Weekend Reading For Financial Planners (November 18-19)

Legislative Prospects Clouded For Congressional Provisions To Kill DoL Fiduciary Proposal

(Mark Schoeff | InvestmentNews)

After many months of anticipation, the Department of Labor (DoL) earlier this month released a proposal, dubbed a "retirement security rule", designed to curb conflicts of interest around retirement savings recommendations. Among other measures, the proposal would amend the current 5-part test that determines fiduciary status for retirement accounts by defining as a fiduciary act a one-time recommendation to roll funds from a company retirement plan to an Individual Retirement Account (closing what historically was a loophole that the fiduciary obligation only applied to "ongoing" advice, such that one-time sales transactions avoided its scope). The proposal also would strengthen advice standards for independent insurance professionals, in particular, by applying itself to insurance products that are not securities (e.g., fixed index annuities), and would cover advice that is provided to plan sponsors regarding the menu of investment options to include in a company's retirement plan (e.g., regarding the recommendation of insurance or annuity products into a plan's lineup in the first place).

Not unexpectedly, given the increased requirements the rule would impose on its members, industry lobbying groups representing broker-dealers as well as the insurance and annuities industries (which brought the successful legal challenges to the Obama-era fiduciary rule) have pushed back against the proposal, arguing that investors are protected by other regulations (e.g., the Securities and Exchange Commission's Regulation Best Interest [Reg BI]), that commissions are often an appropriate form of compensation, and that, ultimately, the rule could lead to fewer investors being able to access advice given that compliance costs associated with the new rule could be passed on to consumers (at the same time, the new rule was cheered by groups promoting stronger standards for financial advice such as CFP Board, the Public Investors Advocate Bar Association (PIABA), and the Consumer Federation of America).

The rule has also found some opposition within Congress, as the Republican-led House this week approved 3 amendments to appropriations legislation that would restrict or potentially prohibit the DOL from using funding to finalize, implement or enforce its proposed "retirement security" rule. However, not only has the House has postponed further consideration of the overall appropriations legislation under after Thanksgiving, but it is unclear whether there is enough support to pass the legislation with the attached "policy riders" when Congress reconvenes. Further, President Biden has indicated that he would veto the funding legislation if it included restrictions on enforcing the "retirement security rule".

Opponents of the "retirement security rule" also sought to extend the comment period on the measure, but the DoL declined to do so, maintaining the January 2 deadline to comment. In a letter to the Securities Industry and Financial Markets Association (SIFMA), DoL Assistant Secretary Lisa Gomez argued that the measure already reflects input DoL has received regarding similar measures since 2010. DoL is also planning to hold a virtual hearing on December 12 to discuss the proposed regulation.

Altogether, given likely opposition within the Democrat-controlled Senate and from the White House, it is appears unlikely that legislative actions will be able to derail the implementation of the newly proposed "retirement security rule". Which suggests that, if enacted by DoL following the comment period, the measure's ultimate fate, like that of its predecessors, could be decided by the courts, as industry opponents are very likely to bring legal challenges against the regulation and the DoL will have to defend the scope of its new rule and its rulemaking process.

Will Details Of Dirty Deeds Deter Bad Advisor Behavior? CFP Board Hopes So

(Dan Shaw | Financial Planning)

As a part of maintaining its CFP trademark and determining which advisors will be permitted to license its use, CFP Board is responsible for managing its standards of conduct and creating a disciplinary process that is fair to the CFP certificants who use the marks, while also pursuing its mission of protecting the public (and ensuring the CFP marks remain in high esteem). Part of this process is to report when advisors are disciplined, which can allow CFP professionals to better understand actions that will not be tolerated (and the penalties for doing so) and potentially boost confidence among the broader public that CFP professionals they encounter are held to certain standards.

