Liz Warren Puts A 2020 Target On Advisors' Backs (But Is She Electable?)

Front runner looking to tear down support systems for “the wealthy and well connected” should have everyone who likes the industry status quo looking to reduce career risk . . . just in case.

With the presidential vote now less than 14 months away, dramatically different visions of how the following four years will play out are shaping up fast.

On one side, you’ve got the incumbent, happy to roll back regulations on advisory conduct and taxes on the wealthy investors we work with. 

And if he doesn’t win, the front runner right now in Iowa is the debt expert the banking world has hated for decades. Liz Warren is now taking a shot at the White House.

Needless to say, the antipathy is mutual at this point. Wall Street isn’t just on her hit list. Hitting Wall Street is now the core of her platform. 

We can’t trust the polls at this early stage but she leads Trump by six points on Fox right now.

Even if she doesn’t captivate the public imagination, she’s got a real shot at this. We’ll talk about the odds later.  

For now, the important thing is being ready to roll if she wins.

Wind the regulatory clock back

Before the 2008 crash, Warren wasn’t too vocal on what we would consider Wall Street. Ground-level advisors were beneath her notice.

It took the big banks imploding and the Dodd-Frank era to get our end of the industry on her radar. Since then, she’s incorporated “financial advisors who cheat people” into her rhetoric.

That’s largely the influence of the fiduciary movement: dismiss everyone but fee-only planners who tout their freedom from conflicts of interest, regulate everyone else into extinction.

She now wants regulators with teeth, which means FINRA loses the freedom to police its own members while the SEC’s role expands. It means cracking down on traditional compensation models.

And if the existing regulators don’t get tough, we’ve seen this line of thought lead to other government entities like DOL or Warren’s own CFPB leaping bureaucratic borders to achieve the desired results.

A Warren presidency would almost certainly take us back to the decade of dithering over whether FINRA is obsolete and how much disclosure on non-retirement accounts protects advisors from frivolous client lawsuits.

Those who did the heavy lifting to satisfy the fiduciary rule then can simply dig those programs out of the mothballs. Everyone else should probably at least reconsider voluntary compliance.

We’ve discussed this over the years. Sometimes voluntary compliance is worth the aggravation and the expense because at least that way you know you’re covered from whatever Washington dreams up.

But if you’ve been fighting the DOL standard, that war isn’t over. Warren will almost certainly litigate it again.

While it will sting if she wins, there’s a silver lining. Your clients are going to need you more than ever to keep up with a Warren White House. 

No friend of the private equity class

All you need to do is find a way to communicate and monetize that value. Start on the other end of Wall Street where bankers make fortunes public companies private and private companies public.

That’s who Warren is really fighting. The 2008 crash turned her against the deal-making machine itself and now she wants to align compensation there with risk.

If she’s elected, the securitization of everything will take a big step back. Corporate raiders will need to be more gentle with their acquisitions and more careful with their debt.

Somehow the “I won’t be here, you won’t be here” short-term profit mentality that ran the banks in the mortgage boom will be legislated away. I’m not sure how that kind of deep change in culture happens but it probably revolves around new rules for bonus pools and getting the SEC involved.

Management fees throughout the industry will probably wilt under scrutiny, starting with hedge funds. Carried interest deductions will go away. These things don’t immediately affect us, but a lot of clients will feel the pain.

The truly wealthy will need their money to work harder to keep up with taxes. They’re going to need great advisors who can protect them.

After all, Warren wants to take 2% of all standing wealth above $50 million (assessed every year) and 3% from every billionaire. And don’t forget the 14.8% surcharge on investment income for high-earning households, eliminating the Social Security and Medicare caps and so on.

It’s no wonder she hasn’t commented directly on her plans for the capital gains tax because it really won’t matter once the IRS gets all these new fingers into client accounts. 

Turn into a differentiator

The math is simple. Advisors who can suggest more tax-efficient structures for those assets can justify their fees and create lasting loyalty. Whenever the stakes get bigger, there’s more room for expertise to make a visible difference, year to year.

Right now tax loads are light and the gap between the best planning in the world and none at all has gotten extremely compressed. But it’s a pendulum that swings across administrations and ultimately generations.

You know the routine. Lock in tax rates when they’re at their lowest. No matter who wins the White House next year, odds are high that the rich will pay more tax in a decade than they do now.

Whether that burden is expressed as income tax, capital gains, “investment tax,” estate tax or a naked wealth tax is just rhetoric. Pay when rates are low. Hold when rates are high.

And convert to tax-advantaged vehicles whenever you can. That means Roth. Private equity, perversely enough, but as an investor and not a fund manager. Annuities tailored to skirt the taxable limits. Life insurance.

A Warren presidency opens the world to a lot of innovation in products and services. Advisors who keep up with what’s best on the market will give their clients better outcomes and their careers will thrive.

As far as I’m concerned, it’s easier to add value through protection than to chase higher performance in order to keep up with the taxes. Right now a lot of advisors are chasing returns.

Maybe she won’t win. Maybe she won’t even get the nomination.

But I know a few hedge fund heavyweights who are practically drooling to see her enact some of these policies. They aren’t big bankers. They just like the idea of another shift in the Washington landscape.

That’s where opportunities emerge as well as anxieties. We’ve gotten through everything the world could throw at us so far. 


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