Weekend Reading For Financial Planners (August 26-27)

What Investors Really Think Of AI-Generated Advice: Survey

(Michael Fischer | ThinkAdvisor)

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, 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. More recently, though, the increasing popularity of ChatGPT and other Artificial Intelligence (AI)-based tools, in addition to the growing amount of financial 'advice' available on social media, has once again raised fresh questions about whether consumers will turn to these technology-driven advice tools instead of working with a financial advisor.

However, a recent survey of 1,153 adults by CFP Board indicates that trust in financial advisors remains high, and that many consumers view advice from AI and social media as a supplement to, rather than a replacement for, advice from a human advisor. According to the survey, 52% of respondents said that AI and social media will supplement human financial advisors, while 25% said that these tools will not take the place of advisors, and only 11% thought that they will take the place of advisors. Overall, respondents reported having the most trust in financial advisors (with 87% either strongly or somewhat trusting this source of advice), with generative AI tools (37%) and social media (25%) falling well behind. In fact, 46% of those who have used an AI-based financial services platform, 45% who used a generative AI tool, and 35% who had used social media for financial advice, still verified this advice with a human advisor (and less than 35% of those surveyed felt comfortable using these non-advisor tools without verifying the advice they provided).

Overall, this recent survey appears to confirm previous research from Vanguard indicating that financial planning clients see a role for both human advisors and digital tools, preferring 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 (which in practice human advisors increasingly tend to leverage technology to manage for their clients anyway).

And so, in the long run, it appears once again that the most likely legacy of AI for financial planning (similar to robo-advisors a decade ago) 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 bring down the cost of human-delivered advice, in turn growing the market for financial planning advice services!

SEC Settles First Charges Stemming From Updated Marketing Rule

(Patrick Donachie | Wealth Management)

Almost 2 years after it was first announced, enforcement of the SEC's new marketing rule began in November of last year. The new marketing rule presents RIAs with the opportunity to greatly expand their marketing efforts with new options, from client testimonials to promoting the reviews they've received on third-party websites, to provide prospective clients with evidence of the quality of their service. Last September, the SEC issued a risk alert putting advisors on notice that examiners will be conducting a number of reviews to evaluate how firms are complying with the new rule, including scrutiny of how advisors are incorporating performance metrics in their advertisements.

This week, the SEC announced that it settled its first charges related to the new marketing rule. The regulator had brought charges against robo-advisor Titan Global Capital Management – which will be required to pay more than $1 million in collective disgorgement and penalties, among other measures – for allegedly making misleading statements in marketing materials regarding hypothetical performance data related to a cryptocurrency strategy it offered. For instance, while Titan's website said that the strategy had an "annualized return" of 2,700%, this projection was based on a hypothetical account with no actual trading and that the return had been extrapolated from a 3-week period (during which the strategy returned 21%). Further, the information describing the hypothetical calculation was not in the firm's ads themselves, but rather in embedded links labeled as "disclosures" and "track record" in the ad's fine print.

Ultimately, the key point is that while the SEC has heavily scrutinized the use of hypothetical performance in advertising for many years, its restrictive stance is codified in the updated Marketing Rule. And while the SEC's first settlement resulting from the rule appears to be related to a brazen violation of its provisions, it does signal that the regulator is scrutinizing performance data in advertising and that firms will want to ensure their performance advertising fits within the guidelines!

Survey Suggests "Longevity" Is The New "Aging" For Older Adults

(Steve Randall | InvestmentNews)

Retirement is often portrayed as a time of rest and relaxation after a long career. But for many Americans, retirement is viewed less as a time to 'wind down' and more of an opportunity to take on travel, hobbies, and other active pursuits. And a recent survey suggests that this latter view of retirement is also shaping the language used to talk about it.

According to a Harris Poll study conducted by Age Wave, 66% of respondents age 50 and older see retirement as a new chapter in life (compared to 16% who say it is principally a time for rest and relaxation) and 59% of pre-retirees and retirees reported that they want to work in some form in retirement. Perhaps related to this view of 'active' retirements, 69% of these respondents prefer the term "longevity" when thinking about growing older, compared to 31% who preferred "aging"; in addition, those surveyed who were at least 65 also reported being freer and happier, and less anxious, compared to younger demographics. Altogether, respondents 50 and older appear to have a different view of their relative youth compared to their predecessors, as they said that while age 60 was considered "old" during their grandparents' time, age 80 is now the marker of being "old".

Altogether, this survey provides evidence that the 'traditional' view of retirement as a time to step away from work relax might no longer hold. Further, the responses suggest that for advisors, retirement planning for today's retirees could look different than it did in the past (e.g., planning for 'semi-retirement' rather than a clean break from work), and that prospects and clients might be more receptive to talking about 'longevity' rather than 'aging' during these retirement planning conversations!

