Weekend Reading For Financial Planners (April 1-2)

Schwab Study Says RIAs Are Looking For Indicators Of Success Beyond AUM

(Andrew Foerch | Citywire RIA)

While financial advisory firms have many metrics to measure their financial and business success, a firm's Assets Under Management (AUM) is typically the most cited. In practice, AUM has arguably been a fairly effective metric given the dominance of the AUM-based fee model (according to the Kitces Report on How Financial Planners Actually Do Financial Planning, AUM-based fees were the majority revenue source for 82% of firms surveyed), where simply calculating approximately 1% of the firm's AUM also provides an estimate of its revenue (and given 'typical' profit margins, its profitability). At the same time, though, AUM alone metric does not necessarily provide a complete picture regarding a firm's health, as not all firms actually charge 1% (and in fact, the typical revenue yield of an advisory firm is typically closer to 0.7% than 1%), different firms may have wildly different profitability based on their AUM and revenue (due to how they structure their staff and other costs to deliver those services), and similarly not all AUM growth is similar (as there can be a big difference in the profitability of acquisition-driven AUM growth compared to organic AUM growth from new clients compared to organic AUM growth by getting new assets from existing clients). Not to mention the reality that as subscription, flat fee, advice-only, and other 'alternative' (non-AUM) fee models grow, AUM itself can be utterly unrepresentative of the size, revenue, or profitability, of a growing number of advisory firms.

With this industry shifts in mind, the latest edition of Schwab Advisor Services' Independent Advisor Outlook Study asked respondents (862 independent RIAs that use Schwab as their custodian) about the factors that they think reflect the growth of the RIA industry beyond AUM. Number of clients served was the top response (63%), followed by the number of RIAs (43%) and the diversity of services offered (42%). The latter is becoming especially significant, as the growth of advisory firms offering more tax- and estate-related services means the firm can substantially grow its revenue and its business and financial success… in a manner that would be completely missed by looking at AUM alone.

Of course, serving more clients and offering a wider range of services can lead to greater time requirements (whether for the advisor or their service team), and the Schwab study also shows that as alternative/additional advice services grows, so does the demand from some advisors to look to automation to gain efficiency and reduce this time burden. Overall, when rating their firm's progress towards total automation, advisors gave themselves a median score of 6 out of 10 (with 1 being totally manual and 10 being the totally automated). Statements, income distributions, and portfolio alerts were the most commonly automated areas, with financial plan updates, personalized client experiences, and scheduling client meetings being among the least automated tasks of the areas surveyed (notably, these results match up well with a Vanguard study from last year, which similarly found that clients actually prefer that certain tasks such as ensuring details or accounts are not overlooked, be performed by digital tools rather than a human advisor).

Ultimately, the key point is that as the advisory business becomes more complex and more comprehensive, from the addition of non-investment services into holistic advice offering, to the rise of alternative fee models that go beyond AUM fees (and investment-based advice services), that looking at AUM alone is becoming a less effective metric to size of a firm's business and financial success. At the same time, though, the shift to new and different models is also creating newfound challenges for advisory firms to scale, increasing the focus on reducing client variability and leveraging technology to automate back-office tasks can help firms scale more efficiently!

RIAs May Increasingly Fight Back Against Gensler's Active SEC

(Sam Bojarski and Andrew Foerch | Citywire RIA)

The SEC has been busy during the tenure of Chair Gary Gensler, having proposed 26 new rules between January and August of 2022, more than double the number in 2021 and more than were rolled out in each of the 5 prior full years. And many of these rules have focused on the growing RIA industry, including a proposed 'outsourcing rule' that would establish formalized due diligence and monitoring obligations for investment advisers who hire third parties to perform certain functions, as well as proposed amendments to the SEC's Custody Rule that would, among other measures, extend custody obligations beyond securities and funds (subject to the current rule) to encompass all assets in a client's portfolio for advisors who manage on a discretionary basis.

