Weekend Reading For Financial Planners (Apr 30-May 1)

IAA Working With Regulators To Clarify RIAs Can Call Themselves "Fiduciaries"

(Tracey Longo | Financial Advisor)

Recently, the SEC issued guidance for Registered Investment Advisers regarding Form CRS and the use of the term “fiduciary”. Form CRS has been required for SEC-registered RIAs under the Regulation Best Interest rules since June 30, 2020. But the recent guidance cautions RIAs against using the terms “fiduciary” or “fiduciary duty” as a way of “embellishing” statements about the RIA’s services – effectively barring RIAs from using their fiduciary status to differentiate themselves from broker-dealers who also hold out as financial advisors.

The SEC’s guidance has received blowback from members of the RIA industry, who point out that by limiting the use of "fiduciary" for RIAs, the guidance makes it seem as though RIAs and broker-dealers are held to the same “best interest” standard at all times (when in reality, Reg BI’s ‘best interest’ obligation applies only when at the time the broker gives the recommendation but not the rest of what the broker-dealer offers in the client relationship, while RIAs' fiduciary duties extend to the entire client relationship). Furthermore, because Form CRS is meant to serve as a tool for consumers to easily compare potential financial advisors to hire, prohibiting RIAs from highlighting the different standard of care to which they are held potentially makes the differences between RIAs and broker-dealers even less clear to consumers – the opposite effect from what Form CRS was intended to achieve.

In the latest instance of industry pushback, executives from the Investment Adviser Association have voiced their concerns about the SEC guidance, and in particular the lack of specific guidance about when RIAs can use the term “fiduciary” on Form CRS. Because, somewhat confusingly, while the SEC’s FAQ does state explicitly that the term can be used, it goes on to state that using it in a phrase like “an investment adviser who is held to the fiduciary standard” would likely be inappropriate…leaving many advisors to wonder, if a straightforward factual statement such as the one above isn’t allowed, what possible ways they even could use the term “fiduciary” on Form CRS?

Ultimately, the debate over using “fiduciary” on Form CRS matters not so much for its impact on how RIAs can communicate their fiduciary obligations to prospective clients (since, after all, RIAs have many other ways in which they can highlight their fiduciary status, like their website and other marketing materials, which may even be more likely to be seen and read by consumers than Form CRS), but because of the way it highlights the inherent conflict between how regulators (and the public) view the advice industry as a whole and how RIAs view and market themselves. If, as the SEC has stated, the regulator views the standards of conduct required of RIAs and broker-dealers as “substantially similar” despite the technical differences, it is not unlikely that much of the public will also find it difficult to grasp the distinction.

So while the RIA industry can continue to lobby for clarification about Form CRS, individual firms in the meantime may have better success in highlighting their services and what they actually do for clients on an ongoing basis in their marketing (since even if they can use the term “fiduciary”, that may not be the differentiator that RIAs want it to be anyway)!

Trade Associations Raise Concerns About SEC's Cybersecurity Proposal

(Mark Schoeff | InvestmentNews)

On February 9, the SEC released a proposed rule that would require SEC-registered RIAs to adopt written policies and procedures addressing risks related to cyberattacks. A 60-day window for public comment followed the release of the proposed rule, and major industry associations such as the Investment Adviser Association and American Securities Association weighed in during the comment period on concerns they have with the regulations as proposed.

In both cases, the organizations spoke out broadly in favor of a cybersecurity rule, but outlined specific areas of the SEC’s proposed rule that present cause for concern. Among the most significant is the proposed requirement that RIAs report cybersecurity incidents to the SEC within 48 hours of confirming that an incident has occurred – a rule that presents a potential obstacle to quickly responding to cybersecurity incidents when they occur (since some firms may not have the resources both to address a cybersecurity issue and prepare a report to submit to the SEC within 48 hours). Additionally, the fast-moving nature of cyberattacks could mean that a firm might not fully grasp the scope or extent of a threat when it is first discovered, meaning that firms may ultimately need to submit multiple revisions of the disclosure form when additional information comes to light, further detracting from firms’ ability to focus on responding to and resolving issues.

