Weekend Reading For Financial Planners (June 8-9)

Consumers Trust Humans Over AI For Financial Advice, But Are They Better Together?

(Steve Randall | InvestmentNews)

One of the hottest topics in financial advice in recent months is the potential impact Artificial Intelligence (AI) tools will have on the industry. On the one hand, AI tools could be seen as a threat to human advisors if companies are able to leverage these tools to provide high-quality advice for a fraction of the price of human advisors, while on the other, AI tools also have the potential to empower human advisors to provide advice more efficiently, allowing them to lean into their strengths as humans (e.g., understanding clients' needs and making them feel heard).

2 recent surveys suggest that humans continue to have an advantage over AI tools when it comes to consumer trust, though many respondents appear to be open to having software powered by AI perform certain planning functions. According to Northwestern Mutual's 2024 Planning & Progress Study, which surveyed 4,500 U.S. adults, an average of 54% of respondents said they trust humans more when it comes to a range of financial planning functions (e.g., creating a retirement plan or making asset allocation decisions), compared to only 15% who said they trust AI more. Similarly, a separate study from FINRA found that respondents were more likely to trust statements related to financial planning (e.g,. on an asset allocation strategy) if they were told it came from a human advisor rather than from an AI tool. At the same time, a majority of respondents to the Northwestern Mutual study said they were comfortable with financial services firms using AI to perform a variety of tasks, including answering a straightforward financial question, making updates to basic customer data, and making updates to an existing financial plan.

Overall, 41% of respondents said they are excited about the potential of AI in the financial services industry, while 47% expect that AI will improve the customer service experience in the financial services sector, including with financial planning. Notably, these responses differed greatly by generation, with Gen Zers (63%) and Millennials (57%) expecting a better customer experience thanks to AI compared to Gen Xers (44%) and Boomers (32%), suggesting that while many current pre-retiree and retiree clients appear to be more skeptical about the use of AI in financial services, those in the younger generations could be seeking an AI-enabled client experience.

Ultimately, the key point is that while some consumers appear to be imposing a "trust penalty" on AI tools (i.e., wanting to see evidence that they can perform better than humans at certain tasks), many are open to their advisors using AI-powered tools within their practices, particularly for data analysis functions (e.g., 69% of respondents in the Northwestern Mutual study said they were comfortable with advisors using AI tools to detect fraud). Which suggests that many consumers don't see human-provided versus AI-provided advice as an either/or tradeoff, but rather as an opportunity for the 2 to work together to leverage their unique strengths!

New Texas Stock Exchange Takes Aim At New York's Dominance

(Corrie Driebusch | The Wall Street Journal)

In decades past, there were a variety of regional stock exchanges (e.g., in Philadelphia, Chicago, and Boston) that competed for company listings and traders' business, but many of these have either been shut down or folded into today's largest players: the New York Stock Exchange (NYSE) and Nasdaq (which have dominant positions in terms of corporate listings and together provide about 35% of total volume in U.S. equities trading).

Amidst interest amongst some market participants for increased competition amongst exchanges (and perhaps chip away at the market power of the leading exchanges, which gives them more room to raise fees and compliance requirements), a group backed by asset management giant BlackRock and electronic-trading firm Citadel Securities this week announced that they plan to start the Texas Stock Exchange (TXSE), with a goal of facilitating trades in 2025 and hosting its first listing in 2026. In an effort to attract companies to list on the exchange, TXSE's backers suggest that it will be more CEO-friendly than the NYSE and Nasdaq (possibly by offering lower fees and a reduced compliance burden).

Notably, TXSE is not the first effort to increase competition in the stock exchange space, as other recent upstarts include the Members Exchange (MEMX), Investors Exchange (IEX), and Miami International Holdings (MIAX). While these smaller exchanges benefit from SEC rules that effectively force large brokers to link to every exchange and pay for connections and market data, they have been fairly slow to gain traction, with MEMX accounting for 2.4% of U.S. equities volume in May, IEX having 1.8%, and MIAX processing 1.7%, suggesting that the TXSE might have to come up with a particularly compelling value proposition (whether in terms of lower fees or fewer rules, or perhaps leveraging its geographic base to attract Texas-based companies to list on the exchange) to emerge as a significant competitor to the NYSE and Nasdaq.

