Weekend Reading For Financial Planners (Jan 21-22)

Wave Of State Tax-Hike Bills Target Ultra-High-Net-Worth And High Income Residents

(Melanie Waddell | ThinkAdvisor)

In 2021, Congressional Democrats and the Biden administration released draft legislation dubbed the “American Families Plan” that would have, among other measures, increased the top ordinary income tax rate, raised the top long-term capital gains tax rate, and created new minimum distribution requirements for taxpayers with high income and mega-sized retirement accounts. In the end, none of these measures were enacted at the Federal level, but several states are now considering similar measures.

Legislators in California, Connecticut, Hawaii, Illinois, Maryland, New York, and Washington state plan to release a series of bills this week that would target high-income and ultra-high-net-worth (UHNW) residents for tax increases, according to a report in The Washington Post. The specific proposed measures vary by state and include taxing unrealized capital gains, raising the top state income tax rate, reducing the state estate tax exemption, and raising the state capital gains tax rate. In addition, certain proposals would create first-of-their-kind wealth taxes, with California considering a 1.5% tax on wealth above $1 billion in assets.

The measures are being introduced simultaneously in order to discourage residents from moving to another state to avoid the new taxes (though even if all 7 states passed their respective measures, residents would still have plenty of other options if they chose to move). Further, it is unclear which of the measures (sponsored by Democratic state legislators) actually have a good chance of passing, as the similar Federal-level proposals failed to gain support from a sufficient number of Democrats and previous state-level proposals have not passed (and, even if enacted, could face legal challenges). One possibility is that tweaks to current tax rates (e.g., raising the top state income tax rate) could pass while totally new taxes (e.g., a wealth tax) could have a harder time being enacted.

Ultimately, the key point is that advisors can add value to their clients by being aware of changes to income, wealth, and estate taxation in their individual states and how federal and state laws differ. For instance, while the Federal estate tax exemption currently stands at $12.92 million per individual, the state estate tax exemption is considerably lower in many states (with Maryland now considering reducing their exemption from $5 million to $1 million), creating planning considerations for even non-UHNW clients. In addition, because states that are often labeled as ‘high tax’ states often have retiree-friendly tax policies, advisors can also help inform their clients about the financial implications of living in a certain state in retirement!

Fidelity Tracks M&A Trend Of More Deals Involving Smaller RIAs

(Jeff Benjamin | InvestmentNews)

RIA Mergers and Acquisitions (M&A) activity has been brisk during the past few years, as heightened demand from acquirers (often larger firms, sometimes infused with Private Equity [PE] capital) drove up valuations, to the benefit of those selling their firms. However, concerns have mounted among industry participants that changes in the economic environment in the past year (from inflation to weak market performance) and rising interest rates (and their impact on firms’ willingness and ability to borrow funds for their acquisitions) have the potential to cool the market for RIA M&A.

According to Fidelity Wealth Management’s December 2022 M&A Transaction Report, while the pace of deals remained strong through the end of the year, the size of those deals has come down. December say 26 RIA transactions in December for a combined $9.7 billion in Assets Under Management (AUM), representing a 44% month-over-month increase in the number of deals and a 49% drop in the AUM associated with the deals. Among deals in December, more than 80% involved RIAs with less than $500 million AUM, and only one deal involved a firm with more than $1 billion in AUM. For the full year, the number of RIA deals increased by 7% to 229 transactions compared to 2021, but the total deal size declined by 18% to $283.8 billion and the median deal size fell by 32% to $478 million.

Overall, the Fidelity M&A data suggest that there remains continued demand for RIA deal activity, although economic headwinds could make smaller deals more popular than large-scale acquisitions in the coming year. This could be good news for owners of relatively smaller firms who are considering a sale in the near term (particularly those with a strong talent pool and client growth, which could make them even more attractive acquisition candidates!).

Survey Suggests Fees And Returns Are Driving More Clients To Look For A New Advisor

(Rob Burgess | Wealth Management)

During the bull market of the 2010s, many financial advisory clients were happy with their portfolio performance, and often, by extension, their advisors. But 2022 was one of the most challenging years on record for investors as both stocks and bonds (which are often considered to be a less-risky counterbalance to stocks) saw significant declines. And according to a recent study, many advisory clients are now considering changing their advisor.

According to a survey sponsored by YCharts, 21.8% of financial advisory clients surveyed switched to a new advisor since the start of the pandemic, with another 25.3% considering a move. This was particularly pronounced for respondents under 60 years old (with 27.3% changing their advisor and 29.8% considering doing so) as well as those with more than $500,000 under management (28.7% of whom moved to a new advisor and 24.4% considering doing so).

