Weekend Reading For Financial Planners (June 10-11)

House Unanimously Passes Bills To Expand Accredited Investor Pool

(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 and more generally implying a shift where the bulk of growth happens before a company is accessible as a public stock via the stock market. And amid weak stock and bond market performance in 2022 – and more generally with several years of volatile markets – more investors have looked for alternate ways, including private investments, to generate returns (leading to an explosion in the use of ‘alts’ amongst financial advisors as well!). 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 just having ‘enough’ income and wealth to afford to lose money on risky private investments doesn’t necessarily the person has the ability to analyze a private company and the risks involved in such an investment in the first place).

Amid this debate, the U.S. House of Representatives has advanced legislation on a bipartisan basis that would expand the pool of individuals considered to be accredited investors, and more substantively shift the requirements away from income-and-wealth-based tests to an actual ‘test’ (an examination) that investors could pass to become accredited investors. Last week, the House passed the Equal Opportunity for All Investors Act, which would allow individuals to become certified as accredited investors after successfully completing an examination designed by the Securities and Exchange Commission (SEC) and administered by the Financial Industry Regulatory Authority (FINRA). And this week, the House passed both the Fair Investment Opportunities for Professional Experts Act, which would deem individuals with certain licenses or educational or professional backgrounds (e.g., brokers and investment advisors) to be accredited investors (similar to an SEC rule enacted in 2020), and the Accredited Investor Definition Review Act, which would give the SEC discretion to determine what certifications, designations, or credentials investors must possess to be accredited… and requires the agency to review the accredited investor definition every 5 years.

This legislation will now go to the Senate, where its prospects are unclear. But, if passed and eventually signed into law, these measures could significantly expand the pool of accredited investors, presenting both opportunity (both for the investors as well as businesses who could be able to access more capital) as well as risks (as often illiquid and opaque private investments could lead to investment losses for newly minted accredited investors). And while many financial advisors have already been able to offer their clients access to private investments following the SEC’s 2020 rule, news of expanded opportunities for individuals to qualify as accredited investors could spark client interest in these investments and offer advisors an opportunity to add value by doing due diligence on private investments and determining whether they might be a fit for client portfolios and their broader financial plans!

Growth Of Younger Investors, Popularity Of Individual Stocks (Over ETFs) Cited As Top Investment Trends

(Holly Deaton | RIAIntel)

The 21st century has seen a number of technological and other trends that have shaped the investment landscape, from the increasing popularity of online, retail investor-oriented discount brokers (making it significantly easier for individuals to invest on their own) to the rise of Exchange-Traded Funds (ETFs), which have gained market share from mutual funds (thanks in part to their tax advantages and intraday liquidity) and the steady decline of ticket charges to the point where investors today can largely place trades for free. And a recent report suggests that these innovations have led to younger and less-wealthy investors entering the market as well as the growing popularity of investing in individual stocks rather than mutual funds or ETFs.

According to Broadridge’s 2023 U.S. Investor Study (which drew on data from 2018-2022 covering approximately 90% of all U.S. households who invest in mutual funds, ETFs, and equities sold through financial intermediaries), the percentage of “mass market” households (those with less than $100,000 in investible assets) who are investing has increased across almost all generations (the Silent Generation, those born between 1928 and 1945, were the exception), with Millennials (those born between 1981 and 1996) seeing the largest increase (from 35% to 44%) since 2018. Further, Millennial Assets Under Management (AUM) increased during this period from 3% to 5% of total industry AUM between 2018-2022 (though still trailing the assets of older generations, as 72% of assets are held by investors age 58 and above).

The increased use of ETFs and the declining role of mutual funds in investor portfolios (including those created by advisors) has been an ongoing trend for several years, but the Broadridge study suggests that individual equities are also becoming increasingly attractive for investors. For instance, while the average number of ETFs held in the portfolios of 60-year-old investors increased from 2.6 to 4.1 between 2018 and 2022, the number of individual equity positions rose from 4.4 to 8.5 (while mutual fund holdings declined from 5.6 to 5.1). This effect was even more pronounced among 30-year-old investors, who almost tripled the number of equities held in their portfolios during the period. In addition to the growth of commission-free trading (which reduces the cost for individuals to create their own diversified[?] portfolios with individual equities rather than relying on funds), an increase in technology tools and apps for investing (e.g., Robinhood) has made online trading even easier. And overall, while total assets allocated to mutual funds has declined in recent years (from 60% to 47% of assets), the bulk of the growth has not gone to ETFs (which ‘only’ rose from 18% to 22% of assets on average) but instead to individual stocks (which grew from 23% to 31% of holdings).

