Weekend Reading For Financial Planners (October 21-22)

Advisors Increasingly Looking To Go Independent, Fidelity Finds

(Ali Hibbs | WealthManagement)

The wealth management industry has evolved significantly over the years, now offering a variety of different business models and platforms for advisors, from traditional wirehouses and independent broker-dealers, to independent RIAs, and increasingly the RIA aggregator and network platforms that support them. And while there is flexibility for advisors to move across different firms and business models over the course of their careers, that change can be scary, as advisors might fear the unknown and the challenges that can come with moving to a new model or firm.

Nevertheless, a study from Fidelity Institutional has found not only that 1 in 6 advisors has changed firms over the last 5 years, but also that a majority of those who made a change did so by moving to the independent channel. Notably, the decision to make a move has been successful for the majority of advisors who did so, with 94% reporting that they were happy with their decision, and 85% feeling that they have more control over their future. In addition to these more qualitative feelings, 80% of movers saw their assets under management subsequently grow, with a median increase of 42%.

Top considerations for moving included compensation (cited by 51% of respondents), better firm culture (50%), and the ability to provide a higher level of client service (39%). The chief concerns among respondents about moving included fear of the unknown (60%), client attrition (48%), and time spent transitioning versus managing their practice (35%). Though notably, despite potential concerns that clients might not be supportive of a move (given the potential service changes and repapering requirements of doing so), 99% of movers said their clients supported the move, with 54% saying that their clients were "immediately" supportive.

According to the study, one of the primary factors preventing advisors from going independent is a lack of knowledge of the options and resources available to do so. With this in mind, Fidelity (currently the number 2 RIA custodian in terms of assets) has created an "Independence Hub" with educational resources and tools (including a valuation tool that gives advisors an idea of how much they could potentially earn by transitioning to the RIA model) for advisors contemplating a move (which an advisor could then compare to their current situation!).

In the end, this study highlights the growing attractiveness of independent models for many advisors, and that while most fear the unknowns of the change, it tends to go well (and clients typically support it) when they do make the leap. At the same time, given that those advisors considering a move have many challenges to navigate along the way (from the Broker Protocol to choosing an RIA custodian and technology), understanding each step and taking a methodical approach could help make the transition a smooth one, both for the advisor and their clients!

Don't Say "Fiduciary Rule"; DoL Terms Next Attempt A "Retirement Security" Reg

(Mark Schoeff | InvestmentNews)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans), has gone through a multi-year process across three presidential administrations updating its 'fiduciary rule' governing the provision of advice on these plans. The DoL fiduciary standard first formally proposed in 2016 under the Obama administration took a relatively stringent approach (where commission-based conflicts of interest had to be avoided altogether), but encountered numerous delays under the Trump administration, and was ultimately vacated by the Fifth Circuit Court of Appeals in 2018 (under the somewhat awkward auspices that brokers and insurance agents are merely salespeople and shouldn't be held to a fiduciary standard because they are not in a position of 'trust and confidence' with their customers), before being resurrected and adopted in a more permissive form (e.g., allowing broker-dealers to receive commission compensation for giving clients advice involving plans governed by ERISA as long as the broker-dealer otherwise acts in the client's best interest when giving that advice) in December 2020.

After many months of anticipation, the DoL in September sent a proposal formally titled "Conflict of Interest in Investment Advice" to the Office of Management and Budget (OMB); if the OMB approves the proposal, the DoL will release it for public comment (which could occur as soon as later this month). While the full contents of the proposal are not yet known, the abstract says the measure would redefine the term "fiduciary" to "more appropriately define" when those providing advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of federal retirement law (raising the interesting question of whether the DoL will take more of a titles-based approach to define who is providing advice or not?). Notably, despite appearing to cover much of the same ground as previous attempts at a "fiduciary rule", DoL Assistant Secretary Lisa Gomez said this week that the DoL plans to refer to the proposal as the "retirement security rule" to signal that it is not a regurgitation of previously proposed versions of a "fiduciary rule" (though she did not provide details on how the latest proposal differs from previous versions).

