Weekend Reading For Financial Planners (Nov 26-27) 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.

(Lisa Shidler | RIABiz)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans), has gone through a multi-year process across three presidential administrations updating its ‘fiduciary rule’ governing the provision of advice on these plans. The DoL fiduciary standard first formally proposed in 2016 under the Obama administration took a relatively stringent approach (where commission-based conflicts of interest had to be avoided altogether), but encountered numerous delays under the Trump administration, and was ultimately vacated by the Fifth Circuit Court of Appeals in 2018 (under the auspices that brokers and insurance agents are merely salespeople and shouldn’t be held to a fiduciary standard because they are not in a position of ‘trust and confidence’ with their customers), before being resurrected and adopted in a more permissive form (e.g., allowing broker-dealers to receive commission compensation for giving clients advice involving plans governed by ERISA as long as the broker-dealer otherwise acts in the client’s best interest when giving that advice) in December 2020.

But now, the DoL has indicated that a new fiduciary rule could be released as soon as next week. While the contents of the new rule are unknown, expert ERISA attorney Fred Reish thinks that it could fall in the middle of the Obama and Trump rules, as the administration will have to take into account the Fifth Circuit ruling that vacated the original Obama rule. Reish speculated that a new rule could provide that a single recommendation can be considered fiduciary advice (as opposed to only recommendations made on a regular basis, which historically exempted transactional advisors because they weren’t in an ‘ongoing’ advice relationship). For example, the new rule could state that if an advisor or insurance agent has a relationship of trust and confidence with the participant (e.g., by holding out as an advisor in the first place), then a rollover recommendation will be fiduciary advice, even if it’s otherwise ‘transactional’ and not ongoing advice that continues after the rollover is completed.

A former DoL official has previously suggested that related changes 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 PTE 84-24 (which permits certain commissionable insurance sales in retirement plans). Notably, the ‘new’ fiduciary rule will have to go through the entire notice and comment process required by the Administrative Procedures Act, including a comment period once the proposed regulation is published in the Federal Register.

Separately, the DoL this week finalized a rule to explicitly permit retirement plan fiduciaries to consider Environmental, Social, and Governance (ESG) factors when selecting investments and exercising shareholder rights (e.g., proxy votes), reversing a Trump-era regulation that Reish described as somewhat adverse to the use of ESG factors for selecting plan investment and which prohibited ESG-factor-qualified default investment alternatives. The rule will be effective 60 days after its publication in the Federal Register except for a delayed applicability until one year after publication for certain proxy voting provisions to allow fiduciaries and investment managers additional time to prepare.

Ultimately, the key point is that while there is a long road ahead for a ‘Biden’ fiduciary rule, the DoL appears to be signaling that it wants higher standards than those under the Trump-era rule currently in place (particularly when it comes to determining when an insurance agent or broker-dealer registered representative has a fiduciary duty to their clients and goes beyond ‘just’ serving as a transactional salesperson). And given the finalized ESG rules, the Biden administration has shown that it is prepared to act when it comes to reversing advisor-related regulations created during the previous administration!

(Stacy Cowley and Zolan Kanno-Youngs | The New York Times)

The COVID-19 pandemic has led to a series of legislative actions and regulatory actions to help boost the economy and ease the burden on consumers, from the CARES Act enacted during the Trump administration to the American Rescue Plan enacted during the current Biden administration. In addition to measures such as stimulus checks and enhanced unemployment compensation, one of the common areas addressed in these efforts was how to handle Federal student loan debt. The CARES Act initially put a pause on Federal student loan payments through September 30, 2020, but this deadline has been repeatedly extended, and, until this week, was set to expire on December 31.

But now, amid legal challenges that have halted its broader plan to address Federal student loan debt, the Biden administration announced this week that the pause on Federal student loan payments will continue until 60 days after the court cases are resolved, or until 60 days after June 30 if the cases are not resolved. In other words, for student loan borrowers who were expecting payments to resume on January 1, 2023, that initial repayment date may be pushed back as far as September 1, 2023!

The legal challenges that triggered the extended payment pause were brought by six states and challenge Biden’s sweeping student loan debt relief plan that, among other measures, would cancel up to $20,000 of Federal student loan debt for certain borrowers and create a new Income-Driven Repayment (IDR) plan that would limit payments on Federal undergraduate loans to 5% of the borrower’s discretionary income and forgives loans of less than $12,000 after 10 years of payments. This week, the U.S. Court of Appeals for the Eighth Circuit issued an injunction blocking the plan and the Biden administration has asked the U.S. Supreme Court to overturn the ruling.

