Weekend Reading For Financial Planners (September 2-3)

Will Affirmation Of Massachusetts Fiduciary Rule Have A Ripple Effect In Other States?

(Tracey Longo | Financial Advisor)

In early 2020, Massachusetts adopted a new regulation holding all broker-dealers to a fiduciary standard when making investment recommendations. While the rule is similar in effect to the SEC's Regulation Best Interest rule (which requires brokers to act in their clients' best interests at the time that they're making an investment recommendation), Massachusetts and its Secretary of State William Galvin proved to be more aggressive than the SEC in pursuing broker-dealers with a full-fledged fiduciary obligation when providing advice in their capacity as a broker.

Later that year, Massachusetts securities regulators filed a complaint against Robinhood under the new state regulation, alleging that the brokerage firm targeted young people with limited investment experience and gamified their application to encourage them to make repeated trades against their own interests. Robinhood then counter-sued Massachusetts to overturn its state fiduciary rule, alleging that the rule is invalid under both Massachusetts law and is preempted by Federal law (Reg BI) and that in any event Robinhood serves "only" as a self-directed broker and is not providing investment advice to which a fiduciary duty should attach. Last year, a Massachusetts judge ruled in Robinhood's favor, and in doing so ruled sections of the state's fiduciary rule invalid.

But in the latest twist in this legal battle, the Massachusetts Supreme Judicial Court last week upheld the state's fiduciary rule, reversing the lower court ruling. The court ruled that Galvin acted within his authority to establish the rule and held that Reg BI did not preempt the state from imposing a stricter requirement, writing that Reg BI constitutes a "regulatory floor" that does not "foreclose State regulation to more clearly protect investors".

Notably, while this decision only applies to the Massachusetts rule, it could open the door for other states (which might have been waiting to let the court cases play out) to enact similar regulations of their own. Which could ultimately mean that while Reg BI falls short of a full fiduciary standard at the Federal level, states could take the matter into their own hands and hold broker-dealers to the tougher fiduciary standard when operating within their borders!

Legal Battle With Frequent Foe Could Hobble FINRA

(Patrick Donachie | Wealth Management)

The Financial Industry Regulatory Authority (FINRA) operates as a self-regulatory organization overseeing its member broker-dealers and their registered representatives. And while it operates under the purview of the Securities and Exchange Commission (SEC), currently it is not required to follow Constitutional requirements that a government agency might, and at least one firm is questioning whether FINRA should be permitted to operate in this manner.

Alpine Securities, a brokerage that a FINRA hearing panel expelled from the industry last year (though a 3-judge panel temporarily halted the ban last month), has filed a suit challenging the regulator's legal foundation. The firm argues that the FINRA-appointed hearing officers who head the arbitration panels that rule on cases between FINRA's enforcement division and its member firms are essentially judges, yet are not accountable to anyone in the government, which it claims is a violation of the Constitution. For its part, FINRA has argued that it is not a state actor subject to the Constitution's rules on appointments and that making its hearing officers subject to the Constitution would "effectively decapitate FINRA's enforcement program" and "destroy the self-regulatory model" under which it operates.

Some legal experts are suggesting that while Alpine Securities' claims would have been unlikely to succeed in years past, the current U.S. Supreme Court, which has issued several rulings calling into question the constitutionality of self-regulatory organizations, might be more open to such arguments. For instance, the Supreme Court could rule that Congress and the SEC cannot delegate policy decisions to FINRA, which could upend the current regulatory framework, or perhaps issue a more limited ruling that kept FINRA intact but reduce its powers. Notably, stripping FINRA of its powers could bring broker-dealers under the regulatory purview of the SEC, which already appears to be stretched overseeing investment advisers.

In the end, while the legal battle between Alpine and FINRA could last for years, Alpine's suit (and the temporary halt to its expulsion) could encourage other broker-dealers to challenge the FINRA penalties they face and possibly receive reprieves based on what some consider to be the regulator's lack of accountability. Which could ultimately make it harder for the organization to enforce regulations against its members (and protect the public in the process?) while the process plays out.

Many DIY Investors Lean More On Advisors As Retirement Nears, Cerulli Says

(Jennifer Lea Reed | Financial Advisor)

While individuals face financial decisions throughout their adult lives (from deciding how to pay off student loans to when to buy a house to how to save for retirement), the pressure to make good financial choices often increases as they approach retirement. Given that they will no longer have an income to rely on once they retire, pre-retirees who might have operated on a 'Do-It-Yourself' (DIY) basis throughout their lives, making most financial decisions on their own, will often seek out the advice of a financial advisor to ensure they are positioned for a financially successful retirement.

