Weekend Reading For Financial Planners (March 2-3)

Final DoL Fiduciary Rule Likely Out This Year, Experts Say

(Melanie Waddell | ThinkAdvisor)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans), has gone through a multi-year process across 3 presidential administrations in efforts to update its "fiduciary rule" governing the provision of advice on these plans (as well as IRA rollovers in/out of these plans). Amid this backdrop, the DoL released a new proposal in October 2023, dubbed the Retirement Security Rule (a.k.a. the Fiduciary Rule 2.0), which would again attempt to reset the line of what constitutes a relationship of trust and confidence between advisors and their clients regarding retirement investments and when a higher standard should apply to recommendations being provided to retirement plan participants. 

Given the dramatic nature of the proposals, public debate over the Retirement Security Rule has been heated, with the DoL receiving more than 19,000 comments. A particularly contentious portion of the proposed rule (and the subject of criticisms from brokerage and insurance industry groups) is a measure applying a fiduciary standard whenever a one-time rollover recommendation is made (not just as part of an ongoing relationship, as covered by PTE 2020-02), and would include those recommending rollovers out of a retirement plan, thereby covering a wide swath of investment advisers, brokers, and even insurance agents recommending annuities and insurance to prospective retirees' retirement assets (that aren't currently covered by Regulation Best Interest because they're not securities). For their part, certain investor advocates have spoken out in favor of the proposals, arguing that the proposed rule would promote stronger fiduciary standards in the financial services industry.

The DoL is now in the process of finalizing the rule, a step which is likely to come this year (perhaps by May) with a January 1, 2025 effective date, according to Fred Reish and Brad Campbell, partners at the law firm Faegre Drinker. The lawyers noted the timeline could be influenced by the upcoming presidential election, with the Biden administration wanting to ensure the rule is enacted before it leaves office (if a Republican were to win the presidency). At the same time, the rule is likely to face continued opposition even if it does go into effect, given that opponents would likely mount legal challenges (as they did against previous versions of the "fiduciary rule") as well as an effort in Congress to add a rider to a spending bill to cut funding for the rule until a study of its effects could be conducted. 

In the end, while the DoL's Retirement Security Rule could be enacted soon and would represent a significant shift toward greater fiduciary standards in the financial services industry, its final disposition will likely play out in the courts, which would decide whether the DoL is 'overreaching' or appropriate in its expansion of fiduciary duty (in particular as it pertains to brokers and insurance agents recommending product sales in IRA rollover transactions) and could leave the rule as is or potentially gut its key features? 

Social Media Scams, Crypto Fraud On The Rise: NASAA Report

(Gregg Greenberg | InvestmentNews)

Financial scams have likely been around as long as money has existed, with fraudsters using a variety of tactics to bilk individuals out of their hard-earned money. While these scams have taken many forms over time, the internet age has provided fraudsters with myriad new ways to target potential victims, and a new report indicates that scams involving social media and cryptocurrencies are becoming increasingly common.

According to the North American Securities Administrators Association's (NASAA's) 2023 Enforcement Report, the number of investigations by state securities regulators involving social media and internet scams jumped to 172 in 2022 from 127 the year before, and those involving investments tied to digital assets (e.g., cryptocurrencies) jumped about 30% from the previous year (overall, the regulators investigated 8,538 cases in 2022, up from 7,029 in 2021, clawing back $702 million in restitution and more than $223 million in fines). Further, while social media and crypto scams are unlikely to abate, state regulators also appear to be particularly concerned about the use of Artificial Intelligence (AI) tools by malicious actors, with 36% of those surveyed believing that AI scams could become the top threat to investors.

Altogether, the NASAA data suggest that financial advisors could have an important role to play in combating financial fraud, whether it is in making clients aware of common scams (perhaps a helpful topic for a monthly client newsletter?), establishing and engaging with trusted contacts to support those with diminished mental capacity (who could be particularly attractive targets to fraudsters), and ensuring their firm has proper procedures in place to avoid becoming a victim itself (e.g., through wire fraud)!

