Weekend Reading For Financial Planners (Apr 2-3)

House Approves SECURE 2.0 With Strong Bipartisan Vote

(Mark Schoeff | Investment News)

The Securing a Strong Retirement Act, better known as “SECURE 2.0”, has been in the works since October 2020, when it was first introduced by the House Ways and Means Committee. The bill passed that committee in May 2021, but saw little progress for the remainder of the year as lawmakers focused on other priorities like the bipartisan infrastructure bill (which ultimately passed) and the Build Back Better Act (which ultimately failed). But despite being kept on the back burner, the legislation was kept alive thanks to bipartisan support for reducing taxes on retirees and building on the popular provisions of the original 2019 SECURE Act.

On March 29, SECURE 2.0 saw its first significant action in nearly a year, passing the House of Representatives on an overwhelming 414-5 vote. Among the bill’s many provisions are an increase in the RMD age from 72 to 75 (phased in over a decade), higher catch-up contribution limits (up to $10,000) for IRAs and 401(k)s, and a requirement for (some) employers to auto-enroll employees in 401(k) plans. Additionally, it would expand the tax credit for small businesses to offset pension plan setup costs, allow for more employers to join “Multiple Employer Plans” (MEPs) to distribute the administrative costs of sponsoring a retirement plan, and allow employers to make “matching” contributions to retirement plans for employees who are paying off student loans (even if those employees do not contribute to the plan themselves).

While it is as yet unknown when the Senate will take up the bill (and what changes might need to occur to allow it to pass there), the overwhelming bipartisan support of SECURE 2.0 in the House indicates that it may see an easier road to passage than the Democrat-led signature bills of 2021. For now, the question seems to be whether the Senate will opt to pass it prior to this fall’s midterm elections, or to wait until the post-election lame-duck session – in the meantime, advisors have time to review the bill in its current form and prepare for the strategies they will recommend once it passes (which could, as with the original SECURE Act, occur late in the year with little time to take action before the bill’s provisions took effect).

In Win For Robinhood Judge Declares Massachusetts State Fiduciary Rule Invalid

(Nate Raymond | Reuters)

In early 2020, Massachusetts adopted a new regulation holding all broker-dealers to a fiduciary standard when making investment recommendations. While the rule is similar in effect to the SEC’s Regulation Best Interest rule (which requires broker-dealers to put their clients’ interests first when giving investment advice), Massachusetts and its Secretary of State William Galvin proved to be more aggressive than the SEC in pursuing broker-dealers with a full-fledged fiduciary obligation when providing advice in their capacity as a broker.

In a high-profile example of its prospective enforcement of that broker-dealer-based fiduciary standard, the state brought an enforcement action in December 2020 against the brokerage firm Robinhood, whose “gamifying” tactics with its online brokerage app encouraged users to trade frequently – a practice which the state argued crossed the line into advice-giving, which meant that Robinhood would have been in violation of its requirement to adopt policies and procedures to ensure its recommended trades were in its customers’ best interests.

But Massachusetts’s aggressive approach toward enforcing its fiduciary rule may have just backfired. Robinhood sued Galvin and the state to stop the enforcement action, and this week a judge ruled in Robinhood’s favor – and in doing so ruled sections of the state’s fiduciary rule invalid. The decision stated that Massachusetts’s regulations improperly overrode state securities laws by trying to regulate broker-dealers as advice providers, handing the regulator a defeat not only in its case against Robinhood but also in its ability to enforce its fiduciary rule against other broker-dealers.

While the ruling is unfortunate for Massachusetts and its fiduciary rule, it was arguably the result of a flawed strategy by the state in pursuing a broker-dealer that was simply engaged in its business of being a broker-dealer. Because as problematic as Robinhood’s sales tactics may have been, there are already rules against misleading or fraudulent sales practices by broker-dealers which could have been used to compel them to amend their behavior. Instead, Massachusetts made the questionable argument that Robinhood’s sales tactics amounted to “advice”, which led to the lawsuit and the judge’s ruling invalidating the state’s fiduciary regulations on broker-dealers providing advice.