Further, Gensler's SEC has not just been active in proposing new rules, but also in enforcing current regulations as well, as the regulator tallied 760 enforcement actions in fiscal year 2022, up 9% in 2021 (which saw a 7% increase from 2020). In terms of dollars, the SEC ordered more than $6.4 billion in penalties, disgorgement, and interest in 2022, the highest in its history and up $2.5 billion from what the SEC ordered in 2021.

Amid this heightened regulatory posture, though, RIAs themselves are reportedly increasingly challenging the SEC's actions on multiple fronts. For example, the SEC's outsourcing proposal has been met with stiff resistance from investment adviser trade groups and some advisory firms, which have branded the proposal as overly broad and have argued that an adviser's fiduciary duty already requires them to conduct due diligence and ensure that outsourcing firms are acting in their clients' best interest. And some firms have taken the SEC to court to fight back against charges and penalties, including Tennessee-based RIA CapWealth Advisors, which prevailed against the SEC in a jury trial after being accused of fraud charges resulting from its collection of 12b-1 fees. And even when they do not go to court, law firms representing RIAs have noted that some firms also have retained legal counsel to negotiate reduced settlements with the SEC rather than simply accepting the SEC's enforcement actions at face value.

In the end, the SEC's increased regulatory focus on RIAs is likely a natural result of the growth of the industry in terms of firms and client assets. But amid an increasingly activist SEC under Gary Gensler, a stronger RIA industry appears to be more emboldened to push back against regulations and enforcement actions that they view as unfair or unnecessary in pursuit of serving clients well.

Cetera To Advisors: Selling Your 'Independent' Practice Still Requires The Broker-Dealer's Ok

(Bruce Kelly | InvestmentNews)

In recent years, many financial advisors have sought more freedom in running their own practices, often moving away from employee broker-dealer models (e.g., wirehouses and regional broker-dealers) toward Independent Broker-Dealer (IBD) or RIA models that offer more independence. Nominally, one of the benefits of the IBD model in particular is that the advisor is an independent contractor, and not an employee (which means there is no advisor employment agreement that might have non-compete or non-solicit provisions), which provides them the opportunity to build the value of their business and have the potential to sell it (and harvest the enterprise value they've created) as they approach retirement.

But given ties to its affiliated broker-dealer, selling an advisory firm as the representative of an IBD can come with more legal complications and restrictions compared to selling an RIA, because ultimately clients are still the clients of the broker-dealer and the advisor is 'merely' the firm's representative assigned to service them.

In this context, it's notable that amid continued interest among investors and other firms in acquiring advisory businesses, broker-dealer Cetera in November sent an email to its roughly 8,000 advisors highlighting that under FINRA regulations, selling their advisory firm to a third party could be deemed to be a Private Securities Transaction and/or an Outside Business Activity, both of which require prior approval form Cetera's compliance department (which Cetera claims is necessary in order for the advisor to avoid potential FINRA sanctions).

Notably, industry attorney Brian Hamburger said the issue is more complicated and technical than as described in the email, as an advisor may need to have prior written approval from the broker-dealer if the advisor sells their practice and plans to continue working at the broker dealer, but no approval is required if the advisor sells their practice and resigns prior to the consummation of the transaction.

While Cetera characterized the email as a standard reminder to comply with securities industry regulations (and Cetera does not appear to have stopped any deals yet), other observers view the email as a warning by Cetera designed to dissuade advisors from trying to sell their practices, and raise the question of whether other IBDs may begin to take similar steps as broker-dealers continue to see slow but steady outflows of advisors to the RIA channel and see their practices acquired by RIA aggregators. Which serves as a reminder that, unlike within the RIA model where the advisor-founder can actually own the firm entity itself, those operating in the IBD model do not actually 'own' their client relationships outright when they are serving as representatives of their broker-dealer!

Should I Buy A House Now?

(Nick Maggiulli | Of Dollars And Data)

The rising interest rate environment has affected many aspects of the financial world, from bond yields to the strain it has put on several banks. In addition, one major part of the economy that has been greatly impacted by the new environment is the housing market, where higher mortgage rates have made buying a home significantly more expensive in the past year.

