Weekend Reading For Financial Planners (May 11-12)

How The New DoL Fiduciary Rule Could Save Investors Billions And Will The Lawsuit Against The Fiduciary Rule Prevail?

(Spencer Look and Lia Mitchell | Morningstar) (Tracey Longo | Financial Advisor)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans) and the rollovers that come out from them, has gone through a multi-year process across 3 presidential administrations in efforts to update its "fiduciary rule" governing the provision of advice on these plans (as well as IRA rollovers in/out of these plans). After much anticipation, the DoL in late April released the final version of its latest effort, dubbed the "Retirement Security Rule" (aka the Fiduciary Rule 2.0), which is set to take effect in late September and again attempts to reset the line of what constitutes a relationship of trust and confidence between advisors and their clients regarding retirement investments and when a higher (fiduciary) standard should apply to recommendations being provided to retirement plan participants, with a particular focus on those not already subject to an RIA's fiduciary obligation to clients (i.e., brokers and especially insurance/annuity agents). 

While the rule would have potential qualitative benefits for investors (e.g., greater assurance that the financial professional sitting across the table from them is operating under a fiduciary standard when it comes to retirement account rollovers and other major decisions), analysts at Morningstar also sought to estimate the potential aggregate quantitative benefits for investors, finding that retirement plan participants (particularly those in smaller plans) could save $55 billion over the next 10 years in fees (in part because plan advisors would be less likely to be able to recommend high-fee funds for plan investment menus while abiding by the new fiduciary rule), and that investors rolling over retirement account assets to purchase annuities could save another $32.5 billion during the same period. Regarding annuities, the analysts assume that fixed-index annuity commissions will decrease (leading to lower embedded costs in the annuities themselves) due to insurance producers following the impartial conduct standards in the new rule (which require advice fiduciaries to provide advice in retirement investors' best interest; charge no more than reasonable compensation; and make no misleading statements about investment transactions and other important matters).

At the same time (and not unexpectedly, given the product distribution industry's successful challenge to a previous iteration of the fiduciary rule), the DoL's Retirement Security Rule has already come under legal fire, with the Federation of Americans for Consumer Choice (an insurance industry lobbying group) and several insurance agents filing a lawsuit asking the U.S. District Court for the Eastern District of Texas to vacate the rule and provide a temporary and permanent injunction against its enforcement. The plaintiffs argue that the rule violates the U.S. Congress' intent in passing ERISA and that the DoL overstepped its authority in adopting the rule. 

In the end, while industry observers are unsure whether this lawsuit (or potential future lawsuits by the brokerage industry or others) will be successful in delaying the implementation of the rule (or putting a permanent halt to its enforcement), it is almost certain that the losing side (whether the plaintiffs or the DoL) will appeal, signaling that the final status of the new rule will likely take some time. Though, given the rule's approaching enforcement date (and the stiff penalties for violating it), many firms subject to the rule might start implementing policies to prepare for it (which could, at least temporarily, impact the quality of advice consumers receive and the expenses they pay?). 

Social Security Trustees Paint A Slightly Rosier Picture, But Sound Warning In Latest Annual Report

(John Manganaro | ThinkAdvisor)

Social Security benefits make up a significant portion of income for many retirees, so the continued ability of the program to make full benefit payments is analyzed regularly. And while the bulk of the funds needed to pay Social Security benefits come from payroll taxes from current workers, in recent years the program has had to dip into the "trust fund" in order to cover the full benefits owed.

This week, the Social Security and Medicare Trustees released its latest annual report indicating that the Social Security Old-Age and Survivors Insurance (OASI) trust fund will be exhausted in 2033, unchanged from last year's estimate. Notably, that does not mean no Social Security benefits would be paid after that time; rather, the trustees estimated that the system would be able to pay out 79% of scheduled benefits based on continuing program income (i.e., funding from payroll taxes). Combining the OASI projections with estimates for the Disability Insurance (DI) trust fund, the resulting projection fund (often referred to as OASDI) would be able to pay 100% of scheduled benefits until 2035, 1 year later than last year's estimate, after which point it would be able to pay 83% of scheduled benefits from continuing income (though the trustees note that the 2 funds cannot be combined absent a change in law). 

