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Ethics In Financial Services Insights
Insights and Highlights: AI Regulation Panel Key Takeaways
The panelists discussed the regulation of artificial intelligence (AI) and its impact on the insurance industry. Panelists highlighted the industry's demand for AI guidance and frameworks, leading to regulatory action through new rules and guidance on how AI can be safely integrated into insurance processes.
In recent months, state insurance regulators have responded to the widespread adoption of AI in multiple ways. The National Association of Insurance Commissioners (NAIC) finalized its model bulletin on the use of AI systems by insurers, which establishes a blueprint that state regulators can use to address the topic in their jurisdictions. In addition, on January 17, 2024, the New York State Department of Financial Services (NYDFS) issued a proposed insurance circular letter emphasizing the use of artificial intelligence systems (AIS) and external consumer data and information sources (ECDIS) in insurance underwriting and pricing. This proposal aims to enforce compliance with existing laws and regulations while promoting transparency, fairness, and governance to address potential discrimination and bias risks. The Colorado Division of Insurance has also addressed the risks of ECDIS in life insurance underwriting, and proposed new rules to test algorithms for outcomes that may be unfairly discriminatory.
Summit participants discussed challenges such as underrepresented markets in the insurance space and the need for compliance tools to evolve for novel risks, with an emphasis on balancing innovation while safeguarding consumer interests and ethical considerations. The evolving regulatory framework aims to incorporate risk management and transparency principles consistent with the new technology used, with stakeholder engagement seen as crucial in supporting informed and effective regulation.
The panelists highlighted approaches for navigating the risks posed by algorithms developed by unregulated third-party vendors with respect to ethical considerations, acknowledging challenges associated with proxy factors that may lead to unfair outcomes. Regulatory efforts to establish approaches to auditing models could improve risk management processes. Ongoing efforts were discussed to refine regulatory frameworks addressing ethical issues, with an emphasis on risk management, transparency, and new methodologies for outcome testing.
Audience questions reflected industry concerns about regulatory readiness and governance in AI implementation. Proactive engagement from industry stakeholders was encouraged. The dialogue underscored the complexity of integrating AI into decision-making processes and emphasized the ongoing need for human oversight to ensure good outcomes, consistent with law. Overall, the discussion highlighted collaborative efforts between regulators and industry stakeholders in navigating the evolving landscape of AI regulation in financial services.
To learn more about AI in financial services, you can explore further with research from the Center for Ethics in Financial Services.
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About The College From The President Insights
National Military Appreciation Month
What is the meaning of Memorial Day?
Going back as far as I can remember, Memorial Day in my family has meant remembering the loved ones we have lost. Honoring the memories of beloved family members, including my infant sister who died at only six months of age. Bringing flowers to their graveside on an almost summer and almost always hot day. Celebrating the love of family by spending time together outside of work and school. That is the original, personal meaning I carry with me each Memorial Day.
Of course, as I grew older and gained more life experience, my worldview changed. Only then did I come to realize all the meanings of Memorial Day. Today, I think of the families preparing to bring flowers to the gravesides of their beloved soldiers, men and women who sacrificed their lives in service to our great country. I think of the young – and the young at heart – eager to wear red, white, and blue at local parades.
Today, I think of the families preparing to bring flowers to the gravesides of their beloved soldiers, men and women who sacrificed their lives in service to our great country.
Indeed, there is no one way to celebrate Memorial Day. I sincerely hope, however, that we all take a moment to appreciate those who have protected our freedoms, including the freedom to choose how we will spend the day.
Originally called Decoration Day when it was formalized in 1868, Memorial Day is the final of three designated days to honor the military community in May, following Armed Forces Day and Military Spouse Appreciation Day. In fact, May is National Military Appreciation Month.
What is the meaning of appreciation?
The word appreciation derives from the Latin word for price. I believe it is very important to appreciate that members of the military community are willing to pay the ultimate price for our country.