For instance, the monthly mortgage payment required to buy the median existing U.S. home (assuming a 20% down payment and a 30-year fixed-rate mortgage) has increased more than 75% since the beginning of the pandemic from less than $1,000 in January 2020 to $1,772 in January 2023. Notably, these rising costs have outpaced income gains, with the payment-to-income ratio for the averaged-pried home in the U.S. (37.4% in November 2022) reaching its highest level since the early 1980s. Further, with 99% of current mortgage borrowers having rates lower than the current market rate, homeowners have less incentive to sell (particularly if they would be buying a new home at a significantly higher rate!), preventing an influx of supply that could drive prices lower.

But amid these headwinds, Maggiulli argues that it could still be a good time to buy a home. For instance, with fewer buyers on the market (as many are priced out due to higher rates), the share of home sales in which sellers offered a credit (e.g., for closing costs) is on the rise (even as there are relatively fewer homes on the market), defraying some purchase costs. Also, while homebuyers might have a mortgage with a 7% interest rate to start, future rate declines could open the door to refinance at a lower rate. Further, buyers who can afford to pay in cash (perhaps older homeowners looking to downsize) can benefit from the decreased competition to negotiate a better deal.

Ultimately, the key point is that higher interest rates does not necessarily mean that now is a 'bad' time to purchase a home. And financial advisors can play an important role in helping clients navigate the higher mortgage rate environment, whether they are looking to buy a home, deciding whether to pay down their mortgage early, or tap the equity they have built up over time!

Real Luxury Goods Don't Have Brand Names

(Christine Benz | Morningstar)

The term 'luxury good' might bring a variety of things to mind, from fancy cars to designer handbags. And because luxury goods typically come with hefty price tags, spending on these goods can add up quickly. But Benz suggests that in her current financial position, where she could afford many of these tangible luxury goods, the 'luxury goods' she seeks today are more in the category of things that make her feel good on the inside rather than look good on the outside.

For instance, being financially well can mean that money does not have an outsize influence in the major decisions she makes, and most importantly for her, is not a cause of stress. As an example, this means that she does not have to cancel a planned vacation just because flight prices increased. Another one of her 'luxury goods' is not having to keep a budget. Rather than tracking every expense (which they did early in their careers), as their salaries grew over time Benz and her husband set monthly targets for saving and investing and spend any leftover funds guilt-free.

Benz and her husband also have the luxury of holding more cash than they would if they were looking to optimize their investment returns. While doing so has almost certainly reduced their total net worth, it has provided them with peace of mind – a tradeoff Benz is more than happy to make. Other 'luxury goods' that Benz has been able to 'buy' with her assets include being debt free and the ability to help friends and family members when they have financial needs. Finally, she has the luxury of simplicity in her life, maintaining only a few investment accounts with a limited number of holdings to avoid the complications involved in having more accounts or investments (because even if she might not be 'optimizing' her money, the reduced amount of time she has to spend managing it is worth the tradeoff to her).

In the end, what constitutes a 'luxury good' can vary significantly from client to client. And so, advisors can play an important role in not only helping clients discover what 'luxuries' they value the most, but also help them create a sustainable financial plan that will allow them to continue to access these 'goods' (whether physical or intangible) in the years and decades ahead (even if that plan does not result in the highest terminal portfolio value!).

How To Get Clients To Spend More Money

(Allan Roth | Advisor Perspectives)

Determining how much a client can sustainably spend in retirement is one of the most common ways that financial advisors add value. For some clients, this means squeezing every last dollar out of their portfolio to support their current lifestyle. But for other clients, it can be mentally challenging to switch from 'savings' mode to 'spending' mode in retirement. And some of these clients might spend significantly less than their portfolio and income could support, sometimes to the detriment of their overall happiness. Which presents and opportunity for advisors to add value by exploring ways to help their clients spend more in order to lead a more fulfilling retirement.

