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Why XYPN Is Suing The SEC Over Regulation Best Interest’s Double-Standard For Financial Planning Advice

September 16, 2019 07:07 am 14 Comments CATEGORY: Regulation & Compliance

Since the beginning of the modern era of financial services regulation in the aftermath of the crash of 1929 and the Great Depression, Congress has recognized a fundamental difference between the activities of broker-dealers and registered investment advisers. Broker-dealers were in the business of literally brokering (effecting securities transactions for their customers) and dealing (effecting securities transactions for their own accounts) as a part of the capital formation process and operation of publicly traded investment markets. While registered investment advisers were in the business of providing advice itself. And accordingly, the two were assigned different regulatory standards, with a Suitability standard for sales-based, transactional brokerage activity, and a Fiduciary standard for advice.

Yet in recent decades, the rise of technology has made various brokerage services increasingly accessible to consumers directly (through the discount brokerage movement and then the emergence of online brokers), coupled with the emergence of the independent broker-dealer model (independent of the investment banks that used to own broker-dealers to facilitate the sale and distribution of public offerings they underwrote), has increasingly led broker-dealers in the direction of providing advice to supplement (or validate entirely) their value proposition to their customers. Leading to a blurring of the lines between broker-dealers and investment advisers, and leading Congress in enacting the 2010 Dodd-Frank legislation to direct the SEC to lift the standard of conduct for brokers to be at least as stringent as the standard for RIAs, recognizing the advice that broker-dealers now deliver.

However, in issuing the new Regulation Best Interest rules, the SEC declined to equalize the standard of care for broker-dealer-delivered versus RIA-delivered advice as mandated by Dodd-Frank, and instead expanded the broker-dealer exemption that would allow broker-dealers to even more easily provide comprehensive financial planning advice without being subject to a fiduciary standard for that advice, nor for the implementation of that advice, and without requiring such advisors to register as investment advisers either… which creates, literally, a double-standard for the delivery of financial planning advice.

Accordingly, last week XY Planning Network filed suit against the SEC to challenge Regulation Best Interest, recognizing that the SEC both failed to follow the provisions of Dodd-Frank to apply an advice standard for brokers at least as stringent as the RIA standard, and that the SEC has exceeded its authority by impermissibly trying to re-write the registration requirements to become an investment adviser to stipulate that investment advisers are only engaged in such fiduciary activity when they manage investment accounts and not with respect to the entire advisor-client relationship (even contradicting SEC’s own prior and concurrent guidance). Particularly when it comes to the delivery of comprehensive financial planning, which the SEC itself recognized in 2005 as being too comprehensive by its nature to be considered “solely incidental” to the sale of brokerage products, and instead would have required all financial planning to be delivered under the aegis of an RIA (before the 2005 rule itself was vacated in FPA vs SEC).

Ultimately, though, the purpose of the XYPN lawsuit against the SEC is not to undermine the ability of broker-dealers to engage as such; instead, the issue is simply that Congress has repeatedly prescribed that the delivery of financial advice must be delivered under a fiduciary standard of care, either by lifting the standards for brokers when providing such advice, or by requiring such advice to be delivered as a registered investment adviser in the first place. In other words, the point is not to challenge the broker-dealer model, but simply to separate brokerage sales from investment advice – as Congress mandated nearly 80 years ago – and instead let financial advisors be (fiduciary) advisors, and let brokers be brokers (who market and communicate their services as such to the public). Especially when delivering comprehensive financial planning, which by its very nature, is too holistic of an advice process to ever be solely incidental to the sale of brokerage products, and must instead be regulated the way all advice has ever been regulated: as fiduciary advice.

Weekend Reading for Financial Planners (Sep 14-15)

September 13, 2019 02:56 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that two lawsuits have been filed against the SEC regarding its new Regulation Best Interest, one by a coalition of 8 state attorney generals that claim the SEC failed to follow the requirements of Dodd-Frank that any new standard of conduct for brokers be at least as stringent as the fiduciary duty that applies to RIAs, and a second by XY Planning Network that claim the SEC has exceeded its authority by trying to re-draw the dividing line between brokers and investment advisers and that all financial planning advice is required under the Investment Advisers Act of 1940 to occur under the RIA aegis anyway (making the standard of conduct for broker advice under Reg BI a moot point anyway).

