The midterm elections: What's at stake for financial advisers

A shift in control of the House could change the course of important issues, including the SEC advice rule, tax reform and retirement policies

Oct 13, 2018 @ 5:00 am

By Mark Schoeff Jr.

As voters head to the polls in three weeks, the fate of many issues affecting financial advisers will hang on the outcome. If Democrats gain control of the House of Representatives in November's midterm elections — as is widely predicted — advisers will feel the impact.

"Please let the Republicans maintain the House and Senate," said Gary Wolfe, wealth management adviser at Northwestern Mutual. "If the Democrats win the House, the first thing they're going to do is go for impeachment [of Mr. Trump], and I don't know why."

Diahann Lassus, president of Lassus Wherley, wants Democrats and Republicans to share the reins of government, because she said it will force them to compromise.

"It will slow down the [legislative] process so that we have discussions about policies and issues," Ms. Lassus said. The current Congress is "not having policy discussions. We're having partisan discussions."

A shift in the House from a Republican to a Democratic majority could alter the course of prominent issues facing the industry, including the SEC's advice rule, additional tax reform and efforts to shore up retirement savings.

(Video: The biggest hurdle advisers will face after the midterm elections)

Watch for Rep. Maxine Waters, D-Calif., to be elevated to chairwoman of the House Financial Services Committee. In that position, she would be the most prominent Democratic voice in the House when it comes to congressional oversight of the Securities and Exchange Commission. That responsibility would undoubtedly include a keen and critical eye on the agency's massive new advice-standards proposal.

On tax reform, many Democrats have railed against the tax breaks Republicans passed in 2017, saying they mostly benefited corporations and the wealthy. They, and their Republican cohorts in high-tax states, will suffocate any attempts to extend the changes — and some conservative deficit hawks might agree.

One bright spot is the hope for bipartisan agreement about legislation on retirement policy, given previous interest from both parties. Rep. Richard Neal, D-Mass., who is likely to become chairman of the House Ways and Means Committee if the Democrats take control, has been a staunch advocate for measures encouraging Americans to save more for retirement.

But that may be one of the few areas of common ground in a government split between a Democratic House and a Republican Senate and White House. That election outcome aligns with what only a minority of financial advisers want to see, according to an InvestmentNews poll conducted Sept. 17-21.

The survey of 1,349 readers found that when it comes to control of Congress, 47% want Republicans completely in charge, 28% would prefer total Democratic control and 20% want Capitol Hill to be divided.

Midterm hopes
The party advisers would most like to see in control of Congress in 2019.
InvestmentNews Research poll of 1,340 readers between Sept. 17-21

Given the likely outcome of a congressional split with the House in Democratic hands, here's how the financial adviser landscape could shake out.


For advisers, the change in the political atmosphere with a Democratic House will be most noticeable when it comes to the SEC advice-reform proposal.

Ms. Waters has made clear that she thinks Regulation Best Interest, the rule to raise advice standards for brokers, is too weak. Many Democrats seek to strengthen investor protections in any standards reform by extending fiduciary duty to brokers. Ms. Waters would have the power to call SEC chairman Jay Clayton to Capitol Hill for a hearing about the proposal and might also introduce legislation directing the SEC to revise it.

"She would use [the committee] platform to express her concern about the SEC rule proposal in hopes that it would be strengthened to better protect investors," said Neil Simon, vice president for government relations at the Investment Adviser Association.

Instead of proposing a uniform standard for all retail investment advice, the commission maintained in its rule package separate regulations for advisers, who are held to a fiduciary duty, and brokers, who meet a suitability standard. The SEC touts Regulation Best Interest as a way to strengthen the broker standard by requiring them to put more emphasis on their clients' needs than on their own revenue.

But in a Sept. 12 letter to Mr. Clayton, Ms. Waters and the Democratic ranking members of three other committees, as well as 31 of their colleagues, said the SEC failed to explain how Regulation Best Interest is different from suitability.

"We urge the SEC to revise its proposal consistent with [the Dodd-Frank financial reform law] and require brokers to abide by the same high standard that currently applies to investment advisers so that their advice to retail investors is provided without regard to their financial or other interests," Ms. Waters and her colleagues wrote.

As chairwoman of the House committee with direct oversight of the SEC, she could drive that point home.

"What you're going to see is [Democrats] looking over the SEC's shoulders and prodding them toward a tougher rule," said Dan Barry, managing director of Atlantic Policy Solutions.

But the SEC is an independent agency, and Mr. Clayton is free to ignore Congress.