Going Off Script In Retirement Conversations

(Robert Laura | Financial Advisor)

With the decline in defined-benefit pensions and the rise in defined-contribution retirement plans, workers increasingly understand the need to plan for their retirement financially. At the same time, as they approach retirement age, busy professionals might not take the time to consider what they actually want their retirement years to look like.

Laura suggests that advisors have an opportunity to add value to clients who are nearing (or in) retirement by helping them think through the 'scripts' they have around retirement. For instance, Laura asks clients 3 questions: "Whose rules (or script) are you following?", "Why are you following them?", and "What would happen if you changed – and went off script?". Together, these questions can help clients consider whether they are following their own plan for retirement or someone else's and what changes would they like to make. Another potential exercise is to ask clients to think about 1 or 2 things that they would not want to regret 3 years from now. While clients might be reluctant to talk about previous regrets, this forward-looking exercise can help them turn off 'auto-pilot' and prioritize what is most important to them.

Ultimately, the key point is that financial advisors can play an important role not only in helping clients plan for retirement financially, but also in helping them explore what an enjoyable and fulfilling retirement looks like to them, whether through the above exercises or techniques such as George Kinder's 3 Life Planning Questions or others!

Why 72% Of Retirees Are Happy

(Fritz Gilbert | The Retirement Manifesto)

A 2020 meta-analysis found that approximately 28% of retirees are depressed, a significantly higher number than the broader population, with the highest prevalence among those forced into retirement, either due to downsizing or illness. On the flip side, separate research from Age Wave and Merrill Lynch found that 76% of retirees reported often feeling happy, more than any other age group studied. Which raises the question of what factors contribute to an individual having a happier retirement.

From his research, Gilbert identifies 3 financial traits and 6 non-financial traits of happy retirees. On the financial side, he cites the findings of Wes Moss' book "What the Happiest Reitrees Know: 10 Habits for a Healthy, Secure, and Joyful Life" that happy retirees tend to have at least $500,000 in liquid assets, have their mortgage paid off, and have multiple streams of income. On the non-financial side, factors driving happiness in retirement include a heightened sense of curiosity (e.g., having a variety of hobbies and interests), having purpose, and having more social connections. Other non-financial factors include retiring at the planned time and personal health, which the Center for Retirement Research at Boston College identified as having a higher correlation to happiness than does financial wellbeing. Finally, those who invest the most amount of time in planning for their retirements (in planning both the financial and non-financial aspects of retirement) tend to be happier than others.

Looking at the list of 9 factors, financial advisors have an opportunity to support clients in many of them, whether it is amassing sufficient assets to support their lifestyle and exploring a variety of retirement income streams, or, on the non-financial side, helping clients explore not only what they want their retirement to actually look like, but also how they will replace the social connections and sense of purpose that can come from a job!

The 5 Types Of (Retirement) Wealth

(Atman | The Knowledge Toolkit)

The word 'wealth' is most frequently used in the context of financial wealth, or the amount of assets one has accumulated. And while individuals often focus primarily on this form of wealth when it comes to retirement planning, other forms of wealth can play an important role in determining whether they have an enjoyable and fulfilling retirement.

For instance, "physical and mental wealth" are important drivers of happiness, in retirement and otherwise. Because even if one has significant financial assets, they might not be able to enjoy them if they are not able to enjoy the full range of physical activities or are plagued by anxiety. In addition, "relationship wealth" (i.e., having close relationships with friends and family members) can combat loneliness, which is a particular problem for retirees who lose many of their connections when they leave their job or move to a new location. Also, "skills wealth" can be useful in retirement, whether it is in pursuing hobbies (or learning new ones) or leveraging prior experiences to volunteer (which can provide a sense of purpose as well). Finally, the ultimate source of wealth might be "time wealth" (e.g., would you want to trade places with Warren Buffett, becoming incredibly rich but, at age 92, having a limited number of years left to live?). And while retirees might be on the back half of their lifespans, this period does present them with significantly more time during the day (no requirement to be at work!), offering significant flexibility and optionality for this period.

Ultimately, the key point is that a myopic focus on financial wealth during one's working years can lead to a dearth of other sources of wealth (as working excessive hours to earn more money could lead to physical and mental strain, as well as a lack of close, personal relationships), which could lead to less happiness in contentment. Which suggests that nurturing these non-financial forms of wealth can ultimately help an individual get the most out of their financial wealth, whether by having other people to enjoy travel and other experiences with, or by having the physical stamina to do them in the first place!

