Weekend Reading For Financial Planners (October 25–26)

RIAs Negotiate With Vendors As Reg S-P Deadline Nears For Obligation To Report Cybersecurity Breaches To Clients

(Sam Bojarski | Citywire RIA)

In recent years, financial industry regulators have increasingly recognized the importance of cybersecurity for advisory firms, given that most firms not only hold a trove of their clients' personal data, but often (through discretionary trading or money movement abilities) have power over their clients' money itself.

Amidst this backdrop, the SEC last year adopted amendments to Regulation S-P (which concerns financial firms' use of private client data) that will, among other measures, require covered institutions (including SEC-registered RIAs as well as broker-dealers and certain other financial firms) to "develop, implement, and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information".

In addition, the response program will be required to include procedures to notify clients whose sensitive information was or is "reasonably likely" to have been accessed or subject to unauthorized use. Were such an incident to occur, firms would be required to notify their client "as soon as practicable", or no later than 30 days, after becoming aware of the breach. Such a notice would include details about the incident, the breached data, and how affected individuals can respond to the breach to protect themselves. The deadline for RIAs with at least $1.5 billion in Assets Under Management (AUM) to comply with the new amendments is December 3 (with smaller RIAs having until June 3, 2026).

Notably (given that most RIAs reliance on third-party software tools in their tech stacks), the rule also extends to third-party vendor relationships, requiring them to have their own incident response protocols and to notify an RIA they work with within 72 hours of becoming aware of a data breach. Which is leading some RIAs (particularly larger firms facing the December 3 deadline) to push for language addressing this change to be added to their vendor contracts (given their own obligations to respond quickly and meet client notification obligations).

In sum, the compliance deadline for the new requirements under Reg S-P is approaching rapidly for larger firms and will be coming soon for others as well, with certain tasks (e.g., creating internal policies, procedures, and an incident response plan) able to be addressed internally, while others (e.g., ensuring third-party vendors report data breaches in a timely manner) might require negotiation and new legal assurances. Though ultimately, such efforts (in combination with internal cybersecurity programs that can reduce the chance of a data breach in the first place) could both keep RIAs in line with these updated regulatory requirements and give their clients greater confidence that their data is being protected and that any future incidents will be communicated clearly and handled quickly.

AWS Outage Highlights How RIAs Can Weather Cloud Failures

(Andrew Cohen | InvestmentNews)

A common workday morning routine for financial advisors is to fire up their computer and log into various software programs, from email and instant messaging to the firm's CRM, financial planning, or portfolio management tools. While this is usually a routine task, many advisors this Monday were surprised to find that various platforms weren't working, due to an outage of Amazon Web Services (AWS), the cloud computing provider undergirding many popular platforms.

While various platforms came back online or saw improved performance throughout the day, this incident can serve as a reminder for firms to consider whether their business continuity plans meet their needs. With cloud computing services top-of-mind, a first step could be to understand which cloud providers are used by third-party vendors in the firm's tech stack. For instance, a firm might find that it's particularly exposed to AWS (or, alternatively, Azure or Google Cloud), perhaps leading it to ensure vital functions could be performed based on another platform (or possibly from private cloud backups). Another key consideration is ensuring communication lines remain open even if a favored platform goes down. This can include internal communication (e.g., ensuring staff can communicate with each other to complete workflows that require multiple individuals) and client communication (e.g., giving clients multiple ways to contact their advisor if needed).

In the end, while Monday's incident was largely an inconvenience for many, it could serve as a helpful warning that tools in a firm's tech stack are subject to (potentially broader and lengthier) outages. Which suggests that firms with effective backup plans not only can ensure that they can remain productive during future outages but also give their clients more confidence that they will be able to communicate with their advisor and make needed transactions even if the primary method they use isn't available.

