Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the huge news that the SEC has officially passed Regulation Best Interest (by a 3-1 vote), which will require brokers to act in the “best interests” of their clients when making a recommendation but stops short of actually requiring a fiduciary duty or for broker-dealers to mitigate their conflicts of interest… and raising the question of whether the SEC is so expanding the advice exemption for broker-dealers beyond its “solely incidental” roots that, like the Department of Labor’s fiduciary rule, Reg BI may soon end out subject to a legal challenge.
Also in the news this week was the revelation that, with the CFP Board’s own coming fiduciary obligation for CFP certificants, Edward Jones is considering whether to force its nearly 2,000 CFP certificants to drop their marks to avoid the fiduciary obligation (at the risk of having them recruited away by broker-dealer or RIA competitors who are willing to embrace an obligation to do the right thing for clients), the announcement that Fidelity is working on a new Managed Account Xchange (FMAX) akin to other model marketplaces but wrapping together Wealthscape and eMoney Advisor into a potential head-to-head Envestnet competitor, the official release of the Envestnet Fiduciary Insurance Exchange (FIDx) to facilitate RIA access to no-commission annuity products, and a look at the current landscape of independent broker-dealers from Financial Planning magazine’s annual survey (finding that while IBDs are struggling, the largest are growing, in part by increasingly reinventing themselves as fee-based RIA support platforms less reliant on traditional commission-based revenue!).
We also have a few articles this week around the intersection of money and children, including a look at the rise of “allowance apps” that parents are using to dole out allowance and oversee chores in the digital age, Morgan Housel’s advice to his newborn daughter on her financial children, a research study on what children of affluent families are really concerned about (hint: carrying on the family legacy matters to them more than most people realize!), and how to find the “Goldilocks zone” of personal finance, recognizing that while it’s very stressful for those who don’t have enough, it can be similarly very stressful to have “too much” as well!
We wrap up with three interesting articles, all around the theme of having and managing stress: the first looks at how, while we tend to think of stress as being “bad,” a moderate amount of stress can actually be a positive that encourages us to step up and achieve more (as long as we get breaks to refresh and recover, too); the second explores a recent FPA study finding that financial advisors, in particular, are very stressed, despite the ongoing bull market, due to the rising challenges of operating an advisory business; and the last explores the “theory of cumulative stress” and how best to recover when you’ve been carrying too much stress for too long and need some personal relief.
Enjoy the “light” reading!
SEC Passes Regulation Best Interest By 3-1 Vote (Melanie Waddell, ThinkAdvisor) – This week, the SEC approved its controversial new Regulation Best Interest in a 3-1 vote (along party lines, with sole Democrat Commissioner Peter Jackson dissenting). The SEC’s Fact Sheet highlights what was ultimately a series of four rules – Regulation Best Interest itself, the new Form CRS Relationship Summary, an updated interpretation of the standard of conduct for RIAs, and an updated interpretation of the “solely incidental” exclusion that allows broker-dealers to avoid being required to register as investment advisers (and be subject to a fiduciary duty in the first place). With over 1,300 pages(!) of regulations across the four rules, the industry is still absorbing the details of the rule itself, but the key point is that the SEC’s new rule will raise the standards of conduct for broker-dealers up from the current “suitability” standard to a new “best interest” standard… with the caveat that the broker-dealer “best interest” standard will still not be the same as the fiduciary best interest standard that applies to RIAs. Specifically, Regulation Best Interest will create a Disclosure obligation (broker-dealers must disclose material facts about the relationship and potential conflicts), a Care obligation (to establish and enforce written policies and procedures reasonably designed to identify and at a minimum disclose if not eliminate conflicts of interest), and a Compliance obligation (that broker-dealers themselves must take steps to ensure compliance with the rule)… although the Public Investors Arbitration Bar Association (PIABA) notes that even the new “Best Interest” obligation for brokers exists only at the exact moment of sale (and does not necessarily cover the rest of the client’s ongoing relationship with the broker-dealer where conflicts) and effectively means that “brokers have to act in their clients’ best interests… unless the broker says otherwise). On the other hand, the SEC also “clarified” the fiduciary duty for RIAs, stating that RIAs can also disclose many of their own conflicts of interest as well… ostensibly to further close the gap between what RIAs and broker-dealers are obligated to do on behalf of their clients’ best interests. Nonetheless, now that it’s been passed by the SEC, the new rule, along with the requirement to provide the new Form CRS, will become effective later this summer – technically, 60 days after the new regulations are published in the Federal Register – but will include a transition period until June 30th of 2020 to give firms time to comply. However, consumer advocacy groups like the Consumer Federation of America have already suggested that the SEC has left itself open to a legal challenge on the rule, both by its failure to conduct a full legal analysis (to justify expanding the solely incidental exemption for broker-dealers to avoid fiduciary duty) and its failure to conduct an economic analysis (of the impact of allowing broker-dealers to hold out as “best interests” advisors and compete against advisors at RIAs who are actually held to a full fiduciary best-interests standard). Which means, similar to the Department of Labor’s fiduciary rule, the fact that Regulation Best Interest has been passed and finalized doesn’t necessarily mean it’s actually a “done deal” just yet?
