Indexed Annuities: The New Retirement Pensions?

Indexed Annuities: The New Retirement Pensions?

Sam-deleo

 

 

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

Defined-benefit plans. Those of us who are older might remember them better as “pensions,” but in 2021 they seem about as common as a rotary phone. (Sorry, but we don’t have time to explain what that is.)

Investopedia.com reported in a story last year that only 17% of U.S. private-sector workers still have access to pension plans. With many of the plans still in existence, employers have placed a freeze on funding them, which is often the beginning of the process to eliminate the plans altogether. In other words, the large majority of us can no longer rely on our employers to fund our retirement plans. We are on our own.

The Pros and Cons of the 401(k)

The most common replacement of the defined-benefit plan has been the defined-contribution plan, or, the 401(k). The 401(k) often offers a traditional pre-taxed account and a post-taxed Roth account, with both sourced in a blend of stock and bond options the employee must choose and maintain with the appropriate risk tolerance until retirement.

Some of us are lucky enough to work for employers that match a percentage of 401(k) contributions. However, in recent years, that benefit has also become rarer. Ultimately, it is up to the employee to secure their future income from the 401(k) choices they make. And as James McWhinney at Investopedia writes, that’s far from a certain outcome:

“After the money hits the account, it’s up to the employee to choose how it’s invested—typically from a menu of mutual funds—and the vagaries of the stock market to determine the ultimate outcome. Maybe the markets will go up, and maybe they won’t.”

The 401(k) plan does offer advantages over pensions for employees. For one, it can be a better instrument for growing retirement savings. Also, workers no longer need to worry about whether their employer can fund the pension or will declare bankruptcy to escape liability for it. But, without pensions, employees also can’t predict an exact monthly income for their retirement. In a 401(k), the income they plan on for retirement rises and dips with the market, and they must hope that none of the “dips” turn into downturns or crashes while they’re preparing to retire.

What Does an Indexed Annuity Do?

Even if market risk isn’t your thing, playing it safe has its own problems. With interest rates for bank accounts, CDs, money markets and even bonds lower than the current rate of inflation, workers will actually lose money year to year by investing in those savings instruments.

So, what is the most efficient tool for creating your own retirement pension? While there are more elaborate and hands-on approaches, more and more retirees are finding the solution is to fund an annuity with a portion of their 401(k).

“One user-friendly version of self-funded pensions is the indexed annuity,” said Tucker Financial President and CFP, Darren Petty. “It functions much like a ‘cash-balance pension plan,’ a defined benefit plan created by the Employee Retirement Income Security Act (ERISA) of 1974, except the annuity version is funded by the employee at or near retirement, usually with a portion of their 401(k) balance.”

An indexed annuity is an insurance vehicle that can guarantee a reliable monthly income over the lifetime of the policy holder, with the remaining balance payable to owner’s beneficiary(ies). The cash balance can grow at a stated interest rate, much like a bank CD, or it can have greater growth opportunity if the owner chooses an indexed option. This “links” the annuity cash value to a stock index like the S&P 500. When the market grows, the annuity cash value grows. When the market declines, the annuity doesn’t lose value because it isn’t directly invested into equities. To be fair, these annuities aren’t to be compared to a stock portfolio in terms of overall growth opportunity, but they can earn a respectable rate, all without market risk.

Why Are Corporations Moving Pensions into Annuities?

When you consider that indexed annuities de-risk principal and can guarantee a reliable monthly paycheck, it’s easy to understand why retirees are finding them to be attractive pension replacements. Even major corporations, such as GM, FedEx, DowDuPont, Lockheed, Molson Coors, Kimberley-Clark and others, have transferred their pension funds into annuities. These corporations understand that insurance firms act as the world’s risk managers and are better-equipped to manage long-term pension liabilities.

