Weekend Reading For Financial Planners (April 27-28)

DoL Releases New Fiduciary Rule, Raising Standards For Insurance Agents Offering Retirement "Advice"

(Kenneth Corbin | Barron's)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans) and the rollovers that come out from them, has gone through a multi-year process across 3 presidential administrations in efforts to update its "fiduciary rule" governing the provision of advice on these plans (as well as IRA rollovers in/out of these plans). Amid this backdrop, the DoL released a new proposal in October 2023, dubbed the "Retirement Security Rule: Definition of an Investment Advice Fiduciary" (a.k.a. the Fiduciary Rule 2.0). This Fiduciary 2.0 proposal would again attempt 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). The proposed rule was met with a flurry (approximately 20,000!) of comments from industry participants and interested parties, with trade groups and others representing the product distribution industry opposing the rule (given that companies in this industry segment and their salespeople would face the brunt of the rule's provisions), and those supporting higher standards for advice arguing in favor of it.

After much anticipation, the DoL this week released the final version of the Retirement Security Rule, which is largely similar to the initial proposal and is set to take effect September 23. Among other measures, the rule amends the current 5-part test that determines fiduciary status for retirement accounts by defining as a fiduciary act a one-time recommendation to roll funds from a company retirement plan to an Individual Retirement Account (closing what historically was a loophole that the fiduciary obligation only applied to "ongoing" advice, such that one-time sales transactions avoided its scope). Notably, not all rollover transactions would be subject to the rule, as the DoL under ERISA only has jurisdiction to regulate fiduciaries in the first place – i.e., those who are providing advice in a "relationship of trust and confidence" – but the new rule expands the scope of who may be deemed a fiduciary by looking to whether the person: a) makes professional investment recommendations on a regular basis; is based on their individual needs and circumstances; reflects the individual's professional or expert judgment; and may be relied upon by the retirement investor as intended to advance their best interests.

In other words, the DoL's new fiduciary rule effectively means that those who imply to consumers that they are in the business of providing advice will be held to the fiduciary standard of advice, while those who only provide education or are merely making non-advice sales recommendations will not be deemed to provide advice (and that whether the salesperson holds themselves out as an "advisor" or by similar title will be part of the consideration of whether the consumer would have reasonably viewed their recommendation as advice they should rely upon).

In practice, the new DoL fiduciary rule appears to primarily strengthen advice standards for independent insurance professionals, by applying itself to insurance products that are not securities (e.g., fixed index annuities) when they are recommended to retirees (especially when marketed as being from a 'financial advisor' who is providing retirement 'advice'). In addition, the new fiduciary rule also covers advice that is provided to plan sponsors regarding the menu of investment options to include in a company's retirement plan, which can impact insurance/annuity companies that are recommending their insurance or annuity products into a plan's lineup in the first place.    

However, while the finalized Retirement Security Rule represents a significant shift toward greater fiduciary standards in the financial services industry, its final disposition will likely play out in the courts, which would decide whether the DoL is 'overreaching' or appropriate in its expansion of fiduciary duty (in particular as it pertains to brokers and insurance agents recommending product sales in IRA rollover transactions) and whether the new rule is sufficiently different than the DoL's  2016 fiduciary rule that was ultimately vacated by the courts in 2018. 

Wealth Firms Must Prepare For Demise Of Non-Competes, Despite Legal Challenges To FTC Rule

(Mark Schoeff | InvestmentNews)

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, noncompete 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 noncompete 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) this week issued a final rulemaking existing non-compete agreements 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).

The rule is set to take effect in August, though the U.S. Chamber of Commerce and others have already filed lawsuits against the measure, arguing that the FTC went beyond its mandate in enacting rules determining what types of business conduct are anticompetitive. In response, the FTC said it has the power to make rules to prevent unfair methods of competition. The regulator also noted that trade-secret laws and non-disclosure agreements (or in the case of financial advisory firms, non-solicits) can be used to protect company secrets in the absence of non-compete agreements.

