Weekend Reading For Financial Planners (June 1-2)

“Best Financial Advisors” List Being Developed By FPA And Money.com

(Financial Advisor)

With hundreds of thousands of individuals calling themselves ‘financial advisors’ (or a similar title), it can be hard for consumers to gauge whether a particular advisor will act in their best interests, and have the skills needed to serve their planning needs. While consumers have some ways to parse the many available advisors, from whether they are a fiduciary, CFP professional, or, increasingly (thanks to the SEC’s 2021 marketing rule), through client testimonials and online reviews, finding the ‘best’ advisor for their needs can be a challenge.

To help consumers identify well-qualified advisors, the Financial Planning Association (FPA) and financial website Money.com announced this week that they are developing a list of the ‘best’ financial advisors, which will be released at FPA’s annual conference in September. Similar to the existing FPA PlannerSearch tool, the new “Best Financial Advisors” list would be only open to FPA members, but in this case qualifying will require the completion a detailed questionnaire (which will be available in mid-June) covering factors including education, credentials, and experience, and FPA has indicated that it plans to evaluate harder-to-quantify areas such as trust factors and client communication (differentiating it from some other ‘best advisor’ lists based on assets under management or client headcount). FPA and Money.com will then evaluate the responses received to determine the advisors who will be included on the final “Best Financial Advisors” list (the number of advisors who will be included has not been pre-determined).

Yet while arguably it is laudable for the FPA to try to highlight the value of financial planning (from the “Best” financial planners), the new initiative is already making some controversial waves. As while PlannerSearch is a platform that supports all FPA Members who choose to be listed, the “Best Financial Advisors” list will only be available to a subset of members who are judged “better” than their fellow members. Which raises the serious risk of a backlash from FPA members who don’t make the cut because the membership association they pay annual dues to doesn’t think they’re “good enough” to be highlighted in a potentially lucrative business development opportunity to millions of Money.com readers?

Ultimately, the key point is that at a time when it is challenging for consumers to parse through the tens of thousands of available financial advisors, the FPA/Money.com list could serve as a valuable tool for finding an experienced and skilled advisor, and because of the reach of Money.com gain significantly more visibility than FPA’s PlannerSearch tool does today. However, that also raises the question of why FPA would pursue a new “Best” advisors initiative that will favor a select subset of its members over the rest, and not simply promote the membership-wide PlannerSearch tool it already has invested in for years? At the least, expect a significant amount of scrutiny in the coming month, when the FPA makes public its criteria of what it believes make some of its members “the best” financial advisors, compared to their FPA peers (and the wide swath of non-FPA members who would also have to become FPA members to be eligible for consideration)?

Senate Bill Would Force SEC To Weigh Economic Impact On Small Advisors

(Tracey Longo | Financial Advisor)

In an effort to protect consumers, the Securities and Exchange Commission (SEC) creates and updates regulations that must be followed by SEC-registered investment advisers. While these regulations can raise standards of conduct amongst advisers, they also come with a compliance cost for firms that are required to follow them (e.g., additional paperwork and time spent training employees). And while larger firms might be able to handle such burdens fairly easily due to their greater headcount (possibly including staffers whose sole role is compliance), complying with new regulations can be a tougher task for smaller firms (where an advisory firm owner might also be the firm’s chief compliance officer!).

With this in mind, the Small Entity Update Act (which passed through the House with bipartisan support last year) has been introduced in the Senate and would require the SEC to consider the impact of its regulations on smaller firms it regulates and determine whether there are less burdensome means of achieving regulatory goals. Further, under the legislation, the SEC would be required to expand the number of smaller entities covered by increasing the amount of assets managed by small firms to above the current $25 million (given that firms typically register with the SEC once they reach $100 million of AUM, this limit covers very few SEC-registered firms) and adjust this amount for inflation every 5 years. The legislation has been cheered on by the Investment Adviser Association, which also has suggested that firm headcount (rather than AUM) be used as a more accurate measure of determining whether a firm is “small” (in part because it would tend to fluctuate less than AUM).

