The Best Of Weekend Reading 2024: Top 24 Articles You Might Have Missed

Retirement Planning

Is The 4% Rule Too Safe?

(Keith Dorsey | Harvard Business Review)

In 1994, financial planner William Bengen published his seminal research study on safe withdrawal rates. The paper established that, based on historical market data, a person who withdrew 4% of their portfolio's value during their first year of retirement, then withdrew the same dollar amount adjusted for inflation in each subsequent year, would never run out of money by the end of a 30-year time horizon – even in the worst case sequence of returns ever experienced in the historical US data. From this insight, the so-called "4% rule" was born, and while it has been subject to numerous challenges and critiques over the years (with some calling it "too safe" and others claiming it is not safe enough), 4% remains anchored as at least a productive starting point for countless retirement planning conversations (before narrowing-in on more client-specific recommendations).

In fact, a recent survey of financial advisors by Prudential found that 61% of financial advisors most commonly use 4% as the withdrawal rate for their clients (followed by a 5% withdrawal rate by about 20% of respondents and 3% by about 15% of advisors surveyed). Nevertheless, Blanchett argues that the “4% rule” might be too conservative for many investors because it ignores other income streams (e.g., a retiree who can cover most of their 'necessary' expenses with their Social Security benefits and/or a defined-benefit pension might be willing to be more aggressive with their portfolio withdrawals), it doesn't account for spending flexibility (i.e., a retiree might be willing to cut their spending, at least temporarily, during market downturns, which could allow for a higher initial withdrawal rate), and that it focuses on whether the retirement goal is accomplished in its entirety (i.e., did the portfolio last throughout retirement without becoming exhausted) rather than assessing the magnitude of the failure (e.g., a 'failure' where the portfolio is still able to support 90% of a client's desired spending for several years would be preferable to a 'failure' where the portfolio is fully exhausted).

With these critiques in mind, Blanchett in a new research paper introduces a concept called "guided spending rates", which propose 'safe' initial withdrawal rates based on a selected retirement period length and an individual's spending flexibility in retirement. For instance, according to his calculations, a retiree with a 30-year time horizon and moderate flexibility could start with a 5% withdrawal rate (a 25% bump compared to the "4% rule"!), while a retiree with less flexibility (perhaps because they have high fixed expenses and/or limited sources of guaranteed income) could have a 4.3% withdrawal rate and a retiree with greater flexibility (perhaps because of few fixed expenses and/or significant sources of guaranteed income) could start with a 5.5% initial withdrawal rate.

Ultimately, the key point is that while rules of thumb like the "4% rule" can provide a shortcut to estimating sustainable retirement spending, they do not necessarily take into account the variety of client-specific factors (e.g., retirement time horizon and spending flexibility) that could allow for a higher (or perhaps lower) initial withdrawal rate. Which offers a potential opportunity for advisors to take advantage of clients' spending flexibility to propose a higher initial safe withdrawal rate (particularly if they will be able to work with the client over the course of their retirement and recommend spending adjustments when necessary!).

The Four Unique Risks In Decumulation

(Peter Neuwirth | Advisor Perspectives)

Those saving for retirement face several risks as they accumulate assets to support their lifestyle after they leave the workforce. For example, individuals face investment risk (i.e., the risk that their investments will decline in value) as well as inflation risk (i.e., the risk that inflation will erode the value of their assets). Nonetheless, because these investors are cash flow positive (i.e., they are contributing to, rather than withdrawing from, their portfolio), these risks are mitigated to some extent. However, the transition to retirement (where the individual flips from contributing to their portfolio to withdrawing from it) can introduce unique risks that can threaten the sustainability of one's portfolio.

First, sequence of returns risk is the concept that, even if short-term volatility averages out into favorable long-term returns, a retiree could still be in significant trouble if the sequence of those returns are unfavorable (i.e., with the bad returns occurring at the beginning of retirement). Because while the sequence of returns doesn't matter when there are no cash flows in and out of a portfolio, once cash flows occur (e.g., portfolio withdrawals to support retirement spending needs), the sequence of returns can play an important role in determining the ultimate sustainability of a portfolio (notably, while advisors often focus on the impact of a poor sequence of returns, there is significant upside for clients who experience a positive sequence of returns).

Next, retirees also face longevity risk, or the risk that their portfolio will not be able to support a lengthy lifespan (with this being a particularly important issue for client couples, as the portfolio typically will have to last until the second spouse dies). Further, retirees face tax risk, for example from future changes to tax brackets (that could increase the amount of taxes they pay and the amount they need to withdraw from their portfolios). Finally, retirees face the risk of unexpected spikes in expenses (e.g., extended long-term care needs) that could derail a portfolio withdrawal strategy that assumes a relatively steady spending pattern.

Notably, there are potential solutions for each of these risks. For instance, reducing a client's allocation to more volatile assets in the years leading up to and immediately following retirement (e.g., by creating a "bond tent") can help mitigate Sequence Of Return risk. For longevity risk, lifetime guaranteed income sources like annuities can help protect against a longer-than-expected lifespan. Tax risk can be mitigated by making contributions to Roth accounts (given that qualified withdrawals are tax-free) or potentially engaging in a (partial) Roth conversion strategy, as doing so allows an individual to 'control' the tax rate at which taxable withdrawals from a 'traditional' IRA or 401(k) are made. Finally, individuals can consider insurance products that can reduce the risk of certain major expenses in retirement (e.g., long-term care insurance).

In sum, while some of the factors that will determine the sustainability of a client's portfolio in retirement are outside of their control, financial advisors have many tools at their disposal to help mitigate these risks, from managing a client's asset allocation to ensuring they are properly insured. Advisors can also add value for their clients by communicating the potential risks and rewards of each of these strategies, as they tend to come at a price (whether it is reduced upside potential of a more conservative asset allocation or assets that are annuitized, the tax cost of Roth conversions, or the cost of insurance), and help them decide on and implement the best option for their needs!

Practical Considerations For Implementing (Partial) Roth Conversions For Clients

(Wade Pfau, Joe Elsasser, and Steven Jarvis | Advisor Perspectives)

Roth conversions are, in essence, a way to pay income taxes on pre-tax retirement funds in exchange for future tax-free growth and withdrawals. The decision of whether or not to convert pre-tax assets to Roth is, on its surface, a simple one: If the assets in question would be taxed at a lower rate by converting them to Roth and paying tax on them today, versus waiting to pay the tax in the future at higher rates when they are eventually withdrawn, then the Roth conversion makes sense. Conversely, if the opposite is true and the converted funds would be taxed at a lower rate upon withdrawal in the future, then it makes more sense not to convert.

