As we close the books on 2012 and begin to look forward to 2013, a number of significant issues are looming that will shape financial planners, their practices, and the profession in the year to come. Perhaps the most apparent issue is the one that generated the most intensity in 2012, yet without a resolution: the ongoing debates regarding the implementation of a uniform fiduciary standard for financial advisors, and which regulator will be responsible for increasing the oversight of investment advisers. This issues will become hot topics again in 2013, as the SEC has committed to moving both issues towards a resolution, and the Department of Labor is also anticipated to (re-)release its own new fiduciary rules for 2013. This will be an intense year for financial advisor regulation.
Beyond what’s on the regulatory horizon, though, two other significant issues loom for 2013. The first is a wave of change in the software and technology that advisors use, as tablets are rapidly becoming so mainstream that already the majority of advisors are using one… and soon the majority of all Americans will be, too. The bad news is that means a great deal of pressure is coming for advisors to improve their software, systems, and practices to accommodate the use of tablet computers. The good news is that this in turn may lead not only to dramatic improvements in the efficiency of the office and the experience for clients, but also that a wider base of tablet users attracts more software developers and providers to innovate and create even more new solutions and improvements.
The final issue for 2013 – what will likely turn out to be both the biggest, yet is the one we are least anticipating and for which we are the least prepared – is the establishment later this year of health insurance exchanges and the need for clients to choose what health insurance they will purchase for 2014, or pay a penalty. The sheer numbers involved are daunting and almost overwhelming, as there are nearly 50 million uninsured Americans who must by the end of the year go through a process to purchase health insurance – and must do so from a series of state insurance exchanges that don’t even exist yet! The issue will not be constrained to only the uninsured, either, as many employers are likely to cease offering coverage for employees and instead simply pay them a little more and let them obtain their own guaranteed coverage directly. In the long run, this dissociation of health insurance from employment is arguably a positive step for clients; nonetheless, in the nearer term, I suspect we will find that when the books are closed on 2013 a year from now, we’ll be stunned by the volume of work that will have been done guiding clients through this health insurance transition period.
Uniform Fiduciary Standard and the SRO Debate
2013 is increasingly shaping up to be a major and possibly deciding year for the ongoing debates regarding the application of a uniform fiduciary standard on financial advisors (pursuant to Section 913 of the Dodd-Frank legislation) along with a potential change in the regulatory oversight for investment advisers (the so-called "SRO debate") for the purposes of increasing adviser exams (under Section 914 of Dodd-Frank). After all, the battle lines for the issues have largely been drawn at this point, as was noted in several articles in my recent Weekend Reading column. It’s a matter of moving forward with implementing actual rules at this point.
Regarding a uniform fiduciary standard, the SEC’s Section 913 study has been out for two years now, which did recommend that the SEC should move forward with rulemaking. The challenge, however, has been determining exactly how this uniform fiduciary standard should be written (do we need to write a new set of rules to define fiduciary in this context, or can we apply the fiduciary duty as defined by statute and case law under the Investment Adviser Act of 1940?), as well as how widely it should apply (to all registered representatives and investment adviser representatives, or some subset?). Notably, Section 913(g)(1) of Dodd-Frank does stipulate that the uniform fiduciary standard should be "no less stringer than the standard applicable to investment advisers", but on the other hand that same section of the legislation also directed the new fiduciary rule to be as business model neutral as possible and that "the receipt of compensation based on commission or fees shall not, in and of itself, be considered a violation of such standard applied to a broker, dealer, or investment adviser." This looming question of how to craft an appropriate fiduciary standard that meets all these requirements has been, to say the least, a sticky issue, and many have suggested that the SEC has been dragging its feet; nonetheless, the SEC has indicated recently in its 2012 Financial Report that it still intends to move forward with (proposed) fiduciary rulemaking in 2013.
The landscape for a uniform fiduciary standard will be further colored in 2013 by a parallel proposal for fiduciary rules from the Department of Labor under Phyllis Borzi; after issuing an initial version of proposed fiduciary regulations last year, which was met with sharp criticism from many segments of the industry, the DOL took back its proposed rule for revisions. Nonetheless, the DOL has still indicated that it intends to issue another version of the rules in 2013, and to implement them. The DOL’s fiduciary rules are significant both because of their own wide scope – potentially applying a broad and deep fiduciary standard not only to all interactions with employer retirement plans, but also to advisors who consult regarding IRA rollovers of qualified plan dollars – but also because, if the DOL moves first with rules that are actually implemented, they will likely influence and could even become the basis for the SEC’s own subsequent fiduciary rules, especially given the partially overlapping jurisdictions (especially with respect to advisors working with IRA rollovers). In fact, if the DOL and SEC both issue fiduciary rules that are different, "harmonizing the fiduciary standard(s)" may become the next major regulatory issue for 2014 and beyond.
