Weekend Reading For Financial Planners (April 29-30)

SEC Issues New Reg BI Guidance

(Melanie Waddell | ThinkAdvisor)

The Securities and Exchange Commission (SEC)’s Regulation Best Interest (Reg BI), issued in June 2019 and implemented in June 2020, requires brokers to act in their clients’ best interests at the time that they’re making an investment recommendation, by meeting 4 core obligations: disclosure, care, conflicts of interest, and compliance. But because Reg BI is principles-based (i.e., the regulations themselves don’t specify precisely how broker-dealers must manage conflicts of interest, just the principle that they must have processes and procedures designed to reasonably ensure that their brokers will do so), some industry observers have been looking for additional guidance – or the results of investigations – to get a better idea of the SEC’s actual expectations when it comes to complying with Reg BI.

To fill this need for guidance, the SEC in March of last year issued a bulletin that focused on account recommendations, stressing that brokers and investment advisers must consider costs and other investment options for clients when they make recommendations about opening accounts and rolling over retirement assets. In August, the SEC issued a 2nd bulletin that emphasized that reducing conflicts of interest should be a regular task, rather than a one-time compliance change. SEC staff directed that client disclosures should be specific to each identified conflict of interest, be written in 'plain English', and be tailored to firms' business models, compensation structures, and products, among other factors.

This week, the SEC issued a 3rd bulletin on Reg BI, focusing primarily on its care obligation. According to the SEC guidance, this obligation includes 3 overarching and intersecting components: understanding the potential risks, rewards, and costs associated with a product, investment strategy, account type, or series of transactions; having a reasonable understanding of the specific retail investor’s investment profile; and based on the understanding of the 1st 2 elements, as well as, in the staff’s view, a consideration of reasonably available alternatives, having a reasonable basis to conclude that the recommendation or advice provided is in the retail investor’s best interest. An SEC official emphasized that a common theme across the 3 bulletins is that complying with Reg BI and the Investment Advisers Act is not a box-checking exercise, and that the obligations need to be met before (rather than after) recommendations are made.

The guidance goes into detail about how brokers can consider investment costs when determining whether an investment is in their customer's best interest, emphasizing that total costs can include commissions, sales loads, advisory or management fees, and the trading costs associated with an investment strategy (while also noting that the lowest-cost investment option might not always be the best choice for a given investor). And in terms of 'reasonable alternatives' the guidance notes that while brokers do not need to vet every investment option available, brokers who only have a limited menu of investment options available through their broker-dealer might not be able to satisfy the care obligation if the choices conclude that the choices available are insufficient to meet a given customer’s best interest – which is notable, as thus far Reg BI has largely focused on the behavior of brokers themselves, with relatively limited scrutiny of their broker-dealers that create the product shelves (and potential proprietary product offerings) their brokers are expected to recommend from.

This latest bulletin comes in the wake of the SEC's announcement that it will prioritize enforcement of Reg BI this year (as contrasted with prior years, where SEC examiners took a more accommodative approach for broker-dealers that were still learning to implement new Reg BI processes and procedures), and provides a clearer framework for brokers and their firms to work with to determine whether they are meeting their obligations under the regulation. Further, with the SEC beginning enforcement actions under Reg BI as well as an increasing number of Reg BI-related arbitration cases being filed, the need to comply with Reg BI is moving from the hypothetical to having real-world implications for broker-dealers and their brokers. And for other advisors, the guidance suggests that the SEC will want firms to 'show their work' when it comes to enforcement of regulations for broker-dealers (and RIAs), meaning that the full range of firms could benefit from reviewing their compliance documentation and policies (and making changes where necessary!).

House Committee OKs Bills Expanding Pool Of Accredited Investors

(Mark Schoeff | InvestmentNews)

The market for private investments has gained increased attention in recent years as some companies have achieved substantial valuations while remaining private, often leading to big paydays for early-stage investors. At the same time, these investments can be incredibly risky, and the graveyard of failed companies is rarely mentioned in media reports touting the latest 'unicorn'.

To help prevent less-sophisticated investors from making risky private investments, the SEC's Accredited Investor rule limits those who can invest in many early-stage companies to investors with certain income or wealth (currently, those with either $200,000 per year of earned income [or $300,000 with a spouse] for each of the prior 2 years and the current year, or who have a net worth of over $1 million, excluding the value of their primary residence), as well as investment professionals and certain entities. While some have argued that this rule is too strict (as it prevents many potential investors from accessing private markets and limits the pool of capital for companies), others have suggested that it could be tightened further (as income and wealth are not necessarily proxies for the ability to analyze a private company and the risks involved in such an investment).

