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.