Ultimately, what this means is that Massachusetts may now be unable to use its fiduciary rule to pursue real bad actors, such as broker-dealers who hold out as “financial advisors” and claim to provide financial advice, but then claim to not be giving advice at the time of the sale (giving them cover to sell products without having their advice held to a fiduciary standard despite the “advisor” title). For now, the court has stayed its order pending an appeal by the state, meaning that the rule is still in effect for the time being; however, if the higher courts agree with this ruling, Massachusetts may soon lose a powerful tool for enforcing a fiduciary standard on those who hold out as advisors (as well as setting a problematic precedent for other state regulators who may have wanted to set their own fiduciary rules).

Median RIA Valuation Rose To 9x EBITDA In 2021

(Andrew Foerch | CityWire)

The RIA industry has been awash in Mergers & Acquisition activity in recent years, and the momentum for deals continued in 2021. According to a recent report from Advisor Growth Strategies, both the volume and valuation of new M&A deals set a record last year, and it continued to be a seller’s market with the median firm valued at 9x EBITDA, a 12% increase from the previous year.

But despite 2021’s record numbers, there are potential signs of slowing growth in firm valuations. EBITDA multiples grew by 29% from 2018 to 2019 and 21% from 2019 to 2020, so last year’s 12% increase continued a pattern where valuations have kept growing, but at a slower rate each year. The slowing growth may be a sign that buyers and sellers in the RIA market may soon reach an equilibrium, and that valuations could stabilize in the next year or two after years of steady growth, as the supply of sellers finally catches up with the demand for acquirable firms.

The report cites several reasons why the supply of available firms could increase in the near future. Aside from the current record firm valuations, RIA founders as a group skew older and closer to retirement, meaning every year could come with a bigger wave of owners ready to hand off their firms to their successors. Additionally, issues of “management fatigue” (e.g., the “accidental business owners” with firms that have grown to the extent that the founder must spend all of their time running the business rather than serving clients) as well as the possibility of future tax law changes that could increase capital gains taxes (including on business assets such as RIA firms) could also bring more firms to market.

All the while, however, the supply of RIA buyers remains seemingly insatiable as growing firms seek to acquire talent and pursue greater size and scale, and private equity investors continue to pump money into the market, providing much of the cash for the deals to keep flowing. Ultimately, then, even though RIA valuation growth may slow in the coming years as the supply of sellers catches up to the number of potential buyers, the total volume of M&A activity seems set to continue at its record pace as both buyers and sellers continue to find good reasons to make deals.

SEC's 2022 Exam Priorities Zero In On Fees And Conflicted Compensation

(Mark Schoeff | InvestmentNews)

Each year, the SEC publishes a list of examination priorities, detailing the areas in which the agency plans to focus based on where it believes present potential risks exist to investors and the overall market. The 2022 list was released this week, and it includes a mix of focus areas both highly topical in today’s age (including ESG-related investment services and products, cryptoassets, and RIAs’ use of private funds) and of perennial concern (like information security and operational resiliency in the face of cybersecurity risks).

One focus area that will likely be closely followed is Environmental, Social, and Governance (ESG) investing. The SEC aims to examine the claims that ESG portfolio managers make about their portfolio management practices and approaches to ESG investing, noting the “lack of standardization of ESG investing terminology” that could lead managers to “greenwash” their products (i.e., to put ESG labels on financial products when the products themselves don’t actually have many characteristics that most investors would consider “green” or sustainable).

Another significant area of focus will be on standards of conduct for broker-dealers and RIAs, and how they are satisfying their obligations under the Regulation Best Interest standards which took effect in 2020. In particular, advisors who earn income via revenue sharing arrangements, 12b-1 fees, proprietary investment products, and wrap fee accounts (particularly when no-transaction-fee mutual funds, which tend to have higher expense ratios than other share classes, are recommended in wrap fee accounts where the client would not have paid a transaction fee either way) will be expected to show how they mitigate the potential conflicts of interest with these compensation methods, and how they ensure that recommendations are in their clients’ best interests. The SEC also plans on targeting dually registered broker-dealers and RIAs, both in the areas above, and in areas that pose particular conflicts for hybrid firms, like the recommendation of more expensive products (e.g., the broker-dealers' own proprietary products, or those that make additional ‘shelf-space’ or revenue-sharing payments to the broker-dealer) that would benefit the advisory firm at the expense of the customer.

