Weekend Reading For Financial Planners (May 25-26)

SEC Finalizes Changes To Customer Data Protection Rule

(Sam Bojarski | Citywire RIA)

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. Nonetheless, given the potential damage that can be caused by a cyberattack targeting financial firms, the SEC in recent years has sought to expand its cybersecurity regulations to promote more uniform standards across the wealth management landscape.

This month, the SEC adopted amendments to Regulation S-P (which concerns financial firms' use of private client data) that will, among other measures, require covered institutions (including SEC-registered RIAs as well as broker-dealers and certain other financial firms) to "develop, implement, and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information". Further, the response program will be required to include procedures to notify clients whose sensitive information was or is "reasonably likely" to have been accessed or subject to unauthorized use. Were such an incident to occur, firms would be required to notify their client "as soon as practicable", or no later than 30 days, after becoming aware of the breach. Such a notice would include details about the incident, the breached data, and how affected individuals can respond to the breach to protect themselves. While these amendments will become effective 60 days after being published in the Federal Register, given that it will take time to implement such a program (particularly for smaller firms that don't have a dedicated IT staff), "smaller entities" (which include RIAs with less than $1.5B in Assets Under Management [AUM]) will have 24 months to comply with the rule, while "larger entities" (i.e., RIAs with at least $1.5B in AUM) will have 18 months to do so.

In sum, these amendments will require SEC-registered RIAs and other firms to take a more formalized approach to identifying potential cyber threats and responding to incidents that occur (though many firms likely have already implemented policies and procedures to protect client data). More broadly, the SEC's recent focus on cybersecurity highlights the value for firms in protecting client data (particularly because firms working with relatively affluent clients could be attractive targets for cyberthieves), not only to comply with the SEC's regulation, but also to maintain clients' trust that their assets and personal information are in good hands! 

Proposed Rules Targeting Donor-Advised Fund Practices Receive Heavy Pushback

(Tracey Longo | Financial Advisor)

Donor-Advised Funds (DAFs) have become an increasingly popular medium for charitable giving because they allow an individual to donate assets for charity today – and receive a tax deduction now – even though the actual funds may not be granted to the final charity until some point in the future (and in the meantime, assets inside a donor-advised fund can grow tax-free). Nonetheless, some critics have suggested that the fact that assets can sit in a DAF for years, or even decades, before being distributed not only could delay charities' receipt of donations (while the donor enjoys the up-front tax break), but also could lead to some of the assets within the DAF to be used for non-charitable purposes (e.g., distributions that could indirectly benefit the original donor or others associated with them). 

With this in mind, the Treasury Department and the IRS late last year proposed new rules, that would, among other measures, impose a 20% excise tax on a DAF sponsor that makes a distribution from the DAF to a person or group that is not a qualified charity and a 5% excise tax on a fund manager who knowingly agrees to make a taxable distribution. Notably for certain financial advisors, the regulation would expand the definition of "donor-advisors" to include a donor's personal investment advisor if the advisor also advises on the assets within the DAF. With this measure, the proposed rules appear to aim to discourage a conflict of interest whereby DAF sponsors (e.g., a community foundation that receives donations and makes grants to local charitable organizations) would encourage an investment advisor to steer clients to donate to the sponsor's DAF by hiring (and paying) the advisor to provide investment advice for the assets within the DAF.   

The proposed regulations received significant pushback during a public comment period and a hearing earlier this month. In particular, trade groups representing financial advisors argued that categorizing investment advisors as "donor-advisors" could discourage advisors from recommending that their clients contribute to DAFs in the first place (potentially resulting in less money going to charities overall). In addition, community organizations that sponsor DAFs noted that the regulations not only would require significant operational changes and increased expenses that could discourage donors from using DAFs (though DAF critics might prefer if donors instead donated directly to charities rather than to DAFs, which act as conduits and can incur expenses). Further, a bipartisan group of members of Congress in April wrote a letter to Treasury Secretary Janet Yellen opposing several features of the new rules, including the potential to restrict the role of investment advisors, highlighting the impact the rules could have on charitable giving.

Altogether, while it is unclear whether the proposed regulations will be adopted as proposed or will be amended based on public feedback Treasury and the IRS received, it appears that the Biden administration is focused on ensuring the government gets a 'return' (in the form of grants to charitable organizations) on its 'investment' (i.e., the up-front tax break) in DAFs (which have become increasingly valuable in recent years by allowing donors to 'bunch' donations into a single year to ensure their itemized deductions exceed the higher standard deduction set by the Tax Cuts and Jobs Act) and that the relationship between investment advisors and DAFs could come under additional scrutiny. At the same time, given that many donors suggest grants from their DAFs regularly (leaving only small balances in the DAF at a given time), these regulations might be most impactful on a smaller number of DAFs with large, persistent balances and those that tend to maintain assets in the accounts over time (and the advisors who work with them)?