Until recently, in situations where disciplinary actions were public – e.g., a public censure, suspension, or revocation of the CFP marks – CFP Board typically announced its disciplinary measures with a short paragraph outlining the basic facts of the underlying case. But now, starting with a release last week outlining disciplinary measures against 5 CFP Professionals, CFP Board disciplinary announcements will include a link to documents laying out the alleged misconduct in detail and explaining the reasoning behind the sanctions that were imposed. For instance, rather than simply noting that an advisor was disciplined for recommending investments that were inconsistent with a client's risk tolerance, CFP Board will now report additional details, such as (in the above example) the specific products that were sold, more details about the client to whom they were sold, and additional information about the client's risk profile. In addition, public notices will now include explanations of how a particular decision was reached, including aggravating and mitigating factors that were used to help determine the sanction imposed.

In addition, all of the details of these case histories will be available in a public Case Histories section of the CFP Board's website. Historically, CFP Board made these case histories available on an anonymous basis, but the new policy will both de-anonymize them (client and firm details will remain anonymous, but the CFP certificant themselves will have their name included), and reference them directly in the broader disciplinary announcements (rather than letting consumers find their way to CFP Board's website on their own to search for them).

In the end, these additional disclosures have the potential to help CFP professionals better understand the standards required of them (and the potential consequences of not following them) by seeing the exact details of disciplinary actions for other CFP certificants and bringing more transparency to CFP Board's disciplinary process, and to give the broader public more confidence in the professionalism of the CFP professionals from whom they receive advice. Further, given recent changes to allow CFP Board to pursue more complaints against CFP professionals, CFP Board appears to be attempting (following previous criticism of its ability to identify and discipline advisors who had violated its standards) not only to release more information about sanctions that are imposed, but also to have the capacity to more comprehensively identify advisors who commit violations in the first place and adjudicate their disciplinary cases!

RIAs Recruit Specialized Staff In The Race For Scale

(Cerulli Associates)

When a solo advisor looks to make their first hire, they often look to bring on an Associate Advisor or a Client Service Specialist to help free up time for the advisor to focus more on business development and client-facing work (and, in fact, Kitces Research indicates that a 3-person team with both of these hires can help maximize the number of clients the lead advisor can serve). But as a firm grows further, the firm owner has a variety of team styles from which to choose.

One of these options is to build a team with specialized staff (e.g., investment analysts or tax professionals), which can both allow the firm to 'go deeper' in the planning areas that are most important to their clients and free up time for advisors to spend with clients. According to Cerulli data, RIAs with specialized staff offer 2 more services than those that do not. Further, firms with specialized staff spend 6 percentage points more time on client-facing activities than those without them. Larger RIAs are leading the way with these hires, according to Cerulli, as 68% of "mega-team" RIAs employ specialized staff compared to 35% of other RIAs, which could reflect that, given the costs of hiring a specialist (and the fact that, unlike client-facing advisors, they do not necessarily bring in revenue directly), they could be most effective supporting multi-advisor firms.

Ultimately, the key point is that for firms who can do so cost-effectively, hiring specialists can both build out a firm's expertise as well as ease the planning burden on advisors in the process (in addition, these roles also offer opportunities for planning professionals who do not necessarily want to be in client-facing positions!).

The Good News On Safe Withdrawal Rates

(Amy Arnott | Morningstar)

Last year was a challenging one for investors, as both the broad stock and bond markets saw losses (with a portfolio made up of 50% of each asset class losing about 16% on the year). Further, elevated inflation levels likely led many individuals to increase their spending (and, potentially, portfolio withdrawals). While this experience was no doubt painful, Arnott and fellow researchers from Morningstar identified a potential upside: the ability for a higher Safe Withdrawal Rate (SWR) for those who are about to retire.

