Data & Research August 25, 2022

The Pandemic’s Lingering Impact on Financial Security

A Northwestern Mutual study suggests that, while many people’s financial habits have improved, the pandemic has still disrupted the way people manage their finances.

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A recent study published by Northwestern Mutual explores the attitudes and behaviors U.S. adults have toward money, financial decisions and the broader issues affecting their long-term financial security.

Today’s investors and savers continue to grapple with the pandemic, inflation and economic uncertainty. As a result, many adults have adapted in their financial lives by improving their financial habits, accounting for emergencies and becoming more confident in themselves.

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Findings from the 2022 Planning & Progress Study show that despite these improvements, financial discipline is not at the level it was last year, and personal savings are starting to shrink. Over 60% of respondents said the pandemic has been highly disruptive to the way they manage their finances. Among them, 48% said they have been able to adapt, while 13% said they have not.

More than 4 in 10 (43%) U.S. adults said they made up for financial ground lost during the first year of the pandemic, compared with 30% who said they haven’t and 27% who said they didn’t lose any ground in 2020, according to the study. Among the 43% who have made up lost ground, 10% said they made up all of it and more, and they are now ahead of where they expected to be financially. Some 12% said they made it up entirely and are fully back on track financially, and 21% said they made up some of the ground lost in 2020 but are not fully back on track yet.

The study found that 60% of adults said they’ve been able to build up their personal savings over the last two years, and 69% of those said they plan to maintain their new saving rate going forward. While more people are saving, year-over-year numbers show the overall amount of savings dropped 15%. The average amount of personal savings in 2022 was $62,000, compared with $73,000 in 2021.

Most adults (73%) said they have adopted better financial habits as a result of the pandemic, with an equal amount who said they expect to maintain those good habits going forward, the study says. This is below the 95% who said the same in 2021.

The study lists the top five behaviors adopted: reducing living costs/spending (35% in 2022 versus 45% in 2021), paying down debt (22% versus 34%), increasing investing (19% versus 33%), increasing the use of tech to manage finances (19% versus 28%) and regularly revisiting financial plans (17% versus 29%).

The study found that people who work with a financial adviser and those who self-identify as disciplined financial planners not only report lower levels of financial anxiety in their lives, but also higher levels of happiness and better sleep.

Among respondents, 54% reported feeling somewhat or very anxious about their finances. That number drops to 46% for people who work with a financial adviser and 47% for those who self-identify as disciplined planners, the study says. Among Millennials and Generation Z, 66% said they feel somewhat or very anxious about their finances.

The study also found a strong generational difference when it comes to how people view the impact of their daily financial decisions. A majority of the youngest group of U.S. adults believe that small daily purchases will have an effect on their long-term financial security.

When asked if a small purchase like a daily cup of coffee would have an impact on their long-term financial security, 44% of adults agreed, including 53% of Gen Z, 52% of Millennials, 46% of Gen X and 32% of Baby Boomers, the study found.

More than 6 in 10 Americans (62%) said their financial planning needs improvement, yet only 35% reported seeking the help of a financial adviser, the study says. Nearly one-fifth (18%) of adults said they didn’t have an adviser before the pandemic but now either have started working with someone or plan to moving forward.

Three-quarters of Gen Z and Millennials said their financial planning needs improvement, the study says. They are the most likely to say they didn’t work with an adviser before the pandemic but have since started doing so or plan to moving forward.

The study also found differences in saving behavior among those who work with an adviser versus those who go it alone, with 80% of those who got professional help reporting that they were able to build their savings during the pandemic. Among those who didn’t receive help, 49% said they were able to save more.

In Practice August 25, 2022

A Guide to the SEC’s Reg BI Bulletins

In a recent bulletin, the SEC warns that practically all financial professionals have at least some conflicts of interest with their retail investors.

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This year, the staff of the Securities and Exchange Commission has published a series of interpretive bulletins providing additional compliance guidance for broker/dealers and investment advisers subject to the SEC’s Regulation Best Interest and the Investment Advisers Act of 1940.