EY Report Suggests Tech Stacks, Branding Could Separate Firms Going Forward

(Gregg Greenberg | InvestmentNews)

While many of the central tenets of providing high-quality financial advice are timeless (e.g., competence, objectiveness), advances in technology and broader practice management trends can call for changes in how that advice is delivered and how an advisor runs their business. With this in mind, a recent report from EY (the trade name of Ernst & Young) identifies a range of trends that can help advisory firm leaders move their firms forward in the coming year.

A key theme in the report is for advisory firms to be proactive and intentional in creating effective tech stacks. Because at a time when the AdvisorTech landcape has become increasingly broad, firms that are able to leverage well-integrated platforms that not only support mid- and back-office efficiency, but also boost client engagement, are likely to be more successful than those that take a more piecemeal approach (where the various software programs used do not 'talk' to each other and/or have overlapping capabilities). In addition, the emergence of a growing number of AI tools (both generalist tools and those tailored to advisors) presents an opportunity for advisors to gain efficiency in their marketing (e.g., by having AI tools develop initial drafts of blog content) and with client operations (e.g., by creating "Custom GPTs" to transform meeting management). 

The report also indicates that in the current highly competitive wealth management marketplace, firms that focus on their brand identity and client service offerings could have an advantage going forward. For instance, firms that are able to show how they are 'different' (e.g., by providing a unique service offering to their ideal target client) could find more success than those offering a more general service offering to the broadest group of potential clients (which means they will likely be competing with more firms, including national firms with hefty marketing budgets). Firms could also consider reevaluating their ideal client persona (or create one if they haven't already!) to confirm that it still matches the firm's service offering and marketing messages.     

Ultimately, the key point is that while the high retention rates and recurring revenue available to financial advisory firms can make it easy to be complacent in a changing industry environment, those firms that are proactive in evaluating their client service model and tech stack, and are willing to adapt when a change might be advantageous, could find themselves better positioned to grow and achieve greater profitability in the years ahead!

Mariner Wealth, Other Investment Advisors Hit With "No-Poach" Antitrust Lawsuit

(Mike Scarcella | Reuters)

Employee turnover can prove costly to financial advisory firms, as they not only have to pay to hire and train a new advisor, but also face the potential of clients moving with the advisor to their new firm (depending on what kind of non-compete or non-solicit agreements are in place). With this in mind (and amid a tight market for advisor talent), many firms have sought to enhance the employee experience, whether by creating career paths (so employees can better understand what their future at the firm might look like) or by boosting benefits or perks (as well as salaries). But a recently filed lawsuit claims that certain firms took a different, less employee-friendly, approach.

In late February, 2 former employees of TortoiseEcofin Investments filed a lawsuit alleging that the firm, along with several others – including Mariner Wealth Advisors, American Century Investment Management, and 1248 Holdings LLC (formerly known as Bicknell Family Holding Company) – violated antitrust law by conspiring to restrict employee recruitment and hiring as part of a "no-poach" agreement under which they agreed to not hire employees from one another. The suit seeks class-action status for hundreds of individuals or more (as more employees from these firms could potentially join the suit). 

The suit comes amidst increased regulatory interest in fair hiring practices. Within the wealth management space, Montage Investments (which is also listed in the latest lawsuit) agreed to pay $1 million to compensate current and former employees as part of a non-prosecution agreement with the Justice Department over claims that it and related entities (including Mariner Wealth Advisors) sought to curb competition for employees. More broadly, the Justice Department and the Federal Trade Commission (FTC) in 2016 issued guidance for human resources professionals and others noting Justice's interest in investigating "no-poach" agreements and other potential anti-trust violations. 

Altogether, while the merits of this lawsuit will be determined in court, it highlights the potential benefits for firms to consider their own hiring and employee retention practices (even if they are not engaging in tactics as legally fraught as "no-poach" agreements), from what they can do to encourage employees to stay on their own volition (from flexible work arrangements to strong compensation packages) to how they treat employees who do decide to depart (e.g., how they craft and enforce non-compete and non-solicit agreements)!