Bad Timing Cost Fund Investors 17% In Gains The Past Decade, Morningstar Says

(Tracey Longo | Financial Advisor)

The ever-rising increase in the amount of available financial 'news' and commentary with the accessibility of smartphones, as well as a dramatic reduction in the cost of trading in and out of mutual funds and ETFs, can increase the temptation to time the market and trade in and out of investments. Which in turn can exacerbate the so-called "behavior gap", where investors tend to underperform the returns of the underlying funds they invest in (because they often buy after the fund has risen in value and sell when it falls).

The latest edition of Morningstar's annual "Mind the Gap" report shows that this trend is still prevalent, with the average dollar invested in mutual funds and ETFs earning a 6% return during the 10 years ending in December 2022, compared to a 7.7% return for the average fund, an annual "behavior gap" of 1.7%. Looking at different fund types, the report found the largest gaps in more volatile funds, with these funds seeing a 1-percentage-point increase in the gap compared to less-volatile funds, as well as in sector funds. Fund categories where investors tended to fare better included large-cap growth and large-cap blend funds (which ranged from a slight gain of 0.10%, to a gap of just 0.59%), as well as in broader-based asset allocation funds (i.e., those that invest in multiple asset classes, including stocks, bonds, and cash).

Altogether, these results show that consumers may be doing better in sticking with their 'core' holdings (e.g., asset-allocation funds and broad-based large-cap funds), but still succumb most to the behavior gap (and temptation to trade) when it comes to more volatile investments in particular. Which means advisors can add particular value to clients by helping them stick with the most volatile elements of their diversified portfolio (and the Morningstar study suggests that closing the behavior gap could make up for an advisor's fee on its own). Nonetheless, because prospective clients tend not to look for an advisor who promises to 'handhold you through the emotions' of market swings (as they might be in denial and believe it's not a problem for them), framing this value in a gentler way (e.g., by connecting their portfolio design with their goals) could help advisors demonstrate their benefits without making clients feel judged!

How To Get Rich In The Markets

(Barry Ritholtz | The Big Picture)

While there are plenty of potential ways to get rich using financial markets, the degree of difficulty, likelihood of success, and time required of each one can vary significantly. Because there is no one 'right' answer for everyone, Ritholtz ranked a variety of options in these three dimensions to demonstrate the tradeoffs that come with each.

For example, one way to get rich in the markets is to find the 'next big thing', perhaps loading up on shares of a small company in the hopes that it will turn into the next Apple. This is potentially one of the quickest ways to make a significant amount of money but it also has a high degree of difficulty and low likelihood of success (as very few stocks end up hitting it big in this way). Another option is to time the market, whether by trying to identify stocks or funds that will jump in value, shorting those that appear to be overvalued, or, at the extreme, trying to jump on the next bubble (but getting off before it pops!). These methods might be slightly less difficult than trying to identify the 'next big thing' and do not require decades to succeed, but also come with a relatively low likelihood of success (as successful market timing can be hard to execute). Among the strategies with the highest level of success are indexing, dollar-cost averaging, and/or holding assets 'forever', as these methods take advantage of the fact that the broad U.S. stock market has grown at a generous pace over time (with bumps along the way). The downside to these approaches, though, is the time required; however, such a period could match up well with the time until the funds are needed (e.g., retirement).

In the end, while traders and investors have a variety of potential ways to make money in the markets, each of these requires tradeoffs, whether in the difficulty of execution, the likelihood of success, or the time required for it to succeed. Which could serve as a useful framework for advisors the next time a client brings a 'hot' investment idea to a meeting!

Investing For Immortals

(Joachim Klement | Klement On Investing)

When recommending an asset allocation for a client, an advisor might consider what would be appropriate given the client's age, goals, and life expectancy. Though, at the most, an advisor might plan for the portfolio to be invested for decades (rather than perpetually) given current lifespans (though advisors working with endowments or similar funds might consider a longer term). As a thought exercise, Klement considers how he would invest if he were immortal and would be investing for centuries and beyond.

First, he would avoid making any forecasts about what the world will look like well into the future (given the difficulty predicting what the economic or market environment will be next year, predictions for decades or centuries would be even less likely to be accurate). Rather than trying to forecast what the world will look like, he would instead seek investment strategies that exploit the behavioral biases and mental shortcuts that humans often take. Specifically, he would choose investments based on the momentum and value factors; the former because of investors' tendency to jump onto investments that have gone up in the past, and the latter to take advantage of opportunities when companies with strong fundamentals see their value fall during broader market downturns.

When building and 'immortal' portfolio, Klement would seek out public and private equity investments to take advantage of technological progress and the profits companies would make in that environment. He would also dedicate a portion of his portfolio to a basket of currencies as well as gold to ensure he had sufficient liquidity to tap into when a need for cash arises. He would be less interested in investing in bonds (as they could suffer in an inflationary environment and alternative sources of financing might emerge) and cryptocurrencies (given their short history, it is unclear how long they will be around).

