Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that both the Department of Justice, and the shareholders of both Charles Schwab and TD Ameritrade, have all approved the proposed 'Schwabitrade' merger, making it now only a matter of when (not if) the merger will happen (for what may still be a multi-year transition before the integration is complete in 2022 or 2023!).
Also in the news this week is a new Department of Labor fiduciary proposal that has been sent to the Office of Management and Budget (OMB) for review and should be revealed in July (but more likely to coordinate with Regulation Best Interest's lower standard than reinstituting the prior DoL fiduciary rule), and a new industry study finding that the AUM model is weathering the pandemic recession better than the traditional commission-based model, but the pullback may still leave scars on some advisory businesses.
From there, we have a number of tax-related articles, including the passage of a new Paycheck Protection Program (PPP) Flex Act from Congress that will make it easier for businesses to use PPP (and to still benefit from payroll tax deferral even if they have a PPP loan forgiven), the tax issues that arise from remote workers doing their work from a new/different state (that may trigger multi-state taxation, even if only there on a temporary basis during the pandemic shutdown), and how ultra-low interest rates are stirring fresh interest in ultra-HNW estate planning strategies from IDGTs and intra-family loans to GRATs.
We also have a few advisor technology articles, including the latest annual tech survey from financial planning magazine showing a growing interest in model marketplaces and 'robo' solutions (albeit with some concerns about their sampling methodology and whether it is really representative of the advisor community), a look at the popular options for advisor portfolio performance reporting, and how increasingly 'capable' advisor tech tools are becoming so complex they're actually becoming less likely to be used and valued in many cases!
We wrap up with three interesting articles, all around the theme of #BlackLivesMatter and the explosion of conversations around race, which have significant implications for the financial services industry as well: the first explores how advisors of color (and those from communities of color) are being impacted by the widespread protests; the second examines some of the challenges of black advisors, in particular, who are trying to build their financial planning careers; and the last provides some helpful and grounded suggestions for advisors who do want to 'do something' and better understand race issues but aren't certain where to start and how to become a better Ally, with a "Justice In June" program that provides concrete exercises of books, videos, and podcasts that take 10, 25, and 45 minutes per day.
Enjoy the 'light' reading!
Schwab-TD Ameritrade Deal Surpasses Milestones As DOJ Clears Merger And Shareholders Vote Yes (Jessica Mathews, Financial Planning) - After months of conducting its antitrust investigation, with a particular focus on the potential impact that a Schwab-TD Ameritrade merger would have on the competitive landscape for RIA custody, this week the Department of Justice announced that it was closing out the inquiry, clearing the way for the merger to proceed. In addition, on Thursday both firms conducted their respective shareholder votes on the merger, and the vast majority of shareholders of both firms voted to support the deal, with what appears to be more than enough votes to clear the 2/3rds majority necessary for the merger to proceed later this year (while last week, the remaining lawsuits against the merger were also dropped after Schwab and TD Ameritrade provided additional disclosures). Of course, the reality is that given the size of the companies, it may still take literally years for the merged firms to be fully integrated, with Schwab having estimated that full integration will take 18 to 36 months (which puts the completion date out to sometime in 2022 or even 2023), for a total cost of as much as $1.6B over a 3-year period. Still, though, the end result of this week's series of major milestones, and Schwab separately reiterating that its interest in the acquisition remains strong despite the volatility of the current market environment, the 'Schwabitrade' merger is no longer a matter of 'if', but simply a matter of 'when' the deal will be completed.