Nonetheless, determining the tax that a client will pay on a Roth conversion today (or on a distribution from a traditional account in the future) is not just a matter of looking at their marginal Federal income tax bracket, but rather the broader range of taxes they might pay that impact their marginal tax rate, including Net Investment Income Tax (NIIT), losing subsidies based on the tax return (e.g., ACA premium subsidies), or income-related Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges. When taking these elements together, an advisor can estimate an "effective marginal rate" (EMR) to represent the net cost on the next dollar withdrawn from a traditional IRA (both now, and in the future). This can be a helpful tool to determine if, when, and how large of a (partial) Roth conversion might be advisable. For instance, while clients might hesitate to engage in a partial Roth conversion that led to them exceeding an IRMAA threshold (and be subject to a [higher] surcharge), it's possible that this could still make sense (as future Required Minimum Distributions [RMDs] from the account could put them in a yet-higher-still marginal tax bracket, would increase the amount of Social Security benefits subject to tax, and/or be subject to NIIT so that the future EMR would be higher than the EMR on the conversion today).

In addition to the decision of whether (and how much) to convert in a given year, another consideration is when to complete the Roth conversion. One option is to wait until November or December so that the advisor has a better idea of the client's income picture for the full year and the EMR on a potential conversion. However, waiting until the end of the year could lead the client to miss out on certain benefits from converting earlier in the year. For instance, given that markets tend to rise, converting earlier in the year means that the converted funds will grow in the (tax-free) Roth rather than the (tax-deferred) traditional account. Further, a market downturn that occurs during the year could represent an attractive opportunity for conversion when the prices of assets in the traditional IRA are (temporarily) depressed. With these factors in mind, a potential option is to take a 'barbell' approach, estimating the desired full-year conversion amount, converting some at the beginning, and being opportunistic with the remaining conversion amount (whether taking advantage of a market downturn or waiting until the end of the year).

Altogether, given the fact that many clients have a significant percentage of their retirement assets tied up in tax-deferred accounts, leveraging (partial) Roth conversions can be an attractive strategy to reduce their lifetime tax bill (and perhaps the tax paid by their beneficiaries!). And given the many practical considerations that go into the decision of when and how much to convert in a given year (that can affect the overall tax savings the client receives), this strategy offers a way for financial advisors to add significant (hard dollar) value for their clients!

Tax Planning

How Financial Advisors Can Help Clients Avoid (Increasingly Punitive) Estimated Tax Penalties

(Laura Saunders | The Wall Street Journal)

The United States tax system is set up on a "pay-as-you-go" basis, which means that taxpayers are required to pay taxes throughout the year as income is earned, whether it be through withholding income (via employer payroll) or making estimated tax payments directly to the IRS. Individuals who don't pay timely taxes throughout the year may be assessed estimated tax penalties by the IRS, which are based on the amount of unpaid tax, accruing at the Federal short-term rate (in the first month of the quarter in which taxes were not paid) plus 3 percent.

Amidst the rising interest rate environment of the past few years (which has increased the penalty interest rate to 8%, up from 3% in 2021), total estimated tax penalty assessments soared to $7 billion in 2023 from $1.8 billion in 2022, and the average estimated tax penalty climbed to approximately $500 in 2023 from $150 the previous year. Which means that many taxpayers, including those who are self-employed or receive significant interest, dividend, or taxable gain income, could find themselves facing steeper penalties if they do not make the required payments on time.

Financial advisors have several ways to help clients avoid estimated tax penalties. To start, while many self-employed clients will recognize the need to make estimated payments, other clients, such as those who work for an employer and have taxes on their wages withheld but also have significant income from exercising stock options or large amounts of investment income, may not realize they too have an estimated tax obligation. Recently retired clients, who have "always" covered their estimated taxes via payroll withholding, and now need to make their own estimated tax payments for their portfolio income and retirement account distributions, also need to be educated on the estimated tax rules.

From there, the most straightforward way for advisors to help clients navigate their estimated tax liabilities is to leverage one of 2 'safe harbor' methods, by either: 1) paying 100% of the prior year's tax liability in equal installments [110% if the client's Adjusted Gross Income from the previous year was more than $150,000]; or 2) paying 90% of the current year's tax liability in equal installments. In addition, advisors can analyze the best method of paying the estimated tax liability; while a client can make payments before the 4 quarterly deadlines (April 15, June 15, September 15, and January 15), they could also increase their withholdings from employment income (which are treated as though they were paid ratably throughout the year) or, if the client is retired, taking an IRA distribution and withholding the entire amount for taxes (which can be particularly attractive because an IRA distribution can be taken at any time during the year and, like withholdings from employment income, count towards the estimated payment requirements throughout the year, retroactively applying even if the IRA distribution withholding occurs as late as December!).

Ultimately, the key point is that as penalties for missed estimated tax payments have become particularly acute in the elevated interest rate environment where late penalties accrue at 'current' interest rates, such that the value of getting them 'right' has increased. And with a variety of strategies available to calculate and make estimated tax payments, financial advisors can recommend a plan that meets each affected client's needs (and demonstrate their value in hard dollar terms!).

12 Tax Planning Principles For Early Retirees

(Jim Dahle | White Coat Investor)

Financial planning discussions surrounding early retirement sometimes revolve around the risks involved from no longer bringing in employment income and the need to have the client's portfolio support them for an extended retirement period. Nonetheless, early retirement also can bring a variety of tax planning opportunities and the ability for advisors to help their clients generate needed income in the most tax-efficient way possible.

For clients who retire early and have significant savings in a taxable brokerage account, strategically selling assets from this account to generate income can lead to (perhaps surprisingly) low taxes. For instance, if a client sells high-basis shares (e.g., shares bought for $90,000 that are now worth $100,000) that have been held for more than 1 year, only the $10,000 gain will be subject to the (favorable) long-term capital gains tax rate (clients also might consider engaging in partial Roth conversions to leverage their relatively low income post-retirement and pre-RMD age). Alternatively, a client might choose to sell investments with a low cost basis (e.g., shares bought for $10,000 that are now worth $100,000) to take advantage of the 0% long-term capital gains tax rate.

Notably, when creating an income plan, an advisor and their clients in early retirement might consider the potential impact of different levels of their income on different subsidies and credits that might be available to them. For instance, a client's Modified Adjusted Gross Income (MAGI) will impact the potential subsidies they could receive if they obtain health insurance through a public health insurance exchange. And for those who have kids, other income-restricted opportunities (that might not have been available to them in their higher-earning years) include the child tax credit and the American Opportunity Tax Credit.

Altogether, creating a tax-efficient income plan for clients who retire early can be a way for advisors to demonstrate their value in hard-dollar terms, whether in minimizing their taxes today and/or reducing their (or their heirs') tax bills down the line!

