Weekend Reading For Financial Planners (October 14-15)

Firms Not Offering Tax, Retirement Planning Are Getting It Wrong, But Some Firms Are Still 'Too' Comprehensive, Too

(Ali Hibbs | WealthManagement)

In recent years, an increasing number of advisors are offering 'comprehensive' financial planning services. However, there is no single definition of what this type of financial planning entails, or how many or what combination of services are necessary to make a plan 'comprehensive'. Amid this backdrop, one way to frame a 'comprehensive' service offering is not simply to do "as much as you can" for a client, but instead simply to include the breadth of services most in demand among consumers in particular… with the idea that creating a 'comprehensive' offering becomes comprehensive 'enough' (not too little, nor too much) if it includes these areas that are most compelling to prospective clients.

With this in mind, research and consulting firm Herbers & Company conducted a study of nearly 1,600 consumers and more than 700 financial advisory firms to determine the most in-demand services among consumers, and whether advisory firms were offering these services. The study found that among consumers with more than $250,000 in household assets, tax planning (90%) and retirement planning (74%) were the most in-demand services, followed by investment management (55%) and cash flow planning (41%), suggesting that these are the best areas to build a 'comprehensive' foundation. Among the least in-demand services were health care planning (10%), business planning (10%) and employee benefit planning (11%)… which in turn implies that these are areas advisors should feel comfortable not including in a 'comprehensive' plan because most consumers don't want it and won't miss it (unless they are specifically relevant to an advisor's particular niche or specialized ideal clientele).

On the whole, Herbers' research found that most (albeit not all) advisory firms were well aligned with these consumer priorities. Among advisory firms surveyed, tax planning (offered by 73% of firms) and retirement planning (67%) were the most common services offered (matching the most-demanded services among consumers), followed by investment management (66%), cash flow planning (65%) and education planning (65%). However, reflecting the ways in which some advisory firms are becoming "overly" comprehensive, for several services the percentage of firms offering them far exceeded consumer interest; for example, 61% of firms offered business planning services while only 10% of consumers demanded them, 42% of firms offered employee benefits planning while only 11% of consumers were interested, and 65% of firms offered education planning, while only 21% of consumers demanded the service. Notably, one area where there was consumer interest with unmet advisor capacity was investing in cryptoassets, where 10% of consumers expressed interest but no firms surveyed offered such services. 

The study also assessed how firms experiencing the most organic growth differed from other firms. It found that the top-growing firms had more comprehensive service offerings than other firms. For instance, while 97% of the top-growing firms offer tax planning and 96% offer retirement planning, only 49% and 42% of other firms, respectively, do the same. Firms seeing the most organic growth also separated themselves in terms of their ability to convert prospects to clients, with these firms having a 73% close rate compared to 33% of other firms. Interestingly, 63% of top-growing firms rated their client experience to be "below average", while only 36% of other firms said the same (perhaps suggesting that the top-growing firms are perpetually seeking to improve their client experience while other firms are more complacent about their offering… or alternatively that the top-growing firms are finding that clients don't really choose who to work with based on their 'client experience' when it comes time to actually select an advisor?). 

Altogether, this study suggests that while there is a growth payoff for firms that offer comprehensive financial planning services, there does not appear to be a fixed definition of what (and how many) services are included in such an offering, and firms in an effort to differentiate on comprehensive might actually be going further than they need to. Which offers a range of potential strategies for advisory firms: while some might try to be the 'most' comprehensive by offering as many services as possible (though doing so can require significant firm resources), others might try to meet the broader pool of consumers 'where they are' and focus their offering on the most in-demand services for their particular clientele, and still others might seek to specialize and offer a more unique service in areas of less consumer demand (to attract the clients for whom those services are very important)!

Investors Who Overestimate Their Financial Acumen Pay Higher Fees, FINRA Says

(Emile Hallez | InvestmentNews)

Thanks in part to the rise of online brokerage platforms, it has never been easier for consumers to manage their own investments. At the same time, investing can be a complicated endeavor given the variety of options from which to choose, including funds and other investment products that can come with a range of fees and related expenses (that can eat into an investor's returns). With this in mind, a FINRA Foundation study sought to explore whether an investor's objective investing knowledge as well as their perceived knowledge are correlated with investing in higher- or lower-fee products. 

