Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the industry news that TD Ameritrade anticipates most advisory accounts will not need to be re-papered in its prospective merger with Schwab... even as the merger itself is now potentially delayed while the Department of Justice begins an anti-trust inquiry as to whether the Schwabitrade merger would lead to an unduly anti-competitive environment (particularly with respect to RIA custody).
Also in the news this week is a planned push from E*Trade Advisor Services to significantly ramp up both its technology and marketing spending in the hopes of capturing a share of however many advisors decide they're displeased with the Schwabitrade merger and begin to look for alternatives, and Fidelity's announcement of new refinements to its onboarding process that cuts the amount of information advisors have to fill out by 40% and reduces the account application paperwork from 9 pages down to just 2!
From there, we have several additional items of noteworthy news this week, including a coming series of changes to the FICO credit scoring system that may boost the credit scores of those with already-good credit but potentially reduce credit scores for those who are already struggling to pay their loans on time (in a deliberate effort to better separate 'good' credit risks from 'bad' for lenders increasingly concerned about the long-in-the-tooth economic expansion), IRS guidance for brokerage firms that unwittingly sent out the 'standard' first-RMD notices to those turning age 70 1/2 this year who in light of the SECURE Act won't actually need to begin their RMDs this year, and a look at the new CFP Board Standards of Conduct that recently took effect (and that the CFP Board will begin to enforce in June).
We also have a few articles on planning for aging clients, from a look at the rising frequency of older couples who are "living apart together" by remaining in ongoing committed relationships where they deliberately do not get married nor move in to live with each other, the ongoing shift in consumer preference to die at home and not in a hospital (as last year, deaths from natural causes were more likely to occur in the home than in a hospital, for the first time in more than 50 years!), and the importance of finding a "new normal" after a major health event occurs, rather than trying to regain one's prior lifestyle that simply may no longer be feasible (and make us unduly unhappy to even try).
We wrap up with three interesting articles, all around the challenging theme of fraud, financial abuse, and bad advisor recommendations: the first explores why and how athletes are disproportionately targeted by swindlers and defrauded (and the rise of lawyers and forensic accountants who specialize in unraveling such scenarios); the second examines the ways that spousal financial abuse are transforming in the technology era (where it's easier to hide assets with cryptocurrencies and surveil a spouse with computers and GPS tracking, but also easier to spot and recover paper trails for assets that have been hidden); and the last looks at a new study that finds, when faced with conflicted compensation while making a recommendation, we may be more likely to try to rationalize after-the-fact why the higher-compensation recommendation may have been good, than de-bias ourselves by being aware of the potential conflict in the first place... suggesting that in the future, regulators may try to limit advisors' own access to information about how some recommendations may benefit themselves or their companies more than others (as when people aren't aware of the conflicts until after the fact, they still give objective recommendations), or increasingly try to focus instead on levelizing advisor compensation (so advisors can still be well-compensated for their work, just not differently compensated for various recommendations).
Enjoy the 'light' reading!
Schwab-TD Deal: No Repapering For RIA Clients, But DOJ Wants More Info First... (Jessica Mathews, Financial Planning) - This week was the TD Ameritrade National LINC Conference, with conversation at what may be the last TDA LINC event dominated by the looming sale of TD Ameritrade to Schwab, and questions abounding about the practical details and implications for TD Ameritrade advisors. The good news is that TD Ameritrade was able to announce that, based on how the "Schwabitrade" deal is intended to be structured, most client accounts will not need to be repapered and will be able to rely on negative consent letters. However, it's also not clear how quickly the deal is going to happen at all, as also this week Schwab and TD Ameritrade announced in an 8-K filing that the deal may be delayed because the Department of Justice has (not surprisingly) officially begun to request additional information from the companies to assess its potential anti-trust implications (though the companies are still hopeful the transaction can close in the second half of 2020). Nor is it clear what will happen to TD Ameritrade's popular VEO platform, its open-architecture platform hub that has been a major draw both for advisors to select the TD Ameritrade as a custodian over its competitors, and has drawn a disproportionate amount of AdvisorTech startup innovation (as new companies have tended to build first to TD Ameritrade's open system). Ultimately, though, TD Ameritrade noted that at best, it will still be 2-3 years before any key aspects of the integration would actually move forward. And until the deal is actually consummated (and clears DoJ anti-trust scrutiny), TD Ameritrade is still operating 'business as usual' (including planning for a 2021 LINC conference!).