In the end, increased competition amongst exchanges that reduces listing and trading fees could eventually lead lower costs for clients (and perhaps better execution of trades for advisors), though it remains to be seen whether companies will be willing to forsake the name recognition and market power of the major incumbent exchanges for the reduced compliance costs the TXSE hopes to offer?

American College To Roll Out Tax Planning Certification

(John Manganaro | ThinkAdvisor)

Tax planning has long been part of the financial planning process, with financial advisors engaging in long-term planning alongside their clients' accountants who do the annual preparation of the tax return (and building relationships generate cross-referrals). And in recent years, as technology increasingly commoditizes (or at least, automates) more and more of the investment process, tax planning has increasingly become an even more important and popular part of the financial planning process (and a way for financial advisors to demonstrate their value to clients in terms of not just future retirement planning satisfaction but hard-dollar tax savings!).

Nonetheless, while tax planning is one of CFP Board's 8 principal knowledge domains (which are part of Board-registered education programs and appear on the CFP Exam), there is a lot to do to keep up with an ever-changing tax landscape (from the new measures implemented as part of the Tax Cuts and Jobs Act to the more recent SECURE Act 2.0) and a number of strategies that can help clients (legally) reduce their tax liability (from Roth conversions to deduction bunching). Such that even what CFP professionals originally learned in their CFP tax class may no longer be as relevant (or even accurate) as it once was! Yet at the same time, beyond some availability for tax-centric continuing education for advisors, there is a relative dearth of advanced post-CFP certifications for advisors that helps them not only keep up, but actually go deeper into, the tax planning issues their clients might face.

With this in mind, The American College of Financial Services announced this week that it is planning to offer a new certification, dubbed the Tax Planning Certified Professional (or "TPCP") program, which is slated to formally launch later this year. Led by Kitces.com's own Lead Financial Planning Nerd Jeff Levine (and featuring Michael Kitces as well), the new TPCP designation will feature a series of 3 college-level courses that take financial advisors beyond what they learned in their CFP certification to go deeper on tax planning (while recognizing that financial advisors still aren't the ones who do tax preparation or give formal "Tax Advice" on IRS matter). Interested advisors can sign up on a waitlist to receive updates on the program and when it will actually be available to enroll they to receive updates on the program and when it will actually be available to enroll.

Altogether, the American College's new program appears to offer financial advisors an opportunity to dig deep into the complex world of tax planning, fill what up until this point has been a notable gap in the post-CFP designation landscape for tax designations in particular… and gives advisors an opportunity to earn their own advanced tax certification that could be attractive to clients and prospects for whom tax planning is a key pain point!

3 Assets That Might Not Diversify As Well As You Think

(Amy Arnott | Morningstar)

Diversification is at the heart of many financial advisors' asset allocation strategies, as they seek to create portfolios that offer clients a strong return while reducing the risk that could come from holding concentrated positions (whether in one asset class or in a single security). A key element of portfolio diversification is finding asset classes that are relatively uncorrelated (i.e., that tend not to move in tandem), or even negatively correlated (i.e., when one asset does well, the other one does poorly relative to it, and vice versa), so that if one asset falls sharply in value, other assets will serve as a ballast for the overall portfolio. However, identifying relatively uncorrelated assets can be challenging, particularly because correlations between asset classes can change over time.