Amid this background, the House Financial Services Subcommittee on Capital Markets earlier this year discussed potential legislation to broaden the accredited investor definition. And this week, the full House Financial Services Committee approved with almost unanimous bipartisan support 3 bills that would expand the number of individuals who would qualify as accredited investors. One piece of legislation would expand the definition to include people with certain licenses, qualifying education, or job experience as determined by the SEC, while another would require the SEC to review periodically the list of certifications, designation, and credentials that would qualify someone as an accredited investor, and the final bill would direct the SEC to develop a qualification examination for accredited investors.

The bipartisan support for the legislation is notable, with Republican members noting that loosening the accredited investor definition would potentially increase the amount of capital going to small business startups and increase fairness by giving less-wealthy investors opportunities to invest in private markets that have previously been limited to higher-income or wealthier individuals. Some Democratic supporters see the legislation as an opportunity to allow more underrepresented people to invest in private markets. Though some raised concern about the opacity and riskiness of many private placements and whether investors would be able to properly evaluate potential investments.

In the end, while it is unclear whether this legislation will eventually become law, the (somewhat rare) bipartisan support for expanding the accredited investor definition suggests that momentum is building to do so. Which means that more financial planning clients could be eligible to invest in private offerings, highlighting the potential role for advisors in helping clients evaluate private offerings and determining whether these investments fit within their broader asset allocation and financial plan!

Legislation Would Allow Use Of 529 Funds To Finance Training For CFP Credential

(Mark Schoeff | InvestmentNews)

When it comes to education planning, 529 accounts are generally considered one of the most, if not the most, tax-efficient ways of saving for future expenses. Contributions to such accounts receive no special tax break at the Federal level (though many states offer a deduction or credit for such contributions, particularly if made to an in-state-sponsored plan), but distributions, including earnings, that are used to pay for qualified education expenses are not subject to Federal income tax.

Qualified education expenses eligible for this tax-free growth treatment are typically expenses associated with higher education, such as tuition, fees, books, and supplies for college or graduate students, as well as room and board expenses for those enrolled at least half-time. In recent years, qualified education expenses have been expanded to also include other expenses, such as up to $10,000 of tuition expenses annually for K-12 education (via the Tax Cuts and Jobs Act) and up to $10,000 of lifetime qualified student debt (via the SECURE Act). And for those who were not able to use up the funds in their 529 plans for any of these purposes, SECURE Act 2.0 introduced the possibility of (Iimited) 529-to-Roth IRA transfers.

And now, bipartisan legislation introduced in Congress last month would expand the uses for funds in 529 plans further to include covering the fees and expenses associated with acquiring or maintaining postsecondary credentials. Under the proposed Freedom to Invest in Tomorrow’s Workforce Act, 529 plan funds could be used for tuition, books, and testing costs for programs accredited by the National Commission on Certifying Agencies or the American National Standards Institute. Notably, such programs include the CFP and CPA certifications (both CFP Board and the American Institute of CPAs have publicly backed the bill).

Ultimately, the key point is that If passed, this legislation would further expand the opportunities for using 529 plan funds, not only for financial planning clients, but also for aspiring CFP professionals (as the costs of meeting the education and examination requirements for CFP certification can add up!) as well as experienced advisors considering a new (qualifying) professional certification!

How To Use Google Reviews To Boost Visibility

(Lauren Hong | Advisor Perspectives)

When it comes to marketing, many advisors are familiar with the importance of Search Engine Optimization (SEO) to ensure their firm is near the top of the list of search results for individuals in their chosen market (e.g., client type and/or physical location). And with Google being far and away the most popular search engine, firms can get a marketing boost by optimizing how they are viewed by Google's search algorithm. One way to do so is to capitalize on Google reviews to not only move up the search rankings, but also to provide 'social proof' (i.e., evidence of the advisor’s qualifications) to prospective clients.

The 1st step for an advisor to leverage Google reviews is to claim and verify their business and create a Google Business Profile. The profile allows a company to incorporate keywords for SEO purposes and share basic information such as the firm's address, hours, and services. Next comes getting reviews on the business profile. One way to do so is to provide a link to current clients to leave a review; firms can encourage reviews in a variety of ways, such as when a client has a benchmark achievement or has been with the firm for a certain amount of time (though Google does not allow firms to provide incentives to leave a review).

