Weekend Reading For Financial Planners (April 22-23)

SEC Highlights That Tax Promises Matter, Too, With $9M Betterment Settlement Over Tax-Loss Harvesting Charges

(Ryan Neal | InvestmentNews)

Robo-advisors arrived in the financial technology landscape more than a decade ago, offering consumers the opportunity to have their assets managed in an allocation aligned with their growth goals and risk tolerance. In addition, many of these platforms advertised automated tax-loss harvesting capabilities that purported to more efficiently (and frequently) find tax-loss harvesting opportunities than an investor (or a human advisor) might on their own. But a recent Securities and Exchange Commission (SEC) settlement highlights that when advisory firms start to market tax-loss harvesting as part of their benefits to clients… it means the SEC will scrutinize its implementation and whether the firm really executed the way its marketing stated (even if the firm otherwise invested in a manner consistent with the client’s Investment Policy Statement).

The SEC issued an order this week indicating, among other things, that robo-advisor platform Betterment agreed to pay a $9 million civil penalty (without admitting or denying the SEC’s findings) related to alleged misstatements and omissions related to its automated tax-loss harvesting service. Among other allegations in the order, the SEC said that between January 2016 and April 2019, Betterment stated in marketing materials that it would scan client accounts for tax-loss harvesting opportunities daily, when in reality client accounts were scanned on alternate days. In addition, between September 2017 through January 2019 the SEC said Betterment failed to disclose certain constraints regarding tax-loss harvesting for clients that selected a third-party portfolio strategy available on the platform along with a Betterment-constructed portfolio. Also, Betterment allegedly experienced 2 computer coding errors that prevented its automated tax-loss harvesting system from harvesting losses for certain clients. Altogether, the SEC said these issues adversely impacted the value of automated tax-loss harvesting for more than 25,000 client accounts, totaling approximately $4 million in potential tax benefits.

Notably, the damages the SEC found amounts to less than $160 in tax benefits per client (And Betterment said in a statement that the median payout from the settlement is expected to be less than $100 per customer), and just a small fraction of Betterment’s total accounts (with more than 275,000 enrolled in Betterment’s TLH program), but highlights how the SEC is now scrutinizing not only whether an advisory firm makes mistakes that impact a client’s investment results, but to the extent the firm markets its ‘tax-smart’ solutions, that the SEC will scrutinize its tax implementation as well. More generally, the Betterment settlement represents the latest in several actions from the SEC targeting robo-advisors, which include a $187 million settlement with Charles Schwab regarding its Schwab Intelligent Portfolios offering, and the SEC has emphasized that robo-advisers have the same obligations as other investment advisers regarding the transparency of their services and being upfront about material changes to those services or issues that might negatively affect clients.

The key point, though, is to recognize that because the SEC is simply applying the rules to pertain to any fiduciary, the issue is not really about robo-advisors versus human advisors, but the more fundamental requirement that any advisor – human or 'robo' – must deliver the services promised to clients, in the way that they were promised in the firm's marketing materials and/or advisory agreements. Which means as more advisers use rebalancing technology to semi- or fully automate tax-loss harvesting, the SEC's newfound scrutiny of TLH execution — whether by an advisory firm individually, or via 3rd-parties (given that the SEC is separately considering a proposal that would establish formalized due diligence and monitoring obligations for advisers who use 3rd parties for certain functions), isn’t just a matter for robo-advisors, but whether any and every advisor is really implementing TLH consistently, and properly explaining in its marketing promises of TLH what its software actually delivers?

FINRA's Expungement Rules Just Got Tougher

(Melanie Waddell | ThinkAdvisor)

When a registered representative of a broker-dealer is involved in a dispute with a customer, FINRA requirements mean the dispute typically becomes a part of the public record via the representative’s BrokerCheck page. In certain cases, however – such as when the information about the dispute in the broker’s record is clearly inaccurate – FINRA allows brokers to file for a "straight-in expungement", in which the broker files an arbitration case against their current or former brokerage firm requesting the removal of the customer complaint from their record. But while expungement was only meant to be a remedy in special cases – where a complaint patent is patently false or inaccurate – in practice it has proven fairly easy for brokers to have disputes expunged from their records… to the extent that, as the Public Investors Advocate Bar Association (PIABA) found, 90% of expungement requests over a 15-month time period were ultimately granted. Which in recent years led to investor advocates calling for FINRA to reform the expungement process (to address, among other cited issues with this process, that brokers have been able to make a one-sided case for expungement in front of the arbitration panel, with no other party present to provide opposing information about why the complaint really was valid and should remain!).