Calculating The Tax Benefit Of Investing In 401(k)s Vs Taxable Accounts

(Nick Maggiulli | Of Dollars And Data)

One of the benefits of investing in a 401(k) or other workplace retirement account is that contributions grow tax-free (i.e., without having to pay taxes on capital gains or dividends on an annual basis), avoiding the "tax drag" that comes from investing in a taxable brokerage account (though taxes are due when funds are distributed from traditional 401(k) plans). Nevertheless, given the potential downsides of keeping money in a 401(k) (e.g., reduced liquidity compared to a taxable account), advisors and their clients might consider how much the tax benefits of 401(k)s are actually worth.

Maggiulli considers a scenario where an individual makes a $10,000 annual investment into either a Roth 401(k) or a taxable brokerage account over 30 years, receiving 7% annual growth (5% price growth and a 2% dividend), with the individual paying a 15% tax rate on capital gains (with the entire investment sold at the end of the period) and dividends (he chose to make Roth contributions so that both accounts were invested with after-tax funds) in the taxable account. He finds that the Roth 401(k) ends up with $114,000 (14%) more than the taxable account at the end of the period (after all taxes have been paid). While this might seem like a significant benefit to investing in the Roth 401(k), on an annual basis it provides a 0.73% annualized benefit, which, while not insignificant, could be largely negated if the 401(k) comes with high fees and/or limited investment options (in addition to the reduced flexibility of saving in a 401(k) compared to a taxable account).

In sum, while the tax benefit of investing in a 401(k) is real, it might not be as much as some clients expect and can be weighed against the costs of making these contributions. At the same time, certain clients might experience greater tax benefits if their circumstances differ from the assumptions used here (e.g., if they make traditional 401(k) contributions and have a significantly lower marginal tax rate in retirement than they do today) and these accounts come with behavioral benefits (e.g., automatic paycheck withdrawals could reduce the temptation to spend, rather than invest, these funds), suggesting that advisors can add value to their clients by analyzing the potential tax benefits and costs for each client's unique situation!

Cash Flow Planning

Five Ways To Help Hesitant Clients Spend More In Retirement

(Christine Benz | Morningstar)

While some individuals retire with little available savings (and might end up relying heavily on Social Security benefits to support their lifestyle), others leave the workforce with a sizeable nest egg that could support a healthy amount of spending throughout retirement. Nevertheless, researchers have identified a "Retirement Consumption Gap", whereby many retirees (particularly those in the upper end of the wealth spectrum) spend significantly less than they otherwise would be able to afford to (even accounting for financial uncertainties, such as longevity or medical costs).

With this in mind, there are a variety of potential options that could help hesitant retirees (who would otherwise want to spend more) increase their spending. To start, some retirees might feel better about accessing funds from their portfolio generated from investment income (e.g., dividends and bond income) rather than from capital gains (by selling an asset), which could suggest a greater allocation to income-generating assets for such clients. Alternatively, a client could choose to boost their 'guaranteed' income, for example by delaying claiming Social Security benefits or annuitizing some of their assets. Another option for clients who don't want to see their portfolio balances fall as a result of withdrawals is to increase spending when the portfolio sees gains (so that the portfolio could still grow, or at least remain steady, after accounting for the investment gains and the client's withdrawals) and cutting back when it faces losses. Finally, advisors could introduce data demonstrating that retirement spending tends to decline (in inflation-adjusted terms) over the course of a retirement (before sometimes ticking higher at the end of life due in part to medical costs), which could encourage clients to spend more early on in retirement, with the understanding that this spending might naturally decrease later on (e.g., as physical issues limit their ability to travel).

Ultimately, the key point is that financial advisors can add significant value for clients not only by analyzing how much they can sustainably spend in retirement, but also, more broadly, by giving them 'permission' to spend on an ongoing basis, perhaps by delivering regular income to clients through monthly 'paychecks' derived from their portfolio (or from 'guaranteed' income sources) rather than through more infrequent client-requested withdrawals (which they might be hesitant to make!).

The Non-Linear Relationship Between Spending And Happiness

(Katie Gatti Tassin | Money With Katie)

Individuals who live in a cramped apartment might dream of the day they can move into a large house with room for any activity imaginable (home gym! hosting guests!). But when the day comes that they do move into the larger house, they might find that there are some unwelcome surprises, from more space to clean, additional repairs to make, and higher utility bills. So while the new house might be 3X the size of the old apartment, it might provide less than 3X the boost to happiness.

This non-linear relationship can apply to many areas related to spending. For instance, while going from having no car to 1 car could be a major life improvement and provide significantly more flexibility, adding a new car when you already have 3 might not provide as much enjoyment (but still comes with the marginal costs of having an additional car). In addition, while it makes sense to upgrade your lifestyle to some extent as income rises (without letting "lifestyle creep" crowd out any additional savings that could be put away), the concept of "hedonistic adaptation" suggests that individuals often get used to life "upgrades" quickly, and that it can be much harder to go back to the previous lifestyle, even if it would be financially advantageous (e.g., once you buy a luxury car, 'downgrading' to a less-expensive model might feel like a major sacrifice).

In the end, while some research indicates that more money can buy greater happiness in many cases, the relationship is not linear, with the slope of the increased benefit becoming flatter at higher income levels. Which suggests that financial planning clients might consider not only how much they can afford to spend today, but also the potential marginal benefit of different purchases for their long-term happiness (and how today's lifestyle upgrades could impact their financial plan in the years ahead)!

How Much Should You Spend On Vacation?

(Brett and Kate McKay | The Art Of Manliness)

While most items on a household budget don't inspire excitement (e.g., mortgage payments, insurance bills), one line item that can generate anticipation is the money set aside for travel. Whether it is a family vacation with young kids or a month-long getaway for retirees (or perhaps a sabbatical who are still working!), spending money on travel can be enjoyable. Nonetheless, because no one has an unlimited travel budget, considering how much you (or a client) can afford to spend on vacations can prevent this budget item from eating into others.

To start, setting an annual travel budget at the beginning of the year can provide broad guideposts for the individual trips that will be chosen. For instance, if a 2-week summer trip to Europe would eat up 75% of the annual budget, other trips during the year might have to be less expensive (camping, anyone?). The amount of this budget (in absolute terms and as a percentage of total spending) will likely depend on an individual's or family's other expenses; while those with a tight budget might allocate 5-10% of their income to vacations, those with fewer other expenses (e.g., retirees with a paid-off mortgage and no kids at home) might see this number go much higher.

Notably, vacation choices this year can affect those made in future years. For instance, you might encounter "luxury creep" if you stay in a luxury hotel on a trip and find that going to a 'standard' hotel in the future just won't cut it (meaning that you might have to increase the budget for lodging expenses in the future). Similarly, "entitlement creep" can occur (and lead to increased travel expenses) if you start to feel like you 'deserve' a certain type of trip based on the stresses of daily life (and while trips can be well-earned, this situation might instead call for a reevaluation of what's causing this stress).

