Weekend Reading For Financial Planners (Oct 1-2) 2022

Author: Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for non-profits in the Northern Virginia area. He has an MA from Johns Hopkins University and a BA from the University of Virginia. He can be reached at [email protected]

Read more of Adam’s articles here.

(Edward Hayes | Financial Advisor)

The Department of Labor has had a tumultuous decade when it comes to regulating advice regarding retirement plans, from a years-long process that would have extended the DoL’s fiduciary rule to brokers and agents (which was ultimately overturned by the product industry), to a new set of regulations that went into force earlier this year that tightened some rules regarding retirement plan rollovers but also loosened ERISA’s fiduciary standard to allow commissions in certain cases. Earlier this year, the DoL indicated that it plans to revisit its fiduciary rule yet again, and a pending proposal likely would increase the number of financial professionals who must provide a fiduciary standard of care when providing investment recommendations for 401(k)s, individual retirement accounts, and other plans.

Yet while some hoped that the new rule would be released this year, it now appears more likely to come in the first quarter of 2023, according to Phyllis Borzi, the former head of the DoL’s Employee Benefits Security Administration. While the DoL has not released specifics, Borzi said that the changes in a new fiduciary rule could include amending the five-part fiduciary test, making adjustments to Prohibited Transaction Exemption 2020-02 (PTE 2020-02), and reexamining existing PTEs, such as 84-24 (which permits certain commissionable insurance sales in retirement plans).

Borzi said the delay is due to the amount of work the agency has on its agenda, as well as two pending lawsuits regarding recent regulations (including a suit challenging PTE 2020-02, which recently went into effect and requires firms, among other things, to provide “retirement investors” with the specific reasons why a rollover or transfer of their retirement funds is in the investor’s best interest). She suggested that the DoL might be waiting to see whether the lawsuits are dismissed before releasing more significant changes to its fiduciary regulations (which themselves could be subject to product industry lawsuits challenging them).

Notably, while it remains to be seen whether the DoL will advance the proposal to broaden the range of financial professionals who must act in a fiduciary capacity, CFP Professionals (including those at broker-dealers) will continue to have a “Fiduciary-At-All-Times” obligation (even as being a fiduciary becomes less of a differentiator in a world where more advisors are acting in a fiduciary capacity), though ultimately a regulator-based fiduciary standard (such as one from the Department of Labor) would arguably have far more ‘teeth’ given the DoL’s ability as a regulator to fully enforce those rules and apply substantive consequences to advisors who fail to follow them.

(Benjamin Lev | RIAIntel)

Millennials (those born between 1981 and 1996) are often portrayed as being more cynical and pessimistic about their finances than older generations. Whether it is because of mounting student debt, having started their careers amid the Great Recession, or the effects of the pandemic, there are plenty of potential reasons for some Millennials to be down on the state of their finances and the broader economy. But a recent survey sponsored by Orion suggests that at least high-income Millennials are more optimistic about their personal financial situation and the broader economy than those in older generations with similar incomes.

According to the survey of individuals with at least $150,000 of household income and at least some investments, 60% of Millennials feel confident about their financial future, compared to 42% of those in Generation X and 34% of Baby Boomers (perhaps reflecting the additional years they have to grow their income and save money as they prepare for retirement or other long-term goals). And when it comes to seeking financial advice, 50% of Millennial respondents said that they would be open to consulting with a financial advisor to reach their financial goals, compared to 32% of those in Gen X and 27% of Baby Boomers. Further, 31% of individuals across generations who do work with an advisor have more confidence compared to a year ago in their ability to reach their financial goals, compared to only 21% of those not working with an advisor (which shows that advisors are able to add value even when markets are struggling!).

Altogether, this survey suggests that high-income Millennials are not only open to working with financial advisors, but that many of those who do are more confident in their ability to achieve their financial goals. This reflects previous research demonstrating the self-assessed benefits of working with an advisor for younger investors and demonstrates the distinct opportunity for advisors to work with younger clients who often have different needs (and could benefit from fee-for-service structures), but could remain clients for decades to come!

(Melanie Waddell | ThinkAdvisor)

The Tax Cuts and Jobs Act of 2017 (TCJA) represented the kind of major tax reform that typically only occurs once every decade or so. It contained a range of measures, from broad decreases in income tax rates to changes to tax deductions, that created new financial planning considerations and strategies. But like some other budget- and tax-related measures, many of the provisions are slated to sunset after 2025.