While the ultimate fate of the FTC's rule remains to be seen, within the financial advice industry, a ban on non-competes would give advisors more career mobility to move to another firm that offers a better job fit or higher pay (and perhaps expand the talent pool for firms looking to hire, even if it means that their advisors can more easily leave as well). Notably, the final FTC rule does allow for the use of non-competes in the context of a sale of a business, and with no minimum ownership threshold (whereas the FTC's original proposal only allowed them for those with at least a 25% stake in the company), which would make advisory firm M&A activity much more attractive than it would be if non-competes associated with deals were restricted (as the selling firm owner could simply start a new firm and bring over former clients and staff, greatly reducing the value of the acquisition).

Within the financial advisory industry in particular, a ban on non-competes will lead to (further) reliance on non-solicit agreements (which restrict advisors from soliciting their previous clients when they move to a new firm and were not explicitly covered in the new FTC rule), as advisory firms still will likely want to protect existing client revenue. However, given the murkier nature of non-solicits (i.e., while non-competes are a flat ban on an employee moving to a competitor, with non-solicits it can be unclear whether a departed advisor solicited their former clients or whether the clients found them organically), this shift could result in additional lawsuits within the advisory industry regarding the enforcement of these agreements. And a greater focus on how to best carve up an existing client base into which clients were the "firm's" clients versus the "advisor's" clients in the first place.

Ultimately, the FTC's ban on most non-compete agreements (if it survives legal challenges) would represent a seismic shift in the relationship between employees and their employers. And while some firms might respond to this by expanding the use of non-solicit agreements, another (perhaps less contentious) option is to work together with their advisors to create more equitable non-solicits as a part of their employment agreements, that more clearly set the terms for how the different types of client relationships (e.g., advisor clients who came with them to the firm versus clients that the firm brought in itself and passed to the advisor) will be handled in the event that there is ever a split (from which clients can be solicited or not, what client information can be taken or not, and whether compensatory payments are due back to the firm or not). Which arguably is a better way to protect firm interests while building a more trusting relationship with their advisors, regardless of the ultimate disposition of the FTC's ban on non-competes? 

SEC Examiners Find Firms Making Untrue Statements In Ads

(Patrick Donachie | WealthManagement)

The Securities and Exchange Commission's (SEC's) marketing rule, which went into force in late 2022, presented RIAs with the opportunity to greatly expand their marketing efforts with new options, from client testimonials to promoting the reviews they've received on third-party websites, to provide prospective clients with evidence of the quality of their service. However, alongside these opportunities came compliance responsibilities to ensure, among other things, that the content of testimonials and advertisements did not violate the rule.

With more than a year of enforcement of the marketing rule under its belt, the SEC's Division of Examinations this month released a risk alert outlining its observations of how firms are (and are not) complying with the rule. On the positive end, the regulator found that many firms are acting in accordance with the rule, for example, by maintaining appropriate policies and procedures (and educating their staff on them) and updating their Form ADVs to reflect changes to their advertising (when applicable). However, the SEC also found many deficiencies, including investment advisers falsely claiming that they are "free of all conflicts", "erroneous" personnel qualifications, and referencing investment mandates (e.g., ESG investment mandates) where none were used. The SEC also noted adviser use of misleading statements, including advertisements implying that the advisers were the sole top recipients of certain awards when the awards went to multiple recipients or when the advisers were in fact not the top recipients. The regulator also flagged advertisements that "contained statements that advisers were different from other advisers because they acted in the "best interest of clients", without disclosing that all investment advisers have a fiduciary duty to act in their clients' best interests".

In the end, while the latest risk alert does not create any new obligations for advisors, it can provide advisors leveraging the marketing rule with a better understanding of what SEC examiners will be looking for in upcoming examinations (including specific examples of language that it considers misleading). Because while the marketing rule gives advisory firms the opportunity to market themselves in ways that they have not been able to previously, it comes with the burden of taking the actions necessary to remain in compliance with the rule!

