Weekend Reading For Financial Planners (June 21–22)

The Biggest Changes In The Senate Tax Bill And What Comes Next

(Melanie Waddell | ThinkAdvisor)

One of the major topics of conversation for financial advisors this year is the scheduled expiration of many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and the potential for a major tax bill that could extend (and possibly expand) many of these measures. After months of speculation about its contents, Republicans in the House of Representatives released their version of the legislation in mid-May, with the full House passing it by a narrow margin later that month. That put the ball in the hands of Senate Republicans to release their own version of the tax legislation, which they did this week.

The core of the Senate legislation largely mirrors that of House-proposed measures, including permanently extending (i.e., without a scheduled sunset) the lower individual tax rates enacted as part of the TCJA with a top bracket of 37% for the highest earners, capping the value of itemized deductions at 35% for the highest income taxpayers, maintaining the estate tax exemption at TCJA-prescribed levels (which would reach approximately $15 million in 2026), and (of particular interest to financial advisors) continuing the repeal of miscellaneous itemized deductions (including the deduction for investment advisory fees).

Nevertheless, the legislation proposed by Senate Republicans also comes with several key differences from its House counterpart, including keeping the deduction for State And Local Taxes (SALT) at $10,000 (whereas the House version proposed a $40,000 cap, subject to certain income limits), maintaining the deduction for pass-through businesses at 20% (while the House legislation would raise it to 23%), excluding the House-proposed expansion of Health Savings Accounts, and allowing certain clean energy tax credits to last longer than was proposed in the House version.

Notably, the legislation introduced in the Senate has found opposition from some Republicans both in the House (particularly among Republicans from relatively high-tax states who pushed for the higher SALT cap) and in the Senate itself (with some Senators wanting steeper spending cuts and others expressing concern about the proposal's deeper cuts to Medicaid compared to the House version). This opposition is notable because the House Republican legislation passed by a single vote and Senate Republicans would need at least 50 of their 53 members to vote in favor of it for it to pass (assuming no Democratic Senators sign on to the legislation).

In the end, while President Trump had hoped to pass major tax legislation by July 4, debate over a range of measures amongst Republicans in both the House and Senate could challenge this 'deadline' (though they would still have time to do so before several TCJA measures are set to expire by the end of the year). Which might keep financial advisors and their clients waiting longer to find out exactly the tax policies they will face in 2025 and beyond (though, given that tax brackets, deductions, and other measures will remain largely the same under both the House and Senate proposals, there might be fewer 'action items' for advisors compared to the passage of TCJA, which brought significant changes to tax rates, deductions, and the estate tax exemption).

New SEC Leadership Axes Proposed RIA Outsourcing, Custody, AI Rule Changes, Among Others

(Tracey Longo | Financial Advisor)

The Biden-era Securities and Exchange Commission (SEC) under Chair Gary Gensler issued proposed regulations at a rapid pace, including many rules that would have affected RIAs in the future if implemented pertaining to everything from the firm's due diligence obligations when outsourcing to the scope of what triggers custody. However, the election of President Trump and his subsequent appointment of Paul Atkins (who had previously expressed skepticism towards the more active regulatory approach embodied by Gensler's time leading the regulator) led some industry observers to speculate whether the new administration might amend or pull back some or all of these proposals.

This week, the SEC withdrew 14 proposed rules issued during Gensler's tenure (without offering detailed justifications for each rule's withdrawal), including several of direct interest to RIAs. These include the proposed 'outsourcing rule' (which would have established formalized due diligence and monitoring obligations for investment advisers who hire third parties to perform certain functions), proposed amendments to the SEC's Custody Rule (that would have extended custody obligations beyond securities and funds [subject to the current rule] to encompass all assets in a client's portfolio for advisors who manage on a discretionary basis [potentially subjecting the majority of RIAs to at least some of the additional compliance burdens of having custody]), and the Predictive Data Analytics proposal (which would have required a firm to eliminate or neutralize the effect of conflicts of interest associated with the use of predictive analytics technologies such as artificial intelligence or algorithm-driven 'robo' nudges, among other measures). Other proposed rules that were withdrawn covered market structure, ESG disclosures, and shareholder proposals, among other areas.