However, a new bill, the TCJA Permanency Act, would make permanent many of the provisions of the TCJA. These include the revised tax brackets, the 20% deduction for qualified business income, and the higher standard deduction. In addition, it calls for the child tax credit to remain at $2,000 per qualifying child (greater than the pre-TCJA $1,000 credit, but less than the temporarily increased credit for 2021), as well as making permanent certain expanded uses of 529 plans. At the same time, it would also make permanent the $10,000 cap on deducting State and Local Taxes (SALT), which limited the deductibility of these taxes, affecting many higher-income taxpayers and those living in higher-tax states.

While it remains to be seen whether the TCJA Permanency Act will gain traction in Congress (and its future could depend in part on the results of the upcoming midterm elections), it does show that some members of Congress are considering making many of the TCJA’s measures permanent. And while the benefits and drawbacks of doing so will vary by client, given that financial planning projections are made many years, or even decades, into the future, having more certainty regarding the sun-setting tax measures would almost certainly help the planning process!

(Edward Hayes | Financial Advisor)

The arrival of fall means an increase in the hours Americans spend watching television, as football games and new seasons of popular series offer ample entertainment opportunities. But this year, fall arrives amid the continued bear market, which (along with continued elevated inflation) has many consumers on edge about the state of their finances. Perhaps with these factors in mind, and in the midst of last year’s new SEC Marketing Rule that allows financial services firms to more proactively market their financial advice (including with the use of testimonials and endorsements), some of the biggest players in the financial services industry have started television advertising campaigns to attract prospective clients to seek professional advice.

For instance, insurance giant Northwestern Mutual has rolled out an advertising campaign focusing on televised NFL games, as well as on social media. Their message is to seize on consumer sentiment that amid uncertain times (between the pandemic and financial market turbulence), an advisor can help them put together a plan. Similarly, MassMutual, has also ramped up its television advertising, targeting mass affluent individuals between ages 35 and 65 and emphasizing a message of stability. In addition, Wells Fargo has been running an advertising campaign to encourage its banking clients to consider investing via its Wells’ affiliated broker-dealer (and vice versa), which goes alongside a broader effort from the company to increase its advisor headcount and transform its branches from locations to engage in transactions to locations to get financial advice.

The renewed television advertising campaigns from some of the largest financial services companies suggest that they see an opportunity to attract consumers during the continued tumultuous period, and that there is a prospective return on their marketing dollars to spend on such broad-based advertising efforts. And while smaller RIAs might not have the budget for a major television campaign (in fact, only 1% of respondents to the latest Kitces report on How Financial Planners Actually Market Their Services said they use television commercials in their marketing), the shift to more centralized marketing strategies (rather than the firms simply relying on their advisors to go get new clients) from some of the largest firms in the industry does highlight the ongoing evolution of how advisory firms market and grow, and the rising focus on incorporating whatever methods that have the lowest client acquisition cost (which include search engine optimization and online advisor listings, according to the Kitces research study) or those that bring in the most revenue per client (which include client appreciation events and webinars, according to the same study), and especially those that are the most scalable (which include strategies that are built around centralized marketing expenditures and not advisor-by-advisor, time-intensive prospecting efforts)!

(Sam Bojarski | Citywire RIA)

The SEC’s new marketing rule, which will be enforced starting November 4, presents RIAs with the opportunity to greatly expand their marketing efforts. From client testimonials to promoting the reviews they’ve received on third-party websites, firms will be able to point prospective clients to evidence of the quality of their service. At the same time, the SEC will be looking to ensure that advisors stay within the bounds of the new regulation, suggesting that compliance will be a major consideration for firms looking to take advantage of the new opportunities.

Jamie Hopkins, managing partner of wealth solutions at Carson Group, said his firm recognizes the balance between the opportunity to use testimonials (which his firm plans to do to allow consumers to learn more about the firm) and the need to stay in-bounds with regulators. He suggested that Carson will take a cautious approach and that being a second mover when it comes to the new marketing opportunities might not be a bad thing.

Larger firms like Carson could benefit from having established compliance teams to review potential marketing campaigns and online activity to ensure that the firm’s advisors are remaining compliant with the new rules. At the same time, being larger also means that it can be more challenging to ensure that all marketing materials, referral agreements, and procedures (which have to be upheld by potentially thousands of employees) are following the regulatory guidelines, according to attorney Max Schatzow.

