Weekend Reading For Financial Planners (November 9–10)

Analysts See Loosening Of RIA Regulation Under Trump Administration

(Sam Bojarski | CitywireRIA)

The Securities and Exchange Commission (SEC) under Chair Gary Gensler has issued Proposed regulations at a rapid pace over the course of the past several years, including many rules that would affect RIAs in the future if implemented, including an 'outsourcing rule' that would establish formalized due diligence and monitoring obligations for investment advisers who hire third parties to perform certain functions (a potential increase to the compliance burdens for advisory firms whenever they add a new tech vendor or platform partner), and proposed amendments to the SEC's Custody Rule that would, among other measures, extend custody obligations beyond securities and funds (subject to the current rule) to encompass all assets in a client's portfolio for advisors who manage on a discretionary basis (potentially subjecting the majority of RIAs to at least some of the additional compliance burdens of having custody).

However, given how Republicans implemented their regulatory agenda for advisors the last time Trump was in office, the Gensler proposals will almost certainly will be slowed, if not retracted altogether, once Donald Trump returns to the White House in January. To start, while Gensler's term technically runs until 2026, industry pundits anticipate he will likely resign once Trump takes office, following SEC tradition when there is a change in presidential administration. While it is unclear who will succeed Gensler (though Trump could select one of the current Republican SEC commissioners, Mark Uyeda and Hester Peirce), Trump's stated desire for a deregulatory agenda suggests the next chair will take a lighter touch when it comes to regulation, including for RIAs.

Looking beyond the SEC, Trump's election would appear to doom the Biden Department of Labor's Retirement Security Rule (aka "Fiduciary Rule 2.0"), which attempted to reset the line of what constitutes a relationship of trust and confidence between advisors and their clients regarding retirement investments and was blocked by a federal court this summer, continuing the back-and-forth across Democratic and Republican administrations regarding regulation of the product sales industry. As while technically the rule's outcome is still dependent on the decision of the courts, the Trump administration could further delay or simply decide to stop defending the rule (effectively allowing those challenging the rule to immediately prevail), akin to what occurred with the prior Department of Labor fiduciary rule when President Trump last took office in 2017. Also, the Federal Trade Commission's ban on most non-compete agreements (which was also blocked by a Federal court) would also appear to have little chance of making a comeback under a coming Trump administration (though it could still make sense for advisory firms to revisit their non-compete and non-solicit agreements to ensure they meet firm goals while being fair to their advisors!).

In the end, the pendulum appears likely to swing back toward a looser regulatory environment in the next Trump administration. Which could be a relief for some RIAs (and broker-dealers struggling with the onslaught of hundreds of millions in fines for text messages), as a slower pace of regulation could reduce or at least slow the growth of their compliance burden (particularly so for smaller firms without specialized compliance staff). Though if lighter-touch regulation leads to more abuses that erode consumer trust in the financial advice industry (whether they occur in RIAs or otherwise), fiduciary advisors could have a harder time convincing clients that they truly are acting in their best interests and differentiating from product salespeople who continue to use the "financial advisor" title.

More Collaboration Means More Referrals: Study

(Edward Hayes | Financial Advisor)

While financial advisors have always needed to work together with clients to prepare a financial plan (e.g., to understand their goals and to collect their financial data), technological improvements offer the opportunity for a heightened level of collaboration that goes beyond a static printed plan. And according to a study by financial planning software provider eMoney, consumers are seeking a collaborative relationship with their advisor, with the survey of 1,200 investors finding that 78% of respondents expressed a desire to be actively involved in the process of financial planning, not just in the initial planning stages but throughout the process.

The study identified 5 key collaborative activities: comparing plan options and stress testing; analyzing the current course of action; demonstrating scenarios and competing actions; reviewing assumptions and estimates; and reviewing and refining recommendations. It found that "highly collaborative advisors" (i.e., those who complete all 5 key activities) represent 'just' 19% of the industry but see several improved outcomes, including a 33-percentage-point increase in the likelihood of receiving referrals. In addition, the study highlighted the benefits of frequent client use of a client portal. For instance, while 73% of clients who "always" use the client portal said they are committed to maintaining a relationship with their financial advisor/professional, only 44% of those who either "sometimes/frequently" or "never" use a client portal said the same.