The trustees noted that the long-term finances of the combined OASDI fund improved this year thanks to an upward revision to labor productivity (due to stronger-than-expected economic growth in 2023) and a lower assumed long-term disability incidence rate, though these were partially offset by a decrease in the assumed long-term total fertility rate (which would lead to fewer workers paying into the Social Security system). 

Ultimately, the key point is that while the underlying contributors to the Social Security system's funding improved somewhat in the past year, in the absence of legislative intervention, the program remains on track to pay reduced benefits a decade from now. So while advisors regularly field questions from clients about Social Security's future, there are many potential actions (from a payroll tax increase to raising the retirement age to changing the way benefits are calculated) that could be taken to shore up the system, which means there isn't really a question of "what to do" about Social Security's shortfall, but simply a matter of what Congress will implement between now and when the system's trust funds become insolvent?

RIA Custodian Altruist Raises $169M In Series E As It Competes With Custodial Giants

(Holly Deaton | RIAIntel)

The independent RIA community has long lamented the dearth of RIA custodial competitive options beyond big-3 of Schwab, Fidelity, and Pershing – especially in the aftermath of Schwab's acquisition of TD Ameritrade – and while there are a handful of RIA custodian alternatives, they have all struggled to achieve any substantive size and scale. But in recent years, RIA custodial platform Altruist has managed to gain traction with a particular focus on the small-to-mid-sized RIAs that tend to receive less service and attention from the big-3 (and can more readily adopt a tech-savvy new platform, especially if they're starting from scratch in the first place), tripling its assets under management in 2023 for the second consecutive year.

Nonetheless, with this growth comes the need to build out its capabilities (to continue to attract and retain advisors) and staffing (to serve these advisors). Which has led the firm to conduct a series of capital raises, with the latest being a $169 million Series E round this month, bringing its total funding to $450M and its valuation at more than $1.5B, according to the company, which said it plans to use the funding to make further investments in its technology and scale its staff to grow along with its customer base. 

The funding comes on the heels of several developments for the custodian since the start of 2023, including establishing its own self-clearing platform (allowing it to become a full-service custodian, and improving its own long-term economic viability), its acquisition of Shareholder Services Group (SSG) (potentially adding more than 1,600 advisors to Altruist's roster, which would launch it into third place in terms of RIA firms as customers behind Schwab and Fidelity), and its announcement that its "All-In-One" investment platform would subsequently provide portfolio management software (which includes trading, performance reporting, and fee billing capabilities, as well as a client portal) entirely for free to advisors who custody entirely with the firm (though the ride hasn't been entirely smooth, as a 'draft' of a new fee schedule that was accidentally released in April led to consternation amongst some advisors on the platform, and an apology from founder Jason Wenk).

Altogether, Altruist appears to be boosting its capital in an effort to boost its capabilities and service – and expand its marketing of those capabilities and services – as it seeks to compete against entrenched custodial giants Schwab and Fidelity (which continue to have dominant positions in the RIA custodial market). Nonetheless, given that RIA-custodian relationships are often very 'sticky' (as the process to change custodians can be time-intensive for advisors and their clients alike, and creates risks for advisors who may be concerned that on-the-fence clients may use the change as an excuse to terminate the advisor by not signing the transition paperwork), it remains to be seen how effective alternative custodial options like Altruist will be at prying away larger firms from their current custodians, with whom they have built established systems, integrations, and long-term relationships! 

Is The 4% Rule Too Safe?

(David Blanchett | ThinkAdvisor)

In 1994, financial planner William Bengen published his seminal research study on safe withdrawal rates. The paper established that, based on historical market data, 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. From this insight, the so-called "4% rule" was born, and while it has been subject to numerous challenges and critiques over the years (with some calling it "too safe" and others claiming it is not safe enough), 4% remains anchored as at least a productive starting point for countless retirement planning conversations (before narrowing-in on more client-specific recommendations).

