Weekend Reading For Financial Planners (January 11–12)

Implications Of The WEP/GPO Repeal For Financial Advisors And Their Clients

(Marcia Mantell | ThinkAdvisor)

Social Security planning (e.g., deciding when to claim benefits) is an important way financial advisors can add value for their clients, particularly those who depend on these benefits for a significant portion of their retirement income. However, while most clients will likely have paid into the Social Security system throughout their lives (through payroll taxes), clients who worked in "non-covered" positions (most commonly state and local government employees, as well as certain Federal employees who began service before 1984) and are eligible for pensions from these employers might not have paid into Social Security during portions (or all) of their careers. Which means that they might not be eligible to receive Social Security benefits, or, if they also worked in other "covered" jobs that did withhold taxes for Social Security, might receive a lower benefit around than typical clients might.

Nonetheless, those who worked both "covered" and "non-covered" jobs over the course of their careers in the past could benefit from Social Security's progressive benefit formula (which provides a higher income replacement rate for lower incomes) as years of "non-covered" work (but not the earnings in those years) would count towards their benefits, leading to Average Indexed Monthly Earnings (AIME) that would appear lower than their actual earnings in years in "covered" jobs (meaning that more of their earnings would be subject to the higher replacement factors when calculating their Primary Insurance Amount [PIA]). With this in mind (and given that these individuals were also receiving public-sector pensions meant to stand in for Social Security benefits), the U.S. government enacted two provisions, the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), which reduce these individuals' own Social Security benefits (in the case of WEP) or the spousal or survivor benefits received by individuals who worked in "non-covered" jobs (in the case of GPO). While these measures have saved the government billions of dollars since they were enacted more than 40 years ago, they have come under criticism from those whose benefits have been reduced, among others.

Amidst this backdrop, Congress passed and President Biden this week signed into law the Social Security Fairness Act", which eliminates both the WEP and GPO provisions and is expected to lead to an average increase in Social Security benefits of $460 for Social Security beneficiaries and more than $1,000 for some spouses of affected workers by 2033. These beneficiaries will see an increase in their benefits in 2025, with retroactive benefits applying for 2024 as well. For clients who previously claimed Social Security benefits but were subject to WEP/GPO, their updated benefits should come automatically (because it could take many months to operationalize the new law, the Social Security Administration has created a dedicated webpage for updates on its implementation).

Notably, advisors might also have clients who did not previously claim Social Security because they believed GPO would completely wipe out their spousal benefits. However, with its repeal, these individuals could now be eligible for benefits and might consider claiming. Additionally, some clients might have applied for Social Security benefits before age 70 (when they could receive the maximum possible benefit) because they believed their spouse would not receive survivor benefits based on GPO. Nevertheless, given the GPO repeal, some of these clients might choose to withdraw their benefits application (though they must have had their benefits approved in the past 12 months and will need to pay back any benefits already received) to receive a larger benefit for themselves and their spouse.

In sum, given the range of workers (and spouses) for which WEP/GPO applied, many advisors will likely have retired clients who will receive increased Social Security benefits in the years ahead (and can adjust the estimated future Social Security benefits of clients who are still working and would have faced WEP/GPO limitations when conducting planning analyses as well). Nonetheless, while these clients will see a boost to their benefits, given the WEP/GPO repeal's estimated cost of $196 billion over 10 years, this legislation (as well as a separate proposal to make Social Security benefits tax-free) could move up the exhaustion date of the Social Security trust funds (from the current estimate of 2035) and ultimately affect a wider range of clients if Congress enacts tax increases and/or benefit cuts to shore up the system in the coming years. Note: stay tuned for a full-length article on the Nerd's Eye View blog covering the WEP/GPO repeal and its implications for advisors and their clients!

Nearly 71% Of New Advisors Drop Out Within 5 Years

(Jennifer Lea Reed | Financial Advisor)

While financial advisors on the whole report strong levels of wellbeing (according to Kitces Research), those with more industry experience tend to have greater wellbeing than those newer to the field. Which suggests that helping get employees through the (often challenging) first several years in the business not only can allow them to reap these wellbeing benefits but also reduce advisor turnover for firms.

Amidst this backdrop, according to data from research firm Cerulli Associates (representing advisors in broker-dealers, RIAs, and other channels), nearly 71% of new advisors drop out in their first five years (with most of these leaving their firm within three years), demonstrating both the high hurdles to success for many new advisors as well as the turnover that certain firms face. Notably, surveyed advisors indicated that new client acquisition was the largest hurdle for success in the industry, suggesting that firms making new hires could improve retention by reducing (or eliminating) business development requirements for new hires and instead focusing on training and career development (e.g., while 93% of newer advisors believe training on financial planning topics is important to their success, only 55% said their firms provide sufficient training). Other factors promoting success include mentorship opportunities and the ability to join an established team, according to Cerulli.