Critics of annuities claim they carry high fees, and this is particularly true of variable annuities, which have fees ranging from 2% to 5%. The lower-cost indexed annuity typically comes with a 1% or less annual fee, depending on the retiree’s deferral period (years until retirement). Others say you can make more money by investing in stocks. It is true that you might grow money faster in stocks or mutual funds, but creating your pension income at retirement is still the goal of this growth. Another common critique is that indexed annuities “tie up your money,” but in fact, most offer between 10% and 20% liquidity each year. “This (liquidity) is far more than you should ever access,” said Petty, “when you consider that all distributions are fully taxable if the annuity has been funded by 401(k) dollars.”

Indexed annuities are not for everyone, and they may not be for you. If you’re still well within your accumulation years, you can take greater amounts of risk in the market. For those who are, say, less than 40 years old and have the time to recover any potential loss from riskier market investments, it may be wise to wait before investing in an indexed annuity. And, if you are a very high-net-worth investor who does not require secure monthly income for retirement, an indexed annuity is likely superfluous.

But the recent trend toward indexed annuities as an alternative to other retirement income solutions is not an accident. People want the security of the old pension plan. They’re finding they can come very close to recreating that financial period of history with a carefully selected indexed annuity.

We spoke with Darren Petty a bit more in depth about what he sees as the similarities and differences between the old pension plan and today’s indexed annuity, as well as other possible methods of creating this kind of income.

Q: How can retirees most efficiently receive pension-like income throughout their retirement?

A: There are several options within just the categories that are appropriate for retirement income. You have dividend-paying stock portfolios, laddered-bond portfolios, rental income or annuities. Within these categories, we look at four main things: income, growth, liquidity and tax efficiency. So, within those four categories, the most efficient for those who don’t want to be tied to managing their investment constantly during their retirement is the self-funded annuity. It provides reliable income, respectable growth, sufficient liquidity and tax efficiency. The fifth, bonus aspect is that it requires no monitoring or maintenance. Q: What are the advantages and disadvantages of dividend-paying stocks for retirement income? A: The advantage is that you can get stock growth and receive a monthly income when the sun is shining, so to speak, and the tide is high and all boats are floating. So, in an expansionary economy, they’re great. In a recessionary economy, the stock value goes down and its dividend often disappears. As Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.”

Q: What are the pros and cons of annuities for retirement income?

A: Some of the cons are that they can’t compare to your stock portfolio. The growth potential can be disappointing if compared to a high-flying stock. They are also not 100% liquid. The advantages contrast the disadvantages. While your annuity will not experience outsized growth, the vehicle has no downside risk, which makes it appropriate for an income-producing asset where moderate gains that never experience a market loss are sufficient. Also, 100% liquidity is an insane request on a 100% tax-deferred vehicle.

Q: Can you talk about the key differences between employer pensions and self-funded annuities?

A: If you have an employer pension, the advantages are that you don’t have to allocate or manage the investment. Your retirement income is easy to calculate, and it’s a clear trajectory. In a 401(k), as we’ve discussed, it will be a bumpier ride but you’ll be able create your own pension that you own and control. And an indexed annuity will likely be a large part of that creation.

Q: How much of a retiree’s income should be “guaranteed,” i.e., how much of the 401(k) should be used to fund an annuity?

A: I think that is a very practical question for people. So, this should be a reverse-engineered calculation where you subtract Social Security benefits from your required annual retirement income, and fund an annuity to cover the difference. For example, if your goal is $100,000 in annual income, and $50,000 of that is in Social Security benefits, you would fund an annuity for the other $50,000. That may require anywhere from 40% to 70% of your 401(k), but that’s the purpose of 401(k)s, to fund retirements. Our approach is that we’re trying to leave as much outside the annuity as possible but still make sure that the client has zero lifestyle risk. That’s our goal, to keep as much of your investible assets out of the annuity while still securing your monthly retirement needs.

For decades now, the financial industry has presented indexed annuities as products. Some financial advisors used them in ways that did not maximize their advantages for the client. So, advisors themselves are somewhat to blame for indexed annuities only now receiving their due as powerful financial instruments when used the right way to fund retirements.