Don't Let Communication Errors With Clients Become Dealbreakers

(Danielle Labotka | Morningstar)

While being an effective financial advisor requires a certain amount of technical acumen to understand a client's financial situation and make appropriate recommendations, strong communication skills can help an advisor better understand their clients' goals and communicate their analyses and recommendations in an accessible manner. However, given their deep technical knowledge of financial planning topics, advisors can potentially suffer from the "curse of knowledge", which suggests that teaching something that one knows very well can sometimes be difficult because, as a 'knower', they don't remember what it is like to be a learner. Which can potentially result in an advisor being confident that they clearly explained a concept to a client, but the client feeling frustrated that they did not fully understand what the advisor was trying to communicate.

For advisors looking to more clearly communicate with their clients, one potential step is to practice clear and concise communication, for instance, by writing out an explanation for a topic and then reading it over (and perhaps having a non-advisor colleague do the same) to assess whether it uses industry jargon or relies on technical knowledge (which a client might be unfamiliar with), or, on the other end of the spectrum, is too simplistic (which could make the client feel patronized). Another way to minimize miscommunication is to create clear frameworks of written communication, for example by including the words "Action Required" in email subject lines when requesting that clients take a specific action, or providing a bulleted summary that includes next steps and expected timelines at the top of longer emails or documents. Finally, sending out a post-meeting survey to clients asking them whether any information or action items discussed in the meeting were unclear (which can provide a double benefit of allowing the clients to feel heard and letting the advisor rectify any miscommunications that are identified!).

Ultimately, the key point is that in a technical industry like financial planning there is bound to be occasional miscommunication between advisors and their clients. Nonetheless, by being aware of the "curse of knowledge" and taking steps to mitigate it, advisors not only could improve the chances that their clients will understand and act on their recommendations, but also improve client satisfaction and client retention in the process by reducing the frustration that miscommunication can create!

5 Mistakes That Undermine Client Meetings

(Micah Shilanski | Advisor Perspectives)

A financial advisor might spend hours preparing a client's financial plan in advance of an in-person meeting with them. However, the client's experience in the meeting will likely not just be a matter of the quality of the plan itself, but also how the advisor acts. Which could mean the difference between a client who is satisfied with the experience or one who leaves with a bad taste in their mouths (which could erode trust with the advisor over time).

One potential danger area for advisors is trying to tell too many jokes during client meetings. While a couple small jokes might lighten the mood (given that financial planning can be a serious subject), trying to force too many jokes in can distract from the core purpose of the meeting. In addition, bringing political conversations into planning meetings tends to be distracting at best and has the potential to turn into an argument at worst. When clients initiate a political conversation themselves (perhaps during a discussion of changes to tax laws), advisors can consider redirecting the conversation to the meeting agenda can keep the meeting on track. Another potential meeting disruptor is the use of the phrase "to be honest" when expressing uncertainty or potential downsides (as a client could wonder whether the advisor is being honest when they're not using the phrase). Instead, an advisor can explain what has worked for other clients in similar situations to communicate their experience handling the issue that needs to be addressed.  

Often, the most effective meetings are those where there is an ongoing dialogue between the advisor and their client. However, asking closed-ended questions (i.e., those that can be answered with a "yes" or a "no") can halt the flow of conversation. Instead, asking open-ended questions (e.g., asking "What questions or concerns do you have?" instead of "Do you have any questions?") can elicit more constructive responses from clients. Further, advisors can make clients feel comfortable to express their questions and concerns even before the meeting officially starts by creating a welcoming office environment and greeting them enthusiastically, perhaps starting with some small talk before discussing more technical topics. 

In sum, while an advisor might put significant work into ensuring a client meeting goes well, communication mishaps have the potential to derail a meeting or, even worse, a client's trust in the advisor. Which suggests that creating an environment that promotes open conversation, while steering away from controversial or distracting topics, can lead to meetings that not only are more efficient, but also more satisfying to the client!

