How to Talk to Clients About Politics and Investing

As senior vice president of applied insights at Hartford Funds, John Diehl feels he has one of the most interesting and engaging jobs in the advisory industry.

In the role, Diehl leads Hartford Funds' research efforts with the MIT AgeLab as well as other thought leaders, and he oversees a team of industry experts who translate this research into actionable ideas for financial professionals and their clients across the U.S.

During a recent interview with ThinkAdvisor, Diehl shared some insights from a new survey of investors taken ahead of the forthcoming midterm congressional elections. According to Diehl, with the midterm elections approaching, financial professionals have an opportunity to underscore the importance of avoiding emotional investment decisions and to emphasize the wisdom of investing objectively for the long term.

Nonetheless, as advisors look to provide more holistic financial planning and attract the next generation of clients, Diehl says, they must be prepared to engage in conversations about topics that might not have historically fallen within their purview, from taxes to politics.

Midterms and Markets

The survey shows nearly 90% of investors believe the midterm elections will affect their portfolios in some way, but only 38% plan to make changes to their portfolios. The data also reveals, however, that younger generations are more apt than older generations to make changes to their portfolio based on the election outcome.

According to the survey, a majority (55%) of millennials believe a Democrat-controlled Congress is best for their portfolio, while only 26% of baby boomers believe this. Alternatively, 47% of baby boomers believe a Republican-controlled Congress is best for their portfolio, while only 25% of millennials believe this.

When it comes to investment decisions in light of the elections, the data shows some other clear demographic discrepancies. For example, a sizable majority (73%) of women don't plan to make changes to their portfolios in light of the election, compared with about half of men (53%). Most (81%) baby boomers and Gen X investors (64%) don't plan to make changes to their portfolios in light of the election, but most Gen Z (75%) and millennial investors (65%) do plan to make changes to their portfolio.

"It is always interesting to examine the intersection of politics and investing," Diehl says. "In my anecdotal experience, however, the midterm elections generally are not as emotionally intense as a presidential year, because there isn't that lightning rod of being able to focus on two singular candidates vying to be the next president."

Some Timely Advice for Advisors

Diehl says advisors, generally speaking, must take extreme care when the topic of politics is raised by a given client. Even if an advisor is sure their own personal views match those of a given client, there is still a very real risk that purely political discussions could cloud sound investment decision-making.

One thing that is clear, Diehl says, is that the equity markets seem to prefer a divided Congress. This is one lesson that advisors can have ready if and when a client wants to get political. The advisor can reframe the discussion and keep the focus on the markets and long-term investment outcomes.

"For example, it is not always intuitive for a given client why the markets might prefer a 'deadlocked' Congress," Diehl says. "The basic lesson is that the markets distrust one-party rule, because it becomes much harder to anticipate what is coming. A divided Congress is something the markets can understand and adapt to relatively easily."

Diehl says historical market data shows that, over long periods, there is no great correlation that can be demonstrated between specific federal election outcomes and market outcomes. This is itself an important lesson for advisors to bring to their clients, Diehl says.

"When I'm having this discussion with people, I like to ask them if they know which president had the best stock market performance since the beginning of the modern political era in, say, the early 1960s," Diehl says. "A lot of people guess President Trump or President Obama, but in fact, the answer is Gerald Ford."

Diehl says he likes to use this anecdote because it helps people to see that the U.S. and global economies are "so large, so dynamic and so innovative" that they cannot be directly controlled by one political figure, or even by a unified Congress with a friendly president in the White House.

"We may like to think and talk as if that one person in power at any given time has tremendous control over the economy, but that's just not true," Diehl says. "Of course, parties and policies can have a big impact over a long time, but in the short term, there is so much noise and disruption that it makes portfolio planning difficult."

Other Lessons for Investors

Rather than focusing on politics, Diehl says, the current moment represents a great opportunity for advisors to engage with their clients and help them to understand the interrelated roles of inflation, interest rates and the Federal Reserve.

"We can work to make sure our clients understand that the economy and the market are not the same thing," Diehl says. "We can help them to understand what the Federal Reserve does, and why it is important that the Fed is not controlled by Congress or the party that happens to be in power at the moment."

According to Diehl, the Federal Reserve, given its ability to set and control interest rates, has a much more direct lever to pull to affect the economy than does Congress. It is important for clients to understand this, Diehl says, especially in an environment where inflation and rates are both expected to remain elevated.

Diehl says both advisors and their clients often forget during difficult moments that markets are forward looking mechanisms.

"Again, the economy and the market are two different things," Diehl says. "I see this sentiment brought up by investors all the time. They mistakenly believe that the low point in the market coincides with the low point in the economy, and that's just not true. If you understand that markets are forward-looking, you also understand that, by the time things feel the worst in the general economy, the market may have already made its turn."

Diehl says the remainder of 2022 is likely to be a period in which advisors and their clients are watching for a stable bottom in the equity markets. Even as U.S. and global economic conditions continue to deteriorate, the markets very well may start to rebound as hopes and expectations for 2023 and 2024 come into better focus.

"As we wait for the turnaround, this is an opportunity to think about things like tax loss harvesting and even buying attractive investments at a discount," Diehl says.