Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the SEC has prevailed in its legal challenge against Regulation Best Interest, as the 2nd Circuit Court of Appeals ruled in its favor, clearing the way for this week's enforcement date (but with questions looming about whether XY Planning Network will appeal the ruling). In the meantime, the Department of Labor also revealed its newly proposed Advice Rule this week (which would similarly provide an exemption from the typical ERISA fiduciary obligation for brokers that provide non-fiduciary "Best Interest" advice that conforms to Reg BI), and the CFP Board's own 'fiduciary at all times' standards will also begin to be enforced starting this week (but with questions remaining about whether or how effectively the CFP Board can enforce CFP professionals complying with its rules).
From there, we have a number of investment-related articles this week, including discussion of the news that Dimensional Fund Advisors (DFA) will be launching ETF versions of its funds that many advisors have been demanding (but in the process, will move away from its legacy of being an 'advisor-only' solution as consumers will now be able to buy DFA in ETF form directly), the Fed briefly becomes the #3 holder of the largest corporate bond ETF as its bond stabilization program expands since May (but may soon contract?), and a fresh look from Morningstar finding that, despite the traditional view that actively managed funds will shine in the midst of market turmoil, in practice, actively managed funds only slightly outperformed in Q2 and by less than they underperformed in Q1 (such that 57% are still underperforming year-to-date!).
We also have a few practice management articles about employee morale, including a look at how autonomy is one of the biggest drivers of advisor satisfaction (which may help to explain the explosion of the independent channels over the past decade?), tips on how to boost staff morale (by not letting the team just get 'stuck' in the busy day-to-day management of clients amidst the pandemic), and further tips on how to support employee morale in challenging times (starting with the simple recognition that advisory firms should be at least as proactive in communicating with their teams about the health of the business as they have been with clients about the health of their portfolios and financial lives).
We wrap up with three interesting articles, all around the theme of finding happiness and personal satisfaction: the first examines a recent analysis of long-term longitudinal data that finds higher incomes really are associated with greater happiness, and that consequently a "happiness gap" is emerging that aligns to rising income inequality; the second looks at how higher income may actually be more associated with our evaluation of our life satisfaction but doesn't actually correlate as well to our day-to-day happiness in living our lives; and the last explores how to find our own 'happiness threshold' in trying to draw the line of what constitutes "Enough".
Enjoy the 'light' reading, and happy Fourth of July!
SEC Prevails Over XY Planning Network In Challenge To Regulation Best Interest As New Rule Takes Effect (Melanie Waddell, ThinkAdvisor) - As the June 30th effective date for Regulation Best Interest loomed large, the 2nd Circuit Court of Appeals issued its ruling in the case of XY Planning Network vs SEC, affirming that XYPN had standing to challenge the rule because RIAs will be competitively harmed relative to broker-dealers as a result of Regulation Best Interest, but concluding nonetheless that the SEC had received sufficient authority under Dodd-Frank to permit broker-dealers to begin providing non-fiduciary personalized investment advice to consumers. The ruling came just days before the June 30th effective date for Regulation Best Interest (or "Reg BI" for short) was scheduled to take effect, and with the court's ruling, is now fully implemented and in force, including both the new "Best Interest" standard for broker-dealers providing advice recommendations, and the new Form CRS disclosure obligation for both broker-dealers and RIAs. Notably, though, XYPN has indicated that it is still "weighing its options", and may further appeal the case to be heard en banc by the entire Appeals Court panel, and could even file a petition for certiorari to have the case heard by the Supreme Court (though there's no way to tell whether the Supreme Court would take up the matter). In the meantime, though, XYPN has vowed to continue the fiduciary debate at the state level, as a growing number over the past year, from Nevada to Massachusetts, New Jersey to New York, have proposed their own state-level fiduciary rules for broker-dealer advice in reaction to what the states deemed an 'insufficient' consumer protection from Reg BI. In fact, with Reg BI now finalized (and the States having lost their own challenge against the rule as well), there may even be an uptick in state-level fiduciary rulemaking as state regulators evaluate their own options. Which means even as the Courts have declared that Reg BI should stand, the debate over standards of care for advice will likely still continue for the foreseeable future.
