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Retirement Legislation, Crypto and Investing News for Financial Advisers

The latest for financial advisers: Congress and the retirement system, two very different looks at crypto, and clients are still asking about Peter Thiel's Roth IRA.

A roundup of the latest news and reports of interest to financial advisers.

Biden’s nominee to head EBSA reflects aggressive rulemaking agenda: Lisa Gomez's career is rooted in ERISA, and her keen understanding of the law would help the DOL as it seeks to implement new rules, lawyers said in this InvestmentNews report.

Congress urged to act on numerous retirement system changes: In a hearing before the Senate Finance Committee, witnesses urged lawmakers, according to InvestmentNews, to include changes such as mandatory coverage, student loan provisions and emergency savings in whatever legislative package materializes, such as the SECURE 2.0 bills in the House and Senate.

FBI, SEC warn public about fake brokers and advisers: In an investor alert, the agencies point out four tactics that fraudsters use to trick investors, such as spoofed websites and fake profiles on social media platforms, according to InvestmentNews.

Ric Edelman’s excellent crypto adventure: His embrace of volatile cryptocurrencies for mainstream investors is a major shift from the cautious world of fiduciary advice that’s synonymous with his namesake firm, according to FinancialPlanning.

TurboTax Tips: Taxes and Cryptocurrencies

Investing a Roth IRA in early stage growth companies without violating prohibited transaction rules: IRS regulations are complicated, conflicting and rife with gray areas, but clients are still deluging advisers with questions about how Peter Thiel's strategy could work for them, according to Jeffrey Levine.

8 Retirement Planning Bills to Watch in 2021: Retirement security is taking center stage in Washington. Lawmakers have been busy over the past three months floating or passing bills related to retirement security, renewing retirement planning officials’ hope that passage of a comprehensive retirement package this year may be in the offing.

This ThinkAdvisor gallery outlines the host of bills being offered this year that are designed to, among other things, boost the required minimum distribution age, expand auto-enrollment in retirement plans and allow penalty-free withdrawals from 401(k)s.

SEC Chair Expects Climate Risk Disclosure Rule This Year: The chair of the Securities and Exchange Commission has asked the regulator’s staff to come out with a rule on climate risk disclosure before the year is out, according to Financial Advisor IQ.

Execs Tell Finra: Start Early, Get Creative in Educating New Investors: Reduced barriers to entry — such as low- and no-commission trading and the ability to purchase fractional shares — have made it easier for new investors to open accounts, according to Financial Advisor IQ.

The Risk of Buffer and Floor StrategiesDavid Blanchett provides guidance on the “equity-like” risk of buffer and floor strategies when included in a diversified portfolio, assuming an S&P 500 underlying index.

Why Nassim Taleb Says Bitcoin is Worthless: In a new paper, Taleb aims a scattergun at bitcoin and its underlying database technology, blockchain. Some of those scatter shots ding bitcoin or blockchain slightly or not at all, writes Michael Edesess. But some of them hit the mark squarely.

Research of Interest

Wealth and Insurance Choices: Evidence from U.S. Households

Theoretically, wealthier people should buy less insurance, and should self-insure through saving instead, as insurance entails monitoring costs. Here, researchers use administrative data for 63,000 individuals and, contrary to theory, find that the wealthier have better life and property insurance coverage. Wealth-related differences in background risk, legal risk, liquidity constraints, financial literacy, and pricing explain only a small fraction of the positive wealth-insurance correlation. This puzzling correlation persists in individual fixed-effects models estimated using 2.5 million person-month observations. The fact that the less wealthy have lower coverage, though intuitively they benefit more from insurance, might increase financial health disparities among households.

Behavioral Economics and Financial Decision Making

Behavioral economics provides insights into how people process information and make decisions. It also helps to explain why and how people tend to make decisions that are not in their best interest, as opposed to what rational choice theory would suggest. This chapter provides an introduction to behavioral economics and highlights its relevance to understanding and influencing financial decision-making. The chapter explores major cognitive biases that commonly lead to mistakes in financial decisions, such as confirmation bias, overconfidence bias, loss aversion, the endowment effect, and status quo bias. The chapter also highlights the challenges brought about by choice overload, that is the multiplicity of options that overwhelms people and undermines their ability to make appropriate financial decisions. The chapter then discusses how choice architecture and nudges can be used to address the limitations resulting from cognitive biases and choice overload. In particular, the authors examine default choices, pre-commitment mechanisms, framing, and priming approaches and discuss how these can foster positive financial behaviors. This chapter thus represents a useful starting point for researchers and practitioners interested in developing and applying behavioral economics principles and tools to prompt financial decisions that lead to long-run financial security. (Free download)

Guaranteed Income: A License to Spend

Prior research finds that retirees don’t spend nearly as much as they could from their investments. Economic theory provides both rational and behavioral explanations for under-spending among retirees with high non-annuitized wealth. Longevity risk will result in lower spending among rational, risk-averse retirees. Retirees may also exhibit behavioral preferences that make them far more comfortable spending from income than assets. The researchers explore how the composition of retirement assets is related to retirement spending and find that retirees who hold a higher percentage of their wealth in guaranteed income spend more than retirees whose wealth consists primarily of non-annuitized assets. Marginal estimates suggest that investment assets generate about half of the amount of additional spending as an equal amount of wealth held in guaranteed income. In other words, retirees will spend twice as much each year in retirement if they shift investment assets into guaranteed income wealth. The size of the effect suggests that the explanation for under-spending non-annuitized savings is likely both a behavioral and a rational response to longevity risk.

Measuring Financial Advice: Aligning Client Elicited and Revealed Risk

Financial advisers use questionnaires and discussions with clients to determine a suitable portfolio of assets that will allow clients to reach their investment objectives. Financial institutions assign risk ratings to each security they offer, and those ratings are used to guide clients and advisers to choose an investment portfolio risk that suits their stated risk tolerance. This paper compares client Know Your Client (KYC) profile risk allocations to their investment portfolio risk selections using a value-at-risk discrepancy methodology. Value-at-risk is used to measure elicited and revealed risk to show whether clients are over-risked or under-risked, changes in KYC risk lead to changes in portfolio configuration, and cash flow affects a client's portfolio risk. The researchers demonstrate the effectiveness of value-at-risk at measuring clients' elicited and revealed risk on a dataset provided by a private Canadian financial dealership of over 50,000 accounts for over 27,000 clients and 300 advisors. By measuring both elicited and revealed risk using the same measure, the researchers can determine how well a client's portfolio aligns with their stated goals. The researchers believe that using value-at-risk to measure client risk provides valuable insight to advisers to ensure that their practice is KYC compliant, to better tailor their client portfolios to stated goals, communicate advice to clients to either align their portfolios to stated goals or refresh their goals, and to monitor changes to the clients' risk positions across their practice.