Weekend Reading For Financial Planners (May 20-21)

Investors Want AI-Powered Advisors, Not AI Alternatives To Advisors

(Ryan Neal | InvestmentNews)

The arrival of robo-advisors into the financial technology landscape more than a decade ago led many to believe that the combination of (relatively) low fees and digital presence offered by robos would entice many consumers to eschew human advisors and turn to these automated tools. However, since the introduction of robo-advisor technology, client behavior has suggested that these original predictions of robo-dominance and the downfall of human advisors have not been borne out. In fact, improvements in automation technology (including robo-advisor services built for human advisors) have made human advisors more efficient and profitable.

Further, consumers appear to recognize the value of human advice combined with digital tools. For instance, a 2022 Vanguard Group report found that while financial planning clients preferred a human advisor for factors such as having a personal connection and feeling understood, they preferred that digital tools be used for functions such as preventing details from being overlooked or ensuring they have diversified investments.

And now, with the growing popularity of ChatGPT and other Artificial Intelligence (AI)-based tools, many consumers appear to be looking for their advisors to incorporate them into the financial planning process. According to a survey by Morgan Stanley Wealth Management of 924 investors, 74% said they believe AI will help financial advisors better serve their clients and 63% said they would be interested in working with an advisor who leverages the technology (this effect was particularly pronounced among the younger investors surveyed (those between ages 35 and 44), 89% of whom said that AI will help advisors better serve clients). And while some observers have worried that AI-powered tools could eventually replace human advisors, the Morgan Stanley survey suggests this is not the case, as 82% of respondents said they believe AI will never replace human guidance and 88% agreed that the human-to-human financial advisor-client relationship is extremely important.

Amid the growing interest in AI, several AdvisorTech tools are incorporating AI technology in their advisor-facing platforms. These include Orion’s ChatGPT integration with its Redtail Speak client texting platform, which will generate suggested responses to client inquiries via text message, as well as Pulse360’s AI Writer tool, which can convert an advisor’s notes or suggestions into client-ready text that can be dropped into an email. And on the investment side, Morningstar this week announced that its AI chatbot “Mo” has gone live and can be used by advisors to surface and summarize investment insights and analysis from Morningstar’s investment research library in a conversational format.

Ultimately, the key point is that, in the long run, the most likely legacy of AI for financial planning is not to replace financial advisors, but to help them increase their productivity by streamlining more of the middle and back office tasks and processes. Which, in turn, will either enhance the profitability of firms or allow them to provide their services at a lower cost for the same profitability while increasing the market of consumers who can be served, further growing the reach of financial planning. Or stated more simply, AI will not necessarily end up as a threat to financial advisors; instead, it is probably more of a useful tool for advisors that will help to grow the market for financial planning advice services!

Revised CFP Board Procedural Rules Coming Sept. 1

(Jeff Berman | ThinkAdvisor)

As a part of maintaining its CFP trademark and determining which advisors will be permitted to license its use, CFP Board is responsible for managing its standards of conduct and creating a disciplinary process that is fair to the CFP certificants who use the marks, while also pursuing its mission of protecting the public (and ensuring the CFP marks remain in high esteem). Of course, these disciplinary rules and procedures are subject to change, including in 2021, when the CFP Board changed its procedural rules and sanctions guidelines to update the sanctions that CFP certificants receive when failing to follow the standards of conduct, and creating an appeals commission to hear cases of disciplinary actions imposed on CFP professionals.

Late last year, CFP Board proposed a new slate of changes to its procedural rules, and after receiving comments from industry participants and the public, announced this week the adoption of a set of revised rules that will take effect September 1. Among other changes, the revised rules will transfer some administrative functions from CFP Board’s Enforcement department to the Adjudication department and expand the role of the Disciplinary and Ethics Commission (DEC) Counsel to make the adjudication process more efficient. Beyond ‘streamlining’ the enforcement process, though, the new rules would also establish a process for admitting expert testimony in CFP Board disciplinary hearings (as cases against CFP certificants become more complex and nuanced).

