Weekend Reading For Financial Planners (August 3-4)

Federal Court (Temporarily) Blocks DoL's New Retirement Security Rule

(Emile Hallez | InvestmentNews)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans), has gone through a multi-year process across 3 presidential administrations updating its "fiduciary rule" governing the provision of advice on these plans. The DoL fiduciary standard first formally proposed in 2016 under the Obama administration took a relatively stringent approach (where commission-based conflicts of interest had to be avoided altogether), but encountered numerous delays under the Trump administration and was ultimately vacated by the Fifth Circuit Court of Appeals in 2018 (under the somewhat awkward auspices that brokerage firms and insurance companies themselves maintained that their own brokers and insurance agents are merely salespeople and shouldn't be held to a fiduciary standard because they are not in a position of 'trust and confidence' with their customers), before in December 2020 being resurrected and adopted in a more permissive form (e.g., allowing broker-dealers to receive commission compensation for giving clients advice involving plans governed by ERISA, as long as the broker-dealer otherwise acts in the client's best interest when giving that advice).

After much anticipation, the DoL in late April released the final version of its latest effort to lift standards for retirement-related advice, dubbed the "Retirement Security Rule" (aka the Fiduciary Rule 2.0), which was set to begin taking 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). At the same time (and not unexpectedly, given the product distribution industry's successful challenge to a previous iteration of the fiduciary rule), the Retirement Security Rule quickly came under legal fire, with the Federation of Americans for Consumer Choice (an insurance industry lobbying group) and several other organizations representing the product distribution industry (e.g., the Financial Services Institute and Securities Industry and Financial Markets Association) filing suit to halt implementation of the rule, arguing that it violates the U.S. Congress' intent in passing ERISA and that the DoL overstepped its authority in adopting it.

Last week, 2 separate Federal district courts in Texas ruled in favor of the groups opposing the Retirement Security Rule, with one court ordering a stay on one of the amended Prohibited Transaction Exemptions (PTEs), PTE 84-24 (which applies to commissions on non-security insurance products recommended in IRA rollovers), and the second court issuing a broader stay of the entire rule and the related amended PTEs. In both cases, while the stay will apply until the courts issue final rulings, judges in both cases indicated that the plaintiffs are likely to succeed based on their claims that the rule is unlawful and that they would suffer harm from it. However, some observers suggest that if the courts issue final rulings in favor of the plaintiffs, the DoL might choose to appeal, with the issue perhaps eventually reaching the U.S. Supreme Court.

Ultimately, the key point is that the latest iteration of the DoL’s “Fiduciary Rule” appears to be running into similar legal roadblocks as did its previous efforts to raise standards for financial advice. And while the recent court rulings have put a temporary halt to enforcement of the Retirement Security Rule and related amended PTEs, its final status could play out over several years, leaving advisors in limbo over their potential responsibilities under the regulation (and possibly leaving consumers even more confused as to whether and when the financial professional they are working with is bound to put the consumer’s interests first?).

401(k) Participants More Upbeat About Retirement Savings In 2024, Recognize Value Of Financial Advice: Survey

(Elaine Misonzhnik | WealthManagement)

401(k)s and similar workplace retirement plans often represent the bedrock of Americans’ retirement savings. At the same time, the financial advice available to plan participants can vary widely depending on what the plan sponsor chooses, from written educational materials to one-on-one guidance from a financial advisor. With this in mind, Charles Schwab conducts an annual survey to gauge plan participants’ perceived preparation level for retirement and their openness to different types of financial advice.

According to Schawb’s 2024 401(k) Participant Study, which surveyed 1,000 plan participants, 43% of respondents said they are “very likely” to achieve their retirement savings goals (up from 37% in 2023), while another 45% said they are “somewhat likely” to do so. Notably, younger investors were more confident in their ability to meet their retirement goals (possibly because of their longer time horizon), with 50% of those in Gen Z indicating they are very likely to reach their goals, while 40% of Gen Xers and Boomers said the same (potentially opening the door to working with a financial advisor to help them meet their goals). Altogether, respondents estimated that they would need $1.8M saved for retirement, which they expected to last 23 years (notably, both figures were identical to the 2023 version of the survey).