For instance, real estate is sometimes considered to be an appropriate diversifying asset class when paired with equities. In fact, the correlation between stocks and real estate (in the form of a Real Estate Investment Trust [REIT] index) reached below 0.10 in the early 2000s (a reading of 1.0 would signal the assets are perfectly correlated, and 0 would signal no correlation). However, the correlation between stocks and REITs has increased in recent years, reaching 0.88 over the past 3 years. Further, while the returns of REITs had held up relatively well in previous equity market downturns (e.g., in 1973–1974, 1987, 1990, and 2000–2002), they have seen heavier losses than equities in the past 3 bear markets (2007-2009, 2020, and 2022).

Next, some investors have looked to high-yield corporate bonds as a diversifier for equities. This has paid off in certain periods, with the Bloomberg U.S. High-Yield Corporate Bond Index having a negative correlation to equities for much of the period between 2002 and 2020. Nonetheless, this relationship has shifted dramatically, with the high-yield bond index seeing a correlation of 0.88 with equities during the past 3 years (further, high-yield bonds have experienced larger drawdowns than government bonds during the past several equity bear markets, suggesting the latter might be more effective for cushion downside risk).  

Finally, in recent years cryptocurrencies have been seen as a potentially attractive diversifier among some investors. For example, during the past decade, Bitcoin and other major cryptocurrencies have had a correlation of less than 0.3 when measured against stocks, bonds, real estate, gold commodities, and other assets. However, these correlations have increased as of late, with the MarketVector Bitcoin Index having a correlation coefficient of 0.55 with U.S. stocks between 2021 and 2023. In addition, while certain cryptocurrencies have offered eye-popping returns in some years, they also have experienced large drawdowns (e.g., an approximately 73% drawdown for Bitcoin between November 2021 and December 2022), which might be hard to stomach for many investors (even if an allocation to Bitcoin is a relatively small part of their overall portfolio).

Ultimately, the key point is that achieving portfolio diversification can be a challenging endeavor, given that asset correlations can change over time (and because certain potential diversifiers can come with sharp drawdowns). Which suggests that financial advisors can add value for their clients when it comes to investment planning not only by creating an initial asset allocation that meets their growth needs and risk tolerance, but also by regularly analyzing whether the combination of assets within it is still offering the desired diversification benefits!

Using Exchange Funds To Manage Concentration Risk

(Michael Allison | Advisor Perspectives)

While many financial advisors seek to achieve diversification in their clients' portfolios, one challenge to doing occurs when a client has a concentrated position in a single security that has large, embedded capital gains (perhaps from a workplace equity grant or from a stock that has grown significantly over the course of many decades). In this scenario, the advisor faces a potential dilemma: if the client keeps the concentrated position, their overall portfolio could suffer if the position drops in value, but selling the position (or at least a portion of it) would require the client to realize the capital gains for tax purposes.

One potential way to mitigate this issue is through the use of an exchange fund, by which a group of investors contributes stock (often a concentrated position with significant embedded capital gains) to a pooled fund, receiving shares of the fund equal in value to the stock they contributed and providing an increased level of diversification (as the fund includes shares of contributed stock from various companies). After a 7-year "socialization period" required by the tax code, the exchange fund investors can redeem their fund shares and receive a basket of the stocks held in the fund (at which point they can choose to hold or sell the shares of the component stocks). What makes exchange funds particularly valuable though, is that neither the contribution of assets to the fund, nor the redemption of shares are taxable events, meaning that participants can achieve greater diversification without having to realize capital gains (until the investor sells the shares of the component stocks in the fund).

In addition to determining whether a client might be a good candidate to use an exchange fund, Allison (the investment strategist for Cache, a company offering exchange funds for advisors) suggests that advisors can add value by finding the best option for the client's needs. For instance, exchange funds can vary based on the diversification within the fund's holdings (e.g., if all of the stocks contributed were from tech companies, the fund would not have the same level of diversification as it would with shares from a range of industries), contribution minimums (e.g., a minimum $100,000 investment), and fees and expenses charged to investors.