When asked to rank the top three factors that were most important to them when selecting an advisor, the most common responses were portfolio performance, accessibility or availability of the advisor, and a deep understanding of the client and their goals. Notably, portfolio performance was listed in the top three factors for 74% of clients with less than $500,000 under management and 78% of clients with more than $500,000 under management, well up from 38% and 53%, respectively, when YCharts ran a similar survey in 2019, suggesting that the market downturn has brought performance to the forefront of many clients’ minds. Another shift between the surveys was seen with fees, as 45% of those with less than $500,000 under management and 38% of those with more than $500,000 under management cited fees in their top three considerations in the most recent survey, up from 26% and 20%, respectively, in 2019 (perhaps the result of some clients considering whether the fee they are paying is worth it considering the weak portfolio performance many of them experienced).

The survey also looked at trends in client communication preferences. When asked how they prefer to receive information from their advisor, email was the most commonly cited medium (72.6% of those surveyed, up from 66% in 2019), with text messaging also seeing a boost (up to 35.3% from 31%). And perhaps unsurprisingly, virtual meetings have become more common since 2019, with more than 70% of clients having at least some virtual meetings, well up from about 50% in 2019 (and the share of clients who meet with their advisor exclusively virtually has risen to 20.3% from 12.5% in the past three years). Further, nearly half of clients said they want their advisor to contact them more frequently (while only 1.6% of respondents wanted less contact with their advisor), suggesting that advisors could enhance client retention by creating more ‘touchpoints’ with their clients (while considering being 'accessible' rather than always 'available' to help prevent advisor burnout).

Altogether, the survey suggests that market performance has risen to the forefront of many clients’ minds. And while advisors cannot control the ups and downs of the market, they do have the opportunity to consider the value they are providing to their clients (other than investment selection), as well as whether their communication (both in terms of frequency and method) matches up with their clients’ preferences!

Growing RIAs Must Focus On 'Process', Not Technology

(Matt Sonnen | Wealth Management)

Financial advisors have a wide, and growing, array of AdvisorTech tools available to use in their firms. Given the number of options available in different categories within a firm’s tech stack (e.g., CRM, financial planning software), when the firm’s current software isn’t working the way advisors would like it to, it can be tempting to switch to a new option within the category. But Sonnen suggests that firms might first consider whether they are using their current software appropriately before making a (potentially costly) switch to an alternative.

For instance, some firms that use a ‘client portal’ to facilitate the sharing of performance reports and other documents between the firm and its clients find that many clients do not actually access the portal (or do so infrequently). But instead of finding a different software provider, Sonnen suggests that a firm first consider whether clients are able to send and receive documents in other ways (e.g., through email) that makes using the portal less necessary, as well as finding other ways to encourage use of the portal (e.g., sending the firm’s market commentary via the portal rather than by email).

Another area of frustration for some firms is with client billing software, which can keep advisors up at night worrying whether the tool is billing clients correctly. But if a mistake is found, it is often not the result of the software itself, but rather from data input errors that occur during the initial client onboarding process. By auditing its process for adding new households into the billing software, a firm can not only streamline this task, but also reduce the number of mistakes in future billing cycles (and potentially help the firm owner sleep better at night!).

Ultimately, the key point is that while there are always newer, ‘shinier’ AdvisorTech tools available, it can frequently be more cost effective to review the firm’s current processes rather than changing software providers, which can involve both monetary expenses and staff disruption (as they will need to get trained on the new tool)!

How To Manage Your Firm's Data Instead Of Drowning In It

(Gino DeRango | Wealth Management)

In the 21^st century, data is more widely available than ever, and the financial advisory business is no different. But while leveraging data can help a firm owner run a more efficient and profitable practice, the sheer amount of data that comes in over time can be overwhelming. The key, then, is to organize data to make it more easily usable and focus on analyzing key metrics rather than all possible statistics.

Client data can be structured or unstructured. Structured data has been predefined and formatted into a set structure, which allows it to be easily retrieved and used by the firm. It can also be used by software tools to uncover patterns in the data more efficiently than humans. On the other hand, unstructured data exists in its native format (e.g., emails, Word documents) and cannot be easily analyzed or used by an advisor (or software programs). Therefore, advisors can improve the usability of their client data by transforming unstructured data into structured data, which is often done by using CRM software (particularly software that integrates with other tools in the firm’s tech stack).