90% Of Americans Plan To Claim Social Security Before Age 70, Citing Cash Needs, Sustainability Concerns: Survey

(Tracey Longo and Jacqueline Sergeant | Financial Advisor)

Social Security benefits are a foundation of many Americans' retirement incomes, offering a valuable source of inflation-adjusted lifetime income when such offerings are increasingly hard to find elsewhere. Importantly, though, the amount of a recipient's monthly benefits is based not only on their lifetime earnings, but also on when they decide to claim, with eligibility typically beginning at age 62 and extending to age 70 (when they can get their maximum possible benefit).

While there are benefits to be had for delaying claiming Social Security (not least being a larger monthly payment), many Americans claim earlier, with a recent survey of 1,500 U.S. investors finding that 90% plan to claim before age 70 and 44% plan to claim before reaching age 67 (the Full Retirement Age for those born in 1960 or later), though 70% said they understand that waiting longer to claim benefits would increase their monthly payments. Reasons cited amongst those surveyed for claiming benefits before age 70 include wanting to access benefits as soon as possible (37%), concern that Social Security will run out of money or stop making payments (36%), and a need for the benefits earlier for regular income (34%).

These findings present opportunities for potential advisor-client conversations to discuss their unique circumstances and determine whether claiming benefits early or delaying them is the right option for a particular client. For instance, clients who have good reason to think they will have a relatively short lifespan or who want to front-load their retirement spending might consider claiming benefits on the earlier side, while those with longer life expectancies or who can afford to 'bridge' the period between retiring and claiming (what would be increased) benefits might consider delaying. Advisors can also help clients understand the state of the Social Security system, particularly the fact that (despite headlines that might suggest otherwise) that even if the Social Security trust fund were to be depleted (which is currently expected to occur in the early 2030s, absent any policy intervention), it would still be able to pay out the vast majority of benefits (given that most of the system's revenue comes from ongoing payroll tax receipts).

Ultimately, the key point is that given that individuals have varying cash needs, retirement plans, and tolerance for certain risks, there isn't a single 'right' choice when it comes to claiming Social Security benefits. Which offers a valuable role for advisors in helping their clients create a retirement income plan (and Social Security claiming strategy) that matches their unique preferences and needs.

Capital Gains And Capital Pains: Are Tools Used To Defer Capital Gains Worth The Price?

(Robert Huebscher | Robert's Substack)

Whether it's a sizeable chunk of their company's stock or long-held shares of a single company, many investors will find themselves holding positions with significant embedded capital gains within their taxable portfolios. Which, from a portfolio management perspective, can create concentration risk, as changes in the price of the large position could have an outsized effect on the performance of the broader portfolio. While an advisor might recommend selling at least a portion of the stock for diversification purposes, doing so can lead to a large tax bill (given the significant embedded capital gains in the position).

Given this backdrop (including the run-up in stocks over the past 15 years that has left many investors with significant embedded gains), a variety of solutions have emerged that allow investors to diversify away from a large position while deferring the realization of capital gains (at least for a certain period of time). Though, as Huebscher explores, these strategies come with tradeoffs, whether in terms of challenges executing them properly or the costs associated with them (e.g., for instance, assuming a 5% discount rate and a 20% capital gains rate, each year capital gains are deferred is equivalent to earning and extra 1% on the investment [or 1.85% if the tax rate is 37%], which could serve as a point of comparison with the costs of gains deferral strategies).

One strategy that has gained attention is the Section 351 ETF, where investors seed an ETF with stocks (with the cost basis of the holdings carrying over to the ETF), giving the investor immediate liquidity and some diversification. A key limitation, though, is that the largest holding cannot be more than 25% of the amount seeded by the investor (and the top five holdings cannot be more than 50% of the amount seeded), meaning that an investor with a large concentrated position would need to contribute three times the amount of that position to the ETF and incur the expenses of the ETF on those assets as well (which could be much higher if the other assets being contributed are individual stocks or low-cost ETFs). In addition, Section 351 ETFs might not provide the same level of diversification as a broad-market index ETF (in particular, they could be heavily weighted towards technology given those with concentrated positions in that sector have seen significant gains over the past several years).