Altogether, this legislation would expand the number of investment advisers considered to be “small entities”, which could lead the SEC to put a heavier weight on their interests when it comes to determining the burden of a proposed regulation. Which could ultimately provide relief for smaller firms that already have to balance compliance with client service, marketing, and the other duties that go into running a firm (and perhaps encourage the formation of new firms, which could allow the industry to serve more clients!).

"Partial" Retirees More Likely To Experience Spending Surge: Study

(John Manganaro | ThinkAdvisor)

While the word ‘retirement’ is often associated with a one-time, complete exit from the workforce, in reality, the transition to retirement can look different depending on the individual. For instance, a client might reduce the number of hours they work for a number of years before fully retiring or might switch to a part-time job in a different field. And for client couples, one partner might decide to retire earlier than the other, leaving them with some continued earned income. Which could lead to a range of outcomes, both in terms of how much the clients spend at ‘retirement’ as well as the volatility of this spending over time.

According to research from J.P. Morgan Chase Asset Management, “partially retired” households (for the purposes of this study, those whose labor-related income was less than 95% of their pre-retirement income), which made up 53% of households studied, were more likely to see a “surge” in spending at retirement compared to those who fully retired (perhaps as their income increased by tapping retirement savings and/or claiming Social Security benefits while still having some earned income), with the health care, apparel, and food and beverage categories seeing the biggest boost. Notably, while this “spending surge” was evident amongst households with pre-retirement income of $50,000-$90,000, the effect did not persist for those with more than $150,000 of pre-retirement income (perhaps because their income provided them with the flexibility to meet desired spending before retirement).

Similar to prior research, the study found that retirees’ average inflation-adjusted spending tended to decline gradually over time, though increased health care costs tended to tick higher, particularly in retirees’ later years. However, on an individual level, retirees showed more volatility in their spending, with only 18% of those studied maintaining their spending within 20% of their pre-retirement expenses in the year after they retire and only 34% doing so when they were between ages 75 and 80 (notably, retirees with more volatile spending were equally as likely to see spending increases or decreases of greater than 20%).

Ultimately, the key point is that while aggregate data indicate that retirees’ spending tends to gradually decline over time, the experience of an individual retiree can vary widely, with many seeing (at least temporary) increases or decreases in spending of greater than 20%. Which suggests that financial advisors can add value for their clients by helping them explore their retirement goals (e.g., full versus partial retirement) and planned spending in their early retirement years, which can help the advisor shape an appropriate asset allocation and retirement income plan (e.g., to mitigate sequence of return risk, particularly for those who want to boost their spending [and perhaps their portfolio withdrawals] early in retirement!) to increase the chances they will experience a successful retirement!

IRS Warns High-Net-Worth Individuals Of Elaborate Schemes

(Anna Sulkin Stern | Wealth Management)

Every year, the IRS releases its “Dirty Dozen” list of tax scams to help consumers be aware of the latest tactics scammers are using to abuse the tax system (and potentially defraud consumers who sometimes pay for help or advice to implement these not-actually-valid tax scams). This year, in addition to broader frauds like phishing scams, the IRS highlighted several schemes that target high-net-worth individuals in particular.

Similar to last year, the agency flagged misused Charitable Remainder Annuity Trusts (CRATs) (e.g., wrongly claiming that the transfer of appreciated property to the CRAT results in an increase in basis to fair market value as if the property had been sold to the trust), monetized installment sales (i.e., by improperly delaying the recognition of gain on the appreciated property sold until the final payment of the installment note rather than as the proceeds/payments are received), and improper Employee Retention Credit claims (often made at the urging of a promoter who makes money by claiming to calculate the size of the credit or determine a business owner’s eligibility) as scams targeting the wealthy. In addition, new this year is a warning about improper art donation deductions, whereby unscrupulous promoters encourage taxpayers to buy art at a “discounted” price (which can include fees paid to the promoter), then donate the art (possibly an arranged donation to a charity organized by the promoter) after waiting at least 1 year to claim a tax deduction for an inflated fair market value. The IRS noted that it has a team of professionally trained appraisers to determine the true value of the donated art.