In a recent research report, the authors calculated that retirees with a portfolio consisting of 40% stocks and 60% bonds could have as much as a 4.0% initial spending rate, assuming a 90% probability of still having funds remaining after a 30-year retirement period (notably the SWR was 4.0% for equity allocations of 20% or 30% as well but was reduced for higher equity allocations given the asset class's volatility). This figure is up from the researchers' 3.8% estimate in 2022 and 3.3% for 2021, thanks in part to increased expected returns from the bond portion of a retiree's portfolio (amidst higher yields) as well as reduced inflation expectations (though reduced future expected equity returns tempered the increase in the SWR). Notably, the authors calculated that retirees could start with an even higher safe withdrawal rate by taking certain other approaches than a fixed, inflation-adjusted withdrawal rate. For instance, those employing a Treasury Inflation-Protected Securities (TIPS) ladder could start with a 4.6% SWR (though this would fully deplete their portfolio after 30 years), while those using a "guardrails" approach could have a 5.2% SWR (though this approach introduces the possibility of required spending reductions in the future).

In the end, while a fixed SWR approach can provide a retiree with a reasonable starting point for their spending, financial advisors can support their clients not only by evaluating the status of their portfolio (and spending needs) on an ongoing basis, but also to help clients assess their risk tolerance and legacy goals, which can allow the advisor to create a more bespoke withdrawal strategy!

'Supernerds' Unite Against Dave Ramsey's 8% Safe Withdrawal Rate Guidance

(David Blanchett, Michael Finke, and Wade Pfau | ThinkAdvisor)

For those about to enter retirement, one of the key questions they face is how much they can sustainably withdrawal from their portfolio in retirement to support their spending. This question has led to extensive research into Safe Withdrawal Rates (SWRs) that retirees (and their advisors) can take, with perhaps the most famous study being Bill Bengen's paper suggesting that a person who withdrew 4% of their portfolio's value during their first year of retirement, then withdrew the same dollar amount adjusted for inflation in each subsequent year, would never run out of money by the end of a 30-year time horizon – even in the worst case sequence of returns ever experienced in the historical US data.

And while subsequent research has come to different results than Bengen's "4% Rule", most SWR findings are in the same ballpark. Which is why the retirement research community was in an uproar this week after financial personality Dave Ramsey suggested that retirees who invest in a 100% equity portfolio (assuming 12% returns per year, with 4% annual inflation) could have an 8% SWR, doubling Bengen's and other's previous findings.

Blanchett, Finke, and Pfau first note that Ramsey's calculation confuses arithmetic return (the simple average return) with the geometric return that retirees actually experience. For instance, if a retiree's $1 million portfolio drops by 20% in the first year of retirement, they will have $800,000 left (assuming no spending). If the second year sees returns of 25%, the portfolio will return to a $1,000,000 balance, for an experienced annual return (i.e., the geometric return) of 0.0%; however, the arithmetic return during the period would be (-20% + 25%) / 2 = 2.5%! So while Ramsey cites a 12% average (arithmetic) return for stocks, investors in reality might not experience these returns given the volatility of equity markets.

Further, because retirees will likely be drawing down their portfolio to support their lifestyle needs, poor returns early in their retirement can have a particularly adverse effect on their portfolio longevity, a concept known as sequence of return risk. In fact, an individual retiring in the year 2000 with an all-equity portfolio and an 8% inflation-adjusted withdrawal rate would have depleted their portfolio by the year 2013, even though the average annual return in this period was 8.3%!

In sum, while a 4% SWR might seem conservative to some observers, it reflects the unique risks a retiree faces, particularly sequence risk (as well as the fact that because a retiree only has one chance to get retirement 'right' they will likely want to minimize the chances of running out of money!). At the same time, advisors can add value to clients by helping them find potential ways to boost their income in retirement, whether it is delaying claiming Social Security or (for those willing to face spending cuts in retirement) flexible withdrawal strategies that could provide for a higher initial SWR!

We Need To Talk About Your Retirement 'Spending'

(Christine Benz | Morningstar)

Many retirees (and their advisors) look for the highest possible portfolio safe withdrawal rate in retirement to maximize their retirement income without depleting their portfolio before their deaths. But other retirees spend less than their portfolio could sustainably support, often because they want to have assets remaining when they die to leave to their children, charities, or others.