In the end, while new advisor turnover might be seen as a feature rather than a bug by some firms focused on product sales (given that new hires will likely bring in some clients, who the firm can potentially profit from after the advisor leaves the firm and/or industry), it will likely be up to other firms to train and develop these advisors (perhaps putting business development goals aside while they grow as an advisor) so that they not only become the next generation of successful advisors within the firm, but also the future leaders of the financial advice industry as a whole!

FINRA Faces Big (And Potentially Existential) Legal Battles In 2025

(Sean Allocca | The Daily Upside)

While the Financial Industry Regulatory Authority (FINRA) operates under the purview of the Securities and Exchange Commission (SEC), in practice it acts as a self-regulatory organization overseeing its member broker-dealers and their registered representatives. However, in recent years its practices (e.g., its ability to expel member firms without being subject to Constitutional requirements that a government agency might face) have come under scrutiny from both sides of the political aisle as well as from some firms under its jurisdiction.

On the political side, Democratic Senator Elizabeth Warren sent a letter to FINRA last year asking for answers regarding the decline in enforcement cases brought by the regulator (reaching the lowest level in the agency's history in 2023, with fines making up only about half of what it issued at its peak in 2016), while conservative activists have called for major reform to (or even abolishment of) FINRA (arguing that its processes are not transparent and that its operational costs outweigh its benefits).

On the other hand, given the potential difficulties of passing FINRA-related legislation through Congress, an even greater threat to the regulator could come through the court system. In a long-running dispute, a group of three Federal judges in November ruled that Utah-based Alpine Securities would face "irreparable harm" if FINRA were allowed to expel the firm, and imposed future reviews by the SEC on expedited expulsions. Which at best slows FINRA's ability to expel problem firms, and at worst could curtail its ability to be an effective regulator, as the courts similarly have begun to question just how much regulatory and enforcement authority is appropriate for FINRA to have when it's not actually a government agency. And at the least, while the judges did not address Alpine's argument that FINRA itself is unconstitutional, aggrieved firms could make a similar case in the future to slow their own expulsion or other regulatory enforcement actions against them.

Ultimately, the key point is that FINRA has to thread a very tight needle, leveraging its regulatory powers to take enforcement actions against bad actors (to fulfill the desire of legislators and the broader public for regulation of the broker-dealer industry) while, as a self-regulating organization, maintaining the favor of its member firms, all while trying to engage in enforcement without the full force and authority (and oversight and review) of a bona fide government agency. Which raises the possibility additional legislative and/or judicial scrutiny (potentially up to the Supreme Court) in the years ahead and the potential for it to be stripped of (at least some of) its powers (a move that could bring broker-dealers under the regulatory purview of the fully-government-sanctioned SEC… with the caveat that the SEC already appears to be stretched overseeing investment advisers before adding in broker-dealers as well!?).

Does High CAPE Predict Low Market Returns?

(Harry Mamaysky | Advisor Perspectives)

The Cyclically Adjusted Price/Earnings (CAPE) ratio is a popular tool to assess stock market valuation across a period of time (typically 10 years or longer). With the CAPE ratio today in the vicinity of highs seen before the market crashes associated with the Great Depression and the tech bubble (and media attention highlighted these elevated valuations), advisors might face client questions in the coming months regarding whether it would be appropriate to reduce their equity allocation in advance of a potential market decline.

However, Mamaysky suggests that today's elevated CAPE levels do not necessarily presage particularly poor market returns in the coming year(s). To start, the measurement of corporate earnings today might not be directly comparable to those of decades past (given that CAPE calculations go back to the 1800s). In addition, investors today might expect faster future earnings growth, which could justify a higher price-to-earnings ratio today without implying lower future returns. Mamaysky also highlights that the CAPE ratio has experienced an upward trend over time (meaning that while today's value is still high in historical terms, the trend-adjusted value isn't as elevated as the raw ratio might suggest). Further, when segmenting CAPE values and subsequent forward returns into 'buckets', he notes that investors looking to wait on the sidelines for CAPE to fall below its long-term average might not have a chance to get back in the market, as almost the entirety of the strong stock market performance over the last three decades took place from relatively high detrended CAPE buckets (with the exception being the lows of the 2007-2009 financial crisis, which saw the CAPE temporarily dip below the long-term average).