Altogether, this study suggests that at a time when Kitces Research indicates that more advisors are engaging in collaborative planning, advisors are also reaping benefits from engaging clients throughout the initial and ongoing planning processes, whether within their financial planning software or from a range of advice engagement tools!

Compliance Professionals Using AI, Though Yet To See Results: Study

(Patrick Donachie | Wealth Management)

The rise of Artificial Intelligence (AI)-powered software tools during the past couple years has led many financial advisory firms to consider how they might incorporate these tools for client-focused tasks. However, AI-powered software could offer solutions in other areas, including compliance, and a recent survey indicates that many compliance professionals have done so.

According to the survey by compliance firm ACA Group and the National Society of Compliance Professionals of 200 compliance professionals in financial services, 67% of respondents said they were using AI to "increase efficiency in compliance processes", with the most common uses being for research, marketing, compliance, risk management, and operations support. However, 68% of these AI users said they had seen "no impact" on the efficiency of their compliance programs. Respondents said the biggest hurdles to adopting AI tools remained cybersecurity and privacy concerns as well as regulations and examinations, and 92% said they have no policies in place for AI use by third parties and service providers (with almost 70% of firms reporting that they have not drafted or implemented policies and procedures governing employees' use of artificial intelligence).

In sum, while some compliance professionals appear to be dipping their toes into the AI waters, potential efficiency benefits have yet to emerge for many. At the same time, as AI-powered tools become more common (and perhaps more useful?), ensuring they are used in a compliant way can help a firm not only protect client data, but also avoid scrutiny from regulators during their next examination.

Advisors Say They Discuss These 7 Retirement Issues. Clients Disagree.

(John Manganaro | ThinkAdvisor)

While an advisor might be well-versed in the technical details of retirement planning, from crafting a retirement income stream to managing a client's Required Minimum Distributions (RMDs), being able to effectively communicate their recommendations and the analysis behind it not only can increase the chances that clients implement recommended actions, but also recognize the full value their advisor is providing them.

Nonetheless, a recent paper from retirement researcher David Blanchett suggests that in many cases there is a disconnect between the topics advisors believe they are discussing with clients and what clients actually remember hearing. For instance, according to a survey from the Alliance for Protected Income, 97% of advisors said they talked to their clients about how to handle RMDs (while only 54% of clients said so), 95% of advisors said they discussed minimizing taxes (compared to only 64% of clients), and 96% of advisors said they raised which accounts they should withdraw retirement income from at which time (with only 66% of clients saying they discussed this topic). Other areas with at least 20-percentage-point gaps between advisor and client responses included sources of protected income, portfolio rebalancing, and budgeting, with discussing an overall retirement income plan being the only area with a narrower gap (with 98% of advisors saying they discussed it and 85% of clients indicating the same). Notably, gaps were also seen in discussions of more qualitative topics as well, such as how the client will spend their time in retirement, the possible impact of caring for a family member or friend, or the possibility of cognitive decline.

Altogether, these results indicate that while advisors might in reality be discussing key topics related to retirement, their comments might not be making a sufficient impression on their clients that they remember discussing them over time. Which suggests that implementing strategies to boost client engagement with the advice being offered (whether using visual, interactive, and/or process-related elements) could help clients better retain the information being provided by their advisor and recognize the full breadth of advice being offered to them?

Improve Engagement By Making Clients Feel Smarter

(Josh Welsh | InvestmentNews)

Engaging a financial planner can be an intimidating experience for a prospective client, not only because they might fear being judged for their financial decisions but also because they might be embarrassed to not be familiar with various financial terms or concepts. Which presents an opportunity for advisors to ease these concerns by meeting prospects (and clients) where they are to make them feel more confident in handling financial issues and implementing planning recommendations.