How To Speak Your Client's Language

(Kerry Johnson | Advisor Perspectives)

One of the keys to success for a financial advisor is listening closely to clients' concerns and goals in order to create a more effective financial plan that meets their unique needs. In addition to this active listening, Johnson suggests that paying attention to how clients communicate can help financial advisors better connect with them.

For instance, there might be certain phrases or idioms that a certain client uses often (e.g., "no brainer"). By picking up on these (either by recognizing that they are used often or by noting that the client pauses before using them) and then including them in their own comments, advisors not only can demonstrate that they are listening to the client, but also can improve the chances that they will understand what the advisor is trying to communicate. In addition, clients might use certain emotion-laden language based on their previous experiences. For example, a prospect whose parents had a poor retirement experience might say, "I don't want to end up like Mom and Dad," throughout a meeting with the advisor. This offers the advisor the opportunity to use this same language when presenting their value proposition to the client, clearly demonstrating how they can solve the client's concern (in a way the client can relate to). 

In the end, while advisors often play 'defense' when it comes to the use of language in prospect and client meetings (e.g., avoiding the use of industry jargon that clients might not understand), they also can go on 'offense' by actively listening to the words and phrases clients and prospects use and then including them in their own comments, which can help them feel heard and ultimately lead greater trust and rapport with the advisor!

The Hidden Costs Of Homeownership Are Skyrocketing

(Nicole Friedman | The Wall Street Journal)

When individuals think about the affordability of homeownership, they are likely to first consider the potential mortgage payment, which is a function of both the price of the home and the interest rate they can get on the loan. In the past couple of years, both of these components have been rising, creating significant affordability challenges for those looking to purchase a home (particularly first-time home buyers who do not benefit from having the proceeds of the sale of a current home to support the purchase). But even those who bought a home before the run-up in home prices and interest rates can also find their budgets challenged by rising 'hidden' costs of homeownership.

To start, rising home prices and broader inflation not only have impacted the affordability of buying a home, but also the property taxes homeowners pay (which typically are assessed based on the value of the property and a property tax rate chosen by the locality). And at a time when local budgets are rising amid inflationary pressures, property tax bills have risen as well to support these outlays, with the average property tax on single-family homes in the U.S. rising to $4,062 in 2023, up 4.1% from 2022. In addition, home insurance costs have been rising as well, with a 20% surge between 2021 and 2023, according to insurance-shopping site Insurify, with certain disaster-prone areas (e.g., hurricane zones or locations susceptible to wildfires) often seeing much greater hikes.   

Further, the costs of home maintenance have risen significantly. According to home-improvement tech company Thumbtack, the average cost to maintain a home (e.g., expenses like gutter cleaning and roof repair) rose 8.3% in the fourth quarter of 2023 compared to the year-prior period. While supply chain issues resulting from the COVID-19 pandemic led to price hikes in recent years, these rising costs are also attributed to greater demand for home repairs and renovations than the supply of service professionals available to complete them.   

Ultimately, the key point is that while many homeowners focus on the cost of their mortgage, many might be surprised to see that the 'hidden' costs of homeownership are rising significantly (perhaps beyond the overall rate of inflation). For financial advisors, this could call for revisiting (and potentially revising) client spending assumptions to reflect these higher costs to ensure that their financial plan remains sustainable (which could be particularly valuable for retirees with paid-off houses, who might have assumed their total housing costs would be relatively low). 

Why The Rent Vs Buy Decision Is More Complex Than It Might Seem

(Nick Maggiulli | Of Dollars And Data)

One of the most consequential decisions an individual or family will make, both for their finances and for their lifestyle, is where to live. In addition to choosing a type of home and neighborhood, a key question is whether to rent or buy. And while some clients might have assumptions about whether one or the other is clearly a better choice financially, it turns out that the calculation is much more complicated than it seems.

