Weekend Reading For Financial Planners (August 24-25)

Study Indicates Broad Satisfaction, But Varying Approaches To AdvisorTech Use

(WealthManagement)

While the business of financial advice requires a certain amount of face-to-face (or perhaps Zoom window-to-Zoom window) contact with clients, there is no shortage of advisor technology solutions to increase the efficiency of their business and how the advice they provide is prepared and delivered. That said, because building a tech stack requires an outlay of time (to research various solutions) and money (as the costs of software build as the tech stack gets larger), firms take a variety of approaches to adopting tech, from those who use a broader and deeper tech stack as a differentiator to those who use a smaller, core tech stack of high-impact tools.

According to the 2024 WealthStack Study, which was based on 416 advisory firm respondents, a third of firms put themselves in the former group, describing themselves as "innovators" who invest in tech to differentiate themselves from their competition and to enhance the client experience, while 12% of firms put themselves in the latter group, saying they don't prioritize technology or use it effectively. Notably, the largest group at 57% and dubbed "operators" fell in between, investing in technology largely to improve operations and internal efficiency.

Overall, firms were satisfied with the Return On Investment (ROI) they got from their tech stacks, with 44% saying they were very satisfied (up from 37% last year), 52% indicating they were somewhat satisfied, and 4% reporting that they were not very satisfied (down from 8% last year). In terms of the tech solutions that deliver the best return on investment, the most commonly cited categories were financial planning, CRM, and portfolio management (which tracks closely to the most commonly adopted tech categories identified in Kitces Research on Advisor Technology). Looking forward, Artificial Intelligence (AI) was the most common response (75%) among respondents when asked to identify 3 technology areas that will have the greatest impact on the wealth management industry in the next 5 years, followed by regulatory compliance and cybersecurity (52%) and access to centralized data (25%).

Altogether, these survey results suggest that advisory firms are taking a strategic approach to building their tech stacks, starting from a base of tools that deliver the highest ROI and deciding whether (and how much) to expand from there (and with 'only' 1/3 of advisors in the forward-leaning "innovators" group, most firms don't appear to be trying to differentiate themselves based on their tech stacks). And so, by viewing the decision of what decision to adopt through the lens of their client's needs and wants, advisors can have an easier time deciding which tools can best enhance their work and deliver a strong return on their investments in tech!

Court Strikes Down FTC's Non-Compete Ban, But Legal Fight Might Continue

(Kenneth Corbin | Barron's)

Non-compete agreements (where a company prohibits an employee from working for competitors, at least for a certain period of time) are often used to help companies protect their investment in the employee (e.g., the time and money spent training the employee) as well as preventing the employee from taking the company's best practices to a new job at a competitor. But for employees, non-compete clauses can restrict their ability to move to a job that offers better opportunities or pay (and can also reduce their leverage in salary negotiations with their current employer, which knows the employee has limited options because of the non-compete clause).

Given the potential negative impact of non-compete agreements on employees' job mobility (including their ability to start their own firm) and earnings potential, as well as uneven state-level regulation of non-competes, the Federal Trade Commission (FTC) in April issued a final rulemaking deeming existing non-compete agreements to be no longer enforceable for most employees (even and including already-existing non-compete agreements, which will only remain effective for senior executives who had already signed such agreements). However, the ban came under immediate legal fire, with the U.S. Chamber of Commerce and other business groups filing lawsuits against the measure, arguing that the FTC went beyond its mandate in enacting rules determining what types of business conduct are anticompetitive (the FTC for its part has argued that it has the power to make rules to prevent unfair methods of competition). These suits gained steam last month, as U.S. District Judge Ada Brown issued a preliminary ruling that included a temporary injunction barring the FTC from enforcing the ban against the plaintiffs.