E*Trade Ramps Up Spending In Attempt To Grab Schwab-TD Clients (Vicky Ge Huang, AdvisorHub) - With the potential disruption that the Schwabitrade merger may have on existing TD Ameritrade advisors, E*Trade announced during its Earnings Call this week that it is looking to ramp up spending on its own RIA custody platform to more aggressively compete for new business (including what has already been an uptick of TD Ameritrade advisors who are indicating that they may not want to be assimilated into the Schwab platform, and recognizing that even well-executed mergers can result in 4%+ attrition, which on TD Ameritrade's base of advisors is a very significant market opportunity). The new E*Trade expense allocations to its RIA division, now rebranded to E*Trade Advisor Services (from the prior TCA by E*Trade, after E*Trade's acquisition of Trust Company of America back in 2018) include both accelerating integrations of advisor technology and finishing the conversion of its own technology (from TCA's bank-based custodial platform to E*Trade's brokerage-based offering), improve E*Trade's own advisor referral platform (akin to other RIA custodians' advisor referral networks), and increase its marketing spending. Though notably, relative to Schwab and TD Ameritrade, the E*Trade RIA offering is still 'small' - with 230 advisory firms and $20B of AUM, driven primarily from the TCA acquisition - which detractors see as a potential limitation on E*Trade's depth of service to RIAs, but others see as an opportunity for E*Trade to rapidly grow (leveraging its existing retail platform capabilities) and gain market share in the wake of a potentially turbulent year for RIA custody.
Fidelity Launches Revamped Client Onboarding And Rolls Out Fractional Share Trading (Tobias Salinger, Financial Planning) - Leading up to the FSI OneVoice conference this week, Fidelity unveiled the latest changes to its Wealthscape platform, with significant improvements to its onboarding experience, including a 20% reduction in the amount of information clients must review, a 40% reduction in the number of fields that advisors must complete (and more ways to auto-populate that data), and a reduction in the electronic pages of its onboarding paperwork from 9 to just 2 (a welcome relief after a recent survey found 56% of sampled advisors on the Fidelity platform stated that its account opening process was cutting into client face time). In addition, Fidelity announced that it will be piloting new chat- and virtual-assistant programs to further enhance support, expanding APIs in its Wealthscape Integration Xchange, and other "new digital services". In separate but related news, Fidelity also announced this week that it will be rolling out fractional-share trading as well (for both stocks and ETFs, to be executed as market or limit orders), in what is widely expected to accelerate the adoption of 'direct indexing' solutions (though for the time being, the fractional trading will be limited to mobile devices for retail clients, in what is broadly viewed as a response to fractional share direct-to-consumer competitors like Robinhood).
FICO Changes Could Lower Your Credit Score (AnnaMaria Andriotis, The Wall Street Journal) - Fair Isaac Corp (FICO) recently announced its first set of major changes to its credit scoring system since 2014, with new 'red flags' (i.e., reductions in credit score) for those with rapidly rising debt levels or those who have sustained high utilization scores (where most of the available credit limit is being used every month), those who sign up for personal loans (as the unsecured debt category has been surging in recent years), and a new FICO 10-T score that will apply harsher penalties for those who fall behind on loan payments. On the other hand, the adjusted FICO scores will be higher for those who are managing their loans well. Which effectively means that the gap between those with 'good' credit and 'bad' credit will likely widen once the new system is implemented. Notably, in recent years FICO has primarily focused on adding new data points that could increase credit scores, including removing some negative information (such as civil judgments) from credit reports, and factoring in more information like bank account balances and utility payments (especially helpful for those with limited credit histories); however, the end result of those changes is that the average credit score has steadily risen for nearly a decade (albeit aided by an overall improving economy as well), such that - especially with the current economic expansion long in the tooth - there is now growing interest in balancing the industry's desire to expand loan volume (expedited by higher credit scores) and the ultimate potential for loan defaults (where a tighter credit scoring system is more helpful), though most consumers are expected to only see modest swings (less than 20 points) in their score, and FICO scores will still be primarily driven by the same 5 factors they always have been (payment history, percentage of credit used, length of credit history, mix of loans, and how many new accounts are being applied for).