In sum, while money spent on vacations is not necessarily a financial investment, it can be an investment in having the opportunity to have new experiences, relax, and generate memories that can last a lifetime. Which offers financial advisors the opportunity to help their clients not only in deciding how much they want to budget for travel in a given year, but also to help them grow their wealth so that this number can increase over time (and perhaps help them maximize the credit card rewards they receive from regular spending so they can travel even more!).

Estate Planning

Steps A Client Can Take To Simplify Their Estate

(Cheryl Winokur Munk | The Wall Street Journal)

The death of a parent or other loved one is an inherently stressful situation for those who are left behind. Sometimes, this grief can be compounded by stress resulting from the decedent leaving a complicated estate plan (or none at all), requiring their executor and/or heirs to decipher and execute their wishes. Which suggests that clients potentially can prevent this further stress by updating and simplifying their estate plans.

To start, regularly updated estate documents (and beneficiary forms) can ensure that selected assets go to the desired person (particularly important for blended families, where the beneficiary of some accounts could be a client's previous spouse rather than the current one). In addition, clients can help avoid conflict by assigning tangible personal property to specific individuals in advance (and writing down where each item is located!) to prevent arguments among their children or other heirs as to who gets what. Similarly, identifying digital assets (e.g., financial assets such as cryptocurrencies or a digital picture collection) can help ensure they are not lost in the shuffle when it comes to dividing up an estate. Other helpful instructions to write out in advance include the location of estate and other key documents, the names, numbers, and locations of financial accounts, and names and contact information for attorneys, accountants, and financial advisors. Finally, clients can reduce sibling rivalry issues by naming an outside party as the executor for their estate and or trustee for trust accounts rather than one of their children (or, if they do name a child, write out their reasoning for doing so, for example because the child lives locally).

Altogether, while clients might think about their legacy in part in terms of the assets they leave to their heirs, one of the most underrated gifts of all (and an area where a financial advisor can add value!) could be a well-designed estate plan that is relatively simple to execute and avoids creating strain among the client's survivors!

Why Everyone Needs A "Digital Death-Cleaning" Plan

(Alexandra Samuel | The Wall Street Journal)

When it comes to creating an estate plan that explains how they want their assets to be divided, many clients will think of the key documents, from a will and power of attorney to any trusts that are set up. Nonetheless, in the 21st century, an individual's assets are not just financial (e.g., investment accounts) or tangible (e.g., a home and other personal property), but also include digital assets, from online accounts to digital photographs.

Just as an effective estate plan can ease the burden on the executor of an individual's estate (as well as their heirs) when it comes to managing the individual's tangible property, creating a "digital death cleaning" plan can also help to organize and close up their digital life as well. For instance, having a document (hard copy or digital) that includes a list of one's financial and other online accounts, along with passwords, can help survivors close down accounts (e.g., the decedent might not want their Facebook profile to live on forever). Beyond online accounts, individuals can also smooth the process by organizing their digital files (from photographs to important documents), perhaps sorting them into categories such as "relevant", "memorabilia", and "delete upon death". Further, by digitizing hard-copy documents and photos, individuals can further cut down on the amount of clutter that survivors will need to manage (and in the case of pictures and other memorabilia, allow them to be shared with a wider audience compared to only giving a hard copy to a particular person!).

Ultimately, the key point is that as digital assets have become an increasingly important part of client's lives, financial advisors have an opportunity to add value by encouraging them to create a plan for their organization and disposition (perhaps with the assistance of a growing category of software tools designed for this purpose), which, alongside other estate planning documents and plans, could provide them with greater peace of mind that they won't overburden their family and friends upon their death!

Seven Considerations For Providing A "Living Inheritance"

(Randy Fox | WealthManagement)

Parents naturally want to help their children thrive, which not only can involve money spent on their upbringing and education (e.g., helping to pay for college) but also leaving assets to them after the parents pass away. In between, though, parents might consider gifting their adult children money or other assets while still alive as a form of "living inheritance".

Taking a "living inheritance" approach can come with a range of tax benefits, particularly for those with potential estate tax exposure. For instance, gifts up to the annual exclusion amount ($18,000 in 2024, or $36,000 for a married couple, per recipient) do not require the givers to file a federal gift tax return or have it count toward their lifetime exemption amount (potentially reducing the size of the parents' eventual estate for estate tax purposes). At the same time, some parents might choose to accelerate gifting during the next year and a half before the current gift and estate tax exemption ($13.61 million per individual or a combined $27.22 million for a couple) is set to sunset at the end of 2025 (when it could be cut in about half, absent legislative intervention). These are in addition to potential qualitative benefits like providing financial relief for the recipient (e.g., to help pay for a large medical bill) and the opportunity to see them enjoy the money.

Nonetheless, there are potential downsides to giving a "living inheritance" as well. To start, parents will likely want to ensure (perhaps with the assistance of a financial advisor?) that any gifting allows them to achieve their other goals within a sustainable financial plan (even if it means giving up some tax benefits?). Also, many parents might be concerned that their gifts will reduce their children's incentive to earn up to their capabilities (though parents might see this as a plus if it allows a child to pursue a lower-paying but more-meaningful job). Finally, there might be considerations surrounding how a gift to one child will be seen by others (if they don't receive the same amount) to avoid family friction.

In the end, while a "living inheritance" can make sense for many families, assessing the best way to give (both in terms of financial costs and benefits as well as qualitative impacts of the giving) is an important step to make sure parents (and grandparents) get the most out of their generosity!

Insurance Planning

The Challenges And Future Of Traditional Long-Term Care Insurance

(Tom Riekse | LTCI Partners)

Long-Term Care (LTC) insurance policies were very popular amongst consumers in the 1990s and into the early 2000s, as aging Americans sought to protect themselves against potentially high long-term care costs and take advantage of relatively low premiums offered by insurers. But as insurers began to experience claims on these policies, they found that the pricing was inadequate, leading to significant rate increases that came as a surprise to current policyholders and made coverage prohibitively expensive for many prospective buyers.

Within this environment emerged hybrid life insurance/LTC policies that combined a permanent insurance product with LTC coverage. These products were attractive to many buyers, as, in return for a lump-sum premium payment, the cost of the LTC coverage was guaranteed not to change (though this might have been a bit of a mirage given that insurance companies were not obligated to pay a going rate of return on the cash value of the policy). In recent years, similar policies that require annual premium payments rather than a single lump-sum premium have become a popular alternative to 'traditional' LTC insurance coverage as well.

Nonetheless, Riekse (whose firm is a LTC insurance broker), suggests that traditional LTC coverage (which typically pays a monthly benefit when care is required in return for an annual premium payment, with no death benefit) could be an attractive option for many individuals looking to mitigate their LTC exposure. These include individuals who do not have a need for additional life insurance coverage (that is part of hybrid policies) and those who want to pay lower premiums (because they do not include life insurance coverage, traditional LTC policies typically have lower premiums than hybrid policies for similar LTC benefits).