And so this week, the SEC approved a new FINRA rule that modifies the straight-in expungement process to make it tougher for brokers to clear client disputes from their records. Under the new rule, state regulators and clients would be informed of a broker's expungement request (offering them the opportunity to provide evidence opposing the expungement), and brokers are now required to appear in person or by video conference at the expungement hearing (eliminating phone-based appearances). Further, these expungement requests must now be decided by a three-person panel randomly selected from a roster of public arbitrators with enhanced expungement training, and the panel must be unanimous in a decision to expunge a client dispute. In addition, the rule puts new time limits (2 to 3 years after the date of the customer complaint, depending on the circumstances) into place for when brokers can make straight-in expungement requests.

Altogether, the new rule creates a more thorough expungement process in an effort to ensure that all sides have a chance to be heard when brokers seek to have customer disputes removed from their record. Which has implications not just for the brokers themselves (as the expungement process will likely become more challenging), but also for the broader public, which can benefit from being aware of brokers with prior (legitimate) customer complaints!

Morningstar Survey: Quality Of Advice Most Common Reason For Firing An Advisor

(Diana Britton | Wealth Management)

Financial advisory firms tend to have strong client retention rates, often 95% or higher. While this might be greater than many other industries, given the costs of acquiring new clients and the lifetime value a client can provide, it can still pay for advisors to be aware on the factors that keep clients with the firm and why clients leave in order to maintain, or even improve, their retention rate.

With this in mind, Morningstar conducted a survey of 3,003 investors that confirmed the industry’s high retention rate, as only 184 respondents (6%) said they had terminated a relationship with an advisor. Of those who had left an advisor, the most common reason for doing so (cited by 32% of respondents) was related to the quality of advice and services, followed by the quality of the relationship (21%), the cost of services (17%), investment performance (11%), the client’s comfort handling financial issues on their own (10%) and the quality of communication (9%). These findings suggest that the decision to fire an advisor is often not primarily based on dollars and cents, but rather on the quality of the relationship and how the advisor demonstrates the value they provide.

In the end, the Morningstar study suggests that advisors could potentially improve their retention by focusing on the human side of their relationship with their clients, whether it is building a thorough understanding of their clients' needs and goals and/or proactively engaging with them throughout the year to ensure they feel noticed and are aware of the value the advisor is providing for them!

I Bonds Lose Their Luster With Yield Set To Plunge Below 4%

(Charlie Wells and Claire Ballentine | Wealth Management)

With inflation reaching levels not seen in decades, the Series I savings bond, or 'I Bond' for short, has gone from relative obscurity to one of the hottest savings vehicles during the past 2 years. What makes I Bonds unique is their interest structure, which consists of a combined “Fixed Rate” and “Inflation Rate” that, together, make a “Composite Rate” – the actual rate of interest that an I Bond will earn over a 6-month period. For instance, bonds purchased between May 1 and October 31 of last year received an annualized 9.62% for the first 6 months they were owned, and 6.47% for the subsequent 6 months, making them a potentially attractive investment for those looking to combat the impact of inflation (though I Bonds are also subject to certain purchase limits).

But as inflation has cooled in recent months, the next adjustment to I Bonds’ inflation rate is likely to bring their return lower. While the exact rate will not be known until May 1, I Bonds purchased on or after that date are expected to earn 3.8% for the next 6 months. This suggests that those considering a purchase might want to do so before then to lock in the current 6.89% composite rate. At the same time, those who wait to purchase I Bonds could benefit if the fixed rate is increased (it currently stands at 0.4%), as this rate remains fixed for the life of the bonds (which have a 30-year maturity). However, because the exact calculation for how the Treasury Department determines the fixed rate remains a mystery, it is unclear how this rate will change in May.

In addition to raising questions for new buyers, the anticipated reduced return of I Bonds (and the now-elevated rates of return from other ‘safe’ ways of generating return on cash, from bank savings accounts to Treasury bills) could leave many current holders of I Bonds wondering whether they should cash in their holdings. In addition to considering rates of return, it is worth considering that I Bonds redeemed between 1 and 5 years after purchase forfeit the last 3 months of interest (I Bonds cannot be redeemed until 1 year after they are purchased).

