Client Service April 28, 2020

The Need for Planning—Not Just Advice—Is Clear

Where does a comprehensive financial plan start?
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Art by David Huang


Financial advisers say the coronavirus pandemic has exposed the need for creating a comprehensive financial plan as opposed to receiving ad hoc advice.

“It would be nice if everyone had a comprehensive financial plan, just as it would be nice if everyone went to the doctor to have a comprehensive physical,” says Steve Gresham, a senior education adviser at the Alliance for Lifetime Income. “But that doesn’t happen very often.”

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Ric Edelman, founder of Edelman Financial Engines, says he only offers comprehensive financial planning to his clients. In his opinion, that starts with learning about the client’s goals. “All of your decisions are based on those goals,” Edelman says. “Without answers to these questions, it would be impossible to form a financial planning strategy. We want to take a look at each client’s entire financial situation. We need to know about all of their money, their expenses, their attitudes toward risk and their need for liquidity.”

Gresham also says a comprehensive financial plan should be specific to each individual’s goals.

“The biggest drivers are longevity and health,” he proposes. “That determines your approach to investments to meet that time horizon. This is simple but exceeds what most people do.”

“We also want to look beyond their finances,” Edelman says. “Do they have insurance, debt, employee benefits? Do they have particular family circumstances that they need to address, like an aging parent or children heading to college?”

Edelman also believes it is important for a comprehensive financial plan to include cash reserves. Certainly, he says, the current pandemic is underscoring the critical importance of having an emergency savings fund of six months to a year’s worth of expenses covered.

In fact, 4-Point Financial makes having an emergency savings fund that can cover that period of time the centerpiece of its comprehensive financial planning, says David Keefe, a financial adviser with the practice. Hundreds of thousands of dollars can also potentially be accessed from cash value life insurance, Keefe says.

“Clients who have worked with us on a comprehensive financial plan have those components in place,” he says.

Sheila Padden, a board member of the Alliance of Comprehensive Planners, says a comprehensive financial plan should extend beyond investments.

“We have comprehensive relationships with our clients,” Padden says. “For instance, we are discussing with clients that run small businesses whether they should be applying for a Paycheck Protection Program [PPP] loan and whether they should file their 2019 tax returns now or wait until the July 15 extension. There is a value in doing comprehensive planning because no one area stands alone.”

Like the others, Padden believes that a comprehensive financial plan is rooted in knowing the client’s goals and what they are trying to accomplish. She also believes that it should include insurance and estate planning.

The advisers in the Alliance of Comprehensive Planners are fee-only, so they do not receive commissions from selling products or receive referral fees, Padden notes. They address numerous financial planning issues in an integrated fashion, she says, adding that clients receive analysis and advice on investments, insurance, taxes, education, retirement, estate planning and other critical issues.

While many advisers do not address tax issues, Holistiplan has created software that enables advisers to go over their clients’ tax situations, says Kevin Lozer, co-founder of Holistiplan.

“Within seconds, it produces a white-labeled tax report that advisers can review with their clients to have a meaningful conversation about their tax situation,” Lozer says. “In turn, that helps drive some of their investment decisions.”

Finally, a comprehensive financial plan should have a portion of the portfolio invested in annuities to safeguard against longevity risk, says Cyrus Bamji, head of communications at the Alliance for Lifetime Income.

“At a 30,000-foot level, there has been a major shift in retirement planning in the past 30 or 40 years,” Bamji says. “In the early 80s, 60% of people had a pension. Today, it’s only 17%. The burden for retirement savings has shifted to the individual—and yet, there is very little attention paid to what actual income you are going to need in retirement. There are three sources of protected income: pensions, Social Security and annuities. You need to consider putting an annuity in your retirement plan portfolio so that you will have a source of guaranteed income for the rest of your life.”

Because retirement plan sponsors are not likely to offer their participants access to an adviser who will create a comprehensive financial plan, Envestnet | MoneyGuide has created financial planning software that breaks down individual goals into sections, called MyBlocks.