Overall, 61% of respondents believe their financial situation warrants financial advice, with the most common sources of financial advice being their 401(k) plan itself (cited by 39% of those surveyed), a financial advisor (35%) and family and friends (27%). Notably, respondents are much more likely to trust human advisors over computer-generated advice, with 60% saying they would be very likely to follow human professional recommendations for financial advice (up from 52% last year), while only 19% said the same for computer-generated recommendations (suggesting that Artificial Intelligence [AI]-based advice tools have a steep hill to climb when it comes to competing with human advisors).

Altogether, this study suggests that while a minority of 401(k) plan participants are currently working with a human financial advisor, many appear open to doing so, which could come in the form of workplace financial wellness programs or a relationship with an unaffiliated advisory firm (and advisors can further support plan participants by providing plan sponsors with fiduciary services to make their plans as effective as possible)!

SEC Begins Enforcement Of Transaction Settlement Rules

(Sam Bojarski | Citywire RIA)

Before the widespread adoption of electronic trading, investors often received paper stock certificates or bonds. However, the emergence of electronic trading (where no physical shares are being exchanged) and electronic bank transfers in the modern era means that less time is typically needed to settle trades. Which led the SEC in 2017 to shorten the settlement cycle from 3 days after the trade was made (“T+3”) to 2 days after the trade (“T+2”). In practical terms, this meant that investors engaging in a sale had one fewer day to either deliver the shares (though typically their custodian would already have possession of them) or, when making a purchase, to deliver sufficient cash to the custodian to settle the trade. Doing so also reduces the counterparty risk for brokerage and clearing firms that trades would not settle (e.g., if the buyer is not able to come up with sufficient cash for the purchase or doesn’t actually have the stock shares to sell).

Last year, to further streamline trading and reduce settlement risk (particularly in the wake of the “meme stock” craze of 2021, where market volatility led to certain trades not settling properly), the SEC finalized a rule to shorten the standard settlement cycle for securities transactions (specifically, for equities and ETFs, corporate and municipal bonds, and UITs, REITs, and MLPs) further to 1 business day after the trade (“T+1”), a change that went into effect on May 28, and align securities settlements with the long-standing T+1 settlement time for mutual funds.

Given that the new rule will impact both broker-dealers and RIAs, the SEC in March released a risk alert outlining the requirements for these market participants and explaining how the regulator will review compliance during upcoming examinations. For broker-dealers, the new rules mean, among other things, that they will need to ensure contracts for the purchase or a sale of a security (other than exempted securities) provide for payment of funds and delivery of securities no later than the first business day after the date of the transaction. Further, the rules require RIAs to maintain records of T+1 trade confirmations related to relevant transactions under the new rules. Further, according to a compliance alert from RIA compliance consulting firm ACA Group, the SEC has started to include these requirements in its examinations of RIAs and could ask firms about policies and procedures affected by the conversion to T+1, amendments made to the firm’s policies and procedures to accommodate the T+1 transition, and contracts with the firm’s broker-dealers, among other information.

In the end, most advisors and their clients are unlikely to experience major practical changes as a result of the change from T+2 to T+1 settlement, particularly if client assets are held at a custodian (and are therefore available to settle trades without the need for the delivery of paper stock certificates or cash to settle the trade). At the same time, advisors will want to be aware of the trade confirmation recordkeeping requirements under the rule (though most receive such notifications from their custodial platforms already) as well as the potential for SEC examiners to take a more comprehensive look at their overall trading operations to ensure they comply the new rules!

Small Cap Stocks For The Long Run

(David Blanchett | Advisor Perspectives)

U.S. large cap stocks have been on a tear over the past decade, leaving some investors wondering about the benefits of diversification across different parts of the stock market. For instance, while the small-cap effect (where small cap stocks tend to have higher returns than their larger counterparts, outperforming by 2.3% over historical 5-year periods) has been well-documented (popularized by Eugene Fama and Kenneth French’s work on factor-based investing), small cap returns have trailed that of their large cap counterparts for the last decade.