The study used data from 4,827 individuals who reported owning non-retirement investments (the vast majority also owned retirement accounts) and found that those who scored better on a 10-question quiz testing their knowledge of investing tended to pay less in investment fees compared to those who scored worse on the quiz (notably, the respondents self-reported the fees they paid, introducing the possibility that some investors miscalculated the actual fees they pay). For instance, those who reported paying less than 0.5% in fees answered an average of 5.7 questions correctly, while those paying 4% or more in fees answered 3.65 questions correctly on average. This suggests that those with greater objective investment knowledge tend to gravitate toward lower-cost investments (perhaps recognizing the potential importance of fees in determining net investment returns). 

The researchers also considered the potential effect of self-assessed investing knowledge on total investment fees paid. Interestingly, those paying the most in fees reported greater investing knowledge than others. For example, those paying 4% or more in fees rated themselves at 5.43 (out of 7) in terms of investing knowledge, while those paying less than 0.5% gave themselves a 4.96 rating. Which suggests that those with more confidence are more willing to invest in pricier products, perhaps because of confidence that they will be able to pick investments that will outperform net of fees. 

In sum, this research suggests that those with greater investing knowledge tend to gravitate toward less-expensive investments, while those with higher self-assessed knowledge are willing to take on more fees. Which potentially presents an opportunity for advisors working with clients in each group: those with greater knowledge might appreciate an advisor's ability to put them in a lower-cost portfolio, while an advisor might be able to improve the net returns of a higher-confidence investor who had previously invested in pricier funds!

New Survey Makes The Business Case For Pro Bono Planning

(Diana Britton | WealthManagement)

Among other factors that help the medical and legal fields stand out as bona fide professions is their commitment to pro bono service. And as the financial planning industry transitions from an industry to a profession, increasing the amount of pro bono service performed by its professionals could be an important part of being recognized at the same level as those other professions. Further, in addition to helping the financial planning industry as a whole, a new report makes a business case for firms to encourage pro bono service among its employees.

According to the report from the Foundation for Financial Planning (whose mission is to expand access to pro bono financial planning for people in crisis or need), 73% of the CFP professionals surveyed had previously performed pro bono service, with 50% engaging in 1 to 12 hours in the past year and 22% having performed more than 12 hours. And this service provided a range of benefits for those who participated, with 71% saying their pro bono service helped them develop more effective client listening and communication skills, 73% reporting that the opportunity gained through pro bono financial planning to interact with a more diverse client base makes them more effective as an advisor, and 56% responding that their pro bono services has allowed them to take on new roles and develop specific leadership skills that they can apply with paid clients and/or in their broader career. This skill development was particularly noticeable for CFP professionals under age 35, with 81% saying that their client listening and communication skills improved (suggesting that pro bono service could be a productive way for junior advisors at a firm to practice their client meeting skills).

The survey also indicated that many advisors would be more likely to want to work at a firm that encourages pro bono planning, with 46% of all respondents, 55% of those under age 35, and 55% of female respondents indicating this was the case (at the same time, only 28% of all respondents said that their firm has an encouraging policy for pro bono planning, suggesting that firms that do adopt such policies could be more competitive in the market for advisor talent). Among the potential ways firms could encourage pro bono planning, top responses from the CFP professionals surveyed included allowing advisors to use some of their work hours for pro bono service (identified by 67% of respondents), taking care of compliance-related issues (67%), having partnerships with nonprofit organizations who lead the pro bono movement (59%), and taking positive note of pro bono service during performance reviews (52%).

And while firms might be concerned about the time it might take to set up their own pro bono program, in reality they do not have to do so on their own, as there are a variety of organizations that facilitate connections between advisors and pro bono clients, including the Foundation for Financial Planning itself (which offers the ProBonoPlannerMatch website that allows firms and advisors to connect with nonprofits looking for pro bono support), as well as pro bono platforms such as Advisers Give Back that take care of many of the back-office responsibilities of setting up successful pro bono meetings so that advisors can spend their time working directly with clients.