In fact, a recent survey of financial advisors by Prudential found that 61% of financial advisors most commonly use 4% as the withdrawal rate for their clients (followed by a 5% withdrawal rate by about 20% of respondents and 3% by about 15% of advisors surveyed). Nevertheless, Blanchett argues that the '4% rule' might be too conservative for many investors because it ignores other income streams (e.g., a retiree who can cover most of their 'necessary' expenses with their Social Security benefits and/or a defined-benefit pension might be willing to be more aggressive with their portfolio withdrawals), it doesn't account for spending flexibility (i.e., a retiree might be willing to cut their spending, at least temporarily, during market downturns, which could allow for a higher initial withdrawal rate), and that it focuses on whether the retirement goal is accomplished in its entirety (i.e., did the portfolio last throughout retirement without becoming exhausted) rather than assessing the magnitude of the failure (e.g., a 'failure' where the portfolio is still able to support 90% of a client's desired spending for several years would be preferable to a 'failure' where the portfolio is fully exhausted).

With these critiques in mind, Blanchett in a new research paper introduces a concept called "guided spending rates", which propose 'safe' initial withdrawal rates based on a selected retirement period length and an individual's spending flexibility in retirement. For instance, according to his calculations, a retiree with a 30-year time horizon and moderate flexibility could start with a 5% withdrawal rate (a 25% bump compared to the "4% rule"!), while a retiree with less flexibility (perhaps because they have high fixed expenses and/or limited sources of guaranteed income) could have a 4.3% withdrawal rate and a retiree with greater flexibility (perhaps because of few fixed expenses and/or significant sources of guaranteed income) could start with a 5.5% initial withdrawal rate. 

Ultimately, the key point is that while rules of thumb like the "4% rule" can provide a shortcut to estimating sustainable retirement spending, they do not necessarily take into account the variety of client-specific factors (e.g., retirement time horizon and spending flexibility) that could allow for a higher (or perhaps lower) initial withdrawal rate. Which offers a potential opportunity for advisors to take advantage of clients' spending flexibility to propose a higher initial safe withdrawal rate (particularly if they will be able to work with the client over the course of their retirement and recommend spending adjustments when necessary!). 

Is Underspending A Fiduciary Problem?

(Michael Finke | Advisor Perspectives)

Financial advisors working with retirees are often focused on ensuring that a client's portfolio is able to support their spending needs throughout their lifetime (given the risk of a poor sequence of portfolio returns). Nevertheless, many clients do not come close to depleting their portfolio (whether because they experienced a positive sequence of returns or because their spending ended up being less than they might have anticipated), which can result in significant assets left at their deaths (that can be left to family, charities, or others). 

While some clients might be interested in leaving a large legacy, others might prefer spending more during their retirements, particularly in the "go-go years" early on when they might be able to be more active. Nevertheless, many clients (and some advisors) might be tempted to be conservative with retirement spending for fear of running out of money later on, when in reality they could potentially afford to spend more (particularly if they have flexibility in their spending if adjustments are eventually deemed to be necessary). 

With this in mind, Finke suggests that advisors can play an important role in ensuring that retired clients are able to get the most out of their nest eggs. He highlights research he conducted with fellow retirement researcher David Blanchett indicating that retirees are likely to spend more when their income comes from guaranteed incomes sources (e.g., Social Security or a defined-benefit pension) compared to portfolio withdrawals. Which suggests that by boosting sources of guaranteed income (e.g., by delaying Social Security benefits to receive a larger monthly payment or by purchasing an annuity, which has the added benefit of transferring some longevity risk to another party [the government in the case of Social Security or the insurance company issuing an annuity]), a retiree could reduce the risk that they run out of money while being encouraged to boost their spending in the meantime.