And when the firm starts to receive reviews, advisors can manage them by responding to both positive reviews (to thank the reviewer for their comments) and negative ones (which can be an opportunity to show off the advisor’s compassion and values). Firms can also consider highlighting positive reviews on their website, while being mindful of the SEC’s rules regarding testimonials and endorsements. Notably, while companies with a Google Business Profile cannot have negative reviews filtered out, they can flag a review for removal if a review includes spam, personal information, or comes from a suspected fake account.

Altogether, Google reviews can be a powerful tool not only to improve a firm's search engine visibility, but to show prospective clients the value current clients have received from working with the firm!

How To Use Social Proof On Your Website

(Mikel Bruce | Advisor Perspectives)

Handing over one's life savings to be managed by an advisor can be a major leap of faith for planning clients. Because of this, prospective clients often have a high bar for an advisor to show that they are capable of providing the services the prospect needs. And because an advisory firm's website is often the first touchpoint with prospects, it can be a useful place to provide 'social proof' that they are qualified and capable of meeting the client's needs.

One way to do so is to quantify the advisor's expertise. For instance, the website could include statistics on how many years the advisor has worked as a financial planner, how many clients they have served, and/or their assets under management.  Advisors can also display their certifications, professional memberships, and awards to strengthen their credibility. In addition, advisors could feature media outlets in which they have been cited to show how 3rd parties have acknowledged the firm and have talked about what it does. Firms might also consider featuring anonymized client success stories (without including specific results, to avoid compliance concerns) to illustrate the advisor's experience in dealing with specific client situations, share details about what it is like to work with the advisor, and serve as a qualification tool to filter out visitors who do not fit the firm's ideal client type.

Ultimately, the key point is that an advisory firm's website can be an important way to start building a trusting relationship with prospective clients. And so, by including information that demonstrates an advisor's qualifications (without getting to the point it comes across as bragging) and the experience prospective clients can expect if they decide to work with the firm, firms can potentially increase the likelihood that website visitors will start on the path to becoming a client!

5 Tips To Get Started With ChatGPT In Your Marketing

(Susan Theder | Financial Advisor)

In recent months, the Internet has been abuzz exploring the possibilities of ChatGPT, a generative Artificial Intelligence (AI) system that allows users to 'prompt' the program by asking questions and making requests. But ChatGPT goes well beyond a simple question answering system and can by advisors as a valuable copywriting tool to help advisors craft marketing content.

Advisors can start leveraging ChatGPT by creating an account and introducing themselves and their services to the tool (ChatGPT is persistent, meaning that its future output will take into account previous prompts and responses). In this way, ChatGPT can become familiar with what the firm does and the current tone of its marketing. Among other potential use cases, an advisor might provide ChatGPT with a recent post from the firm’s blog and ask it to create a social media post or perhaps ask for a list of potential topics to write about next on the blog (and then ask ChatGPT to create a 1st draft based on a chosen topic!).

At the same time, ChatGPT isn't perfect in producing content and advisors can dive in and help ChatGPT refine its responses. For example, because ChatGPT isn't good at fact-checking (i.e., in its enthusiasm to respond to prompts, it will sometimes misstate facts), it is important for advisors to review any ChatGPT output before publishing. Also, ChatGPT will not take regulations into account when generating output, adding to the importance of reviewing its output to ensure it meets compliance requirements. And while ChatGPT can write in a variety of styles and tones, advisors could consider adding personalized touches to demonstrate their unique voice.

In sum, ChatGPT's ability to produce ideas and content quickly (for little to no cost) could make it a valuable advisor tool for generating everything from blog articles to social media posts. But like any other outsourced tool, it is important for advisors to evaluate its output to ensure it meets their (and their clients') needs!

Here's What Retirement Looks Like In America In 6 Charts

(Veronica Dagher, Anne Tergesen, and Rosie Ettenheim | The Wall Street Journal)

Helping clients plan for successful retirements is at the core of many financial advisors’ value propositions. And while advisors typically focus on the details of each client case, it can also be helpful to step back and see what retirement looks like today for Americans as a whole.