Another option to defer capital gains while achieving greater diversification is an exchange fund, which has fewer restrictions than Section 351 ETFs on the type of assets that can be contributed, but comes with significant liquidity limitations and has its own fees as well. Also, investors could consider 'side portfolios', where a concentrated position is hedged (e.g., using an options 'collar') to protect against losses while the side portfolio is used to harvest losses (allowing a certain amount of the concentrated position to be sold without incurring capital gains tax liability). These strategies also come with their own costs an complications, whether in using a margin loan to implement the side portfolio (e.g., when taking short positions in companies similar to that of the concentrated stock), paying fees associated with a direct indexing platform, or managing the complexity and minimum asset requirements of variable-prepaid forwards.

Ultimately, the key point is that there is no 'free lunch' when it comes to achieving greater diversification while deferring capital gains on concentrated positions. Which provides an opportunity for financial advisors to support their clients by helping them evaluate the various products and strategies available and determining whether they are superior to holding onto the position (which might be appropriate for an older client whose heir might benefit from a step-up in basis) or (perhaps slowly) selling it off to create a more diversified portfolio, even if it means incurring some capital gains taxes in the process.

How To Handle Portfolios With High Unrealized Gains

(Harry Mamaysky | QuantStreet Capital)

Many financial advisors will likely have encountered a situation where a new client comes to them with a taxable investment portfolio that includes large positions in single stocks that have significant embedded capital gains but don't necessarily fit within the advisor's ideal portfolio recommendation. A key question then becomes whether to hold on to the position to avoid incurring taxable gains or sell it to achieve greater diversification (though investors could also take intermediate steps, such as winding down the position over the course of several years or utilizing tools such as exchange funds to achieve greater diversification while deferring capital gains).

Notably, the answer to this question will depend on both the cost basis of the concentrated position and the additional return that would be expected to be achieved by diversifying away from it. For instance, a position with a relatively high cost basis (e.g., 80% of its current value) and a high expected return from diversifying (e.g., an additional 90 basis points annually) would be a good candidate for the sell and diversify approach, while a position where the basis is only 20% of the current value and diversifying is expected to return an additional 20 basis points annually might be a better candidate to be held (assuming a 20 year time horizon and a 20% capital gains tax rate). More moderate scenarios for these factors (e.g., 50% basis and a 50 basis point return differential) lead to less clear answers, where the client's preferences might prevail (e.g., they might hold the position if they're particularly averse to realizing capital gains or sell it if they're concerned about concentration risk).

Another factor that can be considered in this situation is the availability of the cost basis step-up to the client's heirs when they pass away. Which can tilt the calculation towards holding the concentrated position, particularly for older clients. For instance, for a position whose cost basis is 50% of its current value and for which an advisor could achieve a 50 basis point greater return if it were sold, the expected value of selling the position and diversifying would be positive assuming a 20% capital gains tax rate and a 20 year time horizon, but would be negative with a step-up in basis after 20 years (assuming a 0% capital gains rate).

In sum, while a quantitative approach can inform the decision of whether to hold on to a concentrated position or sell it and use the proceeds to buy a more diversified set of assets, uncertainty over key variables (e.g., future returns and tax rates) as well as client preferences (e.g., seeking greater diversification or deferring taxes as long as possible) can complicate this decision. Which suggests that financial advisors can offer value to clients both by 'running the numbers' on their particular situation, and also by laying out the options (and their potential consequences) to help them make the best choice based on their needs and preferences.

Capital Gains Strategies For Highly Appreciated Investments After A Big Bull Market Run

(Nerd's Eye View)

Executives and small business owners often struggle to figure out how to diversify a concentrated investment in company stock, due to the adverse tax ramifications of liquidating a highly appreciated investment. Which leads to strategies including variable prepaid forward contractors, exchange funds or stock protection funds to facilitate diversification, or leveraging available tax laws like Net Unrealized Appreciation to mitigate the tax consequences.

