Weekend Reading For Financial Planners (December 14–15)

Advisory Firms That Raise Their Fees Still See 97% Client Retention: Dimensional Study

(Edward Hayes | Financial Advisor)

Over the past few decades, financial advisory services have become more comprehensive, moving beyond 'just' investment or insurance planning to incorporate everything from tax planning to estate planning. Which has almost certainly benefited clients (who receive a more holistic planning experience), but can come at a cost of profitability for the advisory firms themselves (particularly if they need to hire additional staff to support this more comprehensive planning experience). In this environment, one potential solution is for a firm to raise its fees to reflect the significant value it provides to its clients. However, some firms might be reluctant to do so (or might even lower their fees in an increasingly competitive environment for advisory services), perhaps worrying that raising fees might lead current clients to depart for another firm (or dissuade new clients from coming onboard).

Nonetheless, according to a recent study by Dimensional Fund Advisors (which surveyed 790 firms globally), raising fees might not have as much of an impact on client attrition as might be assumed (or feared!). In fact, their study found that firms that raised their fees had a 97.1% retention rate, while firms that lowered their fees had 97.8% client retention. In other words, fee increases versus decreases had a less-than-one-percentage-point impact on retention rate! Notably, firms that raised their fees saw revenue growth in the first and second years after doing so, which could be particularly important at a time when the top growth challenge cited by respondents was capacity constraints, as this revenue can provide the financial wherewithal to reinvest into more and better services (e.g., through hiring new staff or investing in technology) for clients that improve growth.

The study also looked at trends in new client acquisition, with some firms looking beyond client referrals (which, according to Kitces Research on Advisor Marketing, remains the most commonly used marketing tactic for advisors [and the one with the greatest advisor satisfaction]). For instance, for "high performing" firms the greatest source of new clients was Mergers and Acquisitions (M&A) activity (with the added benefit of bringing on advisor talent from the acquired firm to serve a growing client base). In addition, while many firms have embraced digital marketing strategies, some appear to be returning to 'old school' tactics such as in-person seminars or speeches to build networks in the local community. The study found that these practices accounted for 13% of growth for high-performing firms in 2023, up from 10% in the prior year.

In the end, given the key difference between 'sizing up' (i.e., growing top-line revenue) and 'scaling up' (i.e., growing revenue at a faster rate than expenses), firms face important choices as they reach capacity (a point when firm staff could become overburdened and client service might suffer in the process). Which could mean raising fees (perhaps with less pushback than might be assumed, according to this study) to expand revenue (either as a productivity lift, or to further reinvest into services and growth), or perhaps focusing on the most impactful services for its ideal target client to avoid providing a planning offering that is 'too' comprehensive and focusing on the value-adds that clients really are the most willing to pay (more) for!

The SEC Can Limit Mandatory Arbitration By RIAs, But Will It Ever?

(Emile Hallez | InvestmentNews)

Investment advisory and broker-dealer firms often include arbitration clauses in their client agreements, which stipulate that any dispute between a client and the firm will be heard not in the court system, but through a third-party arbitrator who hears evidence from both sides and issues a (typically binding) ruling. The financial industry generally favors arbitration because it can be faster and less expensive than the court system; however, unlike a lawsuit heard in court, arbitration hearings do not become public record, which enables firms to save face if found guilty of wrongdoing and limits the ability of prior cases to become precedent for future plaintiffs. In theory, clients and the advisory firms they're challenging might try to agree on whether a case will be heard in a court of law or via arbitration (as each weighs both the costs and whether they think they will receive a more favorable outcome in one form or another), but in practice arbitration clauses are often mandatory with advisory firms, meaning that a client who signs a brokerage or advisory agreement containing the clause loses their right to ever take that firm to court in the event of a dispute. Even if the client believes that might have been the better forum to have their case heard.

Following a request from the House Committee on Appropriations (and calls from a variety of consumer and investor advocacy groups) for the SEC to collect data on this issue, the regulator last year published a report assessing the state of RIA mandatory arbitration clauses, finding that 61% of SEC-registered RIAs have these clauses, with the vast majority using private arbitration forums to hear claims (which can be more costly than the dispute resolution fora used by other firm types, such as the system run by FINRA for adjudicating customer and registered representatives' claims against brokerages). Notably, under the 2010 Dodd-Frank Act the SEC has had the power to regulate the use of mandatory arbitration clauses for RIAs and investor advocates such as the Public Investors Advocate Bar Association (PIABA) have urged the regulator to do so.