Ultimately, the key point is that RIAs now have resolution on the status of several SEC-proposed rules that could have expanded their regulatory requirements, and confirmation that the Atkins-led SEC intends to take a lighter touch towards rulemaking compared to his predecessor. Notably, though, while the withdrawal of the rules will save firms time from various recordkeeping and paperwork requirements, several of the areas highlighted in the now-withdrawn rules (including disclosing conflicts of interest and conducting due diligence on service providers) already fall under an adviser's fiduciary obligations (and the fact that they were already part of the RIA's fiduciary obligation was the primary reason several SEC Commissioners opposed Gensler's approach in the first place). Which means that while firms might now face fewer formal filing requirements, Atkins' changes don't alter the substantive fiduciary obligations of RIAs themselves, and the work of ensuring that advisory firms are acting in their clients' best interests across a range of fronts (whether in terms of keeping client data secure or when outsourcing certain functions to third parties) will continue.

SEC Committee Recommends RIA Arbitration Reforms

(Sam Bojarski | Citywire RIA)

Investment advisory and broker-dealer firms often include arbitration clauses in their client agreements, which stipulate that any dispute between a client and the firm will be heard not in the court system, but through a third-party arbitrator who hears evidence from both sides and issues a (typically binding) ruling. The financial industry generally favors arbitration because it can be faster and less expensive than the court system; however, unlike a lawsuit heard in court, arbitration hearings do not become public record, which enables firms to save face if found guilty of wrongdoing and limits the ability of prior cases to become precedent for future plaintiffs.

In theory, clients and the advisory firms they're challenging might try to agree on whether a case will be heard in a court of law or via arbitration (as each weighs both the costs and whether they think they will receive a more favorable outcome in one form or another), but in practice arbitration clauses are often mandatory with advisory firms, meaning that a client who signs a brokerage or advisory agreement containing the clause loses their right to ever take that firm to court in the event of a dispute. Even if the client believes that might have been the better forum to have their case heard.

The SEC in 2023 published a report assessing the state of RIA mandatory arbitration clauses, finding that 61% of SEC-registered RIAs have these clauses, with the vast majority using private arbitration forums to hear claims (which can be more costly than the dispute resolution fora used by other firm types, such as the system run by FINRA for adjudicating customer and registered representatives' claims against brokerages). Notably, under the 2010 Dodd-Frank Act the SEC has had the power to regulate the use of mandatory arbitration clauses for RIAs and investor advocates such as the Public Investors Advocate Bar Association (PIABA) have urged the regulator to do so.

At a meeting earlier this month, the SEC's Investor Advisory Committee approved recommendations including requiring RIAs to disclose in their ADVs pre-dispute arbitration clauses as well as pending and resolved arbitration claims themselves (which would shed light for prospective and current clients on disputes that were adjudicated in the arbitration system). The committee also suggested that the SEC adopt rules similar to those FINRA places on the broker-dealers it oversees, including putting no limits on the ability of arbitrators to make any award or on the ability of a party to file any claim in arbitration, as well as to require RIAs to agree to an arbitration venue closest to the investor's residence (in part to prevent clients from facing high travel costs when going through the arbitration process). Further, the committee recommended the creation of a database for investment adviser arbitration awards similar to that of FINRA's searchable database.

Altogether, while the fate of these recommendations is now up to the SEC's commissioners (or perhaps Congress), firms can consider on their own whether the potential benefits of using mandatory arbitration clauses (e.g., costs to the firm and speed of resolution) outweigh the potential to turn off prospective and current clients (at least those who are aware of their use?).

Social Security Trust Fund On Track To Be Depleted By 2034: Trustees Report

(Lorie Konish | CNBC)

Social Security benefits make up a significant portion of income for many retirees (and a reliable source of inflation-adjusted income for others), so the continued ability of the program to make full benefit payments is analyzed regularly. And while the bulk of the funds needed to pay Social Security benefits come from payroll taxes from current workers, in recent years the program has had to dip into the "trust fund" in order to cover the full benefits owed.

