Inside the guidance high-net-worth individuals are getting from money managers ahead of elections
Big talk and hefty promises have been made on the campaign trail this election season. And it’s causing jitters among high-net-worth individuals, especially around potential tax changes under a Democratic administration.
Between the two candidates, former President Donald Trump’s tax cuts could cost the government more but Vice President Kamala Harris’ policies are cagey, says Kent Smetters, the faculty director of the Penn Wharton Budget Model.
However, it’s Harris’ campaign that has been the talk of the town on Wall Street. On the extreme end, there’s chatter around unrealized gains being taxed at 25%. But you’d have to have a net wealth above $100 million before worrying about that.
The top 1% aren’t the only ones with a target on their backs: Those in the $400,000 to $1 million income bracket could see their capital gains tax rise under her. There has also been concern about whether the step-up in basis, a provision that adjusts capital gains taxes for inherited assets, could be repealed.
Smetters has been tracking the potential economic impacts of policies tied to each candidate. So far, he’s only been able to confirm two policies from Harris’ campaign: a bump up in corporate tax from 21% to 28%, and an increase to the top rate for long-term capital gains to 28% for those making above $1 million. Much of the rest is hearsay based on media discussions with sources or a belief that she will take on Biden policies, he noted.
The vagueness means money managers like Mark Malek, the CIO at Siebert, have to separate the signal from the noise and determine what’s being said for political favoritism versus policies that could realistically be enacted.
“A lot of them are very panicked,” Malek said of his high-net-worth clients who have been obsessing over some of the tax implications and questioning whether they should go to cash.
Mike Reynolds, the vice president of investment strategy at Glenmede, is watching the polls and discounting impacts in real time. “This is really not a normal election cycle,” he said.
Reynolds, who has also been speaking to high-net-worth investors, told B-17 that one of the biggest concerns for his clients has been the coming expiry of the Tax Cuts and Jobs Act of 2017 and what a renewal would look like under each administration. In a typical election round, he would have over a year to suss things out, including what each candidate stands for on major issues. But after the Democratic party switched their candidate, he has been left with unknowns.
On a lighter note, some of the grandiose promises will be difficult to pass if the winning candidate doesn’t snag a majority in Congress. As a result, Reynolds and his team have been tracking House and Senate seats that are up for reelection. And at this rate, he doesn’t think either side will be able to take Washington fully.
“We are looking at the map of available seats and running through it for what it would take for either side to get 10 more seats,” Reynolds said. “And you’d have to see scenarios like Republicans winning Senate seats in Rhode Island, New York, California, which just is very difficult to imagine. Or, you’d have to see Democrats winning in places like Nebraska, Indiana, Wyoming, which also seems equally improbable.”
It’s great news considering a split government has historically been better for the stock market, he noted.
Investing tips
The overarching advice money managers have been giving their clients is to remain aware of the policies but avoid making premature investment decisions until something is confirmed.
Malek has been telling his clients to sharpen their pencils and take scores of their portfolios to determine which assets could be sold if capital gains taxes go up. Another area he’s preparing for is if there are adjustments to the step-up in basis.
That said, real estate has been a core asset for high-net-worth individuals. A 1031 Exchange is popularly used to sell and buy investment property while deferring capital gains tax until future generations inherit it. Once they do, a step-up basis can be used to dismiss those previous capital gains taxes.
Even though Harris hasn’t touched the subject, Malek is concerned that she may follow Biden’s 2025 Budget Proposal and close that loophole or cap it at a certain amount, such as $500,000. Despite being a bad time to sell or buy real estate, Malek has been prepping his clients on the possibility of making a move in the event this shifts.
As for any impacts from the Trump administration, unilateral trade sanctions and tariffs would hurt the economy and be depressive to the market, Malek said. When making stock-pick decisions, he has been taking note of sectors and companies with exposure to China, whether through supply chains or customers. As for stocks within the tech sector, they are also up for debate: those being examined for antitrust, like Alphabet and Nvidia, are expected to do poorly under Harris, he noted.
Reynolds believes concerns around antitrust is a bipartisan issue and it’s a classic reason why he has advised against chasing the largest companies altogether. Those chasing big tech’s market darlings are sitting themselves up for poor future returns, he noted.
Over the past two years, concerned investors have found a safe haven in cash that could return higher yields. But that may be going away as we near rate cuts. Malek believes the outcome will be a shift back to options strategies to hedge the market uncertainty.
Sandi Bragar, chief client officer at Aspiriant, whose typical clients have a net worth between $25 to $30 million, is already on the alternative hedging bandwagon. Her firm has been allocating to various hedge funds and mutual funds with exposure to alternatives in an effort to balance an unknown environment that could result in continued positive returns or a scenario where things get dark quickly, she said. One of those funds is the GMO Benchmark-Free Allocation Fund, which has had solid returns and diverse allocations spread across equities, bonds, and alternatives.
