Weekend Reading for Financial Planners (Jan 29-30)

Pending SEC Proposal Targets Advisers' Cyber 'Hygiene'

(Mark Schoeff | InvestmentNews)

In recent years, financial industry regulators have increasingly recognized the importance of cybersecurity for advisory firms, given that most firms not only hold a trove of their clients’ personal data, but often (through discretionary trading or money movement abilities) have power over their clients’ money itself. And in light of numerous high-profile hacks of Fortune 500 companies – showing that even the largest corporations can fall victim to cybercrime – firms of all sizes have sought to develop cybersecurity programs that can protect their clients and meet the SEC’s requirements for cybersecurity compliance. But the problem is that, while numerous SEC rules – such as books and records, data privacy, and business continuity – touch on a firm’s cybersecurity procedures, there is no comprehensive and explicit cybersecurity rule that firms can reference.

As a result, advisory firms – particularly smaller firms without dedicated IT support staff – must follow a patchwork of various regulations which can be opaque, complex, and arduous to follow. Furthermore, many of the SEC’s rules that do explicitly discuss cybersecurity – such as 1999’s Regulation S-P requiring firms to protect customer records and information – are decades old and potentially do not take into account modern security threats in our increasingly digital world. And so, as threats evolve and new vulnerabilities appear, many firms are stuck relying on out-of-date guidance that contains little actionable instruction for firms that simply want to keep their clients’ data safe.

In a speech this week, SEC Chair Gary Gensler proposed three broad steps that the SEC will consider to modernize and expand its cybersecurity regulations. First, the SEC will consider reforming Regulation Systems Compliance and Integrity (Reg SCI), a 2014 rule requiring stock exchanges and clearinghouses to maintain robust cyber infrastructure, and potentially expanding it to cover some of the largest broker-dealer firms (acknowledging their significance in providing custody and trading infrastructure to a large swath of the financial industry). Second, the SEC may increase its requirements for cybersecurity preparedness and reporting for RIAs and broker-dealers. Finally, the SEC will consider reforming and modernizing Regulation S-P (including, specifically, altering the timing and method of notification that clients would receive if their personal data were breached). Ultimately, however, Gensler’s speech was so broad in scope that it gave little indication of whether the SEC’s proposal will result in a more clear and comprehensive cybersecurity policy for financial advisors (or simply, as suggested in the speech, increase reporting requirements for RIAs); however, any new proposed rules are targeted to be released in April 2022, so firms can look forward to more details potentially forthcoming this spring.

Broker-Dealers Are Getting Reg BI Deficiency Letters From SEC, Compliance Exec Says

(Tracey Longo | Financial Advisor)

The SEC’s Regulation Best Interest (Reg BI) rule requires SEC-registered broker-dealers to act in their clients’ best interests when making an investment recommendation. Among the recommendations covered by the rule are rollover recommendations for clients’ retirement funds (such as assets in IRAs or 401(k) plans), for which the broker-dealer must assess “reasonably available alternatives” to demonstrate that the recommendation is in the client’s best interests. Prior to Reg BI’s enactment in June of 2020, rollovers were often significant sources of abusive sales practices, with a subset of less-honest broker-dealers in their role as “advisors” convincing retirees to roll over entire accounts into products that would generate a hefty commission for the broker-dealer; the rule was designed to curb such abuses by requiring more transparency about the costs and benefits of executing a rollover to catch those ‘bad apples’.

At least that is how it would work in theory; in practice, however, it seems that many broker-dealers have yet to fully comply with Reg BI’s requirements, and are receiving deficiency letters from the SEC detailing their failures to complete and document the required assessments. Among the various deficiencies are the failure to standardize, digitize, and supervise representatives’ obligation requirements, as well as allowing representatives to “self-attest” that they have performed their duty-of-care obligations by simply checking a box on a form, without providing any of the actual data used to make the assessment (thereby taking the advisor’s word that they fulfilled their obligation, which would presumably do little to prevent any abusive behavior by a dishonest advisor who could simply self-attest whether or not they actually performed the assessment).

