Weekend Reading For Financial Planners (March 1–2)

CFP Board Releases Ethics Guidelines For Use Of AI In Financial Planning

(Lilly Riddle | Citywire RIA)

Since ChatGPT burst onto the scene in late 2022, many financial advisors have been curious about the potential use cases for it and other generative Artificial Intelligence (AI) tools. However, given the relatively new nature of this technology (including software incorporating it), some advisors might be concerned whether its use might put client data in danger or lead to other ethical concerns (e.g., when is financial advice so AI-assisted that it's no longer really "your" advice as the financial advisor?).

With this in mind (and to help CFP professionals ensure they are abiding by the organization's Code of Ethics), CFP Board this week released a "Generative AI Ethics Guide" that covers advisors' use of off-the-shelf generative AI platforms (as opposed to custom-built AI platforms) and includes a checklist to help firms ensure they've given comprehensive consideration to their use of these tools.

To start, the guide highlights potential use cases for advisors, including client data gathering (e.g., extracting data from and then summarizing client documents, or providing a meeting notes summary of the data gathering meeting), conducting initial research to assess strategies and investments that are in the client's best interests, improving the clarity and comprehensibility of communications to clients (e.g., by having an AI-powered tool review grammar and tone), creating or refining blog posts and other public-facing (e.g., marketing) content, and generating ideals for building or improving a firm's brand.

Notably, the guide recommends that advisors exercise caution when using generative AI for work that requires a reasonable understanding of assumptions and outcomes (e.g., developing recommendations for clients) if there are limitations in accessing the data and algorithms that generative AI platforms use for the output (given the possibility of inaccuracies or 'hallucinations'), highlighting that advisors are still responsible for the final work products delivered to clients. The CFP Board's AI Guide also raises the importance for firms of having established policies and procedures to guide their employees' use of generative AI tools, and of conducting sufficient due diligence on technology tools they are considering.

Altogether, at a time when the number of potential uses of generative AI software for advisors is expanding, CFP Board's checklist provides CFP professionals (and other advisors) with a structured way to ensure they are using the tools appropriately while making the most of the features they offer. Which could ultimately be a win-win for both advisors (who might gain efficiency in performing tasks like the drafting of meeting notes) and their clients (whose advisors might have more time for in-depth, planning-centric analysis and conversations!).

DoL Retirement Security Rule Remains In Limbo Following Court Ruling

(Tracey Longo | Financial Advisor)

After much anticipation, the Department of Labor (DoL) last year 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 attempted 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). However, the rule quickly came under legal fire (not unexpectedly, given the product distribution industry's successful challenge to a previous iteration of the fiduciary rule), and two Federal courts subsequently blocked its enforcement.

While the DoL under the Biden administration proposed the Retirement Security Rule (and was therefore likely to defend it in court), the Trump administration this week was granted a 60-day pause to consider how (and whether) it wants to appeal the court rulings, with its ultimate decision signaling whether it plans to defend the rule. Notably, while the Retirement Security Rule didn't come up during the confirmation hearing for labor secretary nominee Lori Chavez-DeRemer, President Trump's nominee to be the assistant secretary for labor for the Employee Benefits Security Administration (which enforces the fiduciary and other provisions under ERISA), Daniel Aronowitz, has previously characterized the Retirement Security Rule as "classic regulatory overreach". Further, if the actions of the first Trump administration (during which the Obama-era fiduciary rule was ultimately vacated by the Fifth Circuit of Appeals before being resurrected and adopted in a more permissive form) are a guide, it appears possible that the administration could decline to defend the current version of the rule and perhaps put forward a different approach.

Ultimately, the key point is that the latest iteration of the DoL's "Fiduciary Rule" appears to be running into similar legal (and potentially political) roadblocks as did its previous efforts to raise standards for financial advice. Which will leave advisors in limbo over their potential responsibilities under the regulation (and could make 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?).