Former Hightower Advisor Sues Firm Over Non-Compete Restrictions

(Leo Almazora | InvestmentNews)

Non-compete agreements (where a company prohibits an employee from working for competitors, at least for a certain period of time) are often used to help companies protect their investment in the employee (e.g., the time and money spent training the employee) as well as to prevent the employee from taking the company's best practices to a new job at a competitor. In addition to applying to employees who were hired by the firm itself, non-compete and similar agreements are often used as part of mergers and acquisitions, as a buyer might want to avoid having the seller immediately start a new firm that would be a direct competitor (including for the seller's former clients), at least for a certain period of time.

A recent lawsuit filed in California (which has been relatively aggressive in striking down non-compete agreements deemed to be too restrictive) alleges that the "standard protective agreement" included as part of a 2019 merger of 2 wealth management firms facilitated by Hightower Advisors was "overly broad and unreasonable". Notably, the agreement included non-compete, non-solicit (where an individual is prohibited from soliciting clients from their former firm for a certain period of time), and non-hire (where a firm is prohibited from hiring individuals from another firm) provisions (and the plaintiff is asking the court to nullify the non-compete and non-hire provisions, among other requests).  

While the outcome of this lawsuit remains to be determined, the Federal government has been increasing its own scrutiny of non-compete agreements writ large, with the FTC last year proposing a rule that would ban non-compete clauses in employment contracts. Though no matter the ultimate disposition of the proposed rule, firms that currently have their employees sign non-compete (or non-solicit) agreements might review them to determine whether they are sufficiently tailored to protect the firm while not unduly restricting the ability of employees to further their careers elsewhere (which could ultimately help these attract more employees if their competition forces employees to sign more draconian agreements)!

Crafting More Equitable Advisor Non-Solicit Agreements With The ACRES Agreement

(Michael Kitces and Adam Van Deusen | Nerd's Eye View)

While non-compete agreements (where a company prohibits an employee from working for competitors, at least for a certain period of time) are fairly common in the business world, in the financial advisory industry, non-solicit agreements (where the departing advisor is restricted in whether and how they can communicate with their clients, and "solicit" them to come with the advisor when they leave for another firm) are more common, as firms typically are less concerned that a departing employee will take 'trade secrets' to a competitor and are more concerned about clients (and the revenue they bring in) following their (departing) advisor to their new firm. 

As non-solicit agreements have become more prevalent among independent advisory firms, the terms of these agreements come into focus, such as whether a non-solicit agreement covers all of an employee advisor's clients or only certain ones. For instance, while it might be clear that the firm 'owns' the relationship with a client that the firm brought on itself and passed on to the advisor (thereby perhaps warranting a stricter non-solicit agreement), it would seem inappropriate to restrict an advisor from soliciting certain other clients (e.g., a personal friend or relative/family member) to their new firm.

In addition, there is also a fuzzy middle where it is less clear who owns the goodwill equity of the relationship (e.g., if a firm brings in a prospect through its marketing, but the advisor closes the deal and brings the individual on as a client, or the advisor brings in the prospect but does so using some of the firm's marketing resources or by leveraging its known brand in the local community). In these cases where the client is effectively a 'joint' client of both the firm and the advisor, it might be appropriate for the firm and the advisor to negotiate the specifics of how these client relationships will be handled under the firm's non-solicit agreement. For instance, the firm and the advisor might specify the client relationships that would be acceptable for the advisor to solicit, or perhaps negotiate a price at which the advisor would have to pay to take and service clients at their new firm.

Since many advisors and firms lack the legal expertise or resources to hire a lawyer to craft a custom agreement for each advisor, this article includes a foundational template advisory firms can use and/or modify to their specifications. At its core, the "ACRES Agreement" formalizes the recognition of the "yours, mine, and ours" split of client relationships, and allows firms and advisors to set the terms for how those different types of client relationships will be handled in the event that there is ever a split (from which clients can be solicited or not, what client information can be taken or not, and whether compensatory payments are due back to the firm or not).

Ultimately, the key point is that non-solicit agreements that represent the investment that firms and their advisors make into attracting and serving clients can leave each side feeling confident that their interests will be respected if the advisor and firm ever decide to separate in the future. And by considering using the ACRES Agreement as a template, advisory firms and their advisors can set better, clearer, and fairer terms for both parties!