Ultimately, the key point is that while policyholders have experienced significant frustration when it comes to premiums on traditional LTC insurance policies, they (alongside hybrid policies) remain viable options for many clients and their advisors to consider. Which means that advisors can add significant value for clients by helping them evaluate their LTC (and life) insurance needs and (if called for) selecting a product (as well as coverage amounts and inflation adjustments) that best meets their unique needs (and budget).

Five Medicare Mistakes Clients Make (And Advisors Can Help Fix)

(Rick Fine | Sensible Financial Planning)

Financial planning clients nearing or in retirement are likely to understand that Medicare will play a major role with regard to their health care in retirement. However, the Medicare system itself can be challenging to fully comprehend given the various coverage options, expenses, and deadlines involved, giving financial advisors an opportunity to educate clients on how it works, correct misconceptions they might have, and ensure they are enrolled in the best coverage to meet their needs.

To start, many clients might assume (given that they've paid into the Medicare system through payroll taxes throughout their careers) that Medicare coverage is completely free. Whereas, in reality, several parts of Medicare (e.g., Part B medical coverage and Part D prescription drug coverage) require an enrollee to pay premiums. Further, even if a client understands that they will have to pay premiums, they might not be familiar with Income-Related Monthly Adjustment Amount (IRMAA) surcharges, which apply to participants above certain income thresholds and can increase their costs further. Also, when a client is nearing age 65, they might not be familiar with the important enrollment deadlines (e.g., the 7-month-long initial enrollment period, which includes the 3 months before they turn 65, the month they turn 65, and the 3 months after they turn 65), which, if missed (and if an exception, such as continuing employer-based health coverage, does not apply), can lead to penalties on premiums for the rest of their life. In addition, once enrolled in Part B, participants have a 6-month Guaranteed Issue (GI) period for Medigap plans; if this window is missed, the individual might have to undergo a medical review to obtain coverage (which could result in higher premiums or denial of coverage), though some states offer an annual GI period.

Another potential mistake clients might make is to assume they don't need to sign up for a Part D prescription plan because they currently don't take many prescription drugs. However, given the sometimes-unpredictable nature of health outcomes and the often-high costs of prescriptions without coverage, a Part D plan could make sense for these individuals in some cases. Relatedly, spouses might choose the same prescription drug plan by default; however, given that they will likely have different prescription needs, each might benefit from different types of plans (e.g., how different drugs are covered). Finally, some clients might assume that Medicare enrollment is a one-time task and that they will remain on the same coverage for the rest of their lives; however, the annual open enrollment period offers the opportunity to make a range of changes to coverages (given that premiums, deductibles, and/or coverages for certain plans can change each year).

In sum, financial advisors have the opportunity to support their clients by ensuring they enroll in Medicare at the appropriate time, select the plans that best meet their needs, review coverages annually, and managing their income to mitigate IRMAA surcharges, potentially savings them thousands of dollars in the process!

Assessing Health Insurance Options For Early Retirees

(Gail MarksJarvis | The Wall Street Journal)

Many financial planning clients will end up retiring at age 65 or later, at which point they will be eligible for health insurance coverage under Medicare, which tends to be quite affordable given premium sharing with the Federal government (funded via the Medicare taxes deducted from workers' wages and/or self-employment income). However, those who decide to retire earlier (which means they will not be eligible for Medicare, unless they are disabled or have permanent kidney failure) typically have to seek out an alternative source of insurance once they are no longer eligible for coverage from their employer, which can be significantly more expensive than the (often heavily employer-subsidized coverage) they received during their working years.

Nevertheless, early retirees have a variety of options to choose from for their health insurance needs until they achieve Medicare eligibility. For those clients who have a relatively short gap between their retirement date and Medicare eligibility (e.g., if they retire at age 64), liked their insurance coverage from their previous employer (and/or would like to ensure they can continue to see the same doctors), and worked at a company required to offer it (typically those with more than 20 employees), continuing coverage under "COBRA" could make sense. Under COBRA, former employees (and eligible spouses and dependent children) typically can continue their coverage for up to 18 months. However, the employee will have to pay the full cost of the policy (i.e., without employer subsidies), which could be significantly higher than the premiums they are used to paying (employers can also charge an additional 2% administration fee). Given the time limits and cost of COBRA coverage, it often makes the most sense for early retirees who will become eligible for Medicare during the COBRA-eligible period.

For those retiring well before they reach age 65, finding health insurance coverage on a state health insurance exchange could make sense. To start, early retirees (who no longer have wage income) might find that they are eligible for income-based subsidized coverage with premium assistance tax credits. In addition, these policies will not disallow coverage based on pre-existing conditions and cannot deny coverage if an insured becomes sick after buying the insurance. With these plans coming in a range of coverage tiers (that vary in terms of premiums, deductibles, and other factors), early retirees (and their financial advisors) can compare available options to determine the best option for their needs.

While many early retirees will choose coverage either COBRA or their state insurance exchange, retirees in certain situations could choose from a variety of other options, including joining a still-working spouse's employer-subsidized health insurance plan (which might be 'Plan A' for those in this situation), getting a part-time job that offers health insurance coverage, converting their employer-based group insurance plan to an individual plan (notably, this is only offered by some employers and the terms of these policies can differ from the employee's previous policy), pursuing private insurance coverage off of the insurance exchanges (which can offer lower premiums than exchange policies, though early retirees could be denied for pre-existing conditions and/or be subject to maximum coverage amounts), or joining a healthcare sharing program (though pre-existing conditions can lead to coverage limits).

In the end, while health insurance coverage is often one of the larger line items on an early retiree's budget, they have several options to choose from to meet their unique needs. Which means that financial advisors can add significant value to their clients by comparing the various options and helping them select the one that meets their medical needs and fits within their budget (and, for those on state exchange plans, perhaps creating an income strategy during this period that will help them maximize the subsidies available to them!).

Investment Planning

Why Not 100% Equities?

(Cliff Asness | AQR)

While there are few ironclad rules when it comes to investing, two popular beliefs are that investors should hold a mix of stocks and bonds (with the assumption that the less-volatile bond allocation can steady the portfolio during equity downturns), and that younger investors should have a greater allocation to stocks compared to older investors (given the potential for a poor sequence of returns to derail an individual's retirement when the investor is older, relative to the long time horizon for recovery that a younger investor still has).