This week, Brown issued her final ruling, permanently blocking the non-compete ban (which was slated to go into effect on September 4), arguing that the FTC's rule was "unreasonably overbroad" and that even if the FTC had the power to adopt the provision, it could have instead targeted specific non-competes rather than issuing a sweeping ban. Nonetheless, an FTC spokesperson said the agency is "seriously considering" a potential appeal (suggesting that the legal battle over the rule might not be finished) and noted that the decision doesn't prevent the FTC from addressing non-competes on a case-by-case basis (further, several states have laws restricting the use of non-compete agreements).

hile the non-compete ban has now been put on ice (pending a potential legal appeal), the ongoing discussion surrounding non-competes could prompt financial advisory firms to (re)consider their use of these agreements (and other restrictive employment agreements, such as non-solicits) to determine whether they are meeting firm goals, and, if desired, refine them to reflect the interests of both the firm and their advisors (which could create a more harmonious relationship between the 2 parties, particularly when an advisor does decide to leave the firm).

U.S. Court Asserts Federal Preemption, Strikes Down Missouri Rules Targeting SEC Advisors' Use Of ESG

(Tracey Longo | Financial Advisor)

In the United States, Registered Investment Advisers (RIAs) are required to register in one of 2 ways: with the Federal government (namely the SEC) or with one (or more) state securities regulatory agencies. While SEC-registered RIAs are governed by the Investment Advisers Act of 1940 (and its associated regulations), state-registered RIAs are subject to the individual rules of the states (which have their own securities laws and regulations) where they are registered. For RIAs that are registered with the SEC (typically when they reach $100M of regulatory assets under management), one benefit is being governed by a single regulator, rather than potentially multiple state regulators (and the varying adviser regulations they enforce).

In 2023, Missouri imposed regulations that required advisers (both SEC- and state-registered) to obtain client consent before providing advice that "incorporates a social or nonfinancial objective" (in part to push back against advisers incorporating Environmental, Social, and Governance (ESG) objectives in client investment recommendations). However, in a ruling this month, a U.S. District Court in Missouri struck down the regulations, finding that they are both unconstitutional under the First and Fourteenth Amendments, and are preempted by the Federal National Securities Markets Improvements Act (NSMIA) and the Employee Retirement Income Security Act (ERISA). Or stated more simply, states are limited in their ability to create new regulations for advisers that prevent or impose new burdens that conflict with what Federal law requires (or not) in the first place.

Notably, there are circumstances where states can try to establish additional protections for citizens of their state – above and beyond the standards that might already exist Federally – but that requires the state regulations to be clear in how they would be layered on top of the Federal framework. By contrast, in this instance, the court noted that Missouri's prospective ESG rules were "unconstitutionally vague", as the term "nonfinancial objective" was inadequately defined and guidance wasn't provided on how to apply the "maximization of financial return" requirement, which from the court's perspective meant there was a risk that Missouri wasn't just adding to Federal protections by trying to contradict them. After all, financial advisors already consider more than just maximization of financial returns under Federal law; in practice, there can already be other reasons that advisers might not solely pursue the greatest returns (e.g., risk management).

More broadly, though, the real concern from Missouri's proposal was that, if allowed to proceed, it would introduce the risk that other states might create their own investment standards as well, which could quickly spiral into a quagmire of compliance challenges for investment advisers who increasingly have a multi-state national clientele. As a result, both SIFMA (which lobbies for large broker-dealers) and the IAA (which lobbies on behalf of investment advisers), which often oppose each other on fiduciary regulatory issues, came together in both opposing Missouri's rules, with the IAA in particular arguing that giving states authority to impose regulations on SEC-registered advisers would have "subjected advisers' fiduciary judgment to divergent and shifting political influences on an endless range of issues".

In sum, the District Court's ruling not only struck down the specific regulations Missouri imposed with respect to investment adviser use of ESG, but also sent a broader message to states considering enacting regulations on SEC-registered advisers going forward that they still cannot conflict when it comes to Federal regulations. Which helps to support why so much of the financial landscape is regulated at the Federal level in the first place, as it helps to provide a more consistent regulatory experience for firms already bound to comply with Federal regulations across all the states their clients live in (avoiding the specter of new regulations by each of the various states where they operate and where their clients live, which would make it extremely difficult to systematize and scale!).