The SEC’s letters come as the Department of Labor is preparing to enforce its own best-interests rules regarding rollover recommendations starting February 1, which requires firms to deliver their rationale for making a recommendation directly to the investor (as opposed to only documenting it internally, as the SEC requires), and to conduct an annual review of their compliance with the rule – meaning that firms who fail to digitize and properly archive their recommendations may find themselves swamped in paper forms or PDFs when it comes time to perform those reviews. Ultimately, the failure of so many broker-dealers to comply with Reg BI foreshadows even greater future issues complying with DOL’s even-more-stringent requirements (which could end up costing those firms greatly, since DOL has the ability to impose a 10-year suspension of rollover transactions on firms that violate its best-interests rules).

Group Seeks End To RIAs Forcing Costly Arbitration On Clients

(Tracey Longo | Financial Advisor)

Recently, the existence of arbitration clauses in advisory firms’ client agreements has become an increasing matter of debate. The advisory industry tends to favor the clauses, which provide a way to settle disputes with clients more quickly and privately than through the court system, but investor advocates have begun speaking up against the clauses for a variety of reasons.

First, the clauses are generally mandatory, meaning clients have no option to bring their dispute to court rather than follow the arbitration process. Second, there is a widespread belief that arbitration outcomes tend to favor advisory firms over clients (since arbitrators often come from within the industry). Third, and perhaps most alarming, clients who pursue arbitration against advisory firms often need to pay $30,000 in arbitration fees in advance just to begin the process – a fact that may deter many clients from even pursuing disputes (since an investor who loses savings due to bad advice may not have the money to pay in advance; and even if they did, the amount they could stand to recover through arbitration could be less than the cost of the arbitration itself).

To reduce the burden that the arbitration process imposes on clients, the Public Investors Advocate Bar Association (PIABA) is lobbying the SEC and NASAA to either prohibit forced arbitration clauses altogether, or require RIAs to pick up a greater portion of the cost of arbitration. This position represents a harder stance from PIABA, which previously sought only for firms to be required to disclose their arbitration clauses on Form CRS, but it also echoes legislation introduced in the House of Representatives last year that would have guaranteed RIA clients a choice of pursuing disputes either through arbitration or in court. Notably, a third possible route would be to simply require all arbitration disputes to proceed in FINRA arbitration forum, which currently permits claims against RIAs to go through its forum (but only if both the client and the RIA agree to it, giving the RIA an effective veto over the process), which has a comparatively lower average of $2,300 in fees and requires the firms to pay a higher proportion of the cost – meaning that, if the arbitration process were shifted over to FINRA, it would accomplish PIABA’s aim of reducing the cost of arbitration to clients without the need for more extensive reforms.

A Guide To Buying The Right Medicare Policy

(Joanne Giardini-Russell | Advisor Perspectives)

Navigating Medicare enrollment can be a tricky task for retirees, and sometimes for their financial advisors as well. And while many advisors feel comfortable outlining the different parts of Medicare as well as their general advantages and disadvantages, they often refer clients to a Medicare specialist to help the client choose a particular plan. But as Giardini-Russell (a Medicare agent herself) argues, the quality of service from these agents can vary significantly.

The agent-vetting process can occur as clients are approaching Medicare eligibility age (typically 65), and a good agent should be familiar with the pros and cons of starting Medicare at the age of eligibility if the client has other options (e.g., a workplace retirement plan). Also, a good agent will also guide clients through the process of applying for Medicare Parts A and B, even though they will not earn a commission for doing so (as Medicare specialists are typically only compensated for Medigap supplemental policies, Medicare Part D prescription drug plans, and Medicare Advantage plans). Similarly, agents should be able to explain how the client’s Medicare premiums will be impacted by the Income-Related Monthly Adjustment Amount (IRMAA) based on their income (an area where advisors can provide value by helping control client income to stay below IRMAA threshold levels!).

Agents can then help clients choose among Medigap, Medicare Part D, and Medicare Advantage plans for their specific state. For example, if the client is considering a Medicare Advantage plan, having an agent that is familiar with the insurance carriers and hospital networks in the client’s state can help ensure they choose a plan that includes the best medical providers for their individual situation. The key point is that not all Medicare agents are the same, and advisors can not only help clients find a Medicare agent that best suits their particular needs, but also provide support in reviewing potential policies and explaining the implications for their financial plan!

