The wealth management market is already in shock from Democrats’ tax proposal—think top tax rates of over 65% for high tax states. Remember that a large majority of states charge taxes on residents, including big ones like New York and California, where large numbers of America’s wealthy reside. Now, California, the largest and one of the most influential states in the union, has just put out a proposal for taxing wealth, not income. The plan comes from the state’s legislator. Here are the basics of the plan: “The state would apply a 0.4% rate to all net worth above $30 million for single or joint filers. The tax would apply on wealth above $15 million per spouse for married taxpayers who file separately. Net worth would include all assets and liabilities held globally by a taxpayer”, according to Barron’s.
FINSUM: Two eye-opening things here. Firstly, Democrats have a veto-proof supermajority in the state legislature, so passing this will be much easier than elsewhere. Secondly, how much will this influence other states? It was easy to see how left-leaning states influenced others as it regarded state-level fiduciary rules.
The wealth management industry has a long-standing issue that has recently been re-highlighted by some new research studies. That issue is that financial advisors—who are overwhelmingly male—tend to have unconscious biases which lead to miscommunication, poor judgments, and bad experiences for female clients. According to Merrill Lynch, one of the big changes in household investing is the increasing involvement of women. For instance, women under 45 are twice as likely as average to be the financial decision maker in their home, and 4.5x more likely than women over 55 to consider themselves knowledgeable about investing. In meetings with heterosexual couples, advisors are still focusing most of their attention on men, which is frustrating to women. Male advisors also often mistakenly assume the couple’s finances are integrated and they are investing from the same account.
FINSUM: It is no surprise that the issues exist in wealth management, as they seem to be present in all industries. Our sector seems pre-disposed to the issue given the overwhelming majority of older male advisors.
Advisors need to start thinking about what the post-election tax landscape might look like for clients, especially high earners. The proposed Biden/Democratic tax package is even more stringent than many think, as when you diver deeper it becomes clear that the increases are quite extensive. One core element that is less understood is Biden’s Social Security Payroll tax of 12.4%, which applies to all income with no cap (all income between $137,000 and $400,000 would be taxed at the same level). Combining that with a raised federal tax rate of 39.6%, and state taxes means that some residents of high tax states could see punitive-levels. For example, in California, which has a 13.3% top tax rate, the total tax burden for high earners would be over 65%! Even in states without state taxes, income taxes could be 52%. Furthermore, Biden intends to eliminate capital gains tax rates for those who earn more than $1m, effectively doubling the capital gains tax rate.
FINSUM: There is good news and bad news here. The bad news is obvious. The good news is that because of the state of the economy and the need for fiscal stimulus, Democrats are unlikely to pass these measure until we re-reach full employment, which could be years.
LPL has been a true leader on the recruiting front in 2020. One should expect no less from the largest independent broker-dealer. As one of their new initiatives, they have just launched a program—called the “independent employee” model—to try to attract new advisors who want some of the benefits of being independent, but also want to be a W-2 employee. Such models have been around for a long time, and are most prevalent at Raymond James and Ameriprise, but LPL thinks there is an opportunity to scale it up. The program is designed to appeal to wirehouse advisors who like being W-2s but want to earn higher payouts. Payouts for the program range from 50-70%.
FINSUM: If an IBD is a halfway house between being a wirehouse advisor and being an independent RIA, then this is a one-quarter-way house. It does seem like this might be a smart move—W-2 benefits with higher payouts.
Advisors are mostly a conservative bunch, so many are incredulous of the current political polls. Others just don’t want to think about a Biden presidency. That said, if oddsmakers are right and the Democrats take over in a January, a strict new fiduciary rule is likely on the way much faster than almost anyone in the industry suspects. The reason why is the method the Democrats are likely to use to make a new rule. While all of us have seen how slow the rulemaking process has been at the DOL and SEC—and have probably thought of that as the status quo—Barbara Roper from the Consumer Federation of America pointed out this week that instead of crafting a new rule, democrats are probably just going to use the existing Reg BI framework and modify it.
FINSUM: Using an existing rule infrastructure and just beefing up parts of it would be a much quicker process than crafting a new rule. We might have a strict fiduciary rule by June 2021. You have been warned.
Something very interesting is happening in recruiting. While advisor movement slowed down right at the beginning of the pandemic, it has bounced back strongly in the last couple month. The reason why is that advisors are finding it easier to explore opportunities with new firms while they are working from home. Any advisor recruiter will tell you that calling a wirehouse broker at their branch is an almost impossible task as the office itself works as a gatekeeper. Even if you can get the advisor on the phone, it is taboo for them to speak about moving firms while they are in the office. Thus, the ability to take zoom calls from their comfort of their kitchen has opened the door to more recruiting since advisors are free to explore firms in-depth and with total privacy. Further, the lack of a need for offices has made advisors wonder if they need the infrastructure (and lower payouts) that come with being at a wirehouse.
FINSUM: The landscape for recruiting has changed overnight. No conferences, but no office gatekeepers either! It seems a great time for advisors to consider a move, and firms would be smart to put effort into recruiting right now as this is truly an unprecedented opportunity.