Unfortunately, such large embedded capital gains create real tax complications when engaging in even routine investment adjustments like periodic rebalancing, and especially in situations where the advisor might want to switch strategies (or the investor might want to switch advisors), but "cannot" do so because of the adverse tax consequences. On the plus side, though, the reality is that the tax benefits of deferring capital gains are often smaller than most investors realize, as they confuse "tax avoidance" (not recognizing the capital gains) with what really is just tax deferral (the capital gains will ultimately have to be paid if the investor is ever going to use the money).

In addition, relatively straightforward tax strategies can further help investors to get comfortable with unwinding investments with large capital gains, from establishing a "capital gains budget" for the amount of capital gains to be triggered each year (perhaps targeted to stay under the threshold for the next capital gains tax bracket), setting targets for staged sales at progressively higher (or lower) prices to help investors pre-commit to making a change, or simply engaging in a "donate-and-replace" strategy that leverages the tax preferences of contributing appreciated securities for a tax deduction (and eliminating the capital gains altogether) and then replacing the investment (as a new higher cost basis) with the cash that would have been donated in the first place.

In the end, while it's hard to consider a taxable investment portfolio with large embedded gains to be a 'problem' (as it's better than the alternative of a portfolio that has lost significant value!), mitigating the tax burden when disposing of these assets is a way for advisors to offer hard-dollar value (and lessen the 'pain' of taxation) for their clients.

4 Unconventional KPIs That Actually Measure Productivity

(Libby Greiwe | NAPFA Advisor)

As the end of the year approaches, many financial advisory firms will look back at their performance in 2025 and set goals for the coming year. A key part of this effort, though, is to pick the 'right' metrics to track based on the firm's objectives (to ensure it's not chasing numbers that are less relevant to its success). With this in mind, Greiwe offers four Key Performance Indicators (KPIs) that can help a firm gauge its productivity.

First, taking stock of the different types of client interactions the firm has during the year and rating them based on their impact can reveal the touchpoints that are particularly effective and those that the firm might spend less time on in the coming year (this exercise can be enhanced by also rating the difficulty level of each interaction and identifying those that hit the 'sweet spot' of being high impact but low difficulty). Next, while firms might gauge their total revenue, looking at the revenue per hour worked can reveal which types of clients are associated with the greatest productivity (e.g., a client who generates $5,000 of revenue per year but only takes 10 hours to serve might be more valuable to the firm than a client who generates $10,000 of revenue but takes 25 hours to serve).

In addition, tracking the percentage of time spent directly working with clients can signal when administrative creep is taking up more of an advisor's time (which could be an opportunity to delegate some of this work to an employee or an outsourced solution). Finally, instead of tracking the total number of client referrals the firm receives, tracking the number of referred prospects who fit the firm's ideal client profile can demonstrate whether client referrals are productive, the firm is doing a good job articulating its niche, and if the firm is delivering a frictionless experience that encourages clients to talk about it with friends and family.

Ultimately, the key point is that given the seemingly unlimited number of available KPIs to track, zeroing in on those that get at the heart of a firm's productivity can help a firm both save time on data tracking and focus its efforts on the actions that are most likely to generate the greatest return in the coming year and beyond!

How To Get The Most From A Firm's Performance Review Program

(Lisa Crafford | Citywire RIA)

The end of the year brings performance review season for many firms. Which offers a chance to look back on employee performance during the past year and to set goals for the year ahead. A key, though, to get the most value of performance reviews is to treat them as an intentional exercise (rather than a pro forma task to complete).

To start, effective performance reviews often tie an employee's performance with the firm's core values. This can give employees a chance to highlight examples of how they demonstrated these values over the course of the year (and to raise areas where the employee might have fallen short). At the same time, it's also important to avoid surprises during this exercise; while a firm might have a standard end-of-year performance review, feedback (both positive and constructive) can be given throughout the year so that managers and employees alike are on the same page.

When looking ahead to the coming year, aligning employees' individual goals with the firm's strategy can benefit both parties; employees will better understand how their work in the coming year will contribute to the firm's success as a whole and the firm can ensure that employee effort isn't wasted on tasks that aren't contributing to business objectives. Further, firm leaders can set the tone for the whole organization by engaging in goal setting and performance reviews themselves, the latter of which can offer the opportunity to receive feedback from team members on how they might be better leaders in the coming year.