This week, the SEC's Investor Advisory Committee met this week to discuss these mandatory arbitration clauses, with the SEC's Ombudsman suggesting that the various harms that can come to clients from these clauses (e.g., limitations on claims or damages), their use could potentially violate RIA's fiduciary duty to their clients. In addition, a PIABA representative highlighted that approximately 60% of these clauses require arbitration in a certain state (often where the adviser is located), potentially requiring significant travel costs for a client who lives out of state (which is increasingly common as technology has enabled more firms take clients from around the country) and possibly dissuading them from making a claim in the first place. On the other side of the coin, SEC Commissioner Hester Peirce in prepared remarks argued that arbitration can often be "a cheaper and less burdensome process than litigation", appearing to express skepticism towards a potential rule that would restrict arbitration clauses.

Altogether, while RIAs often differentiate themselves from other advisory firm models on transparency grounds (e.g., in how and how much clients pay in fees), this week's hearing and the previous SEC report suggest that the ubiquitous presence of mandatory arbitration clauses and the lack of data surrounding them is an area of relative opacity for RIAs. And while it is unclear whether Congress or the SEC will take action to restrict the use of these clauses, firms can consider on their own whether the potential benefits of using them (e.g., costs to the firm and speed of resolution) outweigh the potential to turn off prospective and current clients (at least those who are aware of their use?).

Number Of CFP Exam-Takers Sets New High

(Melanie Waddell | ThinkAdvisor)

Since 1991, the CFP Board has offered the CFP certification exam to establish a high standard of excellence for financial advisors to act as fiduciaries for their clients. The exam is a rigorous, 6-hour test, and is offered only three times a year. Because of the nature of the exam and the scope of material covered (not to mention the relatively low pass rate generally ranging from 60–65%), candidates aspiring for CFP certification invest an inordinate amount of time to ensure that they pass the exam. Nevertheless, given the benefits of passing the exam and becoming a CFP professional (after also completing CFP Board's education, experience, and ethics requirements), from enhanced credibility to higher income, more and more (aspiring) advisors are doing so.

In fact, CFP Board reported this week that a record-high 10,437 candidates took the exam in 2024, with 3,755 doing so during the most recent November administration, seeing a 62% pass rate (down slightly from 65% in July and 68% in March). In a post-exam survey, the top reasons cited by exam-takers for pursuing CFP certification were to demonstrate expertise in their job (38%) and to distinguish themselves as a fiduciary (34%). Also, at a time when the advisor population is graying, 69% of exam-takers were under age 40 and 39% were under 30, suggesting that there could be a healthy inflow of younger advisors into the industry. Further, 33% of exam-takers said they received some financial support from their employers during the CFP certification process (perhaps as firms recognize that having service advisors who obtain the CFP marks can lead to greater productivity [and profitability] not just for the advisor, but also for the firm as well).

Ultimately, the key point is that a growing number of advisors are taking the CFP exam, with many recognizing the credibility (and financial benefits) it can provide and lifting the standards of the financial advice industry in the process. Nevertheless, given the historically high attrition rate of new advisors in the industry, it will likely be up to firms to train and develop these advisors (perhaps putting business development goals aside while they grow as an advisor) so that they not only become the next generation of successful advisors within the firm, but also the future leaders of the financial advice industry as a whole!

Why Savers Need Help Estimating The True Cost Of Retirement

(David Blanchett | ThinkAdvisor)

Popular retirement discourse often revolves around "the number", or the amount of money an individual needs to have saved to ensure a financially sustainable retirement. Of course, this "number" will vary considerably depending on an individual's retirement income needs and can be difficult to determine (particularly for consumers who might not have access to financial planning software that can provide retirement income projections!).

With this in mind, a study from the Employee Benefit Research Institute and Greenwald Research asked consumers whether they had estimated the amount they needed for retirement (and how much), and, if not, to take a guess regarding how much they would need. Looking at the data, Blanchett finds that households who make less than $100,000 per year and who are 'guessing' tend to overestimate the required savings that they will need while those who earn more than $100,000 underestimate this figure. For instance, those with income between $60,000 and $75,000 and who estimated their savings needs thought they would need $375,000 saved, while those who were guessing thought they would need $625,000. On the other hand, for household income between $150,000 and $250,000, those who estimated thought they would need $1.75 million and those who were guessing estimated needing $1.25 million. Notably, estimating retirement savings needs was associated with saving more (with 52% of such individuals doing so).