Nonetheless, Blanchett argues that small caps still have an important role to play in investor portfolios, particularly for those who have a longer investment time horizon. In recent research, Blanchett finds that the potential returns of small caps (whether analyzed using historical data or forward-looking expectations) possibly merit an allocation not just in line with their market capitalization weight (with the market cap of the small-cap Russell 200 index only being 5% of the total market cap of the broad-market Russell 3000 index), but even larger, especially for investors who can weather periods of relative underperformance, such as the past decade (notably, one model suggests fully turning towards small caps for investment horizons exceeding 8 years, though that kind of concentration would likely be hard for many investors to stomach, and would rely on the small cap effect persisting into the future!).

In the end, while many financial advisors preach the benefits of diversification, it can be hard for clients to see certain investments underperforming over extended periods (particularly when one of the top-performing asset classes is also one of the most publicized!). Nonetheless, by assessing the value of different asset classes and areas of the stock market (e.g., small caps and international stocks) for client portfolios, advisors can add significant value by maintaining an asset allocation designed to meet their clients’ goals rather than chasing the latest ‘hot’ investing trend (which is unlikely to persist for the client’s full lifespan)!

Why International Investing Makes Sense For Long-Term Investors

(John Rekenthaler | Morningstar)

Since coming out of the Great Recession-induced bear market, U.S. stocks have dominated their international counterparts. For example, from January 2008 through May 2023, the S&P 500 Index returned 9.2%, outperforming the MSCI EAFE Index return of 2.7% by 6.5 percentage points and the MSCI Emerging Markets Index return of 1.0% by 8.2 percentage points. Which has led some investors to wonder whether international diversification still makes sense.

Rekenthaler argues that the potential benefits of holding international assets in a portfolio extends beyond average returns to their ability to serve as a cushion against severe negative shocks to the U.S. market (particularly when returns are considered on an inflation-adjusted basis). For instance, since 1950, the worst 10-year period for U.S. stocks (adjusted for inflation) saw $1,000 turn into $655, while the worst 10-year period for international stocks saw $1,000 turn into $886. Bonds also show a similar pattern, with $1,000 in U.S. bonds declining to $577 in inflation-adjusted value in their worst 10-year period, compared to $815 for international bonds. Notably, while the worst 10-year performance for international stocks and bonds was much worse than their U.S. counterparts during the first half of the 20th century, this is due in part to the predominance of European stocks at this time (which were directly exposed to the 2 World Wars), whereas a diversified exposure to international stocks today would include a significant allocation to China, Japan, and India, amongst other non-European markets (though a truly global conflict could threaten these shares as well?).

Altogether, while U.S. stocks have offered stronger returns than the broader international market for the past several years, allocations to international stocks (and bonds) could be appropriate for many investors, whether because of the potential for international stocks to have a period of relative outperformance (as they did for much of the 1980s and early 2000s) or because of their potential to help mitigate losses during particularly sharp downturns in U.S. markets (though given that U.S. and international stocks [particularly developed market stocks] have relatively high correlations, diversification into other, less-correlated asset classes could further buffer against major downside risk).

Do Wealthy Clients Need To Own 'Fancy' Investments?

(Meg Bartelt | Flow Financial Planning)

While stocks and bonds often get the most attention when it comes to investing, there are no shortage of potential asset classes to choose from, from more ‘traditional’ avenues such as rental real estate or hedge fund investing to newer trends such as cryptocurrencies and angel investment platforms. Which can lead some financial planning clients to wonder whether they should go beyond ‘vanilla’ publicly traded stock and bond funds and invest in these other areas.