To start, understanding a prospect's or a client's financial knowledge can help an advisor tailor how they present information to them. For instance, a long-time personal finance DIYer might be interested in hearing about the ins and outs of Monte Carlo analysis, while someone with much less financial knowledge might need education on the differences between stocks and bonds (well before a potential asset allocation is proposed!). Another way to get around potential knowledge gaps is to create content (e.g., newsletters, blog posts, podcasts, or short videos) for prospects or clients that they can consume on their own time to feel like they better understand key financial concepts (without having to ask their advisor directly!). Other options to make clients feel better informed include using infographics (which could be helpful for individuals who learn better by seeing rather than by listening) or by incorporating metaphors and real-life examples that can put a complicated financial concepts in terms a prospect or client could better understand.

Ultimately, the key point is that because prospects and clients will come to the meeting table (or Zoom screen) with a wide range of financial expertise and different communication and learning preferences, advisors who are adaptable in the way they present information could find themselves with better prospect conversion rates and client satisfaction over time!

Thinking Long Term, Communicating Short Term

(Gretchen Halpin | Advisor Perspectives)

Financial planning typically is an endeavor for the long run, whether it is in creating a cash flow plan that meets today's needs while saving for retirement or crafting a sustainable income plan that could last for a multi-decade retirement. Nevertheless, there are inevitable bumps in the road along the way (e.g., a market downturn) that can create short-term stress for a client even if it doesn't necessarily impact their long-term plan.

With this in mind, creating a regular client communication plan not only can help an advisor communicate that they are thinking about their clients throughout the year, but also get ahead of potential bumps in the road. For instance, an advisor might send out a regular email newsletter highlighting upcoming economic events and show how markets have reacted in the past (letting clients know that a major market move might not be unexpected!). Or in the case of a sudden market drop that does occur, recording a short video and blasting it out to clients could be an efficient way to reassure them (and show the advisor's face) without having to spend time on the phone with every client (though some clients might still call).

In the end, regular client communication (whether synchronous or asynchronous) can be a low-cost way for advisors to let their clients know they 'have their back' throughout the year, potentially building trust and loyalty (and perhaps growing client referrals if current clients show their advisors' content to nervous friends?) in the process.

100%+ Rate Hikes Could Leave Clients With Long-Term Care Insurance Policies With A Tough Choice

(Elizabeth O'Brien | Barron's)

Long-Term Care (LTC) insurance policies were very popular amongst consumers in the 1990s and into the early 2000s, as aging Americans sought to protect themselves against potentially high long-term care costs and take advantage of relatively low premiums offered by insurers. However, a confluence of events – including inadequate pricing on policies, falling interest rates, reluctance among some regulators to permit requested rate increases, and higher-than-expected claims – has led to a breakdown in the traditional LTC market and tough decisions for many clients.

In the wake of insurance companies pulling out of the LTC market as well as increased premiums, sales of standalone LTC policies have crashed from more than 585,000 in 2000 to just 35,000 in 2023, with premium revenue for the insurance companies plummeting from $1 billion in 2002 to $143 million in 2023. This year, Genworth, one of the few insurers pushing forward with traditional LTC policies (and the issuer of many policies during the product's heyday) is requesting premium increases of more than 100% in some states as it seeks to keep its policies on sound (and profitable) financial footing. Which leaves policyholders who have dutifully paid their premiums for decades with a difficult choice: accept the premium increase (and the potential lifestyle hardship that could come with it), drop the policy (potentially threatening their financial security if they do end up needing long-term care), or, in some cases, accept an offer from the insurance company to change their policy (which might have unlimited benefits) to reduced "paid up" coverage (e.g., a smaller lifetime maximum benefit), eliminating the need to pay additional premiums but potentially receiving fewer benefits depending on their care needs.

In this challenging environment, financial advisors can play a valuable role in supporting both clients with current LTC policies facing premium hikes (i.e., helping them assess the financial implications of various available options and potential scenario-based outcomes) as well as those considering insurance to cover possible LTC needs (whether a traditional policy or a hybrid life insurance/LTC policy that combined a permanent insurance product with LTC coverage) to help determine if buying a policy makes sense given their unique circumstances and, if so, the coverage amounts and inflation adjustments that best meets their needs (and budget).