Ultimately, the key point is that after more than a year of waiting, the release of the contents of the DoL's latest proposal for regulating advice for retirement plans and accounts appears to be getting closer. Though the details of when and how it applies – to what activities ('only' employer retirement plan advice, or to rollovers from those plans as well?), and with what conflicts of interest permitted or not (will commissions be permitted with disclosure or barred?) – remains to be seen. Nevertheless, to the extent that the DoL appears likely to be trying to advance the standard of care for retirees, the new proposal (like its predecessors) almost certainly will face a torrent of comments from interested parties, from consumer groups and fiduciary advocates supporting stricter rules on the provision of advice (to protect consumers from receiving advice that is not in their best interest) to brokers and insurance companies opposing stronger measures (potentially arguing that current rules are sufficient to protect consumers and that strengthened fiduciary requirements could increase the costs of providing advice to those consumers).

Notably, though, while the DoL maintains that its proposal isn't "fiduciary", CFP Professionals (including those at broker-dealers) will continue to have a "Fiduciary-At-All-Times" obligation (even as being a fiduciary becomes less of a differentiator in a world where more advisors are acting in a fiduciary capacity). Though ultimately a regulator-based fiduciary standard from the DoL (even if it's not called "fiduciary") would arguably have far more 'teeth', given the DoL's ability as a regulator to fully enforce those rules and apply substantive consequences to advisors who fail to follow them. Which is also why the product manufacturers and distributors will likely fight so hard to prevent it.    

RIA M&A Surges Back In The 3rd Quarter: Report

(Bruce Kelly | InvestmentNews)

While RIA Mergers and Acquisitions (M&A) activity had been brisk for many years, with heightened demand from acquirers (often larger firms, sometimes infused with Private Equity [PE] capital) driving up valuations, the pace of deals started to slow late last year as rising interest rates and other factors served as headwinds to continued deal flow. And while 2023 could be the first year in almost a decade in which RIA M&A is down, there are signs that deal activity could be picking back up.

According to data from investment bank Echelon Partners, RIA buyers announced 86 transactions, a 32% increase over the 65 transactions announced in the 3rd quarter and setting the mark as the most active third quarter on record. This report reflects an even larger uptick than what was reported by M&A consulting firm DeVoe & Company, which found that while year-to-date activity was down about 7% from the 3rd quarter last year, the first 11 weeks of the 3rd quarter saw a slight (2%) increase in deal flow compared to the prior-year quarter and 7% more deals compared to the 2nd quarter of 2023. Strategic acquirers led the way in 3rd quarter deals, accounting for 90.6% of transactions according to Echelon Partners, highlighted by Goldman Sachs' announcement that it was selling its Personal Financial Management RIA business to mega-RIA Creative Planning.

In sum, while M&A activity continues to face potential headwinds (e.g., greater financing costs in a higher interest rate environment), the apparent continued presence of interested buyers (some of which are leveraging private equity funding) and sellers (as aging firm owners seek to retire and smaller firms look for opportunities within larger RIAs) suggests that deal activity could remain brisk going forward!

The Healthcare Plan Most People Should Buy – And Why They Don't

(Amitabh Chandra | The Wall Street Journal)

The arrival of Fall means the start of open enrollment periods for employees around the country, who have the opportunity to adjust their elections for a wide range of employer-sponsored benefits, from health insurance to disability coverage. Although this is an opportunity for employees to assess their current coverage and decide whether a different plan might be appropriate, the number of different benefits offered, and the choices within each benefit category, can be overwhelming, leading some to default to their plans from the previous year, which might not always be the best option.