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Almost two years after the rule’s effective date, the SEC has also brought the first known enforcement action specifically alleging violations of Reg BI. Attorneys say the charges represent a milestone for the brokerage and advisory industries, in part because of the moment’s symbolic force, but also because of what industry practitioners can take away from the situation. As Issa Hanna, a partner at Eversheds Sutherland, puts it, the enforcement action and the staff bulletins clearly demonstrate the serious compliance obligations at the heart of Reg BI.

Now, two attorneys with the Wagner Law Group, Stephen Wilkes and Seth Gaudreau, have issued their own compliance alert, in which they dissect the recent Reg BI bulletins and offer insight to advisers and brokers subject to the expansive regulation.  

What Is a Conflict of Interest?

The SEC bulletin defines a “conflict of interest” under Reg BI and the fiduciary standard as any interest that might incline a broker/dealer or investment adviser—consciously or unconsciously—to make a recommendation or render advice that is not disinterested.

“The staff further states that firms need to take a proactive approach that is not only robust and ongoing but is tailored to each conflict and not merely a ‘check the box’ exercise,” the Wagner attorneys wrote.

According to Wilkes’ and Gaudreau’s analysis, the SEC staff has expressed a clear view that all broker/dealers, investment advisers and financial professionals have “at least some” conflicts of interest with their relationships with retail investors. In the staff’s estimation, the economic incentives for firms and financial professionals to recommend various products and services that may not be in a retail investor’s best interest create substantial conflicts of interest.

“The staff also clarifies that under Reg BI not only must broker/dealers establish, maintain and enforce written policies and procedures reasonably designed to identify all conflicts of interest—they must also identify conflicts of interest on an ongoing basis,” Wilkes and Gaudreau wrote.   

Disclosure Alone Does Not Suffice

The attorneys’ analysis posits that disclosures alone do not satisfy the obligation to act in the retail investor’s best interest, and any conflicts should and must be mitigated or eliminated.

As the attorneys noted, Reg BI requires broker/dealers to have written policies and procedures reasonably designed to identify and eliminate any sales contests, sales quotas, bonuses and noncash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.

Under the Investment Advisers Act, the attorneys wrote, such conflicts of interest must be “fully and fairly disclosed” to allow a client to provide informed consent. If such informed consent cannot be obtained, they warned, then the conflict needs to be eliminated.

“The bulletin provides a generalized example that firms with compensation and incentive programs, based on benchmarks, quotas or other performance metrics, whose benefits are seen to influence a financial professional’s decision regarding a retail investor’s interests, will be scrutinized by the SEC,” the Wagner attorneys explained. “The staff has concerns that the level of rewards associated with these programs calls into question whether they comply with Reg BI and the fiduciary standard. Firms should consider whether such programs need to be reduced or eliminated.”

Disclosures Aren’t ‘Check-the-Box’

Wilkes and Gaudreau emphasized that specific conflicts need to be disclosed in “plain English” and tailored to a firm’s business models and compensation structures—as well as to the different products offered.

“The staff warns that generalized disclosures that a conflict ‘may’ exist is not a sufficient disclosure where a conflict exists,” they wrote. “In cases where the nature and extent of the conflict make it difficult to convey the material facts or effects of the conflict, then it cannot be fully and fairly disclosed and a firm should consider mitigation or elimination of the conflict.”

The staff bulletin provides best practices and a “nonexhaustive” list of examples that need to be disclosed, the attorneys observed, highlighting the fact that addressing conflicts is not a single exercise.

“Firms need to monitor conflicts of interest over time and periodically assess the adequacy and effectiveness of their policies and procedures to ensure compliance with Reg BI and the fiduciary standard,” the attorneys concluded. “[The SEC] further states the importance of documenting the measures a firm has taken to address and monitor conflicts of interest, in order to show that the firm and its financial professionals are not placing their interests ahead of retail investors.”

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