IRS Issues Guidance Amid SECURE Act RMD Confusion (Melanie Waddell, ThinkAdvisor) - Under the SECURE Act, the age at which Required Minimum Distributions begin has been changed from the existing age 70 1/2 to age 72 for those who were not already age 70 1/2 by the end of last year. As a result, no consumers will actually be required to begin their RMDs in 2020, as those who were already 70 1/2 in 2019 or prior will simply continue their existing RMDs, but those who would have begun in 2020 by turning 70 1/2 this year will now be able to wait until 2021 or 2022 (whenever they turn age 72). However, many financial institutions send notices every January to those who are turning 70 1/2 in the current year, to inform them that their RMD obligations are beginning... and unfortunately, the SECURE Act was implemented so late in 2019 that many financial institutions had already queued up (and have now sent out) to their turning-age-70-1/2-in-2020 customers what have ended out being incorrect notifications about starting their RMDs this year. In response, the IRS just issued Notice 2020-6, at least granting relief to the institutions that they will not be penalized for 'incorrectly providing erroneous RMD notices' as long as the institution provides a follow-up to customers by April 15th of this year to inform them of the error (and that RMDs aren't actually due). However, because the notices have already been sent, advisors should consider being proactive in informing turning-age-70-1/2-this-year clients that they really do not have to begin their RMDs this year... notwithstanding whatever notices their bank or brokerage firm may have recently sent them! (Though notably, those who turned 70 1/2 in 2019 and were waiting to take out their first RMD by April 1st of 2020 do still need to take that first RMD for the 2019 tax year, and continue with their RMD obligations for 2020 and going forward.)
New CFP Board Ethical Standards Are Now In Effect! (Tom Giachetti, ThinkAdvisor) - Back in 2018, the CFP Board announced its new Code of Ethics and Standards of Conduct that would apply a fiduciary duty to all CFP certificants providing any kind of financial advice and had an effective date of October 1st of 2019 (last year). Notably, the enforcement date for the new standards was subsequently delayed to June 30th of 2020, which means that any misconduct that occurs during the interim will be enforced under the 'old' rules and not the 'new' rules... though CFP professionals are still otherwise expected to be acting in compliance with the new standards (and after June 30th, may be subject to disciplinary actions for any subsequent violations that occur). Which is important given how much more broadly the new standards will apply, as they are not constrained to just when CFP professionals are providing (full-fledged or material elements of) financial planning, but any kind of financial recommendations, which must meet the fiduciary obligations of a Duty of Loyalty and a Duty of Care (albeit while still honoring the Duty to Follow Client Instructions if clients wish to proceed against the advisor's recommendation). Although the significance of the new CFP Board rules are not just the standard of care by which the CFP professional's financial advice will be evaluated, but also new requirements for information that must be provided to clients prior to or at the time of engagement, including a description of products or services, the manner in which the CFP professional (and their firm, and related parties) will be compensated, and disclosure of prior disciplinary history or prior bankruptcies. Other notable changes include: new requirements for (prudently) selecting technology vendors, new guidance on the proper use of "Fee-Only" and "Fee-Based" to describe compensation, and new enforcement processes and how incidents must be reported to the CFP Board.
More Older Couples Stay Together Because They Live Apart (Clare Ansberry, The Wall Street Journal) - The traditional viewpoint of marriage is that "if you really love each other, you will live together", but in practice, a new trend is emerging with couples, particularly those in the second half of life, who are choosing to live in separate homes while still seeing each other regularly in what they maintain is a highly committed relationship... just one where they also get to maintain their own personal space and independence. Notably, the appeal for couples staying separate appears to be driven at least in part by the fact that remaining separate can make it easier to avoid otherwise messy entanglements around merging household finances or clashing relationship dynamics with adult children (in an era where "gray divorce" is on the rise with a doubling of the divorce rate for those aged 55 and older). Though in other cases, it's simply a matter of different lifestyle preferences, from one couple where she prefers the city and he likes the quiet of the country, to another where she is an extrovert who wanted more social time and he is an introvert who prefers more quiet time... potential couples conflicts that are easier to resolve when they don't live together in the first place! And some distance-based couples have suggested that the time apart enhances their relationship by being able to look forward to the time together (a la "absence makes the heart grow fonder!"). In fact, one recent survey of more than 2,000 adults found that nearly 1/3rd(!) of those aged 50 to 65 who are unmarried are actually in a committed long-term relationship and are simply living apart (which academics have now dubbed "living apart together"), and overall unmarried partnered adults aged 57 to 85 are twice as likely to have separate homes than to live together.