A recent study by research and consulting firm Cerulli Associates confirms this trend, finding that once households are within 5 years of retirement, their share of the "advisor-reliant" market jumps from 27% to 46%, and then to 57% once they are within one year of retirement. Notably, this is not the only change in these investors' views, as the study also found that the preference for an advisor affiliated with a national firm increases from 39% to 45%. In addition, 39% of investors said they preferred that portfolio management services be performed by a dedicated team within an advisory firm compared to 29% who said they prefer these services to be done by an individual advisor.

Altogether, this study shows that many consumers see the value of working with an advisor, particularly as they approach or reach retirement. Further, this research suggests that investors do not necessarily want their advisor to do 'everything' for them, particularly when it comes to portfolio management. Which could mean having a dedicated investment management team within the firm (or, for smaller firms, perhaps outsourcing these functions to a Turnkey Asset Management Platform [TAMP]) that can also serve to free up time for advisors to focus on business development, financial plan preparation, and other responsibilities!

You Probably Need Less Money Than You Think For Retirement

(Ben Carlson | A Wealth Of Common Sense)

Figuring out how much an individual needs to save for retirement can be a challenging proposition given the wide range of factors involved (from their spending needs to available sources of guaranteed income). In the absence of a single, universal 'number' (or the help of a financial advisor), some individuals might look around to their peers and their perceived wealth for cues on how much they need to save. However, especially for higher-earning individuals, doing so can lead them to assume they need more for retirement than they might actually need in reality.

For instance, a 2018 study from the Employee Benefit Research Institute found that retirees across wealth levels tended not to spend down their assets in the first 2 decades of retirement (possibly because spending is counterbalanced by portfolio returns or because they spend less than expected). For instance, while those with less than $200,000 of assets (not including their house) spent down about 25% of their savings in the first 18 years of retirement, retirees with $500,000 or more in assets spent a median of less than 12% of their assets in the first 20 years of retirement.

This is similar to the idea that choosing a withdrawal rate in retirement on the basis of a one-time Monte Carlo analysis (where there is no room for adjustments) is very different than being able to do an updated analysis as the size of a client's portfolio changes (based on withdrawals and market performance), as the latter group can make a downward adjustment to their spending to prevent their portfolio from being depleted (though these spending cuts could be painful!).

Ultimately, the key point is that, given the challenge for individuals of knowing how much they 'need' to save on their own for retirement, financial advisors can play a valuable role by helping clients determine not only the size of the portfolio they might need to accumulate given their lifestyle goals, but also by regularly checking in to ensure that they remain on a sustainable path once they do enter retirement!

Are Clients Saving Too Much For Retirement?

(Massimo Young and Sounak Chatterjee | Advisor Perspectives)

One of the most common financial planning services advisors provide is helping clients create a plan for a financially sustainable retirement. While a client's assets (and asset allocation) play an important role in this analysis, the client's spending in retirement will also determine how much income they will need.

While an individual client's spending trajectory across what could be a multi-decade is inherently unknowable at the outset, one approach to estimating their annual expenses could be to take their spending in the first year of retirement and extend it out across the life expectancy being used for the analysis while adjusting for inflation (and while future inflation rates are unknowable, advisors could use historical data [perhaps adjusted upward if the client wants to be more conservative] in this calculation). However, previous research found that, for the average retiree, inflation-adjusted spending did not remain steady throughout retirement, but rather resembled a "spending smile", where inflation-adjusted spending declined by 1% annually in the early years of retirement, 2% in the middle years, and by 1% toward the end of life, reflecting the idea that retirees are active in the early years, slow down their pace of activity (and spending) in the middle years, and become much less active late in life (though the spending decline in this period can be mediated by higher healthcare costs).

While the "spending smile" has been a useful tool for advisors when estimating the path of retired clients' spending, a recent study suggests that spending for some retirees might decrease by even more than the previous research suggests. Researchers from Rand Corporation – using data from the Health and Retirement Study conducted by the University of Michigan, a longitudinal survey of older Americans from 2005-2019 – found that inflation-adjusted spending for couples in the highest wealth quartile (with average financial assets of $2.2 million [the median was $1.2 million]) declined at about 3.1% per year on average during retirement, a greater inflation-adjusted reduction than under the "spending smile" construct. Singles in the highest wealth quartile (with average financial assets of $720,000 [$427,000 median]) saw their inflation-adjusted spending decline at a slower pace, at 1.5% annually.

In the end, these studies can only show the average rate of change in retiree spending, and each individual client will chart their own spending path. Nevertheless, this most recent study suggests that for affluent clients, inflation-adjusted spending might decrease even more than previous studies suggested, which could be an important consideration when determining how much they might need to save for a sustainable retirement (perhaps less than they previously anticipated) and how much they might be able to spend at the start of their retirement (possibly more than they expected)!