In addition, the new Procedural Rules provide CFP Board more latitude to conduct “pre-investigation outreach” – in essence, conducting "informal inquiries” in response to complaints to better identify potential wrongdoing (that would then merit a full investigation and go through CFP Board’s enforcement and adjudication process). Which gives CFP Board more latitude in situations where there is an allegation of potential wrongdoing against a CFP certificant that doesn’t contain enough specificity to move forward based on the merits of the complaint alone (but other merits at least an ‘informal inquiry’ to explore further). Notably, CFP Board in responding to comments also reserved its right to conduct such informal inquiries without the CFP professional or their legal counsel being present, as the informal inquiry process is what also makes it more feasible for CFP professionals to report on the wrongdoing of fellow advisors based on client activity they may see (and in this manner, CFP Board can preserve their anonymity from the CFP professional they reported). While still trying to preserve due process by requiring that if an actual enforcement action is initiated, the CFP professional will still have an opportunity to see the full details of the complaint and respond accordingly.

Altogether, the proposed changes appear to attempt to make the disciplinary process more efficient for respondents as well as CFP Board staff, and expand the CFP Board’s ability to pursue more complaints against CFP professionals (including via ‘whistleblowing’ from fellow CFP certificants) as CFP Board continues its efforts to ramp up enforcement, while also looking to improve the adjudication process through the use of expert witnesses. Which could ultimately better serve CFP certificants and maintain the public’s confidence that CFP Board is enforcing its standards effectively! Though at the same time, CFP Board’s expanding enforcement scope is also raising a growing number of questions about whether CFP professionals really want ‘yet another quasi-regulator’ in their businesses, as notably a significant portion of the Public Comment letters in response to its proposal did not question the details of CFP Board’s Procedural Rules updates for Enforcement, but whether or how much CFP Board should be involved in enforcement in the first place?

In the meantime, advisors looking for more details on the new rules can review a redlined version of the adopted revisions as well as changes the CFP Board did (and did not) make in response to the public comments.

The Patent That Helped Vanguard Clients Pocket Big Gains Expires

(Emily Graffeo | Bloomberg)

Thanks to the growing popularity of index investing during the past couple of decades as well as its reputation for low costs, Vanguard Group as of March 2022 stood as the second-largest asset manager globally, with $8.1 trillion in managed assets (only trailing BlackRock, which manages $9.57 trillion). One unique feature of Vanguard’s offerings is a system it patented in 2001 that allows its Exchange-Traded Funds (ETFs) to track their benchmarks closely and cheaply by launching them as a share class of existing mutual funds (rather than creating them as standalone products). But with this patent expiring this week, other asset managers could consider using this structure as well.

However, using Vanguard’s ‘system’ is not a simple proposition. To start, the SEC will need to grant companies exemptive relief from current rules that would let them use the fund structure. Further, while Vanguard used this approach with its index funds, a fund issuer looking to do the same with an actively managed fund will need permission to do so (managers of actively managed funds might also be dissuaded by the portfolio disclosure requirements of the ETF structure). To date, only one company, PGIA, the U.S. arm of Australian asset manager Perpetual Ltd., has asked the SEC to add ETFs to the share classes of its actively managed mutual funds (and is currently awaiting a response from the SEC).

In the end, the impact of Vanguard’s expiring patent is unclear, as mutual fund issuers try to navigate regulatory barriers and contemplate whether they are willing to meet the transparency standards required of ETFs. Further, given the growing popularity of ETFs and rule changes that have made launching ETFs easier, many asset managers might consider creating a new ETF rather than trying to create new share classes of an existing mutual fund. But if fund issuers do decide to take advantage of the new opportunity created by the patent’s expiration, advisors could gain access to strategies previously only available in mutual fund form, with the tax and other benefits of the ETF structure!

Too Much Work

(Morgan Ranstrom | The Value Of Advice)

While Kitces Research has found that on the whole, financial advisors score better than those in other professions across several dimensions of well-being, serving clients can take up a significant amount of an advisor’s time. This includes both the literal time spent in the office as well as the time thinking about client issues (i.e., the ‘mental load’ of thinking about client issues outside of regular work hours). And given research showing that feeling ‘time poverty’ (i.e., not having enough time to do everything an individual wants to get done) has been found to lead to reduced happiness (and can claw back the happiness gains that come from having a higher income), managing one’s workload appears to be an important part of an advisor’s wellbeing.