In sum, while CAPE has shown some ability in the past to offer insight into future returns, Mamaysky's arguments suggest that it's not a particularly effective short-term market timing indicator. Which suggests that advisors could address client concerns about equity valuations (without reflexively reducing equity allocations) by using this ratio as one of many data points in projecting planning outcomes (particularly for clients nearing and in retirement most subject to sequence of return risk), perhaps as part of an economic regime-based forecasting models using Monte Carlo simulations, and perhaps then determining (alongside other factors, such as the client's tolerance and capacity for risk) potential portfolio adjustments?

International Diversification Is About Decades

(Ben Carlson | A Wealth Of Common Sense)

Since coming out of the bear market associated with the Great Recession, U.S. stocks have dominated their international counterparts. For example, from January 2008 through May 2023, the S&P 500 Index returned 9.2%, outperforming the MSCI EAFE Index return of 2.7% by 6.5 percentage points and the MSCI Emerging Markets Index return of 1.0% by 8.2 percentage points. Which has likely led many advisors to face client questions regarding whether international diversification still makes sense.

While it might be frustrating for clients with a portfolio with an international allocation to see returns lag the (highly publicized) returns of the S&P 500, Carlson suggests that international diversification continues to make sense, particularly when looking at a decades-long time frame rather than just a few years. Looking at a sample of ten of the largest developed markets (e.g., the U.S., Japan, Germany, France), the United States has put in the best performance for both the 2010s (257% cumulative return) and the 2020s (67% as of May 2024). However, previous decades saw the U.S. lag behind other developed markets, with the -9% cumulative return of the 2000s trailing all but one of the other sampled countries (and falling well behind the 100%+ return seen by Canada and Spain during the period). Looking back further, the U.S. was second in the 1990s, eighth in the 1980s, and seventh in the 1970s (notably, the other countries in the sample similarly went up and down the scale in terms of decade-long returns, indicating that difficulty of identifying the country that will offer the best returns in the coming decade).

In the end, historical return data suggest that the value diversifying across U.S. and international markets is not about achieving the best possible return each decade, but rather ensuring that a client will benefit from top-performing markets while avoiding 'lost decades' that are more likely to occur with single-country investing than a more diversified approach. Which might be cold comfort to some clients during the current period of U.S. dominance but could pay off if (when?) market winds shift in the future!

Is The Stock Market Too Concentrated?

(Allan Roth | Advisor Perspectives)

Investors often look to index funds as a way to get broad exposure to the stock market. However, depending on how they are weighted, a small handful of stocks can make up a significant percentage of the index, calling into question whether investors are achieving the desired diversification benefits (and whether such concentration might lead to a market downturn). For instance, as of mid-2024, the ten stocks with the largest market capitalization in the S&P 500 made up about 35% of the index (with the other 400+ stocks making up the rest). Further, all but two of those stocks were heavily technology-related, suggesting that future weakness in that sector could have an outsized impact on the returns of the index as a whole.

To assess the impact of periods of high market concentration, researcher Bryan Taylor in his paper "Two-Hundred Years Of Market Concentration In The United States" looked at stock returns from 1790 to the present, dividing this era into seven different periods. To start, he found that periods of market concentration are not uncommon and have featured several different industries, from banks to railroads in the early years of the country to energy and, most recently, technology. He notes that concentration typically increased during bull markets (reflected in the current post-2014 period of increasing concentration and strong equity returns) and decreased during bear markets. Further, while bear markets necessarily follow bull markets, periods of high concentration don't necessarily predict the timing of a future bear market.

Altogether, given that periods of increased stock market concentration might make some clients nervous, advisors can play a valuable role in calming their nerves and ensuring that their portfolios are aligned with their goals and risk tolerance, whether by leveraging rebalancing strategies and/or creating a diversified portfolio of assets with low correlations.

Five Ways Financial Planners Can Exceed Client Expectations In 2025

(Sheryl Rowling | Morningstar)

The turn of the new year brings opportunities for firms and advisors to enhance their offerings for clients, perhaps even exceeding their expectations and generating greater loyalty (and retention rates) in the process.

One potential option is for an advisor to 'level up' their knowledge, perhaps by doing a deep dive into a topic that is valuable for their ideal target client (whether a single course or a certification program). Notably, this knowledge not only can be used with current clients, but can be leveraged in the form of content (e.g., blog posts) used for marketing to new clients as well. Another option for firms is to invest in technology to help clients better engage in the planning process, for instance by encouraging more collaborative plan presentations. Firms could also consider ways to increase touchpoints with clients (without taking up too much advisor time). One option could be regular virtual Q&A sessions, which would allow clients to ask questions on their minds (and perhaps let advisors address common questions in a more efficient manner than addressing the same question at each client meeting!). Similarly, proactively addressing client concerns (whether through an email update or a client newsletter) could demonstrate that an advisor is thinking about their clients between regularly scheduled meetings. Finally, firms could consider ways to have more social engagement with clients, possibly by initiating a new in-person client event (which could have a side benefit of potentially generating referrals from friends the clients bring!).