Ultimately, the key point is that while advisors working with individual clients typically do not have to plan for their portfolios to last for multiple centuries, considering which broad investment principles would be most likely to stand the test of time can be a useful thought exercise!

How Opinions About Hybrid Work Differ Around The Globe

(Mark Mortensen and Henrik Bresman | Harvard Business Review)

While remote and hybrid work options have existed for many years, the pandemic brought these practices to the forefront. But as pandemic-related concerns have receded for many individuals, companies are making decisions about whether to continue allowing employees to work remotely part- or full-time (and some employees are shaping their job decisions based on these policies).

Notably, research has found that opinions about remote and hybrid work do not just vary across companies and industries, but across countries and continents as well. For instance, a survey of managers across the globe found that respondents in the Asia-Pacific region were more interested in returning to the office than those in other regions (with those in the United States having the least interest in doing so). One reason for this disparity might be differences in how managers view productivity when working remotely; for example, half of respondents in the Americas rated remote productivity a 5/5, while only 26% of those surveyed elsewhere said the same. In addition, those in the Americas were less likely to report being concerned about missing out on social connections with coworkers than other respondents.

While financial advisory firms typically are not global in nature, understanding the interests of different groups of employees (as well as the needs of the firm itself, such as being in the office for client meetings) can help managers create more effective hybrid and remote work policies. For instance, newer employees might be interested in spending time in the office for the mentorship and training opportunities available when in physical proximity to more senior coworkers. In addition, firms can decide between different hybrid approaches; for instance, assigning specific days that employees are required to be in the office can create more opportunities for in-person interaction, while allowing employees flexibility in choosing their days to be in the office can provide them with more flexibility.

In the end, there is no 'right' answer for every firm when it comes to hybrid and remote work. But by considering the preferences of the full workforce alongside firm needs, managers can formulate policies that could promote productivity and employee satisfaction!

The Working-From-Home Illusion Fades

(The Economist)

While the pandemic forced many companies to implement remote work policies, working remotely offered potential benefits as well, from shorter commute times to increased workday flexibility. Another potential benefit was an increase in worker productivity, as a home office could allow for fewer distractions compared to a busy office.

However, several recent studies call into question the productivity benefits of remote work. For instance, a study from the Federal Reserve Bank of New York found that workers in a call center for a large company fielded fewer calls when they moved from the office to a remote environment. In addition, working remotely led to degraded call quality (particularly for inexperienced workers) and reduced workers' promotion rates. A separate study of employees at Microsoft found that professional networks within the company became more static and isolated when employees worked remotely. This reduced social interaction could explain some of the productivity losses for remote workers, who have fewer opportunities for collaboration or to interact with senior managers.

At the same time, separate research has found that remote work leads to happier employees, suggesting there could be a tradeoff between productivity and employee satisfaction. Further, productivity levels related to remote work could vary based on the type of work being performed; for example, work requiring extended periods of deep focus could potentially be performed better in a quiet home environment compared to an office prone to more interruptions.

In sum, available research suggests that working remotely does not automatically confer greater productivity and could serve as a detriment in certain cases. Which suggests that advisory firms could consider adjusting their hybrid or remote policies based on the type of work being performed and to provide sufficient opportunities for collaboration, training, and mentorship for their employees!

Hybrid Work Makes People Better At Their Jobs But Most Companies Aren't Doing It Right

(Trey Williams | Fortune)

In the past couple years, there has been significant debate about the merits and downsides of remote versus in-office work. While some companies have gone fully one way or the other, a third option, hybrid work, provides the opportunity to get the best of both worlds: allowing employees to work from their (usually quieter) home offices and save on commuting time, while still having in-person days in the office for collaboration and serendipitous encounters.

At the same time, there is no single 'way' to create a hybrid work schedule. For instance, some companies mandate the specific days employees need to be in the office (e.g., Monday and Wednesday each week), while others require employees to be in the office for a certain number of days each week, but do not prescribe which ones they have to be. While each style has potential benefits, Stanford University professor Nick Bloom suggests that the first style (with "anchor" days where everyone is required to be in the office) is the superior approach because doing so allows workers (and the firm) to get the best of both worlds: workdays at home where they can take on 'focus' tasks like writing or analysis with fewer interruptions, and other days where everyone is in the office to maximize face-to-face interactions. Because while the second style (letting employees choose which days to come into the office) provides workers with more schedule flexibility, it can result in frustration if they come into the office but still have to hold meetings via videoconferencing because some colleagues are at home.

Altogether, Bloom suggests that a hybrid approach using "anchor" days could result in a 3–5% improvement in productivity. Which suggests that such an approach could be viewed positively not only by firm owners (who want to promote productivity and employee retention) but also employees (who will still be able to benefit from multiple at-home work days each week)!

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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.