7 Factors To Choose The Best Retirement Location

(Elliott Appel | Kindness Financial Planning)

Many individuals spend their working years living in one place, whether because their employer's office is close by or because they want to maintain continuity for their kids as they advance through their school years. However, retirement provides an opportunity for a fresh start, potentially with cities around the country (or even the world) as options for post-retirement life. With this in mind, taking a structured approach that considers the location factors that are most important to the retiree can help them make the best choice for where to live during their "golden years".

Retirees often find that their social lives change once they leave the workforce (and/or the city where they spent most of their adult years). With this in mind, retirees pondering a move might consider what their social structure will look like in a potential location. For instance, they might decide to move closer to their siblings or kids to spend more time with these family members, or perhaps to an active adult community to have access to a group of potential friends of a similar age. Another common factor for retirees considering a move is climate; the key here is to ensure the weather is a good match year-round (e.g., while some cities are pleasantly warm during the winter, they can be brutally hot during the summer), or, if they have the means, living in 2 locations to match the best weather of each. Also, given that older individuals tend to need more medical care than their younger counterparts, living somewhere with close access to high-quality healthcare options (e.g., both primary care doctors as well as specialists) can reduce the burden of having to travel long distances for care. Finally, other considerations can include airport access (i.e., if a retiree plans to travel often, access to a nearby airport with many direct flights can save time and stress), relative income levels (i.e., a retiree moving to a wealthy city might be tempted to spend more to "keep up with the Joneses"), and taxes (as there can be significant differences in the taxation of retirement income across states).

In the end, while each retiree will prioritize different factors in choosing a location to live in retirement (whether staying in their current home or moving elsewhere), taking the time to consider the full picture of a potential destination (perhaps using a tool like The New York Times' "Where Should You Live" feature) or perhaps 'trying it out' for a month or 2 can improve the odds that an individual will make the right decision for the long run. Which suggests that financial advisors can play an important role not only in helping retired clients understand how much they can afford to spend in retirement (e.g., on a new house), but also in encouraging them to take a structured approach to the 'where to live' decision to ensure the location fulfills their priorities!

8 Considerations For Clients Considering An Overseas Retirement

(Cheryl Winokur Munk | Barron's)

While many retirees take the opportunity to move to a new city within the United States, an increasing number are choosing to live out their retirement abroad, with the number of workers receiving Social Security benefits overseas increasing from about 320,000 in 2009 to 450,000 in 2022, according to the Social Security Administration (further, according to one poll, 34% of respondents expressed interest in settling outside the U.S., triple the percentage from 50 years prior). However, while an international move can provide adventure and a change of pace, doing so also comes with several financial considerations for the retiree (and their financial advisor, if they have one).

One of the key financial changes that can come with living abroad is access to different types of accounts and investments. For instance, some financial providers might require that an individual maintain a U.S. address to continue to serve them. Further, retirees might find that they don't have access to the same investments (e.g., index funds) as they do in the U.S. when working with a foreign financial institution. A second financial factor that can change when living internationally is taxes, as the foreign country might treat certain types of income (e.g., retirement account distributions) differently than does the United States. Also, it can help to consult the 'double taxation' agreement between the United States and the foreign country to understand which country has the primary right to tax under different circumstances. Retirees also will want to consider how they will be covered by health insurance abroad, currency issues (e.g., the U.S. dollar might be strong against the new country's currency today, but will the retiree be able to meet their lifestyle needs if the dollar weakens?), and potential estate planning impacts (e.g., possible taxation of life insurance benefits).

Ultimately, the key point is that while moving abroad can be a fulfilling option for interested retirees, there is significantly more preparation, financial and otherwise, required for such a move compared to changing homes within the United States, offering an opportunity for advisors with the know-how to ensure they are able to do so as seamlessly as possible!