Department Of Labor Proposes New Non-Fiduciary "Best Interests" Advice Rule To Complement Reg BI (Mark Schoeff Jr., Investment News) - In 2016, the Department of Labor issued a new fiduciary rule that would apply to both RIAs and broker-dealers providing advice in retirement accounts, which was ultimately challenged by broker-dealers and product manufacturers on the basis that their brokers and agents were merely product salespeople who weren't actually in the business of advice and struck down in 2018. Just over a year later, one of the lead attorneys against the DoL's fiduciary rule - Eugene Scalia - was appointed by President Trump to become Secretary of Labor. And now, perhaps not surprisingly, the Department of Labor has issued a new advice rule under Secretary Scalia, abandoning the expanded fiduciary framework of the prior rule, and instead issuing a newly proposed "Best Interests"-style rule intended to conform to the SEC's recently-finalized Regulation Best Interest. Notably, the new advice rule would not undermine the existing fiduciary duty that applies under ERISA, but would allow plan fiduciaries to receive a wider range of compensation for advice that was previously prohibited, including third-party payments (i.e., commissions, 12b-1 fees, sales loads, mark-ups and mark-downs, and other revenue-sharing payments), as long as the broker providing the advice could otherwise demonstrate that they acted in the retirement savers "best interests" by following "impartial conduct standards", including earning reasonable compensation, not making misleading statements, and telling customers they are acting as fiduciaries. In addition, the new DoL rule would also deem brokers as being in compliance with the fiduciary requirement as long as the broker follows the (non-fiduciary) Regulation Best Interest requirements. And the new DoL rule also reintroduces the "five-part" test that previously existed under ERISA, which notably allows sales agents to avoid a fiduciary obligation as long as they make only one-time (and not ongoing) sales recommendations (e.g., regarding the sale of an annuity for a retirement rollover). At this point, though, the DoL's proposed rule is simply that - a proposed rule - which will enter into a Public Comment period, after which the DoL could modify the rule before finalizing it, especially given that consumer advocacy groups like the Consumer Federation of America are already raising concerns about the potential impact of the reduced advice standard.
CFP Board's New Ethics And Standard Of Conduct Are Now Being Enforced (Karen Demasters, Financial Advisor) - After a multi-year update process that began with the formation of a 12-person Commission On (Fiduciary) Standards in late 2015, this week the CFP Board's new "fiduciary at all times" standards of conduct took effect and will apply to all 87,000+ CFP professionals in both RIAs and broker-dealers and insurance companies. Notably, the new Standards of Conduct themselves were adopted back in October of 2019, but the CFP Board chose to delay the enforcement date for the new rules to conform to the June 30th effective date of Regulation Best Interest in an effort to allow large financial services more time to align their SEC, FINRA, and CFP Board compliance processes and procedures. The new standards include additional requirements for CFP professionals to provide information to prospective clients upfront, in addition to a series of 15 Duties to fulfill their fiduciary obligations (including a core Duty of Loyalty, Duty of Care, and Duty to Follow Client Instructions), and the CFP Board has launched a series of new compliance resources to help guide CFP professionals in how best to comply with the rules. At the same time, the CFP Board has also vowed to step up enforcement, starting with a more proactive process of background checks that has already unearthed 1,240 CFP professionals with potentially problematic disciplinary or other legal or financial issues. Though ultimately, it remains to be seen to what extent the CFP Board will be able to proactively investigate potential complaints against CFP professionals, given that in the end it does not have the investigative legal powers of a regulator, and can at worst only publicly suspend or revoke the marks of a CFP certificant (but not otherwise fine or sanction problem advisors).