As the SEC has conducted its initial rounds of examination following the implementation of Reg BI, it is clear that the agency is focused on ensuring that firms with potentially conflicted compensation models have concrete procedures in place to address those conflicts. Even though SEC regulations continue to allow these compensation models to exist, it may become more difficult for firms to continue to use them if they are not able to justify what makes them in their clients’ best interests, as the SEC puts continued pressure on firms to take other considerations into account.

SEC Emphasizes Weighing Costs Of Account Recommendations

(Mark Schoeff | InvestmentNews)

Since the SEC’s Regulation Best Interest rule took effect in 2020, there has been a lot of attention paid to the differences between the standards of care applied to registered investment advisors (who must follow a fiduciary standard in all of their client relationships) and those that apply to broker-dealers (who are now subject to Reg BI and required to act in their clients’ best interests only when making a recommendation). But a simpler way of looking at it is that, under Reg BI, when making a recommendation, RIAs and broker-dealers are held to essentially the same fiduciary standard, since both are required to act in their clients’ best interests once the “advice” threshold is triggered.

Recognizing this point, the SEC has released a staff bulletin outlining some of the standards of conduct that apply both to broker-dealers under Reg BI, and RIAs under the fiduciary rule. And though it contains no new guidance about applying the standards that hasn’t already been published in other formats, it is framed in an FAQ format that can perhaps more clearly address advisors’ questions about their obligations to clients, and reduce the confusion over when advisors are required to act in their clients’ best interests.

The bulletin focuses primarily on recommendations that involve opening or transferring accounts; namely, that both broker-dealers and RIAs must consider (and document) a number of factors – including the client’s financial situation and goals, account fees and investment costs, and the availability of reasonable alternatives – before a recommendation can be considered to be in the client’s best interests. As such, while cost is not the only factor advisors are required to consider (indeed, the SEC expressly states that advisors are not required to recommend the lowest-cost option), advisors must disclose and document the other factors that led them to the recommendation and justify the decision to recommend a higher-cost product when doing so.

In reality, of course, Reg BI and the RIA fiduciary rule are not the same thing in all cases: While RIAs are held to a fiduciary standard through all aspects of the client relationship, broker-dealers and dual-registered advisors are not held to a best-interests standard when acting primarily as a broker – and the “Solely Incidental” exemption even allows broker-dealers who do give advice (as long as it is “solely incidental” to providing brokerage services) to avoid the best-interest standard. Furthermore, some conflicted compensation models – such as commissions and sales bonuses – are still allowed to exist, though it may be more difficult to justify the use of such models as being in the client’s best interest when other alternatives are available. As the SEC bulletin notes, however, the best way to ensure compliance with the standards of care for both broker-dealers and RIAs is to avoid conflicted compensation models altogether (which, given the often-complex nature of such incentive models, can make the analysis and recommendations for client accounts much simpler than when needing to factor in the advisor’s conflicted compensation model!).

The SEC's Private Market Takeover

(Editorial Board | Wall Street Journal)

Private markets have grown immensely in size and influence since the beginning of the 21^st century. Lifted by an infusion of investments from venture capital, private equity, and hedge funds, private companies now make up a sizeable portion of our economy. When the term “Unicorn” – a private company worth more than $1 billion – was coined less than 10 years ago, there were only 39 such companies in existence, but today they number over 1,000 worldwide.

The unprecedented growth of private markets has raised concern from regulators in recent years, both on account of the size and influence they have attained (and consequently, the potential systemic risks they pose to markets and the economy), and the risks they pose to investors (both individuals and institutions like public pension systems that make up many of private funds’ investors). The worry stems from the fact that, compared with publicly traded companies, private companies have far fewer requirements to report or disclose financial information; likewise, funds that invest in private companies are not required to provide statements or disclosures to new or existing investors that detail fees or performance data like publicly traded mutual funds must do.

In response to those concerns, the SEC has proposed several new rules that would significantly increase its power to regulate private markets. Most notably, private fund advisors would now be required to provide quarterly statements to investors detailing performance, fees, and expenses, to be independently audited each year, and to keep books and records related to the new rules. Additionally, the new rules would bar private fund advisors from certain conflicted transactions (like using portfolio funds for expenses associated with the investigation of the advisor) and from giving preferential treatment to some investors over others.