The Most Tax-Friendly States For Retirees: How To Compare State Income Tax Options For Retiring Clients

(Ben Henry-Moreland and Justin Fitzpatrick | Nerd's Eye View)

When a retiree is evaluating their potential options across the U.S., a state's income tax rules can have a significant impact on where they might choose to live. The perception of a state as having high or low taxes could make it more or less attractive for someone choosing where to relocate, and those perceptions are often skewed by the state's 'headline' tax rate (that is, the top tax rate imposed on the highest income tax bracket), meaning that states that don't tax any income at all are often given extra consideration, while those that tax income at the highest rates tend to get crossed off the list fairly early. In reality, however, the top marginal rates don't usually tell the whole story – at least not for retirees. That's because many states (including those typically labeled as "high tax") feature a slew of different tax breaks that can significantly reduce the tax burden for retirees in those states. As a result, the list of states where a typical (or even higher income) retiree would pay very little or even zero tax might be much larger than what might be assumed based on the top marginal rates alone.

State tax breaks for retirees usually come in 4 flavors: no income tax at all; exclusion of Social Security income from taxable income; exclusion of pension or retirement plan withdrawals; and additional exemptions, deductions, or credits for all taxpayers above certain age thresholds. Every state in the U.S., plus the District of Columbia, features at least one of these types of tax breaks benefiting retirees, and many have more than one, meaning that retirees with a combination of Social Security, pension, and even other types of income (like dividends and interest or income from working a job) will almost always pay a lower overall tax rate on their income than those who are still working full-time.

The tricky part, however, is navigating the many nuances and exceptions included in the different tax codes of the 50 states. Many states either have income-based limitations on the tax benefits that higher-income retirees can realize, while others cap the total amount of retirement tax benefits that an individual can use (for example, by setting a maximum amount of combined Social Security and/or pension income that can be deducted from a taxpayer's income). As part of the final decision, therefore, it's often advantageous to do more in-depth tax planning to recognize some of the planning opportunities or pitfalls that could come with retiring to a certain state.

In sum, the key point is that even though it might not be necessary for an advisor to attain a thorough grasp of all 50 states' tax policies, knowing some of the key elements to look for when considering a given state – like whether or not (and how much) Social Security or retirement plan income is taxed; the treatment of interest, dividends, and capital gains; and what other potential deductions or exemptions might be available for taxpayers after a certain age – can create a deeper understanding of the true impact of income tax from living in a certain state. And for some future retirees, it might even expand the potential list of states beyond what they previously considered affordable!

7 Truths About Hybrid Work And Productivity

(Lynda Gratton | MIT Sloan Management Review)

While many companies, including financial advisory firms, moved to a remote work environment in the early months of the COVID pandemic, many have since returned to the office, whether full time or in a 'hybrid' capacity, with employees spending part of the week in the office and part at home. A key question, though, for companies considering whether their current work situation is the optimal option is whether flexible work locations promote or inhibit productivity.

To start, it's important for firm owners to recognize that hybrid work is a continuum, from being completely in-person-optional to mandating the specific days of the week employees must be in the office, which can affect both the type of work that gets done (e.g., using in-office days for group brainstorming) and the flexibility offered to employees. Whichever option an employer chooses, though, communicating the schedule clearly and honesty can help prevent confusion (e.g., a policy where employees technically are allowed to work from home 2 days per week, but are still expected to be in the office every day could create confusion and, potentially, resentment). Further, employers can recognize that any schedule choice they make will come with tradeoffs (e.g., offering complete flexibility on work location could attract employees who prioritize this option while possibly making it more challenging for newer employees to network and receive mentorship). And when it comes to productivity, firm owners and employees might have different narratives. For instance, while a firm owner might be looking at hard output (e.g., number of client meetings), employees might think of their productivity in terms of how they feel when doing their work (e.g., whether they are more likely to collaborate or have more energy in the office or at home).

Altogether, while the growing acceptance of hybrid work has created new options for workplace flexibility for firms and employees alike, the 'right' answer for a given firm is likely to depend on several factors, from the value derived from in-office work (e.g., clients who prefer meeting in person, mentorship and networking opportunities), to the potential ability to cast a wider net for employees when offering location flexibility. Though no matter which schedule is chosen, setting clear and consistent expectations (for time in the office and productivity metrics) can ensure that all parties know what to expect and ultimately make the firm more successful!