Ultimately, the key point is that investing has been increasingly ‘democratized’ in recent years, making it easier for consumers to invest their own assets without a financial advisor. Yet at the same time, the Broadridge study shows that financial advisors can still play an important role in helping investors meet their financial goals (e.g., among Millennials surveyed, 60% said they were very likely or somewhat likely to work with a financial advisor in the next 2 years, suggesting a potential role for advice-only planning for potential clients who feel comfortable implementing investments themselves but want financial advice in other financial planning domains). Further, separate research indicating that investors look to human advisors for certain key elements of the planning process (particularly around communication and relationship-building) suggests that while low-cost and convenient online trading tools have made trading easier, they have not replaced the role of advisor-provided advice for many consumers!

Bill To Fix Big SECURE 2.0 Drafting Errors Is Coming

(John Manganaro | ThinkAdvisor)

Congress in late December passed “SECURE Act 2.0”, legislation related to retirement planning to follow up on the original 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, as part of its end-of-year omnibus spending bill. The massive piece of legislation, coming in at more than 4,100 pages, covered a wide range of areas, from raising the age for Required Minimum Distributions (RMDs) to changing various rules regarding Roth contributions and distributions. Given the size and technical nature of the law, some drafting errors could be expected, and observers identified a few areas in the legislation that were either confusing or appeared to go against the drafter’s intent.

In late May, the chairs and ranking members of the House Ways and Means Committee and the Senate Financial Committee sent a joint letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel outlining their intention to introduce technical correction legislation to address erroneous statutory language in SECURE 2.0. For instance, the legislators highlighted confusion from the original law regarding the RMD age for individuals born in 1959, noting that the original intent is for these individuals to begin RMD at age 73. In addition, the legislators noted that Section 603 of the original legislation could be read to disallow ‘catch-up’ contributions to workplace retirement plans beginning in 2024, indicating that this was not their intention.

Other areas noted in the letter include Section 601 (where the legislators want to clarify that contributions to a SIMPLE IRA or SEP plan [including Roth contributions] will not be taken into account when determining whether an individual has exceeded the contribution limit for Roth IRAs), and Section 102 (where the legislators wrote that the credit for employer contributions to small employer pension plans is intended to be in addition to the credit for pension plan startup costs for these employers and is not subjected to the dollar limit of the startup credit).

Altogether, while the Congressional leaders have expressed their intention to make these legislative fixes, advisors and their clients will have to wait for legislation to work its way through Congress to confirm these interpretations. Though, given that they are designed to match Congress’ original intent, such legislation would seem likely to pass, which would give advisors more clarity on these portions of SECURE Act 2.0!

Rich Vs Wealthy: Summarizing The Differences

(Nick Maggiulli | Of Dollars And Data)

The terms “rich” and “wealthy” are often used interchangeably, typically in reference to an individual or family with a significant net worth. But Maggiulli suggests that, instead, these terms represent financial lifestyles that differ in many respects, from where their money comes from to how it is used.

For Maggiulli, a person who is “rich” typically has a high income or possesses a substantial amount of money. These individuals might have a high salary or business income, a luxurious lifestyle, and/or expensive possessions. The key is that while “rich” individuals might have some assets saved, they are usually reliant on their high incomes to fund their luxurious lifestyles, creating a fragile situation that could be upended if their income were to decline. And when they do have assets, they often use the gains they generate to fund their consumption rather than reinvest for future growth.

On the other hand, he characterizes being “wealthy” as accumulating income-generating assets and resources for long-term financial security. The key point is that being wealthy is not just a number (i.e., one’s net worth), but is a lifestyle where one does not have to actively work for their income (or, at a lower level of wealth, provide flexibility in choosing the work one wants to do). In other words, while having earned income is often necessary on the path to building wealth, a wealthy person is not reliant on it to meet their lifestyle needs (because they have built substantial assets and/or reduced their lifestyle costs to the point where their needs are covered).

In sum, while an individual who spends lavishly on homes and cars might be considered ‘rich’, they might not be truly wealthy if they depend on a continuous flow of earned income to fund these purchases. Which suggests an important role for financial advisors, not only in the dollars and cents of building wealth, but also in helping interested clients adopt a ‘wealth’ mindset that can provide them with greater freedom in the years ahead!