Corporate Transparency Act Is Back In Effect (For Now)  

(Samuel Toth and Peter Van Euwen | Wealth Management)

In 2021, Congress passed the Corporate Transparency Act (CTA) which, for the first time, required small business entities such as LLCs and corporations to report identifying information on their "beneficial owners" (i.e., those who own at least 25% of, or who otherwise exercise substantial control over the business). The law's provisions became effective on January 1, 2024, and so under the law many small businesses – including a good number of RIA firms – would be required to submit a Beneficial Ownership Information (BOI) report to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) before the January 1, 2025 deadline for existing businesses (and even sooner for newer companies formed during 2024). However, the law came under legal fire and its enforcement was delayed beyond the January deadline.

Nonetheless, following a U.S. District Court decision earlier this month, FinCEN has announced that BOI reporting requirements under the CTA are back in effect, with the "vast majority" of reporting companies having a new deadline to file an initial, updated, and/or corrected BOI report of March 21. However, FinCEN subsequently announced that no fines or penalties will be issued, and no enforcement actions will be taken, until a forthcoming interim final rule becomes effective and the new relevant due dates in the interim final rule (which FinCEN intends to issue no later than March 21) have passed. Further, the U.S. House of Representatives passed legislation that would delay the reporting deadline until January 1, 2026 (though its prospects in the Senate are unclear).

Notably, from an advisory firm perspective, SEC-registered RIAs were not required to submit a BOI report (since they're included on a list of entities specifically exempted from the rule) anyway, though many state-registered RIAs are still subject to the BOI reporting requirements – except firms that are dually-registered as insurance producers and/or broker-dealers, which are also included on the list of exemptions. Nonetheless, regardless of whether the CTA applies to a specific firm, given that the beneficial ownership reporting rules have thus far received relatively little publicity in the three-plus years since their enactment, advisors have the opportunity to add value for business owner clients by reminding them about their (possible) reporting obligations!

Helping Retirees Overcome The Hesitance To Spend Down Savings

(Elijah Nicholson-Messmer | Financial Planning)

After contributing towards their savings over the course of a decades-long career, retirees often quickly transition to spending down their accumulated assets to fund their lifestyle needs. However, this shift can be challenging for many clients, who aren't used to taking money out of their portfolios (even if they are employing a sustainable withdrawal strategy) and might not feel comfortable as much as they might otherwise want to.

According to a research paper by retirement researchers David Blanchett and Michael Finke (which analyzes longitudinal survey data from the Health and Retirement Study), retirees are much more likely to spend money generated from 'guaranteed' income streams (e.g., Social Security or annuity payments) than they are from their portfolio. For instance, they find that a 65-year-old married couple has an average withdrawal rate from their savings (including both qualified retirement accounts and non-qualified taxable accounts) of 2.1% (1.9% for single households), significantly less than the "4% rule" and more flexible withdrawal strategies (e.g., a "guardrails" approach), as well as the income that could be generated from an annuity (the authors created a model that found retirees' consumption could increase by approximately 80% if assets were converted to lifetime income streams). In addition, the authors note that retirees are more likely to spend money generated from Required Minimum Distributions (RMDs) than they are other portfolio assets (even though the RMDs aren't required to be spent and could instead be reinvested in a taxable account), suggesting that being 'forced' to distribute assets from retirement accounts can encourage them to spend more.

Notably, financial advisors are well-positioned to support clients who might want to spend more but are hesitant to take assets from their portfolio (while keeping the client's legacy goals in mind). For instance, advisors could generate regular 'retirement paychecks' that are automatically deposited into the client's bank account (simulating the checks they received during their working years, avoiding the 'pain' or requesting large lump sum portfolio withdrawals, and allowing the advisor to generate the cash in an efficient, sustainable manner). Another option is to boost the client's sources of 'guaranteed' income, perhaps by delaying Social Security benefits (and receiving a larger monthly check for the remainder of their lives) or perhaps by purchasing an income annuity.

Ultimately, the key point is that many retirees might be reluctant to tap into their savings to fund their lifestyles, which could lead them to have less enjoyable retirements (and potentially significant leftover assets at their deaths). Which offers opportunities for financial advisors to give them the confidence to spend more, whether through flexible retirement income strategies, generating 'paychecks', and/or boosting sources of 'guaranteed' income that they might be more likely to spend!