Department Of Labor Sends Reworked Fiduciary Rule To OMB (John Hilton, Annuity News) - This week, the Department of Labor published a notice indicating that it was sending a new fiduciary rule to the White House's Office of Management and Budget, the standard step required for a regulatory review before it is released to the public for comment. Entitled "Improving Investment Advice for Workers & Retirees Exemption", the new rule is expected to take a step back from the prior DoL fiduciary rule that was vacated in 2017, and instead to hew closely to the SEC's own Regulation Best Interest rule, especially given that current Department of Labor Secretary Eugene Scalia was one of the attorneys leading the industry's lawsuit against the prior fiduciary rule. Ultimately, the details of the new proposal won't be released until after the OMB review and approval (likely sometime in July), but the new rule is expected to re-affirm the Department of Labor's 'old' fiduciary rules; dial back scrutiny of rollover recommendations for IRAs (effectively shifting oversight of investment recommendations in IRAs away from the Department of Labor and back to the IRS, though some commentators suggest that the Department of Labor may keep scrutiny of rollovers themselves - as the act of exiting from a 401(k) plan (via a rollover) is still clearly within their purview and that the DoL will simply no longer try to regulate how those rollover proceeds are invested); and craft an alternative new exemption to replace the controversial "Best Interest Contract" (BIC) exemption. However, given the timeline of the proposed rule only now going to OMB (likely delayed from last year by the fact that the Department of Labor is on its third Labor Secretary in 3 years), the evaluation and feedback process for a new Department of Labor fiduciary rule won't realistically finish until sometime in 2021, which means in practice whether this 'new' version of the rule proceeds will also depend on the outcome of the November elections and whether the Trump administration is still leading the Department of Labor when it's time to finalize a new rule.
Changing Business Models Means The Coronavirus Pandemic Is Impacting Financial Advisors Differently Than 2008-09 (Eric Rasmussen, Financial Advisor) - In its latest analysis of the largest financial services firms (i.e., wirehouses and major broker-dealers), a new McKinsey report finds that the impact of the coronavirus pandemic and associated recession is rippling through the wealth management industry in a substantively different way than what occurred in the 2008-09 financial crisis. The core difference is the shift of the wealth management business itself, which in just the past 5 years alone has shifted to the point that ongoing AUM fees (i.e., fee-based revenue) make up 69% of firms' gross production, up from 49% in 2015 (and barely 1/3rd of revenue in 2009). At the same time, pricing has slipped but only slightly (from an average revenue yield of 1.07% in 2015 to 1.01% today for households with $1M to $1.5M of AUM), though McKinsey notes that in the last financial crisis 17% of advisory firms discounted their fees, and on average were only able to bring their pricing back halfway in the years thereafter... suggesting that in a more AUM-centric industry today, fee discounting as a strategy to keep clients could have long-term ramifications on firms losing (and being unable to recover) their pricing power. And to the extent that wealth management firms often compensate their advisors based on the revenue they generate and are responsible for, a downturn in AUM and/or pricing may result in a downturn in advisor compensation as well. Still, though, the AUM model and its recurring revenue fees are producing far more stable revenue overall for wealth management firms than the commission-based model, and the McKinsey report finds that AUM-based firms are also more likely to retain clients by serving fewer of them more deeply (where firms with fewer households per advisor had more accounts per client and higher retention).
Payroll Protection Program Flexibility Act Of 2020 Enacted Into Law (Ed Zollars, Current Federal Tax Developments) - The Paycheck Protection Program was created to provide loans to small businesses with fewer than 500 employees that are struggling with the uncertainty of the current economic environment, with the ability to turn the loan into a grant (that no longer needs to be repaid) simply by allocating the dollars to keep employees on board (i.e., to 'protect their paychecks'). The caveat, though, is that the Paycheck Protection Program had a number of requirements in place to ensure that the dollars were used as expected... which in the end appears to have actually deterred some businesses from participating in the program, ironically because their businesses are so impaired for an extended period of time that they're not certain they can deploy the dollars appropriately. Accordingly, this week Congress passed the "Payroll Protection Program Flexibility Act of 2020" designed specifically to make PPP loans (and potential loan forgiveness) more accessible. Key changes include: PPP loans (for those who didn't have them fully forgiven) were originally 2 years, but have been extended to a minimum of 5 years instead (with an option for terms up to 10 years); the covered period (during which the loan must be taken out and used) has been extended from June 30th to December 31st instead; the time period over which the PPP loan proceeds must be spent to ensure forgiveness is extended from 8 weeks to 24 weeks (though, notably, businesses receiving PPP loans to use over 24 weeks must then maintain employee headcount and avoid materially reducing employee wages for a 24-week period); loan proceeds may still be forgiven even if not fully deployed or headcount is not maintained, as long as the business can document either an inability to rehire employees and an inability to hire similarly-qualified employees, or shows an inability to return to the same level of business activity that it was operating at previously due to ongoing government/health restrictions; the original requirement to spend at least 75% of PPP proceeds on payroll costs is reduced to only a 60% requirement (allowing more dollars to be spent on rent and other permitted business needs); and the separate rule allowing 2020 payroll taxes to be deferred into 2021 and 2022 will now be permitted even if companies did receive PPP loan forgiveness (whereas previously, PPP forgiveness disqualified small businesses from this provision).