Benz suggests that while a desire to leave a financial legacy might be laudable, it might not be the most effective use of a retiree's assets because the intended recipient might find the money more useful now than they would when the retiree eventually dies. For instance, the 30-year-old child of a 65-year-old retiree might get more value out of receiving money from their parents today (e.g., for a down payment on a home they might not otherwise be able to afford) than they would receiving an inheritance (even if it were a larger dollar amount due to compounding) much later in life (when they might have already accumulated significant assets of their own) after their parents pass away. Further, in addition to helping loved ones when they need the money the most, giving while alive comes with the extra benefit for the giver of actually being able to see the recipient enjoy the fruits of the gift!

Ultimately, the key point is that retirees who want to support family members or others could potentially maximize the effectiveness of their generosity by taking a spending path that allows for more portfolio withdrawals and gifts while they are alive (even if it means there are fewer assets leftover at their deaths). Further, advisors can add value to clients in this situation not only by helping them decide on the best portfolio withdrawal approach for their unique circumstance, but also by leveraging techniques that can give these hesitant retirees 'permission' to spend!

QCDs: A Tax Break Worth The Hassles

(Laura Saunders | The Wall Street Journal)

As the end of the year approaches, many charitably minded individuals consider how much they would like to donate as well as the organizations that will receive their generosity. In addition to the satisfaction that comes from helping others, donors can also potentially receive tax benefits for their giving. But with many ways to give (e.g., cash versus appreciated stock) and a range of rules that apply to different deductions, it can be challenging for taxpayers to determine the 'best' way to give.

Saunders notes that for individuals who have reached age 70 1/2, making a Qualified Charitable Distribution (QCD) from an IRA is often a valuable strategy, as a QCD, if executed properly, can count toward an individual's Required Minimum Distribution (RMD) for a given year and prevent their Adjusted Gross Income (AGI) from increasing (which, in addition to limiting their taxable income, could prevent a taxpayer from paying [higher] IRMAA surcharges). And while a taxpayer (or their advisor) will want to determine whether they would be better off giving through a QCD or by donating appreciated stock, this calculus has shifted toward QCDs given the increased standard deduction available due to the Tax Cuts and Jobs Act, which reduced the number of individuals using itemized deductions, which include certain charitable gifts.

While taxpayers can reap significant benefits from giving through QCDs, there are requirements that they must follow to receive them. To start, each IRA owner can donate up to $100,000 of funds per year. In addition, because the first dollars out of an IRA are considered the RMD, QCDs made after withdrawing the full RMD amount will not count toward the RMD (meaning that the taxpayer will pay taxes on the full RMD amount, but not the QCD), which is why some advisors recommend that their clients make QCDs early in the year if possible. Further, QCDs need to be coordinated with any IRA contributions that are made in the same year. Taxpayers will also want to ensure that the QCD is reported properly on their tax return (as the IRA sponsor might not break out the QCD(s) from the individual's total IRA distributions for the year).

In the end, while QCDs come with certain restrictions and process requirements, they can be one of the best ways for individuals to give to charity in a tax-efficient manner. And like other tax strategies (e.g., backdoor Roth contributions and tax-loss harvesting), QCDs are an area where advisors can add value for their clients not only by determining whether they could benefit from the strategy, but also by ensuring the process is completed correctly!

Save Your Clients Money With These Tax Tips

(Sheryl Rowling | Morningstar)

Tax planning is a major focus for many financial advisors, as certain strategies can save clients (who typically do not enjoy paying more in taxes than they are required to) significant amounts of money (perhaps enough to cover the advisor's fee?). With this in mind, Rowling identifies 3 categories where advisors can look for potential tax savings when reviewing a client's tax return: deductions, investment strategies, and Roth conversion.

Given the increased standard deduction ($13,850 for singles and $27,700 for married taxpayers filing jointly in 2023) resulting from the 2017 Tax Cuts and Jobs Act, it is harder for many taxpayers to accrue enough itemized deductions to exceed the standard deduction threshold. Which means that "bunching" itemized deductions into a single year when possible could allow them to benefit from the itemized deductions in that year while using the standard deduction in others. For instance, instead of giving $10,000 each year, a taxpayer might 'bunch' the contributions by donating $20,000 to their desired charities in one year and none the next (or perhaps donate the $20,000 to a donor-advised fund, which could allow them to itemize the full amount in the year it was donated while spreading the charitable grants across multiple years). Outside of itemized deduction "bunching", other strategies related to deductions (for those eligible) include maximizing business deductions, making a Pass-Through Entity Tax (PTET) election, the Qualified Business Income (QBI) deduction, as well as making deductible retirement contributions.

