Will the Biden Administration be a net plus or negative for America’s registered investment advisors (RIAs)? It’s too soon to tell. But one thing is certain: change is coming in five key areas.
The presidential election of Joseph Biden represents a sea change for registered investment advisors (RIAs) and their clients. When the Democrats picked up two Senate seats in the Georgia runoff elections, President Biden won narrow control of the Senate. With that came greater ability to define and pass his legislative agenda. But his margin is so narrow—Vice President Kamala Harris’ tie-breaking vote—it’s possible his sea change might become a mere ripple.
Still, the transition from a conservative Republican administration to a liberal Democrat one will likely have a big impact on registered investment advisors (RIAs) and their clients. Just how big depends on Biden’s ability to persuade reluctant senators—Republicans and several right-leaning Democrats. But changes are coming and they won’t be minor. Here are five developments to watch for in the months ahead.
- The economy will receive a significant boost. Biden’s $1.9 trillion Covid-19 relief package passed in the House in late February. If it gets through the Senate it will be the second largest federal cash infusion in history. The only larger one was the government’s original response to the pandemic, 2020’s CARES Act. At the time of this article’s writing (late February 2021), no one knows the final shape or size of the president’s stimulus package. But if he passes it through budget reconciliation (which requires only 51 Senate votes), it’s likely he will get nearly everything on his wish list (except for a $15 national minimum wage). That means the economy will get a major shot in the arm, with GDP growing about 2 percentage points, experts predict.
The unemployment rate is likely to continue falling from its current rate of 6.3% (in January 2021) to 6% or slightly lower by year-end. If Biden’s national COVID-19 vaccination effort succeeds, one can expect more people to return to work and the unemployment rate to decline even further. All of this points to a stronger economic environment for RIAs and a stiff wind at RIAs’ backs as they try to grow their firms in 2021. - Federal spending will grow as the President tries to rebuild national infrastructure and to move toward green energy. President Biden has proposed a $2 trillion spending program designed to fix crumbling infrastructure, while speeding the transition to a green economy. Plans are in the works to invest in roads, bridges, rail, airports and other crucial structures, with an emphasis on promoting electric vehicles and renewable energy sources. Biden will continue his push for a carbon-free electric grid by 2035 and a net-zero carbon-emission economy by 2050. Other features of Biden’s spending package are free four-year public colleges for families earning less than $125,000 per year, free community college and expanded skills training for Americans. An additional $300 billion for technology research and development (R&D) and $775 billion to increase child and elderly care are also in the works.
Based on these and other Biden plans, America is entering an era of more muscular government involvement in the economy. With Americans presumably learning and earning more, the number of people with enough disposable income and cash to become “entry level” RIA clients may grow. A possible downside; more aggressive taxation of affluent clients will shrink top-end wealth, not to mention unleash inflationary pressures that hurt all Americans (see tax discussion). With this downside stated, this may still present a positive outcome for if RIA’s proactively address these topics with their clients. - The Administration will rescind some of the tax cuts put in place under former President Trump and increase tax rates on higher-income Americans. President Biden has aggressive plans to reinvest in America. This agenda plans on getting its high cost of funding by calling for more taxation on affluent Americans and businesses. His plan will bring back the 39.6% tax rate on people earning more than $400,000 per year, as well as increasing the corporate income tax rate from 21% to 28%. He also plans to lower the estate tax exemption from $11.58 million to $3.5 million. His estate tax rate will increase from 40% to 45%. In addition, Biden will begin applying ordinary-income tax rates on capital gains for people making more than $1 million per year. He will also cap the tax deduction at 28% for people making over $400,000 per year.
Another Biden proposal includes eliminating the stepped-up basis at death for asset sales, which will likely be controversial and its passage far from assured, especially with only a one-vote Democratic margin in the Senate. Meanwhile, Biden’s narrow Senate edge might limit his ability to push through nearly all of his extensive tax plans. But if they do become law, they will spark many opportunities for RIAs to adjust client asset portfolios for greater tax efficiency. To the degree this work generates extra fees, the downside of higher taxes on affluent clients may become an upside for RIA booked revenue. - Biden’s economic investments will lift key industry sectors, creating investment opportunities for both clients and advisors. Renewable-energy industries should benefit from Biden’s efforts to transition the U.S. to a non-carbon-based economy. This means sectors like wind, electric vehicles, battery producers, solar, biofuels and more will get a boost. Biden’s focus on infrastructure rebuilding should lift construction and engineering firm revenues and earnings. His executive orders rolling back President Trump’s immigration policies should improve the financial performance of industries such as retail, fast food and agriculture, all of which rely heavily on immigrant labor.
Ongoing efforts to combat the pandemic will continue to increase healthcare industry spending and stock valuations. As with all new presidential administrations, opportunities for RIAs to evaluate and rebalance client asset allocations will be significant. Adding value to client portfolios in this way not only may generate extra fees, it will also satisfy clients who are confused about investing in the new environment. Proving your value and understanding this new landscape should enhance client satisfaction with your firm and their loyalty to you. - The Biden Administration will move toward tighter regulation of RIAs and other financial providers. As a Democratic president, Biden will adopt a stricter approach to business regulation. In the financial advisor industry, this will involve more aggressive enforcement of the SEC’s Regulation Best Interest, the rule that requires securities firms, advisors and other financial entities to put their client’s interests ahead of their own. Legal experts expect Biden’s SEC to not only get a new Chairman—the current chairman Jay Clayton is expected to leave the agency during 2021—but to also more strongly enforce the best-interest rule.
The Department of Labor’s (DOL) fiduciary regulation, which was slated to take effect on February 16, was put on hold for 30 days. It’s possible a more liberal DOL will reopen the rule to public comment. In any case, advisors will soon have to comply with the rule’s requirement that advisors involved with IRA rollovers uphold a fiduciary standard when working with clients and document that approach in writing. For RIAs, it’s possible the Biden Administration will make advisory and planning fees tax deductible. This would encourage more Americans to retain wealth advisors to help with their financial and investment planning, something that will be even more sorely needed after the pandemic recedes.
President Biden has expressed an interest in revisiting investment-advisor noncompete agreements and no-poach clauses both of which he believes limit trade. “Companies should have to compete for workers just like they compete for customers,” Biden said in 2019. He believes that restrictive agreements and clauses make it harder for investment advisors to switch jobs or firms. Conversely, eliminating or loosening them may result in higher pay, more equity participation and other enticements for employees to stay in place. This change will likely be highly popular among RIAs, perhaps offsetting other less popular Biden initiatives affecting the industry.
In conclusion, the five changes mentioned above, along with many others in the works, will create upsides, downsides and uncertainties for both advisors and their clients. For clients who lose ground financially in the year ahead, blaming —and suing—their advisors may become more common. With so much potential opportunity on the table in 2021, the last thing you want or need is to waste time in court. For this reason, it will be crucial to keep your E&O insurance, your defense policy, in force. Now more than ever is the time to be vigilant about mitigating any new business risks that emerge this year.
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