Remote-Working From A Different State? Beware Of A Tax Surprise! (Laura Saunders, The Wall Street Journal) - The shutdowns brought about by the coronavirus pandemic have caused a massive shift to work-from-home environments, which in at least some cases may result in employees doing work in a different state than they have in the past (whether due to relocating or simply deciding to work from another location for the intervening weeks out of the office). However, the standard rule for state taxation of income is that states have the right to tax any income that was earned while working in their state... in some cases, even if only for a single day that work was done there. In the past, these rules typically only impacted high-profile individuals who earned a lot of money visiting a state for a short period of time (e.g., entertainers or athletes performing or playing a game in their state). However, with the pandemic and a mass shift to remote work, a tech worker who temporarily moves back to where they're from or a business owner who decides to set up shop in their vacation home as a remote work environment is now earning dollars in a new/different state... and may be required to report it to the state (and pay state income taxes) accordingly. Notably, some states do have a 'de minimis' rule to ignore a very minor amount of income, and 13 states have already announced that they will not enforce these rules on remote workers who are in their states due to the coronavirus. However, with state budgets also being slammed by the economic shutdown, many states are indicating that they do intend to pursue their legal right to tax work done in their state - even if on a temporary basis due to remote work. Of course, not all states have the same state tax rate, and ironically it's even possible that a remote worker's state could have a more beneficial tax rate (e.g., a California worker who works remotely from Texas for a few months), and if taxes are generated in one state they generally can be used as a credit against the individual's home state (to avoid double taxation). Still, though, it's important to be aware that working remotely in a new and different state can create new and additional state tax burdens... and depending on the state, businesses with employees who relocate accordingly may also have obligations to withhold taxes on behalf of employees working there, too.
New Ultra-Low Interest Rates Spur Interest In Certain HNW Estate Planning Strategies (Ben Steverman, Bloomberg) - Many estate planning strategies are built around the idea of reducing estate tax exposure in the future by gifting assets today... but with strings attached that don't actually fully relinquish control of the assets from the grantor (or fully cede control of the assets to the beneficiary) until some point in the future. Which requires a determination of what the present value of a future gift would be, calculated using the so-called Section 7520 rate. And with the recent crash in interest rates in response to the coronavirus pandemic, the Section 7520 rate has also crashed to record lows of just 0.8% in May (falling further to 0.6% in June), well below the prior low of 'just' 1% in January 0f 2013. The significance of such low Section 7520 rates is that it facilitates a number of estate planning strategies where families (or their intentionally defective grantor trusts) either borrow money from each other at such ultra-low interest rates (shifting all growth above that low rate to the beneficiary estate-tax-free) or make gifts of assets with an annuity that pays the gift amount back to them (through a so-called Grantor-Retained Annuity Trust, or GRAT) where any growth above the Section 7520 rate remains in the trust at the end of the term (and again shifts to the beneficiaries estate-tax-free). The fact that the market decline has depressed the value of many public and privately held assets further increases the appeal of such strategies, allowing them to be shifted at lower valuations and further amplify the estate-tax-free shift in value to the beneficiaries if/when the value rebounds. Though notably, estate planning attorneys for HNW clients also note that the looming November elections, and the potential of a shift in the White House that could be associated with an increase in estate tax rates or a crackdown on estate planning strategies, may also be driving an uptick in interest in estate tax planning strategies as well.