When it comes to business data, there are myriad Key Performance Indicators (KPIs) that can be used to track how well the business is doing. But because doing so could take up significant time (that could be used to work on the business itself!) advisors can focus on a few crucial KPIs (and compare themselves with other firms through benchmarking studies). For instance, AUM can show whether a firm is growing over time, and firms can learn more about their health by examining the reasons for its AUM growth or decline (e.g., AUM growth caused by an influx of new clients is likely to be preferable to growth resulting from strong market performance, which the firm cannot control). Firms can also track their gross and net profit margins (to compare their revenue with their expenses), individual client profitability (in part to determine whether the firm might want to “graduate” certain clients), as well as the firm’s growth rate (both in terms of revenue from new clients as well as new revenue from existing clients).

Overall, because it can be easy to drown in a sea of available data, creating structured data and focusing on the most important KPIs can help a firm owner reduce the time spent crunching numbers while using the data on hand to improve their client service and firm profitability!

Got A Hiring Crunch? Maybe Your Firm's The Problem

(Angie Herbers | ThinkAdvisor)

Hiring the right talent is one of the keys to successfully growing a firm. But hiring the ‘right’ people can be a challenge, as the competition for advisor talent today is fierce. Amid this competition, some firms will offer higher pay to candidates in order to lure them away from other opportunities. But firms often find that money is not enough to attract top talent; instead, factors such as firm culture and the presence (or lack thereof) of career paths can also play an important role in a candidate’s decision on which firm to choose.

Some firms expect new hires to begin generating business soon after coming on board. After all, many current firm leaders came into the business in sales positions where they were expected to bring in clients. But this sales focus can be a deterrent to potential candidates, who see themselves more as aspiring financial advice professionals rather than salespersons. Further, given that many firm owners have strong sales skills, it can make sense to hire employees to serve current clients while the owner leverages their skills to generate more business.

Similarly, firms often expect candidates to have expertise in the full range of knowledge areas needed to be an effective advisor. But this expertise often takes time to develop, and new hires will be unlikely to have the knowledge of specific rules and strategies. Instead of searching for expert candidates, firms can instead look for talent that has the core skills the firm really needs and then invest in developing and training on additional skills.

When it comes to pay, candidates often are not only interested in their starting salary, but also the compensation path they can expect over the years working at the firm. Relatedly, aspiring advisors also frequently look for defined career tracks at a firm so they know what their career might look like years into the future and what it will take on their part to get there. Finally, firm culture can attract (or repel) candidates, as many candidates will want to see that firm employees enjoy their work and each other.

Ultimately, the key point is that firm leaders who look beyond starting compensation to their broader employee value proposition will be more likely to attract the best candidates in the tight advisor labor market. Whether it is focusing on client-centric (rather than sales-centric) responsibilities, establishing defined career tracks, or ensuring a strong firm culture, firms have several ways to become more attractive for top talent.

The Art And Science Of Spending Money

(Morgan Housel | Collaborative Fund)

Financial advisors are often focused on the ‘science’ of money, from the best portfolio construction methods to optimal decumulation strategies. But the experience of working directly with clients makes it clear that there is also an ‘art’ to financial planning, as clients come with different experiences, preferences, emotions with money. And this is particularly true when it comes to how clients spend money.

For example, a client’s family background and past experiences can heavily influence their spending preferences. Clients who have amassed wealth but grew up poor might engage in ‘revenge spending’, conspicuous consumption aimed at those who previously judged them for being poor. Rather than enjoying a fancy home or luxury car for their own sake, these individuals spend to fulfill a deep-seated psychological need.

On the other hand, those who grew up rich or found wealth early in adulthood might find themselves ‘trapped’ by a need to spend lavishly in order to ‘keep up appearances’. Similar to the individual engaging in ‘revenge spending’, these clients might not get much joy out of the actual goods they are purchasing, but rather are filling a psychological need (even if their level of spending is unsustainable given their resources!).

But while some clients spend more than they can afford, others who were diligent savers throughout their working years can sometimes find it hard to transition to spending mode once they enter retirement. In these cases, frugality and savings become a large part of the client’s identity over time and it can be hard to switch gears, even if they recognize that they would enjoy spending more of their money.

In the end, how clients spend their money is not just a function of the goods and services they enjoy, but also a range of psychological factors as well. Therefore, advisors can support clients by not only helping them build and spend their wealth in a sustainable manner but also by helping clients explore their values to help inform spending decisions that will help them live their best lives.

Why Aren't Americans Ditching Big Banks?

(Dion Rabouin | The Wall Street Journal)

The relatively low-interest rate environment of the 2010s benefited borrowers at the expense of savers, who typically received paltry returns for money held in bank savings accounts. But even in this environment, consumers who shopped around could find relatively better savings account interest rates, often at smaller or online banks rather than the largest national banks.