Also in the news this week is an announcement that the various annuity carriers that declared they were pulling their fee-based annuity contracts out of New York due to the new disclosure requirements under Regulation 187's new fiduciary rule for annuity and insurance sales may now return, thanks to further guidance from the New York Department of Financial Services that commission-based annuity agents won't be required to disclose to clients that there may be less expensive fee-based versions of the same annuity contract if they're not dual-registered to sell both in the first place... and raising concerns that New York is already undermining the relevance of its own new Best Interests standard by simply encouraging annuity agents to maintain commission-only agent licenses to avoid the disclosure requirements.

From there, we have several AdvisorTech articles this week, from the announcement that the CFP Board will now begin to grant CFP CE credit for at least some technology-related content, to the highlights of the new FinTech solutions that debuted at the recent In|Vest technology conference, the launch of a new digital-only commission-free RIA custodian called Altruist, and a discussion of the recent NASAA study finding that cybersecurity deficiencies are on the rise in state RIA examinations.

We also have a few investment-related articles, including the milestone that the total amount of U.S. equity assets held in passive mutual funds and ETFs have finally surpassed actively managed U.S. equity funds (though the total amount of global assets held in passive vehicles is still relatively low), and two different articles critiquing and debunking the recent Michael Burry statement that passive index funds may represent a "bubble" at risk of popping.

We wrap up with three interesting articles, all around the theme of where people choose to live: the first looks at how the looming deadline for tax extensions from 2018 means a slew of high-income taxpayers will see for the first time how much their tax liabilities were impacted by the new $10,000 cap on deducting state and local income and property taxes, which may potentially lead to an uptick of high-income individuals relocating to states with lower tax burdens; the second explores how the trend of intra-US migration from dense metropolitan areas to other parts of the country appears to be accelerating due not to the impact of taxes but to the cost of housing and the pursuit of more affordable housing options; and the last examines how the feasibility of working remotely in the modern digital age may be further accelerating the trend of relocation away from big cities as knowledge workers can increasingly be paid for what they do regardless of where they live (making it feasible to choose where to live based on housing affordability, taxes, weather, and any other preferences they may have... but without any need to consider the availability of local jobs in the new location!).

Enjoy the "light" reading!

Kitces & Carl Ep 16: Helping Clients Understand What It Really Means To Retire

September 12, 2019 08:48 am 5 Comments CATEGORY: Kitces & Carl Podcast

The traditional view of retirement has generally been to work as hard as you can during your working years and save as much as possible, to enjoy a life of comfortable leisure after the retirement transition. And although that may seem to be perfectly reasonable on the surface, the reality is that sometimes, careers are more of a (sometimes excruciating) slog rather than a purposeful journey, that even just making it to the retirement transition can be a challenge. In addition, the retirement transition itself can be challenging as well, as the expectation that we’re supposed to know exactly how we’re supposed to lead a fulfilled and rewarding life once it’s time to flip the retirement switch is not always the case in practice. Which, in turn, begs the question: is it really fair to ask someone to “hang in there” with a job that makes them miserable, so they can save up for a future they don’t know how they want to spend anyway?

In our sixteenth episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards explore different ways advisors can frame their conversations with clients when helping them envision and plan for a retirement they can actually look forward to, how to integrate relevant “what if” scenarios for a client that can help them truly understand the range of options available that they may not have otherwise thought possible and practical ways to ask questions in a way that probes what clients love to do, what excites them, and what brings them joy – which, in turn, can spark retirement ideas that they will be truly motivated to pursue.

As a starting point, advisors might ask clients how they might go about doing less of what they don’t like to do, and more of what they do like to do (rather than trying to envision a full-stop retirement). And what it might look like to adjust income over time to eventually reach a no-savings and no-withdrawal stage, to reflect a gradual change in work activity (e.g., jobs that might pay less, but that involve activities the client loves more), which can show the client they don’t necessarily have to wait until “retirement” to leave their current job in the first place. Meanwhile, advisors can also simply ask clients what kind of work they would do if they were financially independent and the level of income from their work didn’t matter to begin with, as a probing thought experiment to help clients see past the “traditional” picture of retirement and formulate specific goals that are both meaningful and enjoyable.

The key point, though, is simply that conversations around retirement planning must go past the traditional objective of figuring out how much a client needs to have at a certain age so that they can afford to maintain their current lifestyles, which presumes a sometimes-hard transition away from what might have been meaningful work into a retirement lifestyle they may not really have clarity about anyway. Instead, by examining alternative possibilities leading up to (and through) retirement, advisors can add even more value for their clients… not only by helping them understand their financial picture (in the traditional sense), but also in realizing the wide range of possibilities available to them moving forward!