This week, the Social Security and Medicare Trustees released its latest annual report indicating that the combined Social Security Old-Age and Survivors Insurance (OASI) trust fund and Disability Insurance (DI) trust fund (referred to as OASDI) would be able to pay 100% of scheduled benefits until 2034, 1 year earlier than last year's estimate, after which point it would be able to pay 81% of scheduled benefits from continuing income (largely from payroll taxes).

Part of the reason for the advancing exhaustion of the OASDI trust fund was the passage of the Social Security Fairness Act, which increased benefits for a range of workers as well as their spouses and survivors. Other key factors leading to the advancing exhaustion date include reduced assumptions for the ratio of total labor compensation to GDP (reducing the payroll tax base) and lower actual and expected fertility rates. The report highlighted several potential single-policy changes that could be enacted to close the Social Security program's solvency issues, including a 3.65 percentage point increase to the payroll tax (which would have to be 4.27 percentage points if enacted in 2034), a 22% reduction in total benefits (26% if enacted in 2034), or a 27% benefit reduction for new beneficiaries (notably, this policy lever by 2034 would not by itself close the funding gap by itself). Notably, Congress could elect to enact a combination of these proposals (reducing the blow of each one) and/or choose other measures (e.g., raising the wage cap for Social Security taxes or raising the full retirement age) to close the gap.

Ultimately, the key point is that while the exhaustion date of the Social Security trust funds continues to approach (alongside the deadline for Congress to act to avoid a broad reduction), the system is still poised to be able to pay more than 75% of scheduled benefits following the exhaustion date. Which would be particularly impactful on seniors who rely on Social Security for the bulk of their retirement income (which could spur Congressional action), though some recipients might be surprised to find out that they will continue to receive the majority of expected benefits even (in the perhaps unlikely) event that the trust funds are exhausted.

Americans Are Claiming Social Security Early, Fearful Of Its Future

(Anne Tergesen | The Wall Street Journal)

While the decision of when to claim Social Security benefits can be addressed mathematically (with a variety of assumptions regarding factors such as life expectancy), a fundamental challenge in the real world is that a variety of factors can influence an individual's decision of when to claim benefits, from health issues (that perhaps force an earlier-than-expected retirement) to concerns about the Social Security systems financial footing.

According to a March Gallup poll, 76% of U.S. adults surveyed said they worry a great deal or a fair amount about Social Security (a 13-year high) and this appears to be playing out in the form of more individuals choosing to claim their benefits, with pending Social Security claims for retirement, survivor, and health insurance benefits totaling 580,887 in March, up from 500,527 a year earlier. A variety of factors likely play into this figure (e.g., a growing number of Baby Boomers retiring), though news headlines about the impending exhaustion of the Social Security trust fund (which would reduce, though not totally eliminate, the system's ability to pay out benefits) as well as recently enacted changes at the Social Security Administration (e.g., staff reductions and changes to how certain services are provided) appear to be having an influence with some individuals (which would reflect the findings of a 2021 study that found workers tend to report a desire to claim benefits earlier when Social Security's finances are referenced negatively in the news).

In the end, while the decision of when to claim Social Security benefits is personal to each individual or couple, financial advisors can play a valuable role not only in showing the potential financial benefits of delaying claiming Social Security benefits (if appropriate for a particular client's situation), but also in explaining the (true) health of the Social Security system (including the fact that it would still be able to pay out a majority of scheduled benefits if its trust fund is exhausted and the potential for it to be put on more stable footing) and the historical backdrop (e.g., the likelihood that Congress will act to shore up the system, even if it waits until the last minute to do so, as it did with the Social Security Amendments of 1983), which could reassure clients who are exposed to regular headlines about Social Security and give them the full picture when making benefit claiming decisions.