Bartelt cites several potential reasons investors might want to reconsider investing (a significant amount of) funds in these ‘fancy’ investments. To start, it can be harder to gain diversification within these asset classes. For instance, while it’s simple to buy an index fund that owns shares of the broader stock market, an aspiring landlord will likely have to purchase properties one at a time (leading to concentration risk if the local rental market experiences a downturn). In addition, many of these investments are illiquid; while this can sometimes be a feature (i.e., the “liquidity premium” some relatively illiquid investments receive), it also means that it can potentially take a significant amount of time to get out of the investment (and in the meantime, it can be hard to determine its true value). Further, these investments frequently come with steep costs when buying, selling, or even holding (e.g., in the case of hedge funds or other managed funds that have steep management fees). Finally, potential investors can consider whether they will be able to put in the time needed to compete against professional investors and analysts who make a living analyzing and investing in these markets.

Ultimately, the key point is that while the upside potential of ‘fancy’ investments might seem exciting to investors, their risks and costs must be weighed as well. Which suggests that advisors can add value to their clients by putting these factors into perspective and encouraging them to ‘stay the course’ with the original asset allocation they chose (and is expected to help them meet their goals) for the bulk of their portfolio (though some advisors might choose to put in the work to evaluate alternative assets and make it part of their client value proposition?).

The Benefits Of Substack As A Publishing Platform For Advisors

(John Kador | WealthManagement)

Financial advisors for many years have used blogging as a tool to communicate with prospects and clients alike. While advisory firms often publish their blog posts on their websites, the emergence of Substack as a popular publishing platform provides a potential opportunity for advisors to extend the reach of (and potentially monetize) their content.

Substack allows authors to efficiently publish and distribute digital newsletters at no cost and claims more than 20 million monthly active readers, approximately 10% of whom are paying subscribers. Substack’s model gives authors the option to make all of their content freely available, use a hybrid “freemium” model of making some content public and other posts limited to paying subscribers, or make all content require a subscription. And while many of the most popular Substack authors discuss current events, economics, and politics, financial advisors are finding it as a useful way to reach new readers (who might find them through Substack’s search and recommendation features), efficiently distribute their posts, and, through Substack’s data features, analyze what posts or topics resonate the most with readers.

For advisors considering starting a Substack, one of the keys to success is consistency, as the best-read Substacks tend to have a regular publishing cadence (e.g., weekly). In addition, writing in the advisor’s own voice and allowing their passion for financial planning come through can allow readers to get a better understanding of their personality and what it would be like to work with them as a client. On that front, advisors can also include a Call To Action (CTA) on their Substack, perhaps offering readers the opportunity to schedule a one-on-one introductory call. Notably, before starting a Substack (and particularly before monetizing it), checking in with the firm’s chief compliance officer can help set the boundaries of what an advisor might discuss to remain in line with relevant regulations.

Ultimately, the key point is that Substack represents a new medium for advisors to get their message out to a broader range of potential clients (and/or other advisors, if they want to share best practices in financial advising!). And while an advisor might not build up audiences in the hundreds of thousands as do some Substacks, growing a readership of regular readers over time could eventually lead to a stream of prospective clients as the advisor is able to demonstrate their expertise and personality through their writing over time!

The 2 Keys To Effective Email Subject Lines

(Andrew Preshong and Marcus Roth | WealthManagement)

Email is ubiquitous in personal and professional life, and, given the number of emails individuals send in a given week, an author might not take time to evaluate the quality of their subject line (particularly if they know the recipient will open it anyway). Nonetheless, when it comes to marketing emails, composing an effective subject line can mean the difference between the recipient opening and reading the full email and it going straight to their trash bin.

With this in mind, marketing firm Lone Beacon analyzed more than 2,700 email subject lines used by actual advisors to find which ones led to higher open rates. First, the firm found that subject lines with lower character counts tend to perform better than those with more characters. Because recipients might scroll quickly through their inbox, a pithy subject line can get the advisor’s full message across in as little time as possible. In addition, subject lines with a clear value proposition were more likely to be read than emails without one (as they are harder to ignore!). In terms of mistakes advisors made when crafting email subject lines, the firm found that use of jargon or mentioned uncomfortable topics (e.g., estate planning) often led to lower open rates.