Should Clients Have More Input In Their Advisory Experience?

(Andrew Foerch | Citywire RIA)

When considering whether to adopt a new AdvisorTech solution, advisors have a range of sources of information, from vendor booths at advisor conferences to research on the technology that has the highest advisor satisfaction. While many AdvisorTech tools are used internally within a firm (suggesting that a firm might consult stakeholders such as the advisors and support staff that will actually use the software before purchasing it), others are client-facing (e.g., client portals). However, a recent report suggests that many advisors do not consult with their clients to better understand how they might use these client-facing tools, potentially leading to the purchase of software with a poor Return On Investment (ROI).

According to a survey of 38 RIAs, asset managers, and other wealthy management firms by consulting firm F2 Strategy, while 81% of those surveyed believe a compelling client experience is critically important in the next 3-5 years, 58% of respondents said they do little to no research with clients to define the client experience, and few firms reporting that they use client interviews and tools like the Net Promoter Score (NPS) to solicit feedback. Which could lead to advisors' guessing' what kinds of technology their clients want to (and will) use rather than making decisions based on client comments. Further, only 21% of respondents indicated that they track the ROI on the client experience, suggesting that despite the (sometimes steep) price of AdvisorTech tools, advisors often are unsure of whether they are getting sufficient 'bang for their buck' (which could be in the form of greater client engagement or even more client referrals). 

Ultimately, the key point is that while advisory firms often make significant investments in how they deliver financial advice and how their clients engage with it, taking the time to understand their clients' needs and how they actually interact with these tools (or not) could help firms deliver a more tailored client experience and achieve a greater ROI on these outlays!  

Return To Tradition? 3 Reasons To Consider A Bond Allocation

(Meredith Birdsall and Jonathan Duensing | Enterprising Investor)

During the period of historically low interest rates between the "Great Recession" and the Federal Reserve's rate hikes in 2022, investors looking for higher yields from their bond portfolio often had to look to either bonds with longer maturities (which come with increased interest rate risk compared to their shorter-term counterparts) or lower-quality corporate bonds (which come with greater credit risk). However, the rising interest rate environment of the last 2 years has introduced opportunities for investors to earn much higher yields on cash-like instruments (e.g., Treasury Bills and money market funds) than they were when rates were lower. Which has led some investors to shift their fixed-income allocations from riskier products to these 'safer' assets. 

Nonetheless, Birdsall and Duensing (fixed income portfolio managers at asset manager Amundi) suggest that the current moment could be an attractive time for investors to shift assets from 'safe' assets to intermediate high-quality bonds. To start, because the yield of the Bloomberg U.S. Aggregate Index (i.e., "the Agg", a broad benchmark of investment-grade bonds) is currently at a 16-year high (and, as they argue, yield is a good indicator of a bond's total return over the intermediate or longer term), long-term investors could see better returns by locking in yields on bonds with longer maturities rather than focusing on cash-like products, whose yields could decline if interest rates were to fall. In addition, investors in  bonds with longer maturities could experience strong performance if and when the Fed starts to cut interest rates (e.g., during the Fed's 2019-2020 rate-cutting cycle, the Agg returned 10.12%, while 3-month Treasury Bills only returned 1.47%), with the duration benefits outweighing the increased credit risk (as rate cuts often come alongside recessions), though a period of further rate increases would degrade the performance of these bonds. Finally, bonds with longer maturities can act as a portfolio diversifier, experiencing many historic periods of negative correlation with stocks, though, as in 2022 when both stocks and bonds saw sharp declines, these correlations can sometimes turn positive. 

In sum, while many investors have sought the safety and relatively high yields (compared to recent years) of cash-like products in the current elevated rate environment, bonds with longer maturities could still have a place in a client's portfolio and would potentially benefit if interest rates were to decline (though these benefits could be balanced against the possibility for a 'higher for longer' rate environment, which would hurt the performance of these bonds!).

They Just Wanna Sell You A Bond Fund

(Bill Gross)

While bond investors experienced one of the worst years in history in 2022 as the Federal Reserve hiked interest rates, some observers have argued that the Fed is likely finished with their rate hikes (and could commence rate cuts soon), making bonds a potentially attractive investment thanks to yields that are higher than what has been seen for more than a decade and the potential for price appreciation if interest rates were to decline.