How Stress Testing Retirement Plans Builds Client Confidence

(Justin Fitzpatrick | Advisor Perspectives)

For many clients entering and in retirement, one of their greatest fears is outliving their assets and not having the income necessary to support their desired lifestyle. And with a wide range of potential threats to their retirement security that could be considered (from market downturns to inflation spikes), some might decide to 'play it safe' and take relatively modest withdrawals from their portfolios in an effort to ensure their assets aren't depleted over the course of their lifetimes.

Notably, this scenario provides advisors (who can come to the table with data and the ability to conduct simulations) with an opportunity to put actual numbers to a client's fears through stress tests. For instance, Monte Carlo analysis can show the probability that a client's current course will succeed or fail. However, this can be improved upon by showing clients the magnitude of success/failure (e.g., a client is likely to view 'failure' differently if it occurs at age 70 versus age 100), which could make some clients more comfortable with accepting a lower probability of success (and higher portfolio withdrawals in the process). In addition, advisors can reduce the risk of depleting a client's portfolio by recommending spending adjustments for their clients over time (as opposed to using a fixed withdrawal rate), further decreasing the chances of a 'failed' plan (and offer the opportunity for upside adjustments if investment returns are strong!). Further, advisors can use economic context (e.g., current market valuations, long-term inflation trends) to get a better idea of how sustainable portfolio withdrawals might change going forward (as well as return sequences during previous downturns to show how a portfolio would have performed both during a crisis and the subsequent recovery).

In sum, a financial advisor's ability to provide ongoing planning support to their clients (whether through stress testing their portfolio and/or making adjustments to their income plan) not only can increase clients' confidence that they are on a sustainable retirement path, but also potentially encourage hesitant clients to spend more than they would have taking either a fixed or more ad hoc approach to portfolio withdrawals.

The Extraordinary Upside Potential Of Sequence Of Return Risk In Retirement

(Nerd's Eye View)

One of the key challenges of determining 'reasonable' spending in retirement is that, even if a financial advisor is right about the anticipated long-term returns of the retirement portfolio, there's a risk that ongoing withdrawals on top of a series of early bad returns will cause the portfolio to be fully depleted before the good returns finally arrive to average out in the long run. As a result, retirees must generally spend less than what expected returns alone would otherwise predict is affordable, to defend against this "sequence of return risk".

Yet the caveat is that while a bad sequence of returns coupled with ongoing withdrawals can catastrophically deplete a portfolio too quickly, a good sequence of returns can quickly compound the portfolio so far ahead that substantial excess wealth accrues instead. In fact, because of how long-term returns compound to the upside, favorable sequences of returns actually produce far more excess wealth than unfavorable sequences risk to the downside. For instance, taking a 4% initial withdrawal rate has an equal (10%) likelihood of leaving all the retiree's principal left over at the end of retirement or leaving 6X the starting account balance remaining instead!

Which means not only is it important to give at least some consideration to the potential upside "risk" of getting a favorable sequence of returns, but the asymmetric nature of sequence risk to the upside suggests that simply spending conservatively and adjusting later if a "good" surprise occurs may be too likely to leave dramatic levels of unspent wealth that could have been enjoyed earlier. After all, at a 4% initial withdrawal rate, the odds of nearly depleting the portfolio are equal to the odds of growing it by more than 800%, and even at a 5% withdrawal rate, the odds of depleting the portfolio early are equal to the odds of tripling the retiree's starting principal on top of taking an initial withdrawal rate of 5% with 30 years of annual inflation adjustments.

With this in mind, dynamic spending approaches can allow clients to tap into the upside potential of sequence risk while still defending against a poor sequence of returns, whether through a ratcheting plan (to lift a low initial spending rate higher if the sequence is favorable or at least, is not unfavorable), or, for those who are willing to be more flexible in their retirement spending, a guardrails approach to know both when to cut spending in a bad sequence, and when to lift it higher in a more favorable one.

Ultimately, the key point is that sequence of return risk truly cuts both ways, creating both the risk of depleting a portfolio too early with a bad sequence (even if returns do average out in the long run), but also the risk of the retiree waiting too long to fully spend and failing to enjoy the assets and income that turned out to be available because a favorable sequence of returns occurred instead!