Altogether, these findings suggest that short, simple, and positive subject lines are often the most effective for advisors sending marketing messages. So while it can be tempting to squeeze as much information as possible upfront, leaving the full details for the email itself (or perhaps on a website interested recipients visit through a link in the email) could lead to a better open rate (and, hopefully, greater engagement overall!).

The Power Of Podcasting For Financial Advisors

(Charles Paikert | Action! Magazine)

When it comes to content marketing, advisors have a wide range of options, from blogging to social media to videos. In addition, as podcasts have become more popular in recent years, many advisors have turned to this medium to market themselves to prospects and to communicate with current clients.

In fact, according to Kitces Research on Advisor Marketing, podcasts provided the 5th-highest marketing efficiency amongst tactics studied, returning $0.90 in first-year client revenue for every dollar spent producing it (indicating that this method would more than pay off if a client stays with the firm for many years, or even decades). This is likely due to the fact that podcasts can be relatively inexpensive to start (though the costs can increase depending on the amount of professionalization desired and outsourced production providers being used) and can both communicate to listeners an advisor’s expertise as well as their personality (while remaining in compliance with relevant regulations!). It should be noted, though, while they can be a relatively efficient marketing tool, advisor podcasts typically don’t provide immediate returns to advisors in the form of new clients. Rather, inbound inquiries tend to come over time, as an advisor builds their audience as well as trust with listeners over the course of many episodes.

Given that there are thousands of podcasts available (and at least hundreds produced by financial advisors), podcasts that are targeted directly at an advisor’s ideal client persona tend to be more effective than more general podcasts (e.g., while many financial podcasts have discussed the potential benefits of Roth IRAs, fewer will discuss the retirement planning needs for individuals in a particular occupation or life stage).  Also, Kitces Research found that podcasts were particularly effective when supported by other marketing tactics, for example by promoting it on social media or through Search Engine Optimization (SEO), suggesting that podcasts can be best thought of as part of an advisor’s broader marketing plan rather than as an isolated tactic.

In sum, podcasting (which is one of the few marketing tactics that allows advisors to talk directly to consumers!) can be a potentially effective marketing tool for advisors who can put time into creating episodes that resonate with their ideal target clients and who are willing to wait for the tactic to bear fruit in terms of new client relationships!

Striving For Work-Life Harmony Rather Than Balance

(Dan Solin | Advisor Perspectives)

When considering the term “work-life balance”, the first image that comes to mind might be a scale, where an individual puts all of their work responsibilities (e.g., hours in the office and otherwise) on one side and their personal life on the other (e.g., spending time on hobbies and with family), hoping that the (metaphorical) scale ends up in perfect balance. However, many individuals will find that this mental scale is imbalanced, perhaps because they are spending more time than they like on work (leaving less time for personal fulfillment) or, on the other hand, have non-work obligations that are making it harder to achieve their professional ambitions. Over time, constantly attempting to achieve this perfect “work-life balance” could cause both stress and anxiety.

With this in mind, Solin suggests that individuals avoid the “work-life balance” framing and instead strive for “harmony” in their work and personal lives. This latter approach recognizes that there will be times in life when the “work-life scale” is out of balance, perhaps when working on a particularly important project at work or when raising young children (and perhaps taking care of aging parents at the same time!). At these times, individuals can take several steps to support both their own mental health as well as their personal and professional relationships. For instance, communicating to an employer in advance when one expects to have additional personal obligations (or opportunities) can allow both parties to better prepare for this period. Alternatively, talking to one’s spouse about a major work initiative can allow for better joint planning of how to handle family responsibilities during this time. In addition, self-care can be valuable, whether in the form of practicing mindfulness (which can help an individual make the most of the present moment) or seeking professional support (so that anxiety about achieving work-life harmony doesn’t stay bottled up in one’s head and to learn coping strategies during particularly challenging periods).