Altogether, the string of temporary measures and court rulings have made student loan planning more challenging for financial advisors and their clients with student loan debt. For now, student loan borrowers will no longer have to resume payments starting January 1, but the date they will resume (and when they might receive relief under the broader student loan plan) remains unclear. In the end, the continued changes to the Federal student loan program give advisors the opportunity to add significant value to clients with student loans, not only by staying abreast of the latest changes, but also by helping them formulate a plan for when payments resume and if/when the relief package is implemented!

(Jeff Benjamin | InvestmentNews)

The economic environment of the past decade—with low interest rates, robust market performance, and relatively strong economic growth—coupled with an aging cadre of advisory firm owners, contributed to a surge in RIA mergers and acquisitions (M&A) activity in recent years. But while deal flow remained strong through the first three quarters of 2022, M&A activity appears to be slowing amid higher interest rates, slumping markets, and cooling economic conditions.

According to consulting firm DeVoe & Co., October and November are on pace for about 15 deals per month, down significantly from the monthly volume of 23 transactions for the first nine months of 2022. While 2022 is likely to set a record for deals (with 227 transactions through November 15, on pace to top the 241 deals seen in 2021), it remains unclear whether the current slowdown is temporary or a sign of further trouble ahead, according to DeVoe.

In addition to putting pressure on deal volume, the current economic environment could change deal structures as well. As the struggles of stock and bond markets this year wreak havoc on client portfolios (and revenue for firms charging on an assets under management basis), some firm owners might be reluctant to sell when their revenue numbers – an important firm valuation metric – are (perhaps temporarily) lower than they once were. And so, to entice sellers, some acquirers might offer mechanisms to recoup some of the value that they have lost as a result of the market environment (as a firm owner will want to avoid ‘selling low’!).

The key point is that while the frenetic pace of RIA M&A might be slowing down, there appears to continue to be interest from both buyers and sellers in consummating deals, at least under the ‘right’ terms. So while the current market environment might be dampening valuations, interested firm owners can consider how to best position their firms for a sale (though, ironically, doing so could reduce their desire to actually sell it?).

(Annie Lowrey | The Atlantic)

Housing is the largest monthly expense for many American families. In recent years, housing has become more expensive for both renters and buyers, and, amid a rise in interest rates, could become even more costly in the months and years ahead. And while there are a range of potential public policy measures that could help ameliorate this situation—particularly in some of the highest-cost cities like New York, San Francisco, and Boston—advisors can also help their clients work through this challenging situation.

Nationwide, 47% of renters spend more than 30% of their income on rent and utilities, with one in four spending more than half of their income on shelter. This can not only make it challenging to afford housing as a renter, but also makes it difficult to save money for a down payment to buy a home. Further, rising mortgage rates will make it even more challenging to buy a home (unless housing prices fall precipitously). One of the primary causes of high housing costs is restrictive permitting practices in many major metropolitan areas (often those that are generating the most new jobs) that make it harder to build new homes. For instance, New York City issued fewer new housing permits in the 2010s than it did in the 2000s or even in the 1960s, regularly creating more jobs than home. Often, current homeowners (perhaps afraid that their home values will fall amid new housing supply) push back against permitting reform that would allow for new, and denser, construction.

Amid this thorny policy debate, advisors can help clients navigate this challenging housing environment. At a broad level, they can help clients explore where they want to live, both in terms of location (as there is significant variability in rental and home prices throughout the country) and type of unit (possibly trading size for a more affordable price), perhaps taking advantage of the flexibility of remote work arrangements offered by some companies. And when it comes to buying a home with today’s relatively high mortgage rates, analyzing different mortgage types (e.g., adjustable-rate mortgages could become increasingly attractive) and exploring alternative financing arrangements (e.g., an intra-family mortgage loan), could help clients meet their housing goals!

(Francine Russo | The Wall Street Journal)

Parents are often seen as a primary source of advice for children and young adults. But as adults approach middle age (and the parents get older), they often find themselves wanting to give their parents advice. And the holiday season, when family gatherings are more prevalent, is often a tempting time to give parents unsolicited advice, whether it pertains to their living situation, finances, or health.