In parallel to the discussions of the fiduciary standard, expect to see a lot more activity regarding the debate of how to increase oversight of investment advisers in 2013. The issue was nearly decided in 2012 with proposed legislation from Congressman Spencer Baucus, which would have directed the SEC to turn oversight of investment advisers over to a self-regulatory organization (for which FINRA was the SRO-apparent to step into the role), but the legislation was fought back by RIAs and the Financial Planning Coalition, due in no small part to a study commissioned by the Coalition with Boston Consulting Group that found FINRA oversight would drastically increase the cost of compliance for advisors to the tune of more than $50,000 per advisor. By contrast, increased oversight from the SEC was projected to be only about half that cost, and associated proposals suggested that this cost could be paid to the SEC by the advisory firms themselves in the form of a user fee. The Baucus legislation itself may not return – in part because Congressman Jeb Hensarling is taking over for Baucus as chair of the House Financial Services committee due to term limits – but the pressure is still on the SEC to come to a conclusion on this issue. Notably, some form of increased oversight is likely for RIAs no matter what – that outcome appears unavoidable at this point – but what organization will provide that oversight, and what the cost will be, are still very much up in the air.
The first major steps to anticipate in early 2013: a new proposed fiduciary rule from the Department of Labor, and some cost-benefit analyses from the SEC that are viewed as necessary before it can proceed to a resolution for the issues on its plate. The cost-benefit analyses are viewed as a key step because whichever side "loses" the debate will likely challenge the SEC’s rule, so the SEC is eager to get its ducks in a row with a defensible position before moving forward.
Technology – The Rise of the Tablets
Although tablets like the iPad aren’t exactly new, the reality is that new technology takes time to be adopted, for software to be adapted, and for advisors to begin to implement them (not to mention clients beginning to use them). As tablets begin to hit their stride, though – according to the recent Advisor Technology Survey covered in Weekend Reading, half of all advisors now own a tablet – the number of users is reaching a critical mass where the offerings of software will soon explode. Being able to use a tablet – and provide clients tools to interact using them as well – is quickly transitioning from a nice-to-have to a minimum requirement to do business. As a result, advisors are rapidly transitioning to cloud-based software – in part, because it can be easily accessed anywhere using a tablet – and software providers from CRM to portfolio reporting to financial planning are following suit.
The tablet trend will be accelerated by the fact that prices on tablets continue to decline, rather drastically. Acer is anticipated to launch a 7-inch version of an Android tablet in 2013 for a mere $99 (although it’s not clear if/when it will be available in the US), undercutting the $159 Kindle Fire (which already undercuts the iPad), and the Aakash 2 tablet in India may soon launch in India at a partially-subsidized-by-government price of approximately $20. If you think the trend towards tablets has been explosive so far, wait until they’re cheaper in the next year or two than what you paid for a smartphone just a few years ago – not to mention becoming cheap enough you could actually have several around your house, for each family member or even installed in the wall controlling the lights and thermostat of every room. Just add voice activation and it will be like living on the Starship Enterprise with a central computer to respond to your every whim and demand.
Granted, the ubiquity of a tablet controlling every room of your house may still be a few years out, but the trend is underway. Pew Research recently found that by mid-2012, 25% of American adults already own a tablet; two years prior, it was only 4%. And for most of that astonishing two-year adoption period, the only choices available cost $500+, making them outright unaffordable to a large segment of the population. With the latest Kindle Fire now available for 1/3rd of that cost, and more competition driving prices even lower, 2013 is poised to become the year when not just advisors, but most clients have tablets, and those clients will expect to interact with their financial plan in the same way they do all the other key aspects of their lives. While the software and technology choices to support this now are still in the early stages, expect an explosion on this front in 2013 as the rapid growth of the tablet marketplace makes "available on tablet" a requirement instead of a feature for most software providers serving advisors and their clients.
The good news is that means the tools and choices available for advisors to deliver a better experience to clients will soon be incredible; the bad news is that means advisors will have new choices to make about what software to use and how to implement it within their firms and with their clients. But the bottom line is that we are about to see how the delivery of financial planning and the ongoing monitoring of a plan will really begin to change as financial planning enters the digital age.