Tech Survey 2020: Are Advisors Losing Faith In Their Financial Planning Software? (Ryan Neal, Financial Planning) - Financial Planning magazine has conducted one of the longest-standing annual studies on advisor tech adoption, and the latest 2020 version of the study shows a number of notable shifts in advisor tech usage. However, this year's study also relied on the smallest sampling of advisors ever - just 225, down from 350 for the 2019 survey - and it's not clear that Financial Planning even surveyed similar types of advisors as in prior years. For instance, in 2019 Financial Planning showed MoneyGuidePro with a whopping 65% market share, compared to eMoney Advisor at 13% and MoneyTree at 2%; this year, the survey shows eMoney with a similar 12% market share, but MoneyTree growing to 8%, and MoneyGuidePro 'crashing' from a 65% market share to only 7% (and to say the least, there's no indication from Envestnet that MoneyGuide's market share has fallen by nearly 90% in the past 12 months since MoneyGuide was acquired!). Which raises the question of whether Financial Planning simply surveyed a different composition of advisors (i.e., ones who work at firms where MoneyGuidePro simply isn't used as much, and where MoneyTree happens to be used more). Still, though, the latest survey does provide some interesting indications of shifts in advisor technology (which again must be taken with a grain of salt given the aforementioned sampling issues), including: advisory firms are beginning to experiment with Chatbots on their websites (e.g., Drift and Cognito for bank-based advisors); model marketplace adoption is growing (driven by Blackrock, Envestnet and its FolioDynamix subsidiary, TD Ameritrade, Orion, and of course Morningstar); use of 'robo' tools appears to be growing, led by custodian-provided options like Schwab Institutional Intelligent Portfolios and Fidelity Go, but also third-party offerings like Blackrock's FutureAdvisor and Orion; social media management tools for advisors are gaining traction (primarily Hootsuite, Lithium-now-Khoros, Sprout, and Grapevine6); and advisors are increasingly focused on mobile technology and digital platforms, real-time financial activity reporting, and emerging uses of artificial intelligence and big data (though notably, wearable devices, natural language processing, and virtual reality tools still rank poorly).
Performance Reporting Technology Options For [New] RIAs (Matt Sonnen, Investment News) - For financial advisors who have established their careers at major financial services firms, from wirehouses to major retail wealth management providers, the reality is that the 'mothership' typically provides all, from compliance oversight to training and the technology that's used to service clients on a day to day basis. The end result, though, is that when it's time to make a transition to independence, the breadth of choices suddenly available, and figuring how to link them all together, can quickly become overwhelming. For firms that plan to rely on assets under management (and more generally, on managing portfolios) as a core of their business, though, Sonnen suggests that in practice, it's the advisor's performance reporting tools that really become the 'hub' of the business (as the custodial platform itself does provide statements, but only statements, with none of the additional household performance or further context that an advisor would want to show their clients). Therefore once choosing an RIA custodial platform itself, the performance reporting software is the next most crucial decision (and from there, the advisor can choose trading/rebalancing tools, CRM, a client portal, financial planning software, etc., that integrate with that performance reporting solution). For which the most popular solutions include: Black Diamond (known for its focus on client experience and data breadth and quality); Envestnet | Tamarac (which competes on the breadth of its capabilities, including tying in to its own CRM software); Orion Advisor Solutions (which has its own expanding tech suite and a growing spate of compliance support tools); and Addepar (which is known for its capabilities in reporting on alternative investments for ultra-HNW clients in particular).
How Advisor Technology Is Jeopardizing Its Own Future (Michael Thrasher, RIA Intel) - As businesses grow, it's natural to want to offer more to their customers, and the world of advisor technology is certainly no exception; as AdvisorTech solutions grow and gain market share, they tend to add new features, expand into 'adjacent' technology capabilities, and become more appealing for a wider base of advisors to grow their market share further. Yet in practice, the end result is sometimes technology that is so sophisticated and capable, it's too complex for almost any advisor to actually figure out how to use (and how to integrate and fit together like a misshapen jigsaw puzzle with the other growing components of the advisor tech stack), leading paradoxically to software that is more and more capable but less and less valued. In fact, a recent survey by Cerulli Associates found that the majority of advisory firms (68%) lacked the time to learn and implement their increasingly complex technology; in addition, 52% reported inadequate resources and training, and 54% indicated a lack of staff support to utilize the software's full functionality. And ironically, the problem is especially acute amongst independent RIAs, which have the most flexibility to choose amongst technology vendors, but the least time and capability to actually implement the technology. Which implies that for at least some technology providers, resources currently being spent on new features may be better allocated to simply making the existing features better, easier to use, and with more training support... as otherwise, with the compounding of an ever-expanding feature set, today's struggles with implementing advisor technology may only get even worse in the future.