While some individuals might base their analysis on the initial cost of rent versus the expected mortgage payment, the calculation is much more complicated. First, costs related to homeownership (e.g., property taxes, insurance, maintenance) and renting (e.g., moving costs if the individual or family moves multiple times during the period studied) can be considered to have a better understanding of the total costs of each option. However, the largest determinant in this calculation might be future inflation. Because while monthly rent might be less than the mortgage payment on a house today, a (fixed-rate) mortgage payment will remain fixed throughout the term of the loan (though tax, insurance, and maintenance costs could rise over time), the cost of rent tends to rise over time (since 1940, rents have increased by approximately 4.8% each year, or 1% more than overall inflation). In addition to these different costs and future inflation rates, the relative value of renting versus buying can also depend on the returns a renter would earn on the money they save from renting (e.g., by investing the money they would have contributed as a down payment if they had bought).

In sum, given the uncertainties involved (e.g., future inflation rates and investment returns), giving a blanket answer on whether renting or buying will end up making more sense financially is difficult, if not impossible. This suggests that while financial calculations can be a key part of the decision, non-financial factors (e.g., the client's desire for housing flexibility versus stability) could play an important role as well. Which means that financial advisors have the opportunity to add value for clients facing this decision not only by analyzing the financial factors involved (e.g., creating financial projections with varying assumptions for inflation and investment returns), but also by helping clients explore their broader housing motivations so to help them make a decision that fits within their financial plan and meets their lifestyle goals!  

How Advisors Can Add Value For Clients In A Higher Mortgage Rate Environment

(Nerd's Eye View)

Leading up to 2022, financial advisors and their clients might have grown accustomed to a relatively low mortgage rate environment. In fact, the average 30-year fixed mortgage rate had stayed below 5% from 2010 until 2022 (and below 7% since 2001). But as the Federal Reserve has raised interest rates in an effort to combat inflation, mortgage rates have reached levels not seen in more than 20 years, with 30-year fixed mortgages currently sitting at about 7.5%. And while the plight of homebuyers facing higher mortgage rates has attracted much media attention, higher interest rates can affect financial planning calculations for current homeowners as well, including those who want to tap their home equity through a home equity loan or a Home Equity Line Of Credit (HELOC) as well as older homeowners considering a reverse mortgage will also be subject to higher interest rates.

At the same time, higher interest rates can present opportunities for some clients. For example, those who are interested in making an intra-family loan could generate more income from the higher Applicable Federal Rates (while the loan recipient, perhaps a child or grandchild, would still benefit from a rate significantly lower than standard mortgage rates). In addition, many current homeowners could have mortgages with rates lower than the 'risk-free' rate of return now available on U.S. government debt, which perhaps changes the calculus of whether to pay down their mortgage early. And current homeowners with significant equity could consider downsizing and buying a smaller home in cash, potentially benefiting from a less-competitive housing market while not having to take out a mortgage at the current rates.

Ultimately, the key point is that a higher interest-rate environment affects not only homebuyers looking to purchase a home for the first time but also those who are current homeowners. Further, given that a home can be considered a consumption good (that often comes with emotional attachments) as well as an asset on the homeowner's net worth statement, advisors can also add value by helping clients explore their home-related goals and assessing the financial tradeoffs of purchasing a more- or less-expensive home with a mortgage in a higher rate environment (or, if they have the means, whether buying a home in cash might be appropriate)!

3 Financial Advisor Networking Hacks

(Stephen Boswell | WealthManagement)

Networking is a common activity for financial advisors, whether it is meeting prospective clients at a local event or chatting with other advisors at a conference. Given the potential for networking to lead to new professional opportunities, making the most of these encounters can lead to a better return on the time investment required to attend them.

To start, successful networkers are often those who come across as (authentically) likable. Aside from having a friendly disposition, some research indicates other techniques can improve likeability, including offering compliments, showing vulnerability (e.g., sharing a slight challenge or lesson learned can make an individual seem more human), or 'mirroring' (i.e., subtly mimicking the body language of the person you're speaking with). In addition, making a networking interaction more memorable can boost the chances that it will lead to a follow-up meeting. Potential ways to do so include storytelling (e.g., personal anecdotes related to client success) and leveraging the "peak-end rule" (i.e., because people tend to remember the most emotionally intense point and the end of an experience more vividly, crafting a conversation around this structure can make it more memorable).