There's a chance a Democratic House takeover could alter progress on the proposal in a counterintuitive way: quicker adoption. "It's possible [Mr. Clayton] will try to get it done this year before the new Congress is in place," Mr. Simon said. "Congressional interest in this could potentially affect the [SEC] vote."

But given the size of the proposal and several thousand public comments, not to mention commission disagreement, it will be tough for the SEC to release a final rule until at least early 2019, said Jason Rosenstock, partner at lobbying firm Thorn Run Partners.

"I don't think there's any way [Mr. Clayton] can avoid potentially running into the whipsaw of House Democrats," he said.


Democrats may not be able to stop the SEC's advice proposal, but they definitely can put the kibosh on Republican hopes of continuing their tax-cut momentum in 2019.

A Democratic House takeover "kills what little chance there would have been for a Tax Reform 2.0 from happening," said Tim Steffen, director of advanced planning at R.W. Baird & Co. "The general theme would be raising taxes on higher-income people and lowering taxes on the lower- and middle-income taxpayers."

If Republicans maintain control of the Senate, the two chambers can cancel each other out on tax reform.

"In order to pass something significant, you almost need one-party control over the House, Senate and White House," Mr. Steffen said. "It could be two years of wandering in the desert."

If Mr. Neal ascends to the chairmanship of the House Ways and Means Committee, he could be counted on to challenge further cuts that mirror what's already been passed, having been a vocal opponent of Republican tax reform to date.

Industry groups that have developed a communication channel with the current committee chairman, Rep. Kevin Brady, R-Texas, will have to go back to square one in promoting tax policies that would benefit their members.

Dean Harman, owner of Harman Wealth Management and a Financial Services Institute leader, knows Mr. Brady personally because he lives in Mr. Brady's district.

"From a tax standpoint, it would be more complicated" in a Democratic House, Mr. Harman said. "I don't have a relationship with Neal. You've got to start over with all these issues."


As head of the Ways and Means Committee, Mr. Neal also would be the focal point on retirement savings issues, where there's hope for bipartisanship.

This year, for instance, provisions of the Retirement Enhancement and Savings Act that encourage workplace savings programs and the use of annuities within them have drawn support across the aisle.

"Mr. Neal has clearly communicated to us, both privately and in public statements, that retirement security is one of his top priorities," said Paul Richman, vice president of government affairs at the Insured Retirement Institute. "We think that could be a positive development."

Rep. Richard Neal "has a deep understanding ... of the issues that are important for advisers when it comes to savings and investments."Dan Barry, managing director Atlantic Policy Solutions

Mr. Neal has gained a reputation as one of the leading advocates on Capitol Hill for reforms that help average Americans put away more money for retirement.

"More so than many others, he has a deep understanding and appreciation of the issues that are important for advisers when it comes to savings and investments," Mr. Barry said.

The Family Savings Act, which gained House approval largely along party lines late last month, was part of the Tax Reform 2.0 package that likely will die in the Senate.

But Democrats who opposed the retirement provisions because they were wrapped in Tax Reform 2.0 might be inclined to support several retirement savings aspects in it. Elements such as enabling small businesses to band together to offer 401(k) plans, relaxing required minimum distribution requirements for individual retirement accounts, and making it easier to use annuities within 401(k) plans could gain wider backing if they move separately later this year or in the new Congress next year.

On the issue of health savings accounts, which some people are using to build savings for retirement due to their triple tax advantage, a bill that would double contribution allowances was approved by the House 242-176 in late July, with 12 Democrats in support.

With so few Democrats on board, it's not likely to get through the Senate by the end of the year. The HSA reform measure would then have to be reintroduced and go through the legislative process again in the new Congress next year. Such legislation would face an uphill battle in a House controlled by Democrats, who would rather preserve and strengthen the Affordable Care Act.


If Democrats take the Senate as well as the House, their political strength will grow exponentially. For instance, Sen. Elizabeth Warren, D-Mass., could become chairwoman of a Senate Banking subcommittee, giving her a stronger foundation from which to advocate for pro-investor legislation.

But the most likely scenario is that the GOP maintains the Senate, which limits how much House Democrats can accomplish.

"You'll see a lot of messaging bills about how a Democratic-controlled House feels about loosening Wall Street regulation, but you're not going to see any changes," said Duane Thompson, senior policy analyst for fi360. "If Republicans keep the Senate, any Democratic messaging bills are going to run into a buzz saw and die."

That would mean the legislative status quo for advisers. But, Mr. Thompson said, advisers are "going to see fireworks in terms of oversight hearings."


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