This abundance of choice is particularly noticeable for employer-sponsored health insurance, where employees might have the choice among many plans with a range of coverage options. However, research indicates that many employees are not prepared for this decision and often make sub-optimal choices. For instance, one study found that only 14% of consumers surveyed were able to answer 4 multiple choice questions about basic components of traditional health insurance design (deductibles, copays, coinsurance, and maximum out of pocket costs), suggesting that many employees would find it challenging to accurately compare different plans. Another study found that a majority of employees at a large company chose plans that were objectively suboptimal (e.g., an employee looking for a lower deductible might choose a plan that has a $500 lower annual deductible but costs $750 more in annual premiums than the higher-deductible plan, making it an inferior option no matter how much care the individual ends up needing). 

But even if an employee were able to successfully analyze different plans, they still might have trouble deciding on a plan because of the challenge of estimating how much they might spend on health care in the coming year (i.e., an individual who knew they would have high expenses in the coming year might choose a lower-deductible plan [even if it has higher premiums] while someone who was going to spend less in health care might pick a higher-deductible plan and get the benefits of lower premiums). 

Nevertheless, Chandra suggests that for most employees (perhaps excluding those with expensive chronic conditions or major planned procedures), a High Deductible Health Plan (HDHP) could be the optimal decision. In return for having a higher deductible than other plans (which could lead to higher out of pocked expenses for the insured), these plans typically come with lower premiums. In addition, being enrolled in an HDHP gives an individual the opportunity to make contributions to a Health Savings Account (HSA) and the "triple tax advantage" (i.e., tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses) it offers (that makes it one of the top options among tax-preferenced savings vehicles). In some cases, the combination of lower premiums and employer contributions to employee HSAs could make up for most of the difference in the deductibles between an HDHP option and a standard plan (without even considering the potential benefits of the employee's own HSA contributions).   

Altogether, the challenge of comparing different health care plans presents an opportunity for financial advisors to support clients during the annual open enrollment period by helping them review their plan options (e.g., which plans are taken by their preferred medical providers) and financial circumstances (e.g., their ability to meet certain deductibles or the potential tax benefits from HSA contributions) to choose the best option for them, whether it is an HDHP or otherwise. Which not only could save clients hundreds or thousands of dollars, but also represents a way for advisors to demonstrate their ongoing value! 

Workers Don't Carefully Examine Health Plan Choices, EBRI Says

(Tracey Longo | Financial Advisor)

Health insurance coverage can be one of the most valuable employer-sponsored benefits that employees receive. Typically, employees have the option to review their coverage on an annual basis and switch to a different plan, if multiple plans are offered, or decline coverage (perhaps if their spouse's employer offers better coverage options). And while many employees might be satisfied with their current coverage, changes to plan features (e.g., deductibles and premiums) and life circumstances (e.g., if an employee or their spouse is expecting a new baby in the coming year) could mean that changing to a different plan would be more cost efficient.

Despite the potential benefits of reviewing their coverage, a recent study from the Employee Benefit Research Institute (EBRI) found that most enrollees spent less than an hour on their health plan during open enrollment. When asked about the most important aspects when comparing health care plans, respondents were most likely to cite the network of health care providers, followed by prescription drug coverage, low out-of-pocket costs, lower premiums, and a plan that is simple to understand (suggesting that some employees might prioritize whether their preferred doctors accept the insurance than balancing the tradeoff between premiums and deductibles). 

Notably, the report identified differences between those who enrolled in traditional health care plans and those with High-Deductible Health Plans (HDHPs). For instance, those with HDHPs spent more time making their health insurance plan decision and were significantly more likely to consult their employer's annual employee benefits guide (58% versus 38% of those with traditional plans), suggesting they were more likely to engage in an in-depth comparison of their options (they were also more likely to have multiple plan options from their employer, which could have contributed to this difference). The report also identified coverage of preventative care for certain chronic conditions before reaching the deductible as a potential way to encourage more employees to choose an HDHP, as a majority of respondents currently on a traditional plan said they would be at least somewhat likely to choose an HDHP if it offered this coverage.

Ultimately, the key point is that despite the medical and financial ramifications of the choice of health insurance plan, many individuals devote little time to making this choice during their employers' open season. Which could be an opportunity for financial advisors to educate clients and prospects about how to compare plans (perhaps in an email newsletter or other content medium) and to help clients choose the right plan for their given circumstances! 