However, Gross (a long-time fixed-income fund manager and market commentator) does not share this rosy outlook. He argues that because the U.S. government continues to run large fiscal deficits, it will need to continue to issue huge amounts of bonds, driving up the supply of bonds available in the market and thereby keeping bond yields higher than bond 'bulls' might expect (as the government will need to offer an attractive yield to attract sufficient buyers), perhaps pushing yields on 30-Year Treasury bonds up from 4.5% today to 5% over the next year. And unlike the early 1980s, when yields on 30-year Treasuries were at 15% (shortening durations and offering a ballast against interest rate hikes), today's yields do not offer the same level of protection, leaving investors vulnerable to potential rate hikes (whether because of a supply-demand imbalance or a rise in inflation that leads the Fed to raise rates again).

Ultimately, the key point is that while higher yields and expectations of interest rate cuts have led many to make bullish predictions for bonds, a continued swift pace of bond issuance could keep yields elevated for an extended period. Though, for financial advisors, given these conflicting views (and the general difficulty of predicting the future), making a short-term 'call' on where bonds are heading is perhaps less valuable to a client than ensuring that their bond positioning provides the desired attributes (yield, risk level) for the client's specific needs?    

Should Investors Steer Clear Of Bond Funds?

(John Rekenthaler | Morningstar)

In the modern financial media environment, there are no shortage of 'hot takes' when it comes to market and macroeconomic predictions. Recently, much of the debate has concerned whether current conditions represent an attractive entry point for those looking buy bonds, with 'bulls' arguing that today's relatively high yields and a predicted decline in interest rates could lead to strong returns and 'bears' suggesting that rates could remain elevated (or move higher) amidst large government deficits and the potential for inflation to tick higher once again.

For his part, Rekenthaler is largely skeptical of macroeconomic predictions, not necessarily because of the acumen of those making them or the underlying data being used, but rather because of the difficulty of predicting the future. For instance, while many commentators predicted that the U.S. would go into a recession in 2023 (and/or 2024) based on a variety of seemingly sensible reasons (e.g., that higher rates would lead to an economic slowdown and higher unemployment), which could have led the Federal Reserve to cut interest rates (a tailwind for bond prices), such forecasts have yet to come to pass. On the other hand, prominent market commentator Bill Gross, who is currently bearish on bonds, made a notable prediction in 2009 that the U.S. economy was going to enter a "New Normal" of lower economic growth due to "delivering, deglobalization, and reregulation", which might have made sense given economic conditions at the time, but did not end up coming to pass. 

In sum, while a pundit can be well-schooled in the dynamics that drive the economy and investment returns, making projections about future events can be challenging, even ones that are based on seemingly solid fundamental grounding, or, as baseball player Yogi Berra said, "It's tough to make predictions, especially about the future!".

These 4 Pillars Are The "SOUL" Of Organic Growth

(Joe Duran | Citywire RIA)

Whether a firm is brand new or well-established, organic growth (i.e., onboarding new clients or adding additional assets from current clients) is a key metric that can determine its health. But while most firms want solid organic growth, actually achieving it can be much more challenging. With this in mind, advice industry veteran Duran offers a 4-part framework with the acronym "SOUL" to outline what it takes to do so.

To start, the "S" in "Soul" stands for Sales. Because while many advisors have chosen to move from a sales-first, "eat what you kill" culture seen often in the product distribution industry, sales skills are still needed to convert prospects into clients. This can require an investment of time on the part of firm management, with Duran suggesting that at least a quarter of leadership time be spent on the sales process, which not only includes selling the firm to prospective clients, but also tracking results and making improvements. The "O" in "SOUL" stands for Originality. At a time when many factors that a firm used to differentiate themselves (e.g., being fee-only or a fiduciary) are much more common now, firms can look for new ways to show how they are different, for example by offering unique expertise or services. Relatedly, the "U" stands for Understanding, by which he means the ability to understand a client's unique circumstances. And given the wide range of client types, selecting a client niche can potentially allow a firm to craft a service model that meets these clients' specific needs. Finally, the "L" stands for Love. Whether it is the advisor's love of serving their clients or employees' love of the mission and purpose of their firm, having a culture of deep caring can help a firm win more clients.

In the end, while there is no single 'secret' to achieving strong organic growth as an advisory firm, Duran's "SOUL" framework offers potential ideas for firms to build on top of current initiatives (e.g., strengthening firm culture or narrowing in on a client niche) or perhaps starting new ones (e.g., refining a firm's marketing to reflect how it is truly 'different')!