Perhaps another way to translate this word is to think of appreciation as the act of pausing to consider someone or something not in the literal sense of a price or sum, but rather, in the sense of intangible value. Freedom, sacrifice, leadership, determination, the resiliency of the human spirit – these are ideals we value, and ideals that the best of the military community represent for us.
Latin origins aside, to me appreciation means acknowledgment. National Military Appreciation Month gives citizens the opportunity to acknowledge the current, former, and departed men and women of the military community – including active-duty, guard, reservists, and veterans. If you’re not in this group, you likely know someone who is.
Freedom, sacrifice, leadership, determination, the resiliency of the human spirit – these are ideals we value, and ideals that the best of the military community represent for us.
What does the military mean to financial services?
There’s a strong connection between the military community and the financial services profession – and one we continue to strengthen.
Back in 2021, the U.S. Department of Veterans Affairs reported 200,000 service members transitioned to civilian life per year. As of late last year, that number has increased to 250,000 per year. I am hopeful many will join us by pursuing careers in financial services.
When veterans search for well-paying and fulfilling careers that emphasize service and leadership (careers to which they are well-suited), financial professional and financial advisor consistently appear in the top 10 of many lists (here’s an example). Likewise, in my experience, if I had to come up with a list of the greatest leaders in financial services, there’s no doubt military veterans would make it into that top 10.
As I like to say within our College community, and something that certainly holds true within the military-College community: We are stronger together!
When veterans search for well-paying and fulfilling careers that emphasize service and leadership (careers to which they are well-suited), financial professional and financial advisor consistently appear in the top 10 of many lists
How can you get involved?
I want to take this chance to appreciate and acknowledge the military community directly. Thank you for your service! And thank you for being part of The College – whether you’re a student, an alumna, alumnus, or designee, or just getting started.
Others, please join me in recognizing our colleagues who have military backgrounds, or who have family members who are serving or have served. If you can’t connect in person or by phone, you may share this message or acknowledge them on LinkedIn.
You’ll recall I opened this blog by suggesting you ask your friends about their traditions, and I hope you do. I’ll close by asking about yours: Would you please thoughtfully consider starting a new tradition of honoring those who have strengthened our nation – and our profession – by supporting College scholarships, events, or other efforts in the military community?
The American College Center for Military and Veterans Affairs and Center founding partner and sponsor Penn Mutual invite you to join the cause – to help members of the military community expand their opportunities.
Although we can’t put a price on their contributions, we can acknowledge how much we appreciate and value the military community.
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Practice Management Podcasts
Shares: Going Deep on FIAs and RILAs
In this episode of our Shares podcast, host Michael Finke, PhD, CFP® speaks with Bobby Samuelson, an expert on annuity products, for a deep dive on their practical uses in financial planning and the ins and outs of how they can be used to benefit your clients.
Bobby Samuelson is the executive editor of The Life Product Review, one of the industry’s best sources for independent and objective life insurance product intelligence. He regularly presents at major industry events and has been quoted in The Wall Street Journal. He is also the President and CEO of Life Innovators, an independent product development firm helping life insurers create and implement unique life insurance and annuity products. Previously, Samuelson was the senior vice president and head of product development and pricing for life insurance and annuities at Brighthouse Financial, formerly MetLife US Retail. Prior to joining MetLife in 2013, he published The Life Product Review and was an independent consultant to life insurers, distributors, and advisors. He is the third generation of his family to work in the life insurance industry.
Any views or opinions expressed in this podcast are the hosts’ and guests' own and do not necessarily represent those of The American College of Financial Services.
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Representation Insights
FinServe Ambassador Supports Fellow Women Working in Wealth
Welsh is a 17-year veteran of Sequoia Financial Group, a growing RIA firm based in Akron, Ohio. Founded in 1991, the practice has seen explosive growth over the last several years and currently features 14 offices in eight states, as well as $18.3 billion in AUM as of 3/31/2024. She says her time with Sequoia has been an incredible journey – not least of which is because financial services wasn’t the life she had originally planned for herself.