What's Your 'Enough' Number And How Can It Help You Live Your Best Life?

(Sophia Bera Daigle | Gen Y Planning)

In modern society, it can be tempting to always want 'more', whether it's more income, a larger net worth, or, in the material world, a nicer car or house. The problem, though, is that there are no limits to these 'measurements', as one could always earn a higher income, have more wealth, or have a fancier car or residence. Even worse, because individuals often compare their current situation to their peers, they might find themselves trying to 'keep up with the Joneses' rather than pursuing what is most important to them.

When it comes to wealth, one potential solution to get off the treadmill of 'more' is to decide what net worth would be 'enough' to meet an individual's given needs. Everyone's 'enough' number will be different; one person might just want to be able to pay off the mortgage on their primary residence, while another individual's 'enough' number might include sufficient money to buy a vacation home outright. 'Enough' can go beyond money as well; for instance, an individual might want to be able to have a 4-day workweek or take an extended sabbatical. Altogether, taking the time to think about what 'enough' would look like and painting a detailed picture can allow an individual not only to put their goals in concrete terms, but also can help them avoid 'moving the goalposts' later on.

In sum, because the temptation to always have 'more' is hard to resist, figuring out what 'enough' means can help an individual avoid running on the hedonic hamster wheel forever. Further, financial advisors could play a valuable role as impartial observers who not only can help clients explore what 'enough' might mean to them, but also can use planning tools to show them how (and when) they can get there!

How To Develop Superstars

(Kerry Johnson | Advisor Perspectives)

When financial planning firms make a hire, they typically do so with the hope that the new team member will develop their skills and stay with the firm for many years to come. But this does not happen automatically; rather, Johnson suggests that it is important for managers to be intentional both with how they praise (and reprimand) employees in order to build a company culture that will encourage staff to stay for the long haul.

When it comes to giving effective praise, Johnson suggests a 3-step approach. The first step is to find opportunities to praise someone in front of others, which can not only encourage the recipient to do more to get praised but can also create a more enjoyable environment for the firm as a whole. Next, it is important to praise a specific behavior and not just the person. For instance, saying "great job" is less effective than saying "great job responding to the client's concerns during yesterday's meeting". Finally, providing "global" praise (e.g., "I appreciate you") can make an employee feel good and motivate them to perform better. In terms of frequency, Johnson suggests that managers try to give praise each employee twice a day; while this might seem like a lot, doing so can create a much more positive work environment.

Similarly, managers can take an intentional approach to reprimanding employees when necessary. First, it is important to only reprimand an employee when no one else is around (as doing so could embarrass the employee). In addition, reprimanding a behavior rather than the individual can encourage the employee to make a change without the criticism feeling as personal (e.g., "This wasn't done right" comes off better than "You did that wrong"). Finally, staff will often take a reprimand better if it is followed up with global praise (e.g., "This client deliverable wasn't compiled correctly, but I appreciate the work you've been putting in this week").

Ultimately, the key point is that if a manager provides neither praise nor reprimands (or worse, only reprimands), employees might not know how they are performing and whether their work is appreciated. With this in mind, being intentional when giving praise and reprimands (and praising often!) can help create more motivated staff and better employee retention!

RIA Leaders Must Ditch Firefighting To Protect Their Culture

(JC Abusaid | Wealth Management)

Given the brisk pace of business, it can be easy for financial advisory firm leaders to get stuck working on day-to-day responsibilities and not take a step back and look at the bigger picture for their business. However, the lack of a well-communicated, longer-term vision can leave the firm and its employees without direction.

With this in mind, Abusaid suggests that firm owners create strategic plans in collaboration with the workforce and communicate the plan widely as well. Doing so not only can demonstrate transparency to the broader workforce, but also better help employees understand what they are working toward and provide a 'North Star' to follow during turbulent times for the firm. To make the plan sustainable, breaking it down into 'bite-sized' goals at the 1, 3, and 5-year marks (with buy-in for these goals from employees) can create opportunities for measurement along the way and allow for course corrections if necessary.

In sum, while it can sometimes be hard to look past near-term challenges, engaging in a collaborative and transparent strategic planning process could ultimately boost employee buy-in and promote the long-term health of the firm!

Why A Happy Advisor Is A Good Advisor

(Jacqueline Sergeant | Financial Advisor)

When thinking about what makes a good financial advisor, traits that come to mind might include trustworthiness, dedication to clients, and passion for the work. In addition to these, veteran advisor Rick Kahler suggests that advisor happiness can signal whether an advisor will provide good service to their clients (and, if working at a multi-advisor firm, be a productive employee and good teammate).