Nationwide Protests Over Race Highlight Hurdles Faced By Non-White Advisors (Nicole Casperson, Investment News) - While the nation continues to struggle with the economic fallout of the coronavirus pandemic and associated shutdown, some advisors - particularly those working in urban areas and serving communities where the protests have been biggest - are facing additional challenges for clients whose businesses may be blocked by protestors or damaged by riots and looting... actions which are not always fully covered by insurance, and create real-world challenges from lost business, destroyed inventory, or lost wages or business or rental income. And in the context of the financial services industry in particular, while diversity and inclusion have been a high-profile public issue, a recent study found that, in practice, financial services firms are still ranking "attract and hire more diverse talent" as second-to-last amongst the initiatives they believe are necessary to align their firm with the future of the industry (and similarly, 55% of advisors responded that they do not believe increasing diversity should be a strategic priority). On the other hand, the sad reality is that when wealth itself faces a significant racial gap, and a disproportionately small portion of assets are owned by minorities, many firms don't see a clear path to 'why' advisor diversity is necessary. Though in the long run, if/when/as wealth itself becomes more racially diverse, financial services firms that lack diversity may struggle to remain relevant to a more diverse clientele. And with everything from human rights violations to racism increasingly becoming a priority for ESG investing - which itself is becoming more mainstream - businesses may be increasingly sought out and 'rewarded' by investors themselves (with better access to capital and lower borrowing costs in capital markets) by placing a higher priority on their own diversity and inclusion.
It's Past Time To Advance Black Advisors (Lazetta Braxton, Financial Planning) - The financial services industry, at large, and financial planning profession, in particular, have long struggled with diversity, with a recent CFP Board report revealing that only 1,355 CFP professionals (or barely 1.6%) are black (out of more than 87,000 in total). And that while the industry has long talked about improving its diversity, it often fails to support advisors of color in the moments that matter most - such as an incident from Braxton's own past, when a prospect referred to black people as 'N-----s', not knowing or caring that a black person might be part of the advisory team... and the firm chose to keep the client and their money over standing up for their black advisor (who subsequently left and launched her own independent firm instead). And while ultimately Braxton notes her story is just a sample of one when, industry-wide, barely 1.6% of CFP professionals are black, and only 6.9% of the broader financial services industry is black (compared to over 13% of the general population), there are clearly problems broader than her individual experience alone. Which is compounded by the tendency of firms to pressure their advisors of color to 'not cause a fuss' about racial issues, and/or to comport and assimilate themselves to the industry's existing culture (from how they dress themselves to how they wear their hair). For advisors that do want to see and support a change, though, resources and pathways are emerging, from the CFP Board's recent whitepaper "Racial Diversity in Financial Planning: Where We Are And Where We Must Go", to listening to the 2050 Trailblazers podcast, and supporting the Association of African American Financial Advisors (AAAA or Quad-A).
This Google Doc Teaches How To Become An Active Ally To The BLM Movement (Curiocity) - The recent and growing protests in response to high-profile killings of unarmed black people, from Ahmaud Arbery jogging in a Georgia neighborhood, to Breonna Taylor being killed in her own home by police, and George Floyd dying under the literal knee of a Minnesota police officer, have brought a newfound focus on racism in America, and a #BlackLivesMatter movement that has brought resistance from some, sympathy from others... and for many white people, a sense of frustration in wanting to 'do something' but not necessarily knowing what to do. In response, two women - Bryanna Wallace and Autumn Gupta - have created a program they've dubbed 'Justice In June', that provides a series of simple daily tasks that anyone can take up and engage with to learn more about the challenges of black and brown people in America. Broken into exercises of either 10 minutes/day, 25 minutes/day, or 45 minutes/day, the program includes everything from articles to documentaries (that can be broken up across several days), TED Talks, specific podcast episodes, and some suggested actions to take (e.g., write/call the local police to ask for all officers to be outfitted with body cameras, or write to your town government representation to advocate for evidence-based police de-escalation training). So for all those who have said "I want to help, I'm just not sure how", check out Justice In June as a good place to start.
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.