Determining the correct amount for your “annuity pension” is something a good financial advisor will help you with by providing a context for a comprehensive financial plan. The indexed annuity can play a crucial part in any financial portfolio that seeks a balance of growth and security. Even more exciting, when used the right way, indexed annuities can serve as a worthy substitute to the pension era that retirees once enjoyed.

Notes

For more information about indexed annuities or to receive a downloadable white paper on addressing annuity concerns, email Kyle.Savner@TuckerAdvisors.com or Jason.Demers@TuckerAdvisors.com.

Sources:
1. Investopedia.com
2. MedicareWallet.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

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Join Tucker Advisors

Call 720-702-8811 or email COO Jason Lechuga at Jason.Lechuga@TuckerAdvisors.com

Indexed Annuities: The New Retirement Pensions?

Indexed Annuities: The New Retirement Pensions?    By Sam DeleoTucker Advisors Senior Content Specialist/EditorfacebooklinkedintwitterDefined-benefit plans. Those of us who are older might remember them better as “pensions,” but in 2021 they seem about as...

Client Appreciation Events

Client Appreciation Events: A Guide For Every Financial Advisor By Jordan CollinsTucker Advisors Senior Digital Marketing SpecialistfacebooklinkedintwitterTable of Contents  Click the links below to jump to a client appreciation event page section specific to your...

Will I Have To Become A Fiduciary

WILL I HAVE TO BECOME A FIDUCIARY?     By Sam DeleoTucker Advisors Senior Content Specialist/EditorfacebooklinkedintwitterIf you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the...

Will I Have To Become A Fiduciary

WILL I HAVE TO BECOME A FIDUCIARY? 

Sam-deleo

 

 

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

If you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the industry as a whole remains, where will these rules take us next?

The word “fiduciary” refers to any advisors who must legally prioritize their clients’ interests above of their own. When advisors are not fiduciaries, they follow what is called the “suitability” requirement, which is basically an ethical call to follow the same prioritization of interests.

According to the Department of Labor’s (DOL) website, the identification of a fiduciary follows ERISA standards and the five-part DOL test, based on the assumption that anyone who offers investment advice for a fee, commission or other compensation, will be regarded as a fiduciary.

Five-Part Test for Status as an Investment Advice Fiduciary

For advice to constitute:

“investment advice of a fiduciary, a financial institution or investment professional who is not a fiduciary under another provision of the statute must:

    1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
    2. On a regular basis,
    3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
    4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
    5. The advice will be individualized based on the particular needs of the plan or IRA.”

The DOL text goes on to say that a “financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA (Title I) and under the Code.” Additionally, “Title I of ERISA and the Code each contain provisions forbidding fiduciaries from engaging in certain specified ‘prohibited transactions’ involving plans and IRAs, including conflict of interest transactions, unless an exemption applies.”

While this update has not enforced any further regulation on the financial industry, many believe that day is coming. We recently interviewed Lloyd Domingos, Senior Director of Operations for Tucker Asset Management, about the current regulatory landscape and what he sees unfolding as we move forward.

1. Could you give a brief summary of what the current regulations mean for advisors?

Lloyd Domingos – Basically, the current rule, in a nutshell, would force insurance-only agents to act as fiduciaries—not get paid as a fiduciary, but to have the obligation to act as one. So basically, they’re going to turn you into a fiduciary whether you like it or not. But, if you don’t get your Series 65, you’re not going to get paid as a fiduciary. And you could potentially write less business, because clients will perceive that you’re not a holistic advisor, that you don’t perform the complete duties of an advisor in an all-encompassing way for your clients. Now, they haven’t begun enforcing the new definition of “fiduciary” as part of the rule. But that is supposed to begin on Dec. 20, 2021.