Will Edward Jones Stop Advisors From Using The CFP Designation? (Andrew Welsch, Financial Planning) – While the SEC ultimately decided not to require broker-dealers to be subject to a fiduciary standard for their clients, last summer the CFP Board did put forth new standards of conduct that will require CFP certificants to adhere to a fiduciary standard when providing financial advice or financial planning to their clients… even if the CFP certificant is employed by a broker-dealer that is not otherwise subject to a fiduciary standard. And with the CFP Board’s new standards set to take effect soon – in October – it’s been revealed that Edward Jones is considering whether it will require its nearly 2,000 brokers (out of 17,000 total) who hold the CFP marks to drop them in to avoid the fiduciary duty that would be applied… effectively forcing those 2,000 CFP certificants at Edward Jones to choose between their firm or their designation. The potential ramifications of the Edward Jones decision are very high stakes; on the one hand, it may set off a frenzy from competing broker-dealers and RIAs that are willing to support the CFP marks (and their fiduciary duty) who would try to aggressively recruit those 2,000 Edward Jones representatives by promising that they can keep their marks and their client-centric focus; on the other hand, recruiting away from Edward Jones would be difficult in many cases (as their reps are often in solo offices in small towns and suburbs that aren’t served by competitors in the first place), and in the extreme Edward Jones may try to band together other broker-dealers to threaten an even larger defection of CFP certificants in the hopes that the CFP Board would back off its standards before implementation. At this point, though, the CFP Board maintains that it adopted its standards “after extensive engagement with the public, CFP professionals, and the firms at which CFP professionals work.” And in a world where consumers increasingly recognize the CFP marks, there aren’t many alternatives for Edward Jones to support anyway.
Fidelity Announces That It Is Building A Managed Accounts [Envestnet-Competitor] Platform (Ryan Neal, Investment News) – This week, Fidelity announced that it is developing a new wealth management platform called “Fidelity Managed Account Xchange” (FMAX), which will tie together its Wealthscape custodial platform (along with Fidelity’s AMP “robo” solution), eMoney Advisor, and managed account solutions from both Fidelity itself and other third-party asset managers as well, in an attempt to provide a single consolidated platform that advisors can use for everything from prospective and new client onboarding to financial planning and (outsourced) model management of portfolios. On the one hand, the new solution provides a more expedited and integrated platform for advisors themselves (who today often work with separate financial planning and portfolio management tools), and essentially becomes Fidelity’s version of a model marketplace, but on the other hand the new FMAX solution would also put Fidelity even more squarely in the middle of competition with Envestnet (that similarly has built/acquired an integrated platform of investment management via Tamarac, financial planning software via MoneyGuidePro, and its own managed account marketplace, leveraging its technology as a distribution channel), although ironically in the age of FinTech “co-opetition” Envestnet’s technology will also be what powers FMAX’s core managed account engine. Fidelity will be spinning up a new RIA entity – Fidelity Institutional Wealth Adviser – to support on the investment management and due diligence (and ostensibly so it can participate in the economics of other third-party managers as a sponsor or solicitor), and the FMAX platform has a planned rollout of next year (2020).