Advisors also can look to implement tax-aware investment strategies where appropriate for their clients. These include tax-loss harvesting (i.e., selling an asset at a loss while simultaneously purchasing a similar, but not "substantially equal", asset), avoiding short-term capital gains where possible (as they typically come with a higher tax rate than do long-term gains), optimizing asset location (i.e., putting assets in different account types based on their tax treatment), and avoiding funds with significant (taxable) capital gains distributions. Finally, advisors can be on the look out for Roth conversion opportunities, particularly in years where clients have relatively low income.

Ultimately, the key point is that advisors can potentially help their clients save thousands of dollars in taxes by digging into their tax returns and finding opportunities to leverage tax-saving strategies, from deductions the client might not have been aware of to investment strategies that can maximize clients' after-tax returns!

2023 Year-End Tax Planning Checklist

(Elliott Appel | Kindness Financial Planning)

The end of the year represents an opportunity to take a step back and spend time with family and friends. But for financial advisors, the end of the year is also a busy time in the office, as they work to ensure that their clients have taken required and beneficial actions related to their taxes before the year ends. With this in mind, Appel has put together a checklist that individuals and advisors can use to ensure they have considered many of the key end-of-year tax requirements and opportunities.

For advisors working with retired clients, one of the major end-of-year tasks is ensuring that they have taken any Required Minimum Distributions (RMDs) from their retirement accounts (though notably, individuals with inherited retirement accounts can have RMD obligations as well). In addition, advisors could assess clients' income, tax withholdings, and estimated tax payment obligations to ensure they will not have a significant underpayment (which could result in penalties), and, if needed, consider increasing withholding from their final paychecks for the year, or, for older clients, making distributions from retirement accounts to cover the excess tax liability. Further, advisors can help ensure those clients considering making gifts (perhaps to maximize the annual gift tax exclusion [$17,000 for 2023]) or charitable donations (in the form of Qualified Charitable Distributions [QCDs], donations of appreciated securities, or otherwise) do so before the end of the year to get the potential benefits on their 2023 tax return.

Altogether, advisors have the opportunity to help clients reduce their tax bills and avoid potential penalties by doing a year-end review of their tax situations. And by starting early, both advisors and clients can ensure that required actions are completed in plenty of time before year-end deadlines!

Why Really Rich People Worry (About Money)

(Khe Hy | RadReads)

Sometimes, it can be tempting to think that if you had a certain amount of money that your worries would go away. But many people with this mindset find that as their wealth increases, so too does the number that is 'needed' to feel secure.

At a certain level, it becomes more difficult for additional money to 'buy' happiness. For instance, research has found that while moving up from low levels of income can provide a significant boost to happiness (e.g., by having enough income to ensure housing and food security), the boost to happiness tends to increase at a slower pace as income rises. In addition, a 'scarcity mindset' can lead seemingly wealthy individuals to worry about money, perhaps because of a fear that they could 'lose it all' (even if that is incredibly unlikely). Though ultimately, Hy suggests that wealthy individuals who perpetually worry about money often do so because of the realization that there are certain things that money can't buy, such as self-actualization, or that problems that it can't solve, like feeling insignificant, unworthy, or forgotten, which can lead these individuals to try to earn even more in an attempt to prove to themselves that those traits don't apply to them.

Altogether, while there is a correlation between money and happiness, this general relationship by no means applies to everyone and cannot prevent wealthy individuals from worrying about their net worth (or, perhaps more accurately, their self-worth). Which provides an opportunity for financial advisors not only to help clients build wealth, but also to build and enjoy the type of life that allows them to worry less about money along the way!

