. People can support whichever political party or candidate they want, but as Warren Buffet has said, to invest in the market you really need to believe in America, and just like individuals who fall on hard times but pull themselves up by their bootstraps, America does the same. We’ve had bad presidents in the past and we’ll probably have them in the future, but there’s really nothing we can’t reverse. I certainly can’t give any guarantees, but having lived through a lot of elections, I can say the market usually gets past them very quickly, and I think it’s fair to tell clients, “If you believe in America, you can believe in the market.”
With your CPA hat on, what do you see as the most important tax policies and issues to monitor once the election is over?
Everything is in play when it comes to tax policies right now, especially the estate tax. It’s possible we could revert from current estate tax exclusions ($13.61 million per individual or $27.22 million per married couple) back to 2016 levels (approximately $6 million per individual and $12 million per married couple). Reverting to tax laws we had in 2016 means higher taxes for just about everyone. Along those lines, advisors need to focus on how policy decisions relating to taxes, social security and Medicare could impact clients’ portfolios and their lives. Among those three areas of focus, I view Medicare as the most pressing challenge because it’s no secret Americans are living longer, but politicians haven’t yet decided who’s going to pay for the increased healthcare costs that come with a population with growing longevity.
Helping clients avoid emotionally driven financial decisions is a core tenet of advisors’ value. When a client calls you in a panic due to election or market volatility, what’s your conversation with them like?
Honestly, this scenario should almost never arise if we’re doing our job as advisors because we should all be bringing up the worst-case scenarios with every client at the beginning of the relationship. I say to clients, “What would happen if we have another 1929 to 1944 on our hands, a repeat of the worst period in history for the stock market?” We stress-test their portfolio against the worst possible scenarios to see how their portfolio would handle it. And importantly, while it doesn’t make anyone immune to market volatility, we emphasize to our clients that they should try to get their mortgage paid off, eliminate debt and have their retirement income tied to investment interest and dividends which still pay regardless of the valuation of an individual stock or investment. Once the plan is in place to make sure their income is as secure as possible, market volatility becomes less of an issue. Clients get comfortable with the fact their advisor has presented the worst-case scenario to them, and it makes it easier for the client to ignore the outside noise. When I do get the rare, panicked call from a client, I pull up my notes from when we discussed how we planned for worst-case scenarios and remind them of that conversation, and that takes the emotion out of it.