When Choosing A Medicare Plan, Look Beyond The Premiums

(Mark Miller | Wealth Management)

When reviewing different Medicare options, some retirees might first look at the cost of premiums when selecting from the available plan options. However, because not all Medicare plans are created equal (and because retirees will have varying needs for medical care), choosing a plan with a lower premium could end up costing a retiree more in the long run.

One of the major decisions when enrolling in Medicare is whether to choose traditional fee-for-service Medicare or Medicare Advantage. Medicare Advantage plans can be attractive for some retirees because they often have lower premiums than the alternative of using traditional Medicare with Medigap and Part D prescription plans, and can come with additional benefits, such as prescription, dental, and vision benefits. Nonetheless, these plans can have high maximum out-of-pocket limits that could be reached if the insured has significant medical needs. Further, Medicare Advantage plans steer retirees to ‘in-network’ providers, meaning that a policyholder could end up paying significantly more for care if they are seen by an ‘out-of-network’ provider.

Similarly, retirees choosing among Medigap policies might be tempted to choose the plan with the cheapest higher-deductible premium (which could result in significant out-of-pocket expenses if the retiree ends up needing expensive medical care), or at the opposite end, the plan with the most comprehensive coverage (which might lead the retiree to pay more in premiums when they could afford the deductibles and coinsurance of a plan with cheaper premiums). In the end, there is no ‘one-size-fits-all’ approach to selecting Medicare plans, and advisors can help clients look beyond premiums to the total expected costs to select the most appropriate plans given their health and financial situation.

Medicare Do-Over Season

(Mary Beth Franklin | InvestmentNews)

The timeline for Medicare enrollment can be confusing for many retirees. While most retirees sign up for Medicare in the seven-month initial enrollment period (the three months before they turn 65, their birthday month, and the three months after they turn 65), those who continued to use (creditable) employer health coverage after turning 65 can sign up for Medicare penalty-free up during a special enrollment period that ends eight months after their coverage ends.

Given the various deadlines, a portion of retirees will forget to enroll in Medicare during either the initial or special enrollment periods. However, they get another opportunity during the general enrollment period that runs from January 1 through March 31 each year. Yet this opportunity comes with additional costs, as the coverage will not begin until the following July 1 (creating a period where the retiree could be on the hook for any medical expenses), and their Medicare Part B premiums will incur a 10% late enrollment penalty (which is applied to Part B premiums for the rest of their life!) for every year they were eligible to enroll in Part B but did not.

The January through March period is also the time when those with Medicare Advantage plans can switch to a different Advantage plan, or to traditional Medicare. However, switching from an Advantage plan to original Medicare can be difficult for some people with health problems, as insurers can reject applicants or charge increased premiums for those who apply for a Medigap plan to supplement their traditional Medicare application given that they are now outside of their initial seven-month enrollment period. Given the potential consequences of not applying for Medicare during the initial or special enrollment periods, financial advisors can support clients (and save them potentially thousands of dollars in penalties!) by making sure they enroll in time and choose the Medicare plans that best meet their needs.

The Role Of Qualitative Data Gathering In Developing Client Trust And Commitment

(Carol Anderson and Deanna Sharpe | Journal of Financial Planning)

The ability to communicate and foster productive relationships with clients has long been recognized as a key skill for financial advisors. Communication opens the door to trust and commitment on behalf of the client, and those qualities are necessary for creating an open dialogue between the planner and client and ultimately for delivering advice in the client’s best interest. But it is difficult to quantify what exactly comprises effective communication, and what really builds trust in client relationships, because unlike some of the more technical areas of financial planning, there is not much clear-cut data on the subject of client communication.

A 2006 research study by the Life Planning Consortium attempted to provide empirical evidence for the role of effective communication in planner-client relationships by surveying both planners and clients on the planner’s use of various communication tasks and measuring the levels of client trust and commitment, both from the planner’s and the client’s perspective. In this paper, Anderson and Sharpe replicate the 2006 study to evaluate how planner-client communications have evolved in the intervening years, focusing on planners’ efforts to learn about their clients in four specific areas: cultural values, personality types and traits, money attitudes and beliefs, and family history and family values. The study’s most notable finding was that, in all four categories, planners significantly overestimated their communication skills (that is, planners rated themselves much more likely to make efforts to learn about their clients than their clients rated them) – a finding that differed starkly from the 2006 study, in which planners and clients closely agreed in each category.