17 Team-Building Activities For In-Person, Remote, And Hybrid Teams

(Rebecca Knight | Harvard Business Review)

The phrase "team-building activity" might conjure a range of reactions, from excitement about the opportunity to take time away from day-to-day work and get to know each other better to a proverbial shoulder shrug for 'mandatory fun'. Nevertheless, finding opportunities for productive team building can help create more cohesive work units, whether the firm is operating in person, remotely, or on a hybrid basis.

The first step to creating an effective team-building experience is to take an intentional approach, for instance scheduling activities on a consistent basis (e.g., monthly) to demonstrate commitment and to respect employees' schedules (e.g., so that they can plan ahead for it). In addition, managers can increase the likelihood of success by involving others in planning to access a broader range of views of what the team might enjoy (e.g., perhaps by starting a social committee), choosing an activity that meets the team's needs (e.g., holding an in-person retreat or similar event once or twice a year could help build cohesion for remote teams), and by setting the tone themselves (e.g., by showing enthusiasm for the event rather than treating it as a 'box-checking' exercise.

A manager can then consider the type of team-building exercise they want to choose. For new teams or those with several new members, "get-to-know-you" activities could be particularly helpful. For instance, each team member could share stories about when they've been at their best or the team could take a personality or work-style assessment (e.g., Kolbe or DISC) and then hold a discussion to learn more about how each person likes to operate. For a more fun activity, in-person teams could go out to lunch together on a monthly basis while remote teams might take time to play an online game (e.g., Codenames) together. Other potential ideas include regular lunch-and-learns (where one team member offers their expertise on a given topic [work-related or otherwise]), team volunteer projects, or taking time to attend a conference together.

In sum, while there is no shortage of potential ideas for team-building activities, the success of these efforts (and whether they are worth the time and money they might involve!) can depend on finding the right 'match' for a team's needs and having managers demonstrate authentic enthusiasm for the effort. Which could ultimately lead to better communication, stronger teams, and potentially improved employee retention!

Creating An Effective Collaboration Plan For Hybrid Teams

(Ben Wigert and Sangeeta Agrawal | Gallup)

Hybrid work seemingly offers the best of both worlds: the opportunity to get the most out of in-office work while giving employees the flexibility to work from home for a certain number of days each week (saving time on a commute and potentially providing intra-day flexibility). However, merely instituting a hybrid work policy is not necessarily sufficient; rather, instituting and following a plan for hybrid work and collaboration can both boost productivity and employee satisfaction.

According to a Gallup survey of 2,877 hybrid workers, those whose team has discussed a formal or informal plan for hybrid collaboration were 2.2x as likely to say their organization's hybrid policy has an extremely positive impact on their team's collaboration, 66% more likely to be engaged at work, and 29% less likely to be burned out than the 48% of respondents whose team did not have a collaboration plan. The most commonly identified aspects of a collaboration plan included regularly scheduled team check-in meetings (cited by 67% of hybrid workers whose team has a collaboration plan), guidelines for when to be available during work hours (62%), and guidelines for communicating periods of unavailability (50%). However, guidelines for prioritizing specific activities while on-site (e.g., collaboration, feedback, or team building) were less common (cited by 29% of respondents), suggesting that some companies might not be taking full advantage of hybrid operations (e.g., by prioritizing collaboration when employees are in the office). Teams can also benefit by regularly discussing their hybrid work plan to make sure the current structure is meeting the goals of both team members and their company (and making changes if necessary!).

In the end, while adopting hybrid work policies can provide flexibility for employees while allowing for in-person collaboration, creating and regularly reviewing a plan for operating in this manner can ensure that all team members understand what is expected of them and better take advantage of the time spent working in the office and at home, potentially boosting productivity and employee wellbeing in the process!

Why Clients Might Extend Their Budgets When It Comes To Their Pets

(Lane Gillespie | Bankrate)

Having one or more pets can bring significant joy to an individual or family. At the same time, having a pet can be costly, with many of these costs being irregular (particularly veterinary bills), suggesting that pet care can end up being a major line item on a client's budget.