While anti-regulation conservatives like the Wall Street Journal editorial board argue that the proposed rules are the result of pressure from public unions (which invest in many private equity funds) and a desire by the SEC to impose ESG requirements across all markets, the more likely reality is that, as private markets grow in size and influence, regulators are naturally concerned to see a significant portion of the economy go ‘dark’ into markets with few disclosure requirements. Furthermore, the SEC has long considered its role as protecting the ‘mom-and-pop’ retail investor, and though it may seem like an overreach for it to extend its regulations to private markets (which have traditionally been the realm of ‘sophisticated’ professional investors), the fact that public unions do make up a large portion of private fund investors means that the teachers and other public employees who make up those unions do have a stake in the outcome.

HHS Asks Officials To Consider Lowering This Year's Medicare Premiums

(Amy Goldstein | The Washington Post)

With most individuals over age 65 getting their health insurance coverage through Medicare, any premium increases can impact the finances of millions of Americans (many of whom are on fixed incomes). And when the Centers for Medicare and Medicare Services (CMS) in November of last year increased the monthly Medicare Part B premium to $170.10 from $148.50 (the largest increase in dollar terms, and the fourth-largest hike in percentage terms in the program’s history), it came as a jolt to the budgets of many seniors.

The cost increase was largely associated with the potential costs to the program of the Alzheimer’s drug Aduhelm, which initially came with an annual price of $56,000 per patient. And with many Medicare enrollees potentially eligible to use the drug, the Part B premium increase was adopted to cover potential costs for the program. However, the drug’s manufacturer, Biogen, in December cut the price of Aduhelm to $28,200, and, in addition, CMS is slated to issue a final decision in April on how Medicare will cover the drug (potentially limiting the number of Medicare patients eligible to receive the drug). Together, these developments prompted a call from Health and Human Services Secretary Xavier Becerra for CMS to review the Part B premium hike in light of the potential for reduced costs to the Medicare program.

So while a potential reduction in Medicare Part B premiums is pending, financial advisors and their clients should be aware of the potential for future premium increases, particularly as new, expensive drugs come onto the market. At the same time, the pattern of health care costs for seniors vary in rather predictable and plannable ways (e.g., for those transitioning to Medicare or those with chronic health conditions), so advisors of clients concerned about the 2022 premium increase can help provide perspective by framing the changes in terms of the client’s overall health care costs and financial plan (while hoping that CMS goes through with the premium reduction!).

Meet The Retirees Who Live On Cruise Ships

(Laura Kiniry | Condé Nast Traveler)

When individuals leave their jobs and transition into retired life, one of the major decisions is where to live. Some choose to stay in the house where they spent their working years, while others decide to move to a different city, perhaps to be closer to friends or children. And more adventurous retirees, tempted by adventure and (often) lower costs of living, decide to retire abroad. But a certain select group of retirees choose an even different lifestyle: living much of their year on cruise ships.

Retirees interested in the cruise lifestyle have many options to choose from. At the most expensive end are cruise ships that constantly sail the world, and allow retirees to purchase or lease apartment units on board (apartments on one of these ships cost between $1 million and $8 million, with 12- and 24-month leases starting at $400,000). Retirees can choose to remain on board for extended periods, or intersperse time on the ship with stints back in their home country. Another option is to sign on for an extended sailing of one of the major cruise lines, which can cost more than $25,000 per person. For example, Holland America offers an annual 128-day Grand World Voyage that allows passengers to travel around the world without having to plan extensive flights or hotel stays (and perhaps escape the winter in their permanent home!). And for those who would rather spend shorter periods on the water, other retirees link several shorter cruises together to spend a month or longer on the water, taking advantage of the amenities cruise ships have to offer (from housekeeping service to meals onboard).

Of course, the cruising lifestyle might only appeal to a select number of retirees (or those taking a semi-retirement!), but advisors can support clients who are considering the option by incorporating the range of potential costs (from cruise fares and amenity fees to ensuring proper travel health insurance coverage) into financial planning scenarios in case the client decides to cast off!