Ultimately, the key point is that pro bono service can benefit everyone from individual advisors and their firms to the broader financial planning industry to the public as a whole. And thanks to new tech-enabled platforms, engaging in pro bono financial planning has never been easier!

The New FAFSA: Changes To College Financial Aid Application Are 'Tectonic', Says Expert

(Jessica Dickler | CNBC)

Each Fall marks the beginning of the college application and financial aid process for students and their parents and for those applying for financial aid for the first time (and some returning filers!), filling out the Free Application For Federal Student Aid (FAFSA) can be an intimidating prospect. And so, to help alleviate some of the confusion related to the FAFSA form, Congress in late 2020 approved changes to the FAFSA, as well as the formulas used to determine financial need, which are set to take effect for those filing the FAFSA this year.

Several of the changes to the revamped FAFSA could increase students' eligibility for aid, depending on their circumstances. For instance, while distributions from grandparent-owned 529 plans were previously reported as untaxed income for the student (reducing their aid eligibility by as much as 50% of the amount of cash support), they will now low longer impact a student's eligibility for aid. In addition, the federal financial aid formula will become more generous to lower-income students, allowing an additional 1.7 million students to qualify for the maximum Pell Grant (which is worth $7,395 for the 2023-2024 school year). On the other hand, certain changes could reduce students' eligibility for federal aid; for instance, families will no longer receive a break for having multiple children in college at the same time (and this could impact many middle- and higher-income clients, who are expected to contribute to college costs according to the new "Student Aid Index" calculation).

Notably, given the changes to the form, the FAFSA filing season will open in December this year (for those applying for aid during the 2024-2025 school year), rather than the customary October 1 start date (the Department of Education has said that it plans to revert to an October 1 start date next year). And advisors could potentially support clients not only in filling out the FAFSA by encouraging them to complete the form as early as possible (and helping them fill it out, if necessary, though some of the required financial information now will be imported directly from the IRS), as some financial aid is awarded on a first-come, first-served basis, or from programs with limited funds.

In the end, these changes will potentially simplify the FAFSA filing process as well as affect the amount of aid certain students receive. At the same time, it also presents opportunities for advisors to add value for their clients, whether in educating them on the changes as well as in taking advantage of certain planning strategies (e.g., grandparent-owned 529 plans, which will become significantly more valuable!).

FAFSA Vs. The CSS Profile

(Ann Garcia | The College Financial Lady)

When it comes to financial aid for college, the Free Application For Federal Student Aid (FAFSA) is the most well-known form, as it is used by all colleges to allocate federal funds for student aid. Nonetheless, the CSS Profile is also an important part of the financial aid landscape, as it is used by about 250 (mostly private) colleges to help determine how much institutional aid a student might receive (which can be particularly valuable given the often-high sticker prices of private schools!).

While the 2forms serve a similar function (determining how much a student and their family might be expected to contribute to the cost of college), their calculations differ in several ways. For example, the CSS Profile considers a broader range of data than does the FAFSA, including home equity (based on the Federal Housing Multiplier Index), all 529 accounts for which the student is the beneficiary (not just those owned by the student's parent), as well as the cash value of insurance and non-qualified annuity products (though notably, individual schools have latitude in terms of how they use each of these factors in setting their institutional aid policies). In addition, the CSS Profile uses total income from all sources (i.e., tax returns and W-2s), meaning that families have to add back pre-tax contributions to employer retirement plans. On the plus side, the CSS Profile continues to divide the Expected Family Contribution (the output of the Profile's calculation) between the number of college students in the household, whereas the FAFSA no longer offers this 'sibling discount'.

Ultimately, the key point is that while the FAFSA gets much of the attention when it comes to college financial aid, the CSS profile is another key form within the financial aid universe, particularly for families with students interested in attending a private college. Which presents an opportunity for advisors to help clients better understand the potential value of filling out each form, how they are different, and, more broadly, the different types of financial aid (i.e., federal versus institutional) they might receive!