In the end, while they can be a useful tool, exchange funds represent one of several potential ways for advisors to help their clients reduce concentration risk, which also includes using a direct indexing strategy to build the client's portfolio around the concentrated position (i.e., by removing companies from the same industry as the concentrated position from the index being used), by gradually selling off shares of the concentrated asset (realizing gains but keeping income below certain tax thresholds), or (if they're charitably minded) donating shares of the position directly to a charity or to a donor-advised fund not only to reduce the size of the concentrated position and avoid realizing capital gains, but also potentially gaining a deduction for the value of the contributed shares!

Is The Stock Market Too Concentrated?

(John Rekenthaler | Morningstar)

In the past few years, some market commentators have noted the increasing weightings of the largest stocks, sometimes dubbed the "Magnificent 7" (i.e., Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and Meta), within the broader S&P 500 index and the potential for a downturn in these companies' share prices to surprise many index investors who thought investing in a broad equity index would help avoid sharp losses caused by declines in only a few stocks.

Currently, the "Magnificent 7" stocks make up about 29% of the total assets of the S&P 500, giving them significant influence over the investment outcomes for investors in the index. Nevertheless, Rekenthaler notes that very few investors are likely to invest in an S&P 500 fund alone. For instance, an investor in a total stock market index fund would 'only' have a 25% weighting to these stocks, while these stocks might make up less than 10% of a portfolio that also includes allocations to bonds and international stocks.

Further, while the 10 largest stocks accounted for 43.4% of public company profits at the beginning of 2023 (up from 33% 5 years earlier), this concentration is not unprecedented, as the 10 largest public companies accounted for more than 40% of overall profits for much of the period between 1960 and 1992. Perhaps most interesting, between 1958 and 2019, there was little relationship between the profit percentage of the 5 highest-earning companies (compared to the profits of the 100 highest-earning firms) and the future 5-year standard deviation of the stock market, indicating that periods of high concentration do not necessarily predict sharp downturns.

Ultimately, the key point is that while the largest companies today make up a significant share of large-cap stock indices and account for a significant portion of public company profits, this situation is not unprecedented historically and is not necessarily detrimental to client portfolios. Though, the current environment could offer an opportunity for financial advisors looking to ensure their clients' portfolios meet their diversification goals (e.g., by adding less-correlated assets or rebalancing the portfolio if it has drifted significantly from its original targets) to prevent a potential downturn in these prominent stocks from having a dramatic impact on overall portfolio performance!

Financial Planning For Families With Disabilities

(John Kador | Wealth Management)

Given that about 61 million Americans have a disability that makes independent living difficult or not possible, according to the Centers for Disease Control and Prevention, financial advisors are likely to work with clients that support a family member with a disability. And while clients in this situation have many of the same planning issues as other clients, there are several unique factors that advisors might consider.

To start, while intergenerational planning is often an important topic for clients, it is often more so for clients when a child has a disability. Because while clients typically assume that their children will be able to support themselves in adulthood, this is not necessarily the case for those who have a child with a disability that might prevent them from doing so. Which means that the clients might be particularly focused on leaving a large legacy interest to support their child, offering an opportunity for an advisor to create a financial plan and asset allocation with this goal in mind (the advisor can also work with the clients to ensure the plan is designed to support their own needs through retirement as well).

Beyond crafting a financial plan that meets the needs of the client while meeting their gifting and bequest goals for a child with a disability, financial advisors working with these families can also help them navigate the balance of financially supporting the child without sabotaging their eligibility to receive valuable government benefits, such as Supplemental Security Income and Medicaid. This can be accomplished in part by establishing accounts (e.g., 529A ABLE accounts) and trusts (e.g., pooled special needs trusts) that are designed to provide a certain level of benefits for individuals with disabilities without threatening their eligibility for government benefits.

In sum, advisors have many ways to add value when working with client families that have a disabled child, from helping them see the big picture of their financial plan to navigating the often-confusing government benefits system, which could ultimately help individuals across multiple generations not only have the financial resources they need, but also to live better, more fulfilling lives!