Six Strategies For Retirement Income

(Krisna Patel | Advisor Perspectives)

A common reason that prospects approach financial planners is that they want to ensure they will not run out of money in retirement. And with many seniors living into their 90s and beyond, the assets of retirees have to cover a longer period than they would have a few decades ago (making them susceptible to sequence of return risk, though this risk can have extraordinary upside potential as well!). With this in mind, there is a range of options available to financial advisors and their clients to help protect against longevity risk.

A conservative way to ensure that a retiree’s expenses will be covered is asset-liability management, by which an individual invests money today to meet a future liability (their retirement expenses in future years) with a high degree of certainty. Under this method, a retiree could decide how much income they want in the future, and invest an amount of money that will achieve that goal using conservative investments (e.g., Treasury Inflation-protected securities, or TIPS). However, given the conservative investments (and low current yields), this method can require a significant initial outlay of funds, and, because individuals do not know their exact longevity, it would be impossible to know how many years of income would be required.

Another method is to take static inflation-adjusted withdrawals from a portfolio each year. For example, the 4% rule developed by Bill Bengen suggests that, based on historic market returns and certain assumptions, retirees can afford to take out 4% of their portfolio in the first year, and adjust that amount for inflation in subsequent years (and while the 4% rule was developed in the 1990s, it remains an effective strategy today). This method allows for a steady, inflation-adjusted stream of income for the retiree (although its inflexibility could leave a retiree with significant unspent assets at their death if investment returns are strong).

For retirees who are nervous about having to sell investments in a down market, a ‘bucket’ strategy can be useful. With this method, the retiree sets aside a cash-like ‘bucket’ of money to cover their expenses in the short term (perhaps two to three years) and allows the rest of their assets to be invested. In this way, the retiree will not have to sell invested assets to fund their lifestyle (until the short-term ‘bucket’ runs out) or be tempted to move their assets to cash in a downturn. Though at the same time, simple rebalancing has been shown to be a potentially superior strategy (in part by ensuring that liquidations come from asset classes that are up the most in value, similar to what bucket strategies are intended to accomplish).

With a variable retirement income strategy, retirees plan to spend different amounts of income in the various stages of retirement. For example, research from David Blanchett demonstrated a ‘spending smile’, with inflation-adjusted spending among retirees declining throughout most of retirement, only increasing in their final years. Using a variable strategy could allow retirees to spend more in their early years, while saving for potential healthcare costs in their later years. At the same time, some retirees might resist declines in real spending throughout the middle part of their retirement.

With a dynamic strategy, retirees adjust their spending based on the performance of their portfolio and its resulting effect on a Monte Carlo simulation. For example, a retiree targeting an 85% chance of success in a Monte Carlo simulation might increase their income if this figure rises to 95% but decrease income if it falls below 75%. This ‘guardrails’ approach can also be improved by introducing risk-based measures as well. And while retirees will appreciate the opportunity to increase their incomes, they will also have to be prepared for reduced incomes when their probability of success hits the lower guardrail.

Finally, retirees can use an insuring strategy, in which they use their assets to purchase a guaranteed income stream, typically through an immediate fixed annuity. This has the advantage of guaranteeing a certain income for the life of the retiree (or both members of a couple) regardless of market conditions, and unlike the asset-liability management approach, it also covers the uncertainty of longevity (as annuity payments can be ‘for life’). At the same time, purchasing such an annuity is an irrevocable commitment of capital, and includes costs associated with the product.

The key point is that there are a variety of ways advisors can help prevent individuals from running out of money in retirement, and the best method for a given individual is likely to depend on, among other factors, their risk tolerance and spending flexibility.

Survey Indicates Salary, Opportunity For Advancement Top Priorities For Aspiring Advisors

(Sean Allocca | InvestmentNews)

With the average age of a financial advisor over 50 and experienced advisors retiring rapidly, there is a strong need to develop the next generation of advisors. But each generation not only comes with its own experiences, but also its own viewpoints on the financial planning business and expectations for company culture.

