How much does who’s in the White House matter to financial advisors? No, I’m not asking about how fervently they hold their political beliefs: rather, how much effect does the president have on the livelihoods of advisors and their clients? In my career, I’ve witnessed the impact of five administrations over nearly 30 years—Reagan, Bush Sr., Clinton, Bush Jr., and Obama—and I have to say that I honestly don’t know. Or perhaps more accurately, it seems to depend on the president himself (or, hopefully someday, herself,).
What does impact financial advisors and their clients, of course, are the financial markets. And while individual companies can buck the trends from time to time, the markets are dependent largely on the U.S. and global economies. The economy, in turn, is affected by various factors including interest rates, inflation, taxes, oil prices, and wars, which brings us back to the Oval Office. Presidents don’t appear to have much control if any over these factors, yet some seem to have considerable influence over them.
For instance, in the early 1980s, Ronald Reagan’s clear intentions to influence Congress to reduce tax rates and (attempt) to curtail Federal spending calmed Federal Reserve Chairman Paul Volcker’s fears of inflation sufficiently enough that he lowered interest rates from their double-digit highs. At the same time, oil prices fell from a high of $60 a barrel (yes, that was high back then) to under $10 a barrel—the result, I believe, of a deal that Reagan cut with the Saudis to protect their oil tankers from the threatening Iranians (yes, they were a problem back then, too), in return for much higher oil production from that country.
The combination of lower interest rates, lower inflation and lower taxes launched the bull stock market that continued through either 2000 or 2007, depending on who’s counting. Either way, the effect on financial advisors was dramatic: with inflation down, the equity markets heating up, and the Tax Reform Act of 1986, the tax shelter and inflation-hedge business that had been advisors’ virtually sole source of income for over a decade (with investments in oil and gas, real estate, gold and other “tangible” assets) literally dried up. It was replaced with a boom in equity mutual funds and the corresponding fee-based asset management business that continues to transform the advisory industry today.
With the economy humming along, there was little in the form of economic tinkering for the first President Bush to do, and to his credit, he was up to the task. Unfortunately for him, in the short recession of ’91 that followed the Persian Gulf War, his hands-off approach appeared “insensitive,” and he lost his bid for a second term to Bill Clinton and James Carville’s brilliant “It’s the Economy, Stupid” campaign. Still, well-allocated advisor-managed portfolios continued to grow—so much so that in 1999, Merrill Lynch announced that it was converting its entire commission-based broker force to fee-based asset management.
For his part, as the underlying economy was still sound, President Clinton also adopted a hands-off approach, while working with Speaker of the House Newt Gingrich and other “budget hawks” to balance the Federal budget (with the help of a bit of accounting sleight of hand). Yet it was also under Clinton’s watch that savings and loans were able to change what they could own in their investment portfolios, to allow them to benefit from the technology boom, adding fuel to the fire that became the Dot.com crash of 2001. And although the clients of advisors who’d been savvy enough to avoid overweighting in tech stocks did better, this was the first indication since the mid-‘80s that “traditional” asset allocation might not be all it was believed to be.
Which leads us to George W. Bush. Hit with the aforementioned Dot.com crash followed by the 9/11 attacks within his first year in office, President Bush continued the laissez faire approach to financial markets of the preceding three presidents, which would ultimately lead to disaster. With investors understandably skittish about the stock markets, Wall Street increasingly turned to sophisticated mortgage-backed securities to generate the kind of revenues to which it had become accustomed.
Still, advisors and their clients who stayed the course were rewarded with another five-year bull market. But with the U.S. fighting wars on two fronts, and cracks beginning to appear in the global economy, Fed Chairman Ben Bernanke couldn’t hold interest rates down—and when they started to climb, the trillion-dollar web of adjustable rate mortgages began to unravel, ultimately (and ironically) taking Wall Street down with it.
To my mind, the most disturbing part of the Mortgage Meltdown is that when Bernanke finally raised interest rates half a point in 2007 (despite his assurances that he wouldn’t) starting the downward spiral, the entire subprime market was only about $500 million in loans. Had the Bush Administration acted swiftly to work with Congress to simply buy those loans, convert them to long-term mortgages (30 or even 40 years) at low rates, the crisis would have been averted, and the taxpayers would likely have made a profit (as they did when President Roosevelt used a similar strategy in the 1930s).
In fairness, both Rep. Barney Frank, D-Mass., and Sen. Chris Dodd, D-Conn. (the chairs of the House and Senate financial committees, respectively), steadfastly refused to admit there was a mortgage problem. But that’s the point: It’s the president’s job to get Congress to act during a crisis, and in this regard, President Bush clearly dropped the ball. And financial advisors and their clients took a hit second only to the Great Depression, from which many are still struggling to recover—and to find better portfolio management strategies.
That ball, of course, fell squarely into President Obama’s lap. Clearly not taking a page out of the Reagan Recovery Manual, the current administration has used huge government spending combined with (so far) only slight tax increases and Federal Reserve rates at virtually zero to fuel a recovery that, while sluggish, has benefited advisors and their clients—many of whom are at least back to breakeven from 2007—with advisory revenues back up as well.
Still, the effects of the president’s financial reform remain largely unmaterialized, as are the consequences from his omnibus health care reform. With oil prices up substantially, Europe seemingly teetering on the brink, and U.S. inflation a strong possibility, the coming presidential election would seem quite significant to the economies of the U.S. and the world, the markets, and I suspect, to the futures of financial advisors and their clients.