Given that many financial planning clients could be attractive targets for these scams – especially for those holding long-term appreciated assets, where the scams are focused on (incorrectly) trying to defer or avoid large gains – advisors can add value for their clients by helping them recognize such that offers really are “too good to be true”. Further, the IRS’s notice can serve as a reminder for advisors who (legitimately) use CRATs or installment sales with their clients to ensure they are structured and executed appropriately in accordance with the relevant tax laws!

Why Wealthy Clients Fall For 'Dirty' Tax Scams

(Jeff Stimpson | Financial Advisor)

There is no shortage of scammers looking to bilk taxpayers and/or the government using a variety of sketchy tactics (some of which are highlighted each year on the IRS’s “Dirty Dozen” list. Given that wealthier individuals are often the targets (or intended audience) for these scams, advisors can play a role in helping them avoid losing money or falling into trouble with the IRS.

Many scams target wealthy (and particularly older) individuals, who are duped into unwittingly giving their money to the perpetrator. For instance, the IRS in this year’s “Dirty Dozen” list of tax scams highlighted email-based “phishing” and text-based “smishing” attacks that trick individuals into giving up personal information that can be used to make fraudulent charges or drain their accounts. Advisors could help their clients avoid these and other cyber threats by educating them on the risks of providing personal information in response to unsolicited emails and the telltale signs of phishing and smishing schemes. Another scam targeting unwitting victims highlighted by the IRS is the use of fake charities that attract donations from unsuspecting contributors, often after natural disasters and other tragic events. To help clients avoid falling victim to fake charities, the IRS advises consumers (perhaps following the prompting of their advisor!) to run the name of a supposed charity through the IRS’s Tax Exempt Organization Search Tool to verify that it is eligible to receive tax-deductible charitable contributions (as fake charities will often use a name similar to that of a real charity!).

In addition, wealthy taxpayers can also be tempted by dubious tax schemes that purport to help them minimize their tax bills. Examples of these on this year’s “Dirty Dozen” list include the improper use of CRATs, bogus deductions for art donations, and monetized installment sales, while other schemes targeting the wealthy include syndicated conservation easements and micro-captive insurance companies. In these cases, advisors can play a valuable role in evaluating the supposed tax benefit and assess whether it is pushing the limits of (or outright violating) tax law (and potentially make a referral to a reputable accountant or tax attorney if necessary).

In sum, financial advisors can add value for their clients not only by providing tax planning services, but also by helping them fall victim to tax scams, from those that seek to steal client information and money to those that include dubious tax-avoidance tactics that clients might be tempted to try in order to reduce their tax bill (but could lead to severe penalties from the IRS)!

Whose Tax Is It Anyway?

(Nick Maggiulli | Of Dollars And Data)

Some tax planning strategies take relatively little time and effort on the part of the taxpayer (especially if they are working with a financial advisor who can conduct an analysis of their options!). For instance, a taxpayer could potentially reduce their tax bill significantly over their lifetimes using strategies like asset location, Roth conversions, and capital gains harvesting. On the other hand, other tax minimization strategies can require a much more serious commitment on the part of the taxpayer.

For instance, a recent Bloomberg article highlighted how a number of high-earning individuals organize their lifestyles to ensure that they are only physically present in New York for fewer than 184 days each year in order to avoid being deemed a New York resident subject to the state’s income tax (and for those who live in New York City, the city’s additional income tax). To maximize the time they do spend in New York, some individuals will purposefully enter and exit the state at certain times (e.g., arriving just after midnight or leaving just before midnight to avoid being ‘charged’ with an extra day in the state), which can dictate their travel plans (e.g., being forced to take a flight that departs at a certain time or sitting in their car just across the state border until the stroke of midnight).