However, a recent paper challenges these assumptions, arguing that investors would be better off investing in a portfolio of 50% domestic stocks and 50% international stocks (i.e., 100% in 'diversified' equities) throughout their lifetimes rather than in target-date funds (which tend to follow the two popular beliefs outlined above by investing in both stocks and bonds, adjusting the allocation towards bonds as the individual nears retirement age). The researchers cite the superior long-term returns of stocks compared to bonds to argue that investors would build greater wealth with their approach than by using target-date funds (or similar asset allocation approaches on their own or with the assistance of a financial advisor) and that advisors and regulators should be more open to this equity-heavy strategy.

For his part, Asness finds the arguments in the paper wanting. To start, he notes that it is well understood that stocks have historically provided a greater long-term return than bonds (which is to be expected given that stock investments have come with greater risk than bonds). He suggests that a more important question is whether a 100% equity portfolio would provide a greater return for the risk taken compared to a portfolio with a mix of stocks and bonds (i.e., investors might require significantly greater upside potential in return for taking on much greater risk). Further, the 100% equity approach does not take into account the risk preferences of the investor themselves; for example, some investors might seek to maximize their wealth and are willing to risk a poor sequence of returns to do so (in which an equity-dominant portfolio might be appropriate), while others might be willing to sacrifice return upside for a steadier ride along the way and greater assurance of the income they will have available in retirement (or would outright be at greater risk of retirement failure by talking on 'too much' in equities and increasing their sequence of return risk). Asness also argues that the returns in the sample period of the paper (1890-2019 for the U.S., with later start dates for certain other countries) might not represent the returns that an individual today will receive given that equity valuations today are higher than they were during much of the sample period (and could therefore portend weaker returns going forward compared to the sample period).

In sum, while the researchers argue for an approach that is superior 'on paper', implementing a 100% equity strategy for clients could prove difficult, given the potential for increased volatility compared to a more balanced asset allocation, the impact of withdrawals (for retired clients) versus portfolios that investors can just buy-and-hold (and not use) forever, and possible underperformance if stocks perform worse going forward than they did in the sample period. Which offers an opportunity for financial advisors to offer significant value, not only by evaluating different investment strategies (and the research behind them), but also by understanding the unique needs and risk tolerance of their clients, along with their cash flow needs to navigate sequence of return risk, to help them stay the course and meet their financial goals!

Why Portfolio Rebalancing Might Be Sub-Optimal For Retirees

(Rajiv Rabello | Advisor Perspectives)

A common task for financial advisors within the investment planning domain is rebalancing client portfolios, which is typically done to reduce volatility resulting from portfolio 'drift'. For instance, if a client starts with a portfolio consisting of 60% equities and 40% bonds, strong equity returns over time could make this asset allocation 'drift' to perhaps 80% equities and 20% bonds, which could lead to increased portfolio volatility (given that equities historically have had greater volatility than bonds). With this in mind, rebalancing a portfolio back to its target allocation (possibly over set time periods or when the asset allocation drifts beyond a preset limit) can counteract this 'drift' and the increased volatility it can introduce. And while portfolio rebalancing can be done throughout a client's life, it could be particularly important as they near and begin retirement, a time period when the downside effects of sequence of return risk (i.e., if early returns are too low for too long, ongoing withdrawals can deplete the portfolio before the 'good' returns finally arrive) are particularly acute.

With sequence risk in mind, an advisor might decide to regularly rebalance the portfolios of clients nearing and in the first several years of retirement (particularly if the equity portion is above its target allocation) to mitigate sequence risk. Nevertheless, Rebello suggests that because equities tend to offer higher returns over time and because a retiree's portfolio might need to support them for a retirement of 30 years or longer, such rebalancing (that tends to reduce the allocation to equities, given that they tend to return more than bonds over the long run) might be sub-optimal. For instance, running an analysis of 1,000 scenarios based on a 55-year-old couple with $2.8 million in assets, a portfolio allocated to 60% stocks and 40% bonds, and desired annual withdrawals of $200,000, he found that the retirement goal was met in 77% when rebalancing annually and a nearly identical 76% of scenarios when no rebalancing is done. However, the after-tax median portfolio value at age 95 when rebalancing was approximately $6.1 million, less than the $7.7 million median portfolio value when no rebalancing is undertaken and the equity allocation is allowed to drift higher over time.

Notably, in the previous analysis, while withdrawals when rebalancing were taken so that the portfolio returned to its 60/40 allocation (i.e., by selling equities when they performed better than the bonds in the portfolio), the no-rebalance scenario took withdrawals based on the prevailing allocation percentages in equities and bonds (i.e., if the portfolio moved to 70% equities and 30% bonds, 70% of the withdrawal was taken from equities and 30% of from bonds) . Rebello notes that an advisor could improve on this by taking portfolio withdrawals solely from the bond portion of the portfolio. When this type of "bond tent" strategy is done, drawing down bonds during the dangerous sequence-of-return-risk years and allowing equity allocations to glide higher, the probability of success rises to 79% (greater than the rebalancing strategy) and the median age-95 portfolio value jumps to $10.9 million, dwarfing the final value of both the previously discussed strategies.

Altogether, while portfolio rebalancing can reduce volatility, it could end up reducing a client's long-term returns, suggesting that facilitating a "rising equity glide path" in retirement (by not rebalancing a portfolio and allowing equity returns to drift the allocation higher, and/or by taking portfolio withdrawals from the bond allocation) could lead to greater portfolio growth over time with a similar or improved probability that a client's retirement income needs will be met. That said, while this strategy takes advantage of the upside potential of sequence of return risk in retirement, it could also lead to an asset allocation with a much higher allocation to equities than a client might be comfortable with, which means that successful implementation of the strategy not only involves managing the portfolio itself, but also addressing a client's potential concerns that such an aggressive strategy could threaten their retirement income (possibly by framing it as a "bucket" strategy where 'safer' bonds are used to support the retiree's shorter-term income needs and 'riskier' equities are meant to ensure that the portfolio can support their income needs for the long run?).

Buffer ETFs May Protect Against Some Losses, But Come With A Cost

(Elaine Misonzhnik | Wealth Management)

Investing in the stock market offers the potential for significant long-term returns at the 'cost' of volatility along the way. For long-term investors (particularly those with strong risk tolerance), such short-term volatility might be less of a concern, as they can remain invested long enough for the market to recover. However, for those with a shorter time horizon (e.g., individuals about to retire, for whom sequence of return risk is a potential threat to their spending in retirement), being highly exposed to sharp market downturns might be less palatable.

To meet the needs of investors looking to participate in equity market gains while limiting their exposure to market losses, a number of products have emerged in recent years that offer (at least some) downside protection in return for capping the upside return from investing in equities. One particularly popular set of products are buffer ETFs (a group that has grown to $37.99 billion in assets under management, spread across 159 ETFs), which use options strategies to provide a "buffer" against losses, while an upside 'cap' is put in place to pay for the cost of providing the downside protection. For instance, a particular buffer ETF might provide for a 15% buffer (i.e., investors will not experience losses if the index being tracked (e.g., the S&P 500) falls less than 15% during the period of the ETF series [often 12 months]) with a 15% cap (i.e., investors will participate in gains of the target index up to 15%, but will not receive additional gains if the index appreciates beyond that point).