Here's Why Consumers Accept Hikes In LTC Insurance Rates

(Allison Bell | ThinkAdvisor)

When sales of Long-Term Care (LTC) insurance policies were booming in the 1990s and early 2000s (as those in the Baby Boomer generation sought coverage as they prepared for retirement and insurance companies saw a profitable opportunity to write policies and collect premiums for coverage that likely wouldn't be used for many years), policyholders were sometimes given the impression that their premiums would remain relatively steady, or perhaps increase slightly. But given the troubles the LTC market has faced in recent years, premium hikes have been much higher than what many policyholders might have considered when they purchased the policy.

To study how policyholders would respond to a rate increase, the National Association of Insurance Commissioners surveyed 1,118 consumers age 55 and older, about 28% of whom who said they would be willing to pay more to keep their LTC insurance benefits steady, 25% of whom said they would probably accept an offer for reduced benefits, and 16% who said they would cash in their policies. The researchers then showed participants a hypothetical LTC insurance rate increase letter that showed reduced benefit options and found that those surveyed were more likely to accept the rate increase if they received a prior rate increase, thought the letter was clear and easy to read, thought the reduced benefit options were clear, said they had enough information and were in control of their choice, and had confidence in their knowledge and skills (with those who found the letter to be unclear and hard to read less likely to pay the higher premium). More generally, factors that increased respondents' willingness to pay higher premiums included a belief they would need care or that peers would pay more, a higher level of financial knowledge, and a higher level of risk aversion.

Altogether, these results indicate that advisors can add value for clients (particularly those who might be considering dropping an LTC insurance policy with attractive benefits) by clearly explaining their options (and the implications of each one) in order to give the clients greater confidence in choosing whether to accept an (increasingly common) rate increase, and, ultimately, deciding on an option that best fits within their broader financial plan.

The Perils Of Self-Funding Long-Term Care

(Margie Barrie | ThinkAdvisor)

With a need for long-term care being a potential financial peril for aging clients, many choose to insure against this risk through a traditional Long-Term Care (LTC) insurance policy or a hybrid life insurance/LTC policy. Nonetheless, some individuals with sufficient assets choose to 'self-insure' by earmarking certain assets (and their future growth) to cover potential LTC needs, eliminating the need to pay LTC policy premiums and potentially leading to greater wealth down the line (particularly if they don't end up needing long-term care).

However, Barrie argues that the self-funding approach can come with several perils. To start, the client could experience a lower-than-expected rate of return on invested assets, leaving them with insufficient funds to cover LTC needs when they need them. Relatedly, depending on how the assets are invested, an event requiring long-term care could come at a time of a market downturn, also leading to fewer available funds (and preventing the funds from growing during an eventual market recovery). Also, if the earmarked funds are needed much sooner than expected (before having the time to compound), the client could end up with fewer resources than they would if they had purchased an LTC policy (whose full benefits would be available). Finally, taxes could take a bite out of the growth of invested assets set aside for LTC needs, leaving less money than expected. Given these potential perils, Barrie suggests a '50/50' approach could be appropriate, by which a client purchases LTC coverage to cover 50% of potential expenses and uses investible assets to cover the remaining 50%, reducing market and tax rate risk while inviting the possibility of greater investment growth and terminal wealth.

In the end, the decision of whether to buy an LTC policy, self-fund for potential LTC needs, or a combination of both will depend on a variety of factors, including the client's age, expected LTC needs, marital status, total assets, risk tolerance and more, presenting an opportunity for a financial advisor to add value by helping them choose the option that best meets their particular circumstances.

There's A New Hit Podcast That Will Blow Your Mind

(Ben Cohen | The Wall Street Journal)

In the modern age, busy professionals often have a limited amount of time available to consume content (other than 5,000-word blog posts on financial planning topics, of course). Which has contributed to the rise of podcasts, which can be listened to while on a commute, when walking the dog, or even (for those who specialize in multitasking) during the workday. And while podcasts usually involve one or more human hosts discussing a particular topic or chatting with an expert guest, a new type of podcast puts a twist on this genre.