Ultimately, the key point is that while advisory firms tend to have very high client retention rates, refining a firm's service offering (both to provide clients with increased value and to save advisor time), finding new ways to show clients their advisor is working on their behalf (outside of regularly scheduled meetings), or holding events that can build the personal bonds between advisors and clients could all be ways to build client loyalty (and perhaps attract new ones) in 2025 and beyond.

How Advisors Can Differentiate Themselves From Generative AI Advice

(Samantha Lamas | Morningstar)

In recent years, many financial advisors have faced the challenge of differentiating themselves in the eyes of prospects as previous separators (e.g., offering comprehensive planning services) become more common. In addition to inter-firm competition, human advisors could face a new competitor in the coming years in the form of financial advice provided by generative Artificial Intelligence (AI) tools.

According to a model created by research and consulting firm Deloitte, generative AI tools could become the leading source of retail investment advice in 2027, achieving 78% usage in 2028. Notably, though, the model predicts that investors' use of human advisors will only fall from 35% today to 31% (as some investors use both a human advisor and AI-generated advice). Perhaps most importantly, though, given the type of advice most likely to come from generative AI tools (e.g., relatively broad asset allocation guidance), the most likely advisors to be displaced could be those providing a more limited scope of financial advice (with those offering comprehensive planning services being harder to unseat by AI). In addition, human advisors could be better positioned to add value on the 'human' side of financial planning, such as helping clients craft goals for their unique situation, conducting regular updates to their plan, and serving as a sounding board during turbulent markets or when 'life happens'.

In sum, while generative AI tools could displace advisors providing more "limited scope" advice (not dissimilar to the effect robo-advisors had on the industry), those advisors offering comprehensive planning services and addressing more complex issues are less likely to be affected (and could potentially benefit from AI-enabled, advisor-facing tech tools!).

Using Feedback Surveys To Discover What Clients Value

(Meg Bartelt | Flow Financial Planning)

Financial advisors provide value to their clients in a wide range of ways, including both technical (e.g., retirement income planning) and qualitative (e.g., serving as a reassuring voice when times get tough for clients) services. However, while an advisor might have an opinion of what their clients value the most from working with them, it's possible that the clients themselves have different views.

One way for advisors to better understand what their clients value the most (rather than just guessing) is through the use of a client survey. For example, Bartelt has now conducted two annual client surveys, which revealed that while her clients valued many aspects of their work with her firm (e.g., quick responses and attention to detail), what they most valued (on the whole) were their conversations with her team (which provide, among other things, accountability and peace of mind, according to the survey). Further, the 2023 survey indicated that clients wanted meetings more proactively scheduled between their annual meetings, which led the firm to start scheduling these mid-year meetings (in addition to their next annual meeting) during the annual meeting, preventing this task from slipping by as clients returned to their regular busy schedules.

Ultimately, the key point is that client surveys can provide advisory firms with insights into what their clients value the most from the relationship and potentially offer ideas for how to offer an even higher level of service going forward (which might only require small tweaks, rather than wholesale changes, to current processes)!

Credit Card Rewards Strategies: How To Maximize Benefits And Add Client Value

(Nerd's Eye View)

Credit cards are ubiquitous in the United States, and financial advisory clients are likely to have at least one in their wallet. Nevertheless, while many consumers may know about the rewards they earn on the credit cards they hold, they might not be aware of the opportunities that maximizing their rewards could offer.

Credit card rewards come in three types: cash back, travel points/miles, and transferrable points that can typically be used for either cash or travel. Each of these can be appropriate for different types of clients. For example, clients who crave simplicity or have little interest in travel might find cash back rewards most useful. Other clients who are accustomed to economy-class airfare and only dream of flying in business or first class may want to maximize travel credit card rewards instead, to get an experience that they would not be able to have otherwise!

Rewards can be earned through sign-up bonuses and regular spending with the card. Credit card sign-up bonuses (which can be worth more than $1,000 in cash or travel expenses per card) are the fastest way to earn rewards, typically offering a bonus for spending a certain amount of money in a given period of time. For regular spending, credit cards either offer a fixed rate for spending on the card (e.g., 2% cash back for all categories of spending) or a variable rate based on the particular category of spending (e.g., 4% cash back for every dollar spent on travel, or 3% cash back for every dollar spent at restaurants).