What Advisors Get Wrong About Money Scripts

(Rick Kahler | Advisor Perspectives)

Financial psychology has become an important part of the planning process for many advisors (and in 2021, the Psychology of Financial Planning became the 8 CFP Board Principal Knowledge Domains). While financial psychology encompasses a broad range of topics (from sources of money conflict to principles of effective communication), one particular area of interest for many advisors has been to uncover client attitudes, values, and biases towards money.

One frequently discussed way to uncover client attitudes toward money (and the reasons behind them) is to identify clients’ “money scripts” a term coined by Kahler, Brad Klontz, and Ted Klontz to refer to unconscious beliefs about money. But while the term “money scripts” has become common in the financial industry, Kahler suggests that some professionals are applying the concept incorrectly by assuming there are only 4 money scripts. While some individuals identify money avoidance, money worship, money status, and money vigilance as the 4 money scripts, Kahler notes that these are actually the 4 categories of “money scripts”, and that, because a money script can be very personal, each person can have hundreds of scripts.

Ultimately, the key point is that individuals typically do not have a single “money script” that drives their financial behavior. Rather, advisors can work to uncover the many unconscious biases individuals have about money (perhaps using a tool like the Klontz Money Script Inventory -Revised [KMSI-R]) in order to help them make the financial decisions that will allow them to live their best lives!

Exploring Your Social-Emotional Relationship With Money

(Alina Fisch | Contessa Capital Advisors)

Many individuals view themselves as cool-headed and rational when it comes to spending and other financial decisions. But as anyone who has made an impulse purchase knows, making all purchases based on the cold hard facts is not always possible. With this in mind, developing better emotional self-awareness could help individuals develop a healthier relationship to spending.

One way to characterize one’s emotional state is to use the “Mood Meter” chart developed by Marc Brackett and the Yale Center for Emotional Intelligence, which asks users to rate themselves on 2 scales: how much physical energy is running through our bodies and how pleasant or unpleasant we feel. Scoring high on both of these areas (the “yellow” quadrant) would signal that a person might be feeling joy, excitement, or enthusiasm, while scoring low on both scales (the “blue” quadrant) could signal that a person feels disappointment, sadness, or discouragement. Scoring high on energy but low on pleasantness (the “red” quadrant) could mean a person is feeling anxiety, rage, or frustration, while scoring low on energy but high on pleasantness (the “green” quadrant) might signal that a person is feeling calm, relaxed, or content.

Because an individual’s ‘position’ within the 4 quadrants can change over time, the key is to recognize how one tends to react in a given situation. For instance, in the financial context, an individual might find that they tend to spend more when they are in the “blue” quadrant (as they might assume that buying things will put them in a more pleasant mood), while they might make impulsive changes to their portfolio when they are in the “red” quadrant and are feeling extremely anxious. And so, taking the time to check in and understand which quadrant one is located in at the moment could help individuals step back and ask themselves if the financial decision they are about to make is a thoughtful choice or the result of their current (temporary) emotional state. Which not only could be a useful exercise for clients who want to gain more control over their emotional relationship with money, but also for advisors as well when making important personal or business-related financial decisions!

Semi-Retirees Know The Key To Work-Life Balance

(Kate Cray | The Atlantic)

Retirement has traditionally been viewed as a time to get away from the office completely, changing from a life of work to a time of leisure. However, many individuals decide to work well past ‘traditional’ retirement age and while some do so out of financial necessity, others do so for the other benefits continuing to work can bring (and some research suggests that those with higher Socioeconomic Status [SES] tend to work for more years than those with lower SES).

Notably, the decision whether to keep working past traditional retirement age does not have to be an all-or-nothing decision. Rather, some individuals might choose a “semi-retirement” where they continue working at their own job or in another field, perhaps for a limited number of hours per week or only for certain months of the year. In this way, they can get many of the potential benefits of working (e.g., a sense of purpose, social interaction, and, of course, additional income) while having the flexibility of choosing when to work and what to do (perhaps trying out a totally different field). Some retirees might find that they enjoy work much more when it is not required to pay the bills and comes with flexibility that allows them to pursue other interests.

Ultimately, the key point is that many individuals are electing out of ‘traditional’ retirement, instead choosing other paths, whether it is semi-retirement or even temporary retirements or sabbaticals throughout their career. Which means that financial advisors can play an important role in exploring the retirement option that works for a given client and helping them create a savings strategy that will allow them to achieve it!

