Weekend Reading For Financial Planners (April 13-14)

Dynasty/F2 White Paper Makes The Case For Smaller RIAs To Use A Shared Back Office

(Andrew Foerch | Citywire RIA)

Compared to many other businesses, starting an RIA requires relatively less capital, as there is no heavy equipment to buy, firm owners can operate a solo practice entirely themselves (at least until their growth necessitates making a hire) and, at a time when many firms operate virtually, leasing office space (often a major expense for new businesses) is no longer a requirement. For many small-to-medium-sized firms, their largest expenses are their tech stack and their first administrative hire(s). And while these tools and support can make advisors more efficient and offer deeper planning services, they can sometimes come with a steep price tag relative to the advisor's revenue at the time they're needed.

Advisors have many options when it comes to building out what they need to scale up, with varying price points. At the cheapest end, firms can use free tools provided by their custodian or perhaps process functions manually through programs like Microsoft Excel (though these methods might not have the same features as more specialty software products). A more expensive option is an "All-In-One" solution such as Envestnet Tamarac or Orion that combines many popular financial planning software functions (e.g., portfolio management and advisory fee billing) into a single combined offering. Alternatively, firms can select software tools a la carte, choosing the best option to meet their needs within each software category, though this customization can lead to a greater total cost than using an All-In-One solution, and takes time from the advisor to go through the selection and integration process. A similar effect occurs with staffing, with solutions ranging from outsourced virtual assistants and paraplanners to recruiting firms to help the advisor hire their own associate advisors to firms building out their own hiring process to attract, and their own management systems to oversee and retain, their own staffing needs.

Another option that has emerged is the "supported independence" model offered by companies like Dynasty Financial Partners and XY Planning Network (XYPN), which allow advisors to still fully own their own independent firm (rather than being an IAR of someone else's corporate RIA affiliate), and offer a curated selection of AdvisorTech tools along with additional back-office (e.g., compliance and operations) support, at a price point that falls between an All-In-One software solution and a robust tech stack made up of individual tools. And according to a recent study by Dynasty and AdvisorTech consulting firm F2 Strategy, partnering with a supported independence platform can pay off for small- and mid-sized firms despite the cost of doing so (e.g., Dynasty charges roughly 15% of revenue to partner with the firm, while XYPN's standard membership is $505 per month). The report analyzed the 5-year Compound Annual Growth Rates (CAGR) and estimated valuations of 20 Dynasty-affiliated firms, against a baseline of more than 3,400 RIAs in the general advisor population, and found that firms on the Dynasty platform had an average of 14.3% 5-year CAGR, compared to about 6.4% for other RIAs – implying that part of the benefit of such 'supported independence' platforms is not merely about whether it's more or less expensive than the firm covering overhead costs directly, but that it's easier for the advisory firm to grow and scale quickly without needing to take the time to make the incremental new hires and technology additions). Further, the researchers estimated that the extra growth of firms on the platform could lead to a 43% higher firm valuation. These benefits were particularly noticeable for firms with less than $1.8B in AUM, according to the study (as the study found that $2 billion of AUM is the approximate threshold where it makes financial sense for a firm to invest in its own proprietary wealth platform and tech stack).

Ultimately, the key point is that among the range of options RIAs have for building a tech stack and their staffing support, the supported independence model could be attractive to firms that want to grow faster without the time and monetary cost involved in selecting individual software solutions and hiring up their entire back-office infrastructure themselves (to let firm owners focus on higher-value planning and client-facing activities). Which is relevant both for those who are a breakaway broker, or those considering whether to take the leap from employee advisor to firm owner! 

Fee-For-Service Advisors Hiked Their Fees In 2023: Study

(Rob Burgess | WealthManagement)

According to Kitces Research on the Financial Planning Process, charging clients on an Assets Under Management (AUM) basis continues to be the most popular fee model for financial advisory firms, with 82% of advisors surveyed indicating that the majority of their revenue comes from this fee source. For advisors, part of the attractiveness of the AUM model is that the fees they receive can naturally grow alongside a client's investible assets, whether from a client's savings or money they move over from another advisor, or from market appreciation, making conversations about raising the client's fee relatively rare (unless the client brings up the issue or the advisor changes the AUM percentage fees they charge). 

Nonetheless, in recent years, many advisors have started charging on a fee-for-service basis (either exclusively or in combination with AUM charges), which (among other potential benefits) can allow them to serve clients who can afford to pay a retainer, hourly, or project-based charge, but might not have sufficient assets to meet a firms AUM minimum. But as a firm grows and improves its services for clients (and as inflation leads to higher costs, whether for the firm's tech stack, staffing, or otherwise), the firm owner will likely want to raise its fees. And, according to a report by advisory fee billing provider AdvicePay, firms on its platform did so in 2023, with an average 6.0% bump for those charging on a monthly recurring basis to $265 per month (or a total of $3,180 per year), and a 1.6% increase for those charging on a quarterly basis to $968 (for total charges of $3,872 per year). Notably, 50% of advisors on the platform charged on a monthly basis, suggesting that clients are attracted to a 'subscription’-type model with lower monthly charges (compared to a quarterly or single annual charge) as they might have for other products and services they use. 