For advisors, cash flow discussions with clients can be a good opportunity to broach suitable credit card reward programs. Advisors can discuss not only what clients are purchasing, but also how they are paying for those purchases. This can reveal important information to help advisors craft a sensible rewards strategy for clients, including the client's regular credit card spending (to gauge their ability to meet spending requirements for sign-up bonuses), which categories of purchases (e.g., groceries, gas) they make most often (to find cards that offer bonus rewards in these categories), and whether they are planning any large one-time expenses (that could be used to meet sign-up bonus spending requirements by themselves).

In addition to understanding a client's spending patterns, it is also important to gauge their interest in managing credit card rewards on an ongoing basis. While some clients might be interested in applying for multiple new cards each year to build up points and miles through sign-up bonuses, others might be less interested in applying for cards and would instead prefer earning rewards on a single card. Either option can be profitable for the client, so it is important that they are comfortable with the process (so that it will be easier for them to stick to the strategy in the first place!).

Ultimately, the key point is that working with clients to devise a credit card spending strategy that maximizes available rewards can help advisors demonstrate ongoing value to attract and retain clients. Because, at the end of the day, what client wouldn't want to work with an advisor who can help send them on a 'free' vacation each year?

Is Maximizing Credit Card Rewards Worth It?

(Nick Maggiulli | Of Dollars And Data)

Credit card rewards can seem like a great deal, as they represent as a type of 'rebate' on everyday purchases or even a way to get hundreds or even thousands of dollars' worth of free travel over the course of the year. Nevertheless, it is also worth weighing the costs of trying to maximize credit card rewards to determine the 'right' strategy for a given individual.

To start, maximizing credit card rewards can take time, whether in finding the best signup bonuses, determining the best card for a given purchase, ensuring that various credit card bills are paid on time each month, and deciding whether to hold on to cards that have annual fees (which suggests that while an individual can potentially earn thousands of dollars of travel through rewards each year, this benefit can be weighed against the time cost of doing so). In addition, applying for credit cards can affect one's credit score, with additional card sign-ups counting as 'hard' inquiries and reducing the average age of credit (though these negative effects are counterbalanced to some extent by the increased amount of available credit, which lowers credit utilization). Which suggests that individuals planning to apply for a mortgage or other major loan might pull back from new card signups in order to keep their credit score as high as possible. More broadly, given that the cost of interest (or overspending) will typically outweigh any points received, those trying to maximize credit card rewards will want to be sure they can pay their monthly credit card bill in full (and not be tempted to buy things they wouldn't otherwise just to hit a signup bonus spending requirement!).

In the end, while maximizing credit card points can be a rewarding proposition (particularly when redeemed at significant value for luxury flights and hotels), it's not a 'free lunch'. Which suggests that this practice is best suited for those with the time, organizational skills, and financial wherewithal (perhaps supported by a financial advisor who could point to the best current offers?) to do so (while others can still get significant value from their credit card spending, for example by using a simple 2% cash back card!).

Turn That Stockpile Of Miles Or Points Into A Trip

(Jacob Passy | The Wall Street Journal)

While it can feel satisfying to build up a healthy supply of airline miles or hotel points (and dream about the travel they could pay for), at some point they need to be redeemed to tap into their value (notably, this tends to decline over time as travel providers increase the cost of redemptions). Which means that having a strategy to use these rewards can be just as important as having one to earn them in the first place.

A first step is to take stock of the points you currently have available to you. For instance, you might have a combination of airline miles, hotel points, and credit card rewards (that can be strategically transferred to a variety of airline and hotel programs to 'top up' your balance to have enough miles or points for a given reward) that could be used in a variety of ways. Next, setting travel goals can help clarify the best potential use of the points (e.g., are you prioritizing traveling in business class, staying at a luxury hotel, or wanting both). For instance, if you have a specific resort in mind, you can figure out exactly how many points you will need for the trip and can then determine whether you have enough already (or might need to tap into a credit card signup bonus to earn the needed points). In addition, it can also be worth checking the cash price for a given flight or hotel (as in some cases it can cost less to book the travel directly using the credit card points or might be worth saving them for another redemption rather than transferring them to the provider's rewards program).

In sum, having a plan for redeeming a stockpile of travel rewards points can help ensure they not only get used (justifying the time and travel it can take to earn them), but also are deployed in a way that generates significant value (often in the form of a luxury travel experience that you might have reluctantly paid for using cash!).

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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.