Envestnet Kindles Chemistry Between Fiduciary Advisors & Insurance Carriers (Samuel Steinberger, Wealth Management) – This month, Envestnet is announcing the official rollout of its Fiduciary [Insurance] Exchange (FIDx) that will make no-commission annuity products from carriers including Allianz, Brighthouse, Jackson National, Nationwide, and Prudential, available to the fee-only RIA community. The launch marks the intersection of two key industry trends – the rise of technology as a distribution channel (where insurance carriers themselves now seek out technology platforms like Envestnet as a way to get their products into the hands of [fee-only] advisors and their clients), and Envestnet’s development of a holistic wealth management platform (particularly with their recent MoneyGuidePro acquisition) to become the central advisor workstation (from/through which such products would be purchased). Notably, in order to effectively create a “marketplace,” Envestnet’s exchange will provide access to a wide range of products whose details will be “normalized” across insurance carriers, to make it easier for advisors to filter, compare, and select the right annuity product. In addition, FIDx is intended to be used to manage clients’ annuity assets as well, facilitating the creation of annuity-based models that can be monitored alongside traditional managed account investments. As the platform grows, Envestnet reports that it intends to add even more carriers, with a goal of 20 annuity providers on the platform by the end of 2020, and a rollout of no-commission life insurance products on the platform for fiduciary advisors by the end of the year as well.
IBD Elite 2019: Time To Celebrate? Not Just Yet… (Tobias Salinger, Financial Planning) – With the ongoing bull market, independent broker-dealers were able to achieve double-digit revenue growth in 2018, for the first time since 2014. At the same time, though, life is still difficult in the independent broker-dealer channel, with the number of IBD firms still declining (although with their broker headcount). And even within the IBD channel, the notable trend is that the largest independent broker-dealers are becoming even bigger, with revenue at 8 of the top 10 IBDs up by double-digit percentages last year, driven in large part by ongoing mergers and acquisitions as the broker-dealer channel consolidates (from LPL buying NPH, to Advisor Group acquiring John Hancock’s Signator Investors)… which in turn is increasingly being fueled by the entrance of Private Equity firms into the IBD channel to further fund those consolidations. Across the IBD channel, though, margins are compressing (from 11% in 2007 to a mere 3% in 2018), driven heavily by the fact that broker-dealers themselves cannot generate the amount of commission-sharing revenue they could in the past, with IBD revenue from fund companies down from an average of 156 basis points in 2010 to just 88bps last year. Yet even as traditional revenue sources are squeezed, broker-dealers are under more pressure to reinvest and improve their technology, building new advisor and client portals and more deeply integrating their technology offerings. Throughout it all, the RIA channel continues to expand, although notably, independent broker-dealers increasingly offer hybrid RIA platforms as well, and Commonwealth offered 75 of their reps the opportunity last year to drop their FINRA registrations altogether and just operate as fee-only RIAs under a new RIA services division… raising the question of whether, as RIAs increasingly take overall market share from IBDs, if the endpoint isn’t that many of the largest IBDs will reinvent themselves into RIA platforms as well?
How Kids’ Allowance Works In The Smartphone Age (Julie Jargon, Wall Street Journal) – While technology continues to change and evolve, the core desire of kids to want money and parents to want to impart a basic work ethic doesn’t change. Nonetheless, as the technology itself does change, the way that allowances and the process of teaching kids about money is changing as well. For instance, keeping a calendar on the refrigerator with the kids’ chores may not work as well as an apps like Greenlight or GoHenry, which links to parents’ bank accounts and allows them to facilitate allowance electronically (so kids can see their accounts rise and fall in real time), and even to teach kids the power of earning interest (which is paid from the parents to the kids directly but facilitated by the app). Greenlight also issues a debit card for the kids against their account, but one where parents can determine both spending limits, and choose the retailers where a child can make a purchase (where parents get notified if the child tries to buy something at an unapproved store, and can immediately cancel the card from the app if it’s lost). The challenge, of course, is that many parents are trying to get their kids off their phones, not onto them more; yet if the future is an increasingly cash-less world of electronic transactions, arguably using digital apps for allowances just meets kids where they are (and helps them build the digital-transaction skills they’ll need in the future). For parents that don’t want to deal with the complexity of bank transfers and debit cards, another option is RoosterMoney, which similarly allows parents to mark off tasks/chores as they’re completed (and even take pictures of overflowing trash cans or messy countertops and post them to the app when chores aren’t completed!), and keep track of what their kids are earning and spending. In addition, BusyKid allows children to also invest some of their savings in stocks, and FamZoo facilitates prepaid debit cards to give kids ways to spend their (otherwise-electronic) allowance money.