“I didn’t know I wanted to go into finance at first: I double-majored in that and dance in college,” she said. “I’d also never been to Ohio before I come to Sequoia, which I did because my cost of living math as a dancer wasn’t really adding up. I had initially been in the Midwest for college, but after interviewing back east and deciding I loved this company, I moved and have been here ever since.”
Welsh described her company’s driving belief to be the idea that planning and investment strategy inform one another to create a foundation that enriches the lives of clients. She also explains that her current position as a senior vice president and leader of the group’s wealth planning department wasn’t something she had planned either.
“Originally I was on the advisor track with Sequoia, working directly with clients and doing typical advisor work – but a year or so into my time with the firm, the country went through a massive market crash,” she said. “All our clients, no matter how well-off, seemed to want to work on their wealth plan or put one in place if they didn’t have it. It was an all-hands-on-deck situation, and some of us junior advisors were called on to help the planning team. I was one of them, and I found I had a real passion for it.”
Specializing for Success
As the market recovered, Sequoia’s leaders decided to dedicate more employees to their technical planning endeavors – and that included Welsh. She rededicated herself to professional development, seeking additional learning opportunities to get the expertise she needed to succeed. The College and its specialized knowledge offerings, she says, were a huge help.
“My initial contact with The College was through my master’s degree, the Master of Science in Financial Planning (MSFP) – then the MSFS,” she said. “I was looking to build my technical depth of knowledge on the planning side and looked at many options, including an MBA, but I didn’t think they were deep enough. The strength of The College’s curriculum is what drew me to it, and it’s what allowed me to expand my opportunities and accelerate my career through that knowledge.”
“The strength of The College’s curriculum is what drew me to it, and it’s what allowed me to expand my opportunities and accelerate my career through that knowledge.”
Welsh also went through The College’s CFP® Certification Education Program to attain her CFP® mark, along with the Accredited Estate Planner® (AEP®) Program to specialize further in retirement and estate planning areas. Like many advisors in the business, she sees retirement planning as the next vital frontier for professionals looking to expand their knowledge.
“Everyone wants something different out of retirement. For some clients it’s about financial independence – how much can they spend safely, or before they run out of money?” she said. “For high-net-worth clients it’s about how they can transfer their assets to future generations in the most efficient way possible. The people I work with are asking about taxes especially, and how things will change as of 2026 with Roth conversions, charitable distributions, and other things. No one can know everything, so the power of specialization is that your business can have a much larger impact on clients the more team members who can help.”
“No one can know everything, so the power of specialization is that your business can have a much larger impact on clients the more team members who can help.”
When considering her plans for the future, Welsh says she remains dedicated to lifelong learning and is interested in pursuing the Chartered Special Needs Consultant® (ChSNC®) designation, which would provide her with an in-depth understanding of the financial planning challenges those caring for individuals with special needs face.
“Sequoia recently acquired a firm that specializes in working with caregivers, and it’s helped us realize it’s not such a niche focus: special needs or similar areas like aging issues or disabilities can affect any client, regardless of net worth or occupation – and all of these issues tie into retirement planning,” she said.
Being a Woman Working in Wealth
Welsh says she remains a champion of this kind of professional development, as does her firm: ongoing learning is at the core of Sequoia’s business model and her own beliefs as a financial professional. However, she has also looked outside the company for further opportunities – especially when it comes to networking with other women in financial services. For her efforts in mentoring, supporting, and advocating for women in the profession, Welsh was honored with the American College Center for Women in Financial Services’ Women Working in Wealth Award.
“I was part of the Women Working in Wealth Summit when we walked down Wall Street together,” she said. “We all took pictures with the famous “Fearless Girl” statue, including me, and at the time I didn’t think much of it. Later on, though, I had several male colleagues tell me they showed my picture to their young daughters to prove to them that financial services could be a place for them to succeed.”
Welsh described recent industry trends that have, in her view, greatly benefited women: the trend away from commission-only models that remove barriers to entry or to staying in the industry for women, who are traditionally the caregivers to their families; companies setting aside more time for their female employees to take maternity leave; and the growing popularity of hybrid work models that allow for the juggling of personal and professional responsibilities. She recognizes, however, that there are still challenges to overcome, including a lack of visibility and confidence that many women face.