But often, this advice can strain the parent-child relationship, as parents might be resistant to taking advice from their children (or perhaps are reluctant to recognize that they are aging), and children grow increasingly frustrated when their parents do not take their advice. A first step toward reducing this conflict (while still trying to communicate advice to the parent) is to avoid coming across as patronizing or overbearing (even if unintentionally). This can often be accomplished by considering the parent’s perspective; perhaps their upbringing left them with different attitudes or preferences (e.g., those whose parents lived through the Great Depression might have inherited conservative attitudes towards investing) that might make sense given the parent’s own experience, but seem strange from the perspective of their children’s generation. This sense of empathy can help to better craft an approach for giving advice to parents that recognizes their unique circumstances (also a good approach for financial advisors!).

Further, it is important for adult children to recognize that they might have unconscious motives for giving advice; perhaps they want their parents to acknowledge that they are a successful or ‘good’ child by listening to the child’s advice. This is important to recognize to ensure that advice is actually being given for the parent’s sake and not the child’s. Another way for adult children to prepare for the conversation is to run their advice past a neutral acquaintance first, to not only ensure their message is coming across clearly but also to take some of the emotion out of the situation. Alternatively, if the parents are unlikely to be receptive to advice coming from their child, an alternate individual (e.g., a sibling or friend of the parent) could be enlisted, either to join the conversation or to provide the advice themselves.

Ultimately, the key point is that many of the techniques financial advisors use to build their relationship with their clients (e.g., asking questions and considering alternate scenarios before diving into giving advice) are relevant when it comes to giving advice to their own parents as well. So before dishing out advice to parents with Thanksgiving dinner, consider both how the advice is being served and whether an alternative approach might be more effective!

(Meb Faber Research)

The end of the year is often a busy time for financial advisors, as they help clients with year-end tax planning, taking the proper RMDs, and other time-sensitive tasks. But there are also some perhaps lesser-known opportunities to help clients save money and build loyalty in the process!

One opportunity for clients is to check for any unclaimed property at Unclaimed.org. This allows them to search for property, from trust proceeds to dividend checks, that is legally theirs but currently sits in government coffers because it has been unclaimed. Another potential ‘quick’ win is for clients to review their subscriptions and services that charge fees, from the streaming service they haven’t watched all year to a credit card they no longer use, to see if any can be eliminated.

Advisors can also take the lead on many of these opportunities. For example, as interest rates have risen this year, the spread between interest rates offered by different banks and financial platforms has widened. And so, analyzing clients’ cash management strategies and helping them move their funds to a higher-earning account could lead to them earning hundreds or even thousands of dollars of additional interest in the coming year. Relatedly, for clients who might be holding a significant amount of cash on the sidelines, having a conversation about potentially putting it into the market (if called for in their financial plan) could be valuable for them in the year ahead.

Ultimately, the key point is that in addition to the ‘traditional’ end-of-year services advisors provide to their clients, they have several other options to help their clients earn or keep more of their money. Which can be a helpful way for advisors to show how much value they are adding to their clients (in dollar terms or otherwise) throughout the year, helping to justify their fee in the process!

(Sheryl Rowling | Morningstar)

When financial advisors discuss asset allocation in retirement with clients, it is often in terms of stocks and bonds (e.g., a 60% stock / 40% bond portfolio). But clients will typically have another asset that is important to consider in these calculations: their Social Security benefits.

Advisors and their clients have several potential ways to approach incorporating Social Security benefits in asset allocations. Essentially, Social Security provides a lifetime annuity with inflation adjustments, and as such could represent a portion of a client’s fixed-income allocation in retirement. And so, one option to incorporate Social Security is to create an allocation equivalency; using this method, the advisor calculates an equivalent investment principal for the Social Security benefit based on the net present value of all future benefit payments (e.g., using a 4% rate of return, a $3,345 monthly benefit payment over a 20-year period would be the equivalent of an investment principal of about $1 million). The advisor then incorporates this equivalent principal into the investment portfolio, and then applies the chosen asset allocation to the new, ‘larger’ portfolio. While this will lead to a higher equity exposure (and likely higher volatility) in the non-Social Security portion of the investment portfolio than before incorporating the Social Security benefits (e.g., the investment portfolio could now be 65% stocks and 35% bonds), the client’s overall asset allocation (with the Social Security benefits being treated as fixed income) will continue to resemble their original target asset allocation.