One way to encourage clients to spend more money is to have them 'pledge' to spend a certain amount, and if they do not, they promise to donate the remainder to charity (perhaps one not of their choosing). Also, while some frugal clients might bristle at the notion of buying luxury goods, an advisor could help them explore ways that they could use their money to buy themselves more time (e.g., hiring a housecleaner or a lawn service). Another option is to have the clients start by picking one 'dream experience' to spend on this year, and then (perhaps once they realize how much they enjoyed the vacation or other experience) expand it to 2 or more in future years.

In addition to helping clients explore ways they might spend their money, advisors can potentially encourage client spending by the way they generate income in retirement. For instance, a study by retirement researchers David Blanchett and Michael Finke found that retirees will spend twice as much each year in retirement if they shift investment assets into guaranteed income wealth (which can potentially reduce longevity risk and prevent the client from having to see their portfolio balance fall each time they make a withdrawal to support their lifestyle).

Ultimately, the key point is that financial advisors can play an important role in ensuring that clients don't spend too much in retirement (and potentially deplete their portfolio), but also encouraging them to not spend too little and potentially live a less enjoyable life than they might otherwise. And this can potentially be done not only by exploring creative ways to encourage spending, but also by generating retirement income in a way that gives them 'permission' to spend more!

7 Must-Read Books For Every New Manager

(Khe Hy | RadReads)

The transition from being a working-level employee to becoming a manager can be a tricky one, and is a common issue for financial advisors who make the transition from employee (or solo firm owner) to overseeing junior staff members. Of course, others have gone down a similar path before, and their experiences can provide insights and practical tools for those looking to lead with confidence.

To start, Radical Candor by Kim Scott explains how managers can provide honest and empathetic feedback to their team members by striking a balance between challenging them directly (i.e., giving honest feedback, even when it's difficult) and caring for them personally (i.e., being considerate of their feelings and well-being). Relatedly, Difficult Conversations by Bruce Patton, Douglas Stone, and Sheila Heen focuses on how managers can navigate difficult conversations and resolve conflicts effectively. This book notes how underlying thoughts and emotions (in addition to the actual words being spoken) can drive a conversation, and the importance for managers of really getting to know their colleagues and direct reports to be able to identify these factors during difficult conversations.

In High Output Management, Andy Grove draws on his experience as CEO of Intel to cover a range of topics, from building and maintaining a high-performance team, setting and achieving goals, and how to handle difficult people and situations. The book also outlines Grove's Objectives and Key Results (OKR) framework, a popular goal-setting methodology. The Making Of A Manager by Julie Zhuo also provides a wide range of advice for managers, from how to build a strong team to how to navigate office politics. This book also includes insights on the challenges of transitioning from an individual contributor to a manager. Another book discussing how to build and lead effective teams is The Five Dysfunctions Of A Team by Patrick Lencioni, which considers the factors that lead to ineffective teams, which include an absence of trust, fear of conflict, lack of commitment, avoidance of accountability, and inattention to results.

For managers looking to create a culture of creativity and innovation in their workplace, Creativity, Inc. by Amy Wallace and Edwin Catmull examines how acclaimed animation studio Pixar was able to find creative success. For instance, the book discusses the concept of "plussing", where, instead of knocking down an idea, managers and team members can instead look to build upon it (which can give team members the freedom to explore their ideas and ultimately allow the team to grow and improve). Finally, in Setting The Table, restaurateur Danny Meyer argues that the key to success is not just about serving great food (in his case), but creating a culture that supports both employees and customers. For instance, Meyer emphasizes the importance of small details, such as the way a table is set, to enhance the overall customer experience.

In the end, because there is no single 'right' way to manage a team, learning from the experiences of a range of successful managers can help a new leader develop the skills they need to take on their new role. So whether you are a firm owner hiring your first employee or an advisor leading a service team, the lessons from leaders in a variety of industries can help you create and manage a successful team!

Hiring? Your Guide To Creating A Positive Employee Onboarding Experience

(Stephanie Bogison | XY Planning Network)

Hiring a new employee can be a challenging and time-consuming process. Because of this, there is a premium on retaining new hires to avoid having to go through the same process again in the near future. And with research showing that 69% of employee are more likely to stay with a company for 3 years if they received a great onboarding experience, creating a well-structured and executed plan can pay off for firms making a new hire.