While specific guidance from the SEC on how RIAs should address and protect against the risk of cyberattacks is both welcome and long overdue, the response to the proposed regulations highlights how difficult it may be to create a rule that both addresses the risks and is feasible in practice for RIAs of all sizes. Though all firms may be at some risk for cyberattacks, the nature of that risk (and how it can be mitigated and responded to) can be very different depending on whether the firm is a solo practice, a small ensemble firm, or a bigger enterprise with many employees (and more resources to deploy). So the focus now is on figuring out how best to establish a cybersecurity rule that provides guidance for firms large and small, while taking into reasonable consideration the practical limitations of what small- and mid-sized firms can realistically do given their limited resources.

FPA Brings Back Externship Program For Third Year

(Financial Advisor)

One of the most significant issues facing those entering the financial planning profession has been the gap between technical knowledge (as taught in the classroom and virtual curricula en route to the CFP certification) and the practical experience of encountering real-life situations. Some firms do offer internships or residency programs for newer advisors to learn how to put their knowledge to work for clients, but the number of firms with the resources to offer such experiential training is far smaller than the number of new or aspiring financial planners who could benefit from it, leaving many new advisors dependent on finding a job – any job – in the field and hoping that the training and experience will give them the skills to get where they want to go in their career.

The Financial Planning Association created its Virtual Externship program, led by financial advisor Hannah Moore, in 2020 to offer experiential learning to newer advisors on a much greater scale than was previously available (with nearly 500 participants having enrolled in the 2021 session). Offering a combination of (fully virtual) live and pre-recorded sessions, the Externship provides training from experienced advisors on applying financial planning knowledge to client scenarios, as well as opportunities for “externs” to learn how a wide range of firms do financial planning – giving them a range of options to consider in deciding what path to pursue in their career (which in some ways is an improvement on the traditional internship model, where interns might only work with one or two firms without any exposure to how other firms might do things differently).

In addition to experiential training, the Externship also offers “office hours” access to experienced planners, eMoney Advisor certification, and 180 hours of CFP Board Standard Pathway experience hours, giving candidates who have met the education and examination requirements for CFP certification an opportunity to add to their experience requirement. Registration is now open for the 2022 Externship through May 27, and the program runs from June 6-July 29.

The Most Seasoned Advisors Show No Signs Of Slowing Down, Or Retiring

(Jeff Benjamin | InvestmentNews)

For workers in many physically intensive occupations, the decision of when to retire is often dictated by their body’s ability to continue meeting the physical demands of their job. But white-collar jobs like financial planning typically do not come with the same constraints, and advisors can potentially work well beyond ‘normal’ retirement age if they choose so. And at a time when the ‘Great Resignation’ and early retirement are common buzzwords, many advisors have decided to continue working into their 70s and 80s.

An important question for any pre-retiree to consider is what they actually want to do in retirement. Because the transition from the workplace to a life of independence can be a shock for many retirees, many choose to either work part time or find other activities that provide meaning. And given that Kitces Research shows that financial advisors score highly in terms of feelings of accomplishment and overall wellbeing compared to other occupations, it makes sense that many advisors would choose to continue their work into their ‘retirement’ years, either on a full- or part-time basis. These advisors often also cite the relationships they have built with their clients over time (sometimes 40 years or longer!) as a motivator to keep working. And while these advisors typically have created succession plans to ensure business continuity (given that they know they will not be able to work forever), many of them are in no rush to merge with another firm for financial reasons.

The key point is that because retirement is really a period of financial independence, it makes sense that many individuals who enjoy their lifelong occupation will want to continue into their later years. And because financial advising is one of the most fulfilling occupations (and does not require significant physical capacity), many advisors have decided that continuing to work is the best ‘retirement’ choice for them.

Heading Off 'Seller's Remorse' In RIA M&A Deals

(Harris Baltch | Barron’s)

For many advisory firm owners, selling their firm represents the culmination of many years of hard work. And while some of these firm owners stay on with the newly combined firm in a senior staff role, others take the proceeds of the sale into retirement. Either way, while many firm owners find satisfaction from a sale, there are several potential pitfalls that could lead to ‘seller’s remorse’ where the owner regrets selling their firm to the specific acquirer, from a financial outcome that is different than anticipated, to missing their previous position running the firm.