Ultimately, the key point is that the SEC’s marketing rule represents an opportunity for both large and small firms to better inform consumers of the experiences current and former clients have had with the firm. But leveraging this opportunity will require care, as the SEC has already announced that its examiners will be evaluating firms’ compliance with the rule!

(The Client Driven Practice)

While product reviews and client testimonials are common in a range of industries, RIAs for decades have been prohibited by the SEC from using any client testimonials in their advertising. At a time when the advisory business was focused on investment management, firms might have been tempted to cherry-pick testimonials from clients who happened to have the best investment returns. But as the services of RIAs have expanded well beyond investment management and into investment planning, client testimonials could cover much more than investment returns. And amid this background, the SEC in late 2020 announced a new marketing rule that, for the first time, allows financial advisors to proactively use testimonials (from clients) and endorsements (from non-clients), and to highlight their own ratings on various third-party websites.

But anyone who has browsed company websites or third-party ratings sites, such as Google, will recognize that not all testimonials and reviews are created equal in terms of their quality, so it is important for firms that want to leverage this new tool to create a plan to ensure the effectiveness of their marketing campaign. First, advisors will want to get testimonials from people their ideal client can relate to. For instance, if an advisor is targeting mid-career professionals, publishing a testimonial on the firm’s website from a current client in that position (rather than a retiree) will allow the ideal client to see how the firm can meet their needs. Testimonials can also be used to demonstrate the firm’s process, so that consumers can get a better idea upfront of whether the firm will be able to meet their planning needs.

And while testimonials published on a firm’s website can help attract prospects and give them a better idea of the client experience, because they are curated by the firm, many consumers look to reviews on third-party websites. And while firms don’t have direct control of the reviews on these sites, they can indirectly influence the reviews that are published. For example, firms can help prevent negative reviews from showing up in the first place by managing expectations for prospects and clients in order to prevent disappointment that could lead them to write a negative review. If a firm recognizes that they will not be able to provide the experience a client seeks, addressing the issue promptly and referring them to a more appropriate advisor can help prevent disappointment from turning into anger.

In the end, the best testimonials are often the ones that help a consumer understand how a given advisory firm can meet their specific needs. And given that many consumers will look at both a firm’s website and its external reviews, it is important for firms not only to create a plan to get the most out of the new opportunity to publish testimonials, but also to double down on determining who their ideal client is and providing a high level of service that will encourage more positive endorsements (and fewer negative ones) down the line!

(Allison Bell | ThinkAdvisor)

When the Centers for Medicare and Medicare Services (CMS) in November of last year increased the monthly Medicare Part B premium to $170.10 from $148.50 (the largest increase in dollar terms, and the fourth-largest hike in percentage terms in the program’s history), it came as a jolt to the budgets of many seniors. The cost increase was largely associated with the potential costs to the program of the Alzheimer’s drug Aduhelm, with an initial price of $56,000 per patient. However, the subsequent reduction in the price of Aduhelm to $28,200 led to a CMS review of the Part B premium hike in light of the potentially reduced costs to the Medicare program.

And while CMS decided against a mid-year Part B premium reduction, many seniors will see reduced premiums in 2023. CMS announced this week that the average Part B premium will fall 3.1% in 2023 to $164.90 per month, with the Medicare Part B coverage deductible decreasing by 3% to $226 (compared to a 5.9% increase for the 2022 premium). Notably for advisors working with higher-income clients, while the new $164.90 monthly premium will apply to those with Modified Adjusted Gross Income (MAGI) of no more than $97,000 (for individual tax filers) and $194,000 (for joint filers), those with more income and are subject to the Income-Related Monthly Adjustment Amount (IRMAA) will also see declines in their monthly premiums. At the highest levels of income, individuals with MAGI of at least $500,000 and joint filers with MAGI of $750,000 or greater will pay $560.50 per month, down from $578.30 in 2022.

Altogether, the decline in Part B premiums (combined with an anticipated large Social Security cost-of-living adjustment) could help many seniors as they face continued inflation in other areas. Also, with the Medicare Open Enrollment Period taking place from October 15 until December 7, it could be a good time for advisors to not only update premium costs in client plans, but also review coverage options with clients who have Medicare to ensure they are on the best plans for their given medical and financial situations!

