GOP Control Of Congress Expected To Benefit Financial Industry

By Cyril Tuohy InsuranceNewsNet

By Cyril Tuohy

Independent advisors called this election, but their musings on the performance of the stock market remain a work in progress.

A poll of 2,300 independent financial advisors by the Financial Services Institute (FSI) last spring found that 66 percent of respondents believed the Republican Party would win back the U.S. Senate. The finding led FSI President and CEO Dale Brown to declare that independent advisors had their “finger on the pulse of politics.”

Republicans won control of the Senate by gaining seven seats. In the House of Representatives, where they already had a majority, Republicans picked up at least a dozen seats.

“We congratulate all incumbents returning to service in Washington and in state capitals as well as all those freshmen who will begin their service,” Brown said in a news release.

“As Washington shifts its collective attention to issues such as tax reform and the retirement crisis, we will remain vigilant in our advocacy efforts and continue our constructive engagement with regulators as well as legislators on both sides of the aisle,” Brown said.

Asked last spring whether they believed the stock market would deliver a “strong, neutral or weak” performance for equities, 43 percent said the market would be strong, 49 percent said it would be neutral and 8 percent said it would be weak.

As of one week after the election, the Standard & Poor's 500 index was up about 10.2 percent year-to-date.

The index returned nearly 30 percent last year. From 1928 to 2013, the average annual geometric return of the benchmark index is 9.55 percent.

Although Republicans are in control of Congress, they probably are not powerful enough to break a Democratic filibuster. They certainly don’t have enough votes to overcome a presidential veto, so many political analysts predict more partisan gridlock.

Yet, a recent blog post by the National Association of Insurance and Financial Advisors (NAIFA) sees potential areas of compromise with regard to business tax reform, which would provide a positive signal to financial markets.

Advisors and brokers are often structured as S-corporations. However, lower rates for businesses would not benefit S-corporations since the profits of an S-corporation flow through to the proprietor’s personal income taxes, which are not likely to be included as part of tax reform, according to NAIFA’s blog posting.

A wirehouse or regional advisory firm, however, might see its 35 percent corporate rate reduced, the post noted, citing an industry trade publication.

With Republicans more favorably disposed to rolling back taxes than Democrats, industry lobbyists have an opportunity in the coming months to protect insurance interests as they find a receptive audience among lawmakers.

The Tax Reform Act of 2014 sponsored by Ways and Means Chairman Dave Camp, R-Mich., would cost the insurance and financial advisory industry as much as $583.6 billion over the next 10 years by repealing tax breaks for underwriters and distributors of insurance, and for retirement and savings products, according to NAIFA legislative analysts.

Proponents of tax reform claim that closing loopholes while making the tax code simpler and fairer for families and small businesses will help economic growth without increasing the deficit, but the real question is who is going to pay.

Insurance interests, by contrast, argue that eroding tax incentives to invest in insurance and protection and retirement products negates any advantage offered by lower tax rates. In any event, the industry could take a big hit, according to NAIFA legislative analysts.

“Most concerning could be proposals to tax corporate-owned life insurance (COLI) or employer-provided health insurance, restrict tax-favored retirement savings or limit nonqualified deferred compensation,” the NAIFA blog post said.

<p> Under the Camp tax reform proposal, changes to defined contribution retirement plans would place annual limits on pretax contributions, a move that would cost the industry an estimated $143.7 billion over 10 years, according to NAIFA.

In addition, the repeal of the Affordable Care Act small business tax credit would cost $11.1 billion, according to a NAIFA analysis.

And finally, the repeal of the 409A/tax deferred compensation rule would cost the industry $9.2 billion, NAIFA said.

If industry lobbyists do their part to push back on taxes, and if markets cooperate and rise even higher between now and Dec. 31, then the 49 percent of independent advisors who predicted a “neutral” year among equities will have fallen short.

On that score, though, no one’s likely to hear any grumbling from advisors who bet wrong.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].