That said, there are several potential ways firm owners can prevent seller’s remorse from occurring. First, they can ensure they do the proper due diligence on prospective buyers, not only to get the best deal possible, but also to ensure it will be a culture fit for the firm’s clients and remaining employees. This could mean interviewing prior owners who sold to a prospective buyer to gauge any unhappiness after they sold their firms. Owners should also be wary of restrictive terms in the sale agreement, particularly irrevocable sales without buyback opportunities (especially if the advisor plans to continue working in the firm and isn’t retiring in full). Sometimes the dollar amount of an offer could make these terms worth it, but they do limit the owner’s options once the sale is agreed to. In addition, firm owners can hire experienced investment bankers and lawyers to help guide them through the sale, especially recognizing that today’s buyers often have the experience of multiple acquisitions while the seller is going through the process for the first time (and thus may be more prone to making unwitting mistakes in the absence of expert guidance).

So while some level of regret is natural after making major life decisions, advisory firm owners can take several steps to help minimize this feeling. While advisors are used to counseling clients to plan for the long run, the same goes for firm owners in preparing their business for a sale well in advance, to not only make their firm attractive to sell (but not too attractive to let go of?), but also to have plenty of time to really vet potential acquirers beyond just the price of their offer.

On Not Retiring

(Ross Levin | Financial Advisor)

As the financial advice business is built on relationships – between advisors and clients, and between advisors themselves – transitions can be difficult. And for firm owners who have built a business over decades, the decision to move away from running the business full-time can be a tricky one. And even when they will remain with the firm as part of an internal succession plan, taking care to meet the needs of their clients is important.

Levin, the founder of Accredited Investors Wealth Management, found this out when he and his partner wrote a letter to clients outlining their succession plan, in which they would remain on the board and still serve clients, but pass the reigns to two new managing partners within the firm. And while Levin thought he was clear with what the plan would mean for clients, he received many different reactions. Some clients congratulated the founders on their retirement (when they had no plans to retire), while others felt as if they were being abandoned (even though they were clear they would continue with client work). Still other clients used the announcement as an excuse to leave the firm (perhaps because they felt uncomfortable doing so while the founders remained in their previous roles). Overall, though, most clients were appreciative that Levin and his partner communicated a clear succession plan and would be sticking around.

Having gone through the internal succession process, Levin suggests several factors contribute to a successful succession plan: a good business (with a broadly diversified client base); good colleagues (who share a common set of values about the business and service to clients and one another); good clients (who are open about their situations and value the firm’s service); and a good sales price (setting a price so that the founder might sacrifice some of their own wealth to give those buying shares an opportunity to generate their own). Together, this makes it more likely that the next generation won’t say “good riddance” to the previous owners and both sides will recognize the value that they bring to the table.

In the end, while an internal succession where the founder(s) remain at the firm might be less fraught than a sale of the firm to an outside party (particularly when the owners leave the business entirely), setting clear expectations for clients and the remaining advisors is important. Because ultimately, many owners are not just in business for their own financial success, but to see the business prosper through future generations of clients and like-minded advisors!

How To Add Value By Reviewing Clients' Tax Returns

(Allan Roth | Advisor Perspectives)

Financial advisors tend to be aware that trying to beat the market through active investment management often doesn’t work out, since the behavior of the markets is beyond any one individual’s control. It is often better to stick to the areas that can be controlled to provide value, and one of those areas is the taxes that clients pay. Reviewing a client’s tax returns can provide many planning opportunities – as well as providing some insights into the client’s behavior and motivations that might not always reveal themselves in meetings or conversations.

Among the first items that may stand out on a tax return is the client’s marginal tax rate, which (among other things) can help the advisor make recommendations such as whether to invest in taxable or municipal bonds, or whether to contribute to a traditional or Roth-style retirement plan. Another observation might involve the tax-efficiency of the client’s investments based on how much taxable income they generate, which could lead to tax-location recommendations that can potentially reduce the annual “tax drag” of income-generating investments.

A deeper look at the tax return, however, could also provide some insights into a client’s behaviors and values that might not have been revealed elsewhere. For example, a client with a large number of investment transactions (as listed on Schedule D and Form 8949) might be more inclined to “churn” through investments (suggesting a need for better investment discipline), and large loss carryforwards might be an indication that a client is more likely to sell during a bear market (though it also could be a more positive indicator of tax planning through tax-loss harvesting, so more conversation might be needed to know for sure).

