Monday, January 14, 2008

Investment advisors class interests

Investment advisors fear a Democratic victory in 2008 according to Investment News

Nothing worries financial advisers more than the prospect of a Democrat's being elected president in November, according to a quarterly poll by Brinker Capital Inc.
The fourth-quarter edition of the Brinker Barometer, which polled 236 advisers in December, found that 22% indicated that a "Democrat in the White House" worried them more than all other economic or geopolitical concerns.

Rounding out the list of concerns was "global unrest" (15%), "U.S. economic growth" (15%), "a terrorist attack" (13%) and "a recession" (13%).

When asked what their greatest tax concern would be under a Democratic administration, 81% of advisers cited a potential increase in the capital gains tax, an income tax increase and heavier taxes on dividends.

Now is this a narrow class interest argument, or an argument about the economy? The advisors seem to be projecting that any Democratic administration will at least let the Bush tax cuts sunset, and potentially increase rates on capital gains, dividends, and the top income brackets. I think that this is an ideological and class argument. Let's follow the money ---

Cactus at Angry Bear has made a pair of very interesting charts that draw upon the BEA NIPA data over the past forty years to examine at the first order the impact of changes in tax rates and economic growth. The lumpings are crude, but on first glance, the groupings are interesting. The first graph is the percentage change in taxes as a portion of personal income and the second is real GDP per capita growth rates.

Under Democrats, the proportion of income paid in taxes increased. Under Republicans the percent of income paid decreased. Not too suprising, but what did these taxes buy in aggregate --- higher or lower rates?

On first glance, marginal changes in tax policy away from favoring capital have produced superior results to the overall economy and also broader distribution of the gains of the superior ecnonomic growth. And here is where class interest may come into play. Investment advisors make their money from their high value clients; they are the individuals who are able/willing/allowed to invest in 2 and 20 hedge funds, high net worth individuals able to get involved in lucrative fee generating schemes and are seeking constant professional advice as to what to do with their money. People with a savings account/money market, a 401(K), a defined benefit pension and a partially paid off house as their dominant asset classes constitute the majority of investors, but not even close to the majority of fees. In these cases asset management is pooled and simplified.

The gains in income inequality and the distribution of the benefits of economic growth during Republican policy regimes have gone overwhelmingly towards the top few percent of the income distribution. This small group overwhelmingly consumes the services of fiscal advisors, and fiscal advisors that are successful enough to be polled most likely are members of this group.

And given an industry that has paid out record bonuses despite having almost zero net value added over the past seven years in a very favorable policy environment, I would be scared of any changes away from a concessionary policy regime towards one that would have a better chance of improving overall growth AND down ladder income growth. Democratic policies are less good than Republican policies for the group of people who pay investment advisors a lot of money, but that definately does not mean that catering to this group will produce improved aggregate outcomes.

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