While buffer ETFs can provide a level of downside protection for interested investors, they do come at a cost. To start, the upside cap limits potential returns in years of particularly strong performance (further, buffer ETFs typically track the price level of the target index, so an investor would not benefit from dividends that would be received if they bought a traditional ETF tracking the same index). In addition, investors (and advisors using buffer ETFs with clients) are not guaranteed to receive the advertised upside cap and buffer if they invest in a buffer ETF series after it is launched (e.g., if a 15% cap buffer ETF runs from January-December, and an investor buys it in March after the index has risen 10%, they potentially will only participate in up to 5% of additional upside if the market continues to rise, not the full 15%!). Also, Morningstar has found that buffer ETFs tend to have fees that are about 70% to 80% higher than regular ETFs, indicating that there are costs beyond the upside cap. Finally, investors will need to be aware that their while their upside is not capped, they could still experience significant drawdowns in years when the performance of the index exceeds the buffer level (e.g., an investor in a 15% buffer index would experience a 20% loss if the index falls 35%).

Ultimately, the key point is that while buffer ETFs can provide some downside protection for investors, it is no 'free lunch', given the upside cap and fees involved. Which provides an opportunity for financial advisors to add value for clients interested in these products by explaining the full implications of these investments and, if they are determined to be a useful addition to their portfolio, to invest in them so that the client receives the full benefits of these products (i.e., by buying the product at launch and holding through the entire defined outcome period) or, otherwise, finding alternative solutions (e.g., a more conservative asset allocation using traditional funds) to mitigate their downside risk!

Advisor Marketing

These Four Pillars Are The "SOUL" Of Organic Growth

(Joe Duran | Citywire RIA)

Whether a firm is brand new or well-established, organic growth (i.e., onboarding new clients or adding additional assets from current clients) is a key metric that can determine its health. But while most firms want solid organic growth, actually achieving it can be much more challenging. With this in mind, advice industry veteran Duran offers a 4-part framework with the acronym "SOUL" to outline what it takes to do so.

To start, the "S" in "Soul" stands for Sales. Because while many advisors have chosen to move from a sales-first, "eat what you kill" culture seen often in the product distribution industry, sales skills are still needed to convert prospects into clients. This can require an investment of time on the part of firm management, with Duran suggesting that at least a quarter of leadership time be spent on the sales process, which not only includes selling the firm to prospective clients, but also tracking results and making improvements. The "O" in "SOUL" stands for Originality. At a time when many factors that a firm used to differentiate themselves (e.g., being fee-only or a fiduciary) are much more common now, firms can look for new ways to show how they are different, for example by offering unique expertise or services. Relatedly, the "U" stands for Understanding, by which he means the ability to understand a client's unique circumstances. And given the wide range of client types, selecting a client niche can potentially allow a firm to craft a service model that meets these clients' specific needs. Finally, the "L" stands for Love. Whether it is the advisor's love of serving their clients or employees' love of the mission and purpose of their firm, having a culture of deep caring can help a firm win more clients.

In the end, while there is no single 'secret' to achieving strong organic growth as an advisory firm, Duran's "SOUL" framework offers potential ideas for firms to build on top of current initiatives (e.g., strengthening firm culture or narrowing in on a client niche) or perhaps starting new ones (e.g., refining a firm's marketing to reflect how it is truly 'different')!

You Don't Have To Be Salesy To Be Good In Sales

(Beverly Flaxington | Advisor Perspectives)

For advisors who entered the industry in product sales roles, asking clients for referrals of friends or family members might come naturally (and could be a relative relief compared to cold calling or other more challenging sales tactics). But for advisors who do not want to appear too 'salesy', making this ask might feel more difficult.

With this in mind, Flaxington offers several ways for hesitant advisors to overcome mental hurdles when it comes to asking for client referrals. To start, she suggests that advisors reframe "client referrals" as "introductions", as being introduced to someone who might have interest in the advisor's services (and just having a conversation with them) can feel like less of an ask than referring someone to become a client (further, because people like to help others, framing this request as asking the client for help can encourage them to make these introductions). In addition, having a structured plan for asking for these introductions (e.g., taking a standardized 3-question approach during client meetings) can make this tactic less intimidating and more effective. Finally, she notes that, in reality, advisors are 'selling' every day through the services they are providing to their clients (and the trust they are building in the relationship). Which suggests that advisors do not necessarily need to come up with groundbreaking planning ideas to prompt their clients to make introductions, but rather provide a consistent level of service over time that will make clients more inclined to refer others.

Altogether, while many financial advisors engaged in comprehensive planning do not consider themselves to be salespeople, attracting new clients does require some sales skills. That said, 'selling' advice does not necessarily require high-pressure sales tactics, but rather (in the case of client referrals) demonstrating the advisor's value to clients and then having a plan to ask them to 'help' the advisor by providing introductions!

18 Marketing Hacks For Independent Financial Advisors

(Jennifer Mastrud | XY Planning Network Blog)

Financial advicers are known for their deep expertise in planning concepts and their desire to act in the best interests of their clients. Nonetheless, the ability to serve clients requires advisors to actually get individuals to become clients in the first place. And even though advisors typically aren't marketing professionals themselves, adopting marketing tactics used across industries can help an advisor grow their audience and client base.

For many prospects, their first 'touchpoint' with an advisor will be through the advisor's website (perhaps after being referred to the advisor by a friend or finding them online). With this in mind, making the website as engaging as possible can increase the chances that the visitor will dig deeper, and, hopefully, take the next step to becoming a client. Ways to boost engagement include the use of a countdown timer (with a tool like MotionMail) on the firm's website to create a sense of urgency (e.g., a countdown to an upcoming webinar hosted by the firm), using visually appealing, magazine-like flipbooks (using a tool such as Publitas) to communicate information rather than colorless, multi-page documents that scroll vertically. At a more basic level, revisiting the fonts and colors used on the website and sizing pictures on the website (and on social media) appropriately can create a more visually enticing experience for visitors.

Another potentially effective marketing approach is to use "Calls To Action" (CTAs) to get a client to engage with the firm beyond just browsing its website. For instance, an advisor might offer a piece of premium content to individuals who provide their email address. To take this tactic to the next level, advisors can consider first crafting an ideal client persona and then targeting both the content provided to this persona to boost its relevance. For instance, an advisor who specializes in working with doctors and tech professionals might consider having separate landing pages (and associated CTAs) for each group. Further, given that many individuals work with financial advisors to save time compared to handling their finances themselves, offering CTAs that will save them time (e.g., a checklist or template) could be particularly attractive to prospects.