“If you’re not physically in front of your leaders regularly due to hybrid work or other reasons, are they overlooking you more?” she said. “Financial services is still a highly male-dominated industry – most of the faces of the business are men, and not even 25% of CFP® professionals are women.”
To combat these issues, Welsh suggests young women and especially advisors find opportunities to build their confidence in professional settings – and calls on their senior leaders to offer those opportunities more readily.
“Think about how you’re introducing a junior member of your team in a meeting: build them up, or maybe spend a little extra time having a prep call or post-call to talk about results of a meeting,” she said.
Welsh also advised financial services leaders to avoid falling into the stereotypical thinking that women aren’t interested in finance, especially when it comes to working with female clients or families.
“Planning is a process, not an event. We need to be prepared to serve clients’ changing needs, and that means continuously enhancing our knowledge.”
“If you’re working with a couple and the woman isn’t at the meeting, there’s probably a good reason for that,” she said. “If both partners are there, make sure you engage both of them equally as much as you can. Most statistics say women live longer than men, and there’s an increasing rate of divorce among older adults, so there are more and more times when women are in control of the money. Not all women want to work with women, of course, but having a depth and diversity of talent available is important and something the industry needs to take seriously.”
Welsh also advised financial professionals working with women to try to avoid jargon in conversations and elevate their clients’ knowledge without talking down to them. She says explaining financial terms in ways that are more digestible and encouraging clients to ask questions removes a discomfort about asking them – and empowers better decision-making. First and foremost, she says lifelong learning is the key to being successful.
“Planning is a process, not an event,” she said. “As financial professionals, we know the economic and legislative landscape is always changing; we can’t just give clients a written plan and tell them they’re good to go. Things around them will change, and their circumstances will change. We need to be prepared to serve their changing needs, and that means continuously enhancing our knowledge.”
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Retirement Planning Insights
Planning for a Longer (and More Expensive) Retirement
How long is retirement going to last?
Underestimating life expectancy is a problem for all older Americans, but especially for higher-income Americans, who have made significant gains in longevity after the age of 65. A longer retirement is a more expensive retirement, and financial planners need to understand how long their clients are likely to live and develop strategies for funding longer lifestyles.
Most people have a vague idea of how long they are likely to live in retirement. It’s common to think of the age our parents or grandparents died when estimating our own longevity. In reality, longevity after the age of 65 increased by about a year every decade in the 20th century, and higher-income Americans can expect to spend significantly more years in retirement.
According to the Social Security Administration mortality tables, half of American men who have reached age 65 will live to at least age 85 and half of women will live to at least age 88. Respondents to the 2023 Retirement Income Literacy Study were asked how long an average 65-year-old man could expect to live. Only 27% selected the correct answer (20 years), 32% thought the average man would live to age 80 (15 more years), 23% believed only 10 more years, just 6% thought an average man would live to age 90, and 12% indicated that they didn’t know.
Respondents’ Expected Longevity of a 65-Year-Old Man
Figure 1
Most Respondents* underestimate or don't know the expected longevity of a 65-year-old man, which is about 20 years (age 85).
In other words, 55% of respondents underestimated retirement longevity and an additional 12% didn’t know. Just a third of respondents (33%) had an accurate or optimistic idea of retirement longevity.
Those who had an unrealistically low expectation of retirement longevity were far more likely to indicate they plan to claim Social Security income benefits before the age of 65. Why is this important? Social Security is the only inflation-adjusted income source most retirees have. Claiming early reduces a retiree’s income for his lifetime and weakens an important source of guaranteed income for workers, many of whom no longer receive employer pensions.
While 42% of those who believed that retirement for a 65-year-old man would only last 10 years expected to claim before age 65, only 33% of those with an accurate estimate of expected longevity planned to claim Social Security early and only 26% of those who overestimated longevity planned to claim before age 65.