Ultimately, the key point is that financial advisors can add value for their clients not only by ensuring their portfolio is able to meet their spending needs during retirement, but also by linking the amount clients spend in retirement to what they want their retirement lifestyle to look like (including potential preferences for spending more early on). Further, advisors have other ways to encourage hesitant clients to spend more, whether it is focusing on the probability and magnitude of spending adjustments rather than the "probability of success" (which some clients might invert to "probability of failure"), segmenting expenses into "core" and "adaptive" buckets (which could show clients that they have more spending flexibility than they might otherwise think), or exploring different 'types' of spending (e.g., 'buying time' by outsourcing tasks or getting the enjoyment of gifting while they are still alive)!  

How Bill Bengen Is Incorporating CAPE And Inflation For More Accurate Safe Withdrawal Rates

(Robert Huebscher | Advisor Perspectives)

While the "4% Rule" has been debated for decades, even its creator, financial advisor William Bengen, has made adjustments to it over time. For instance, in late 2022, he suggested that by adding U.S. microcap stocks into a portfolio with large-caps and bonds, the safe withdrawal rate (for a 30-year retirement, with annual inflation adjustments) could be 4.7%. 

Of course, asset allocation is not the only factor that could determine an appropriate Safe Withdrawal Rate (SWR). In his latest research, Bengen has focused on the influence of equity valuations and inflation to determine the maximum SWR (which he calls SAFEMAX) for a given retirement date. He segmented inflation regimes into 4 categories (deflation, 'low' inflation of 0% to 2.5%, 'moderate' inflation of 2.5% to 5.0%, and 'high' inflation greater than 5%), looked at the beginning Cyclically Adjusted Price/Earnings (CAPE) ratio (a popular valuation measure) for the years that fell into each regime, and then determined the subsequent 30-year SWR. 

For instance, in Bengen's model, an individual who retired in 1986 (when the CAPE stood at 14.8 [relatively low in historic terms] and moderate inflation) could have started with a withdrawal rate of 7%. And even though the retiree would have experienced adverse market conditions in the first few years of retirement, the subsequent recovery allowed the withdrawal rate to be successful for this retiree. On the other hand, a retiree in 1966 (when inflation was also moderate but the CAPE was 22.3) would have found their portfolio under significantly more stress if they had chosen the same withdrawal rate, as subsequent inflation and bear markets would have eaten up their portfolio (perhaps presaged by the elevated CAPE at the start of retirement). 

Altogether, Bengen's research suggests that economic context can be a useful factor when creating an initial SWR. Though advisors looking to apply this research today would encounter a dilemma, as current equity valuations are at historically high levels, particularly for large-cap stocks (e.g., today's CAPE is about 34!), as there are few historical precedents. At the same time, equities have seen tremendous gains over the past decade, a period when the CAPE has remained above its historical average, which raises the question of whether 'this time is different' and the CAPE no longer has the same predictive power it once did or if a large, lengthy market correction to bring 'overvalued' equity prices down to earth could be coming?

How To Tell A Great Story

(Sara Grillo | Advisor Perspectives)

When a financial advisor is meeting with a prospect or client, it can be tempting to focus on the numbers that define the individual's situation. For instance, an advisor might show a prospect how a certain planning strategy would increase their retirement income, or demonstrate to a current client how purchasing a long-term care insurance policy could save them money in the long run. Nevertheless, while the 'numbers' behind planning are important, being able to communicate them in a way that resonates with clients can potentially make an advisor even more effective.

For instance, an advisor could consider incorporating stories into their prospect and client meetings, whether to make themselves more relatable (e.g., by relating a shared experience with a client) or help provide backing to a planning recommendation (e.g., telling a story about how it benefited another client). When crafting a story, starting with a 'hook' can be an effective way to draw the listener in. Next, developing the narrative with detail (e.g., sensory details, a humorous analogy, or specific details about a particular time or place) can help evoke emotion by creating a more intense situation. And once the tension builds, pausing right before a key decision point can help build a bridge between the emotion of the narrative and the reasoning that goes into the final decision (that was either made in the past or will need to be made by the client in the present!). 