In sum, effective financial advisor marketing is not just about the broader strategies chosen, but also how certain tactics are implemented. And so, by creating a visually appealing website and offering relevant, time-saving content for those willing to accept a CTA, advisors can potentially increase the number of leads they generate and, hopefully, prospects that eventually become clients!

Practice Management

Building An Efficient, Thriving Advisory Practice With A Proven Seven-Step Framework

(Stephanie Bogan | Advisor Perspectives)

When a financial advisor first opens their own firm, they might have few clients, but plenty of time on their hands. But as their client base grows, they might find that they have less and less time and are playing a regular game of "whack-a-mole", knocking out tasks each day without a clear direction. With this in mind, Bogan offers a 7-step process to create a more efficient, healthy firm that can generate additional revenue and free time for its owner.

The first step to creating the firm of an advisor's dreams is to first create a vision, answering questions such as what income and lifestyle they and thinking about the clients they do their best work with. With this information in hand, the advisor can identify a client niche they can serve based on their ideal client and their ability to provide expertise for the unique challenges they face. Once they have decided on their ideal target client, the advisor can create a message that explains its client value proposition in a clear, concise, and compelling way (a task that will be made easier by narrowing down to an ideal client type with specific planning needs). After crafting a clear message, the advisor can then find ways to get it out to their target audience (which could mean digital marketing campaigns, blogging, social media engagement, or in-person events depending on where qualified prospects are most likely to see the message).

Next, the firm owner can look inward for ways to streamline their processes to create efficiencies in marketing, onboarding, and service delivery (which can both save time and ensure consistent and high-quality client experience). Another important step is to build a tech stack that allows the advisor to automate workflows, enhance client experiences, and scale operations. Finally, a firm owner can consider how they want to invest in staff, starting by identifying the tasks they can delegate so they can focus on higher-value activities.

In the end, while building an efficient practice that meets a firm owner's lifestyle goals is not an overnight endeavor, taking a structured approach to doing so (that addresses the firm's client type, value proposition, marketing, and service delivery together) is more likely to lead to success than doing so in an ad hoc manner that lacks a guiding vision.

A Step-By-Step Guide To Understanding RIA M&A Transactions

(Richard Chen | Advisor Perspectives)

The acquisition of one RIA by another can be beneficial to both parties. Buyers can use Mergers and Acquisitions (M&A) activity not only to grow their client base, but also to gain the talent of the selling firm (which has become a particularly valuable proposition in the current competitive environment for advisor talent), while owners of selling firms can monetize the investment they've made in their firm, and perhaps benefit from potential economies of scale available by joining a larger firm (e.g., centralized compliance). Nevertheless, given the gravity of M&A deals (from the potential for a buyer to get little value from the firm they buy to the fact that the firm might be the largest asset on a seller's personal balance sheet), the process of completing a transaction typically involves many steps and significant due diligence on both sides.

After preliminary discussions between the 2 parties (perhaps over drinks at a financial advisor conference), they will typically sign a mutual Non-Disclosure Agreement (NDA) to allow for more in-depth discussions and due diligence of each firm to determine whether a deal might be a good fit. If the parties are then able to come to a preliminary agreement on the terms of the transaction (including the valuation of the firm to be acquired), they will enter into a Letter Of Intent (LOI) or similar document that outlines the tentative terms of the deal. Notably, while these deal terms typically are not binding, an LOI can also include a binding "no-shop" provision restricting the seller's ability to negotiate with other parties until the provision expires (which protects the potential buyer from expending effort on due diligence at the same time the seller is also negotiating with another firm). Once both parties have satisfactorily completed their due diligence of the counterparty, legal transaction documents can be prepared including, among other items, key terms (e.g., the purchase price) as well as representations from the seller to assure the buyer that its business has been run in compliance with relevant laws and regulations. After these documents are signed, the parties may then publicly announce the deal and notify their clients.

While the signing of a deal might be cause for celebration for both parties, there is still significant work to be done. For instance, the seller's investment advisory contracts will need to be reassigned to the new firm, requiring the firm to gain their clients' consent to do so (in some cases positive consent [i.e., having the clients actively agree to move to the new firm] will be required, while in others negative consent [i.e., the clients merely have to not object to moving to the new firm] could be sufficient). And even after a deal is subsequently closed, buyers will need to work to integrate the seller's staff and clients into their firm while sellers might need to complete regulatory and tax filings to reflect the sale of the business.

Ultimately, the key point is that the (sometimes lengthy amount of) time it takes to complete an RIA M&A transaction reflects the high stakes for both the buyer and the seller (and each side might have experienced multiple failed deals as well). Which suggests that firm owners looking to build through acquisitions or those seeking to sell their firm will want to be prepared for a potentially lengthy and detail-filled process (on top of managing the ongoing operation of their respective firms!).

Client Loyalty And Why Affluent Clients Sack Advisors

(John Bowen | Financial Advisor)

Financial advisors tend to enjoy high client retention levels, often thanks to the high level of client service provided (though perhaps client inertia can play a role as well). Nevertheless, given the potential loss of revenue that can come when a client departs, taking a step back to consider whether they are providing the types of services and communication methods their clients seek can help advisors keep their retention rates as high as possible. Because while some advisors might assume that portfolio performance is the largest driver of client turnover, survey data from advisor coaching firm CEG Worldwide suggest that while performance is important, it is not the single (or the biggest) factor behind a client's decision to leave their advisor.

Instead, the survey data indicate that an advisor's lack of proactivity is a far more important driver of client dissatisfaction than portfolio returns. And it turns out that many advisors are not fulfilling this need, as only 25.1% of respondents "completely agreed" that their advisor reaches out to them on a regular basis (and only 33.2% said they "completely agreed" that they get a quick response when they do reach out to their advisor). For advisors considering how they might be more proactive, addressing recent tax law changes or evolving market conditions (before a client brings up these topics) can show that they are acting on their clients' behalf outside of regularly scheduled meetings. The survey also found that advisors who provide tailored services to meet their clients' needs tend to have better client satisfaction, particularly for high-net-worth clients. For instance, advisors who engage in strategic tax planning or offer unique investment options that meet a client's specific needs might be more likely to have better client retention than advisors offering more generic tax or investment advice. Also, firms can promote retention by building client loyalty to the firm itself rather than to their individual advisor; in case the advisor moves on, firms that communicate transparently about the sustained quality of service the client can expect from the firm could increase the likelihood that their clients will remain with the firm.

In sum, given the relatively high rates of client retention enjoyed by financial advisors, it could be easy to take continued client loyalty for granted and perhaps let service levels for ongoing clients slip (particularly if the firm is busy onboarding new clients). However, the survey data discussed suggest that advisors who act proactively on their clients' behalf, communicate regularly, and offer customized planning solutions can help solidify their client relationships, potentially for years or decades to come!