Managing Finances In A Couple When One Of You Has Way More Wealth

(Meg Bartelt | Flow Financial Planning)

Many discussions about managing finances as a couple have to do with how to handle financial decisions once individuals are married or in a committed partnership (e.g., whether to have a joint checking account or how much 'fun' money each partner can spend guilt-free). Nonetheless, there are also important conversations to be had (and, perhaps, legal agreements to be made) before a couple enters into a formal relationship, particularly if there are imbalances in wealth and/or income between the two individuals.

For instance, one individual might enter a marriage with significantly more wealth than their partner (whether from their own savings, an inheritance, or another source). In this case, they quite possibly will want to protect this money in case the marriage eventually ends. This is where a pre-nuptial agreement (or, if the individuals are recognizing this issue after they are married, a post-nuptial agreement) can be useful, not only to set the legal terms of who will receive what in the case of divorce, but also (and perhaps more importantly) to get the two partners talking about issues related to money and security in the open. Notably, these agreements come with significant flexibility; for instance, one couple might decide to keep their pre-marriage assets totally separate in case of divorce, while another might start out by dividing the assets by who originally brought them to the marriage if it ends quickly, but split them 50/50 if they end up staying married for several years before splitting up.

More broadly, it can be helpful for couples to discuss how to make lifestyle spending decisions that work for both partners. For instance, they might decide to see their wealth (and possibly income) as 'ours' and be willing to pool all of their resources for their spending goals. Alternatively, the couple might decide on a hybrid approach, where each spouse maintains control of certain assets while pooling others (this might be common if there is a significant wealth imbalance when entering the relationship). When it comes to major spending decisions, couples choosing this latter option do have a range of options, from choosing a higher standard of living that the less-wealthy partner might not be able to afford (in which case they might decide to pay for expenses proportionately to their wealth and/or income), or a relatively lower standard of living (though this could lead the couple to have concerns that they are living a 'smaller' life than they might otherwise). And if one member of the couple has significant wealth but relatively low income, while the other partner is in the opposite situation, they might decide on an option that lets the wealthier partner contribute more money up front for a major purchase (e.g., to buy a home) while letting the higher-earning partner pay for regular expenses.

Ultimately, the key point is that opening the lines of communication is crucial when partners enter a committed relationship with different levels of wealth. Which means that financial advisors working with couples in this situation can support this process by ensuring that they are having these important conversations and are taking any desired legal steps (most likely with the help of outside marriage counselors and attorneys!). Which can not only protect the clients' individual wealth, but also set expectations and boundaries for money that can help their relationship thrive well into the future!

Mint, The Budgeting App, Is Going Away. Here Are Some Alternatives.

(Ron Lieber | The New York Times)

Financial advisors typically use a wide range of AdvisorTech tools, which can help boost back-office efficiency and, potentially, the scalability of their firm. Aside from advisor-facing solutions, there is a vast world of consumer-facing FinTech tools, many of which have been around for more than a decade. And with one of the most popular of these tools, Mint (an account aggregation and expense categorization tool), is being shut down, many consumers are in the market for a new tool with similar functionality.

Luckily, the universe of budgeting and account-tracking apps has expanded greatly since Mint first came on to the scene (and many of them are currently offering discounts to attract Mint users). While many of these tools offer similar functionality (e.g., the ability to track bank and investment account balances as well as individual transactions), many have unique features, or at least are targeted toward a specific consumer (they also vary in terms of cost, as many charge a subscription fee, while some make money from advertising and referrals). For instance, YNAB offers deep budgeting functionality, Tiller lets users track transactions in their own spreadsheets (creating fewer worries about security or control of data), Rocket Money helps users manage subscriptions (and prompts them to cancel services they may no longer need), while Monarch Money uses multiple aggregators to reduce the number of failed balance and transaction updates.

Altogether, consumers have a range of software options to manage their finances. At the same time, advisors could take this opportunity to encourage clients to leverage the client portals, apps, and other tools that are already available through the advisor's own tech stack (or add a tool that offers these features)!

---

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.