2. What does the IRA rollover exemption mean for advisors?

Domingos – This doesn’t mean that you can no longer roll over an IRA. But, if doing so would earn you money, you will likely need additional disclosures, documentation, policies and procedures, and annual review requirements. Again, this action cannot just help your pocketbook, it has to be in the best interest of the client.

3. How do you interpret the DOL’s “best interest” standard?

Domingos – It has to be the very best interest of the client. It can’t just be the “suitability requirement” anymore. It can’t be an action that is very good for the client, but not “the” best. Who is going to determine what this best interest is? The SEC? The client? The DOL? We don’t know that yet.

4. What are the key points advisors need to beware of in order to be in compliance with the present definition/regulation regarding IRA rollovers?

Domingos – I thought RIA in a Box provided a good summary of these points:
The new prohibited transaction exemption, which was affirmed by the Biden Administration on Feb. 16, 2021, “provides RIA firms with two options as relates to IRA rollovers:

  1. Provide only general investment education regarding rollovers. Here, the RIA firm would not need to avail itself of the new prohibited transaction exemption; or
  2. Provide investment advice regarding rollovers that affects compensation. Here, the RIA firm would need to utilize the new prohibited transaction exemption, with requirements including advice subject to the ‘Impartial Conduct Standards’ and a series of other disclosure, documentation, policies and procedures, and annual review requirements.”

5. There has been a lot of talk in recent years of potential new regulations for advisors, which some say could happen by December 2021. Could you comment on some of those possible changes?

Domingos –  I don’t want to speculate too much here. But the path the industry has been on over the last five to 10 years has definitely been one of more regulations, more processes and more standards to follow, not less. So, if anything, my opinion is that it will get harder to do business and not easier.

6. What do you see as the key areas of concern for advisors moving forward?

Domingos – Familiarize yourself better with the definition of “fiduciary” so you know it backwards and forwards, because it’s your livelihood. And take steps, whatever you deem necessary for your practice, to ready yourself for what might be further regulation, or at least more explicit regulation.

7. Why do you think the regulatory environment has changed and may continue to evolve?

Domingos – While many investment advisors and insurance agents truly have the best interests of their clients at heart, unfortunately, there have been the Bernie Madoffs of the world that have heightened the regulatory environment. That story, because of its sensationalism in the media, became somehow representative, when in fact, it really isn’t at all. But that’s just kind of the nature of how many of us react to big media stories like this, so people also likely expressed concerns to government agencies that they might not have expressed before, as well.

8. Are there steps that advisors can take now that will safeguard them from the potential new regulations?

Domingos – I don’t want advisors to think that if they get a Series 65 that it will cure all ills, but having a Series 65 means that you are already held to be a fiduciary in the eyes of the SEC. And most of these regulatory standards are part and parcel of what you already do, because you’re already held to that standard. Most Series 65 advisors’ compensation is fee based. That appeals to consumers, and rightfully so. If the consumers’ balances grow, so does the compensation for the advisor, because their fees are proportionally based on the client balances. But if the balances decrease, so does the balance for the advisor. So, everyone is in step. Neither party benefits while the other doesn’t. There’s a direct correlation.

9. What are the consequences of an advisor simply doing nothing now and waiting to see what happens?

Domingos – Worst-case scenario, you could find yourself going out of business. This could be the precursor to even more extensive regulation. Again, that’s why the Series 65 is important.

10. What assistance is out there for advisors who want to be prepared moving forward?

Domingos – There are educational materials and courses out there that advisors can find by searching online pretty easily. As an example, for advisors who qualify, Tucker Asset Management regularly hosts Series 65 Training Courses that advisors can take. We provide the classes and we pay for many of the costs associated with obtaining the Series 65 license. There is help out there for advisors.

We acknowledge that this is far from a comprehensive summary of the current regulations in our industry, and encourage you to research these issues on your own. It will be time well spent for your business.

We plan to closely follow this fiduciary definition and the regulations that may affect it later this year. Ignoring these issues as a financial advisor is no longer an option. The consequences can dramatically affect both the ways we do business and the potential success of those efforts.