Altogether, this survey indicates that prospective clients are likely to come to an advisor with a wide range of expectations for how much they need to save for retirement (which could be the reason they are pursuing such a relationship in the first place!). Further, the study highlights that expectations of relatively higher-income prospects could differ depending on their knowledge of their financial situation and that those with less awareness might be surprised if an advisor proposes a savings target that is significantly higher than their 'guess' (suggesting they might be reassured if the advisor comes to the table with a plan to help these clients reach the target as well!).

Retirees Will Pay Twice As Much As They Think For Healthcare: Fidelity

(Kenneth Corbin | Barron's)

The transition to retirement entails many financial changes, perhaps most prominently the need to replace the income that came from steady paychecks during an individual's career. In addition, retirement can involve a significant transition from employer-provided health insurance to Medicare. Along with this change, the higher medical costs that can come with age can make it challenging for retirees to estimate how much they will actually need to cover this budget line item.

According to Fidelity's latest Retiree Health Care Cost Estimate, while individuals expect to incur $75,000 of healthcare costs in retirement, the actual average is $165,000 (assuming the retiree enrolls in Medicare Parts A, B, and D), suggesting a potentially large disconnect for some retirees (who then might not account for the actual medical costs in their budget planning). Medicare Part B and Part D premiums are responsible for 43% of this total, out-of-pocket prescription drug costs account for 10%, and other medical expenses (e.g., co-payments, coinsurance, and deductibles) make up the remaining 47%. And while 63% of Americans approaching retirement say they plan to review their Medicare options annually, a separate survey found that retirees aged 75 and older are the least likely to review their coverage each year (despite the potential for savings by comparing plans, given greater medical needs at this point in their lives).

In the end, while many nearing and in retirement appear to underestimate the total amount they might spend on healthcare in retirement, it is worth noting that these expenses are not experienced in a single lump sum, as Medicare premiums, prescription charges, and deductibles are likely to be paid over the course of a retirement. Together, these findings suggest several valuable roles for advisors when it comes to supporting retired clients and their healthcare needs, from providing realistic estimates of their current- and future-year costs (and analyzing ways to generate the income needed to support these expenses) to reviewing their Medicare coverage on an annual basis!

Helping Clients Create Realistic Budgets In Retirement

(Ben Mattlin | Financial Advisor)

Retirement not only involves a change to an individual's lifestyle, but also potentially to their expenses, as they might no longer have to deal with work-related outlays (e.g., commuting costs and professional attire) but can see other expenses (e.g., travel and other hobbies) increase significantly. Which makes determining how much an individual is likely to spend in retirement an important (if challenging) part of creating a financial plan for these clients.

A potential first step to estimating an individual's expenses in retirement (and, by extension, their income needs) is to get a baseline for their outlays as they approach retirement. While some fastidious clients might already have this information available, calculating this figure for others might entail going through bank and credit card statements to determine total spending (though these figures will likely need to be adjusted for the previously discussed spending changes that are likely to occur in retirement!). Next, an advisor can incorporate factors that a client might forget to incorporate (or underestimate) themselves, such as healthcare expenses (including Medicare premiums), home maintenance and property tax expenses, potential taxes on Social Security benefits, and/or Income-Related Monthly Adjustment Amount [IRMAA] surcharges. Further, advisors can incorporate an appropriate level of inflation and longevity estimate to recognize how costs might increase over time (and might last longer than the client might expect!).

Ultimately, the key point is that because many prospects and clients will underestimate their future expenses in retirement, financial advisors can add significant value (and create more accurate and relevant financial plans and retirement income recommendations) by digging into the numbers to estimate their clients' likely expenses (and by reviewing and updating these figures as the clients' lifestyles change as they move through retirement!).

The Four Types Of Investment Mistakes

(Ben Carlson | A Wealth Of Common Sense)

Successful investing can be a challenging endeavor, given the technical and psychological factors involved (which leads many individuals to outsource this task to a professional advisor!). And while many (all?) investors will make a 'mistake' over the course of their investing careers, the magnitude of such mistakes can vary widely.