The Little-Known Way Parents Are Beating College Tuition Hikes

(Ashlea Ebeling | The Wall Street Journal)

The average sticker price of a college education has well exceeded the rate of inflation over the past 2 decades, which has led many parents (and grandparents) to save and invest for their children's college education. And when it comes to education planning, 529 plans are generally considered one of the most, if not the most, tax-efficient ways of saving for future expenses. Contributions to such accounts receive no special tax break at the Federal level (though many states offer a deduction or credit for such contributions, particularly if made to an in-state-sponsored plan), but distributions, including earnings, that are used to pay for qualified education expenses are not subject to Federal income tax.

While savers in state-run or state-sponsored 529 plans typically choose from a menu of investments with the goal of seeing their contributions appreciate by the time their student starts college, a few states also allow 529 plan owners to 'prepay' for their student's tuition by buying tuition 'credits' (typically for in-state public schools) that allow them to 'lock in' the current price of tuition. While this approach does not offer the upside that investing 529 balances in equities or other investments might, it does provide a 'guaranteed' return represented by the difference between today's tuition price and the price when the student eventually matriculates.

As an alternative, the Private College 529 Plan gives college savers nationwide the opportunity to 'lock in' the cost of tuition at nearly 300 private colleges by buying prepaid 'certificates' at current prices. Notably, these certificates only cover tuition and fees, so this approach could be combined with funding a 'traditional' 529 plan that could be used to cover housing, food, and other expenses. Further, credits are redeemable 36 months after the first deposit, so even parents whose children are planning to start attending a participating school the following year could 'prepay' for the child's senior year at current tuition rates. If the child who is the beneficiary of the Private College 529 plan does not end up attending a participating school, the account owner can change the beneficiary to another child or certain other family members, or ask the plan to refund the money, with some adjustments.

In sum, the Private College 529 Plan could be an attractive opportunity for families who anticipate that their child might attend a participating private college and who want to 'lock in' today's tuition prices. Further, advisors can play a valuable role in this process as well, not only by helping families explore the range of college savings opportunities, but also by allocating this money to the type of plan that will best meet their college funding goals and risk tolerance!

How RIAs Can Build A Healthy Family Environment

(Lazetta Rainey Braxton | WealthManagement)

In the current tight labor market, many companies are looking for ways not only to attract new talent, but also to retain current staff. And while they might focus on issues such as compensation and perks, another (potentially less costly) way to promote retention is to demonstrate genuine care for employees' stress levels and work-life balance.

For example, while a manager might check in regularly with staff to gauge progress on work tasks, also asking about employees' stress levels can not only show care for how they are feeling but also could help the manager better understand each employee's capacity for the current day or week. One method to do so is to designate a certain amount of time in one-on-one meetings to allow the employee to tell their manager what they have going on, both in their work and personal lives, which could help uncover stress levels that might not be detected from merely monitoring how many tasks they are completing. Another option is to do an "energy check" during team meetings to see which team members are starting to become overextended, which could help the manager to shift responsibilities to help ensure no team member burns out.

In addition, firms can support their employees by creating an environment where using company-approved flex time and the full allotment of Paid Time Off (PTO) is encouraged. Given Pew Research data showing that 46% of workers take less PTO than they are offered (with reasons cited including worry that they might fall behind at work and concern that taking more time off might hurt their chances for advancement), a significant amount of PTO is likely going unused each year. By setting the expectation that employees can (and should) take their PTO, firms can encourage staff to take time off and potentially help them avoid burnout.

Ultimately, the key point is that employees are more likely to be both productive and loyal to a firm when they feel supported and valued. And doing so does not necessarily require a significant financial expenditure from a firm, but rather thoughtfully taking time to check in with employees and ensuring that their workload and schedule are matched well with their capacity!