Ultimately, the key point is that following the flurry of attention I Bonds received during the past couple years, advisors can add value to their clients by helping them determine whether to hold on to their current bonds as well as whether to buy more, and when to do so, particularly as the inflation rate starts to come down. And more broadly, advisors can add value for their clients by helping them determine how I Bonds might (or might not) fit more broadly within their fixed income and/or cash management strategies!

The Money Move That Has People Ditching Their Bank Accounts

(Imani Moise | The Wall Street Journal)

Up until last year, the previous decade of near-rock-bottom interest rates meant that there was less incentive to shop around for bank accounts with higher interest rates, as the absolute differences in rates between different banks were not that large (i.e., many consumers might not find the hassle of changing financial institutions worth the difference between earning 0.05% and 1.0% on their bank balances). But as interest rates have risen dramatically in the past year, so too have the spreads between the rates offered by different banks on checking and savings accounts. For instance, while some of the largest national banks still offer savings account rates in the 0.05% range (and checking account rates below that), other banks are offering high-yield savings accounts with interest rates around 4%.

In addition to shopping around among banks and credit unions, consumers have also increasingly moved money into cash-management accounts offered by brokerages. These money-market accounts currently pay as much as 3.8% annualized interest and have many of the same features as checking accounts – such as direct deposit, debit cards, bill payment, and paper checks – making them a potentially attractive alternative to bank checking accounts that offer a significantly lower interest rate (though consumers who need to make cash deposits might not be able to do so with the brokerage cash management programs). Further, for those individuals with cash balances beyond those covered by FDIC insurance, brokerage accounts could be attractive as they sometimes have higher insured limits (as the brokerages can spread client cash across multiple banks).

For advisors, it is worth noting that while high-yielding brokerage-affiliated cash management programs might be an attractive prospect for retail customers, they are, for the most part, affiliated with retail-only investment firms that don't have an advisor platform. Nevertheless, several third-party AdvisorTech companies (e.g., Flourish Cash, advisor.cash by StoneCastle and Max) offer cash management solutions specifically designed for financial advisors and their clients, allowing advisors to incorporate client cash more fully into their financial planning (while earning a higher return than at many traditional banks), bringing more of the client's financial picture into their orbit!

What Is Personal Cyber Insurance — And Should You Buy It?

(Cheryl Winokur Munk | The Wall Street Journal)

Cybercrime has become increasingly common, with the FBI’s Internet Crime Complaint Center receiving more than 800,000 complaints, with losses totaling $10.3 billion, in 2022 alone. From data breaches to phishing attacks, there are no shortage of potential cyber threats. To help mitigate this risk, cyber insurance can provide benefits to those who suffer a cyberattack. But while businesses have long considered the potential benefits of these policies (given their size and potential for lost revenue), consumers could benefit from them as well.

Personal cyber insurance is offered by a range of carriers and is often added as a rider to an individual’s homeowner’s or rental insurance policy (though stand-alone policies are available as well). Policies can cover a range of threats, including reputational damage from a cyberattack, ransomware attack remediation, data restoration, identity theft, and money lost through social engineering scams (and a consumer might tailor their policy based on their potential exposures). The costs of these policies will vary depending on the events covered and the limits of the policy; for example, one stand-alone policy costs $5.28 per month for a $10,000 coverage limit and $18.67 a month for a $100,000 limit.

And so, just as an advisor can take steps to protect client data within their business, they can also consider ways to help clients protect their own data and accounts, whether it is helping them practice good cyber hygiene, or considering a personal cyber insurance policy in case they do fall victim to an attack!

What Makes Your Advisory Business Marketable?

(Samantha Russell | Advisor Perspectives)

When it comes to marketing their firm, advisors sometimes focus on choosing the ‘best’ tactics for attracting prospective clients. But while there are no shortage of possible options to choose from, whether it is using paid advertising or starting a YouTube channel, Russell suggests a better first step for advisors is to consider what makes their firm marketable in the first place.

According to Russell, the best marketing strategies combine what consumers are looking for with how a firm’s offerings align with those ‘wants’. For instance, in terms of what consumers are looking for from an advisor, a recent survey from Edelman Financial Engines found that among those who currently do not work with an advisor, the most appealing areas to get assistance on were tax guidance, retirement income planning, Social Security/Medicare advice, and creating a financial plan. Relatedly, a survey from the Spectrem Group found that there was a disconnect between the services clients expected from their advisors and what they actually received (presenting an opportunity for firms to show how they can meet these needs). For example, while 93% of wealth management clients surveyed expected to receive estate planning advice from their advisor, only 22% actually received these services.