In sum, treating performance reviews as an opportunity to recognize accomplishments, identify areas for development, and better link work effort to company goals can provide employees with greater motivation, give leaders greater insight into their own performance, and ultimately help the firm focus on (and achieve) its goals in the year ahead.

The Power Of Training In High-Performing Firms

(Ray Sclafani | ClientWise)

Training and developing next-generation talent is a common element of firms that grow successfully, and end-of-year evaluations can present an opportunity to evaluate employees' progress and future needs, as well as to evaluate the firm's growth path and whether available talent is ready to take on more senior roles.

To start, firms can review (or create, if it doesn't already exist) professional development plans for each employee. This process starts with asking the employee to take stock of where they are today in their careers, where they see themselves in 1-3 years, and what gaps exist between today's skills and tomorrow's role. This exercise can be particularly motivating for employees, as it shows that their manager and the firm care about the employee's unique goals and their ability to reach them. Another potentially valuable document for firms is a career planning guide, which clearly presents the key milestones, technical skills, certifications, leadership traits, and client experience competencies that are required for employees to advance to different levels within the firm (providing greater clarity to employees and helping the firm more objectively identify candidates who might be ready for more senior roles). Finding training opportunities that involve more than one team member (e.g., bringing together the whole leadership team) can also have the bonus of building camaraderie along with skills.

While creating development plans is an important first step, investing in them is required to see them to fruition (e.g., the Association for Talent Development found that top-performing companies spend 1.5x more per employee on training than average firms and are 24% more profitable than their peers). Notably, such a budgeting exercise can include both the hard-dollar costs of training program, external certifications, conferences, and coaching needs, as well as the soft-dollar time costs involved when employee training takes time away from their day-to-day duties. Given this investment, taking time to 'gamify' the experience (e.g., by using visual tools to track progress) and celebrate training 'wins' (e.g., new certifications achieved) can both motivate employees (to complete their training and pursue the next level) and show clients that the firm is committed to providing a higher level of service.

In the end, while training can sometimes fall by the wayside amidst the other areas of focus for a firm, taking an intentional approach and making appropriate investments in this area can pay dividends over time by increasing employees' skills and loyalty and by developing the next-generation of advisors to help the firm grow and provide a high level of client service into the future.

Why Flexible Working Arrangements Have Staying Power

(Emily Boyle | Planadviser)

While some companies have long offered flexible working arrangements (whether in terms of location [i.e., in-office, remote, or flexible work] or schedule [i.e., working certain 'core' hours but having flexibility to complete assignments around them]), these grew dramatically during and after the COVID pandemic, as other firms tried out these approaches for the first time. A key question, though, was whether flexible work arrangements would have staying power over time.

According to survey data from the International Foundation of Employee Benefit Plans, flexible work arrangements remain popular, both in terms of location and schedule. In terms of location, 77% of companies offer hybrid work schedules (with the most popular structure being two days remote and three days in the office) and 47% offer their employees fully remote opportunities. In terms of schedule flexibility, 61% offer flexible work hours, 30% offer compressed workweeks (i.e., working more hours on certain days to get additional days off), 19% have summer hours (e.g., taking Fridays off during the summer), and 8% offer four-day workweeks.

This flexibility was not without potential consequences, however, as 44% of respondents said flexible work arrangements made it more difficult to foster a sense of team (up from 8% in 2017) and 42% expressed concern about achieving fairness for all staff under flexible arrangements (up from 37%). Which suggests that taking an intentional approach to designing workplace flexibility offerings could allow firms to balance competing priorities (e.g., perhaps dedicating time for team-building activities on days when employees are in the office and evaluating which workers might have a harder time taking advantage of flexible arrangements).

