How the Election Will Affect the Brokerage Industry

With the presidential election just four months away, investors are starting to realize just how important the result will be in determining the economic path the country takes for the next four years. With the candidates diametrically opposed to each other on a number of key issues, including taxation, health care, and government spending, the election will have a monumental and lasting impact on businesses across the economy.

Nowhere will the election's effects be clearer than in the brokerage industry. With much of the current economic debate centered on Wall Street, its role during the financial crisis, and its continuing run of controversies like the most recent LIBOR scandal, the election's results will undoubtedly affect both Wall Street's full-service offerings as well as discount brokerage companies.

Where we've come from
The brokerage industry has changed dramatically over the past four years. Before the financial crisis, investment banks Goldman Sachs (NYS: GS) and Morgan Stanley (NYS: MS) stood out from traditional banks Bank of America (NYS: BAC) and Citigroup (NYS: C) by virtue of having their operations focused on investing activities.

But as the failure of Bear Stearns and B of A's buyout of Merrill Lynch demonstrated the fragility of some of the weaker investment banks, Goldman and Morgan Stanley chose to become bank holding companies, subjecting themselves to banking regulations that reduced their ability to use leverage in exchange for having easier access to capital.

Since then, it seems like the big full-service brokers have lost some of their competitive advantage. After a decent recovery after the worst of the crisis in late 2008, both Goldman and Morgan Stanley have lost ground to the point at which they've barely posted any gains since the bottom. B of A and Citi similarly have seen up-and-down performance.

Yet if you think discount brokers would be the natural beneficiaries of Wall Street's woes, think again. Schwab and E*TRADE Financial (NAS: ETFC) have faced the same struggles with their share prices, with Schwab even having traded below 2008 levels as recently as last December.

Where we're headed
Recent events have polarized the parties' attitudes toward brokers and investment banks. Mishaps including JPMorgan's trading debacle, Morgan Stanley's mangling of the Facebook IPO, and the LIBOR-fixing scandal involving Barclays and a host of other banks only underscore the belief that more regulation is necessary to keep financial institutions in check. Yet because of the makeup of Congress, it's unlikely that new regulation will make a big difference regardless of who wins the White House.

But that doesn't mean the presidential election is irrelevant for the brokerage industry. Success for the brokers depends largely on two things: Potential customers need to buy in to the idea that investing will help them make money rather than leaving them as suckers in a rigged game, and interest margins on brokerage balances need to rise as a source of greater profit.

With Mitt Romney's ties to the private equity world, the election could well shape up as a referendum on Wall Street. By that standard, the re-election of President Barack Obama would indicate a lack of trust in financial institutions and would presage further measures to hamstring brokers' freedom to operate. A win for Romney, on the other hand, would open the door to greater latitude for Wall Street brokers and likely result in greater attempts from brokers to woo customers back into the markets.

It's hard to argue which election result will lead to greater economic growth, which in turn would spur higher interest rates and greater optimism about prospects for investors, which would then lead to greater profits for the brokerage industry. But one clue comes from the candidates' tax policies, with Romney's lower rates encouraging investment and Obama's higher rates discouraging it.

The real key for brokers after the election is for economic growth to happen. As long as various parts of the government are divided between the parties, the tendency toward gridlock could well make that a lot harder to achieve no matter who wins the presidency in November -- and could hamper brokers' results for years to come.

Obviously, the election will have wide-ranging effects that go well beyond the brokerage industry. Learn more about the potential opportunities and threats that will follow the 2012 elections by reading the Fool's latest analysis on strategies to protect and increase your wealth regardless of who wins.

At the time thisarticle was published Fool contributor Dan Caplinger has no idea who he'll vote for come November. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Facebook, Bank of America, JPMorgan Chase, and Citigroup. Motley Fool newsletter services have recommended buying shares of Schwab and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy never ran for office, but it could.

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