Percentage Planning to Claim Social Security Before Age 65 by Longevity Expectations
Figure 2
Respondents* who plan to claim Social Security before age 65 are more likely to underestimate the life expectancy of a 65-year-old man. Those who accurately estimate or overestimate a man’s life expectancy (age 85 or higher) are less likely to plan to take Social Security before age 65.
When people are asked “What is the maximum age you would plan for your savings to last in retirement before you run out of money?,” 54% more of those who had an accurate or optimistic idea of expected longevity chose a maximum planning horizon into their 90s compared to those who underestimated longevity.
Percentage Planning for Spending Into Their 90s by Longevity Expectations
Figure 3
Respondents* who plan for their spending to last into their 90s before running out of money are more likely to provide accurate estimates of the life expectancy of a 65-year-old man.
Financial Planning Clients Live Longer
The survey respondents who thought that a 65-year-old man could expect to live 25 years in retirement weren’t wrong for higher-income men. Men and women whose incomes are high enough to work with a financial advisor have made significant gains in retirement longevity in recent decades. Stanford economist Raj Chetty and his co-authors1 found that life expectancy among Americans in the top 5% of income increased 2.34 years for men and 2.91 years for women between 2001 and 2014, compared to just 0.32 years for men and 0.04 years for women in the bottom 5%.
The improvement in longevity among higher-earning Americans is largely due to differences in health-related behaviors. The most notable difference is in rates of smoking, which dropped significantly for higher-income men and women in the United States. Higher-income Americans are also more likely to exercise, eat better diets, and have access to higher-quality healthcare.
Longevity is subject to the laws of statistics. This means that the number of years you’ll spend in retirement looks like a bell curve with a left tail of unlucky retirees and a right tail of those who live into their 90s and beyond. You’re probably going to live longer than your parents. This means that the entire bell curve needs to be pushed a few more years to the right. It also means that today’s healthy retiree will have to fund more years of spending on average, and more than a few will be around into their late 90s and 100s.
To better understand the difference in the probability of the types of higher-earning individuals (who are more likely to be financial planning clients) being alive at various ages, consider the following table that compares average Americans using the 2017 Social Security Administration mortality table and the 2012 Society of Actuaries annuity mortality table adjusted for expected improvement to the present day. Annuity buyers tend to live longer because they are in the group of higher-income, healthier Americans who have accumulated enough savings to buy a lifetime income.
Probability of Being Alive at Various Ages for 62-Year-Olds
Table 1
Americans who buy annuities tend to live significantly longer than Americans overall. For example, a healthy male is twice as likely (8%) as the average male (4%) to live to age 100.
It’s obvious from Table 1 that healthier, higher-income retirees need to plan for a longer retirement than the average American. A healthy 62-year-old man is 65% more likely to be alive at age 90 than the average American. One-third of healthy 62-year-old women can expect to live to the age of 95, and half of healthy couples will have one spouse who lives longer than 95 years.
The percentages from Table 1 can also be seen as failure rates. If financial advisors create spending plans in which their clients’ money lasts to the age of 90, then half of healthy men, 56% of healthy women, and 78% of healthy couples will outlive their savings.
The traditional failure rate methodology in financial planning considers a withdrawal rate safe if the money lasts to the age of 95. For a healthy couple retiring today, this yardstick can’t be considered safe if half of them will have at least one spouse who lives beyond the age of 95. Even if the money lasts to the age of 100, one in five healthy couples will outlive their savings.
For a healthy couple retiring today, this yardstick [of making money last through age 95] can’t be considered safe if half of them will have at least one spouse who lives beyond the age of 95. Even if the money lasts to the age of 100, one in five healthy couples will outlive their savings.
A Long Life is More Expensive
An easy way to see how much more money a retiree needs to save to fund a longer retirement is to estimate the cost of creating a base of income that lasts to various ages using safe investments. Returns on financial assets are generally variable, but it is possible to buy Treasury bonds that will mature and provide a future income that isn’t subject to investment risk.