Altogether, it appears that flexible work arrangements are here to stay, offering firms the opportunity to take stock of their priorities for both work location (e.g., the potential team-building and mentorship benefits of in-person work versus the flexibility provided by remote work) and timing (e.g., the ease of meeting when working identical hours versus the ability to better balance personal and professional responsibilities offered by flexible schedules) and create (or adjust) their policies to best meet the needs of the firm while attracting and retaining top talent.

Is Your Flexible Schedule Burning You Out?

(Elizabeth Grace Saunders | Harvard Business Review)

Busy professionals tend to have a lot on their plates, from meetings and assignments in the office to family, social, and personal responsibilities outside of it. Which has led many companies to offer their employees some form of flexibility in their daily work schedules.

However, Saunders (a time management coach) finds that having too much flexibility can sometimes be a burden, as it can break down boundaries between work and home life as well as raise feelings of guilt. For instance, flexibility might offer the promise of being able to get all of one's work done and attend as many family events as possible. However, there will still be competing tensions as there is seemingly always 'more' that could be done (e.g., a parent might be prioritize attending their kids' afternoon activities and putting them to bed but they might wonder how long they need to spend answering emails at night to compensate). This can be a particularly acute problem for firm founders and leaders, who might want to model flexibility for their employees but could find themselves experiencing burnout from constant role-switching.

With this in mind, Saunders proposes that those with flexible schedules create structure to better organize their days. Often, this will mean working more during 'standard' work hours so there is less pressure to work at non-traditional times (which could eat into opportunities for sleep or exercise). Also, evaluating the list of things one might want to get done can narrow down what needs to be accomplished in a given day. For instance, a leader might look at their list of weekly meetings and determine which they truly need to attend or a parent might prioritize the interactions with their children that are most important to them. Finally, creating solid blocks of guilt-free 'off' time (on the weekends or otherwise) can ensure a busy professional has time to recharge and at their best for both their work and personal lives.

Ultimately, the key point is that while the availability flexible work schedules recognizes the competing responsibilities of employees and leaders alike (and is often a benefit sought out by job candidates), putting boundaries on this flexibility can increase the chances that it remains a benefit and not a burden!

The 4-Day Workweek Gets Shorter With Practice

(Vanessa Fuhrmans | The Wall Street Journal)

The "9-to-5" 40-hour workweek is largely ingrained in modern work culture and a fixture of many companies (though leaders and workers might informally be expected to work longer hours?). Some companies and groups have started questioning this structure though, with one model being a four-day workweek that attempts to give employees an extra day off without significantly adding to their hours on other days (or sharply cutting into company profits).

According to a study from Boston College and the nonprofit advocacy group 4 Day Week Global that observed dozens of (mostly small) companies over the course of a year as they implemented four-day workweek policies. At the six-month mark, workers reported less burnout, improved health, and more job satisfaction, cutting their average work time by about four hours to 34 hours per week. At the 12-month mark hours per week worked declined further to 33 hours (suggesting the move to a four-day workweek wasn't just a matter of shifting hours into four days but rather working fewer hours in total), with 95% of employees saying they would want to continue with this schedule and participating firms reporting an average 15% increase in revenue over the trial (at the same time, a separate review of research on the four-day workweek suggests there could be downsides as well, including more intense performance measures and employee monitoring as well as scheduling problems).

One of the key tactics used to effectively implement the four-day workweek was a reduction in the time employees spent in meetings. For instance, a company might declare a "meeting bankruptcy", clearing all meetings from the calendar for a certain period and only adding back those that are truly necessary (while others might transition to asynchronous check-ins or be eliminated altogether). This can create more time for dedicated 'focus work' and eliminate the distractions that can come from task-switching multiple times each day.

In the end, while firms might or might not be ready to take on a four-day workweek (and additional research is likely needed to demonstrate the full scope of upsides and downsides of this approach), the practices behind it (e.g., giving employees more focus time and trimming meetings where possible) could help a broad range of companies boost productivity and perhaps open the door to more time off for leaders and staff alike (potentially boosting job satisfaction and retention in the process).

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or send an email to [email protected] to suggest any articles you think would be a good fit for 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 "WealthTech Today" blog.