The Financial Advice For My New Daughter (Morgan Housel, Collaborative Fund) – As a (very) recent new father and personal finance expert, Housel shares his thoughts on the financial advice he will (someday) provide his new daughter, including: while hard work matters, realize that not all success is due to hard work (nor is all poverty due to laziness), and that luck and chance play major factors as well (to be considered when judging people… including yourself); the highest dividend money pays is providing the ability to control your time (being able to do what you want, when you want, where you want, with who you want, for as long as you want… which provides more happiness than any amount of material objects you might buy, as having a flexible career with a short commute never gets old, but the thrill of “fancy stuff” wears off quickly); as a parent the goal is to work hard to support you and open doors of opportunity for you, but not to spoil yet (i.e., no one can learn the value of a dollar without experiencing its scarcity… so don’t be upset if parents sometimes let dollars become scarce); Napoleon’s definition of a military genius was the person “who can do the average thing when everyone else around him is losing his mind,” and the same is true when it comes to investing; learning how to live with less is one of the most powerful financial levers (because you can control what you spend more than you can control what you earn or get as returns); it’s OK to change your mind (no one has their life figured out by age 18, so don’t stress too much if you pick a major you end up not enjoying!); everything has a price (from what we buy, to the “cost” of a busy career with time away from friends and family); true success is when the people who you want to love you do love you (and that love comes primarily from how you treat people, not your level of net worth!); and of course, the future may be different than the past, so it’s OK if it turns out you need to reject any of this advice down the road!
What Matters Most To Children Of Wealth (Katherine Dean, Kiplinger) – According to a recent Wells Fargo study of children of affluent families, those kids/young adults (aged 16 to 25) state that the most important thing they will inherit from their parents isn’t their wealth, but their values… and that it’s important to them to carry on their families’ legacies, too. Specifically, the study found that 84% say they want to sustain and build on their family’s legacy, 40% want to have more say in their family’s philanthropic strategies, and more generally the next generation wants help gaining financial acumen and preparation to be good stewards of their family wealth, but that their families rarely meet to discuss finances. Accordingly, Dean suggests that there are three core themes that affluent families must be mindful of when it comes to their children and their wealth: 1) communication is essential, and that when it comes to significant wealth in particular, money can’t remain a taboo subject, and communication techniques from family meetings to mission statements become essential; 2) philanthropy itself can be a tool to help navigate discussions about wealth, values, and priorities (and the research itself found that now 2-out-of-3 wealthy families give together as a family); and 3) financial literacy itself is crucial, with the children of millionaires giving themselves a mediocre B- average in their financial literacy (which means education of those young family members becomes an essential aspect of stewarding family wealth across generations).
The Goldilocks Zone Of Personal Finance (Nick Maggiulli, Of Dollars And Data) – Across much of the natural ecosystem, life is difficult for “subordinate” animals… typically those near the bottom of the food chain, that have a disproportionate share of the physical and psychological stressors (compared to other more dominant species)… a phenomenon that Maggiulli notes is relevant both in the wild, and in the “human” ecosystem (e.g., the kid with no athletic abilities who always gets picked last for kickball!). Yet recent research finds that when it comes to social hierarchies, there are stressors that also typically hit those at the very top of the hierarchy as well, as those at the top often have to do more, fight more, or defend more, to retain their position at the top (and experience similar physical and psychological stressors). Which Maggiulli points out has a particularly relevant impact in the world of personal finance as well. For instance, those at the lower end of the socioeconomic ladder typically have higher cardiovascular mortality (i.e., heart attacks) even after controlling for their smoking, level of exercise, and other factors… but it’s not necessarily easier for someone who is born into a family/position of wealth, and must live and justify their own lifestyle, especially if it doesn’t live up to family expectations (e.g., “[try living] up to Mommy and Daddy’s standard when you don’t wanna go to Harvard!“). In other words, there are effectively some “hidden costs” (psychological, social, and otherwise) of being wealthy (different yet in some ways still similar to the stressors of being poor). Which means to be happy, it’s not necessarily about having a lot more wealth, but finding what Maggiulli calls “the Goldilocks zone” of personal finance – enough money to have comfort, security, and motivation, but not so much that you add guilt, stress, or existential longing. With the caveat that unfortunately, due to our tendency to quickly adjust to our current environment, it’s hard not to get stuck on the hedonic treadmill of lifestyle creep and just keep trying to add more and more, until you move into and then beyond your Goldilocks zone!