(Ed Slott | InvestmentNews)

The arrival of the fourth quarter brings an annual rite of passage for many financial advisors: processing client Required Minimum Distributions (RMDs). While many seniors take distributions from their Traditional IRAs and other pretax retirement accounts throughout the year to meet their spending needs (in fact, almost 80% of seniors take out more than is required!), those who do not need cash from these accounts often wait to take their RMD at the end of the year to maximize deferred investment growth in the account. And while this can be a useful strategy in years of strong investment returns, the current bear market might have some seniors concerned about selling stocks or bonds from their retirement accounts that have declined in value in order to meet their RMDs.

Notably, there are multiple ways for clients to avoid having to sell assets that have declined in value this year in order to meet their RMD. First, many client portfolios will contain significant cash allocations that can be distributed as RMDs, leaving stock and bond investments that have fallen in value this year in the account for a hoped-for recovery. Another option to meet the RMD without selling investments is to distribute investments ‘in-kind’ from the retirement account to the client’s brokerage account. This allows the client to avoid selling the investment (though more shares will have to be transferred to meet the RMD dollar amount than before their value declined), and while the value of the stock transferred will be treated as ordinary income this year, the client can potentially benefit from long-term capital gains treatment if the investment is sold for a gain at least one year after the transfer is made (another benefit is that the basis for the transferred investment is the price on the date of the transfer, not the price it was originally purchased for in the retirement account).

Ultimately, the key point is that seniors have several ways to meet their RMD, from distributing cash, to an in-kind transfer, to a Qualified Charitable Distribution (which has the added benefit of reducing their tax burden!). So while investment performance might be disappointing for many clients this year, advisors can add value by helping them choose the RMD method that best suits their preferences and financial situation!

(David Blanchett and Michael Finke | Advisor Perspectives)

One of the chief concerns of financial planning clients and prospects is having enough money to cover their spending throughout their retirement. And as life expectancies have increased over the decades, the longevity risk of outliving one’s retirement dollars has become increasingly important to consider. For which many clients prefer to cover their retirement spending needs through withdrawals from the ongoing long-term growth of a portfolio, while others prefer to incorporate guaranteed-income benefits (typically through annuities) in part to safeguard against the possibility of a market downturn decreasing their spending ability in retirement (sequence of return risk).

And so, the financial services industry has created a range of annuity products that provide guaranteed income to address the concerns of the latter group. At its most simple, a Single Premium Immediate Annuity (SPIA) provides a lifetime stream of income in exchange for an irrevocable premium contribution. But for some retirees, SPIAs are not attractive because the income payments are fixed and do not adjust if market returns are strong (of course, one of the benefits of an SPIA is that the payments do not decrease if market returns are weak). These retirees are often attracted to variable annuity products, which typically allow for upside potential while cushioning downside risk. Some of these annuities come with a Guaranteed Lifetime Withdrawal Benefit (GLWB), which allows access to the annuity contract value (i.e., are revocable) and guarantees a minimum level of lifetime income (which in some cases could even increase) even if the underlying account value goes to zero.

Of course, because the GLWB feature increases the risk to the issuing insurance company (as they will have to pay benefits to those annuity holders whose accounts are depleted), it comes with commensurate fees to the buyer to cover the cost of the guarantees that are provided, which have led some retirees to eschew this option. But as Blanchett and Finke argue, rather than be considered a ‘fee’, it is more appropriate to consider this cost the price of insuring an income guarantee for the life of the client. For example, just as those who purchase homeowner’s or automobile insurance might never make a claim, many individuals who purchase a GLWB rider might not need the income-guarantee benefit (either because they experienced strong investment returns or died before depleting their account). But those who are less ‘lucky’ (either because they experienced a negative sequence of returns or because they outlived the funds in their account) will file a ‘claim’ and benefit from the guaranteed income insurance purchased. Either way, those with the GLWB rider will have received a certain amount of annual income throughout their retirement years.

The key point is that just like other insurance products, income insurance comes at a cost and many ‘policyholders’ will not make a ‘claim’. Further, purchasing an income insurance product can be thought of not necessarily as a wealth maximizing measure but rather as an income guarantee that can be hard to match from an unprotected portfolio alone. At the end of the day, while the decision on whether to use income insurance products will depend on a client’s assets, income needs, and preferences, the cost of this insurance should not necessarily be treated as a disqualifying factor!