Then, a firm can consider how its own service offering matches up with the identified consumer preferences and build a marketing campaign around areas of overlap. For instance, a firm that performs advanced retirement income analyses could put that fact front and center in their marketing (e.g., on the firm’s website) to make it clear to their target client that the firm is the best advisor option for a prospective client’s needs. Or an advisor whose specialty is in tax planning could post answers to common tax questions in their email newsletter or social media posts to demonstrate their expertise to prospects.

Ultimately, the key point is that while it can be tempting to first focus on different marketing tactics, it can potentially be more valuable for advisors to first understand what makes their service offering unique. By doing so, they can not only differentiate themselves from other firms, but also increase the effectiveness of the marketing tactics they do choose!

What Is A Fractional Marketer And Should You Hire One?

(Bob Hanson | Advisor Perspectives)

Individuals typically get into the financial advisory business to provide financial advice to clients, not to be a marketing professional. But because a firm needs to attract clients in order to stay in business, marketing can become an important part of an advisor’s job, particularly those who run relatively smaller firms. Some advisors in this position might give marketing duties to a junior advisor or administrative employee, but these individuals might not have well-honed marketing skills either. Alternatively, an advisor could hire a full-time marketing professional, but this can require a substantial financial commitment they might not be able to make. Instead, advisors looking for professional marketing assistance without the commitment of hiring a full-time employee could consider hiring a fractional marketer.

Fractional marketers are part-time hires who work directly with advisors (not through a professional marketing firm) to develop and execute marketing strategies to grow the advisor’s practice. Notably, fractional marketers are also different than coaches in that they can both help create a marketing plan and execute it as well. For example, a firm looking to reach new client types (e.g., high-net-worth clients) might engage a fractional marketer to create and execute a plan to attract prospects from this group, from drafting a marketing strategy to launching the campaign. Hanson suggests such a project could involve hiring the fractional marketer for 1 day a week in the planning, building, and launch phase and 1 day a month post-launch, a significant potential cost savings to hiring a full-time marketing employee.

Other potential use cases for fractional marketers include when an advisor does not have expertise in certain marketing tactics. For instance, an advisor could hire a fractional marketer to create customized content for prospects or to promote a firm’s virtual prospecting events. In addition, firms going through major changes (e.g., a rebranding or the transition from the independent broker-dealer model to an RIA) could use a fractional marketer to advise on new branding and website design. Finally, firms that are considering hiring a full-time marketing employee could leverage a fractional marketer to create a comprehensive marketing plan upfront and outline the role needed to execute it.

Altogether, fractional marketers could be a valuable resource for firms who want to take advantage of customized, professional marketing assistance without the commitment of making a full-time hire, whether the firm is looking to craft a brand-new marketing plan or is seeking expertise to improve the effectiveness of its current marketing tactics!

This Marketing Decision Changed My Life And My Business

(Ryan Holiday | Medium)

For many businesses, financial planning firms or otherwise, advertising expenses can be a big part of their budget. From print to digital advertising, there are no shortage of outlets that can be used to reach prospective customers. But while advertising can generate leads for a firm, it does not necessarily add value to consumers itself. Instead, Holiday (an author who previously spent significant dollars advertising his books) suggests that businesses can consider spending less money on advertising and more on the creation of useful content to not only build their business, but also to provide a service to the broader community.

While content creation is an established marketing tactic, Holiday differentiates between content that is published merely to attract customers and that which adds value to those who view it (even if they never buy anything from the company). For instance, instead of spending money on an advertising campaign, a financial advisor could hire a producer to help create high-quality video and podcast content to not only demonstrate their expertise to those who are watching or listening, but to provide valuable insights that recipients can take advantage of themselves to improve their financial lives.

In the end, Holiday suggests that instead of focusing energy and resources to find ways new ways to attract prospects, business owners can instead focus on making stuff that ‘matters’ and is valuable in and of itself. And for advisors, doing so (whether it is writing a blog or conducting free webinars with valuable content) could allow them to use their expertise to improve the lives of individuals well beyond their client base (while potentially still gaining new clients in the process!).