Firms can lay the foundation for a positive experience for the new hire even before their first day on the job. For instance, a welcome email that lets them know how to access the office (including where to park!), what their schedule will look like for their first day or week on the job, and includes an invitation for a casual lunch on their first day can help ease the anxiety that can come with starting a new job. Notably, it is typically not a good idea to assign formal training or have the new hire complete paperwork during this period, as these are usually viewed as compensable time (and therefore would take place after the team member has officially started).

The official onboarding process can begin on the new hire's first day. To start, providing an onboarding checklist can make the process and schedule transparent to the new team member (and can ensure a standardized onboarding process for future hires!). This can include 'standard' items such as a tour of the office, introductions, and paperwork, but also an explanation of the firm's mission and vision, including the new hire's part in achieving them.

To help new hires prepare for the period beyond their first day or week, firms can create a '30-60-90 day plan' that outlines training objectives for their first few months (it can also help to schedule check-ins during this period to answer any questions and ensure they remain on track). Also, assigning a new hire a mentor or 'buddy' (usually someone not in the new team member's reporting structure) who can guide them through the cultural nuances and practical questions of working at the firm.

Ultimately, the key point is that the work of hiring the 'right' new team member does not stop once they have accepted an offer. By making them feel welcomed and acclimating them to work at the firm, leaders can increase the chances that the new hire will not only be a successful addition in their first year, but for many years to come!

The Promise (And Risk) Of Boomerang Employees

(Anthony Klotz, Andrea Derler, Carlina Kim, and Manda Winlaw | Harvard Business Review)

When a firm is looking to hire a new employee, it has many resources to use, from industry job boards to recruiting services. One source that is sometimes not considered though is former employees. And with one study showing that between 2019 and 2022, 28% of 'new hires' at firms studied were actually 'boomerang' hires who had resigned within the last 36 months. These 'boomerangs' can be valuable additions, as they will already understand the firm's culture and processes. Though given that 'boomerangs' can go both ways (i.e., a former employee returning to their previous company or a new hire going back to their former employer), firms can play both 'offense' and 'defense' when it comes to maximizing this trend.

On the 'offensive' side, firms can work to ensure that departing employees leave on good terms. In addition, creating 'alumni' programs (whether an official platform or just a Slack channel) can help these former employees remain connected to the firm. Further, as research shows that former employees are most likely to return about one year after their departure, this can serve as a good time for the employer to reconnect with them. While some former employees might be unhappy at their new job and would be happy to return, others might take some inducement, whether in the form of a promotion from their previous position or increased compensation. Though it is important for companies to take care to not let incentives for boomerang employees dramatically outweigh those for current employees, which could breed resentment (and potentially encourage current employees to leave in the hopes of getting a better offer themselves!).

On the 'defensive' side, firms can take steps to decrease the likelihood that a new hire will want to return to their previous employer. Because research has found that a misalignment between assurances made by the employer during the interview process (e.g., regarding promotions or future pay increases) and a new employee’s experience once they start at the company is a common factor that drives employees to 'boomerang', firms can take care during the hiring process to ensure they providing candidates with accurate expectations for what to expect if they come on board. In addition, while many companies have onboarding programs for a new client’s first few months or first year, given that many 'boomerang' situations occur at about the 12-month mark, creating engagement programs specifically targeted at workers entering their second year can be a worthwhile investment.

Talent retention is one of the hallmarks of successful companies, but inevitably some employees will decide to leave for new opportunities. But by playing effective 'offense' (by keeping in touch with former employees, particularly around the 1-year mark after their departure) and 'defense' (by ensuring that new employees have a positive experience in their first year and beyond), firms can make the most of the 'boomerang' trend while preventing their own new hires from returning to their previous jobs!