Figure 4 compares the cost of buying a safe income using Treasury bonds to the age at which a healthy man, woman, and couple has a 20% chance of outliving their savings (i.e., 80% probability of success) using yields on April 12, 2024. For example, an average 65-year-old man has a 20% chance of reaching the age of 93 years. The cost of funding $20,000 of income from Treasury bonds at today’s yields will be $315,578. A healthy man has a 20% chance of living to the age of 96 years. It will cost him $332,455 today to buy the same $20,000 of income to an age at which he has a 20% chance of “failure.”
The Cost of Funding $20,000 Treasury Bond Income*
Figure 4
As Figure 4 shows, the cost of income is higher for healthy men, women, and couples who need to plan to fund more years of spending in retirement. This means that healthier and wealthier individuals will have to save more to fund the same lifestyle with an 80% probability of success.
Healthy Americans will have to save more to fund more years of spending in retirement.
Figure 5 shows the cost of funding $20,000 of inflation-protected income using Treasury Inflation Protected Securities (TIPS). TIPS are more expensive because the amount of income received is expected to rise in the future by the rate of inflation. It would cost a healthy woman $475,288 to buy $20,000 of inflation-protected income with an 80% probability of success, but only $339,813 to buy $20,000 of nominal income each year. Inflation-adjusted income is even more valuable when a retiree can expect to live longer.
The Cost of Funding $20,000 Inflation-Protected Income*
Figure 5
Average male, female, and couple life expectancies based on the 2017 Social Security Administration mortality table. Healthy male, female, and couple life expectancies based on the 2012 Society of Actuaries annuity mortality table. *Cost estimates to achieve an 80% probability of success for a 65-year-old are based on TIPS yields on April 12, 2024.
Although inflation-protected income is more expensive, it can also be more valuable—particularly for healthy Americans who will have to fund longer retirements.
Implications for Planning
Today’s financial planning clients, who are generally healthier and wealthier than the average American, can expect to live significantly longer than their parents, and longer than the average American. Research from the Retirement Income Literacy Study shows that most Americans ages 50 to 75 underestimate the number of years an average retiree will live. Clients of financial advisors are slightly more likely (31%) than unadvised respondents (24%) to correctly answer the longevity literacy question, but 62% either still underestimate or don’t know average longevity.
Advisors can help clients establish a more appropriate planning horizon and make better choices through longevity education. This is especially importance since survey data suggest that individuals who are less longevity-literate are more likely to claim Social Security early and less likely to plan for income into their 90s.
A longer retirement is a more expensive retirement.
Improvements in longevity have several important planning implications:
- A longer retirement is a more expensive retirement. Being longevity literate means recognizing that today’s planning time horizons for healthy clients will extend into their 90s, and for couples even longer. While a longer retirement is good news, funding more years of spending creates a need for creative planning strategies that help retirees get the most out of their saving.
- Research shows that strategies such as tax-efficient distribution planning—in which advisors pay attention to spending down the least tax-efficient assets first and the most tax-efficient assets last, while taking advantage of opportunities to manage tax brackets and using strategic Roth conversions —can extend the life of a portfolio by as much as 20%.
- The higher value of inflation-protected income for healthier clients, and in particular healthier women, means that delayed Social Security claiming is almost always going to provide more retirement wealth than claiming early. Claiming strategies that focus on the expected longevity of a lower-earning spouse can provide an added boost by providing a larger lifetime spousal benefit. For healthy retirees, delayed claiming can reduce the cost of funding a retirement lifestyle by tens or even hundreds of thousands of dollars.
- Finally, retirees can also reduce the cost of funding an income goal by considering the value of transferring the risk of not knowing how long they will need to fund an income goal to an institution. Annuities allow a retiree to spend as if they will live to about an average longevity, freeing up more dollars to spend earlier in retirement and protecting against the risk of living beyond their planning horizon.
The Retirement Income Literacy Study provides actionable insights into older Americans’ financial literacy on 12 retirement topics, including longevity planning.
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