The Power Of The Right Question

(Derek Hagen | Meaningful Money)

An important skill in navigating the financial planning process is an advisor's ability to uncover a client's financial concerns and goals. However, because some clients might not have fully formed answers to these topics, asking thoughtful questions can help advisors better understand their clients' needs (and give the client the opportunity to explore areas of their financial and personal lives they might not have previously considered).

Given the exploratory nature of these conversations, many advisors might first turn to "open-ended" questions (i.e., those that can't be answered with a simple 'yes' or 'no') to promote a broader discussion and to gain greater context into how the client thinks. For instance, asking a client "What does your ideal financial future look like?" could lead them to open up about their financial hopes for the near- and long-term and invite further questions that can eventually narrow down to more specific planning goals. On the latter point, "closed-ended" questions (i.e., those that can be answered with a "yes" or "no" or, in a financial planning context, with a single number) can play an important role as well to steer a conversation from high-level ideating towards actionable details (e.g., "At what age would you like to retire?").

In sum, while closed-ended questions often get a bad rap for being conversation-enders, many of the most productive financial planning includes a combination of open- and closed-ended questions that allow a client to explore the big picture of their financial situation, narrow down the myriad planning opportunities available to them and their advisor, and become more engaged with the planning process!

Reframing Client Questions To Expand The Range Of Planning Possibilities

(Lisa Whitley | Money By Lisa)

Many prospective and current clients will approach an advisor with a financial question or pain point that is on their mind, from considering when they might be able to retire to whether they can afford to purchase a new home. Though often, these questions are based on underlying assumptions or premises that might not reflect reality and could unintentionally limit the opportunities available to the client.

For instance, a client might ask how much they should save for their child's college education given that they don't know how much the college they eventually choose will cost. While an advisor could approach this (narrow) question by researching average tuition at a variety of schools and mapping out a savings plan to reach it, an initial approach could be to zoom out and consider the client's full financial picture, including how they want to prioritize different financial goals (e.g., do they want to ensure they are on track to retire by a certain age before committing more money to education savings?). Similarly, a client nearing retirement might ask their advisor whether they should work for a few more years or retire immediately. Rather than taking a purely dollars-and-cents approach to this question, an advisor might instead first consider the client's underlying goal (e.g., they might want to retire so they can move near their children) and then move on to the financial implications (e.g., how it will affect their retirement income), which can make the exact tradeoffs more clear for the client.

In the end, while a financial advisor might be tempted to provide a direct answer to a client's question, helping the client get to the root of the issue at hand and putting it into context of their broader financial situation can uncover options they might not have considered and, ultimately, help them make decisions that better match their underlying financial and lifestyle goals!

Building Stronger Client Relationships Using Motivational Interviewing Techniques

(Christina Lynn | Journal Of Financial Planning)

While sufficient technical acumen is a requirement to be an effective financial advisor, because clients are human (and not financial robots), having "emotional intelligence" can be a valuable supporting skill to ensure the client feels heard and understood (an advantage for human advisors over digital competitors). To do so, advisors can consider leveraging "motivational interviewing" techniques (which focus on empathy, reflective listening, and collaboration) with a structured approach to assess their effectiveness in doing so (and to train aspiring advisors before they take on client relationships of their own).

To support advisors in this endeavor, Lynn created a "Financial Planning Emotional Intelligence Scorecard" that includes 10 categories based on motivational interviewing techniques. These include the use of open-ended questions (to give clients broad latitude in responding), affirmations (statements that acknowledge the client's strengths or values), reflections (statements intended to mirror the meaning of what a client has said), and summaries (organizing the client's thoughts and offering them back as a string of reflections). Other categories include prioritizing the client's talking time (ensuring the client, rather than the advisor does most of the talking), employing pauses (to let the client process their thoughts), giving the client input into the agenda, and reading non-verbal cues (such as a client's body language, facial expressions, and tone). Notably, there are also categories of actions for advisors to avoid, including the use of financial jargon and the tendency to employ the 'fix-it reflex' (e.g., quickly identifying solutions to clients' 'mistakes', which can come across as impatient or pressuring).