Real Growth Is Scary As Hell

(Frederik Gieschen | Neckar Substack)

Many people try to achieve personal growth, whether it is advancing in their career, fitness, or relationships. Sometimes, this growth is experienced as a curve, with significant initial gains (e.g., moving from being able to run 1 mile to running 2 within the first month) before eventually plateauing (being able to run 30 miles is incredibly challenging!). A second type of growth can occur when you unlock a new perspective or experience a eureka moment, which can shift the personal growth curve upward (e.g., an individual might discover that they can retire early, unlocking a wide range of possibilities for the next decade of their live).

But Gieschen suggests that there is a third type of personal growth, one that moves us closer to our true self. This growth is not just about incremental progress, but rather leaving behind the comfort of our old identity. It allows an individual to break the frame that previously contained them but offers no promises or reassurances about what the future will hold. Perhaps it means quitting your current job and starting your own business, tossing your current degrees and going back to school in a new subject, or moving to a new city where you do not know anyone else.

Of course, making this kind of radical change can be scary, as previous accomplishments and relationships could be on the chopping block. But Gieschen suggests that consciously making this jump can lead to a leap in personal growth that cannot necessarily be achieved by continuing on the current path you are on now!

Self-Chatter And Self-Compassion

(Joy Lere | Finding Joy)

Sometimes, we can be our own worst critics, ending up in a self-destructive headspace where our inner monologue is rife with self-criticism. This can lead to ruminating repeatedly over mistakes, overanalyzing, and imagining that others are judging and thinking negatively about you. Not only can this internal chatter be stressful and can potentially limit you from reaching your full potential.

Instead, self-compassion can be an effective alternative to this self-criticism and involves 3 components: recognizing when you're stressed or struggling without being judgmental or overreacting; being supportive, gentle, and understanding with yourself when you're struggling; and not losing sight of the fact that everyone makes mistakes sometimes. While some might think these practices are a form of letting yourself off the hook for mistakes, in reality it is a way to recognize your strengths while identifying opportunities to improve.

While self-compassion does not come naturally to most people, it is a skill that can be practiced. To start, first pay attention to what you say to yourself. If you find that this dialogue is frequently negative, try to find a new, more positive voice. If this is challenging, you can try channeling someone in your life that builds you up, imagining what they might say to you (as it is often easier to access kindness for others!).

And so, while everyone makes mistakes in life, we have a choice in how we respond to them internally. By recognizing self-criticism when it arises and replacing it with self-compassion, you can take ownership for your behavior while accepting your flaws and looking for opportunities to improve in the future while reducing the amount of stress you put on yourself!

This Is The Most Fun Way To Make Your Life Awesome

(Eric Barker | Barking Up The Wrong Tree)

"Find your passion" is a piece of advice given to everyone from high schoolers thinking about their future path to professionals unsatisfied with their current job. But it's much rarer to get instructions on how to actually find your passion. With that in mind, Barker, citing research from author David Epstein, lays out a potential path to not only find your passion, but also to develop it as well.

The first step is to "be a scientist of yourself" by running small-scale experiments on potential areas of interest. These experiments are not formal and could be anything from talking to someone in a field of interest to taking a class on an unfamiliar topic. After running several experiments, you might find an area you'd like to dig into further.

At this point, it's time to start developing the chosen skill, which naturally takes time. One effective way to do so is to come at it from many different dimensions (rather than being laser-focused on one element of the skill), which can help create connections across the many facets of this new domain. And notably, becoming an expert in an area does not necessarily have to entail thousands of hours of work (i.e., while the famous "10,000 hours rule" to become an expert in a domain can apply to certain areas that can be mastered with brute force, such as sports or music, this concept is less applicable to more challenging learning environments, such as navigating a career). Given the need to practice, setting aside a specific block of time for it each week (perhaps Saturday morning) can help create a regular routine. In addition, finding a mentor in this area can boost the chances of success as well, as they can serve as a role model for how to operate in the area of interest.

In the end, finding a passion typically does not happen suddenly, but rather it's the result of creative experimentation, trial-and-error, and thoughtful practice. And so, whether it is a new hobby or a different career, taking a methodical yet flexible approach can help you find and develop your passion!

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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.