More often, it might pay to perform.

The Securities and Exchange Commission on Wednesday approved a host of proposals aimed at expanding retail access to private-markets investments, including giving registered investment advisors much more ability to enter into performance-based compensation arrangements on the basis of capital gains in clients’ accounts. A separate proposal would make holders of designations like CFPs, CFAs and CPAs eligible as accredited investors.

The SEC also wants to encourage private sponsors to offer more alternative strategies for retail investors and regulated funds, Brian Daly, director of the Division of Investment Management, said in the meeting.

“Private market exposure is sought out and accessed by nearly every pension fund, every university endowment, every high-net-worth family office, and every other category of institutional investor,” Daly said. “But American retail investors have been unable to access the benefits of this arrangement, and therefore have not had access to many of the world’s most sought-after portfolio managers.”

Comp Competition

The SEC’s move on compensation comes less than a year after a Schwab report found that firms with performance pay generated more long-term revenue and served more clients. Performance-based comp aligns clients’ and advisors’ priorities and can evolve to help curb “excessive risk-taking,” Daly said. In another effort to potentially expand retail access to private investments, the commission also took aim at interval funds and closed-end funds in a proposal that would permit the latter to issue multiple share classes. If approved, the measure would permit monthly repurchase intervals and extend the deferral of first repurchase offers for interval funds.

“Some critics will argue that these proposals will not further investor choice in access, but rather serve as a gift to shady financial product sponsors,” Commissioner Mark Uyeda said in the meeting. “Interval structures provide periodic liquidity; they are not a promise of frequent redemption.”

The decision follows other deregulatory actions the commission has taken under SEC Chair Paul Atkins. In May, the agency:

• Proposed giving companies the option of filing semiannual financial reports instead of quarterly ones.
• Proposed changing the rules for how companies report to investors, aiming to encourage more companies to do an IPO.
• Signaled its intent to rescind climate-related disclosure requirements.

Accreditation Nation. The SEC then approved notices that the agency is considering making certain credentials — CFP status and Finra licenses among them — sufficient for holders to be considered accredited investors. “If the commission were to finalize these designations, that would… [provide] additional non-financial pathways for investors to demonstrate their sophistication in the areas of securities, investing, and financial and business matters,” said Jim Moloney, the agency’s Division of Corporation Finance director.

You really know how to pick ’em.

There are roughly 5,500 ETFs from about 500 issuers listed in the US. Yet for the bulk of their allocations, advisors tend to stick with broad-market index funds from mega-managers like BlackRock, Vanguard and State Street, which collectively hold more than 70% of all ETF assets, per ETFGI data. But when advisors venture beyond the biggest and most established funds — seeking out higher returns, tax benefits or lower correlation to the stock market — how do they decide which ETFs deserve a closer look?

Sometimes, a simple rule is all that’s needed.

“If I can’t explain why it exists, I don’t own it,” said Aaron Gaines, founder of Gaines Capital Management. “I’m not looking for the hottest ticker or the best-looking three-year return.” Upon initially considering a fund, Gaines said he focuses on liquidity, reasonable assets under management, competitive fees and an issuer with a track record of operating funds responsibly. “I generally prefer ETFs that have survived a real market cycle, but I won’t reject a newer fund simply because it’s new.”

Live Fast, Die Young

There are plenty of novel ETFs hitting or about to hit the market, including funds focused on 3x leverage, weather predictions and sports team performances. It can all feel a bit out there, but also kind of enticing. Generally speaking, advisors are more thoughtful investors than the average client, but they aren’t immune to FOMO.

“Advisors feel the same pull clients do,” said Matthew Chancey, founder of Tax Alpha Companies. If a thematic fund launches the same month a trend hits the news, Chancey sees that as an immediate red flag. “New funds are being built faster than they’re being bought,” he told Advisor Upside. “New feels like an edge, [but] usually, it’s just new.” He looks for at least a little longevity before choosing an ETF. “Let it earn its second birthday before it earns your client’s money.”

Brevity has become a hallmark of many ETFs lately:

• Last year, more than 1,100 ETFs launched in the US, a new record, according to Morningstar.
• However, 221 ETFs closed, and among the roughly 150 active funds that shuttered, the average lifespan was less than two years on the market.

KISS. For some advisors, that short life cycle is another reason to keep things simple. “The biggest mistake I see is chasing a hot theme in a thin, expensive fund,” said John Bell, founder of Free State Financial Planning. “Boring, cheap and liquid usually wins.”

If only it were this easy to get broader Social Security reform done.

The Senate unanimously passed the Claiming Age Clarity Act Tuesday evening. The bill, which cleared the House in December and now awaits signature by the president, would require the Social Security Administration to change the terms it uses to describe the ages at which a worker may claim retirement benefits.

Specifically, the SSA must use the term “minimum monthly benefit age” instead of “early eligibility age” when describing age 62, the youngest at which people can tap benefits. Likewise, the agency must use “standard monthly benefit age” instead of “full retirement age” or “normal retirement age” to describe ages 65 to 67, depending on when they were born. And it must use the term “maximum monthly benefit age” when referencing 70 as the maximum age at which a worker may receive additional retirement credits. Finally, the SSA may not use the term “delayed retirement credit” when discussing people who wait beyond their standard claiming age.

While the changes may seem like minor linguistic nuances, they could have a meaningful impact on the public’s claiming behaviors, according to Jason Fichtner, a former Social Security official and executive director of the LIMRA Retirement Income Institute.

“This bipartisan bill is not about Social Security solvency,” Fichtner, who advocated for the policy change, told Advisor Upside. “It’s about making sure people have the right information and using terminology that doesn’t bias their decision. These language changes could improve the financial retirement security of millions of future retirees.”

Words Matter

For decades, the Social Security administration has used the “early,” “full” and “delayed” terms to describe claiming ages. They make sense from a technical perspective, but can confuse people trying to decide when to take advantage of their benefits. For example, the term “early eligibility age” has a positive ring to it, Fichtner said, but people who claim at 62 meaningfully and permanently reduce their monthly benefit checks. “Who wants to be ‘late’ or ‘delayed’ when claiming?” he asked.

The stakes are high for beneficiaries:

• Claiming Social Security at age 62 will result in a permanent reduction of up to 30% in the monthly benefit, per the SSA, with the exact percentage of the reduction depending on the year of birth.
• Waiting until age 70 has the opposite effect, boosting monthly checks by more than 70% compared with claiming at 62.

That’s a Toughie. Industry research shows the question of when to claim Social Security is challenging for many, even if they understand how the government benefits work. While nearly 70% of 1,500 non-retired Americans surveyed by Schroders understood that waiting would result in bigger checks, 45% said they plan to tap their benefits before 67, which is currently the full (ahem, standard) retirement age for those born in 1960 or later. Only 10% said they plan to wait until 70, when benefits hit their maximum.