Recently, Google introduced its "Audio Overview" feature, which allows a user to upload content (e.g., a document or even a set of web links) and, in return, receive an audio "deep dive" into the subject matter. Which might sound similar to what a generative Artificial Intelligence (AI) tool like ChatGPT might put out, but the twist here is that the output is not a dry summary of the material, but rather a lively discussion between 2 'hosts' that closely resembles a human-generated podcast. Like a 'regular' podcast, the 'hosts' pull out some of the most interesting features of the uploaded material, present them in an engaging way, and even banter with each other (also adding verbal tics such as "you know" and "um"), allowing users to better understand what might be dry source material while remaining engaged.

Altogether, while Google's "Audio Overviews" tool might not replace human podcasts (yet?), it represents another way that generative AI can help individuals save time by breaking down dense or boring content (or just present an opportunity to learn something new about a topic of interest), and in this case, present it in an entertaining way!

Why Write When AI Can Do It For You?

(Paul Graham)

While verbal communication skills are also important, writing has long been viewed as a key talent for advancing professionally in many fields. However, the rise of generative AI tools introduces the possibility that writing skills will become less necessary for humans, as they could merely prompt an AI tool to produce the content they want (and perhaps edit it afterwards).

While such a world might seem convenient (and save many a middle schooler the time needed to write a 5-paragraph essay), Graham suggests that a declining interest in writing (and the skills needed to do it well) could have the unintended effect of reducing individuals' ability to think clearly. As many can attest to, there is often a big difference between putting together a thesis in one's head and actually putting pen to paper (or fingers to keyboard), as it's often easier to see weaknesses in the argument when it is in writing. Which could lead to a world where some individuals with the inclination to do so will have strong writing (and perhaps critical thinking) skills while others don't (as opposed to today, where writing skills are more like a spectrum).

Ultimately, the key point is that because good writing is not just a matter of using correct grammar or choosing the 'right' word, but also creating cogent, convincing arguments (including financial planning analyses and recommendations?), a skill that could potentially be lost if individuals increasingly rely on AI tools to craft these written arguments for them.

Why AI Search Could Break The Web

(Benjamin Brooks | MIT Technology Review)

In the past, it was fairly difficult to publish one's thoughts for a wider audience (perhaps relying on book publishing houses or newspapers as gatekeepers), but today the Internet gives content creators the opportunity to have their thoughts seen by the entire world. And while some content (e.g., one's favorite blog) might be accessed directly, search engines have become an important way for content to be 'found' by new viewers (making Search Engine Optimization [SEO] a potentially valuable strategy for those seeking a wider audience).

While there have been improvements to search engine algorithms over time (though some might say steps back when it comes to the quantity of sponsored content?), web search has looked largely the same for the past couple decades. However, the introduction of AI-powered search tools could upend how individuals get answers to their questions and the amount of traffic that search drives to original content sources. For instance, AI-powered search tools like Perplexity or Google Gemini not only find links that might answer a user's search query, but also summarize that information so that the user doesn't necessarily have to click through to the source(s) the tool used to craft its response. While this has led to criticism (and lawsuits) from major media organizations (which have argued that the AI-powered search tools are using their content without credit, consent, or compensation), on a broader level it could threaten smaller content creators if those conducting searches are able to access their content without actually visiting their site. Which could lead to a loss of revenue for these sites (or in the case of financial advisors, fewer prospective clients finding their blog or other content and deciding to schedule a discovery meeting) and, perhaps ultimately, decrease the motivation to create new content (potentially leaving users in worse shape as well!).

In sum, while AI-powered search could save users time by summarizing information from multiple sources (rather than requiring them to click through one or more links), it could ultimately undermine one of the features that makes the Internet special – the ability to find new and unexpected content (and perhaps a financial advisor?).

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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.