First off, the number of retirees (and potential planning clients?) is expected to increase in the coming years, moving from just over 15% of the American population today to more than 20% by 2030. In terms of net worth, those between ages 65 and 74 have larger median wealth ($266,400) than other age brackets (notably, the mean net worth of this age bracket is $1.2 million, driven higher by a number of retirees with significant wealth). In addition to tapping assets, Social Security remains an important part of the retirement income equation as well (with these benefits comprising 90% or more of retirement income for 12% of men and 15% of women), and the average benefit currently stands at about $1,825 per month. In terms of expenses, health care costs are often top of mind for retirees; according to the Bureau of Labor Statistics (BLS), households headed by people aged 65 or older spend an average of $7,030 a year on healthcare, broken down into an average of $4,974 in health insurance costs, $1,077 for medical services, $726 for prescription drugs, and $253 for medical supplies.

Perhaps most interestingly, BLS’s American Time Use Survey provides a glimpse into how the average retiree spends their day. According to this data, retirees spend the most time sleeping (about 9 hours) followed by relaxing and leisure (about 6 hours and 15 minutes), watching television (4 hours and 30 minutes), with other activities (e.g., working, reading, cleaning) taking up significantly less time.

Ultimately, the key point is that while these figures are broad averages, advisors can play an important role helping their clients in each of these areas, from optimizing their Social Security benefits to analyzing their retirement health care coverage options, to thoughtfully creating their ideal lifestyle in retirement!

Taking Advantage Of Flexible Work Options Post-FIRE

(Alicia Adamczyk | Fortune)

The Financial Independence Retire Early (FIRE) movement grew significantly during the 2010s, offering its followers the opportunity to leave the workforce well before traditional retirement by maintaining a high savings rate. Unlike traditional retirees who might plan for a 20- or 30-year retirement, these individuals had a 50- or even 60-year retirement to look forward to , increasing the number of potential financial contingencies that could arise during this period.

One high-profile FIRE advocate, Sam Dogen, is the author of the popular Financial Samurai blog and retired in age 2012 at age 34 with a $3 million net worth. And while Dogen has been able to earn enough passive income (from his portfolio, rental properties, and his blog) to cover his family’s expenses, a few factors have driven him to seek a return to the workforce. Part of the decision is financial, as Dogen is concerned about paying college expenses for his 2 young children (which he had after his 'retirement'). Also, while he found many activities to fill his days (from writing a book to consulting for startups), he did find early retirement to be lonely sometimes (as many friends his age were busy at work during the day and couldn’t meet him for activities). Together, these considerations have led him to search for a new job, though his financial standing provides him with flexibility about the opportunities he will consider (e.g., in terms of location and hours). (Note: It was subsequently revealed that Dogen's comments were part of an April Fool's Day joke and his future work plans are unclear.)

In the end, while the 'Retire Early' portion of FIRE often gets the most attention (and skepticism), achieving 'Financial Independence' is a valuable state in its own right. Because even if these individuals choose to remain in the workforce (or decide to go back after a period of retirement), achieving 'FI' provides them with significant flexibility in choosing the work options they want to pursue (e.g., only considering remote work opportunities) with financial considerations playing a secondary role (perhaps with the support of a financial advisor to show how different options affect their long-run chances of success!).

Most Business Owners Say They Never Plan To Retire

(Business Wire)

Many workers look forward to the day when they can leave the office for good and retire to a life of leisure. But others do not share these sentiments and want to continue in their profession (perhaps shifting to part-time work) well beyond traditional retirement age, not necessarily for financial reasons. And a recent survey suggests that advisors might see many clients who are business owners work well beyond normal retirement age.

According to a survey of more than 150 business owners conducted by The Northern Trust Institute, 32% indicated that they are not interested in retiring and plan to be actively involved in their business as long as they can, while 19% said they do not plan to retire at all, finding other activities to pursue even if they sell their business. For instance, those who have sold their businesses spend an average of 29% of their time on starting a new business, 14% on consulting or sitting on boards, and 13% on philanthropic endeavors. Overall, those who sold their business were satisfied with the decision, with 37% reporting that their lives had become better since the sale and 47% saying their lives had become "much better".

Altogether, these survey results suggest that 'retirement' might look very different for financial planning clients who are business owners compared to others. Which can not only have retirement income planning implications for the client (e.g., continuing to have significant earned income well into their 70s could increase a client's sustainable income in their later years) but can kick off other related planning conversations as well (e.g., succession and estate planning)!