Elsewhere, a look at a client’s itemized deductions might show whether they are charitably inclined – opening up opportunities to discuss strategies to maximize the impact of the client’s giving, such as donating highly appreciated securities, making Qualified Charitable Distributions, and timing donations in order to offset income that would otherwise be taxed at the highest marginal rates.

Advisors often defer to clients’ CPAs on tax-related matters, but as professionals who potentially have a broader view of the client’s goals, motivations, and all-around financial picture, advisors have a unique perspective that can augment the CPA’s tax advice to fit the client’s specific goals and needs – providing value that (hopefully) will become apparent to the client when they review and file their future tax returns!

Tax Tactic Of The Ultra-Wealthy: Split The Masterpiece In Two

(Heather Perlberg | Financial Advisor)

For individuals with charitable inclinations, donating appreciated assets has long been a popular strategy to maximize the tax impact of giving. The strategy has two potential tax benefits: First, the taxpayer receives a tax deduction for the donation (assuming they itemize deductions). Second, they also avoid the need to pay capital gains tax on the appreciated asset, which they would have otherwise owed had they sold the asset instead of donating it.

Though the strategy is often associated with donating financial assets like stocks and ETFs, it is also applicable to other types of assets that appreciate in value, like artwork. This can be preferable for estate planning purposes (for instance, if the individual would prefer to leave behind assets that – unlike artwork – can be easily divided between their heirs) and due to the fact that artwork is usually subject to the higher 28% “Collectibles” capital gains tax rate (as compared with the “regular” top capital gains rate of 20%), giving the donation even more of an impact.

One downside to donating an asset like art is that the original owner no longer gets to use and enjoy the artwork once it is donated. However, one way of getting around this restriction has become increasingly popular in recent years: donating only a “fractional” portion of the artwork, after which its ownership is split between the art’s original owner and the charitable organization. In these cases, the art’s original owner holds it in proportion to their ownership stake (e.g., an individual who donates a 50% share of a painting will get to hold that painting for six months out of the year). And while only having “custody” over a piece of art for part of a year sounds odd, it makes more sense when that owner splits their time between different homes (as has become increasingly popular since the beginning of the pandemic), meaning that only “owning” the art for part of the year might not result in being able to “use” the art any less than they would have otherwise (while still getting the tax deduction for the fractional donation)!

While this tax planning technique might only be viable for clients in a small number of situations, it is a sign of the increasing importance (and creativity) surrounding tax and estate planning around capital gains assets. As asset values across the board have risen dramatically in recent years – from financial assets to real estate to tangible property – the owners of those assets have continued to reach to find new ways to avoid the tax consequences that appreciation. In some cases such as this, it is possible both to avoid taxes and continue to benefit from the asset.

Why Moving To A State With Low Income Taxes Could Cost You

(Cheryl Winokur Munk | Barron’s)

As remote work has taken off in recent years and allowed individuals more freedom to decide where to live, many people have taken state income taxes into consideration when making the decision to relocate (leading to an influx of emigres into states like Florida and Texas, whose combination of warm weather and lack of a state income tax have made them popular with working-age people and retirees alike).

But a singular focus on state income tax rates could lead some people to overlook other factors that could cause them to regret the move to a low-tax state after the fact. For example, states with low (or no) income taxes often have higher property tax rates to fund the services that would otherwise be paid for by income taxes, meaning many people who relocate for income tax reasons might end out paying the same or even a higher amount of property taxes (which could have a particularly large impact on retirees, who might be more likely to own a home that they need to pay property tax on than to have a large amount of income to be taxed).

Financial advisors can help their clients assess the broader implications of relocating, including not just income or property taxes but other cost-of-living issues like housing and healthcare costs, culture, quality (and cost) of education, and access to the kinds of activities and amenities that the client enjoys. Ultimately, the decision of where to live is a personal one, and the features that individuals think will make them happier beforehand (which are often based on influences like media and social comparison) might not be what actually makes them happiest in the long run. State income tax might be a part of the equation, but for most clients, it will only be a small part of what makes relocating worth it (or not).