Why 401(k)s Might Get The Axe

(Allison Schrager | Bloomberg Opinion)

The employer pension plan has been a part of the employee benefits landscape for nearly 140 years. Yet the reality is that after a tremendous rise in the decades after World War II, the availability of the defined benefit plan has been in decline for over 40 years, as the defined contribution plan has risen to take its place. Today, 401(k) and similar defined contribution plans are ubiquitous and serve as the primary retirement savings vehicle for many Americans. Nonetheless, Schrager suggests that the government might decide to scrap the tax advantages of workplace retirement plans (e.g., the tax deferral benefits of 'traditional' 401(k) contributions) in the not-too-distant future.

Why? To start, these tax benefits for individuals are costly to the government, with the Treasury Department estimating that tax preferences for employer-sponsored retirement plans and IRAs reduced federal income taxes by about $185 billion in 2020. Given this cost, the government would hope to achieve significant benefits in the form of encouraging greater retirement savings across the income spectrum (making the tax expenditure a constructive policy tool). However, it turns out that not only do the tax benefits of retirement accounts accrue largely to high income earners (which makes sense given they tend to have the ability to save more, and get the most benefit out of up-front tax break since they are in higher marginal tax brackets), but some recent research suggests they also might not actually spur individuals to save more (as automatic enrollment might play a bigger role in encouraging contributions and could be done anyway, and while company matches also may help they could be converted into a boost to an employee's salary to provide the same additional dollars towards retirement savings). As an alternative, one proposal suggests that the money the government allocates towards 401(k) tax deductions would more effectively support retirees if it were used to shore up the Social Security system.

If the government were to remove the tax advantages of workplace retirement plans, Schrager suggests that they might be replaced with an "employer-sponsored liquid account" that would be funded by payroll deductions but would allow for withdrawals at any time (which would provide savers with more flexibility given the penalty for early 401(k) withdrawals, though the absence of a penalty could lead to more savers tapping into savings earmarked for retirement, reducing the funds available to support them once they do reach retirement age). In fact, an individual version of such accounts – a "lifetime savings account" for individuals that can be used for any purpose from retirement to emergencies – was proposed once already nearly 20 years ago. Or as an intermediate step of simplification, individual IRA and Roth IRA limits could be expanded to match 401(k) limits, and allow individuals to do all of their retirement savings to one set of portable unified individual accounts (instead of needing to stack the costs, and the government stack the tax benefits, of having IRAs and 401(k)s).

While there does not appear to be a serious movement within Congress at the moment to eliminate the tax advantages for retirement savings plans (though President Biden's 2021 "American Families Plan" proposal would have eliminated the "Backdoor Roth IRA" and created new rules for higher-income and wealthier retirement account owners), the potential savings from doing so could be attractive to a cash-strapped Federal government (though such a proposal almost certainly would be viewed negatively by high-income taxpayers that benefit the most from the current tax break). So while there might not be imminent action to be taken by financial advisors and their clients (though advisors can continue to provide value by helping clients determine how much to save in these plans each year and whether traditional or Roth contributions are more beneficial in a given year), modeling the impact of the elimination of retirement plan tax benefits (though such an action most likely would only apply to future contributions and not to current account balances) could be a way (similar to the potential for Social Security benefits to be reduced in the future) to 'stress test' a client's plan?

Congress Takes Another Shot At Automatic IRA

(Emile Hallez | InvestmentNews)

While workplace retirement benefits (e.g., access to a 401(k) plan) have become increasingly common in recent decades (with 73% of civilian workers having access to them as of 2023, according to the Bureau of Labor Statistics), many workers either work at a company that does not offer them (e.g., only 38% of those in the lowest wage decile have access to them) or do not take action to sign up for them (as the BLS data show that 77% of workers overall take advantage of benefits when available). With this in mind (and in the absence of a Federal government requirement for employers to offer these benefits to employees), 19 states have created state-facilitated IRAs for employees who do not have access to workplace retirement plans.