A Few Lessons On Showing Up

(Lawrence Yeo | More To That)

When setting a goal, getting started can sometimes be the hardest part. After clearing this first hurdle, 'showing up', or maintaining the habit, is the next challenge. But creating the habits and motivation to do so can not only help prevent you from getting off track regarding this specific goal, but also can serve as a signal for how you 'follow through' in other aspects of your personal and professional lives.

For Yeo, 'showing up' means going for a 30-minute run every morning, in good weather or bad. And while he enjoys the challenge of the daily run, he's not in the mood to run every day. Because of this, he tries to remove as much friction from his routine as possible, for example by putting on his running clothes (telling himself, "Well, if I’m already dressed in my running shorts and shirt it would be irrational for me to stay inside in these clothes."). In addition, Yeo suggests that while external motivation can be a great tool for kickstarting a new routine, internal motivation is necessary to make it through the tough days (e.g., Yeo runs because it makes him a clearer thinker, facilitating his writing and relationships).

Ultimately, the key point is that while 'showing up' might not be glamorous, it can be one of the most important parts of achieving a goal, whether it is building a business or training for a marathon. And because there will be inevitable bumps along the way, reducing friction and developing internal motivation can make your routine more sustainable!

Be A Finisher, Not A Starter

(Darius Foroux)

New Year's resolutions are common, but actually following through on them can be challenging (just compare the number of people working out in the gym in January to those who are still there in June!). Many of these resolutions fail not because the individuals who set them did not have enough talent to achieve them, but rather because they weren’t able to ‘show up’ each day to work towards their goal. Which does not require exceptional talent but does highlight the importance of a ‘finisher’s mindset’.

Foroux suggests several principles that are key to following through on goals, including: perseverance (not giving up simply because the goal is too hard); mindfulness (being in the present moment and avoiding overthinking); balance (working hard, but not to the point of burnout); planning (writing out exactly what to do each day, week, and month to achieve the goal); and execution (reducing frictions and ‘showing up’ each day). Foroux also suggests that internal motivation is key to following through on goals, as one can control their own motives, while the approval and encouragement of others can be less consistent (especially during the tough times on the way to achieving the goal).

In the end, getting started is just the first step to reaching a goal, and achieving it is not guaranteed. But looking inward for motivation and creating a detailed plan for how the goal will be achieved can increase the chances of making the transition from a 'starter' to a ‘finisher’!

When And How To Disengage From A Goal

(Brett and Kate McKay | The Art Of Manliness)

Many individuals have an achievement mindset, where they 'must' reach any goals that they set. While this can be admirable in many ways (as 'grit' is often seen as an important character trait), it can also lead to burnout and frustration if, in reality, the goal is no longer achievable. In these cases, it can help to reassess the goal and consider whether perhaps changing it (or abandoning it altogether) might be the best course of action.

For example, Brett McKay had a long-standing barbell lifting practice (with the goal of regularly achieving personal records) that had become a source of meaning and identity over the course of 8 years. But as he got older and the weights he lifted started to get heavier, he found himself injured more often. Which was frustrating not only because he couldn’t achieve his goal of lifting ever-increasing weights, but more simply because he couldn’t lift any weight at all for several periods. But after considering a series of studies that showed life satisfaction goes up in individuals who can successfully disengage from unachievable goals and recommit to more achievable ones, McKay decided to adjust his goals from pursuing competitive barbell training to a more sustainable path of practicing strength training for overall health (even if meant reducing the chances he would set additional records in the future).

For those who are vaguely aware that they might need to give up on (or adjust) a goal but have a hard time doing so, setting 'kill criteria' (as suggested by professional poker player Annie Duke in her book Quit) could be one way to make the decision easier. The best kill criteria include a state (e.g., for a business, reaching $100,000 of revenue) and a date (e.g., by the end of the year) that create an objective measurement on which to base a decision to quit (in this example, shutting down a business if the revenue figure is not met by the end of the year). In addition, working with a 'quitting coach' (who can be an actual professional coach or a trusted peer or mentor) who will hold you accountable can further increase the chances that you will follow through on quitting if the kill criteria aren't met.

In the end, while perseverance can be an important part of success, knowing when to abandon or adjust a goal can prevent you from spending time and energy on an unachievable objective. Which could not only make it more likely that you will be able to achieve the other goals you have set, but also potentially increase your life satisfaction in the process!

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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.