(Katherine Bindley | The Wall Street Journal)

For companies and positions operating in-person, the traditional five-day workweek provided little flexibility for employees. But over the past couple of years, many firms have either moved to be fully remote or to a hybrid format, where employees are only required to be in the office for a certain number of days per week. This often allows employees to decide which days to come into the office and which days they will work from home.

But having the option to choose which days you work in the office can lead to a tricky calculation. Some employees might choose to work from home on Mondays to ease themselves into the week without a commute, while others might choose to work from home on Fridays to be able to start their weekends earlier. Perhaps unsurprisingly, these trends are reflected in the data, as Tuesdays, Wednesdays, and Thursdays have been the most popular days to be in the office, according to security firm Kastle Systems.

But some employees are choosing to buck these trends and come into the office on Friday each week. Some cite the benefits of less traffic on their commute (as other hybrid workers work from home), less crowded offices (which let them play whatever music they like and avoid the dreaded microwaved fish situation), and even more time to use office equipment (e.g., using the office printer to copy a long document) that can be backed up on other days. And when managers aren’t in the office to look over employees’ shoulders, some take the opportunity to get outside for walks by themselves or with colleagues (while completing all their work).

So as more workers return to the office, at least on a hybrid basis, many will have the opportunity to choose which days to come in. Whether someone prefers being there when other colleagues are in (extroverts unite!) or coming in when few other employees are around, allowing this flexibility can allow staff to make the optimal choice to fit their personality and their schedule!

(Lindsay Ellis and Angela Yang | The Wall Street Journal)

Workers have experienced a wide range of trends during the pandemic era, from the rapid shift to remote work to “Zoom fatigue” to the gradual return to the office. And during the past year, the tight labor market has led many employees to leave their companies for better opportunities elsewhere in what has been dubbed the “Great Resignation”.

And at a time when many workers are stressed (from dealing with the continued impacts of the pandemic to balancing work and personal commitments), some have started to reevaluate their relationship with work and their employer. This new trend, sometimes called “quiet quitting” isn’t about employees actually quitting their job, but rather often seeking to meet the minimum requirements of their job without going above and beyond in a way that can cause stress or disruption to their life outside of work. Instead of doing what it takes to climb up the corporate ladder, many of these employees are happy enough to get their paycheck and focus on their broader lives.

While the term “quiet quitting” might be new, employee engagement has long been a concern for many employers. According to Gallup, while employee engagement has been falling recently overall, younger employees are particularly disengaged, with more than half of workers who were born after 1989 reporting that they are disengaged at work. Further, Gallup found that younger workers often feel that their work has no purpose and that this can contribute to disengagement.

So while financial advisors tend to rate high on measures of wellbeing compared to other occupations, it is important for firms to recognize that all employees might not feel the same way. In particular, newer employees, who might get less time working directly with clients and have more mundane paperwork tasks to complete, might be prone to disengagement. This increases the importance for firms of building psychological ownership among employees, and ensuring that they have the career opportunities and are receiving the pay and benefits that will motivate them to remain engaged, while also respecting work-life boundaries, all of which can ultimately benefit both employees (who can have a more meaningful work experience) and the firm (that could see improved productivity and less employee turnover)!

(Tara Law | Time)

While office-based jobs are potentially less draining than those that require physical labor, sitting in front of a screen all day can be draining in its own way. But many workers might be reluctant to take breaks, thinking that it will interrupt their train of thought (or, if working in the office, be seen as slacking off by managers).

But research shows that ‘micro-breaks’ of 10 minutes or less can potentially significantly improve your energy and wellbeing. The ‘best’ activity to do during these breaks will vary by individual, but turning away from the computer, stretching, and walking can all be good options. Extroverts might prefer to chat with co-workers during these micro-breaks, while introverts could turn to a book or quiet time outside. When combined with longer breaks (don’t forget to eat lunch!), workers can better balance their work responsibilities with the need to take a mental and physical break throughout the day. And the move to remote work only increases the opportunities for these micro-breaks, as workers aren’t constrained by the opportunities available within the office.

In the end, ‘micro-breaks’ can not only be valuable for employees (who can gain energy and avoid fatigue), but also for their companies as well (as well-rested workers could produce better-quality work). So, if you find yourself feeling fatigued during the workday, taking a ‘micro-break’, whether it’s a trip to the coffee machine or a quick walk outside, can help you not only work better but also improve your overall wellbeing!

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, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.