For Ranstrom, the key to creating a manageable workload was to focus on what ‘matters’ to his clients (he found the most important thing was to ensure and assure clients that they will be okay financially) and to cut out work that mattered less (e.g., general market commentary, being accessible at all times). To address his workload, Ranstrom shortened the duration of his prospect meetings (from a 30-minute phone call and 60-minute meeting to a single 20-minute phone call), reduced the length of his first-year onboarding program (from 5-8 meetings to 3 meetings), and shrank the number of meetings with ongoing clients from 4 to 2 per year. In addition, he was able to cut down his workload and gain efficiency by transitioning from a generalist firm (with 3 to 4 core client types) to a niched firm working solely with prospective retirees (and began targeting 50 clients per advisor in part to manage their workload).

Ultimately, the key point is that for advisory firm owners, managing workload is an important part of preventing burnout and well-being. And they have several potential options to do so, from shrinking the number of meetings to reducing client variability!

When The Pipes Are Built

(Douglas Boneparth | This Is The Top)

When a financial advisor first opens their own firm, building a pipeline of prospects is one of their most important tasks (as the advisor needs to convert some of these prospects into clients to generate revenue and keep the lights on). But once a firm starts to have a steady flow of prospects (and clients), the owner faces an important decision: whether to continue to grow (which could require additional firm infrastructure, such as staff hiring) or to remain a profitable firm of limited size.

After opening his firm, Boneparth spent nearly a decade building his prospect pipeline, doing everything from going to business school to expand his centers of influence, to writing a book about millennials and money, blogging, diving into Search Engine Optimization, making media appearances, and building a social media presence. This work paid off and has led to a growing advisory business. At this point, with the ‘pipes’ constructed, he faces the questions of what he wants his business to be and how he wants to balance his work and professional life.

To start, he recognized that an increasing client count was not the only way to generate revenue as an advisor and has pursued speaking engagements, corporate partnerships, and content creation opportunities to do so (with the help of his wife, who has joined the firm). In addition, they have found ways to create operational efficiencies and dive deeper into client service, which could ultimately boost the productivity of the firm.

In sum, while creating a client pipeline is an important milestone in building a successful advisory firm, it is not the end of the road, as a firm owner will face the decision of whether, and how, to keep growing. But by making these decisions intentionally, an advisor can increase the chances that their firm develops into a business that supports their personal and professional goals, whether it is a ‘lifestyle practice’, a “small giant”, or a larger enterprise!

Reflections On My Firm’s 7th Year

(Meg Bartelt | Flow Financial Planning)

Each year can bring changes for a financial planning firm, from the number of clients served to new employees brought on board. With this in mind, it can be a useful exercise for owners to take stock of where the firm has been, where it currently stands, and what they want it to look like moving forward. In Bartelt’s case, she has made these evaluations public, writing an annual blog post reflecting on how her firm, Flow Financial Planning, is doing and where it is headed.

For Bartelt, 2022 brought several challenges. Some of these were out of her control; for example, the weak market performance of tech companies (where Flow’s target clientele works) and the dramatic slowing of the IPO market (Flow’s planning specialty) combined to create more work for the firm (as clients saw their portfolios lose value, with some also losing their jobs) and a shrinking funnel of prospective new clients for much of the year. And within the firm, Bartelt made several changes, including changing the firm’s meeting cadence (from holding client meetings in concentrated periods to a more spread-out calendar) and hiring a new lead planner (which required an investment of money and time).

Amid these challenges (and the recognition that she only has a limited amount of time left with her kids at home), Bartelt decided that rather than continuing to ‘serve her business’, going forward she wants the business to serve her, allowing her to enjoy the parts of her life that have taken a backseat to the firm in its first several years. With this in mind, she has decided to (at least temporarily) stop trying to grow the firm further, both in terms of new clients (only taking on new ones to replace those who leave, with limited exceptions) and new employees. In addition, she is planning to incorporate a Turnkey Asset Management Platform (TAMP) (to reduce the time spent on investment management) and scale back on industry activities (e.g., conferences and study groups) to have more time to spend with her family.

Altogether, while 2022 was a challenging year for Bartelt and her firm, it also brought her the clarity needed to make changes that will hopefully create a better balance in her personal and professional lives. And so, whether they are in their 1st year or their 50th year in business, firm owners can consider stepping back and reflecting on whether their firm is meeting their needs and whether certain adjustments could promote the well-being of the firm and the owner themselves!