Another option is to switch to a “bucket” strategy, where the Social Security benefit is applied to non-discretionary expenses such as housing, food, and insurance (because it represents ‘guaranteed’ monthly income). This can make a client more confident in having a more aggressive asset allocation (depending on their goals), as the investment portfolio only needs to cover any remaining non-discretionary expenses and other spending (reducing required withdrawals during years when the portfolio declines in value).

In addition to considering how Social Security benefits interact with a client’s broader asset allocation, advisors can add significant value by helping clients with claiming decisions and considering asset location and withdrawal timing strategies (including potential Roth conversions) to maximize their income in retirement and overall wealth. The key point, though, is that when it comes to creating a retirement asset allocation for a client, it is important to incorporate Social Security benefits in the process!

(David Blanchett | 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 (i.e., 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 upfront premium payment. But for some retirees, SPIAs are not attractive because the income payments are fixed and do not adjust if market returns are strong (though of course, one of the benefits of an SPIA is that the payments do not decrease if market returns are weak). Retirees who want more upside are often attracted to variable annuity products, which are advertised as allowing for upside potential while still cushioning at least some of the downside risk (for instance, with a Guaranteed Lifetime Withdrawal Benefit (GLWB), which allows access to the annuity contract value as it grows but still guarantees a minimum level of lifetime income even if the underlying account value goes to zero).

But because the GLWB feature increases the risk to the issuing insurance company (as they will still have to pay benefits to those annuity holders whose accounts are depleted, and can be hit with a large number of payments at once if a sizeable bear market triggers a large cohort of retirees to deplete their cash value and rely on the guarantee all at once), many insurers have stopped offering this product. Instead, some have introduced product features that Blanchett dubs Protected Lifetime Income Benefits (PLIBs). While payouts from PLIBs are similar to GLWBs, in that PLIBs provide some amount of guaranteed income for life even if the underlying account value goes to zero, the income from the PLIB changes over time based on performance (of the investments selected, and also of mortality outcomes, depending on the structure). The key difference is that while the probability of an income increase is significantly higher with a PLIB versus a GLWB, income from a PLIB can actually decline if the returns are negative (whereas income can not decrease for a GLWB), reducing the risk for the insurer.

Overall, for clients who do not want to make an irrevocable annuity premium payment (e.g., by purchasing a SPIA) and who might not be able to find an annuity with a GLWB rider with attractive terms in the current market (as insurers have reined in their availability), using an annuity with PLIBs could be a potentially useful alternative, particularly if they are willing to take on more investment risk (i.e., can accept that their income payout might decrease in certain years). Though at the same time, advisors will need to evaluate whether the costs of the annuity and related PLIB riders are worth the benefits to the client, since if clients continue to bear too much of the upside and downside risk of market movements, the cost of the PLIB rider’s ‘guarantees’ may not be more effective than simply owning a well-diversified portfolio in the first place!?

(Jacqueline Sergeant | Financial Advisor)

Continued high levels of inflation has been one of the key storylines of 2022. With the Consumer Price Index (CPI) reaching an annualized 9.1% in June (before ‘dipping’ to 7.7% by November), rising prices are on the minds of many financial planning clients. But because many benefits and contribution limits are linked to changes in CPI, these adjustments can create planning opportunities for advisors and their clients.

To start, recipients of Social Security will receive an 8.7% Cost Of Living Adjustment (COLA) starting in 2023, helping to defray some of the sting of higher prices. In addition, clients who have pensions that are adjusted for inflation will see higher payments as well in the coming year. For example, retired government employees under the Civil Service Retirement System (CSRS) will geta an 8.7% COLA, while those under the Federal Employees Retirement System (FERS) will see a 7.7 bump in their pension benefits in 2023.

Changes in CPI also affect several tax calculations. For instance, the standard deduction for married couples filing jointly for tax year 2023 will rise by 7% to $27,700 (with similar increases for those filing under different statuses as well), reducing the income subject to taxation for many filers. In addition, tax brackets are adjusted for inflation, so an individual who sees their income rise alongside inflation will not necessarily pay more in taxes. And when it comes to retirement saving, the contribution limits for 401(k)s and other tax-advantaged employer savings plans will increase by $2,000 to $22,500 in 2023, while the limit for IRA contributions will rise to $6,500 (and catch-up contributions for those 50 and older will jump from $6,500 to $7,500).

Ultimately, the key point is that while elevated inflation continues to sting consumers, advisors can provide context to clients on its impact (e.g., by updating their financial plan with their new Social Security benefit and perhaps consider adjusting inflation assumptions) and help them take advantage of increased contribution limits (a potential end-of-year value-add as clients make their workplace contribution elections for 2023!).