To get a sense of the similarities and disparities between current and aspiring advisors, financial technology firm Redtail conducted a survey of more than 4,000 current financial professionals and 224 financial planning students from Brigham Young University-Idaho. And the results show that the biggest blocking point for many financial advisors is simply the financial burden of starting out as a financial advisor, in an industry where the majority of job openings for “financial advisors” require them to get their own clients from scratch and “eat what they kill” from day 1. Accordingly, it is perhaps not surprising that students rated salary, opportunity for advancement, company culture, and quality management as the main factors they were seeking from an employer (with “salary/opportunity for advancement” ranked at the top).

In addition, both professionals and students said mastering interpersonal communication was the most important skillset for advisors, followed by technical knowledge of financial planning content, prospecting/marketing skills, and financial planning technology skills. At the same time, some members of both groups worry about communication challenges with the other, with 31% of professionals experiencing communication challenges with new financial planning professionals, and 44.7% of students surveyed expressing worry about communications challenges with their future employers.

Another area of potential misalignment is in completing the CFP Exam before graduation, with 71.2% of RIA professionals surveyed recommending that students sit for the exam before graduation, but less than 17% of students indicating this was a pre-graduation goal. Perhaps reflecting the difficulty of doing so, students indicated their biggest hurdle for being able to enter the profession will be obtaining licenses and certifications (as again, that’s the barrier they must surpass to be able to begin soliciting clients to meet their financial needs).

Overall, the survey showed broad agreement between current professionals and students on what it takes to be a successful planner, although overcoming communications challenges between the groups will be important both to the success of aspiring planners and the firms they join. This suggests that firms bringing on new advisors should be deliberate about their training programs, and perhaps offer a structured ‘residency’ program to help newer advisors both develop their client communication skills and integrate into the firm’s culture. Though in the end, the biggest blocking point for aspiring financial advisors is simply having a job opportunity that gives them the financial stability (i.e., salary) to be able to live while they learn to be financial planners in the first place?

What My Chef's Training Taught Me About Journalism

(Madison Darbyshire | Financial Times)

Growing up, it can often seem like a career should take a direct path. After graduating high school, an individual might go right into a trade, while others move on to college, where they will major in a subject that will result in a job they will stay in for the remainder of their career. This linear path can seem like the most efficient way to a successful career.

At the same time, there can be significant value in having a range of experiences. For example, Darbyshire is now a financial journalist, but has degrees in both French cuisine and journalism, and during her adult life has worked everywhere from refugee camps to high-rise offices. Each of these experiences has left her with a broader range of skills, more diverse perspectives, and a stronger conviction that she can handle what gets thrown at her. For example, she feels better prepared to meet tight newsroom deadlines thanks to her experience working in hectic restaurant kitchens. The experiences also provided her with insight into the kind of jobs she likes (fast-paced) and those she does not (sitting at a desk).

The key point is that while being a specialist with deep knowledge of a certain subject can be one path to a successful career, developing a range of skills and experiences can not only make an individual more well-rounded in the eyes of employers, but also allow them to discover the type of career (or perhaps the niche) that will be most rewarding to them as well!

The Privilege To Take Risks

(Jack Raines | Young Money)

Some of the greatest rewards in life come from taking professional risks. Whether it's changing careers or starting a new business, some of the best changes in one’s life can come from what seems like a major risk. But sufficient preparation can maximize the upside of taking a risk while cushioning the potential downside.

When taking a risk, it is important to have sufficient time on your side. For example, someone who wants to start a new business might not reach a critical mass of customers or clients to become profitable for many months or years. Because of this, it is important for the entrepreneur to give themselves sufficient time to allow the business to grow. Of course, the individual will still have to pay living expenses while their venture (hopefully) grows to profitability, so it is also important to have a sufficient financial runway prepared. This financial flexibility could mean saving enough to cover one’s personal expenses while the business develops, or perhaps taking on part-time work to provide a boost to income. Further, financial flexibility is not just about income, but expenses as well; an individual with fewer financial obligations will be more likely to survive a period of reduced income while building their career, than someone who does not.

Ultimately, the key point is that taking risks can be incredibly rewarding, and that sufficient preparation can make it more likely that a risk is successful. So whether you are an advisor who wants to get started blogging or are considering starting your own firm, having both time and financial flexibility on your side (by managing your own expenses, and building your own financial runway) are keys to success!

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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, as well as Gavin Spitzner's "Wealth Management Weekly" blog.