Objects In Motion

(Brett and Kate McKay | The Art of Manliness)

According to Isaac Newton’s First Law of Motion, a body at rest tends to stay at rest and a body in motion tends to remain in motion. And so, inertia makes it more difficult to start an object in motion than it is to maintain movement once it has begun. And even outside the world of physics, inertia can play a major role in one’s life, whether it is the relative difficulty of starting a new project or behavioral habit, or the relative ease of moving it along once it is started.

Running provides a good example of this concept. For someone who has never run before, making it through the first mile can be a challenge. So much so that many people quit after running for a short period, and some don’t bother running in the first place. But for those who are able to make it past the first mile, they might find that it is easier to build up to the second mile, and then the third, and eventually running becomes a regular habit.

In the advisory world, this concept can be seen in starting one’s own firm. There are many hurdles to starting an RIA, both practical (everything from naming the company to submitting compliance filings) and emotional (leaving the security of a previous job to start a firm from scratch). The prospect of this work can be daunting and discourage advisors from getting started. But for those who get started with a step-by-step approach, they can build on the momentum of the steps they have taken to move forward to actually opening their new firm. And even if it takes a while to build up a base of clients, advisors who remain ‘in motion’ can end up building momentum and potentially see exponential growth as the firm compounds in later years.

The key point is that going from rest to motion can be challenging, but once a plan has been put into motion, it can become easier to keep it going. So whether you are training for a marathon or starting an advisory firm, the first step is often the most important, as keeping the habit will be easier once it’s (finally) started!

Lifelong Exercise Found To Preserve Stem Cell Counts In Aging Muscles

(Nick Lavars | New Atlas)

It is common knowledge that exercise is part of a healthy lifestyle. But what has been studied less is the impact of a lifetime of exercise on muscle mass and function as we age, particularly for those who are not high-performance athletes. But according to a new study by researchers in Denmark, even light exercise throughout a lifetime can delay the effects of aging on the muscular system.

The study divided participants into three groups: young individuals with a sedentary lifestyle, older individuals with a sedentary lifestyle, and older individuals who had engaged in exercise at a recreational level throughout their lives. The researchers put the participants through physical challenges and then measured their fatigue and muscle stem cells, which are capable of self-renewal and are vital in the body’s response to injury or damaged tissue, and in protecting against nerve decay. And it turned out that not only did the older participants with an active lifestyle show less fatigue and greater quantities of muscle stem cells associated with fast twitch muscle fibers than their more sedentary counterparts, but they also performed better than the younger participants living a sedentary lifestyle!

And so, while the study has limitations (including a study cohort of 46 individuals who were all men), the results suggest that one does not have to be a committed athlete to get lifelong benefits from exercise. So whether it is joining a recreational sports league or having a walk-and-talk on conference calls and phone meetings, there are many options to promote muscle function now and in the future!

Being Present

(Eric Soda | Spilled Coffee)

Living in the 21^st century means being surrounded by many potential distractions, particularly from smartphones. From scrolling through Twitter to responding to text messages and checking work email, there is always something on your cell phone that can keep you occupied. At the same time, these distractions can take you away from other activities, such as focused time with family members or concentrating on an important project for work. At the extreme, these distractions can turn you into a ‘zombie’, who is not aware of what is going on around them and cannot devote all (or even most of) their attention to a given task.

To test whether you might be distracted, you can ask yourself questions such as: what did your family eat and discuss at breakfast, lunch, and dinner; or what do you remember about the conversations with your spouse and kids? If you have a hard time answering these questions, it could be a sign that you might need to do a better job eliminating distractions. One method to do so is to keep your cell phone out of the room when you want to focus. This could be at dinner time with your family, or in your office when you need to concentrate on work; it’s hard to check email or hear a text message come in when the phone is out of sight and earshot (and you might want to take off your smartwatch as well)! In addition, committing to turning off your phone at a certain time before bed can create high-focus time with family members, but also reduce your mental clutter when trying to go to sleep.

Given that our time is limited (particularly when it comes to children), it is important to make the most of the hours we have. So whether it is keeping the cell phone out of reach or creating a professional mindset of accessibility rather than availability (so that you are not expected to respond immediately to work-related issues), making the most of the time we have can lead to more personal and professional fulfillment!

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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.