How An ADA-Accessible Website Can Help An Advisor's Business Grow

(Crystal Butler | Advisor Perspectives)

The Americans With Disabilities Act of 1990 was a landmark piece of legislation that prohibits discrimination based on disability in areas such as employment, public transportation, and public accommodations (e.g., hotels and parks). Of course, technology has changed since that time, and amidst the rise of the Internet, the U.S. Department of Justice has provided guidance for companies to make their websites compliant with the ADA.

Notably, potential reasons for making a firm's website ADA-accessible go well beyond a desire to avoid legal issues (as 4,605 lawsuits related to website accessibility were filed last year) and/or reputational damage. To start, having an ADA-accessible website (which can include features such as screen readers, captioning, and keyboard or voice-based navigation) can extend a firm's market reach to those who might have a hard time reviewing the website without these additions (which might be particularly important for firms serving older clients, who are more likely to have a visual or hearing impairment).

Further, because many website features that make it more accessible make it more usable in general (e.g., by using readable fonts, simple layouts, and clear navigation), an ADA-accessible website could be more attractive to all visitors. Finally, because accessible websites have more structured and organized content, they not only enjoy improved site speed and reduced load times, which can promote its ranking when it comes to Search Engine Optimization (SEO).

Ultimately, the key point is that there is no shortage of potential benefits to having an ADA-accessible website, from mitigating potential legal liability to making it more functional for all visitors. Which suggests making their website more accessible (whether spending time internally to do so or by using an outsourced service like accessiBe) could be a worthwhile investment for firms, not only for compliance purposes, but for marketing as well!

Planning For The Disability Community

(Jeff Vistica | Advisor Perspectives)

Financial advisors are often seen by clients as trusted navigators to help them through various life transitions. For some clients, a major transition is a diagnosis of a child with a disability or an accident that leaves a family member disabled. Like other transitions, advisors can play an important role both in helping them evaluate their goals and in navigating the technical aspects of planning when a child has a disability.

First, an advisor can encourage clients to step back and think about their goals, both for themselves (e.g., when they plan to retire) as well as for the child with the disability (e.g., where the child will live), as well as for other children they might have. This exercise can help inform an estimate of future cash flow needs to support both the parents and their disabled child. Next, getting many of these preferences in writing (e.g., creating and updating a letter of intent) can increase the likelihood that the parents' wishes for their child are met in case a successor guardian takes over care from them.

In addition, while estate planning is an important part of the planning process for all clients, it is particularly crucial for families with a child with a disability, as organizing assets appropriately not only can ensure that the child has the financial support they need after the parents pass away, but also that it is stewarded appropriately. For instance, if the parents set up a special needs trust for the child, having a successor trustee lined up who has experience managing special needs trusts (and perhaps considering appointing a trust protector, micro board, or advisory committee to oversee the successor trustee's actions) can ensure that the parent's plan for the child is executed according to their wishes well into the future.

In sum, while many of the aspects of planning for families with a disabled child are similar to those of other clients (e.g., cash flow planning, estate planning), these can take on extra importance, given that the plan is designed to be sustainable not only through the lifetime of the parents, but also for their child's as well. Which is not just a planning challenge for an advisor, but an opportunity to make a decades-long impact on multiple generations within a family!

Considering The Time And Quality Of Life

(Derek Hagen | Meaningful Money)

Projecting an individual's lifespan is an important (if challenging) part of the financial planning process, given that it can greatly impact the assets that are needed to support a lifetime of spending (and the amount an individual might spend along the way). That said, lifespan is important not just in terms of creating a sustainable financial plan, but also for considering how all of that time will be spent.

To start, an individual might estimate (perhaps based on their health and family factors) that they will live to 85 years old. While that provides some information, it's possible to go deeper. For instance, one might consider their "healthspan", or the number of available years they will be healthy enough to be active and pursue all of their interests (which could be much shorter than their overall lifespan). Considering this metric, an individual might not want to put off the whitewater rafting trip they've always wanted to take until they are well into retirement, as they might not be in sufficient physical shape to handle that kind of excursion.