Coming Soon: Dimensional Fund Advisors ETFs, Available Directly To Consumers (Jeff Benjamin, Investment News) - The big news on the investment side of the advisor industry this week was the announcement that Dimensional Fund Advisors, which has accumulated over $500B in AUM in its factor-based mutual fund strategies made available exclusively to/via financial advisors, has filed with the SEC to roll out an ETF version of 3 of its most popular strategies, including a U.S. all-cap core, non-U.S. developed all-cap core, and an emerging markets all-cap core. The move is significant not simply for DFA's foray into ETFs themselves, but the fact that by repackaging their mutual funds as ETFs, they will become available to any/all investors who wish to buy them (unlike DFA's mutual funds that were only available through DFA-approved advisors), effectively ending DFA's advisor-exclusive distribution strategy (as while technically DFA has been sub-advising some John Hancock ETFs for several years, the new ETFs will be the first to carry the DFA brand). The move appears to be driven at least in part by the launch late last year of Avantis, a new DFA-like factor investing series of ETFs created by former DFA co-CEO Eduardo Repetto, that has quickly garnered $1.5B of ETF assets in just 9 months, while DFA has reportedly seen a whopping $19.5B of outflows this year as advisors expand their asset allocation models. From its perspective, though, DFA claims that the new ETF launch is not defensive, noting both the greater tax efficiencies of the ETF format (thanks to the creation/redemption structure), and that it was existing DFA advisors themselves that had been asking for an ETF option to invest into DFA's strategies, especially now that it can leverage the SEC's recent approval for actively managed ETFs (which will follow DFA's existing philosophy and research). Though ultimately, the question remains whether DFA can maintain the same kind of dedicated following to its funds and strategies as the approach becomes more widely available, both as a result of competition, and its own soon-to-be-widely-available ETFs.
Fed Becomes #3 Holder Of World's Biggest Corporate-Bond ETF (Katherine Greifeld, Bloomberg) - On May 12th, the Federal Reserve began to purchase Corporate Bond ETFs as part of its effort to stabilize bond markets in the midst of the coronavirus pandemic, and in the nearly 2 months since, has accumulated billions of dollars in Vanguard's VCSH short-term corporate bond ETF, Vanguard's VCIT intermediate-term corporate bond ETF, and especially iShares's LQD corporate bond ETF (for which it is now the #3 holder, second only to Bank of America and Fisher Asset Management). Notably, though, as the ETF bond market has further stabilized, the Fed indicated in mid-June that it will begin to purchase individual corporate bonds in addition to ETFs, which means the Fed's ETF allocation may already have seen its high-water mark and may begin to wind down soon. Still, though, the depth of Fed trading into the ETFs themselves brought some record inflows to corporate bond ETFs in the second quarter, with the top 4 players collectively adding more than $26B of net inflows.
Does Q2 Active Fund Performance Invalidate The Benefits Of Active Management In A Downturn? (Janet Levaux & Ginger Szala, ThinkAdvisor) - According to the latest Morningstar data, 52% of actively managed mutual funds and almost 60% of actively managed bond funds were able to beat their category index benchmarks in Q2 (with just over 50% of actively managed funds outperforming during the downturn itself from the market peak in February to the trough in late March). However, viewed on a year-to-date basis, only 43% of actively managed future funds have been able to outperform, as the number of equity outperformers dropped below 50%, and in the case of active bond funds in particular, barely 1/3rd outperformed in total year-to-date (as short duration bets were the wrong way in the midst of rapidly falling interest rates as the pandemic recession unfolded). Or stated more simply, the outperformers during the market decline itself still lost more ground in the first quarter than they were able to make it during the market volatility itself. The data has taken on a renewed focus in the face of recent market volatility, as adherents of active management - that it can outperform and effectively be defensive during tumultuous times - did not hold up, at least on average across the entire landscape of actively managed funds, and renewing the debate of whether active management is "worth it" over passive indexing strategies, with even Morningstar's Head of Global Manager Research, Jeffrey Ptak, suggesting the data shows that "active management is [more] effective in a bear market" is largely a myth.