With this in mind, Carlson suggests a four-tier hierarchy of investment mistakes. To start, the least impactful are "annoying mistakes", such as selling a winning position too early, holding on to a losing position for too long, or investing in an underperforming fund. These mistakes can cause regret but won't necessarily wreck an individual's financial plan. The next level up are "self-inflicted mistakes" (e.g., paying egregiously high fees, overtrading, or failing to do due diligence on an investment), which can lead to greater financial impairment but also are unlikely to permanently derail a plan. The third tier are "painful mistakes", most commonly failed attempts to time the market (i.e., selling all equities in one's portfolio at a low and buying back at a high), which can potentially cause lasting damage. Finally, the top of the hierarchy is for "endgame mistakes" that are difficult to come back from and include fraud, scams, and Ponzi schemes.

In sum, while investing 'mistakes' are common, they can vary significantly in terms of their impact on an individual's overall financial wellbeing. Which suggests that when it comes to investment planning, financial advisors can add value by both playing 'offense' (i.e., proactively putting a client in an asset allocation that meets their unique needs) and 'defense' (i.e., by helping them avoid major investing mistakes, particularly those that could permanently impair their lifestyle)!

The "50% Rule" For Investment Decisions

(Allan Roth | Advisor Perspectives)

One of the challenging aspects of financial planning is that an advisor and their clients have to make decisions today in advance of an unknown future, whether it comes to investment returns or tax rates. And while historical data and planning projections can help inform these decisions, there is almost always the chance a certain choice will lead to regret down the line if unexpected events occur.

With this in mind, Roth often uses a "50% Rule" as a starting point for many of these decisions in an attempt to make financially beneficial decisions while minimizing potential future regret in the process. For instance, when it comes to crafting asset allocations for clients nearing or at retirement, he often recommends a 50/50 allocation between stocks and bonds, which could reduce regret that could come from allocating too heavily to one asset of the other (and, according to Morningstar research, offers a higher safe starting withdrawal rate). Another common decision point where the "50% rule" could apply is in dealing with a new client's legacy investment positions. For example, while an advisor might want to adjust the new client's portfolio immediately to reflect their recommended asset allocation (and/or get out of high-fee investments), selling positions with significant, embedded capital gains all at once could result in a large current-year tax bill. In this case, Roth might look to sell 50% of the outgoing investments (targeting those with the smallest embedded gains) immediately (or, depending on the client's circumstances, donate them to a donor-advised fund or gift them to a child whose income puts them in the 0% capital gains tax bracket) and hold on to the rest. Other potential uses for the "50% rule" include the decision of whether to contribute to traditional versus Roth retirement accounts (to leave room for potential Roth conversions at a lower marginal tax rate in the future while maintaining a pot of tax-free Roth assets in case tax rates move higher) or investing a windfall (possibly investing half today and dollar cost averaging into the market for the rest).

In the end, the "50% rule" is by no means a hard and fast guideline, but rather represents a starting point for conversations with clients. Which could ultimately help them minimize the chances of future regret while allowing advisors to provide valuable analyses and recommendations to help them make a decision that will also allow them to reach their financial goals.

Solving The Mystery Of An Investment That's Too Good To Be True

(Jason Zweig | The Wall Street Journal)

While nearly everyone has heard the phrase "if it's too good to be true, it probably is," it can sometimes be challenging to put it to work, as evidenced by many Ponzi schemes and other scams that many individuals (including some who are quite financially literate) have fallen prey to.

Many of these investments that are "too good to be true" promise a level of guaranteed returns that are hard to come by in more common 'guaranteed' products like bank certificates of deposit, but could be tempting for investors searching for yield (particularly in the historically low interest rate environment of the 2010s). For instance, Zweig identified an investment called a "Mega High-Yield Term Deposit", which claimed to offer up to a 15% guaranteed annual return for 10 years (a return well beyond that offered by bank products or high-quality bonds). The company that seemingly sponsored the product (though a complicated web of entities is involved) marketed it through (often unlicensed) salespeople who stood to earn large commissions for investor dollars they brought in (often selling the products as being "like" certificates of deposit). Notably, those involved in the product didn't appear to have consistent explanations for how such returns would be derived. Nevertheless, these products appear to have attracted millions of dollars, including at least one individual who emptied his 401(k) to invest in the product, before the sponsoring firm apparently closed up shop (the companies behind the products are currently under investigation by the SEC and state regulators).