According to a survey from MetLife, dog and cat owners spent an average of $4,800 on their animals in 2023, with the top spending categories including veterinary visits (an average of $1,242), treats ($645) and food ($633). Notably, these are just averages, and a pet owner could find themselves facing veterinary bills reaching several thousand dollars depending on their animal's condition (and with 83% of pet owners saying that there's no realistic limit to what they'd spend on making sure their pet is happy and healthy, bills could potentially reach even higher). Further, new pet owners might not anticipate the additional homeowners or renters' insurance costs they could face (though with the average dog bite claim costing over $64,000, having such exposures covered could be well worth it).

Ultimately, the key point is that pet expenses can represent a significant budget line for clients, suggesting that advisors not only can consider it alongside other significant expenses in a client cash flow analysis, but also help clients create a plan for covering these costs now and into the future (e.g., by creating a fund for irregular veterinary bills or considering pet insurance to defray some veterinary costs).

Is Pet Insurance Worth The Cost (And Hassle)?

(Elizabeth Kowalski | MarketWatch)

Given the potential for medical bills to reach into the hundreds of thousands of dollars (if not more), nearly all Americans have health insurance to cover this exposure. At the same time, while many Americans face steep veterinary bills for their pets, pet insurance is not nearly as common though it might prove valuable for certain individuals.

At a basic level, pet insurance covers a certain percentage of eligible expenses (with most plans paying 70% to 90% of costs, after any deductible is met). Notably, pet owners can choose from a variety of coverage options, from plans that cover both illnesses and accidents (with the option to add wellness coverage as well) to those that only cover accidents (e.g., emergencies and injuries). While the average cost of pet insurance is $720 per year for dogs and $384 for cats, these premiums will vary based on a variety of factors (in addition to the above), including the pet's age and breed.

One key difference between human health insurance plans and pet insurance plans is that pet plans typically require the owner to pay the full bill up front, submit receipts, and then be reimbursed for covered expenses (which means that owners will still need to have sufficient liquidity to cover veterinary bills that could reach several thousand dollars!). Pet owners will also want to be aware of any waiting periods and exclusions (e.g., for pre-existing conditions) associated with the policies.

In sum, while pet medical costs tend not to reach the same levels of healthcare costs for humans, pet insurance could make sense in certain circumstances to help pet owners defray the cost of their pet(s)' care, suggesting they (perhaps in conjunction with their financial advisor) could benefit from running the numbers to see whether the potential financial benefits of this coverage for their unique situation outweigh the costs (and hassle) of having it!

Incorporating Pets Into Client Estate Plans

(Ashlea Ebeling | The Wall Street Journal)

For parents of minor children, one of the most important reasons to have a well-crafted estate plan is to ensure that appropriate guardians are named (perhaps with assets allocated to cover the children's care) in case the parents die or become incapacitated. And for individuals with pets, including instructions for guardianship and funding for their pets in their estate plans also can provide peace of mind that their beloved animal will be taken care of after they pass away.

One way to ensure care for a pet after their owner passes is through a "pet directive" within the owner's will, which can allow the owner to name an individual (or perhaps multiple, if they have several pets) to take care of their pet after their death and allocate money for their care (notably, unlike human children, pets are considered personal property and don't share the same legal protections). This allows the pet owner to ensure the named individual is willing and able to take on care of their pet and also has the benefit of avoiding court fights over care of the animal (e.g., if both of the decedent's children want to [or don't want to] care for it). Another option is to create a pet trust, which allows for more safeguards than the pet directive (e.g., the trustee is legally bound to oversee the chosen caregiver(s) and distribute funds in the trust based on the decedent's instructions), though these can be costly to set up depending on how they are structured.

Altogether, while there are many reasons for clients to prepare an appropriate estate plan for their needs, including appropriate care for their pets is yet another reason to establish or update one (and highlighting the value of doing so could be a way for advisors to build goodwill with their pet-owner clients!).

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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.