Your Work May Be Stressful, But That May Be OK (Adam Lashinsky, Fortune) – While most people think of stress as a “bad” thing, fundamentally stress is simply what happens anytime humans are operating at the edge of their abilities. Which means, similar to weightlifting, that going through stress can actually make you stronger… at least, as long as you aren’t stressed (or lifting weights) all the time, because it’s also important to de-stress and restore yourself, too. The key, though, is that means the goal shouldn’t necessarily be to avoid all stress – after all, “if your life is interesting at all, you are going to have stress” (whether it’s taking on a new project, moving into a new house, or welcoming a baby into your life) – but instead, to try to balance it. Similarly, moments of anxiety can be self-preservational as well (after all, our ancestors who felt anxious about a saber tooth tiger ran away and survived… while those who weren’t anxious often didn’t get to pass on their genes!). Which means the issue is not whether you are (or occasionally become) anxious, but simply whether you’re doing what the anxiety prompts you to do about it (run away from the tiger, or study for the test, or finish preparing for the big presentation, etc.). The key point, though, is simply to understand that just because anxiety and stress can “hurt” sometimes, doesn’t mean they’re bad, any more than the “pain” of rigorous exercise is bad; instead, occasional stress and anxiety often just help us to focus our efforts, achieve more, and rise up to a new level. But we do need to take breaks to refresh sometimes, too!
Financial Advisors Are More Stressed Out Than Their Clients (Andrew Osterland, CNBC) – Investing can be stressful, at least when the occasional bear market or high-volatility environment emerges. But a recent survey by the Financial Planning Association finds that while 63% of investors feel stressed, an even-higher 71% of advisors themselves report moderate or high negative stress in the current environment, with 28% saying they’re feeling more stressed than they were 12 months ago, and 44% saying they’re more stressed than they were 5 years ago… despite being 10 years into a bull market (when ostensibly investors and advisors would be at lower stress levels, enjoying the euphoria of sustained high growth!). Notably, in fact, follow-up interviews with the advisors who were studied suggest that the real culprit of rising stress isn’t markets themselves, but the competitive challenges of running an advisory business, from greater regulation, more pressure to get new credentials, fee compression and shrinking margins, and increasing competition. In fact, amongst independent RIAs, only 18% said they were very satisfied with the profitability of their business, and only 15% were satisfied with its growth trajectory, while 65% stated they were stressed at trying to maintain a reasonable balance between work and life (and 56% were stressed about building the business itself); in essence, financial advisor stress appears to be driven by uncertainty about their own financial situation. Which is especially problematic, because the research also found that the high-stress advisors were less likely to achieve their goals, as the stress itself may be inhibiting their ability to achieve what they want to achieve (or at least, the challenges of time management and/or mindset are both inhibiting their growth/goals and amplifying their stress). Ultimately, how advisors deal with their stress varies, from meditation or yoga to establishing a personal support system… but at a minimum, the key point is to recognize that it is stressful to be a financial advisor, and that it’s OK and, in fact, a good idea to find some outlets for stress relief!
The Theory Of Cumulative Stress: How To Recover When Stress Builds Up (James Clear) – One way to think about your health and energy is that they’re a bucket a water, where there are things that fill the bucket up (e.g., sleep, nutrition, meditation, stretching, laughter, etc.), and other things that drain the water (e.g., lifting weights, stress from work, relationship problems, etc.). Of course, the reality is that some output from the bucket is inevitable – to be productive, we need some of our energy to flow out at some point – but even positive outputs are still outputs that can/do drain the bucket, necessitating that it be refilled. However, the fundamental challenge is that the impacts of stress are ultimately cumulative; it’s not enough to just drain the bucket every day and try to refresh it every night, or eventually the cumulative impact of stress causes a breaking point (whether it’s working out too often and triggering an injury, or working too much/long/often and causing a nervous breakdown for yourself!). In fact, arguably the whole point of your body having an injury or “giving out” is that it becomes a forced period of rest, as the body compels itself to be rejuvenated by shutting down and preventing anything else from being done. Which means, in essence, that having a recovery period from your stress isn’t really negotiable; if you push your body and mind too long and too hard, it will happen. So you may as well decide how you’re going to take the occasional pause – whether it’s “catching up on sleep, making time for some laughter and fun, eating enough to maintain solid energy levels, or otherwise maintaining time for recovery” – because if you don’t, your body will force you to anyway… on potentially less flexible terms!
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 as well.