More Americans Are Dying At Home Than In Hospitals (Gina Kolata, The New York Times) - In 2017, deaths by natural causes occurred 29.8% of the time in hospitals, but 30.7% of the time at home, marking the first time in more than 50 years that dying at home was more common than in hospitals (and a huge shift from the 1970s, when as many as 2/3rds of Americans died of natural causes in hospitals). Though consumer surveys have shown for years now that most people would prefer to die at home, and not in an 'institutional' setting like a hospital (which also avoids 'heroic' measures that potentially and painfully prolong the inevitable, with about 45% of older people having now completed advance medical directives that often specify doctors should not take extreme measures to prolong life). In addition, hospice care (which is usually delivered at home) is more available than ever before, with almost 1.5M Medicare beneficiaries receiving such care in 2017 (up 4.5% from just 2016 alone). On the other hand, some are expressing concern that shifts in the financial incentives for facilities paid by Medicare (which typically pays hospitals per diagnosis per patient, and not for the number of days the patient is in the hospital) may be unnecessarily encouraging hospitals to discharge patients into their homes (and the care of family members who are not sufficiently trained to care for their sometimes-complicated health conditions). In addition, some patients are unfortunately choosing to stay at home despite significant pain that might be treated in a hospital, out of fear of dying in the hospital instead of in their homes. Which raises the question (if the trend of viewing dying at home as a 'good death' continues) of whether there will soon be an expansion in the types of medical services that can be provided in the home for end-of-life care?
When Life Throws You Health Curveballs, Embrace The 'New Normal' (Jane Brody, The New York Times) - For many people, there is a certain pride and self-confidence that comes from being able to do as much as we can ourselves and completing it, from chores around the house to taking care of ourselves and engaging in various hobbies and other activities. Except, unfortunately, the reality is that when health events strike us, those often become impossible to do... at least, not without help (something the independently self-reliant tend to bristle at). Yet in the end, it's possible (and even probable) that the successful life isn't just a matter of being able to do all the things we want to do and living that life, but instead being able to 'roll with the punches' and adapt as our own circumstances change, as highlighted in the recent book "Voices of Cancer". For instance, one doctor and mother of young children, when faced with a life-threatening and incurable lymphoma, ended out being forced to close her practice... but then started a second career writing books to help other people and their loved ones cope with cancer (at least to the extent possible). Still, though, the transition often entails its own grieving process in what we may lose - our business or career, stamina, or the ability to multitask - before being able to move on and embrace what's still possible. In other words, the key seems to be proactively trying to find what is a feasible "new normal"... which may also help to explain why those in old age often report greater happiness and contentment despite facing more health complications and potential disabilities (because they have learned through their years to embrace their 'new normals' as they come in life!?).
Athletes Hire Him When They Think They've Been Swindled (Patrick Hruby, Washington Post) - One of the fundamental challenges of gaining significant wealth is determining who can be trusted to help care for it... a difficult process in the complex world of financial advisors, and one that many consumers only learn by experience after a series of bad advisor experiences eventually lead them to a good one. Except when it comes to professional athletes, who often generate significant wealth in early adulthood (the average NBA salary is $6.5M and the average player is just only about 26 years old) with limited experience to evaluate the advisors that seek to counsel them about it, there is an especially high frequency of fraud, Ponzi schemes, and other inappropriate investment behavior, impacting even high-profile athletes like John Elway, Kareem Abdul-Jabbar, Dennis Rodman, and Mike Tyson (and if fraudsters will risk stealing from Mike Tyson, they'll likely target anyone!). And the problems are amplified by the fact that many athletes come from disadvantaged backgrounds and have less familiarity with investments like index funds (or the stock market in general), and thus tend to show a preference for the more familiar and tangible (like a nightclub or other business entities, even though such investments can actually be far riskier). Which has led to the emergence of experts like Chase Carlson, an attorney who specializes in working with athletes to help figure out what happened when the money unexpectedly vanishes (and has now recovered nearly $9M on behalf of his clients, in schemes ranging from shady start-ups to an ill-fated nightclub and even an electronic bingo casino). In fact, one Ernest & Young report estimated that from 2004 to 2017, athletes across all sports ended up with fraud-related losses totaling nearly $500M (and Carlson figures the number may exceed $1B, as many defrauded athletes are deliberately not public about potentially-embarrassing financial situations!).