While inconvenient, this strategy can be lucrative. For instance, an individual who wants to spend significant time in New York City and who makes $1 million per year could save more than $100,000 in taxes (based on an effective 6.55% tax rate for New York state and a 3.8% effective rate for New York City income tax) by avoiding New York residency (perhaps spending the rest of their time in a state with no income tax). Which leads to the question of where to draw the line between inconvenience and tax savings. For example, someone who plans to split their time between New York and another location anyway (perhaps ‘snowbirds’ who live in Florida in the colder months and New York in the warmer months) might find such a strategy appealing, while someone whose friends, family, and job are all in New York might demand greater tax savings for the inconvenience involved.

Notably, financial advisors can help clients determine whether strategically planning their state of residence is worth the trouble involved, from helping them explore their qualitative goals (i.e., whether it's worth paying more tax in order to enjoy spending most of their time in a certain location) to analyzing the quantitative benefits of moving to a state with lower income tax rates, which might not be as much as it might seem, as certain states offer tax breaks to retirees, the taxation of some types of income [e.g., certain stock options] can depend on state-specific rules, and because the retiree might face higher rates on different types of taxes (e.g., property or sales taxes) in their new state!

How Financial Advisors Can Support Clients Going Through Divorce

(Steve Garmhausen | Barron’s)

While financial advisors will often work with a client couple until their deaths, some marriages do not last that long and end in divorce. Which can be a challenging situation not only for the clients (who are navigating an emotionally charged situation and will likely end up worse-off financially afterwards), but also for the advisor (who will have to navigate a potentially contentious situation between the members of the couple).

When a couple tells their financial advisor that they are divorcing, the advisor might be tempted to jump right into the numbers, perhaps running Monte Carlo scenarios to show how the divorce would impact each partner’s financial future. But some advisors find it more effective to first sit back and listen to their clients’ concerns to better understand the nature of the divorce (e.g., is it relatively amicable or highly contentious) and, more generally, how they are feeling (as some clients might not be emotionally prepared to discuss the financial details of the divorce and its aftermath). Once the client is in a better position to do so, the advisor can offer more detailed analyses of their financial situation, including what a fair division of assets might look like, what the divorce means for their cash flow and prospects for retirement, and creating a post-divorce financial plan. In addition, after the divorce is finalized, the advisor can make sure that any property transfers are made tax free and that account beneficiaries, healthcare proxies, and power of attorney documents are changed, if desired.

Ultimately, the key point is that while divorce is a difficult experience for clients, it can also present unique challenges for financial advisors. And while advisors can lean on many of their general planning skills (e.g., empathetic listening and scenario planning) to support clients going through a divorce, pursuing specialized training (e.g., the Certified Divorce Financial Analyst [CDFA] certification) can provide additional expertise, whether an advisor wants to be prepared for future client divorces or perhaps offer divorce planning as a specialized service!

Gray Divorce Can Derail Retirement. Here's How Advisors Can Help.

(Nathan Place | Financial Planning)

Divorce can be a financially perilous situation at any age, but particularly so for those nearing retirement age or in retirement, as they have fewer years to implement adjustments and boost their savings. According to one study, the divorce rate amongst Americans over age 50 doubled between 1990 and 2010, and today, the only age group with an increasing divorce rate is adults aged 65 and older. A separate study highlighted the negative financial consequences of these divorces, finding that women who divorce at age 50 or later experienced a 45% decline in their standard of living, while men faced a 21% drop (the decline persisted for men over time, and only reversed for women if they found a new partner).