How Delaying Social Security Can Trump Long-Term Portfolio Returns Or Lifetime Annuity

(Nerd's Eye View)

While much has been written about the inherent benefits of delaying Social Security benefits to age 70, a fundamental challenge in the real world is that the decision cannot be viewed in the abstract. The decision to delay Social Security isn't just about the value of delaying, but also about the money that must be spent from the portfolio to sustain spending in the meantime, and/or the decision to allocate money towards delaying Social Security and not towards other fixed income investments or a commercially available lifetime immediate annuity.

Yet a deeper look reveals that when viewed from an investment perspective, the decision to delay Social Security actually represents an astonishingly valuable "investment" return, based on the internal rate of return of the cash flows that it provides over time. While it is certainly unlike other more "traditional" investments, in that its return is based not on interest rates or market performance but on the longevity of one's life, for those who do live a long time the decision to delay Social Security can produce real (inflation-adjusted) returns of 4%, 5%, or even 6% for those who live into their 90s and beyond.

Calculated in this manner, the reality is that for those whose greatest retirement "risk" is living far past life expectancy, the decision to delay Social Security can actually be a highly beneficial investment, with a real return that dominates Treasury Inflation-Protected Securities (TIPS), is radically superior to commercially available annuities, and even generates a real return comparable to equities but without any market risk. Of course, there is still an aspect of "mortality risk" inherent in the decision to delay, but for those who are most concerned about living a long time and funding a long retirement, the decision to delay Social Security - even if it means partially spending down the portfolio in the meantime - can actually be the best means to securing a successful retirement, by converting the uncertainty of market returns into the certainty of higher Social Security payments!

Using A Master List To Uncover Clients' 'Real' Goals

(Steve Wendel and Samantha Lamas | Morningstar)

It's a common practice for financial advisors to ask clients about their goals (both personal and financial). Which can help the advisor craft a financial plan that gives the client a strong chance of reaching these goals and living their best lives. However, doing so assumes that clients are aware of their true goals in the first place (and can relay them to their advisor quickly and clearly after being asked).

Amidst this backdrop, a study conducted by Morningstar first asked people to list their top investing goals. The researchers then provided participants with a list of common investment goals (e.g., to care for aging parents or to retire early) and asked them to reselect their top goals, drawing from both their original list and the 'master list' of options. The study found that 73% of people changed at least one of their top goals after seeing the master list, with the final list being quite different for many participants. For instance, while some individuals listed broad, vague goals on their original list, exposure to the 'master list' sometimes led them to create more specific, vivid goals. The 'master list' also helped some individuals adjust initial goals that were solely focused on financial outcomes to goals framed in terms of their emotional and personal value.

Ultimately, the key point is that prospects and clients might not have fully formed goals ready when asked about them by their advisor, and that even those that do could potentially benefit from exposure to potential goals that they might not have previously considered!

Using Client Goals To Determine Whether They Might Be A "Builder" Or An "Avoider"

(Raluca Filip | Enterprising Investor)

When market volatility occurs, advisors can face a range of reactions from their client base. While some clients are ready to ride out the storm (and perhaps use it as an opportunity to add to their investment portfolio), others enter panic mode and ask their advisor whether it might be time to reduce exposure to the market.

In this context, Filip suggests a distinction between clients who she calls "builders" and "avoiders". Builders tend to focus on opportunity and growth and might frame their goals as "wanting to retire early", "building a passive income stream", or "growing my capital to have freedom in how I work". She finds that this group is more likely to stay invested during periods of market volatility, to see market downturns as buying opportunities, and to view risk as necessary to achieve goals. On the other side of the coin, avoiders are more focused on minimizing risk or avoiding worst-case scenarios. Common goals for this group might include "I don't want to run out of money in retirement" or "I want to avoid being caught off guard" and common behavioral traits include being prone to panic selling, investing too conservatively, or reducing contributions after early success.

In sum, while an advisor might not get to see how a new client might react to market downturns until one actually occurs, analyzing their goals to determine whether they have "builder" or "avoider" tendencies could help give clues and offer the advisor the chance to be proactive when volatility does arrive.