Notes

For more information or assistance about fiduciary regulations, email Kori.Brooks@TuckerAM.com.

Sources:
1. The U.S. Department of Labor
2. RIAinaBox.com
3. ThinkAdvisor.com
4. MSN.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

tucker-advisors-client-appreciation-guide

Join Tucker Advisors

Call 720-702-8811 or email COO Jason Lechuga at Jason.Lechuga@TuckerAdvisors.com

Indexed Annuities: The New Retirement Pensions?

Indexed Annuities: The New Retirement Pensions?    By Sam DeleoTucker Advisors Senior Content Specialist/EditorfacebooklinkedintwitterDefined-benefit plans. Those of us who are older might remember them better as “pensions,” but in 2021 they seem about as...

Client Appreciation Events

Client Appreciation Events: A Guide For Every Financial Advisor By Jordan CollinsTucker Advisors Senior Digital Marketing SpecialistfacebooklinkedintwitterTable of Contents  Click the links below to jump to a client appreciation event page section specific to your...

Will I Have To Become A Fiduciary

WILL I HAVE TO BECOME A FIDUCIARY?     By Sam DeleoTucker Advisors Senior Content Specialist/EditorfacebooklinkedintwitterIf you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the...

Keys to Preparing for ‘The Great Wealth Transfer’

Keys to Preparing for ‘The Great Wealth Transfer’

Sam-deleo

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

Nearly $70 trillion. According to research firm Cerulli Associates, that’s how much wealth aging generations like baby boomers will transfer to their children and grandchildren in the next two decades or so. This figure represents the largest generational inheritance of wealth ever, which some are now tagging “The Great Wealth Transfer.”

The effects of this massive transfer will introduce new challenges for financial advisors. Gen Xers, millennials and members of Generation Z think differently about money than their parents and grandparents. The methods advisors use in serving this new client base will need to adapt, also.

In addressing this subject, we won’t be so bold as to offer specific recommendations in this space because the challenges are still so new to both this potential client base and advisors alike. We simply want to introduce some methods that advisors may want to consider now and moving forward.

There are many generalizations we can make about younger generations that are as unfair to them as the stereotypes leveled at previous generations. Instead, let’s talk about prevailing tendencies that may or may not exist in the younger folks you might meet as prospects:

They might not be rebellious, but they likely won’t be traditional or “establishment,” either; They might not be impressed by your marketing efforts simply because they’ve already seen everything repeatedly, having been saturated with advertising, marketing and digital culture their whole lives; They might also be less impressed by your credentials and expertise, unless you can show them how your industry experience can directly impact their lives.

Additionally, more young adults live at home than at any point since 1969, according to Generational Insights, a leading research firm on generational demographics. This is not always by their design or preference, as they have weathered unique financial circumstances such as The Great Recession, housing slumps and aggressive valuations, as well as skyrocketing college debt.

Generational Insights summarizes younger generations’ view on experts like financial advisors as follows: Experts are teachers; Experts acknowledge the uniqueness of an individual’s situation; Experts guide, rather than seek to control; Expert’s resources should be available repeatedly, even long after a transaction has closed.

Financial advisors seeking to connect with younger generations would do well to emphasize both their personal characteristics as well as their professional traits. Younger people engage with personal details of people every day in social media settings. While it might be more appropriate to reveal such details in Instagram or Facebook than on LinkedIn, advisors should feel free to express their preferences when it comes to movies, music, sports and other media. What are your hobbies, collections, travel interests and outdoor pursuits? What interests inspire passion in you? You may not feel as comfortable about it yet, but younger people have seen information like this about others as long as they can likely remember.

We spoke with the founder of Generational Insights, Cam Marston, for his expert’s take on what it means to be an expert to younger people today.

“It appears to us,” said Marston, “that many experts in the financial industry who are age 50 and older have some expectation the methods and manners that worked with the parents and grandparents are going to work with the children and grandchildren. Unfortunately, that’s usually not the case.”