Given these financial implications, financial advisors can play a valuable role helping clients going through a “gray divorce” navigate the process and its aftermath. Cash flow management is often a key topic for individuals in this situation, as their income might have dropped sharply and they will no longer benefit from sharing certain expenses with their partner. In addition, advisors can help clients evaluate the consequences of dividing assets in a certain way (e.g., the tradeoffs between keeping the marital home versus financial assets). And on a more qualitative level, advisors can provide clients with emotional support as they adjust to their new lives, including wrapping their heads around the possible need to work longer than expected (or perhaps rejoin the workforce for those not currently working).

In the end, because “gray divorces” can lead to particularly challenging financial circumstances, financial advisors can play an important role not only in analyzing a client’s financial situation, but also by helping them adjust to their new lifestyle. Which could ultimately lead the client to have a successful retirement, even if it doesn’t look exactly like the way they originally imagined it would.

Who Gets The Planner When Client Couples Divorce?

(Danielle Andrus | Journal Of Financial Planning)

When a client couple tells their financial advisor that they are divorcing, a lot might be going through the advisor’s mind, from the possible shock that (possibly long-time clients) are deciding to separate to the financial implications for each of them. At the same time, a more basic question for an advisor is how (or whether) to serve the clients as they navigate the divorce process.

To start, an advisor might check with their firm’s compliance department to better understand any firm policies relating to working with divorcing clients. For instance, the firm might decide to flag accounts belonging to the couple and require verbal approval from each partner when one spouse wants to withdraw money. Then, the advisor could talk to each partner to determine how (and whether) they want to continue the advisory relationship. Because while the advisor will have intimate knowledge of the clients’ financial situation, conflicts of interest can emerge if the advisor is working with each partner separately during the divorce process. If each client is willing to accept this conflict, the advisor could help with high-level planning issues during the process (and the firm might continue to serve the clients as separate households after the divorce is finalized).

In sum, while advisors might encounter conflicts between married partners during client meetings (which present a chance for the advisor to de-escalate the situation and offer practices to reduce the number of future disagreements), a divorce can be a trickier situation to navigate. But by staying within established firm policy and ensuring that both partners are treated fairly, an advisor can address the ethical challenges that come with a client divorce.

'Is This It?’ Getting Off The Professional Hedonic Treadmill

(Rachel Feintzeig | The Wall Street Journal)

While each person has different professional goals, these frequently include higher pay, lofty titles, or the elusive ‘corner office’. Nonetheless, many people find that when they reach one of these goals, the happiness they expected to feel is fleeting. Which begs the question of what actually can provide a feeling of professional fulfillment.

One cause of this phenomenon is the idea of a “hedonic treadmill”, where reaching a goal brings short-term happiness, but this joy tends to revert to baseline levels before too long, leading you pursue new goals (and repeating the process when those are reached!). According to researchers, this doesn’t mean that one shouldn’t pursue these goals (e.g., having a higher salary can lead to greater financial security, though professionals might be cautious of spending too much time pursuing it), but rather that it is important to recognize that achieving them might not bring lasting happiness.

Instead, the Harvard Study of Adult Development (a longitudinal study that tracked individuals over their lifetimes) found that lasting happiness is more likely to come from forming deep professional relationships (e.g., with co-workers or clients) and having work that provides a sense of meaning. For instance, participants in the study often said their proudest accomplishment was being a good leader or a helpful mentor rather than receiving an award or earning a particular title. Further, individuals often thrive professionally when they can be their authentic selves in their jobs, rather than trying to fit in with a company culture that clashes with their personality or values.

Ultimately, the key point is that a sense of professional satisfaction often comes from the relationships built and work done along the way rather than reaching a certain career milestone. Which suggests that for financial advisors, a focus on building strong relationships with teammates and clients and building a business (or working as an employee within a firm) that regularly adds value to the lives of others could lead to greater satisfaction than aiming to reach a certain amount of AUM or arriving at a particular salary level?