The 3 Levels Of Wealth

(Ben Carlson | A Wealth Of Common Sense)

While being ‘rich’ is a relative term, a look at U.S. income data can show where one stands compared to the broader population. For example, the median income for all households in the U.S. is a little more than $70,000 (notably, the median income for married couples is more than $106,000). A household would need about $212,000 of income to reach the 90^th percentile of income, and, for those with higher aspirations, more than $570,000 to be in the ‘top 1%’. Of course, income is only one piece of an individual’s financial picture. For instance, an individual who makes $300,000, but who has little savings and expenses equal to their income might not be as ‘rich’ as someone with $100,000 of income but a $1 million nest egg saved up.

And while income and wealth can be calculated as a number, they can also have a qualitative dimension as well. For example, Stewart Butterfield, founder of the office communication tool Slack, once described what he considers to be the 3 ‘levels’ of wealth. An individual reaches Level 1 of wealth when they are no longer stressed out about debt (perhaps after their student loans and credit cards are paid off). Level 2 is achieved when a person does not care what items cost at a restaurant (and the amount they spend on a meal out is not impacted by their finances). Finally, Level 3 is reached when an individual does not care what a vacation costs (and will no longer be concerned with how much they pay for a hotel or flight). And while these 3 ‘levels’ are subjective, advisors might recognize clients that are in each stage (and perhaps some clients who might be in one level given the state of their finances but spend like they are in a different one!).

Ultimately, the key point is that while there is no single definition of what it means to be ‘wealthy’, the 3 ‘levels’ show how building wealth can provide peace of mind in different ways – whether it is in having the flexibility that comes with being debt-free, not worrying about buying dessert when out to eat, or going on a dream vacation without worrying about the bill after it’s over!

The Problem With “FU” Money

(Khe Hy | RadReads)

Many individuals have the goal of reaching ‘financial independence’, or the idea that once sufficient assets are accumulated, the decision about whether, where, and how much to work, can be made independent of the financial ramifications of the work itself. This is sometimes referred to as having “FU” money (i.e., enough assets to leave a job that is not meeting one’s needs).

While having “FU” money can be satisfying, Hy suggests that having an “FU” identity can be even more valuable. Because while those with “FU” money might be able to leave a job regardless of the financial repercussions, they might depend on that job (and the status that it brings) as part of their identity, or how they view themselves. Instead, those with an “FU” identity are able to choose the things they do for the inherent joy of the activity rather than the identity (or monetary) benefits it brings. This can allow someone to not only have the flexibility to change jobs, but also the option to change careers, or even take time away from work to pursue their interests.

In the end, while having “FU” money can provide an individual with more options when it comes to work, having an “FU” identity can create even more flexibility in one’s life. At the same time, Hy suggests that it is important to recognize that no amount of money or flexibility will make an individual independent of the rest of society (as their actions will inevitably affect others). Which means that the ability to say “FU” might not really be about telling the world off, but rather having the ability to prioritize the activities and relationships that one values the most!

What Makes People Happy? Decoupling The Experiential-Material Continuum

(Journal Of Consumer Psychology)

Consumers have many options when it comes to spending their money. Given the nearly infinite number of choices available, researchers have spent significant time trying to figure out the types of spending that bring individuals the most happiness. One area of this research is determining whether buying 'experiences' (e.g., a vacation or concert tickets) or 'things' (e.g., a new car or item of clothing) brings more happiness. And while previous studies have found that buying experiences tends to lead to greater happiness, recent research suggests that this might not tell the full story.

Previous studies tended to categorize purchases as either 'material' (i.e., things) or 'experiential' on a binary scale. But this coding might not be effective when it comes to certain purchases. For instance, while a tennis racket would typically be classified as a material good, it is used to play tennis, which is an experiential activity. This dynamic applies for a range of other items as well, from buying a vacation home to adopting or purchasing a pet. With this in mind, researchers in a more recent study categorized purchases both by how material and experiential they are.

Reflecting previous research, the authors found that many purchases that were more experiential than material were among the top 10% of items studied in terms of bringing happiness to the buyer, including vacations, meals outside the home, and concerts. But they also found that purchases that had both experiential and material characteristics (e.g., books or a swimming pool) as well as some items that would be considered more material than experiential (a bed or central air conditioning) were in this top category as well, suggesting that there is a broader range of items that can bring happiness.

In sum, this study suggests that while buying 'experiences' can often generate happiness, individuals should not necessarily discount the happiness-boosting potential of purchases that might seem to be 'material', particularly if they enable an experience!