The Rise of the Health Insurance Exchange
Somewhat surprisingly, I suspect that the issue we look back upon as most impactful by the end of 2013 is the one that almost no financial planner has on the radar screen right now: the rise of the health insurance exchange.
For those who aren’t familiar, the health insurance exchange is where all Americans will be able to buy guaranteed issue health insurance beginning in 2014 – in fact, will be required to do so, or pay a penalty, under the requirements of the Patient Protection and Affordable Care Act of 2010 (the so-called "Obamacare" legislation). After being upheld last year as Constitutional by the Supreme Court, the mandatory health insurance requirement and the associated health insurance exchanges where that coverage will be purchased are coming. And by late 2013, clients will be asking a lot of questions about how this new method of purchasing coverage is going to work, especially since most will not want to pay a penalty for failing to comply!
You might be thinking that the issue won’t be a big deal for most of your clients, for the simple reason that most of your clients already have health insurance through an employer. And in theory, employers are incentivized to keep offering coverage – after all, if the company doesn’t offer affordable insurance options to employees, the firm will also have to pay a penalty.
The caveat to this is that in many (perhaps even most?) situations, employers (at least the large companies subject to the rule) will likely find it far cheaper to simply pay the penalty, rather than to subsidize the amount of health insurance premiums for employees that would be necessary to avoid the penalty. In other words, if it costs your business $8,000 per employee to provide enough health insurance premium assistance to avoid the penalty, but only $2,000 per employee to just pay the penalty, the business may just decide to pay the $2,000 penalty, offer a few thousand dollar raise to each of the employees, and tell them to go buy their own health insurance coverage from the exchange. This hasn’t been an option for employers in the past, because the reality has been that offering health insurance is a required employee benefit to attract good talent, as few skilled workers want to be left on their own to apply for health insurance for which they might be declined. In a world where the health insurance exchanges guarantee that employees – or anyone else – can always get coverage, regardless of health conditions, it changes the issue for the employer; instead of being a required benefit, it simply becomes a matter of cost and total compensation. Is it cheaper to buy health insurance for your employees, or just pay them more in the first place and let them get their own coverage, since access to coverage is no longer an issue? Although there are many debates about how widespread employers dropping coverage will really be, especially in the first place, it seems clear that at least some businesses will decide when they do the math later this year that it’s just easier to pay employees a little more (plus the coverage penalty) and let them buy their own coverage. Consequently, 2013 may mark the beginning of a permanent change in separating employment from eligibility for and even the outright purchase of health insurance.
In the long run, arguably this is a plus for clients. Although many debate some of the particulars of Obamacare regarding the mandatory nature of buying insurance beginning in 2014, and the details of how the program is being financed, it is hard to disagree that in the end, there’s really no reason why having access to health insurance should be so directly tied to which employer you work for (or whether you’re working at all) as has been the case for the past several decades. For better or for worse, at least the decision to take a job or not, and the decision to purchase health insurance or not, will be separate decisions in the future.
The caveat to all of this is that the implementation of health insurance exchanges is behind. States are just now getting their approvals to prepare for implementing their health insurance exchanges; other states haven’t even begun – in part because many states and their governors or legislatures still object to the Obamacare legislation – and although there are provisions for the Federal government to run health insurance exchanges in states that don’t implement their own, the entire process is far behind where it should be given how many people need to get coverage. After all, the Census Bureau estimates that nearly 50 million people in the US are uninsured – nearly 1/6th of the population. And assuming they want to avoid penalties – presumably most of them want to avoid penalties! – that means 50 million people need to choose their health insurance coverage by the end of the year, from a series of state insurance exchanges that don’t even exist yet. And that’s before we account for all the people who may need to purchase insurance from an exchange because their employer decided to just pay the insurance penalty (and hopefully give the employee a bit of a raise) and leave the employee to get his/her own guaranteed coverage.
For the time being, most planners have just been trying to get up to speed on the two new Medicare taxes that began this year – the 3.8% Medicare tax on investment income, and the 0.9% Medicare tax on employment income. But the health insurance issue is looming closer and closer, and will soon become an onslaught in planning practices and the media, simply because such an incredible number of people will be impacted.
So to say the least, if you haven’t gotten familiar with the Healthcare.gov website yet – it’s time to get started. Your clients are going to have a lot of questions in about 6-9 months. And stay tuned for a future issue of The Kitces Report on health insurance and the new exchanges – once there’s enough information available, we’ll be providing further education on how to help clients with the health insurance decisions they will soon face!