What does former Vice President Joe Biden’s win mean for advisors? Retooled advisor regulation, potentially higher taxes for wealthy Americans and new rules governing retirement plans, experts say.
Certainly, addressing the coronavirus pandemic and economic turmoil will be top priorities for Biden. Beyond that his administration will likely pursue a more investor friendly regulatory approach, according to experts and industry observers. That would represent a sharp contrast to the Trump administration, which has generally rolled back or eased regulations that irked Wall Street.
“The contrast is likely to be night and day even if you get an [SEC] chair who is on the more moderate end of the spectrum,” says Barbara Roper, director of investor protection for the Consumer Federation of America.
The SEC’s controversial Regulation Best Interest is at the top of the list for revision. The rules package, which went into effect earlier this year, changed advisor and broker standards of conduct. Critics — including the SEC’s own investor advocate — charge it tilted the playing field in favor of brokers and poorly defined what best interest means within the context of the regulation, among other criticisms. For example, the Form CRS document firms are now required to provide to clients expressly prohibits RIAs from mentioning that they are fiduciaries.
“I don’t think RIAs sufficiently appreciate what has happened with Reg BI and Form CRS. It has effectively done away with the Advisor’s Act,” says Knut Rostad, president of the Institute for the Fiduciary Standard.
Laura Posner, a partner at law firm Cohen Milstein and former bureau chief for the New Jersey Bureau of Securities, notes that the Democratic Party’s platform called for stronger investor protections. Without naming Reg BI, the platform said financial advisors “should be legally obligated to put their client’s best interests first.” The Republican Party did not adopt a new policy platform this year beyond stating it “will continue to enthusiastically support” President Trump’s agenda.
“They were pretty open about wanting to do something on a fiduciary rule for everyday investors. So I think they believe it is a priority,” Posner says.
Still, how a Biden administration would handle regulatory change remains an open question. Revision may not result in wholesale replacement by a Biden-appointed SEC chair. Roper says new leadership at the regulator may opt to focus on giving Reg BI more enforcement teeth. In other words, they may choose to renovate an existing house rather than tear it down to build anew.
“I believe there is enough to work with in Reg BI as a starting point. It survived a legal challenge. If you started from scratch, you’d have to go through that all over again,” she says.
For example, Roper says, the SEC could do more to require firms to mitigate conflicts of interest, and not merely rely on disclosure. The regulator could also make Form CRS a “much more readable document,” she adds.
Retooling over replacing could be a more efficient path to significant changes, according to Posner. “If they scrap Reg BI entirely, then that is a long process of putting together new regulations, have a new comment period, and have a vote. But if they were to issue guidance on what best interest actually means, they could do that quickly,” she says.
At the Department of Labor, key Trump administration initiatives are likely due for overhaul or scrapping. Secretary of Labor Eugene Scalia, who helped vacate the Obama era fiduciary rule as a private attorney, proposed a replacement for the defunct regulation earlier this year that would align with Reg BI — which is not a fiduciary standard. The proposal and its short 30-day comment period was met with sharp criticism from fiduciary advocates and even some industry trade groups.
The Labor Department has also made moves to expand the presence of private equity in retirement plans and to restrict the use of ESG criteria even as its popularity soars. ESG investing could be an area where the Biden administration makes regulatory changes or even where Congress could get involved, according to Posner.
“You don’t want different and overlapping disclosure requirements,” she says. “I think everyone benefits from uniformity so long as it’s not a race to the bottom.”
A large number of factors will determine the speed of regulatory change. The SEC may move slowly because a majority vote among its five commissioners is necessary for rule-making. The Labor Department is structured differently. It also matters who Biden nominates to lead the agencies.
“This is where personnel is policy,” Roper says.
Congress gets a say too, and that can either accelerate or hinder change. Biden’s proposal to alter 401(k) tax benefits — effectively curtailing the benefit for high income earners and enhancing it for low income earners — could meet resistance in Congress from both parties.
If the proposal went into effect, it would likely make Roth IRA accounts more appealing to wealthy Americans, according to Paul Swanson, vice president of intermediary distribution at CUNA Mutual Retirement Solutions.
“This proposal significantly lowers the benefit for high income earners. So I think it will drive them to Roth IRAs,” Swanson says.
Biden’s proposal could have big implications for retirement savings. As of June 30, $6.3 trillion was held in 401(k) plans, according to data from the Investment Company Institute. Assets in IRAs totaled $10.8 trillion and total retirement assets were $31.9 trillion, according to ICI.
Swanson adds that any tax increase on the wealthy would likely prompt more advisors to focus on tax efficiency. “Advisors will want to look more closely at tax efficient investing, asset location. They will assess the impact of these changes on their clients,” he says.
Of course, any agenda affecting financial planning will form in tandem with efforts to address an unprecedented public health and economic crisis. The coronavirus pandemic has caused more than 230,000 deaths, and cases are spiking in some regions of the country. The U.S. reported a record of more than 500,000 new cases in the week prior to the election. Meanwhile, the economy grew at a record pace during the third quarter — increasing at an annual rate of 33.1% — but it’s still only recouped two-thirds of ground lost earlier this year. Millions of Americans remain unemployed, and more temporary layoffs are becoming permanent.
The Biden administration may view many policy goals as important in their own right. And other objectives — such as improving retirement savings among low income workers — may seem even more important at a time of severe economic stress.
In short: The incoming administration will have its hands full.