Don't Get Spooked By Open Enrollment Time

(Christy Raines | Azimuth Wealth Management)

When it comes to the choices employees face during their employer's open enrollment season, health insurance coverage often receives the most attention (perhaps given the salience of health care costs throughout the year). Nonetheless, other benefit elections can play an important role in an individual's financial health (and possibly be more impactful than the choice of health care coverage), though importantly many of these require the employee to take action rather than fall into the employer's default selection.

For many employees, their largest asset is not their retirement account, but rather their income (and the potential to earn throughout their remaining working years). Which means that having appropriate disability insurance coverage is a high priority for many workers to recover a portion of their income if they were no longer able to do their job. And while some workers might be tempted to stick with their employer's default coverage option (which the employer might cover at no cost to the employee), opting into additional coverage could result in significantly more income if the individual became disabled. For instance, an employee might have the option between employer-paid, 50% taxable Long-Term Disability (LTD) coverage or the option to, for $300 per month, buy up to 60% after-tax LTD coverage. While an employee might be tempted to avoid the additional premium expense, this could be a costly mistake as the difference in after-tax benefits (particularly for those with high incomes) could be significant. In the case of an individual making $350,000 with a 25% average tax rate, the 'default' plan would provide $11,000 per month of after-tax income, while the optional plan would provide $17,500 monthly after tax!

Another area where employees might consider making elections beyond their employer defaults is with their retirement accounts. This could include (depending on the options offered by their employer) adjusting their 401(k) contribution amounts (and whether they are being made on a 'traditional' or Roth basis), deciding whether to make optional after-tax contributions (i.e., as part of a "mega-backdoor Roth" strategy), and/or participating in their employer's nonqualified deferred compensation plan. In addition, those with High-Deductible Health Plans (HDHPs) can elect to make contributions to their Health Savings Account, perhaps adjusting them to meet the increased limits of $4,150 (for self-only coverage) and $8,300 (for family coverage) for 2024.

In the end, the annual open enrollment period provides employees with the chance to adjust their coverages and contributions for a variety of employer-sponsored benefits to match changes in their financial and personal lives. And financial advisors are well-positioned to help their working-age clients understand the available options and make selections based on their unique circumstances and overall financial plan (perhaps as part of an annual client service calendar?).

How To Follow Up With A Ghost

(Dan Solin | Advisor Perspectives)

The term' ghosting' has become increasingly popular in recent years, typically in the context of dating, when one individual stops communicating with another without any notice or warning (perhaps to avoid the unpleasant experience of telling them they don't want to continue the relationship). Though notably, ghosting can occur in a variety of other contexts as well, including with financial advisors, who will sometimes have a positive meeting with a prospect but receive no follow-up communication.

When an advisor hasn't heard back from a prospect for a significant amount of time after a discovery meeting, their first instinct might be to send a follow-up email. However, Solin suggests that this might not be the best approach given that the message might get lost among the other emails the prospect receives and is less personal than other alternatives. Instead, advisors could consider sending a handwritten note by regular mail, which can convey more thought on the part of the advisor. Solin suggests such a note could first acknowledge the prospect's previous silence and express understanding (avoiding blaming or pressuring them). In addition, the advisor can provide information or resources directly aligned with the prospect's initial interests or concerns so that the advisor can further communicate their value proposition. And if the first note does not elicit a response, the advisor could consider sending another (after a reasonable interval) to show their continued interest.

In sum, while being 'ghosted' can be a frustrating experience for an advisor, it does not have to mean that the relationship with a prospect is over. By reaching out in a thoughtful, respectful manner, the advisor could regain the prospect's attention (as they might have been distracted by other matters rather than purposefully ignoring the advisor) and potentially encourage them to continue the relationship.