For starters, the parents and grandparents either missed the brunt of the Great Depression or had already secured careers and wealth by the time of the Great Recession. They experienced their share of market pressures, but they were different in scope than what young people face today.

“Keep in mind that for some members of this younger audience, like millennials, for instance,” said Marston, “there is still a stain on the financial industry because of the Great Recession. This event occurred right when many of them were trying to enter the work force and begin their careers. And, this new audience views a financial advisor as even more of a burden when they consider what ‘robo’ offers, where you don’t have to interact with a human to set up accounts or undergo the small talk that comes with human interactions. So, the question they ask themselves is, ‘Why should I work with a human?’ That’s why it’s so important financial advisors communicate with them on their level in the ways they prefer.”

What works for older clients, such as telling your story or presenting credentials and awards, may not elicit the same responses from younger prospects.

“Your ‘story’ remains effective with older clients,” said Marston, “but get out of your story and into the future with younger clients. They don’t want to know about you as much as they want to know how you can help them. So, it’s not just the future of the client, it’s, ‘Here is what I see happening if we work together.’ It’s a future focused with the advisor involved. Draw the picture of what the future will look like and then attach an emotion to this future: ‘This is going to be fun’; ‘I think you’re going to like what you’ll learn.’; ‘I think this will be an exciting experience for you,’ and so on.”

One of the biggest challenges facing financial advisors, Marston believes, involves the sales process. It should be a careful and deliberative process with clients of any age, but the way that process functions moving forward may change dramatically with younger prospects.

“Selling has always involved both emotion and logic. Now it’s generational, too,” said Marston. “When it comes to offering a sales pitch, my advice is to first create a picture of the future, with you the advisor as a part of that future. Second, sell in herds, that is to say, ‘Hey, I’d love the opportunity to tell you about what I do. Why don’t you grab a few friends, I’ll buy you all a round of beers and I’ll tell you about how my business works?’ It’s hard to isolate people alone in these younger generations, they’re often more comfortable in groups and with friends. Third, when given the opportunity, say something to the effect of, ‘Before I tell you what we do, why don’t you tell me everything I need to know about you?’ And in that moment of conversation, hopefully, that person feels heard, feels like you are invested in who he or she is. This then allows you to move on to telling them what you can do for them.”

Using data that Generational Insights has compiled, we gathered a list of methods that may still be too new to call “best practices.” That said, here are:

5 Keys to Working with Younger Clients

1. Online Reputation

  • The first step younger clients will take to learn about you is to search your name, business name and website online. Make sure you have put in the work for them to find positive results across multiple search engines and/or review sites.
  • Maintain a presence on LinkedIn that is updated, followed by Twitter, Instagram and Facebook, in that order.
  • If there are communications at this stage, present yourself as an information source, not a salesperson.
  • If a “meeting” develops in this initial stage, keep it as informal as possible and don’t insist that it can only be in person.

For more information on building your online reputation, click here.

2. Key Considerations

 

  • Gen Xers have weathered The Great Recession, a housing slump and massive college debt, so they remain highly suspicious of the financial market.
  • They trust recommendations from their peers more than “experts.”
  • Don’t take their casual attitude as a personal affront.
  • Millennials use online and convenience financial services more than any other group.
  • They are more likely to invest in their causes and beliefs than any other generation.
  • They are comfortable in groups, value their peers and may post online about their interactions with you.

3. Introductions

 

  • In general, be transparent and authentic. Don’t pretend to share their lifestyle and interests if you really don’t. You can be yourself and still be curious about them at the same time.
  • For men, a collared shirt with the sleeves rolled up and a sport coat by your side is fine; Women can also dress business casual—comfortable slacks and a blouse.
  • Ask them what you need to know about them and really listen.
  • Get to your points without wasting time.
  • Ask more questions.