How To Make Your Vacation More Productive (As A Vacation)

(Micah Shilanski | Advisor Perspectives)

As the summer approaches, many advisors might be planning vacation time away from the office. But for some firm owners, it can be hard to fully 'unplug' from work, perhaps due to the temptation to check email regularly or to be available if team members have any questions. For Shilanski, who follows intense 'surge' meeting periods with extended time off, preparation and communication are keys to ensuring he is able to truly decompress (and spend quality time with his family) while empowering his staff to keep the firm running while he is away.

First, Shilanski suggests that those who are taking time off after an intense period of work can consider starting their leave with a “buffer week”, time that allows them to decompress (and tie up loose ends at the office) before fully jumping into family vacation activities. Next, maintaining a list of (non-work) things to do during the leave period (notably, this list of ideas can be created and added to well before the time off begins) can help stem the temptation to take on work activities during time away from the office. And when going on a family trip, creating a plan that will be enjoyable for everyone participating (whether it is setting the appropriate number of days for the trip or scheduling ‘alone time’ away from the rest of the family) can help ensure it will be a success.

Notably, taking extended time away from the office requires professional preparation as well. For example, before he goes off the grid for several weeks (only bringing a satellite phone for life-or-death emergencies), Shilanski sits down with his team to address their concerns and create action plans so that they feel prepared for contingencies (e.g., a client death) his absence. He also lists out specific tasks he expects to be completed by his staff by the time he returns (so he knows what to expect and evaluate when he comes back to work). And during other periods of leave (where he will be accessible by phone or text), he pre-schedules check-in times with the team to avoid being contacted throughout the day.

Ultimately, the key point is advisors who are purposeful about the time they spend away from the office and prepare their team for the leave can not only achieve their personal goals for their vacation (relaxation, quality family time, or otherwise) but also ensure their clients’ needs will continue to be met in their absence!

How Something New Can Actually Make It Feel Like Life Is Slowing Down

(Conor Mac | Investment Talk)

For busy professionals, it can often feel like time is flying by. From work and family obligations during the week to some (hopeful) relaxation on the weekend, the weeks can start to blur together. And the next thing you know, you look at the calendar and a whole year has gone by. This tendency can be disconcerting, but there is a potential solution: doing new things as much as possible.

For many, trying out novel things can help make it feel like time is slowing down. For instance, thinking back to your youth, it might feel like time passed slower than it does in adulthood. This is perhaps because there are so many new experiences early in life (e.g., the first day or high school or a first job) that stand out and help to mark the years as they go by. While these experiences, by definition, can only happen once, there are other ways to do ‘new’ things in adulthood. One potential option is travel; when exploring a city or country, everything is inherently ‘new’, whether it is exploring a museum or just seeing how grocery stores are different in a foreign country and can make a 1-week trip feel much longer than a normal workweek.

And so, if you find yourself having the feeling that time is moving too fast, 1 way to slow things down is to think about 'new' things you can experience, whether it is taking a trip to a new location, trying out a new hobby, or even considering a new career!

The Breadcrumbs Leading To Enough

(Jeremy Walter | Calibrating Capital)

When you hear that someone you know has made a major personal or career decision, it can sometimes seem like it was made all of a sudden. But often, such decisions are the result of a much more gradual process. For example, in late 2020, Walter made the decision to stop taking on new clients with his financial planning firm. But this decision was not made suddenly; rather, the realization that he had 'Enough' was the result of several 'breadcrumbs' and realizations in the several years beforehand, chronicled on his blog.

For instance, in May 2019, Walter wrote about creating a ‘life calendar’ mapping out the days, months, and years given his life expectancy and including important markers, such as the remaining time he had with his kids at home, which helped put his time into perspective. He later considered the legacy he would want to leave behind, not in the financial context, but rather the impact he would leave behind on those closest to him. He also redefined what ‘success’ means for him, ending up with a definition of “Being respected the most by those who know me best” (rather than trying to impress the masses who don’t know him well). Later in 2019, he reconsidered what kind of growth he was looking for in his business, choosing to take time to ensure the health of the firm (and his life outside of work) rather than tirelessly pursuing growth benchmarks he had set. Eventually (with many other steps in between), he realized he had ‘enough’ and made the decision to (at least temporarily) stop taking on new clients.

Notably, the course of Walter’s blog posts shows how, over time, he reconsidered the path he was on and made a major change that he believes will help him live his best life. Which not only provides advisors with a potential lesson in stepping back and considering how their work fits within their broader personal goals, but also the value of writing these thoughts down to see how one’s thinking evolves over time!

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.