Our Prospects Keep "Ghosting" Us

(Beverly Flaxington | Advisor Perspectives)

Financial advisors often spend a significant amount of time (and money) to find qualified prospects who are willing to meet with the advisor for a discovery meeting (where the advisor can learn about the prospect and explain their value proposition). Given this investment, advisors typically want to have a high conversion rate of prospects with whom they meet. But sometimes, prospects will 'ghost' the advisor and not follow up with the advisor (either positively or negatively) after an initial meeting. 

Flaxington suggests a variety of steps advisors can take both before and during meetings with prospects that could reduce the chances that the advisor will be 'ghosted' afterwards. First, the advisor could gather information about the prospects' level of interest (perhaps with a short intake survey or phone call) before holding a formal meeting; if a prospect is not responsive to these requests, it could be a sign that they are in the very early stages of exploring a relationship with an advisor. 

During the discovery meeting itself, the advisor could ask the prospect about how they make decisions; this give the advisor an idea of the steps they will need to take to help the prospect decide. Further, the advisor can set expectations for the relationship by outlining the process for the prospect to become a client (so that the client isn't unsure about their next steps after the meeting). In addition, by framing themselves as a "partner" who is there to help the client decide whether a relationship would be valuable, the advisor can show that they are committed to seeing the process through to the end, which could encourage the client to maintain communication. Finally, the advisor can ask the prospect specifically what the 2 sides could do to avoid communication lines from being broken (which could give the advisor clarity both on the prospect's communication preferences and whether they want the relationship to continue in the first place!).

Altogether, by qualifying prospects, setting expectations, and explicitly recognizing the possibility that communication might drop off, advisors can reduce the number of times they are 'ghosted' by prospects and potentially increase their conversion rate of prospects into clients! 

Why Prospects Don't Move Forward

(Jim Ludwick | Advisor Perspectives)

Procrastination can be tempting in many circumstances, particularly when the job or choice at hand is a difficult one. In the financial advisory context, the enormity of the decision of whether to work with a given advisor can lead some prospects to procrastinate and avoid making a decision. Which can leave advisors wondering what they can do to help these prospects take the next step to become a client. 

Based on his experience, Ludwick suggests an approach to an advisor's closing dialogue (assuming they have already discussed their value proposition during the meeting) that could keep more prospects on track to becoming a client. First, the advisor can ask the prospect "How do you know we're a good fit?". This question can help the prospect 'sell themselves' on the value of working with the advisor. The advisor can then follow up with the second question, "What would you like to do as a first step?", which creates the opportunity for the prospect to complete a single task now rather than focusing on the many steps that they assume might be required to become a client (and potentially avoid taking any steps to keep the process moving forward). 

Ultimately, the key point is that by helping a prospect focus on the potential value of working with the advisor and then coming up with their own first step to doing so, advisors can reduce the chances that the prospect will procrastinate (and perhaps 'ghost' the advisor) and improve the odds that they will take a single step and continue down the path to becoming a client!

Your Face May Soon Be Your Ticket. Not Everyone Is Smiling.

(Julie Weed | The New York Times)

In modern society, individuals often face a tradeoff between convenience and privacy and this dynamic is playing out now in the area of facial recognition. Because while systems using this technology have the potential to speed up wait times and increase security, the potential for images of individuals' faces to be misused could be a deterrent for some consumers.

One location where almost everyone would prefer to wait less is at the airport, where passengers are accustomed to waiting in check-in lines, boarding lines, and at immigration checkpoints, among other stops along the journey. With this in mind, several airports have begun the process of installing systems at international gates that allow individuals to board with a facial scan instead of having to show a boarding pass and passport (the system matches the passenger's image with their passport photo that is already on file). Other travel and tourism companies increasing their use of facial recognition technology include cruise operators (to know who is onboard the ship at a given time and to ensure that only authorized individuals are allowed to board) and theme parks (for entry and to buy food and souvenirs), although there hasn't been much uptake from hotels (which could potentially use facial identification for check-in or to access guest rooms). 