Despite this opportunity to earn more on their savings, a recent analysis found that savers could have theoretically earned $42 billion more in interest in the third quarter of 2022 if they moved their money out of the 5 largest U.S. banks by deposits (which paid an average of 0.4% interest on consumer deposits in savings and money-market accounts during the quarter) to the 5 highest-yield savings accounts (which paid an average of 2.14% during the same period). Going back to the start of 2019, Americans keeping their savings at the largest banks have potentially missed out on at least $291 billion in interest (though it is unclear whether consumers would be able to get the same high rates if they moved to the smaller banks en masse, as an influx of deposits could lead them to lower their interest rates).

These data points suggest that advisors can add significant value to their clients by implementing a client cash management strategy to help them balance their cash needs for spending with the ability to potentially earn a higher rate of interest on the cash they do hold. And with the emergency of cash management solutions designed for advisors (e.g., Flourish Cash and advisor.cash by StoneCastle), it has become easier for advisors to help their clients make the most of their cash holdings!

Failure To Launch Syndrome: What It Is And Why Wealthy Families Are Susceptible

(John Samuels | Advisor Perspectives)

While parents typically want their children to grow into independent, thriving adults, such a transition does not always occur. And sometimes, the parents’ own actions and spending can be key contributors to a stunted transition to adulthood for their children.

“Failure to launch syndrome” refers to young adults who remain dependent on their parents rather than establishing separate and independent lives as self-sufficient adults. While this can occur for a variety of reasons (e.g., struggling with addiction), a frequent cause is parents who provide their children with unlimited resources and ‘do’ everything for them, obviating the need for the children to problem-solve or become more independent, according to behavioral health expert Rachele Vogel.

While this problem can be treated by a therapist, such therapy does not just involve the young adult, but also the rest of their family, who might be engaging in accommodating behaviors that can contribute to a ‘failure to launch’. The process to build independent living skills can be a slow one, young adults can begin to build their problem-solving skills and resilience to be able to operate without their family’s support.

Notably, financial advisors have the opportunity to add value to clients with children who have not ‘launched’ into adulthood. While a professional therapist is likely needed to address the underlying causes, advisors can support clients in this situation by showing how spending on adult children is affecting their financial plan as well as helping them work through estate planning considerations (e.g., strategic use of trusts) if parents (or grandparents) are unsure how whether the child will be able to handle an inheritance. So while a ‘failure to launch’ can be frustrating for parents, advisors can play an important role on the team required to help their children become thriving adults.

The Trends That Will Shape The Advisory Profession In 2023

(Bob Veres | Advisor Perspectives)

While advisors are often focused on the day-to-day work of serving their clients and managing a business, it can often be useful to step back and consider the broad trends that could shape the advisory profession in the year ahead. And at the start of the new year, industry veteran Bob Veres has taken a crack at identifying the major trends that advisors will confront in 2023.

The first trend is the continued challenge advisory firms face in recruiting and retaining talent. While a few years ago, firms might have gotten several candidates for a given open position, the script has flipped, with job seekers often choosing among a range of job offers. And the competitive field does not just include RIAs and broker-dealers, but also firms like Vanguard and Fidelity that offer advice-based (rather than sales-based) positions at higher salaries than independent firms might be able to offer. In order to attract and retain top talent (and prevent reduced capacity to serve clients), Veres suggests that firms can take a variety of steps, from offering competitive compensation (both to new hires and to current staff), considering flexible working arrangements (though recognizing that many young advisors might want to have time in the office for mentorship and training), as well as creating opportunities for advancement within the firm.

The next trend is the potential for Private Equity (PE) money entering the advisory industry to continue to dry up. Initially attracted by advisory firms’ profit margins and fueled by low-interest rates, the market downturn experienced in 2022 (and its subsequent impact on many firms’ profit margins) as well as the increasing cost of capital (making borrowing more expensive for the PE firms) could slow the pace of PE investments into larger firms and, subsequently the pace and/or size of acquisitions by these firms. Further, shrinking profit margins could lead PE investors to demand more out of the firms they invest in, which could lead to pressure to become more efficient, perhaps at the cost of reducing time spent with clients (possibly presenting an opportunity for smaller firms to attract clients with a focus on higher-touch service).

More broadly, Veres expects advisory firms to have a debate about how to balance the conflicting demands of efficiency and effectiveness. While the industry has made significant progress in terms of efficiency during the past few decades (e.g., by upgrading their tech stacks and implementing workflows), much of the potential benefits have been wrung out, creating a situation where firms might be able to better differentiate themselves by providing the types of service that only humans can provide. Though given the increasing cost of hiring human staffers, doing could lead some to consider whether to accept these costs (and their impact on the firm’s margins) or to offer a less-personal level of service (and risk clients moving to firms providing a higher level of service).