“We absolutely believe in having a comprehensive financial plan,” says Kevin Hughes, chief growth officer at Envestnet | MoneyGuide. “MyBlocks takes on financial planning one block at a time, such as looking at consolidating credit card debt, or doing a Roth conversion. So there is a place for both ad hoc financial advice and comprehensive planning. Many people are not ready for a comprehensive plan, so many companies are implementing these blocks. Likewise, many advisers are using MyBlocks to engage digitally with their clients in a hybrid model.”

Compliance April 23, 2020

Nearly Time to Comply with Reg BI

Some see the SEC’s Regulation Best Interest as “nothing new,” while others say it will be a game changer when it takes effect June 30. Likely the biggest impacts will be felt by dual registered firms and broker/dealers.
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Art by Julie Benbassat


The reason why the U.S. Securities and Exchange Commission (SEC) decided to come out with Regulation Best Interest (Reg BI) is because the Dodd-Frank Act required a study be conducted on whether investors could tell the difference between a brokerage account and an advisory account, and, of course, they could not, says Bao Nguyen, a principal in the risk advisory department of Kaufman Rossin.

“To harmonize that, the SEC came up with Reg BI, to bring it closer in line with the fiduciary rule of the Investment Advisers Act,” Nguyen says. “They also came up with Form Customer Relationship Summary (CRS), which requires a broker/dealer [B/D] and adviser to provide a two-page summary of their investment recommendation.”

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The criteria on which Reg BI is based is built on four building blocks, says Thomas Gorman, a partner with Dorsey & Whitney.

“These are the disclosure obligation, the conflict of interest obligation, the care obligation and the compliance obligation,” Gorman says. “It is designed to ensure the broker makes reasonable efforts to put the interests of the client ahead of the firm and the individual broker.”

With the disclosure obligation, the broker must disclose all fees, Gorman says. The conflict of interest obligation requires the broker to either mitigate all conflicts or to disclose them clearly, he says. The care obligation means that the broker must explore all investment options available to meet the customer’s investment objectives.

“The broker has to do his homework,” Gorman says. “He needs to investigate all options. And the compliance obligation means he is taking care of all of these things.” Like other sources, Gorman says the compliance obligation will likely require material changes to firms’ processes and procedures.

With the regulation taking effect June 30, inspectors from the SEC’s Office of Compliance Inspections and Examinations (OCIE) will start to visit broker/dealers to see if they are compliant beginning on that date, Gorman says.

While Gorman says that Reg BI is really nothing new, just essentially the SEC repackaging existing rules, Nguyen sees it as more of a real “game changer.”

“For so many years now, the SEC only applied a ‘suitability’ principle to broker/dealer sales,” he says. “Now, broker/dealers will truly have to act in the best interest of their customers.”

To apply the four principles of Reg BI to their practices, Kaufman Rossin is advising its clients to think objectively and exhaustively about their business models.

“We are telling clients to think carefully about all of the ways they are paid,” Nguyen says. “Look at the conflicts of interest associated with your business model and do a conflict of interest inventory. You then need to do mitigation mapping—mapping specific conflicts to detailed policies, procedures or disclosures that will mitigate those conflicts.”

While it is not expressly required by Reg BI, Kaufman Rossin is encouraging its clients to keep a record of the recommendation they make as to why they think a certain investment is in a client’s best interest.

Rich Kerr, a partner at K&L Gates, says he is telling clients to make Reg BI policy part of their regular supervisory procedures. “That may mean migrating a number of procedures they already have in place to the Reg BI policy,” Kerr explains. “Very likely they will need to enhance their conflict of interest procedures.”

As for the care component of Reg BI, rather than examining product suitability over and over again for clients, K&L Gates is recommending that brokers create a “product inventory documenting the basis on which they have determined that each product is in the best interest of retail customers,” Kerr says.

Brokerages may be surprised to learn that they have contact with retail customers, he adds.

“If you asked them a year ago if they have not just institutional but also retail customers, they would have said no,” Kerr says. “Many firms have discovered that this is not, in fact, the case. So, they need to inventory each of their business lines to see if there are touch points with retail customers.”

Once they have identified the businesses that are impacted by Reg BI, brokerages will need to train all client-facing personnel on the new regulation, Kerr says. With the coronavirus keeping so many people working from home, it will be challenging to meet the June 30 deadline, he says. They will have to replace those in-person training sessions with webinars and video training, he says.

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