By employing the scorecard (whether by having a colleague observe an actual client meeting or during a mock meeting with a newer advisor), advisors can get a better understanding of how well they are listening to their clients (which can be hard to gauge in the moment) and potentially identify areas that could help them make clients feel more understood and, perhaps, more likely to want to continue working with the advisor for the long run!

Why Asking For Advice Is More Effective Than Asking For Feedback

(Jaewon Yoon, Hayley Blunden, Ariella Kristal, and Ashley Whillans | Harvard Business Review)

Asking for feedback is a common practice in the workplace, whether it's an associate advisor running a draft financial plan by a senior advisor, or a more experienced colleague commenting on how a newer advisor handled a question during a client meeting. However, some experimental research suggests that asking for "feedback" might not be the best approach to getting actionable insights to improve future performance.

In one experiment, the authors asked 200 individuals to offer input on a job application, finding that those who were asked to provide "advice" suggested 34% more areas of improvement and 56% more ways to improve than those that were told to provide "feedback". Additional experiments showed a similar phenomenon – those asked to provide "feedback" tended to give more positive, generic responses, while those asked to provide "advice" were much more specific in identifying areas for improvement. The authors posit the reason for this is that "feedback" is associated with (backward-looking) evaluation, while "advice" tends to be more forward-looking. Which suggests those looking for constructive suggestions for changes to their work might frame the request as "advice" (though relatively experienced employees might still seek [motivating, positive] feedback as well).

Ultimately, the key point is that the way a request for feedback is phrased can affect the type and quality of the response they receive. Which suggests that employees (and their managers) might first consider whether they are seeking more evaluative feedback or forward-looking advice when making a request for input!

The Six (And A Half) Components Of A Good Apology

(Allie Volpe | Vox)

Everyone messes up at one point or another, whether it's a mistake in the workplace or an (unintentional) hurtful comment made to a loved one. These situations typically call for an apology on the part of the wrongdoer, though doing so can sometimes feel awkward (in part because they might not know what to say).

With this in mind, Marjorie Ingall and Susan McCarthy in their book Sorry, Sorry, Sorry: The Case For Good Apologies suggest several components that make an apology a meaningful one. To start, it's important to explicitly apologize (e.g., saying "I apologize" or "I'm sorry") to take accountability for what happened (rather than more indirect phrases like "I regret" and, especially, non-apologies that start with phrases like "Sorry if you were offended by…"). It can also help to be clear about the infraction that the apology is related to and to show understanding for why the action was wrong (without making excuses!). Apologies can also include an explanation of what the apologizer is doing to make sure it doesn't happen again (and perhaps an offer to fix what's broken). Finally, the 'half' step is for the apologizer to listen to the recipient to better understand their experience (potentially providing additional insight into how to avoid a similar situation in the future).

In sum, approaching an apology head-on by taking accountability for a mistake that was made is often the best way to ensure it is well-received. Which could ultimately lead to better relationships, whether in the workplace or among friends and family!

A Compliment That Really Means Something

(Arthur Brooks | The Atlantic)

Compliments not only can make the recipient feel good, they can also lead to better work performance and personal relationships. For instance, a group of researchers found that the highest-performing corporate teams gave 5.6 compliments for each piece of criticism of their peers, with separate research finding that the "magic ratio" of positive to negative interactions for couples is 5 to 1.

The first step to giving a good compliment is to be honest, ensuring that it is both credible (i.e., the giver is in a position to make the judgment that serves as the basis for the compliment) and sincere (e.g., not comparing an individual's performance to a negative standard). In addition, giving a compliment without expecting anything in return (whether a favor or a compliment back) can make it more meaningful to the recipient (who might otherwise be suspicious of a 'quid pro quo' scenario). Also, the best compliments don't come with qualifications (e.g., "this work was great…for a junior planner") and avoid comparisons with others. Finally, given that many compliments are either about an individual's appearance or performance, giving a more unique compliment can make it more likely to stick (particularly if it concerns the recipient's character, for example relating to an act of charity, kindness, or compassion).

Altogether, when it comes to compliments, both the quantity and quality of the statement can make a difference. Which suggests that taking time to ensure a compliment is credible, sincere, and unqualified and increase the likelihood it will have its intended positive effect on the recipient, whether it's a coworker, spouse, or friend!