The New Blended Retirement System For Military Servicemembers

September 11, 2019 09:09 am 5 Comments CATEGORY: General Planning

Since before World War I, the United States has maintained a retirement program in one form or another to incentivize military servicemembers to build long-term careers in the armed services. The last iteration of the military defined benefit retirement system, called the High-36 Retirement Plan (or “High-3”), was established after World War II and required servicemembers to serve at least 20 years before becoming eligible for retirement benefits. The High-3 system calculates retirement pay based on a percentage of the average salary from the highest 36 months (or 3 years, thus the name “High-3”), for those who have met the 20-year service requirement.

In this guest post, Kathleen Boyd points out that this requirement has been problematic, as according to the Department of Defense, an estimated 80 percent of military personnel exit their service before 20 years. Consequently, most servicemembers have departed the military without any retirement savings. To compensate for the all-or-nothing cliff vesting, the military began offering a Thrift Savings Plan (TSP) so that servicemembers could supplement their retirement benefits with their own tax-preferenced savings. However, the TSP under the original High-3 system offers no military contributions or matching elements on behalf of servicemembers; it’s ‘just’ a self-directed retirement savings plan. And consequently, it provided little to no incentive for a servicemember to initiate contributions if they weren’t already self-motivated to do so.

In 2016, Congress enacted substantial changes to the High-3 military retirement system for the first time since it was set up in 1981. The National Defense Authorization Act (NDAA), effective January 1, 2018, was created with the goal of cutting expenses while increasing flexibility for servicemembers to participate and get at least some retirement benefits from the government. From that legislation, the new Blended Retirement System (BRS) was born.

The BRS consists of a blend of a new High-3 system, similar to the old but updated with a decreased defined benefit amount (due to an adjustment of the years-of-service multiplier), plus new provisions for servicemember TSP contributions (to supplement the reduced High-3 defined benefit amount), including a 1% service automatic contribution (‘free money’ that does not depend on the member’s contribution level) and an employer match of up to 4%. Additional benefits of the new BRS system include substantially increased contribution limits for servicemembers working in combat zones, and a potentially significant retention bonus.

Notably, while the 20-year service requirement still remains in place to receive the High-3 pension annuity benefit under the BRS, a servicemember can take the TSP funds (including their own contributions, government contributions, and matches) upon exiting the military (assuming they meet the vesting requirements – matching contributions vest immediately, and the 1% service automatic contributions vest after two years of service).

To facilitate the transition from the old High-3 to the new Blended Retirement System, the Department of Defense established a deadline of December 31^st, 2018 for active servicemembers to make a decision on whether to opt into the new system or stay with the old. Yet even though the deadline for the choice has passed, it’s still important for advisors working with military clients to understand the benefits and risks of this irreversible decision for future planning purposes.

For example, if a servicemember opted into the new plan, they are now set to receive a lower defined benefit amount, but also have access to government contributions and a matching benefit to their TSP. Alternatively, if a servicemember chose to stick with the old High-3 plan, they stay on track to receive the higher defined benefit amount but lose out on government contributions and matches to their TSP.

The key point is simply that there are additional intricacies of the new system that advisors who serve servicemembers of the military need to understand, and that the servicemember’s join date and years of service will dictate not only which plan will apply to them, but also which benefits they will be eligible for. And while the 2018 deadline to choose retirement systems has passed, the decision must still be made by any Reserve members who are redeployed who have yet to make a choice.

#FASuccess Ep 141: Building The Differentiated Foundation For Successful Advisor Marketing, with Kristen Luke

September 10, 2019 07:05 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 141st episode of Financial Advisor Success Podcast!

My guest on today's podcast is Kristen Luke. Kristen is the founder of Kaleido Creative Studio, a marketing consulting firm that specializes in multi-advisor fee-only RIAs with $100 million to $1 billion in assets under management, doing financial planning for individual clients.

What's unique about Kristen, though, beyond her clear focus on her target ideal client, is the kaleidoscope wheel of advisor marketing activity she's created, and the steps that advisors can take in each area, from basic to intermediate to advanced, in growing their own marketing channels.

In this episode, we talk in-depth about Kristen's marketing wheel, including the six core areas of client referrals, COI referrals, online marketing, thought leadership, community awareness, and conversion, and what it takes to improve in each of those areas, from refining client profiles by first concretely defining the triggering events that bring your target ideal clients in, to the starting steps of online marketing, from various "find an advisor" websites to refining your local SEO, to the reason why you shouldn't write books or try to appear on TV until you have a blog first, and why podcasts are replacing webinars as the hot new advisor marketing channel.