The Riddle Of Happiness

(Lawrence Yeo | More To That)

The idea that happiness is something to be pursued runs deep in American culture and dates back to its prominent position in the Declaration of Independence. Nevertheless, many people find that once they reach a goal that they believe will make them happy, that the desire to achieve another goal takes over and the feeling of happiness fades away, only to be regained once the new goal is completed.

One potential solution to this problem, suggested by German philosopher Arthur Schopenhauer, is to tighten the distance between desire and satisfaction. For instance, if a goal that will provide satisfaction can only be achieved after 10 years of work, an individual could experience stress as they spend many years striving to reach it. Instead, he suggests that individuals might pursue easily fulfilled desires that can provide satisfaction. For example, those who enjoy compiling ‘to-do’ lists knows the satisfaction that comes from crossing items off of it (guilty!). Nevertheless, while this can provide a brief dopamine hit, if the tasks on the list are trivial, one might look back on the day (or month, or year) and wonder whether any of their work actually had meaning.

Rather than pursuing distant goals (and potentially experiencing stress until they are reached) or easy to achieve tasks (that might lack deep meaning), Yeo argues that the answer might be to not pursue happiness at all. Because if there is a goal to be pursued (whether hitting a certain career milestone or, more broadly, feeling a sense of happiness), a satisfaction ‘endpoint’ will be created that will ultimately be fleeting. Instead, he suggests that the kind of work or leisure pursuits that will lead to the most happiness are, ironically, those that don’t make you question whether you’re happy in the moment or whether it’s providing meaning.

In sum, while it might be difficult to turn off the ‘pursuit of happiness’ switch, taking on opportunities for their own sake rather than as a medium to achieve happiness could ultimately lead to greater wellbeing, as the (often elusive) happiness target doesn’t just shift to the next goal, but rather disappears altogether!

Why Success Doesn't Lead To Satisfaction

(Ron Carucci | Harvard Business Review)

It’s common to set professional goals and/or personal ‘New Year’s Resolutions’ in January each year and then check in at the end of year to see whether they were achieved. However, feelings of satisfaction can differ greatly amongst individuals. For instance, if you achieve 4 out of the 5 goals you set for yourself, was the year a success (“Well done achieving 4 goals!”) or a failure (“But I didn’t achieve all of the goals I set for myself”).

Despite the objective progress made in the previous example (achieving 4 out of 5 goals), many professionals fall into the latter camp, finding anything short of total success a failure. And while such an attitude might inspire an individual to work harder the next year to achieve all of them, this attitude could lead to perpetual disappointment, even if they do hit 100% of them in a given year (“I might have met my goal, but now I need to achieve even loftier goals next year”). Instead, Carucci suggests that those who are tempted to only find satisfaction in maximum success to step back and recalibrate what “enough” means to them. For example, goals that require the approval of others (e.g., getting a promotion or building clout on social media) can be much harder to achieve (which could lead to feelings of failure and dissatisfaction) than goals for which one has more control.

With this in mind, Carucci suggests a few internal “shifts” that could lead to greater satisfaction and happiness, including shifting from comparison (i.e., comparing one’s accomplishments with someone else’s) to compassion (i.e., recognizing the incremental progress one has made), from counting (e.g., reaching a certain AUM milestone) to contribution (e.g., making a qualitative difference in clients’ lives), and from contempt (i.e., blaming oneself or others when a goal isn’t achieved) to connection (i.e., being willing to ask for help and expressing appreciation for the contributions of teammates). Together, these “shifts” not only can help move one’s “enough” gauge to recognize accomplishments that are achieved, but also help build (potentially satisfying) relationships in the process (rather than being focused only on oneself).

Ultimately, the key point is that because “success” is a subjective measure, an individual’s mindset can greatly impact the satisfaction they get from the accomplishments they achieve during the year. Which suggests that happiness is not just about the ‘destination’ of meeting a certain goal, but rather about the incremental gains made along the way (which, for financial advisors, can make a big difference in clients’ lives)!

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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.