In sum, while investment scams go back many years (and many are well known), it can still be easy for individuals to fall prey to them, often out of greed, but sometimes because of a (sadly ironic) desire to reduce the risk they're taking with their assets. Which offers an opportunity for financial advisors to help clients who might be targeted by those peddling these schemes (or perhaps when pitched a questionable investment themselves) to evaluate the 'opportunity' and explain why it is likely too good to be true.

The Art Of Creative Client Gifting

(Christine DeMao | NAPFA Advisor)

Financial advisors often give gifts to clients to commemorate special occasions in their personal lives (e.g., retirement or the birth of a child), to recognize their time with the firm (e.g., 5 years as a client), or might even send an annual gift around the holidays. And by putting a little extra thought into the gifts, firms can create a "wow" moment that could resonate with clients for years to come.

For instance, when a client retires, instead of sending a bottle of champagne, a firm could gift a custom art print that represents the stages of a client's career (and, when hanging in their house, serves as a reminder of the firm's thoughtfulness!). Or when a client has a new baby, the firm could send a set of children's books personalized with the child's name. A gift can also send a message about the firm as well. For instance, DeMao's firm sends new clients a branded tabletop firepit and accessory kit with a deck of cards introducing each member of the firm's staff to communicate the message that "We're fired up to work together" (which is on brand for her 'nerdy' firm). For gifts being sent to larger groups (e.g., sent to all clients around the holidays), consumable goods (e.g., custom chocolates with the firm's branding on the box) are often more functional than an item the client might not end up using. Finally, firms can also demonstrate thoughtfulness based on the sourcing of the gifts. For instance, firms with a largely local client base might consider getting gifts from local artists and creators to demonstrate connection with the community.

Ultimately, the key point is that gift-giving occasions present advisory firms with the opportunity to show a level of creativity and thoughtfulness that can leave an imprint on their clients and serve as a signal of the care that they put into their clients' financial plans as well!

Advisor Gift Ideas For The Holiday Season

(Kelly Coulter | Private Advisor Group)

The end of the year can be a busy time for advisors given end-of-year deadlines for many planning actions (e.g., Required Minimum Distributions). Which can potentially mean that thinking about a client holiday gift might be put on the back burner. Nevertheless, taking a bit of time to send memorable gifts could pay dividends down the line in the form of greater client loyalty.

One way to offer clients a thoughtful gift (without the wrapping responsibilities) is to gift them an experience. For instance, a firm could get a sports-loving client tickets to an upcoming game or, for those who like the arts, tickets to a local performance. Another option is to bring a professional photographer into the firm's office for a photo shoot for clients and their families (which can create an additional touchpoint for the advisor as well!). Advisors could also demonstrate thought by sending gifts related to clients' hobbies, for instance by sending specialty spices to a client who cooks or a family board game the advisor enjoys to clients with kids. Further, personalized gifts (e.g., a throw blanket monogrammed with the client's initials) are often appreciated as well. And for firms that have a core value of giving back to the community, contributing to a charity that is important to a client could demonstrate thought as well (just make sure it's an actual charity!).

In sum, the holiday season presents advisors with an opportunity to demonstrate thoughtfulness when it comes to gift giving, ending the year on a high note (perhaps softening the blow of RMDs in the process?) and building closer ties between the firm and its clients.

The Best Gift-Giving Advice I've Ever Received

(Paul Bloom | Small Potatoes)

While the holiday season can be a time of great joy, it can also create stress, whether in the form of planning for large family gatherings or getting gifts for everyone on your list. On this latter item, while each gift ideally would demonstrate thought and creativity, doing so can be a time-intensive endeavor (particularly for those with a long list of family, friends, and perhaps clients!).

With this in mind, Bloom offers a gift-giving suggestion introduced to him from a former school counselor: buy a special version of an everyday thing. For instance, while it might be challenging (and possibly expensive) to purchase a bottle of wine that would stand out for a wine connoisseur, buying them a high-end or custom corkscrew could be a thoughtful alternative (and something that will remind them of you every time they open a bottle of wine!). Notably, this approach could be particularly effective for recipients who might not have the inclination (or the money) to 'treat' themselves for higher-quality goods (especially if it's something that they'll use often!).

In the end, while gift-givers often look to make a grand gesture (spending hours hunting down the perfect gift for the recipient), it's possible that the most impactful gift could be something much simpler that will last for years to come!

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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.