Training Your Clients to Be Flexible (But Not Fickle) With Their Goals

(Danielle Labotka | Morningstar)

Given that advisor-client relationships can last for many years, or even multiple decades, it's very likely that a client's goals will change over time. Sometimes these goals are changed enthusiastically by clients (e.g., the client decides they want to retire five years earlier after amassing sufficient assets to do so) while others might need to be changed due to negative circumstances (e.g., an extended period of unemployment leading to a target retirement age becoming more challenging to achieve).

However, clients facing this latter circumstance might be hesitant to give up on a goal they've been targeting for many years. There are several reasons why a client might be reluctant to make an adjustment to a goal, from a desire to save face (i.e., not be seen as 'quitting' on their goal), to the 'endowment effect' (i.e., the tendency for a person to value things that belong to them higher than their actual value) and a sense of attachment to a particular vision of the future that an individual has had for many years.

Given this backdrop (and the potential dangers of a client sticking with a goal too long after circumstances have turned against them [e.g., spending more than they can afford to do so sustainably]), advisors can consider taking steps to help clients become more flexible with their goals. This could include reinforcing early on in the client relationship that revisions are common and part of the planning process, helping clients identify the values that undergird their goals (which could help identify alternative goals [e.g., if they value having extended time off away from work, a goal of early retirement could shift to one of taking regular sabbaticals]), and/or helping clients understand the tradeoffs to sticking with or changing goals (e.g., running different scenarios in financial planning software to show how their future might be different if they stick with their current goal or adjust to an alternative).

In the end, financial advisors can support their clients both by helping them set a direction for where they want to go and flagging when adjustments might be needed along the way. Which could ultimately lead clients to have satisfying (and financially sustainable) outcomes, even if it wasn't what they imagined when they first started working with their advisor!

Breaking Down The 'Infinite' Workday

(Microsoft)

Technology has brought many advancements to the workplace, from making it easier to communicate to the ability to operate in a hybrid or fully remote environment (offering employees greater location flexibility). At the same time, as many workers can attest to, workplace technology can also be a tether during 'non-work' hours (e.g., the ping of an instant message coming in) and a distraction during desired periods of focused work (e.g., a regular cadence of email alerts). Further, technological interruptions come on top of other breaks in focused work during the day, from scheduled meetings to impromptu calls with colleagues or clients.

Based on an analysis of user data, Microsoft found that potential distractions are ubiquitous for workers, who receive an average of 117 emails and 153 instant messages (on its Teams platform) daily (in addition, it found that 57% of meetings are ad hoc calls without a calendar invite). In fact, the company found that the average time between interruptions by a meeting, email, or message during core work hours was only 2 minutes! While these potential distractions are nearly non-stop, their impact spreads beyond the workday as well, with 40% of users who are online at 6am and 29% of those online at 10pm reviewing email (perhaps to get ahead of the coming or following day's messages) and employees sending or receiving more than 50 messages outside of core business hours. Which, altogether, suggests that the workday is not just becoming longer (as some workers check messages and take on other tasks outside of regular business hours), but also that it can be challenging to use core work hours for tasks that require deep thought and concentration (given the number of interruptions and meetings on the schedule).

Amidst this backdrop, interested firm leaders and employees themselves can consider different strategies to create more time for focused work and better boundaries between work and personal life. For instance, firm-wide policies might include setting expectations for when employees are expected to be 'available' (e.g., checking email or messages) or by creating dedicated time for focus work (e.g., here at Kitces we have 'no meeting Wednesdays' that allow for extended periods of uninterrupted work), while personal practices could include time blocking, purposeful task prioritization, and perhaps silencing notifications when possible. Which could ultimately lead to greater productivity and less time spent on work outside of core hours!

America's Commute To Work Is Getting Longer And Longer

(Anne Marie Chaker | The Wall Street Journal)

Work life has changed significantly for many during the 2020s, first with the sudden onset of the COVID pandemic, which sent many companies into remote mode, and then subsequent adjustments to workplace policies (with some companies remaining fully remote, others returning to the office full time, and still others adopting hybrid policies). At the same time, Americans' housing options have changed as well, with some remote and hybrid workers electing to live further away from their companies' headquarters and others moving further away to compensate for rising home prices during this period.