How To Support New Workers' Mental Health

(Bernie Wong, Talia Varley, and Seema Parmar | Harvard Business Review)

Starting a new career can be a major shock for an individual, whether they are right out of school or are coming from a totally different field. Notably, though, firms can take several steps during the hiring and onboarding process to promote the mental health of new employees and help them get started on what will hopefully be a long and successful career at the company.

First, firms can consider ways to integrate mental health into their new employee experience. For instance, being clear about how the company views work-life balance in job postings can give applicants a better idea of what it will look like to work at the firm. In addition, firms can consider ways to build support systems for new employees from their first day, perhaps by assigning each new hire a peer 'buddy' and/or more senior mentor who can help them acclimate to life at the firm.

Firms can also promote better mental health among their employees by creating a sustainable company culture. This can include being clear and consistent about teaching workplace "norms", from "hard norms" like roles, timelines, and deadlines to "soft norms" around urgency, responsiveness, and communication practices at the firm. Managers can also encourage employees to share their preferred working styles and schedules to better create an environment in which they can thrive.

Finally, firms can encourage better mental health by making it easier for employees to access available benefits and resources. For instance, holding information sessions that explain available health care and other benefits, as well as providing written reference guides that detail how to navigate and weight different benefit options can help new employees (and existing employees during the annual open enrollment period!) make the elections that best meet their needs.

Altogether, firms can promote new employees' mental health both by being transparent to candidates and new hires about the company's culture and norms, and by offering (and making it easier to choose from) a suite of health-related benefits (that could include everything from health insurance that covers mental health services to flexible schedules that allow both firm and employee needs to be met). Which could ultimately lead to better productivity and employee retention in the long run!

How To Ensure Team Members Strive And Thrive

(Beverly Flaxington | Advisor Perspectives)

As a firm owner or manager, it can be easy to focus solely on the task at hand in a given day or week. At the same time, taking time to look at the 'big picture', including the company's mid- and long-term goals is a potentially valuable exercise to ensure the firm is moving in its desired direction. Further, involving employees in the setting and management of goals, and finding ways for each employee to leverage their unique skillsets, can help the firm achieve its goals while empowering its staff.

At a broad level, a firm can set its vision for what it wants to achieve in the long run and how it plans to get there. In addition, setting clear success outcomes (i.e., quantitative and qualitative goals) when articulating this vision can give employees an idea of what 'success' looks like. Further, firms can consider creating (and communicating) a roadmap to explain how it plans to reach these objectives; notably, while setting specific goals can be helpful, leaving latitude for teams and individuals to work toward these goals in their preferred manner (i.e., being given clearly laid-out steps versus flexibility with guardrails) can be a way to leverage employees' different skillsets and work styles. And when individuals do succeed, providing validation and recognition of their work (which could be a simple "thank you") can encourage them to keep working towards the broader firm goals.

Altogether, while creating and executing a firm-wide vision can be a challenging process, doing so in a way that is transparent and recognizes employees' differences can not only increase the chances of success, but also allow employees to thrive in the process!

The Band Of Debunkers Busting Bad Scientists

(Nidhi Subbaraman | The Wall Street Journal)

It seems like every day, there is a news article discussing a novel research finding from a published study, whether it is in the social sciences, psychology, or finance. But while many readers might take these findings at face value (with the thinking that if a study it published in a respected journal, it must be rigorous), some academics are applying more rigorous statistical tests to determine whether the provided data support these studies' conclusions.

For instance, the three professors behind the website Data Colada have leveraged tips, statistical analysis, and their intuition to uncover studies built on faulty or fraudulent data. They start by eyeballing data to see if they make sense in the context of the research (e.g., one study asked subjects to rate an experience on a scale of 0 to 10, yet the data set somehow included negative numbers!). They might also examine improbable claims (e.g., if a study suggested that an individual could read an entire book in 1 second). The academics also look for "p-hacking" (a now-common term that they coined in a 2014 paper), which occurs when a researcher cherry-picks data or analyses to make insignificant results look statistically credible.