While facial recognition offers the promise of shorter lines, it also comes with privacy and security concerns. For instance, a company using the technology could get hacked, allowing criminals to access the images and perhaps impersonate people online or create "deepfake" videos. There are also concerns that individuals could unwittingly subject themselves to surveillance, either by the companies themselves (e.g., if they have cameras spread around a theme park) or if the data were sold or given to another entity. For now, the use of facial recognition technology is optional for customers of the airports, theme parks, and other entities employing it, given the increased spread of the technology, it might become increasingly difficult to avoid it altogether! 

Google Will Now Make Passkeys The Default For Personal Accounts

(Samuel Axon | Ars Technica)

One of the small, but persistent, annoyances of modern life is setting (and keeping track of) a seemingly endless list of passwords for websites that you visit. And while password managers (e.g., 1Password or LastPass) can help reduce the need to memorize them, some security vulnerabilities and requirements to change them on a regular basis persist. This has led to interest in developing more convenient and secure methods for user authentication online.

In May, Google took what many consider to be the 'next step' in authentication technology by rolling out 'passkey' technology, which is designed to replace passwords by allowing authentication with fingerprint ID, facial ID, or a Personal Identification Number (PIN) on the phone or device used to log in (other web services that already use passkey technology include Docusign, eBay, and PayPal). According to Google, this technology will prevent scammers from using phishing (getting users to divulge their passwords through social engineering), SIM-swap (where an outsider can gain access to an individual's phone number, including their text messages, which are sometimes used for two-factor identification), and other methods of accessing user accounts. In addition, passkeys are more secure because they ensure a user has a separate key for each account, protecting individuals from large password leaks (the use of passkeys also means there are fewer passwords to remember!).

And this month, Google took its use of passkeys further by making them the default login option for its users, prompting those signing into their Google accounts to create and use passkeys instead of passwords where possible. Users who do not want to use the technology have the option of forgoing passkeys by unchecking the "skip password when possible" option in their accounts.

Ultimately, the key point is that while Google's passkey technology might not mean the end of passwords quite yet, it appears to be a step in the direction of more secure (and convenient) user authentication online. And in the meantime, advisors can help their clients keep their online accounts secure, from ensuring they use strong passwords to creating a layered security structure (that might include the use of a Virtual Private Network [VPN], password manager, and/or private email!).

We're Terrible At Giving Security Advice

(Lukasz | Medium)

For those paying close attention, there are no shortage of cyber threats to worry about, from 'classic' threats like phishing and malicious links to newer ones like "qishing" (i.e., phishing using links encoded in QR codes). Given the number of existing and emerging threats (and the potential damage they could cause, from identity theft to lost access to data), it might make sense for individuals to pay close attention to the latest news and take steps to protect themselves against each viable threat. 

Nevertheless, while cybersecurity professionals and tech-savvy individuals might have the time and inclination to study and actively protect against all the threats that exist (and that are discovered regularly), many tech users might not have the same commitment (or skill) to take every possible action to mitigate the threats that exist. With this in mind, Lukasz suggests that a better approach for those providing advice to 'average' tech users (whether it is a cybersecurity professional or an individual giving advice to a less-tech-savvy relative or friend) could be to shift their focus from relaying every possible threat (and the unique techniques to protect against each one) to ensuring that users take the most important actions (e.g., updating their devices, using 2-factor authentication, and/or using a password manager), which can protect them against many of the threats out there (even if it might not protect them against all of them). 

Notably, a similar phenomenon can be seen in the world of financial advice, where there is no shortage of choices or advanced techniques that individuals could consider. Though, for many consumers, making constructive decisions around 'big' items (e.g., choices around home and car purchases, avoiding high-interest debt, saving and investing for the future) is likely to be a much better use of their time than making the getting the 'small' details (e.g., choosing between 2 large-cap mutual funds) exactly right. Which suggests that part of the value that financial advisors can provide is in helping their clients focus on and make 'big' decisions based on their individual circumstances while leveraging the advisor's expertise to handle the range of planning issues that require more technical knowledge! 

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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.