Ultimately, the study’s findings may suggest that financial planners have not necessarily become worse communicators, but that clients have perhaps evolved a different set of expectations about what comprises best efforts to understand the client and their attitudes and values. And one of the study’s other notable findings – that there is a statistically significant relationship between planners’ efforts to obtain this information and the level of trust and commitment experienced by the client – underscores the importance for planners of making the effort to learn about their clients in these categories (and perhaps doing so more explicitly than the planner might assume they should).

The Sign Around Every Person's Neck

(Mitch Anthony | Financial Advisor)

Financial advisors – in particular those near the beginnings of their careers – are often eager to prove their expertise to prospective clients. But an advisor who gets too wrapped up in their own knowledge during a conversation risks forgetting who matters most in that dialogue. Because prospective clients are often less interested in the advisor’s technical expertise – since, after all, there may be many expert advisors to choose from, and if the prospect showed up in the advisor’s office the advisor likely already has the benefit of the doubt that they’re a credible expert – than whether the advisor can help them feel important.

And while simply recognizing this fact, and making sincere inquiries to boost the prospective client’s sense of significance, can go a long way toward improving an advisor’s communication skills, the fact is that there is likely more that each of us can do to improve our curiosity, inquiry, and listening skills. Because, in reality, most people are not born with great listening skills; rather, the ability to listen actively and empathetically (thus letting the advisor’s recommendations flow naturally from the conversation) must be practiced and developed over time. A good first step towards deepening these skills is to self-assess and understand areas in which one may be lacking empathy and listening skills. For instance, some advisors may be prone to dominating a conversation with their own stories. Others may focus predominantly on the facts of a situation without making the effort to fully understand the client’s feelings. And still others may simply miss the point of what a person is trying to say, fixating instead on irrelevant details. An increased level of self-awareness can help one recognize where they have the most need for improvement.

From there, it is a matter of practicing those skills, focusing on one’s weakest areas and practicing awareness to bring them up to par. In any conversation, however, it may ultimately do advisors good to imagine a sign hanging around the other person’s neck reading “Help Me Feel Important”, which is almost always what client communication is about in the end.

Don't Recommend Financial Planning

(Dan Solin | Advisor Perspectives)

Surveys have shown that a large majority of Americans do not work with a financial advisor. Many factors, such as the cost of financial planning or the desire to manage one’s own finances, may factor into this statistic, but it could be possible that the reason many people avoid financial planning is that they simply prefer not to think of the realities of change, aging, and death that financial planning inevitably touches on, and avoid financial planning conversations in order to get around these thoughts. Researchers have dubbed this effect the “End of History Illusion”, which causes us to think of ourselves (as well as our values and preferences) as fixed in time rather than the ever-evolving beings we are.

Accordingly, Solin suggests that one way to have more productive conversations around financial planning may be to avoid the phrase “financial planning” altogether, and instead to frame those conversations around the idea of “investing” – not with respect to their investment portfolio, but investing in themselves and their future. After all, “planning” can conjure images of necessary (but unpleasant) actions without an easy-to-imagine reward, in much the same way that we may know that flossing our teeth and eating vegetables are good for us in some way, but many people nonetheless avoid them because the future rewards for doing so are simply not tangible enough to overcome the “work” required.

On the other hand, “investing” carries the feeling of building towards something – a house, a child’s education, the future wellbeing of children and grandchildren, or anything that might have an immediate resonance for the client. And even without getting into a conversation about stocks and bonds, converting the conversation about financial planning to one about investing fits, because each of the client’s goals require the two inputs – funds and time – that define an investment. So for planners who encounter resistance to having financial planning conversations, this simple reframing of ‘investing into oneself' may be the way to overcome that resistance, have a productive conversation, and ultimately spur action.

How To Get Feedback

(Tomas Pueyo | Uncharted Territories)

Getting useful feedback is an important part of self-improvement. At the same time, while receiving positive feedback can be fulfilling, getting negative feedback can be both painful for the recipient and awkward for the person giving the feedback. Getting painful feedback can also make you question your skills, especially if the topic of the feedback is both important and something you previously considered a strength. But given the importance of feedback, there are several ways to both ask for and receive feedback that will make the experience better for both the person giving and receiving the feedback.