Men View Retirement As A Final Chapter While Many Women See A Fresh Start

(Joseph Coughlin | Forbes)

Retirement can mean different things to different people. While some might view it as an opportunity to relax on the beach or golf course after a long career, others might travel extensively or even take on a part-time job in a different field. And while individuals are likely to have unique preferences, dramatically mismatched expectations between partners for what retirement will look like could create tension in the relationship.

Coughlin and co-author Chaiwoo Lee examined the words people use to describe life after their careers and found that there are key differences between men and women. The authors found that men in middle age or in retirement tended to use words like “rest”, “relax”, and “hobbies”, while women of the same age often described life in retirement as “freedom”, “peace”, and “time for me”. So while men often viewed retirement as an opportunity to kick back and relax, women frequently saw it as part of a continuing journey (and took on active opportunities such as entrepreneurship and volunteering). And so, these differences could come as a surprise to retired men, who might find that their wives have significantly less time during the day to participate in leisure activities together.

Altogether, this research suggests that opposite-sex spouses or partners might have divergent views of what they want retirement to look like, which could lead to discord if these goals are not explored before leaving their careers. Which presents an opportunity for financial advisors not only to help clients decide when they can afford to retire, but also to encourage them to explore their attitudes and goals for retirement as well (and potentially work through any conflicts before they make this major life transition!).

Stop Telling Women That "Confidence" Is The Solution To Their Financial Problems

(Katie Gatti Tassin | Money With Katie)

National data show that women on average earn less and tend to have less wealth than men. Among the myriad reasons suggested to explain these gaps, it has been hypothesized that these gaps are due in part to women having less confidence than men in negotiating higher salaries at work. But Gatti Tassin argues that this stereotype might not be true and that other societal factors are greater contributors to differences between men’s and women’s earnings.

For example, one study (using survey data from Australia) found that while, on average, women were just as likely as men to ask for a raise, the men studied were more likely to be successful (as women who asked obtained a raise 15% of the time, while men saw a pay increase 20% of the time). Another study found that when job postings stated that wages were negotiable, there was no observable difference between men’s and women’s likelihood to negotiate (the study found that men were more likely to negotiate when there is no explicit statement that wages are negotiable). And when women are hesitant to negotiate, it could be related to experimental data suggesting that female job candidates are more likely to be penalized than their male counterparts for initiating salary negotiations.

In the end, Gatti Tassin suggests that merely telling women to act more confidently is unlikely to move the needle when it comes to income and wealth disparities with men. Instead, employers and managers can consider taking steps to even the playing field for men and women; such measures could include explicitly stating that a starting salary is negotiable or examining hiring or promotion decisions to ensure that they are based on an individual’s actual body of work rather than on gendered stereotypes. Which could ultimately lead to more equal opportunities and financial security for all workers!

The Gender Well-being Gap

(David Blanchflower and Alex Bryson | National Bureau Of Economic Research)

Researchers have long been interested in what would seem to be a core question for humans: what makes people happy? For instance, a series of studies have looked at whether having greater income leads to increased happiness (with recent research suggesting that having more income does increase both day-to-day happiness as well as overall life satisfaction, albeit with diminishing returns). Other research has looked into the question of whether there are happiness differences between women and men. Many of these studies have found that women report poorer mental health than men, but Blanchflower and Bryson suggest that the reality might be more nuanced.

Looking at gender differences across 37 positive affect (e.g., feeling calm or cheerful) and 18 negative affect metrics (e.g., feeling depressed or lonely) across 8 cross-country surveys taken in 167 countries, the authors find that women do in fact score more highly than men on all negative affect measures and lower than men on all but 3 positive affect measures, confirming previous findings. At the same time, when examining 3 broader well-being metrics (happiness, life satisfaction, and Cantril’s Ladder [which asks respondents to place themselves on a metaphorical ladder, with the top of the ladder representing their best possible life]), women are either similar to or happier than men. This indicates a paradox in that women report fewer positive feelings and more negative feelings than men on granular measurements but report similar or greater happiness when asked more broadly. The researchers explored various potential reasons for this finding (e.g., measurement issues), but were not able to find a specific cause (though they speculated that one reason could be that women have a different set point to men in responding to the broader well-being questions compared to responses on the more granular measures).

While these surveys indicate potential global differences in well-being between men and women, it is worth noting that these are based on large samples and significant individual variability is common. Which perhaps suggests an important role for financial advisors in helping clients develop and execute financial plans that could boost their overall well-being based on their individual preferences!

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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.