The Secret Ingredient For Keeping Advisors Happy (Gary Stern, RIA Intel) - A recent Cerulli Associates RIA Marketplace report suggests that advisor happiness with their (independent) platforms comes down to three core factors: higher pay, their ability to build value in their business, and increased autonomy. Yet while, at least in the independent channel, the first two are classic hallmarks (with higher payouts for independent advisors relative to employees, and the ability to build their own business value), "autonomy" remains a significant challenge for many, from the impact of required compliance oversight to conforming to the company culture in a wide range of platform or tuck-in models. As from the perspective of the platforms that serve and support advisors, increased flexibility and autonomy also increases the risk that advisors do something wrong/improper, potentially getting both themselves and their platforms into legal or regulatory trouble. And ironically, the challenge is especially difficult for the largest independent advisor platforms that struggle to balance the compliance obligations of overseeing a large number of 'good' advisors alongside the risk of a few 'bad apples' (where providing compliance to the Lowest Common Denominator risks just dragging down the autonomy and thus advisor satisfaction of the rest). In the long run, though, the issue is not even 'just' one of satisfaction, but also that advisors lacking autonomy will generally be less creative and innovative, ultimately placing the firm itself at risk of not keeping up with the competitive environment. And arguably, perhaps one of the primary reasons that the RIA channel has been the fastest growing over the past decade is precisely because it has become the channel allowing the greatest advisor autonomy to build their practices in their own vision?
2 Ways To Boost Staff Morale Remotely (Angie Herbers, ThinkAdvisor) - While some financial advisors have welcomed the additional flexibility and autonomy that has come with the sudden work-from-home environment brought on by the coronavirus pandemic, not everyone likes the work-from-home environment, and the reduced opportunities for team interaction can further limit the team connectivity, culture, and even the workplace's social support system (increasing the risk of everything from depression to employee burnout). And with the pressures of making rapid pivots in the face of the pandemic itself, most firms have been focused on adapting the business' core processes and systems themselves... and not necessarily monitoring the way their team culture is (or isn't) adapting and employee morale. At its core, though, Herbers suggests that adapting culture (and employee satisfaction) in a virtual environment boils down to two straightforward starting points: 1) instead of just trying to 'manage' employees virtually, ask what it is they want and need to continue to do their jobs well (consider an anonymous survey so they can provide constructive feedback?); and 2) make sure you still periodically take time to ask employees where they want to be in the long run (i.e., to talk about their career-track opportunities), so they don't just get stuck in a cycle of only serving clients to the point that they burn out without any visibility of what else may be coming next.
Survival Of The Happiest (Philip Palaveev, Financial Advisor) - The turmoil of the coronavirus pandemic has given advisory firms a lot of time to reach out and 'check in' with clients about how they're doing, but Palaveev notes that it's equally important for advisory firm leaders to also take a moment to do the same for their teams. Which is important, because while most advisory firms have been proactive in communicating to clients with letters and phone calls during the pandemic, few advisory firm founders/CEOs penned a letter to employees to check in and communicate. Despite the fact that such employee communication is arguably more important than ever in the face of challenging isolation and the newfound stresses of balancing work and home life (when it all happens at home!). More broadly, Palaveev suggests that there are four core areas that shape employee morale: leadership (who leads the team and how they do it); motivation (what are the incentives that drive team behavior); team dynamics (how does the team relate with and care for one another); and context (the environment and factors we operate in). The starting point, though, is simply to ensure the basic 'hygiene' factors (the necessities for any work environment to be tolerable) must be met, from reasonable compensation and a safe work environment, to the 'basics' of leadership in communicating, being honest but positive, adapting and listening, and focusing on what matters most. Other key aspects to support employee morale include: don't forget to recognize employee achievements (and that 'achievement' may change, for instance from business development in 'normal' cycles to good client retention in the midst of the pandemic); be cognizant that if cuts are necessary, fairness takes a more central focus (e.g., if team members are losing their bonuses, are executives taking salary cuts, too?); and recognize that in an already difficult environment, one bad apple with bad morale can really drag down the team, which means it's especially important to deal with them (or if necessary, terminate them) despite or even because of the otherwise challenging times we face.
