Trump v. Biden: With no winner (yet), advisor regulatory changes in limbo
With no clear winner yet in the presidential election, advisors and clients will have to wait a bit longer to find out the ramifications for financial planning.
Several key battleground states were still counting ballots as of midnight Nov. 3, and election officials cautioned it could take time to reach a final tally.
From potential tax changes to regulatory shifts, there's much at stake for the country and wealth management. But it’s all on hold until a winner is certified and headed to the White House in January. Here are highlights of what either candidates’ victory could mean for advisors and clients.
What a Biden win means
If Former Vice President Joe Biden emerges victorious, his administration would pursue a more investor-friendly regulatory approach, according to experts and industry observers.
“The contrast is likely to be night and day even if you get an [SEC] chair who is on the more moderate end of the spectrum,” says Barbara Roper, director of investor protection for the Consumer Federation of America.
The SEC's controversial Regulation Best Interest would be at the top of the list for revision. The rules package, which went into effect earlier this year, changed advisor and broker standards of conduct. Critics — including the SEC’s own investor advocate — charge it tilted the playing field in favor of brokers and poorly defined what best interest means within the context of the regulation, among other criticisms. For example, the Form CRS document firms are now required to provide to clients expressly prohibits RIAs from mentioning that they are fiduciaries.
“I don’t think RIAs sufficiently appreciate what has happened with Reg BI and Form CRS. It has effectively done away with the Advisor’s Act,” says Knut Rostad, president of the Institute for the Fiduciary Standard.
Still, how a Biden administration would handle regulatory change remains an open question. Revision may not result in wholesale replacement by a Biden-appointed SEC chair. New leadership at the regulator may opt to focus on giving Reg BI more enforcement teeth. In other words, they may choose to renovate an existing house rather than tear it down to build anew.
“If they scrap Reg BI entirely, then that is a long process of putting together new regulations, have a new comment period, and have a vote. But if they were to issue guidance on what best interest actually means, they could do that quickly,” says Laura Posner, a partner at law firm Cohen Milstein and former bureau chief for the New Jersey Bureau of Securities.
At the Department of Labor, key Trump administration initiatives would likely be due for overhaul or scrapping. Secretary of Labor Eugene Scalia, who helped vacate the Obama era fiduciary rule as a private attorney, proposed a replacement for the defunct regulation earlier this year that would align with Reg BI — which is not a fiduciary standard. The proposal and its short 30-day comment period was met with sharp criticism from fiduciary advocates and even some industry trade groups.
The Labor Department has also made moves to expand the presence of private equity in retirement plans and to restrict the use of ESG criteria even as its popularity soars. ESG investing could be an area where a Biden administration makes regulatory changes or even where Congress could get involved, according to Posner.
A large number of factors would determine the speed of regulatory change, including who is appointed at the SEC and Labor Departments.
Congress gets a say too, and that can either accelerate or hinder change. Biden’s proposal to alter 401(k) tax benefits — effectively curtailing the benefit for high income earners and enhancing it for low income earners — could meet resistance in Congress from both parties.
If the proposal went into effect, it would likely make Roth IRA accounts more appealing to wealthy Americans, according to Paul Swanson, vice president of intermediary distribution at CUNA Mutual Retirement Solutions.
“This proposal significantly lowers the benefit for high income earners. So I think it will drive them to Roth IRAs,” Swanson says.
What a Trump win means
If President Trump pulls off another upset victory after trailing in the polls, it would ensure his generally business-friendly approach to regulation is here to stay for four more years. The win would also raise questions about the future of retirement planning.
“You’ll see an SEC focused on opening markets rather than protecting investors,” says Posner, the attorney and former bureau chief for the New Jersey Bureau of Securities.
Critics of the Department of Labor’s proposed replacement for the defunct fiduciary rule, which they claim erodes fiduciary duties, expect the proposal would be enacted under Trump.
“The cement around it gets to dry and it becomes the law of the land,” says Rostad of the Institute for the Fiduciary Standard.
Other changes for retirement planning that may be here to stay: the Labor Department’s new regulation to restrict the use of ESG criteria. The department issued a final rule for the latter the week prior to the election, saying it was meant to put the focus on pecuniary factors rather than non-financial goals. The proposal has been met with sharp criticism from ESG advocates and Wall Street firms.
“This rule is out of step with professional investment managers who increasingly analyze ESG factors precisely because of long-term risk, return and fiduciary considerations,” Lisa Woll, CEO of sustainable investing advocacy group US SIF, said in a statement.
This and other changes, such as the expansion of private equity, could have big implications for retirement savings. As of June 30, $6.3 trillion was held in 401(k) plans, according to data from the Investment Company Institute. Assets in IRAs totaled $10.8 trillion and total retirement assets were $31.9 trillion, according to ICI.
At the SEC, Trump could pick a new chair. Earlier this year, current Chairman Jay Clayton sought to be nominated as Manhattan U.S. Attorney. After expanding who can qualify as an accredited investor, the commission may broaden the definition yet further, according to Posner.
Trump has also indicated he would pursue additional tax cuts in a second term, though he has not gone into detail about what those would look like. The tax cuts implemented during his first term largely benefited businesses and wealthy Americans.
One tax in the president’s crosshairs: the payroll tax, which funds Social Security. Trump has said he would ensure the program is funded, but has not said how he would do it. Without a new source of funding, the tax cut would eliminate more than $1 trillion, or 90%, of the program’s expected revenue in 2021, effectively ending it, according to Social Security’s chief actuary.
Of course, any agenda that affects financial planning will take place amid an unprecedented public health and economic crisis. The coronavirus pandemic has caused more than 230,000 deaths, and cases are spiking in some regions of the country. The U.S. reported a record of more than 500,000 new cases in the week prior to the election. Trump has said the U.S. is “rounding the corner” on the virus. Meanwhile, the economy grew at a record pace during the third quarter — increasing at an annual rate of 33.1% — but it’s still only recouped two-thirds of ground lost earlier this year. Millions of Americans remain unemployed, and more temporary layoffs are becoming permanent.
Efforts at passing a second round of economic stimulus have stalled due to disagreements between Senate Republicans, the Trump administration and House Democrats. Prior to the election, the president called off negotiations with Democrats.
Democrats in the House have previously passed stimulus bills that Senate Republicans have balked at. It’s not clear if negotiations will resume before a new Congress is seated next year.