In an attempt to expand retirement plan coverage at the national level, Democrat Richard Neal, ranking member of the House Ways & Means Committee, has introduced the "Automatic IRA Act of 2024", which would require employers with more than 10 employees (with limited exceptions) that do not sponsor a retirement plan to enroll employees in an "automatic IRA" (a payroll deduction IRA) or an automatic contribution 401(k) or similar arrangement. And in a further attempt to promote contributions to these accounts, the legislation includes default automatic minimum contribution levels and regular escalations for employees (which employees could opt out of, though they would have to actively make that election).

This proposed legislation is similar to previous (failed) efforts to establish an "automatic IRA" at the national level, though the latest effort includes tweaks designed to placate previous opponents, including increasing the employee exemption limit to 10 (thereby exempting the smallest businesses for which establishing and managing a plan could be relatively costly in terms of time and money) and not including a government-run IRA program (the legislation also would require certain plans to have lifetime income options [e.g., annuities], a measure which has been cheered by the insurance industry). 

Altogether, this legislation would expand access to workplace retirement accounts and could lead to significant increases in retirement savings (given that employees would be defaulted into certain contribution levels rather than having to make an affirmative election on their own, though those on a tight budget might choose to decline to make them). Which could present an opportunity for advisors working with clients in this position to help them choose the right contribution amount based on their income and savings goals (rather than sticking with default contribution amounts)!

How To Talk To Clients Under 55 About Social Security

(Marcia Mantell | ThinkAdvisor)

Social Security benefits make up a significant portion of income for many retirees, so the continued ability of the program to make full benefit payments is analyzed regularly. And while the bulk of the funds needed to pay Social Security benefits come from payroll taxes from current workers, in recent years, the program has had to dip into the "trust fund" in order to cover the full benefits owed. And according to the latest annual report from the Social Security and Medicare Trustees, the trust fund supporting retirees will run out of money in 2033, at which point (based on current tax rates) 'only' 77% of current benefits would be covered. Further, the Congressional Budget Office last year released an even bleaker assessment, predicting that the trust fund would run out in 2032.

Given this outlook, many younger financial planning clients might wonder whether Social Security will even be around by the time they reach retirement age. With this in mind, Mantell suggests that advisors can help boost their clients' confidence that Social Security benefits will be there when they need them. For instance, because Social Security makes up a significant percentage of many retirees' income, eliminating the program could lead to skyrocketing poverty among older Americans, something Congress almost certainly would want to avoid (perhaps in no small part due to retirees being one of the most active voting blocs). So while it's possible that Social Security benefits could be reduced for future generations (whether because the "trust fund" runs out and the program is only able to pay benefits funded by current payroll taxes, or because Congress elects to reduce benefits based on certain criteria, such as income), it appears very unlikely that the system will go away entirely.

Ultimately, the key point is that financial advisors have many ways to support younger clients in planning for the role of Social Security in retirement, whether by laying out the specifics of the Social Security system's finances (e.g., that estimates indicate it will still be able to pay about 77% of benefits even if the "trust fund" runs out), ensuring they understand their annual Social Security statements (and making corrections if necessary!), or by showing them the impact to their financial plan of a potential 'haircut' to their Social Security benefits (given that a reduction in benefits is a more likely scenario than not receiving benefits at all) and making adjustments to their plan if desired!

The Link Between Building A Business And Overconfidence

(Ben Carlson | A Wealth Of Common Sense)

There are several ways to become extremely wealthy, from inheriting a family fortune to winning the lottery. Perhaps a more common path to great wealth is to start and grow a business from scratch. And over the past few years (perhaps spurred on by the pandemic as well as the potential for riches), entrepreneurship has exploded in America, with about 5.5 million business applications being filed in 2023, 2 million more than in 2019!

Nevertheless, starting a business can require significant work (from creating a business plan to finding customers) and has no guarantee of success (government data indicate that just one-third of businesses that were started in 2013 were still around in 2023!). Which suggests that many entrepreneurs will have significant confidence in their skills and judgment (or else they would be unlikely to start a business in the first place!). Though Carlson suggests that business owners who not only survive, but thrive and become extremely wealthy will often apply this (over?) confidence to other aspects of their lives. For instance, in a financial planning context, might be 'certain' about potential investment opportunities. 