Altogether, Veres has identified a slate of trends (which also include a predicted scandal in the brokerage industry) that would impact the full range of advisory firms. From the ongoing competition for talent to balancing efficiency and effectiveness, advisors are likely to confront a range of challenges (and opportunities stemming from them?) in the year ahead!

The Time To Define Insurance Advising Is Now

(Michelle Richter | Advisor Perspectives)

The financial advisory industry includes a range of fee models, from fee-only advisors who sell their advice to brokers and insurance agents who sell financial products (e.g., investment or insurance products) and receive commissions. In addition to the different fee models of financial advisors and insurance providers, regulation of financial advisors and the brokerage and insurance industries varies greatly, with advisors typically regulated nationally and insurance professionals regulated on a state level. Further, while advisor regulation covers both the provision of advice and product sales practices, insurance regulations are focused on the latter. The significance of these distinctions is that, at the most basic level, RIAs sell a ‘verb’ (the process of giving advice) while brokers and agents sell a ‘noun’ (the investment or investment product). Which is important, because the regulation of verbs (which focuses on the service and process) is fundamentally different from the regulation of nouns (which focuses on the product itself and its appropriateness).

Viewed from this lens, Richter highlights notable gaps that have emerged in the regulatory landscape for insurance in particular, because of the lack of its verb-oriented activity. For instance, Richter suggests that financial advisors often struggle to find fiduciary advice and guidance on insurance products (where most states don’t even have an “insurance advisor” license, and for the few that do, it often requires or is outright tied to the same requirements as being an insurance salesperson). At the same time, the domain of teaching “insurance advising” is arguably also lacking, as Richter argues that (typically-investment-licensed) advisors do consider insurance products like annuities, they often rely on an (investment-centric) asset-maximization perspective (and benefit from doing so when charging on an Assets Under Management basis), without necessarily considering factors such as liability immunization or income optimization for their clients. For example, she argues that a plan advisors might look past annuity products like Guaranteed Retirement Income Contracts (GRICs) that could become more widely available in defined contribution retirement plans because they are meant to support retirement income rather than asset maximization (which, she notes, can lead to a significant amount left in the account at death that could have been used to maximize spending and enjoyment in retirement).

For Richter, the key point is that comprehensive financial advisors do not just manage their clients’ assets (typically the purview of investment management), but rather their overall wealth (which includes both asset and liability management). Because of this, she argues that insurance industry experts have an important role to play, and the development of fee-only insurance advice (with reduced conflicts of interest as a result of not also selling insurance products) could ultimately lead to better recommendations and outcomes for consumers! But it will be difficult for such ‘insurance advisers’ to emerge until the regulators catch up to the reality that insurance advising is a verb activity (while insurance product sales is an activity of selling nouns), which necessitates an entirely different regulator (and training) approach.

4 Reasons To Take On An Industry Leadership Role

(Amie Agamata | InsuranceNewsNet)

Starting any new job can be nerve-wracking, particularly for those who are just getting started in their careers (or are a career-changer!). For financial advisors, one way to help ease the transition is to get involved in an industry association, such as the Financial Planning Association (FPA) or the National Association of Personal Financial Advisors (NAPFA), which offer networking, educational, and other opportunities at both the local and national levels. Further, younger or newer advisors can take advantage of these organizations’ programs targeted to these groups, FPA NexGen and NAPFA Genesis.

Beyond joining these association groups, advisors can also take advantage of opportunities to serve in leadership roles. In Agamata’s case, she started out by attending her local FPA chapter’s NexGen happy hour and now, only a few years later, is the national NexGen president/chair. She’s found several benefits from serving in leadership roles along the way. First, they have created more opportunities for her to build her personal brand, from publishing articles in industry publications and media appearances to meeting with FPA leadership and industry thought leaders. She’s also found significant benefits from networking, as she has met other advisors from around the country in similar stages in their careers (many of whom have become friends!). Finally, taking on an association leadership role can help advisors learn more about themselves and their interests; for example, Agamata discovered through taking on leadership positions that she enjoys working in teams, strategic planning, and critical thinking, and recently decided to shift her career path to management rather than a client-facing role.

Ultimately, the key point is that whether an advisor is new to the industry or has been in the industry for many years, taking on leadership roles in industry associations (whether at the local or national level) can not only help support the planning industry as a whole, but their own career as well!

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.