One potentially awkward part of networking at conferences or other events is joining a conversation already in progress (at least compared to meeting someone who is standing alone), as an individual might not want to interrupt an important or private discussion. To assess whether it might be an appropriate time to join this kind of conversation, networkers can assess the space between the speakers (if the individuals are standing close together, it might indicate a more intimate conversation that would be awkward to interrupt). After joining the group, listening to the vocal pitch and speed of the speakers can signal whether they would prefer to go back to their previous one-on-one conversation (with a higher tone or faster pace indicating they might want to be left alone).

In sum, effective networking is not just about the content of conversation, but also about how it is initiated and structured. And so, by reading social cues and presenting one's authentic self to interlocutors, networking conversations can become more worthwhile (and less awkward!).   

5 Secrets For Advisors To Network Effectively Without Burning Out

(Liz Fritz | ThinkAdvisor)

Some advisors seek out as many networking opportunities as possible, whether they are major advisor conferences or smaller, local events (e.g., FPA chapter meetings). However, keeping up a busy networking schedule can be a challenge for others, whether because they are more introverted (and find events like these mentally draining), or because they have a busy schedule balancing work and family obligations. 

Given the competing time challenges advisors face, taking a strategic approach to the networking events they do attend can create better balance for their work and personal lives. For those looking to attend advisor conferences, comparing the potential benefits and opportunities of conferences can help winnow down the field. For instance, while one advisor might be looking for a conference that offers deep insights into the planning process, another might be looking for one that emphasizes structured networking opportunities. Another key conference differentiator is length – busy advisors might find that a one-day conference tailored to their needs is a better fit for their schedule than one that lasts the better part of a week. Another option is to explore digital events, which can offer insights (and even virtual networking opportunities) without having to spend time (and money) on travel. And beyond conferences, advisors could consider other collaboration opportunities, such as advisor study groups, where advisors in similar positions in their careers (or in the same local area) gather to discuss common topics of interest.

Ultimately, the key point is that because there are many different networking opportunities for advisors, each advisor can find the best 'fit' for their needs, whether they are looking to meet with like-minded advisors or hear from some of the top industry thought leaders!

How To Master The Art Of Small Talk

(Allie Volpe | Vox)

Whether one is at a conference, party, or just waiting in line, small talk is a common part of life. Some people relish this activity, seeing it as an opportunity to strike up a conversation and potentially develop a professional or personal relationship, while others view it more skeptically (talking about the weather can only last for so long, right?). Nevertheless, given the ubiquity of small talk in daily life, finding ways to make it more effective (and enjoyable) can make it seem more like an opportunity rather than a chore.

To start, having a curious mindset can help improve the flow of conversations that begin with small talk. For instance, rather than lingering on impersonal topics (i.e., the weather), one might try to find a point of connection with their conversational counterpart. This could mean asking a fellow customer in the line at the coffee shop about their favorite drink or making an observation about a product or item someone has chosen to display (e.g., a water bottle sticker from a national park could be a jumping-off point about favorite travel destinations). Beyond initial points of connection, taking the time to listen to a conversation partner's responses can help an interlocutor craft appropriate follow-up questions that can take the chat to a deeper level. Finally, even if a conversation is going well, it will inevitably come to an end (hopefully with an agreement to talk again if the other person might be an appropriate professional or personal contact). With this in mind, finding an appropriate exit for the situation can help avoid (too much) awkwardness (e.g., at a party one might excuse themselves to go to the restroom or refill their drink). 

Altogether, small talk provides an opportunity to develop a connection with a stranger or casual acquaintance. And by coming armed with potential questions and common points of interest, actively listening to a conversational partner's responses, and gauging the flow of the conversation, these interactions not only can be more enjoyable in the moment, but potentially professionally valuable as well!    

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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.