We also talk about what it takes to build the right marketing foundation. Why defining an ideal client profile really is absolutely essential to differentiate and build a successful marketing funnel, how to identify the right target client for your firm if you've already got a wide range of clients and aren't sure where to go next, and the key data that you should start tracking in your advisor CRM now so that you'll be able to measure the results of your marketing efforts properly once you begin to invest into them.

And be certain to listen to the end, where Kristen talks about how she's lived the advisor marketing path in her own consulting firm to advisors, from making a decision or find the focus of her own ideal target advisory firm to work with, how she's been able to grow her own marketing reach without actually spending a lot of money on marketing, and how she followed the path of many advisors in growing her own firm to the point that she had to spend more time than she liked just managing the people, and the reason she ultimately decided to right-size her own firm to better focus on the types of clients she enjoys working with the most, and got a lot happier in the process.

The Capacity Crossroads And The Small Giant Alternative To Building A Lifestyle Or Enterprise Firm

September 9, 2019 07:09 am 11 Comments CATEGORY: Practice Management

As the financial advisory industry continues to move away from being primarily product-driven (where client ‘relationships’ were primarily transactional sales interactions, and advisors could go months or even years without interacting with some of their clients after the sale was closed) and towards a recurring-revenue ongoing relationship model (where advisors provide continuous, ongoing advisory services to their clients), the total number of clients that any one advisor can handle at any given time has decreased dramatically. Because, not only are there significant time constraints around actually doing the work necessary to serve those clients well (not to mention the time needed to actually find new clients and convince them to work with you), but there are cognitive constraints as well, given that physiologically our brains (as humans) can only keep track of a limited number of interpersonal relationships to begin with!

Traditionally, having ‘too many’ clients was rarely a problem – as advisors just focused on their best clients for repeat business opportunities – but in the modern relationship-driven model, all advisors will eventually reach a point where they simply don’t have the capacity to take on more of those ongoing relationship clients and continue to grow the firm. In other words, the advisor has reached a ‘Capacity Crossroads’, and must make a conscious decision about the path to pursue next - either stop growing, or increase the firm’s capacity by bringing on additional staff (and possibly another advisor) in order to continue growing the firm. The problem, however, is that even for those who choose the path of continued growth, once an advisor crosses that capacity threshold, not only are any additional clients less profitable (due to the higher overhead costs incurred by increasing staff), but the advisor also has to manage that growing number of team members… which is rarely a goal for advisors who decided to strike out on their own to serve clients (and not manage employees)!

For most financial advisors, the choice at the Capacity Crossroads becomes a decision about long-term income potential, where the advisor has to decide whether to become a ‘lifestyle practice’ and stop growing (flat-lining their growth and income), or to hop on the eternal hamster wheel of growth and work towards building an enterprise business to continue to grow their income. Yet the reality is that, for those who do decide to go down the enterprise path, there is little evidence to suggest that there are any economies of scale growing down the road from being a ‘small’ solo practice to a multi-billion-dollar firm. And, in fact, top-performing solo advisors often have the same take-home pay as the average partner at a $1B+ ensemble anyway!

In addition, the reality is that the choice at the Capacity Crossroads isn’t just between Lifestyle or a ‘go-big’ enterprise to maximize shareholder value in the first place; there is another choice, which is to become a “Small Giant” advisory firm, which doesn’t grow just for the sake of growing, but rather is built intentionally to be ‘great’ instead of ‘big’. In essence, Small Giants seek to be a purpose-driven business, typically one that is able to serve not only the clients/customers, but also the employees, vendors, and the community. In other words, the point isn’t to maximize just shareholder value, but rather to simply be excellent at what they do, while focusing on serving all of their stakeholders, including owners, employees, vendors, clients, and communities. Fortunately, it also turns out that small giants also happen to be steady growers, and are able to be rather profitable to boot!

Ultimately, though, the key point is simply that, if there isn’t that much difference in the long-term wealth-building potential between a lifestyle practice, small giant, or enterprise firm (especially given the time, effort, and reinvestment cost required to build a multi-billion-dollar business), then the answer to the question of the best path to take when you reach the Capacity Crossroads simply comes down to personal choice. Which is important, because in the end, the best way to build a practice that maximizes your own happiness as an advisor isn’t by allowing growth to dictate the role you fill in the business, but by intentionally setting a vision for the type of business you want to build in the first place!