(Brett & Kate McKay | The Art Of Manliness)

Many busy professionals try to organize their lives by having set routines. For example, they might wake up at 7:00 am, exercise for 30 minutes, and then eat breakfast before starting work. Or perhaps they set aside time every evening to read a book. By creating a structured schedule, as the thinking goes, it is harder for an individual to forget (or ‘forget’) to finish a task they want to complete.

At the same time, such set schedules can be brittle. For example, if your child wakes up sick in the morning, there might not be any time to exercise. Or perhaps going out with friends in the evening cuts into the allocated time period for reading. In these cases, the ‘must do’ task can go undone during the day (and after a few days of not completing the task, it can often unintentionally fall out of the routine altogether). Instead, an alternative approach is to create a ‘daily routine checklist’, where instead of assigning certain tasks to a specific time of the day, you create a list of tasks that you want to complete by the end of the day. So if you are going out with friends in the evening, perhaps you get your reading in during lunch that day (allowing you to keep your reading ‘streak’ intact).

And given the wide range of tasks (and potential interruptions) that financial advisors face during a given day, using a ‘checklist’ approach could allow for more flexibility in getting required tasks completed within a given day (and when actually doing financial planning for clients, a checklist-based approach can advisors stay on top of the many planning considerations that any given client may require). The key point is that whether you are trying to start a meditation practice or are reviewing tasks in your CRM, using a checklist rather than a set routine can potentially make it more likely that these items are actually completed!

(Eric Soda | Spilled Coffee)

In the 21^st century, there are no shortage of potential distractions. From the high tech (e.g., cell phones with an infinite number of apps that ‘must’ be checked routinely) to the low tech (e.g., spouses and kids when working from home), maintaining focus on the task at hand can be challenging. But there are several small changes you can make to minimize distractions and become more productive!

Smartphones are often a central source of distraction, but there are several ways to prevent them from eating away at your productivity. The most blunt method is to put the phone out of sight, either by turning it off or by putting it in another room. But because having a smartphone nearby for personal or professional reasons is often necessary, adjusting the settings on the phone can at least reduce its power for distraction. This can include removing notifications from all apps and blocking all phone numbers that are not in your contacts (sending them directly to voicemail). Relatedly, removing computer notifications (e.g., when a new email arrives) and staying off of social media (so addicting!) can further eliminate potential distractions.

Outside of technology, time blocking your activities can be an effective method to get your priorities completed. For example, setting aside a 30-minute time block during the day to reply to emails will likely lead to better productivity than answering the emails as they come in. Further, creating a mindset of “accessibility” (able to be reached) rather than “availability” (always at a client’s disposal) can help by more intentionally aligning your time with the experiences you want to have (and the tasks you want to complete).

In the end, because each person faces a different set of distractions, there is no single ‘best practice’ for eliminating them. But by taking a purposeful look at how you make yourself accessible to others, as well as your phone and computer use (or by taking an even more structured approach to completing tasks), you can increase your focus and get more done during the workday!

(Khe Hy | RadReads)

For a financial advisor, it can sometimes seem like there is not enough time in the day to handle the range of potential things that could be done. And sometimes, this means triaging different requests that come your way. But for many people, saying no to a request (particularly if it is from someone you like!) can be a challenge, even if it is the best thing for your productivity.

For example, say you are invited to a brainstorming meeting with several of your fellow advisors. While you have no other meetings during the time allotted for the brainstorm, you have a client meeting later in the day for which you would like to prepare. You decide to decline the meeting but are unsure how to respond without burning any bridges with your coworkers.

The first step is to set firm boundaries. For example, in this case you could tell your fellow advisors that you do not schedule internal meetings on days when you have a client meeting later in the day. Next, offering a potential solution can show respect for the requestor. For instance, in the case of the brainstorm you could offer your ideas in email format (or perhaps as a video message that could be played during the meeting). The key, though, is to be firm so that the requestor recognizes this is your final decision (e.g., so they don’t offer to shorten the meeting from one hour to 30 minutes, when that still violates your ‘no internal meetings on days with client meetings’ rule).

In the end, saying ‘no’ to others can be challenging, even if you recognize the importance of setting boundaries. But because doing so can ensure that you are able to focus on high-leverage work and meet your commitments to others, being able to decline meetings in a diplomatic way is an important skill to master!

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.