According to Kahler, a happy advisor is not necessarily one who is smiling or telling jokes all of the time (as this could be a façade covering up internal unhappiness), but rather one who is "intent in their skin". Happy advisors tend not to work extreme hours and take care of themselves mentally and physically (they also like to take vacations!). Also, happy advisors tend to be good listeners and are able to be present for their clients instead of mentally lingering on their stressors. Another differentiator is that while an unhappy advisor might work out of a sense of obligation or just for the money, a happy advisor will show passion for the work and professionalism in their interactions with clients and will seek to provide a high level of client service.

Ultimately, the key point is that happy advisors tend to be better advisors, which suggests that firms could consider regularly taking the 'temperature' of their advisors (e.g., whether they are taking care of themselves and still have passion for the work) to find any issues that could be fixed (e.g., encouraging a burnt-out advisor to take some time off) and to ensure the firm's clients continue to receive a high level of service!

What's The Status Of Flaunting Your Status?

(Guy Trebay | The New York Times)

In previous decades, members of the upper class often flaunted their wealth by driving top name-brand cars, wearing designer clothes (with company logos so others could know how expensive it was), and sporting flashy jewelry. For these individuals, such displays served to show off their status to their peers and others.

But today's Ultra-High Net Worth (UHNW) individuals (defined here as those with a net worth of at least $30 million) tend to take a more understated approach to signaling their status. For instance, instead of wearing a shirt with the logo of a well-known (expensive) designer, today's UHNW individual might wear an (extremely expensive) plain-looking shirt by a top designer that would be recognized by others in this cadre but does not signal wealth to others. Or instead of trying to buy the largest house possible, an UHNW individual might buy a property in a prime, private location (prioritizing exclusivity) and outfit it not with as many golden fixtures as possible, but rather (high-end) simple-looking touches that will be noticed by their peers.

One reason cited for this shift is a desire among the UHNW for more privacy at a time of ubiquitous cell phone cameras and viral social media posts (which could put them in danger if their true wealth were discovered). Which suggests that for advisors who are interested in serving this clientele, a low-key approach that prioritizes privacy could be particularly effective!

Why 'Retirement' Language Falls Flat With The Ultra-Wealthy

(John Manganaro | ThinkAdvisor)

For many financial advisory clients, a primary goal is to achieve financial independence (i.e., the ability to maintain their lifestyle without having to work), whether it is at 'traditional' retirement age, or perhaps a few years earlier, and advisors are well-positioned to help them create a plan to help them achieve this goal. But for clients who have already amassed enough wealth to be financially independent, other goals might come to the forefront.

According to David Savir, co-founder and CEO of Element Pointe Family Office, while clients with investible assets exceeding $10–$15 million have some of the same questions and service needs as less-affluent clients, advisors in this niche can also offer an expanded list of services targeted at this clientele. For instance, while they are already financially independent, wealthy clients still often ask their advisors how much they can afford to spend sustainably. In addition, planning strategies used with other clients, such as tax-loss harvesting and trust planning, can be applicable for wealthier clients as well (and are perhaps even more valuable given the increased assets involved). To stand out though, advisors interested in working with this niche might also offer expertise in non-traditional planning areas, such as helping clients access trusted service providers in areas like private aviation, art collection curation, and cybersecurity (with the latter being particularly important, as these clients are often prime targets for hackers).

Ultimately, the key point is that while moving 'upmarket' can be a fulfilling (and lucrative) strategy for advisors, those interested in doing so might need to take different approaches (and perhaps acquire additional competencies) to successfully attract and serve these wealthier clients. Further, advisors considering doing so might also consider how to avoid potential traps related to self-comparison with these wealthier clients in order to maintain their own self-worth!

Rich And Anonymous

(Morgan Housel | Collaborative Fund)

There are numerous stories of once-wealthy people losing it all, from lottery winners to heirs. Outside observers might assume that these sad tales are the result of extravagant personal spending, from houses to cars. However, Housel suggests that a different reason, what he calls "social debt", is often the true cause of wealth destruction.

This social debt occurs when an individual's wealth is known to others (e.g., friends and family), particularly when the wealth is acquired suddenly. For instance, a professional athlete who grew up relatively poor might feel obligated to financially support friends and family who helped them along the way. Or for an heir who did grow up around wealth, this social debt can manifest itself in terms of the mental and financial toll of trying to maintain their status and keep up with wealthy peers (e.g., by finding ways to display their wealth).

One potential way for wealthy individuals to reduce their social debt is to remain as anonymous as possible and keep their wealth out of the spotlight (e.g., by keeping a tighter set of trusted friends and giving anonymously). Because for these individuals, the benefits of privacy and independence could outweigh the perceived 'status' of having their wealth known!

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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.