Embracing Discomfort Is Critical To Sustain Organic Growth

(Robert Sandrew | Wealth Management)

For financial advisory firms (particularly those that charge on an AUM basis), revenue growth can come from a combination of market gains and high client retention, even without adding new clients. Nonetheless, organic growth can make a firm's business more sustainable, not only through the ups and downs of market performance, but also as a certain number of clients inevitably leave the firm (either as their circumstances change or as they pass away). 

One way firms can spur organic growth is by adding new services that are important to their clients. For instance, a firm working with small business owners could consider building out its tax expertise, whether by collaborating with an outsourced provider of tax services or by hiring in-house experts with skills in this specialty. While doing so might seem like a big leap for a firm (not only because of the cost, but also because of the need to ensure new partners or hires are a good cultural 'fit' with the firm), adding specialized services could help it stand out amongst firms serving similar clients. Another way for firms to boost organic growth is to enter new geographies, potentially by opening an office in a new city or acquiring a firm in a different location. Making this jump can require upfront work (e.g., the need to understand local market trends and/or doing due diligence on potential acquisition targets) and entails risk (e.g., the cost of buying a firm or opening a new office), but could help a firm find a 'blue ocean' of potential clients outside of its current geography (particularly if their current location is flush with advisors).

Ultimately, the key point is that getting out of a 'comfort zone' can allow a firm to explore creative ideas that can help bolster client retention (and potentially referrals?) by offering high-level services that are important to them and also attract prospects to drive organic growth amidst a competitive environment for client business!  

5 Shifts Transforming Advisor Growth

(Stephanie Bogan | Advisor Perspectives)

While the financial planning business has existed for decades, it undergoes change on a regular basis, whether within the industry itself (e.g., shifts how advice is delivered) or external (e.g., changes in consumer preferences). With this in mind, Bogan identifies 5 ongoing shifts that present opportunities for advisory firms to increase their growth into the future.

To start, the demand for financial advice has grown across market segments (e.g., extending well beyond affluent pre-retirees and retirees), opening up the opportunity for advisors to serve these groups, whether by offering 'lighter' service models for clients with less-complex needs and/or adopting flat-fee or income-based fee models that reflect that while they might not have built up significant assets, they might have sufficient income to afford planning fees. Further, consumers are seeking a deeper, more specialized service experience (suggesting that firms that are able to offer unique expertise for their target client demographic could win and retain more clients).

Next, advances in technology not only can provide advisors with new ways to reach potential clients (e.g., blogs,podcasts,webinars, and social media), but also help advisors expand their capacity (e.g., by leveraging automations and systematizing core services). In addition, the continued embrace by many advisors and clients of operating in a remote environment offers the opportunity to pursue clients regardless of their physical location (and allows advisors to choose a home base independent of where their clients live!). Finally, the aging advisor workforce presents an opportunity for next-gen advisors to take the reins of their firms, perhaps adding their own perspectives and digital fluency to propel their firm forward.

Altogether, in an ever-changing industry environment, firms and advisors who embrace these shifts, perhaps by embracing technology that allows them to market themselves and offer their services more efficiently and/or by tapping into emerging client demographics, could position themselves for greater growth in the years ahead!  

Negotiation Strategies That Helped Increase My Salary By 15%–60%

(Katie Gatti Tassin | Money With Katie)

As an employee gains experience and performs their job with increasing skill (increasing their value to their employer), it makes sense that they would want to be paid more over time. Nonetheless, salary negotiations can sometimes be contentious, particularly if there is a mismatch between the value the employee sees themselves providing and how their employer views their value to the company. With this in mind, Gatti Tassin offers strategies that she has used during her career to earn large pay bumps.

To start, it is important to recognize that while an employer's decision to give an employee a raise might seem like a one-time event, the groundwork for the decision has been made over the course of the year. For instance, if the employee performed exemplary work all year and/or took on assignments that went above and beyond their job description, they will be able to position themselves better for a raise when it comes time to negotiate. In addition, having advocates within the company can serve as force multipliers in helping the employee negotiate for a raise. For instance, in the case of an associate advisor who works with multiple lead advisors in a firm, those lead advisors could advocate on behalf of the associate to firm management, perhaps noting how important the associate is to their work and client service overall. 

After laying this groundwork, an employee can find points of leverage to put themselves in a stronger negotiating position. In general, because the side who 'cares less' (i.e., doesn't mind walking away from the deal) often 'wins' in negotiations, having an alternative option (in the case of an employee, another job opportunity) can strengthen one's negotiating position. Whether it is positioning one's LinkedIn profile to be attractive to recruiters or actively seeking out other positions that might be interesting, having an offer in hand can provide a strong negotiating position (particularly if it would be costly for the current employer to hire and train a replacement!). And because the best kind of job offers will offer a higher salary than the employee is currently receiving, negotiating with the prospective employer (e.g., by basing compensation expectations on one's total compensation package [e.g., salary, profit-sharing, and matching 401(k) contributions] and then asking for a premium (to compensate for the friction costs involved with changing jobs) can help secure a better offer.

