Rarely has the outlook for financial advisers and their clients depended so heavily on the country's chief executive.
Yes, the reason for this is the fiscal cliff.
Most economists believe that absent legislation to avoid them, the roughly $600 billion in tax increases and spending cuts scheduled to take effect automatically in less than a month would send the U.S. back into recession for at least part of next year. Unemployment would rise, business investment would fall and the markets would be volatile, most likely in a downward direction.
The stakes could hardly be higher in the negotiations between the president and the Republican-controlled House of Representatives to avoid this scenario. For financial advisers, the outcome will determine whether their jobs get easier or a lot harder. If there is any hope of a more stable environment in which to manage money, it rests first and foremost with the president.
“President Obama has a lot of power and responsibility in terms of how advisers do business and how they can effectively build the wealth of their clients,” said Dan Barry, managing director of government relations and public policy for the Financial Planning Association. “More than anyone, the president has the power to make or break a deal. If he wants a deal, it will get done.”
In a post-election interview on the subject with Bloomberg News, Mr. Obama, 51, maintained his position that any deal would have to include tax rate hikes for individuals making more than $200,000 a year.
“The president has drawn a line in the sand, and advisers and their clients may find themselves on the wrong side of that line,” said Timothy Steffen, director of financial planning at Robert W. Baird & Co. Inc. “Financial advisers' best clients will feel the brunt of the things the president is pushing.”
Room for Negotiation
Just how hard Mr. Obama will push in the next couple of weeks is an open question. He has said that tax rates need to rise but has not committed to hard numbers. His administration has also offered the possibility of reducing rates later next year as part of a larger reform effort to broaden the tax base.
“The president has less skin in the game now because he doesn't have to run for re-election,” said Harvey Pitt, president of consulting firm Kalorama Partners LLC and a former chairman of the Securities and Exchange Commission. “He has less reason to compromise than those who have to run for office again.”
Mr. Obama also will have a major influence on governance issues facing the advisory industry, largely through his appointments to regulatory and cabinet positions in the coming year.
The two most important financial offices he likely will have to fill are those of Treasury secretary and SEC chairman, with the Federal Reserve chairman not far behind.
Timothy Geithner has indicated that he doesn't plan to stay on at the Treasury Department for a second term. He is leading the fiscal cliff talks on behalf of the administration, however, and that job could extend well into next year.
“In the case of Treasury secretary, my hope is that the president picks someone with sound fiscal judgment who doesn't carry baggage from prior administrations,” Mr. Pitt said. That might disqualify Erskine Bowles, despite his co-chairmanship of Mr. Obama's National Commission on Fiscal Responsibility and Reform with retired Republican Sen. Alan Simpson. Mr. Bowles served as chief of staff for President Bill Clinton.
The markets will have to prepare for a new Federal Reserve chairman, too. Mr. Bernanke is widely expected to step down when his term ends in early 2014. The president most likely will look for a successor who will continue Mr. Bernanke's accommodative monetary policy, focusing on significantly reducing the stubbornly high unemployment rate and supporting asset prices rather than girding for potential inflation.
The emphasis in choosing the next SEC chairman must be on building consensus within an increasingly dysfunctional agency. Implementation of the Dodd-Frank reform law has stalled amid partisan conflicts and federal court rebukes of SEC regulations. It remains to be seen whether Elisse Walter, who was designated chairman after Mary Schapiro announced her departure, can build that consensus.
It's a tall order, given the current 2-2 split between Republicans and Democrats on the commission. And even a third Democratic commissioner wouldn't guarantee a smoother ride.
“The SEC chair is an incredibly difficult job when we have a split Congress,” said David Tittsworth, executive director of the Investment Adviser Association. “The House Republicans will criticize everything you've done or haven't done. It's not a position for the faint of heart.”
Ms. Walter would have to be renominated for the position at the end of next year. Regardless of who assumes the role at that point, issues of greatest concern to the advisory community — a uniform fiduciary standard and a self-regulatory organization for registered investment advisers — could remain stuck in the mud given the divided Congress.
“Without a Madoff or another crisis that cries out for an immediate fix, we're likely to just get broad rhetoric about the need for regulation,” Mr. Tittsworth said.
(To return to the Power 20, click here.