Money Actually Can Buy Happiness!? (Tara Bahrampour, Washington Post) - A recent research study published in Emotion by Jean Twenge and A. Bell Cooper, aptly titled "The Expanding Class Divide In Happiness", finds that the correlation between income and happiness has been steadily rising over the past few decades... but with some notable separations by socioeconomic class. Specifically, the research found that amongst whites with no college education, happiness has been steadily declining since 1972 (when the data begins), while the happiness of whites with a college education has held steady; similarly, amongst African Americans, happiness for those without a college education has remained steady, while happiness for those with a college education has increased. Which means across the board, gaps in socioeconomic status are being reflected in an ever-widening gap in happiness between socioeconomic classes. In addition, the study didn't support prior research that suggested rising happiness tends to taper off after income rises above $75,000, with happiness continuing to rise all the way up to the top decile (which was $108,410+ of income). Ultimately, further research is necessary to determine why the happiness gap is widening, and whether it's a function of rising income inequality itself, home affordability, being able to pay for children's education or some other factor. Nonetheless, the data represents one of the long-standing longitudinal research data sets of more than 44,000 Americans and finds that the 'Happiness Gap' between lower and upper-income households does appear to be widening.
Are Rich People As Happy As They Think? (Andrew Hallam, The Evidence-Based Investor) - In his younger years, Hallam took a year off from work to travel, buying an old Toyota van with few amenities, cooking on a portable propane stove, and bringing a shovel when nature called; more recently, he took another full-time break from work, but thanks to his career success during the intervening decades, was able to travel in the "Shangri-La" of vans, that included a toilet, shower, stove, microwave, television, fridge, air conditioner, and a comfortable bed. Yet research finds that while amenities may be nice, there's remarkably little evidence to suggest that having nicer 'things' is actually correlated to greater happiness, with researchers Elizabeth Dunn and Michael Norton (of the book "Happy Money: The Science Of Happier Spending") finding that those with higher-end flashy cars don't report any more happiness than those who drive 'junkers', as while our "reflective happiness" (how happy we think we are compared to others) may improve, our "experienced happiness" (how happy we actually report we are in the moment) doesn't substantively change. In fact, research by Daniel Kahneman and Angus Keaton has found that in general, higher income improves how we evaluate our lives, but not actually our emotional well-being while living our lives. Which may help to explain the infamous "hedonic treadmill" phenomenon... that we persistently overestimate how more income will measure up in our lives but fail to recognize how little it actually changes the moments we experience?
How Much Money Do You Need To Be "Happy" (Meredith Moore, Medium) - Given the unfortunate reality that money problems are the leading cause of divorce, in practice good financial planning that helps couples align about their money goals can often end out doubling as a good marital counseling session. The challenge, though, is that a lot of households don't even know where their money goes on a week-to-week and month-to-month basis, making it difficult to even understand if they're on the same page in the first place (except for spotting the occasional standout expenditure that can cause a couple to fight). In fact, Moore finds that often, both members of a couple are horrified with their monthly spending number, once they actually sit down and track it and see where the dollars are actually going, and that in practice those who are most self-aware about their spending - and what they really 'need' to spend - tend to be the ones that accumulate significant balance sheets (the so-called frugal "Millionaire Next Door" phenomenon). But the question of "how much do you really need to spend to be happy" is one that anyone (or any couple) can ask of themselves. Moore suggests that the starting point is simply to track spending for a while to figure out what the monthly spend number is. Next, take a hard look at the expenditures to figure out what would it really take minimalistically just to 'survive' in the current lifestyle. Then calculate the difference between the two - what you're spending in practice, and what it would take at a minimum - and consider which dollars really, purposefully, should be put back into the spending budget to add to the (admittedly very) minimalistic lifestyle. And then figure out how to adapt spending in practice to fit the (more ideal) spending pattern that's now delineated?
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, and Craig Iskowitz's "Wealth Management Today" blog as well.