The work of the Data Colada team and other sleuths has led to some progress in research methods, including data-sharing between scientists so that analyses can be checked before being published, and has encouraged some research journals (which have traditionally relied on volunteer experts to ensure the quality of published work, but not necessarily to detect fraud) to work more closely with the academics and to hire more research staffers of their own.

In the end, because most non-academics do not have the time or inclination to dig into the methods and data behind of published research papers, they have to trust that study authors used accurate data and applied rigorous analytic techniques to come to their conclusions. Which means that the growing number of researchers who do take the time to assess the accuracy of these papers are doing the public a significant service by drawing attention to faulty results (notably, at least 5,500 were retracted in 2022 alone, up from only 119 in 2002, according to the website Retraction Watch), which could ultimately give the public more confidence in the research that does survive their scrutiny!

Sadly, Many Happiness Studies Are Flawed

(Nidhi Subbaraman | The Wall Street Journal)

Researchers have conducted a variety of studies to answer the ever-present question, "What makes us happy?". These studies have suggested a variety of activities or attitudes that can contribute to happiness, from spending time in nature to expressing gratitude.

However, a recent paper from psychologist Elizabeth Dunn and doctoral student Dunigan Folk calls into question many of these findings. The researchers reviewed available scientific literature to find studies that examined the effects of 5 activities recommended often for improving happiness – expressing gratitude, being social, exercising, spending time in nature, and meditating – and found 494 peer-reviewed papers in which one of the happiness strategies was evaluated against a control group. They found that of this group of papers, only 57 were determined to be robust. Nevertheless, even these 57 studies were unable to confirm 3 of the 5 activities (spending time in nature, meditating, or exercising), as they had either weak or inconclusive results (though the lack of results doesn't necessarily mean that these activities do not boost happiness for a given individual). On the other hand, the researchers found "reasonably solid evidence" that expressing gratitude made people happy and "solid evidence" that talking to strangers improves one's mood.

This recent study is part of a broader reform movement in the scientific community to set higher standards for study design to increase the chances that results will be valid. These standards include increasing the number of subjects studied (as small sample sizes can lead to false signals), openly sharing data with peers in the field, and "pre-registering" their studies before conducting them to discourage the researchers from burying negative results when data do not support their hypotheses or manipulating data to falsely yield a statistically significant result.

Ultimately, while research can provide macro-level insights into what makes people happy, specific tactics are likely to vary by individual. Which suggests that while one can look to studies for potential ideas (and expressing gratitude and being social evidently have some backing), trying out a variety of techniques to see what works best with one's individual personality could be the most effective 'study' of all!

How To Use Money As A Tool For Happiness And Fulfillment

(Darius Foroux)

For some individuals, money is an end in itself and their goal is to accumulate as much of it as possible. Another way to look at money, though, is to see it as a tool to be used to promote wellbeing today and into the future, rather than a way to 'keep score'. Which requires an individual to find a balance between saving and spending to meet one's needs and goals.

One way to manage this tradeoff is to first consider what you value most. In Foroux's case, he prioritizes 'inner tranquility' over everything, so he prefers to minimize his liabilities (e.g., financial debt), maintain many streams of income (so that he does not have to worry about one of them falling away), and save as much as possible. Nevertheless, because only saving for the future could make one's life today less pleasant and more stressful (e.g., by living in an inexpensive but uncomfortable, house), he notes that spending in key areas is also part of the equation.

One way to consider whether you are successfully managing the saving-spending tradeoff is to consider what your life looks like on an average Wednesday in February and how that makes you feel. Because while we often remember 'peak' moments in life (e.g., a major milestone or exotic vacation), much of our time is spent in the day-to-day 'routine'. With this in mind, ensuring that each 'normal' day is a good day by aligning your income and expenses with your priorities (e.g., spending to 'buy' time that can be spent with family and friends) could lead to greater overall happiness and fulfillment.

Altogether, the tradeoff between saving and spending will look different for each individual. Nevertheless, by exploring your values and priorities and matching them with your financial decisions, you can create a financially sustainable lifestyle that also provides happiness and meaning for yourself (or for your clients!).

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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.