In sum, while “work-life balance” remains a common buzzword, it does not necessarily represent an achievable goal for many individuals. Instead, giving oneself the grace and flexibility to recognize that one’s personal and professional lives aren’t always going to be in sync could ultimately lead to better outcomes for both in the long run!

7 Ways To Weave Mindfulness Into Your Workday

(Michael Watkins | Harvard Business Review)

Some days, it can seem like time flies by, and it’s hard to remember everything that happened. This can be particularly true during busy work periods (e.g., days with several consecutive meetings or a long list of assignments), which can lead to stress based on the amount that needs to get done, but also frustration if it feels like that time was ‘lost’.

One potential solution is to begin a meditation practice, which has been shown to improve decision-making quality, emotional intelligence, and the ability to handle stress. However, many busy professionals might not feel like they have the time to commit to such a program. With this in mind, Watkins suggests a variety “micro-mindfulness practices” that can take little time but can help reduce stress and increase feelings of being “present” in one’s day. At the simplest level, one can start with taking 3 deep breaths, inhaling deeply, holding the breath for a brief moment, and exhaling slowly (perhaps repeating this process if there is sufficient time!). Other options include engaging in a “sensory check-in” (i.e., taking 30 seconds to assess what one can perceive through the 5 senses), doing a “body scan” (i.e., doing a ‘scan’ of one’s body to identify areas of tension and consciously trying to relax them), taking a “mindful minute” (i.e., 1 minute of focusing solely on one’s breath), engaging in a walking meditation (i.e., focusing on the sensations of movement while walking from one place to another instead of scrolling through one’s phone or mentally preparing for the next meeting), taking a “gratitude pause” (i.e., taking time to think of something to be grateful for), and “mindful eating” (i.e., focusing on the food being consumed rather than trying to multitask during meals).

Of course, one hurdle to engaging in these practices is the friction involved in starting and maintaining them. Nonetheless, several “micro-presence triggers” are available to serve as reminders to engage in them. These could include setting up phone notifications, using transitions (e.g., getting up to get coffee) as opportunities for these practices, or by leveraging technology (e.g., apps like Calm or Insight Timer that offer short guided meditations and breathing exercises).

Ultimately, the key point is that a potential antidote to feelings of perpetual busyness is to find ways to check in with oneself and be more “present” throughout the day. Which doesn’t necessarily require a commitment to a comprehensive meditation practice, but rather can be as simple as a few deep breaths!

Is Work-Life Balance Possible For Advisory Firm Owners?

(Alan Moore | XY Planning Network)

Starting and running a business can seem like an all-encompassing experience for an entrepreneur, who might see their business not only as a source of income, but also as something to personally grow and develop over time (perhaps representing a major part of their eventual legacy as well!). Nonetheless, business owners have other obligations as well, whether to others (e.g., family members) or to themselves (e.g., taking time to sleep and exercise). Which can create a challenge in allocating the limited number of hours they have in a day.

Moore suggests the first step to resolving this conflict is to schedule out one’s personal life, first allocating time for their personal priorities (from sleep to time with family to vacations) and then filling in the schedule with time for the business, perhaps by time blocking (i.e., ‘blocking’ specific times on the calendar to get certain tasks done) to ensure there is sufficient time for what needs to get done (while creating limits, as “Parkinson’s Law” suggests that tasks will take as much time as is allotted for them). In addition, by using time-tracking tools (e.g., RescueTime) to see which tasks take up the most time, a firm owner can decide what responsibilities could be outsourced (perhaps because the advisor can’t do them efficiently or would prefer to focus on tasks that better fit their strengths and expertise). While outsourcing (whether through an outside firm or by making a part- or full-time hire) requires an outlay of (potentially scarce) money, it could potentially pay off by freeing up time for the advisor to work on higher-value tasks or for personal time to recharge.

In the end, while entrepreneurship often seems like an all-encompassing activity, business owners have a variety of ways to spend their working hours more efficiently to maintain time for their other priorities. Which can not only lead to greater productivity at work, but also better health and overall wellbeing!

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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.