In sum, financial advisors can play a valuable role supporting clients who are business owners, not only in creating a sustainable financial plan, but also potentially in serving as a 'check' on any overconfidence that might have built up as a result of their professional success. Which can take the form of ensuring they understand their financial situation clearly and accurately and/or helping them identify all possible outcomes of a decision being considered!

Why Frugality Is The Root Of Riches

(Darius Foroux)

When you hear the word "frugality", being judicious with one's spending might be the first thing that comes to mind. While this is often seen as a virtue (i.e., spending less than you earn), at the extreme end of the spectrum frugality can sometimes get a bad name if an individual is 'cheap' (especially when it comes to how they treat others).

Foroux argues that while the concept of frugality is often used in terms of money, it can apply to more areas of life. Citing the thinking of the stoic philosopher Cicero, he suggests that frugality does not necessarily mean a fear of spending, but rather spending in a way that provides for 'abundance'. Notably, this abundance is not necessarily in regard to material goods (e.g., owning many cars), but rather being able to live a full and rich life, many aspects of which (e.g., spending time with family and friends) do not necessarily require money. Frugality can also be a virtuous loop, as needing (and wanting?) to buy less means that less savings is needed to reduce stress (e.g., worrying how a job loss would impact one's ability to pay the mortgage on 2 homes) and potentially can allow one to take time away from money-earning activities – either temporarily (i.e., a sabbatical), or permanently (i.e., [early] retirement) – and pursue other interests.

Ultimately, the key point is that while "frugal" is often a loaded term, it can alternatively be considered as a lifestyle of self-control rather than a pattern of spending as little as possible. Which presents an opportunity for advisors to support both clients who already identify as frugal (e.g., by ensuring they are living 'rich' lives and not saving money for its own sake) as well as those who spend freely (e.g., by highlighting the tradeoff between their spending and the time spent earning the money needed to support it [and perhaps helping them consider what else they might want to do with a portion of that time if it were freed up])!

31 Lessons I've Learned About Money

(Ryan Holiday)

While some financial education is formal (e.g., in the form of personal finance classes, books, blog posts, or other media), many individuals learn about money informally, whether from seeing how their parents or other close relations handle money, or simply learning lessons gained naturally dealing with money over time. For his part, Holiday has learned money lessons in many ways, from his experience dropping out of college and entering the workforce to his career as an author and business owner, which has allowed him to meet individuals across the wealth spectrum.

One of the key money lessons he learned is to recognize that financial goals often are moving targets. For instance, an individual might think that they would feel financially secure once they reach a net worth of $1 million, but once they get there, they might not actually feel satisfied, whether because their spending has increased (and therefore need to save more to feel 'comfortable') or because they are comparing themselves to peers (or strangers) who are wealthier. One potential way to resolve this challenge is to regularly remind oneself about what previously seemed like a lot of money; for instance, a first full-time job out of college might have provided more than enough money to support the relatively inexpensive lifestyle of a recent graduate (instant ramen, anyone?). So while an individual's expenses will likely increase over time, it can be helpful to recognize that it is possible to live on less (which could help prevent further "lifestyle creep", or the tendency for spending to increase alongside income). 

Another group of lessons applies to the benefits of generosity. In business this could mean treating employees well (e.g., offering competitive salaries and benefits to employees, and paying interns) and being generous with the value an individual provides (e.g., content marketing that offers valuable insights for readers or viewers, even if they do not become clients). And in your personal life, this could mean offering to 'pick up the check' when dining out with friends and tipping well, as doing so not only is a nice thing to do, but it can also provide a boost to your wellbeing (as some research has found that such "prosocial spending" is more correlated to happiness than money spent on oneself).

In the end, while each person will have a different experience with money (and preferences for how to use it), certain behaviors and mental frameworks can enable individuals to make the most of what they have. Which suggests a potential role for financial advisors not only in helping clients put their current financial situation into perspective, but also in creating a financial plan that will allow them to live generous lives into the future! 

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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.