The Number 1 Retirement Challenge That “No One Talks About”

(Marc Schulz and Robert Waldinger | CNBC)

When a person nearing retirement is asked about the challenges they expect to face once they take the plunge, they might worry whether they will have enough money to last the rest of their life or perhaps about health problems they might face. While these are no doubt important (and the first is a common reason for individuals to start working with a financial advisor), a long-term study found that a different challenge was cited most often by those who had already retired.

The Harvard Study of Adult Development followed 724 individuals since they were teenagers in 1938, asking detailed questions about their lives at two-year intervals and through their retirements, and found that the top challenge retirees faced was not being able to replace the social connections at work that had sustained them during the course of their careers. These retirees did not necessarily miss the work they were doing, but rather the social connections it generated and the purpose and meaning it brought to their lives. Because of this, some participants returned to the workforce after retiring, often in different positions or fields than their original careers.

Schulz and Waldinger suggest that as they navigate day-to-day work responsibilities, individuals also take the time to cultivate their relationships with their co-workers, not only to make their jobs more pleasant now, but also to build relationships that can last after retirement. For financial advisors, this could mean not only helping clients consider how they might cultivate social relationships in retirement, but also building their relationships with other advisors in their firm and in the industry writ large (as well as with some favorite clients?) to help build a social network that could pay dividends throughout their own retirements!

3 Techniques To Help Retirees Spend More

(John Manganaro | ThinkAdvisor)

Determining how much a client can sustainably spend in retirement is one of the most common ways that financial advisors add value. For some clients, this means squeezing every last dollar out of their portfolio to support their current lifestyle. But for other clients, it can be mentally challenging to switch from 'savings' mode to 'spending' mode in retirement. And some of these clients might spend significantly less than their portfolio and income could support, sometimes to the detriment of their overall happiness. Which presents an opportunity for advisors to add value by exploring ways to help their clients spend more in order to lead a more fulfilling retirement.

According to Jamie Hopkins, managing partner of wealth solutions for Carson Group, 3 methods are particularly powerful for advisors when it comes to helping clients feel comfortable spending. The first is to ‘test out’ retirement by transitioning into partial retirement and working part-time. For instance, to get clients used to withdrawing funds from their retirement accounts, Hopkins suggests that in the years leading up to the client’s ‘full’ retirement advisors could have them continue to contribute to their workplace retirement plan while withdrawing the same amount of money from a retirement account (so that their balance remains the same).

Another option is to segment client spending into “needs, wants, and wishes”. In this way, the advisor might be able to show the client that their “needs” can be covered by guaranteed income sources or other safe assets and that spending on their “wants” and “wishes” (perhaps sourced from portfolio assets) is unlikely to impact their ability to meet their “needs”. Finally, Hopkins recommends going beyond success-or-failure metrics (e.g., a raw Monte Carlo analysis outcome) to also show the magnitude of potential success or failure (e.g., how future spending adjustments, if needed, could raise the chances of success of the plan).

In sum, advisors might have some retired clients who spend more than their financial resources can support and others who could spend more while still meeting their financial goals. And for this latter group, letting them ‘test’ retirement out, showing how discretionary spending will (or will not) impact their ability to meet their ‘required’ spending, and providing more context to measures of plan ‘success’ can all help these clients overcome the mental hurdles that prevent them from spending more in retirement!

The Liabilities Of Success

(Nick Maggiulli | Of Dollars And Data)

When you see a person who has achieved success, whether it is a financial advisor or a famous musician, it is tempting to imagine yourself in their place, running a highly profitable firm or performing in front of thousands of fans. But what’s harder to imagine is the work that went into achieving and maintaining that level of success.

Maggiulli calls these hidden costs of achievement the “liabilities of success”. For instance, the famous musician might make tens of thousands of dollars for each performance now but might have had to spend many years building their fan base by spending most of their time on the road performing for small crowds for very little money. And even today, going on tour might mean significant amounts of time spent away from their families. Or in the case of a successful financial advisor, they might have started their firm with very few clients and spent years building up their client base and staff. And once their firm matures and becomes successful, the challenges can change rather than disappear (e.g., possibly spending more time managing the business rather than working with clients, which they enjoy more).

Ultimately, the key point is that the road to success inevitably comes with tradeoffs. Which means that imagining the ‘successful version’ of your future self and what it would take to get there can help you decide whether the potential benefits outweigh the possible costs!