Together, these trends have led to an increase in commute length, with the average distance to work rising to 27 miles at the end of 2023 from 10 miles in 2019, according to a study by payroll and benefits software company Gusto. Notably, the average commute length for those in their late 30s nearly tripled to 29 miles during this period (perhaps reflecting that workers this age might be able to negotiate for greater workplace flexibility and/or home price pressures). Further, the percentage of particularly long commutes has increased as well, according to research from Stanford University, with the share of 50-74 mile commutes increasing to 6% from 5.1% between early 2020 and 2024 (an 18% bump) and the share of commutes greater than 75 miles rising to 2.9% of all commutes from 2.2% (a 32% increase) in that time span. The cities with the biggest increase in commutes of more than 75 miles each way included Washington, D.C., New York City, Phoenix, and Dallas.

Ultimately, the key point is that while longer commutes might be bothersome to some workers (particularly those who were priced out of living closer to their office), others who don't have to be in the office full time (a much more common feature of work life in the 2020s) might see it as a sacrifice worth making to live in a location they prefer (while employees of fully remote companies have the greatest location flexibility and shortest commutes of all!). Which could inform firms' workplace policies and hiring practices, as allowing employees a level of workplace flexibility could lead to a greater pool of potential new hires (who live beyond the firm's immediate vicinity), though some firms (perhaps those with a high percentage of in-person client meetings) might choose to be in the office full time (and set that expectation for current and prospective employees).

Employee Stress Is A Business Risk – Not An HR Problem

(Chomse, Roos, Misra, and Williams | Harvard Business Review)

In recent years, companies have started to pay more attention to employee wellbeing, though implementation of policies that could lower the level of workplace stress has been inconsistent. For instance, a survey by Deloitte found that while 94% of C-Suite executives agreed on the importance of being health-savvy leaders, 68% admitted they aren't taking sufficient action to safeguard employee and stakeholder health. Notably, high levels of employee stress can potentially lead to negative effects on a company's bottom line, with a study by the authors finding that high levels of stress could translate into an added $5.3 million of annual costs for every 1,000 employees at a company (due to a combination of greater absenteeism and poorer health amongst stressed workers and worse performance when these workers are in the office, among other factors).

As part of their "Risk Thermometer" model, the authors suggest that a first step for companies interested in gauging (and then taking action on) employee stress is to ask employees a question such as "How often do you feel stressed, anxious, or overwhelmed at work?" once every 6-12 months. Based on the responses, firms can then sort employees into three buckets: "low zone" employees who report never or rarely feeling stressed (the authors found 14% of surveyed employees fall in this bucket), "medium zone" employees who report feeling stressed sometimes (41% of those surveyed), and "high zone" employees who feel stressed frequently or all the time (45% of the workforce). Notably, they found that employees in the "high zone" take 8 times more sick days, are 3.7 times more likely to consider leaving the company, 4 times more likely to be disengaged, 11 times more likely to make compliance-related mistakes, and 7 times more likely to report interpersonal conflict with their colleagues compared to their low-stress peers, demonstrating the potential benefits of reducing the stress of workers in this group.

Companies could then analyze this data to find whether "high zone" employees are clustered in particular teams or roles, and, if so, determine whether these areas are showing worse performance and to consider ways to lower the stress levels of these groups. Firms could also ask follow-up questions to those in the "high zone" group, such as whether their workloads or deadlines feel manageable, or whether they feel psychologically safe raising concerns or asking for help, which can further identify potential action items to reduce stress levels.

In sum, this research suggests that improving levels of workplace stress isn't just a 'nice to have' but rather a business imperative as stress doesn't remain internal to employees but is also seen in how (and whether) they show up at work. Which means that investments in assessing employee stress and in taking action to improve it could pay dividends (both literal and figurative) for a company as it is able to attract and retain top employees and allow them to perform at their peak potential.

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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 "Wealth Management Today" blog.