Ultimately, the key point is that stories can be powerful tools to build relationships and persuade others to take action. Because while a prospect or client is unlikely to remember every number presented in a planning meeting, a well-told story could resonate with them well into the future and help them make the best decisions for their needs.

The Role Of Emotions In Financial Marketing

(Meghan Busch | WealthManagement)

While there are certainly plenty of technical aspects to managing money, this topic can be an emotional one for many individuals as well, perhaps because of deep-seated money memories they've developed over time that have become money scripts that drive the way they act with money (which sometimes result in actions that might seem 'irrational'). However, incorporating emotions when meeting with clients can be a tricky task for advisors, who might not know when doing so is appropriate. 

Busch suggests that leveraging emotional storytelling can be appropriate in several situations, including to encourage action (e.g., to help clients visualize the potential positive or negative consequences of a certain decision), to form connections (e.g., highlighting a time when the advisor dealt with a similar situation as their client), to build trust (e.g., presenting a client case study as a story to show how the advisor has helped clients with similar issues in the past), and to align values (e.g., using a story to help explain the advisor's 'why' for why they became a planner or offer planning services in a certain way).   

Nevertheless, there are certain times when incorporating emotional storytelling might not be appropriate. These could include when an emergency occurs (as clients might want to move directly to hearing possible solutions to their problem), when clients are overly optimistic (in which case presenting the reality of their situation could be more appropriate), when a focus on technical details is needed (while stories can inspire action, presenting the 'numbers' is also often necessary to make the best decision), or when it would not align with the advisor's brand (to avoid using stories that feel inauthentic). 

In sum, emotional storytelling can be a powerful tool when used properly, allowing an advisor to reach clients' 'hearts' as well as their 'heads'. Which suggests that first 'rehearsing' these stories in advance with a colleague (both for the substance and to ensure sharing it is appropriate!) could help advisors ensure they are getting the 'right' message across at the 'right' time.

The Art Of Storytelling In A World Of Information Overload

(Morgan Housel | Next Big Idea Club)

In the Internet age, there is no shortage of information available, from a constant barrage of news stories to the limitless black hole that is Wikipedia. Even just within the world of personal finance, there is a seemingly limitless flow of content, from blogs and social media posts to podcasts and short-form videos.

With this in mind, one way that an advisor can add value to their clients is to help them sort through this information, perhaps through the use of stories that provide a condensed version of what they actually 'need' to know. Further, within the information the advisor produces themselves, crafting an effective narrative could help a client understand what the advisor is trying to communicate better than providing them with all of the information available (e.g., a hundred-page financial plan). Because even if the advisor is highly confident in their planning analysis and recommendations, if their message doesn't resonate with a prospect or client, they might not take action (or perhaps be swayed by a more compelling story offered by another advisor or social media personality that might not be acting in the individual's best interest).  

Altogether, while it is valuable to have the 'right' answer (e.g., effective planning recommendations for a client), being able to communicate this answer in a way (perhaps using a story) that helps the intended recipient understand and moves them to act is also a valuable skill for financial advisors and others looking to have their ideas heard and understood!

The Post-Vacation Clarity

(Melissa Kirsch | The New York Times)

Over the course of a year, it can be easy to fall into routines, from the regular cadence of the workweek to cooking the same recipes for dinner each month. One way to get out of these routines is to take a vacation, which not only can provide a break from these normal routines, but also an opportunity to step back and evaluate whether changes to them might be in order.

To start, going on vacation typically means visiting a new place (or perhaps returning to a previous destination). This can create a sense of curiosity as you experience the sights, attractions, and restaurants in this new location. At the same time, going on vacation could serve as a call to be more curious about your own city. For instance, you might look forward to visiting a certain museum at your vacation destination but have put off going to the new museum in your own city. In addition, the limitations on what you can bring on vacation (e.g., whatever you can fit in a checked bag) can serve as a wake-up call regarding whether you really need all of the 'stuff' at your own house (perhaps inspiring you to declutter once you return). Finally, going on vacation can be mentally freeing, as you don't have to worry about day-to-day responsibilities. Though, similar to considering whether you really need so much 'stuff', a vacation could be an opportunity to evaluate whether you might want to free up mental space during the 'normal' workweek by cutting back on certain activities or tasks that might not be truly necessary.  

