Presidential election cycles have a huge impact on wealth management clients and their financial behaviors. As the current election season comes into full swing, discussions surrounding the potential impacts of policies affecting wealth management clients’ financial lives become increasingly relevant. While this can often lead to heated debates, financial advisors mustn’t become apathetic about the consequences or inadvertently invalidate their clients’ concerns by avoiding the conversation. Rather, they can and should engage in productive discourse, specifically focusing on the policies that could directly influence how they work with clients and manage their financial plans and investment strategies.
To do this, wealth management firms need to understand what policies can impact their clients’ financial situations, analyze potential strategies for the various outcomes, and communicate clearly and objectively with their clients. Three major topics are likely to come up in client conversations: the Tax Cuts and Jobs Act of 2017, general impacts on the economic cycle, and potential changes to Social Security.
Tax Cuts and Jobs Act of 2017 (TCJA)
Perhaps the most discussed piece of legislation is the TCJA, which is set to expire at the end of 2025 and includes a broad number of provisions currently impacting the tax code, including lower income tax rates, increased standard deductions, and increased lifetime exemption amounts for estate taxes. For clients, the main fear will be directed toward a potential increase in their tax burden, particularly for high-income earners who have benefited the most from the current rates. Any potential changes might prompt them to reconsider their investment strategies, focusing more on tax-efficient investments such as municipal bonds, which are exempt from federal taxes.
Regardless of which party wins in November, we should expect the current tax code provisions to change in some way. However, even once the election outcomes are finalized, it’s too early to tell how they will change and who they will impact negatively or positively as there is still a year’s worth of negotiations and compromises that will go into finalizing the new legislation. Financial advisors should proactively discuss the possibilities with their clients and explore ways to mitigate the impact of any negative consequences over the coming year while taking note of clients who want to make changes before all of the facts are known.
General Impacts on the Economic Cycle
The perception of which party is best equipped to manage the economy is also a strong point of contention amongst clients. In an economy as complex as that of the United States, many have tried to analyze metrics such as real GDP across time and against which party was in the executive branch or whether there were different parties across the executive and legislative branches.
However it’s sliced, there are no definitive results that prove one party is better than the other at managing the whole economy. Rather, the economy is driven primarily by the underlying business cycle, which is, in turn, driven by several variables independent of the political party in power. This is taking a long-term view, but from a short-term perspective, market watchers have noted patterns associated with stock market returns throughout the election cycle that are tied to how investors deal with uncertainty.
While it may be tempting for some to get ahead of the election results, financial advisors will need to lean into coaching the client through their goals and long-term economic trends as the primary drivers of their strategies while managing short-term volatility impacts.
Changes to Social Security
The future of Social Security is in question as experts predict the fund will not be able to pay full retirement benefits as early as the mid-2030s. Legislative proposals to address the expected shortfall will need to be made sooner rather than later, and the next controlling party will likely have a say in this matter. Social Security benefits are a critical component of retirement planning for many clients. For clients who are about to enter or are already in the distribution phase of the investing lifecycle, close attention should be paid to any changes as they could dramatically affect their financial goals. Advisors should be aware of any clients relying on Social Security, monitor any developments closely, and be ready to adjust plans accordingly once the details of any changes are known.
Stay Grounded and Push Forward
As the election season unfolds, wealth management professionals need to stay informed about the potential impacts of fiscal and economic policies on their clients’ financial lives. Whether dealing with legislative changes like TCJA 2017 or potential shifts in the economic landscape, preparation and facts are key. By identifying how policies are likely to change pending election results, advisors can better prepare for the future and guide their clients through these uncertain times. Advisors can best prepare to lead these conversations by doing the following.
Understand which policies will impact your clients’ financial lives.
Taxes may be the main financial topic that comes to mind when discussing election outcomes, but it’s important to remember there are more ways policies can affect one’s financial well-being. Consider the impact of changes to healthcare for those managing medical bills for long-term illnesses or challenges to marital status for members of the LGBTQ+ community that affect estate planning.
Gone are the days when Julia Roberts, as Erin Brockovich, effortlessly recalled specific client details without the assistance of a customer relationship management (CRM) system. Advisors need robust CRMs to help them stay on top of the issues affecting their clients’ lives. Today’s financial advisors can leverage many advanced capabilities, such as automation and AI-assisted analytics, to recall specific details and create segments for personalized communications.
Lean into behavioral finance to improve interpersonal communications during sensitive conversations.
Financial advisors are sought for their investing expertise, but where they add the most value to their client relationships is through coaching. A Merrill Lynch analysis found that studies reported the value of behavioral coaching to be in the range of 100 to 400 bps. In contrast, the value of tax management was between 0 to 190 bps, and product allocation was only 25 to 85 bps.1
This is a significant opportunity for advisors, but they need to build trust and learn to adapt their communication style to their clients to navigate them through sensitive topics such as the financial impact of election results. With the launch of tools like BeFi20 from Orion, advisors can make short work of understanding their clients’ motivations and decision-making styles.
Analyze retirement plans and engage in scenario planning that focuses on potential legislative outcomes, not which party is in office.
Ensuring a secure retirement is often the primary goal for investors. Between potential tax and Social Security legislation, several factors may change retirement income plans for many. By evaluating scenarios that focus on the variables that drive retirement outputs, such as full retirement age or income limits, advisors can show clients different plans that meet their financial goals regardless of who is in office, easing at least some of the anxiety of uncertainty.
Stay ahead of the curve and ensure that you and your clients are prepared for whatever changes the future may bring. To learn more about the trends that will impact wealth management in 2025 and beyond, contact me at [email protected].
Don’t forget to register for Datos Insights’ Wealth Management Forum on October 10, 2024 in New York!
- The Value of Personal Financial Advice, Merril Lynch, Fall 2016, accessed on August 28, 2024, https://behaviorquant.com/wp-content/uploads/2021/05/Merril-Lynch-2016-The-Value-of-Personal-Fiancial-Advice.pdf ↩︎