4. Selling

• Avoid aggressive pitches and don’t pressure people for decisions.
• Instead, offer information, ask questions and wait for feedback.
• When explaining your suggestions, offer options.
• Show them where they can research your suggestions on the internet, but provide advice you feel they cannot find online, also.
• Consider offering free services for a limited time, or show how you are customizing your services to fit their needs.

5. Follow-up

  • Be responsive to emails, texts and voicemails within 24 hours.
  • Your ongoing service should match their initial experience with you.
  • Be succinct in your messaging and ask them which they prefer: Email, texts, social media, etc.
  • Don’t sign them up for newsletters or email opt-ins without their permission.
  • Only reach out when necessary.

Thus far, we have largely discussed working with younger generations of clients as a future event. It’s not. The Great Wealth Transfer has begun and is in full progress.

You may have helped the parents and grandparents of today’s children. You might believe that, because of that service, new business is owed to you. But it’s not. The sooner you realize that, the better it will be for your bottom line.

Instead, embrace this new challenge of getting to know younger generations. What could possibly be more exciting than meeting the future in the form of bright, engaging young adults? It will be as much a new experience for you as it is for them. There is much to teach, and even more to learn.

Notes

For more information about generational demographics, please email Cam@CamMarston.com.

Sources:
1. Cerulli Associates
2. Generational Insights
3. F&G

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

tucker-advisors-client-appreciation-guide

Join Tucker Advisors

Call 720-702-8811 or email COO Jason Lechuga at Jason.Lechuga@TuckerAdvisors.com

Indexed Annuities: The New Retirement Pensions?

Indexed Annuities: The New Retirement Pensions?    By Sam DeleoTucker Advisors Senior Content Specialist/EditorfacebooklinkedintwitterDefined-benefit plans. Those of us who are older might remember them better as “pensions,” but in 2021 they seem about as...

Client Appreciation Events

Client Appreciation Events: A Guide For Every Financial Advisor By Jordan CollinsTucker Advisors Senior Digital Marketing SpecialistfacebooklinkedintwitterTable of Contents  Click the links below to jump to a client appreciation event page section specific to your...

Will I Have To Become A Fiduciary

WILL I HAVE TO BECOME A FIDUCIARY?     By Sam DeleoTucker Advisors Senior Content Specialist/EditorfacebooklinkedintwitterIf you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the...

15 Consequences of the New SEC Ad Rule

15 Consequences of the New SEC Ad Rule

Sam-deleo

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

A few days before Christmas in 2020, The Securities and Exchange Commission (SEC) announced it had finalized revisions to the Investment Advisers Act. In a press release, the SEC explained that the changes were made to “modernize rules that govern investment adviser advertisements and payments to solicitors.”

The action had been a long time coming, since the last modifications to the Investment Advisers Act happened several decades ago, in the pre-internet world. The amendments now create a single rule “designed to comprehensively and efficiently regulate investment advisers’ marketing communications.”

Today, it is hard to identify any area of life the internet hasn’t changed, and marketing and advertising are certainly no exceptions, having undergone vast transformations. The SEC realized their rules for governing financial advisers in these areas had not kept up. “The technology used for communications has advanced, the expectations of investors seeking advisery services have changed, and the profiles of the investment advisery industry have diversified,” the commission wrote. The commission created the new marketing rule with the goal of allowing advisers expanded digital access to provide the public with useful information, “subject to conditions that are reasonably designed to prevent fraud.”

SEC Chairman Jay Clayton commented, “This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors.”

The new SEC ad rule went into effect on May, 4, 2021, and advisers will have 18 months from that date to transition into compliance. But, what does this mean in concrete examples for advisers? The answer is that we won’t truly know until we see how the SEC enforces its revisions, but the changes are generally good news to the marketing interests of financial advisers.