Getting high-quality feedback starts with how you ask for it. Best practices include being specific in what you are asking for feedback on, and asking for it in advance if possible. For example, rather than asking “How was my speech” after it was already given, asking “Could you give feedback on my delivery” in advance of the speech gives the person giving the speech a better idea of what to evaluate, and avoids a situation where they criticize the speech immediately after it was given.

When receiving feedback, it is important to avoid interrupting the person giving the feedback if you disagree with what they are saying (as you do not want to cut off what they have to say). And even if you do disagree with the content of the feedback, it is an opportunity to consider whether you are communicating in a way that gets your point across as intended (as almost by definition, their negative feedback suggests they didn’t receive the information that way, regardless of what was intended!). Also, when receiving negative feedback, it can help to separate your behavior from your identity. For example, if a colleague says that a comment you made offended them, it does not mean that you are a bad person, but rather that in the future you could consider changing the offending behavior (e.g., phrase that point differently!).

Finally, it is also important to thank, and not attack, the person giving the feedback, because even if you disagree with it, you want to leave the door open to receiving feedback in the future that could prove helpful to you. The key point is that while being a good recipient of feedback can take just as much thoughtfulness and skill as giving valuable feedback, the rewards to doing so can be significant!

Big Skills

(Morgan Housel | Collaborative Fund)

The phrase “the whole is greater than the sum of its parts” helps explain the concept that two seemingly innocuous factors can turn into something greater when combined. For example, one of the major advancements in human history came with the creation of bronze, whose hardness is useful for tools and weapons, but is the combination of copper and tin, neither of which are particularly hard themselves.

This can apply to financial planning as well, where observing the full range of a client’s financial situation can show more strength than any of the individual accounts they hold. But the idea that the whole can exceed the sum of its parts can also extend into human talent, where a combination of seemingly normal abilities can combine to create an extraordinary skill. For example, neither drawing nor being funny is particularly extraordinary, but someone who combines those skills could be a great cartoonist.

Housel identifies several characteristics that, while not particularly notable in isolation, can lead to improved decision-making and professional success when combined. These include, among others: curiosity across disciplines; the willingness to adapt views you wish were permanent; thinking in probabilities as opposed to certainties; knowing the long-term consequences of your actions; and deserving the good reputation that you have. As while again, none of these take any particular skill or natural ability (and might even be ignored in isolation!), together they could lead to extraordinary success!

Why You Should Ignore The Metagame

(Nick Maggiulli | Of Dollars And Data)

After playing a ‘game’ for a long time – whether it’s basketball, investing, or another activity – you might get the feeling that the unwritten ‘rules’ of the game have changed. In basketball, an example of this has been the dramatic increase in three-point attempts by NBA teams in the past decade; the value of a three-pointer has remained the same, but teams have figured out that increasing the number of three-point attempts can lead to more victories. This game about the game is called the ‘metagame’, and can be thought of as the optimal strategy to win a game at a specific point in time (and recognizes that the optimal strategy can change as the meta shifts over time).

For example, when it comes to investing, this could refer to ‘hot’ investment trends, whether it was the internet stocks during the boom in the late 1990s or cryptocurrencies today. And while these changes to the metagame can create success for early adopters, those who come late to the party often end up losing out as the game shifts again (e.g., those who bought Pets.com stock soon before the tech bubble burst). And so, Maggiulli argues that the time it takes to successfully ‘play’ the metagame (identifying trends and jumping on them, while there is still value to be had) is not necessarily worth the potential rewards given that many others will be attempting to do the same.

Instead, he suggests creating a ‘personal monopoly’, where you leverage your relative strengths to create a career and life uniquely suited to you (rather than chasing the trends that many others are also pursuing). For financial advisors, this could mean that instead of chasing the hot new trends to attract generalist clients (for whom many other advisors are competing), that you instead find a niche of interest where you can provide superior service to a specific group of clients. And so, the key point is that concentrating your effort on building your own unique talents can be a better way to find success than trying to ‘win’ (and feel like you’re continuously chasing) the metagame!

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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.