Ultimately, the key point is that employees can put themselves in a stronger position when it comes to raise and promotion discussions not only by performing at a high level during the year, but also by gaining leverage in negotiations with their employer. And because salary increases are cumulative, a successful negotiation today could set the course for a higher pay trajectory over the course of one's career!

Is Autonomy The Key To Workplace Happiness?

(Katie Mogg | The Wall Street Journal)

When comparing job opportunities, it can be tempting to focus primarily on the salary being offered. However, job satisfaction can be influenced by many other factors, from the benefits and perks offered, to the number of hours per week the job requires, to, more fundamentally, whether the day-to-day responsibilities are a good match for one's skills and interests. 

In addition to choosing a particular company to work for, self-employment remains an option. And while there are risks to doing so (e.g., no guarantee of a steady salary), the flexibility and independence of "being your own boss" can be attractive. For instance, a survey by payroll-services provider ADP found that approximately 75% of independent workers, freelancers, and consultants surveyed said they felt they were paid fairly, compared with 70% of part-time employees and 68% of full-time workers. Notably, though, satisfaction with pay can depend on one's industry (e.g., workers in tech and finance tended to be more satisfied with their pay than "gig" workers [e.g., Uber drivers]) and level of experience (as those with significant experience in a field can command better pay as a consultant or freelancer than individuals earlier in their career). In sum, combining strong pay with the opportunity to set one's own hours can be a powerful combination to improve one's satisfaction with their work.

Further, Kitces Research on Advisor Wellbeing found similar results within the financial advisor industry, with autonomy (i.e., command over one's work schedule and confidence in their ability to effectively perform the responsibilities of they role that they selected for themselves) being one of the most powerful influences determining financial advisor wellbeing. For example, amongst "Thriving" advisors (i.e., those who rated their wellbeing at 9 or 10 on a 10-point scale), 62% were in strong agreement that they were effective at their jobs, compared to 18% among "Struggling" advisors (i.e., those who rated their wellbeing at 5 or less). Further, "Thriving" advisors worked 9 hours/week less over the course of the year than their "Struggling" counterparts, indicating greater amounts of free time and scheduling flexibility. Notably, another key factor determining advisor wellbeing is experience, with the typical "Thriving" advisor having 2 decades of experience working with clients, compared to 7 years for "Struggling" advisors (indicating that many advisors leverage their greater experience for greater pay and increased time flexibility). 

Ultimately, the key point is that while pay can have some influence over job satisfaction and overall wellbeing, other factors, particularly a sense of autonomy, can often have a stronger impact. Which suggests that when choosing between jobs or deciding whether to start a firm of one's own, the job with the best pay might not in fact be the best opportunity (and for those just starting out, the data on experience suggests that while mastering one's craft takes time, there potentially are significant rewards in terms of wellbeing and flexibility available to those who are able to stick it out!).      

Why Our Company Makes All Salary Information Public

(Joel Gascoigne | Buffer)

Whether an individual is applying for a new job or looking to get a raise in their current position, it can be challenging to find salary benchmarks to determine what a 'fair' salary might be. While this opacity can be frustrating for workers (who might underestimate their value and receive a lower salary in the process), it can allow companies to have the upper hand (given that they know what all of their employees make) when it comes to salary offers to new hires and adjustments to current employees (particularly if the company discourages workers from discussing their pay with each other!). 

Despite these potential advantages to the company, digital marketing company Buffer has taken a much different approach, not only publishing the model they use for determining salaries, but also making the salaries of every employee in the company (from the CEO on down) publicly available. These policies fit in with the company's overall compensation principles of being "transparent, fair, simple, and generous" and offer benefits both to job candidates (who can see how individuals in their position are paid in the company) as well as current employees (who have a better understanding of how their salary is determined and how much they will make as they advance in the company). And while the company might lose some 'leverage' by publishing its salary system and pay data, it has found that this transparency has led to greater trust amongst its staff, potentially making it a more attractive employer to candidates and encouraging employee retention. 

In sum, while such a policy is rare in the business world today, making pay transparent (both in terms of how much a certain position is paid and also how that pay is determined) could potentially offer benefits not only to candidates and employees (who can gain a more accurate idea of how much they might earn), but also to the organization as a whole (if it enables greater trust between employees and company leadership). Which could ultimately create a stronger company culture and perhaps greater overall productivity as employees embrace the company's mission and values! 

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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.