Endorsements and testimonials will now be more readily available for advisers to use in marketing materials, so long as they follow the new disclosure and compensation restrictions. Advisers can make use of new tools, such as performance advertising and third-party ratings, by following the guidelines governing transparency. And “transparency” is a critical concept to understanding the wider context of these changes: The new SEC Ad Rule addresses not only what advisers say in their marketing materials, but how they say it, as well. Transparency in giving consumers the “whole story,” and not only what reflects positively on an adviser, will be key for advisors moving forward.

For those who want to research actual documentation, the SEC revisions affect Rule 206(4)-1 and Rule 206(4)-1, as well as the Form ADV and Rule 204-2 that relate to the investment adviser registration form and the books/records rule. But we’ve tried to highlight from the SEC website what we feel are the 15 biggest consequences of the ad rule for advisers in their attempts to market themselves with the transparency that will now be required:

tucker-advisors-client-appreciation-guide

1. Advisers cannot make untrue statements about a material fact

They also cannot omit a material fact “necessary to make the statement true.” As found in many cases moving through these changes, full disclosure appears to be a common denominator behind many revisions.

2. Advisers must be reasonably able to back up their statements.

This applies to any “statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.” In other words, don’t talk the talk if you can’t walk the walk.

3. Don’t infer or imply untrue statements.

 

This includes “information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser.”

4. Don’t omit negatives.

 

Advisers need to talk about potential benefits, and they can still do so, but not without also “providing fair and balanced treatment of any associated material risks or limitations.”

5. Don’t eliminate risks from investment advice.

This is basically the last step applied to investments: Advisers cannot offer specific investment advice without fairly mentioning risks and limitations.

6. Do not ‘cherry pick’ performance results.

Advisers cannot include or exclude performance results for a time period that renders the performance unrepresentative, or, in the commission’s language, falls short of “fair and balanced.”

7. Include full disclosure in testimonials and endorsements.

Advertising “must clearly and prominently disclose whether the person giving the testimonial and endorsement (the “promoter”) is a client and whether the promoter is compensated.” In positive news for advisers, this new rule eliminates the old rule’s requirement “that the adviser obtain from each investor acknowledgements of receipt of the disclosures.”

8. Advisers are responsible for compliance of testimonials and endorsements.

 

An adviser also must “enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser,” or if the promoter has received $1,000 or less, or the equivalent value, in compensation during the preceding 12 months.

9. No third-party ratings.

Advisers cannot use third-party ratings in their ads unless they disclose the party, the time period and satisfy “certain criteria pertaining to the preparation of the rating,” which can mean that the third party has no relation to the adviser and is in fact in the third-party rating service.

10. “Gross” and “net” must be together in performance ads.

Advisers cannot mention gross performance in an advertisement without mentioning net performance.

11. Refrain from mention of the SEC in performance ads.

It may be tempting to announce that you’re following SEC guidelines, but avoid doing so, as you cannot mention that the commission “has approved or reviewed any calculation or presentation of performance results.”

12. Advisers cannot use partial performance results of portfolios.

Don’t use results from “fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement.”

13. Advisors cannot extract a subset of investments from a portfolio in ads.

The exception to this restriction would be if the advertisement provides, or offers to promptly provide, the whole portfolio’s performance.

14. Avoid hypothetical performance results in ads.

Advisers should steer clear from projections into the future “unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience.”

15. Avoid predecessor performance results.

Don’t mention a previous adviser “unless there is appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser. In addition, the advertising advisor must include all relevant disclosures clearly and prominently in the advertisement.”

The new SEC Ad Rule modernizes financial marketing, granting advisors new ways to access new people. This benefit alone seems enough to outweigh the restrictions in reaching these audiences. But the SEC acknowledges that an adjustment period will be necessary for advisers.

Approaching the compliance deadline of late 2022, it will be important for advisers to ensure that their marketing efforts are compliant. If you have questions, email the SEC directly at IM-Rules@sec.gov.

If you’d like more information on marketing your financial advisory practice visit the Tucker Advisors Blog

  – For Financial Professional Use Only.
Insurance-only agents are not licensed to offer investment advice.

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