There's A Kind Of Stress Our Brains Don't Notice – And It's Burning Us Out

(Gabriela Riccardi | Quartz)

The workplace can sometimes be the source of major stressors. Maybe a long-time client informed you that they are planning to leave for another advisor, or perhaps a manager is constantly badgering you to bring in more business. While it is fairly obvious that these would cause stress, smaller, day-to-day interactions can also lead to mental strain that builds up over time.

Rob Cross and Karen Dillon, authors of the book The Microstress Effect call these “microstresses”, or the accumulation of tiny triggers we encounter in routine, everyday interactions. For instance, while having to complete a task for a less-reliable coworker might not be as stress-inducing as a round of layoffs, microstresses such as this can build up over time and leave you feeling overwhelmed. Cross and Dillon identify 3 common forms of microstresses: capacity-draining microstresses (i.e., things that hold you back from getting things done [e.g., a barrage of emails asking you for project updates]); emotion-depleting microstresses (i.e., stressors that wear on our energy [e.g., a manager worrying whether they are doing enough, or perhaps too much, to support their team members]); and identity-challenging microstresses (i.e., things that separate us from how we want to act [e.g., being forced to use high-pressure sales tactics to drum up business]).

To help deal with microstresses, the authors suggest a “2-2-2” method. The first step is to identify 2 microstresses that are routine for you and find a way to talk about them. For instance, you might ask your manager to only send project update requests during business hours (or even save them for a regularly scheduled meeting). Then, you can find 2 small stressors you might be putting on other people. For example, you might confirm with a teammate that you are holding up your end of a project. Finally, you can think about 2 microstresses that you can let go of completely (e.g., perhaps avoiding office gossip). And in addition to the 2-2-2 approach, building a “resilience network” of individuals you can turn to for support (both inside and outside of your firm) can help ensure you will always have someone to help you identify microstresses and consider ways to address them.

Ultimately, the key point is that stress can come not only from seismic events, but also from smaller issues that can bubble up over time. But by recognizing these microstresses and finding ways to mitigate or avoid them (and making sure that you are not causing microstresses for others!), you can potentially reduce the amount of stress you feel during (and after!) the workday.

You're Not Powerless In The Face Of Impostor Syndrome

(Keith Dorsey | Harvard Business Review)

Impostor syndrome, doubting one’s skills and achievements or fearing being exposed as a fraud, can happen to anyone, but often is felt by high achievers from underrepresented backgrounds who might feel that they do not fit in, are not welcome, and do not belong in a certain position or title they have earned. Impostor syndrome can be crippling mentally and emotionally, as those experiencing it regularly worry about whether they deserve their role, distracting them from actually doing their best in the position. But Dorsey, who has worked with many individuals experiencing impostor syndrome in his role at an executive search firm, suggests that there are several ways to address and potentially overcome these feelings.

Dorsey highlights the importance of having moxie – an intensity of motivation characterized by the strength of will, self-discipline, and the ability to persist despite challenges – as an important factor in finding success in a challenging role and overcoming impostor syndrome. For instance, when faced with an obstacle (e.g., negative feedback on a project they are working on), individuals with moxie typically would not internalize it as a personal failure (or externalize it as an irreconcilable systemic barrier), but rather transform it into sources of motivation. In fact, one study found that moxie predicted intrinsic and extrinsic motivation more than other constructs like grit or self-control, and also predicted goal achievement.

And while moxie does not necessarily come naturally, there are several ways individuals can build this attitude and deploy it in their professional lives. For instance, hardship can be turned into moxie by considering a previous situation you faced and reflecting on how you got through it and how it was resolved. Doing so can uncover your unique brand of moxie and help you overcome future challenges. Another method is to engage in “identity play”, experimenting with new ideas and behaviors as you take on new professional challenges and roles. This tactic recognizes that a new position might require different knowledge and behaviors than previous roles you might have had and allows you to recognize that there is a learning curve involved any time you try something new. In addition, tuning out naysayers who point out the supposed ways you don’t measure up can help you stay focused on the task at hand rather than worrying about whether you belong (though this is different than accepting constructive criticism about a specific project, which could help you improve your performance going forward).

In sum, while building moxie is not necessarily easy, taking the time to focus on your previous successes and challenges you have overcome, along with accepting that you will not always perform perfectly in a new role, can help overcome impostor syndrome, whether you are working with your first client or are starting your own firm!

---

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.