Financial Abuse In The Age Of Smartphones (Veronica Dagher, The Wall Street Journal) - While unfortunate incidents of spousal financial abuse have long existed, the rise of smartphones and the evolution of modern technology is causing the ways that financial abuse may occur to evolve as well. For instance, while in the past abusers may have put a partner on a strict budget and hidden bank accounts or assets from them, now some are going so far as to install keystroke-monitoring software on a victim's computer to see if a spouse is seeking help or trying to open their own accounts. Hidden cameras and GPS tracking devices (often pre-installed on smartphones or in vehicles) to facilitate surveillance of an abused partner are also increasingly common. And some are going so far as to leverage the emergence of cryptocurrencies like Bitcoin as a means to transfer and hide assets from spouses (e.g., to pay less alimony or child support following a divorce). On the other hand, technology often still leaves more of a trail, and a growing number of forensic and data consultants are finding ways to leverage technology to identify hidden assets or provide proof of financial abuse. In the context of financial advisors in particular, though, it's important to recognize that financial spousal abuse can occur in homes at all wealth levels, and in fact, some advocates have suggested that affluent women may be more at risk, as their social standing in the community or reliance on a certain lifestyle for themselves or their children (that they couldn't possibly afford on their own if they left) may reduce their likelihood to report abuse in the first place. In addition, data from the National Domestic Violence Hotline shows that women try to leave an abusive relationship an average of 7 times before succeeding (where a lack of financial resources is one of the most common reasons a person returns to an abusive relationship). Which, again, can span all wealth levels, as the recent book "Not To People Like Us: Hidden Abuse In Upscale Marriages" reveals how when abused spouses in affluent marriages try to break away, it often entails "an onslaught of meritless [legal] pleadings and frivolous lawsuits" that, for one survivor, resulted in an 8-year divorce and more than $1M in legal fees!
Advisor Ethics Can Resemble A House Of Mirrors When Relying On Disclosure Alone (Greg Bartalos, RIAIntel) - One of the primary focal points of recent advisor regulation has been on disclosure, and that advisors should both understand their potential conflicts of interest and be able to explain to prospective clients how they are compensated and the potential conflicts that may entail. Yet a recent academic paper entitled "Bringing The Self" finds that when people are aware of their conflicted compensation it doesn't necessarily help them avoid making biased recommendations, as instead, the incentives tend to cause them to come up with plausible explanations about how the recommendation may still be appropriate for and in the clients' best interests... effectively trying to justify the compensation after the fact to avoid any self-perception of bias for having made the recommendation. Yet the researchers found that when people don't even know how they're being compensated (and whether one recommendation may provide better compensation than another), their recommendations often end out being different (and more objective). Notably, the study ultimately was conducted via the Amazon Mechanical Turk platform (a crowdsourcing platform that engages consumers in various tasks, including academic researchers' hypothetical research scenarios), and not necessarily with financial advisors themselves, who may or may not have additional capabilities to self-mitigate their conflicts (e.g., given additional advisor education). Still, though, the fundamental point remains: being self-aware of potential conflicts of interest that come from uneven compensation for various product recommendations doesn't necessarily help us be less biased in our recommendations, and instead may be more likely to simply encourage us to rationalize after the fact the recommendation that we're being incentivized to make (which further supports regulatory approaches to either levelize and equalize compensation across products, or to actually reduce the awareness that advisors have about how different types of products may have different financial benefits for themselves and/or their companies).
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors as well.
Yes this is the best weekend reading for financial planners.