Looking beyond the lifespan and healthspan for a given individual, considering these factors for their loved ones can help inform their life planning process as well. For example, while spouses might have similar lifespans and healthspans, these periods are likely to be very different for their parents (who likely have fewer years of expected longevity), children (who likely will have longer lifespans, but potentially only a few more years living with their parents), or even pets(whose lifespans might be much shorter than human friends and family). Given these varying 'timelines', an individual might prioritize certain experiences at particular times in their life, for example, taking their parents on a major trip now, while they are still in good physical shape, rather than planning to do it at an undetermined future time.

Ultimately, the key point is that while it can be easy to put a goal off until later ("I'll have plenty of time to take that trip!") one's own lifespan and healthspan (to the extent it can be estimated) can be very different compared to these measures for the people who can enhance these experiences. Which suggests that when formulating goals, financial planning clients might expand their scope from the objectives they want to achieve themselves to also consider the people they want to join them along the way!

How To Create A Successful Sabbatical

(Abby Falik | Fast Company)

It can be easy to fall into a rhythm with the day-to-day routines of life, particularly when it comes to work. And while routines can often be comforting, sometimes it can be helpful to take a step back to look at the big picture of one's personal and/or professional life. One way to do so is a sabbatical, which can take many forms, from a single day away from the office and spent in nature to a multi-month absence from the working world.

To make the most of a sabbatical, Falik suggests that an individual first define the questions that are important to them. For instance, for a professional-focused sabbatical an individual might reflect on what they've accomplished so far in their career, what their job looks like today, and where they might want to be in the future. Or, for a personal-focused sabbatical, issues to consider might include internal questions (e.g., what brings me joy or who am I when no one is watching) as well as those that focus on one's relationship with the external world (e.g., how could I make a greater difference in my community).

In addition, a sabbatical can be an excellent opportunity to get out of one's comfort zone, perhaps taking the opportunity to learn a new skill or traveling to a new location with no set agenda (tough for those of us who like to plan trips out in advance!). Sabbaticals can also provide much more time to write than one might have during their normal workdays, which can provide an avenue for personal reflection or outright creativity (whether it's poetry or that financial planning murder mystery novel that's sitting in your head!).

In the end, the key to a successful sabbatical is not necessarily its length, but rather whether the individual taking it is able to fully 'unplug' professionally, from personal obligations, and/or from technology. And given their benefits, financial planners can add value by helping their clients craft a financial plan that allows them to take these opportunitiesor even take one (or more!) of their own!

I'm Craving A Depth Year

(Maddie Burton | On The Cusp)

There are times in life when "accumulation" makes sense. For instance, an individual might accumulate knowledge in a wide variety of subjects in school, meet many new friends and professional acquaintances in their early working years, and obtain more 'stuff' when they move from an apartment to a larger house. But at some point, there can be diminishing returns from additional "accumulation" (whether it is the difficulty of maintaining relationships beyond a certain number or the storage limits of one's closets).

With this in mind, writer David Cain popularized the idea of a "depth year", where instead of looking to start a new hobby or buy new books, an individual would dig deep into what they already have, whether it is perfecting a pursuit that they've already started or reading (or re-reading) the books they already have on their bookshelf. In Burton's case, a period of illness gave her the opportunity to go deep into listening to and identifying bird calls (with an assist from the app Merlin). And now, rather than trying recipes from different books on her shelf (or buying new ones), she's going to try to make all of the recipes in a single cookbook (in her case, a book of pizza and salad pairings) over the course of a year. Which could leave her with easy knowledge of different ways to make pizza and salad, something that might not have been possible if her attention were focused on a wider range of recipes.

In sum, while there are many occasions to "go wider" in life, sometimes "going deeper" can be a valuable practice, whether it is with regards to a hobby or building stronger personal relationships (or perhaps digging into a financial planning topic of interest to an advisor's clients, which could eventually become a niche?).

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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.