Ultimately, the key point is that the benefits of a vacation are not confined to the time spent away from home. Rather, the ability to step back and evaluate normal routines and 'baggage' could inspire you to make positive changes in how you work and live after you return home!

How Much Should You Spend On Vacation?

(Brett and Kate McKay | The Art Of Manliness)

While most items on a household budget don't inspire excitement (e.g., mortgage payments, insurance bills), one line item that can generate anticipation is the money set aside for travel. Whether it is a family vacation with young kids or a month-long getaway for retirees (or perhaps a sabbatical who are still working!), spending money on travel can be enjoyable. Nonetheless, because no one has an unlimited travel budget, considering how much you (or a client) can afford to spend on vacations can prevent this budget item from eating into others.

To start, setting an annual travel budget at the beginning of the year can provide broad guideposts for the individual trips that will be chosen. For instance, if a 2-week summer trip to Europe would eat up 75% of the annual budget, other trips during the year might have to be less expensive (camping, anyone?). The amount of this budget (in absolute terms and as a percentage of total spending) will likely depend on an individual's or family's other expenses; while those with a tight budget might allocate 5-10% of their income to vacations, those with fewer other expenses (e.g., retirees with a paid-off mortgage and no kids at home) might see this number go much higher. 

Notably, vacation choices this year can affect those made in future years. For instance, you might encounter "luxury creep" if you stay in a luxury hotel on a trip and find that going to a 'standard' hotel in the future just won't cut it (meaning that you might have to increase the budget for lodging expenses in the future). Similarly, "entitlement creep" can occur (and lead to increased travel expenses) if you start to feel like you 'deserve' a certain type of trip based on the stresses of daily life (and while trips can be well-earned, this situation might instead call for a reevaluation of what's causing this stress).

In the end, while money spent on vacations is not necessarily a financial investment, it can be an investment in having the opportunity to have new experiences, relax, and generate memories that can last a lifetime. Which offers financial advisors the opportunity to help their clients not only in deciding how much they want to budget for travel in a given year, but also to help them grow their wealth so that this number can increase over time (and perhaps help them maximize the credit card rewards they receive from regular spending so they can travel even more!). 

How Much Is A Memory Worth?

(Mike Troxell)

When it comes to consumption, many goods and experiences provide enjoyment in the moment, whether it is feeling the rush of driving a new car or enjoying a meal at a favorite restaurant. In addition, these purchases can create memories that can provide enjoyment well into the future. Which leads to the question of what kinds of spending 'investments' pay off the most in the form of memories that are not long forgotten.

One might argue that spending on 'stuff' is likely to create more memories because they can be enjoyed for a longer period. For instance, while a vacation might only last a week, a new car can be driven for many years. However, Troxell argues the opposite, that while a 'thing' might last longer physically, the enjoyment of it and the memories it creates can wane over time (e.g., you might remember the first time you drove your new car, but not the 500th time). On the other hand, experiences act more like appreciating assets, in that the initial experience might be short, but the value of it tends to increase over time (e.g., while a vacation might only last a week, the memories of a distinctive trip could last a lifetime). Further, while physical goods are often enjoyed by oneself (e.g., driving a new car), experiences typically are undertaken with others, which can create a shared memory and stronger relationship (e.g., each member of a family might recall different memories from a trip). 

In sum, one of the best ways to convert spending into happiness is often to use money to 'buy' memories that can last for decades. Whether it is an intangible good (e.g., going skydiving or visiting a new country) or a physical item that enables an experience (e.g., a car that enables a series of memorable road trips), spending that generates long-lasting memories could be viewed as one of the best possible 'investments' available! 

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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.