While advisors might be nervous about communicating a fee increase to clients (as they might be concerned about client pushback, or even client departures), one way to mitigate these risks is to focus on the increased value that the client is receiving, which could come in the form of additional services the advisor is offering them (e.g., estate planning, tax planning, or an employee benefits review) or offering more comprehensive or specialized services that match the client's needs. Doing so can both give the advisor more confidence in communicating the fee increase and help the client understand that the value they are receiving from their advisor (potentially more than) makes up for the fee increase. 

In sum, while the process of raising fees can be more challenging when charging on a fee-for-service basis rather than based on AUM, advisors can frame the conversation in a way that helps their client understand that continuing to work with their advisor is a sounds financial decision (though given that many advisors eventually raise their fees suggests that they could have charged more in the first place?). 

Advisors Know ChatGPT, But That Doesn't Mean They Trust AI

(Rachel Witkowski | Financial Planning)

Artificial Intelligence (AI) has become a buzzword over the past couple of years thanks to the development of ChatGPT and other AI tools that can provide not only information, but also creative responses to user prompts. At the same time, the output of these tools is not always accurate, as they are sometimes prone to 'hallucinate', or give confident, but incorrect responses to users. Which might be fine when asking an AI tool to provide vacation recommendations or to prepare a draft email, but would have more serious implications for higher-stakes tasks.

For instance, crafting financial planning recommendations not only is a high-impact endeavor (given that a client is trusting their advisor to manage their life savings), but also requires analysis of complex issues (e.g., assessing a client's goals and risk tolerance before making a recommendation). Which means that many advisors (and clients) might impose an 'AI trust penalty' (i.e., holding AI tools to extremely high accuracy standards) before using these tools (another example of this 'penalty' is the reluctance of many individuals to trust self-driving cars given the complexity involved in navigating roadways and the literal life-or-death stakes involved). 

Notably, this 'AI trust penalty' appears to be playing out among financial advisors at the moment. According to a recent survey of wealth managers by media company Arizent, while many advisors have used AI tools (e.g., 63% of respondents indicated that they have used ChatGPT), only 25% said they would trust AI tools to be mostly responsible for making financial recommendations. Which suggests that many advisors will need to be convinced that AI tools are able to make accurate recommendations before using their output with clients (which could eventually come from tools that are 'trained' specifically on data from financial advisors, rather than on a more general pool of information).

In sum, while many advisors are already using AI for creative tasks (e.g., brainstorming ideas for blog posts or writing first drafts of client emails) or to quickly analyze data (e.g., preparing a summary of a client meeting or assessing a prospect's portfolio statement), they appear to be holding these tools to a higher standard when it comes to making (more impactful) client recommendations. Further, given the likelihood that clients will also impose a 'trust penalty' on AI tools (given the stakes for their financial wellbeing and their preference for human advisors, rather than digital tools, to fulfill certain parts of the planning process), the long-run impact of AI on financial advice might not be to replace advisors (at least those comprehensive planning services that might not be easily replicated by an AI software tool), but rather to allow them to serve clients more efficiently (and profitably?)! 

Here's How Advisor Businesses Are Finding Great Talent Now

(Steve Garmhausen | Barron’s)

The financial advice industry has experienced a so-called' war for talent' for many years now, as firms compete to attract top advisors and, amidst a graying advisor cadre, ensure they remain sustainable for the long run. When looking to make a hire, a traditional approach might be to post the position on job listing sites (whether general sites like Indeed.com or advisor-specific listings offered by CFP Board, FPA, NAPFA, and other organizations), or perhaps work with a recruiting firm. However, many firms are also expanding their reach for potential candidates by using less traditional methods.

One potential source of qualified candidates is a firm's client base itself, as an advisor will be familiar with their clients' career experience and personalities (and a client is likely to have inside knowledge of the firm's niche, if it has one!). For instance, a client who is a successful human resources professional in a different industry could be a good fit for a firm looking to hire for a similar position (advisors might also be able to identify clients who might be interested in a career change into financial planning as well!). Another source of potential candidates could include referrals from current staff members, who might have extensive advisor networks they could tap for potential interest (perhaps spurred on by a referral bonus offered by the firm?). Finally, firms with a longer-term focus could consider starting internship programs to tap aspiring advisor talent from financial planning programs and find potential long-term fits. 

Ultimately, the key point is that a bit of creativity can help firms expand their reach when looking for qualified job candidates, whether in tapping into their professional networks or by considering individuals who might not have industry experience but could be good fits for the firm. Further, given the expected retirements of many advisors in the coming years, bringing in individuals from outside of the industry could prevent the 'war for talent' from becoming a zero-sum game (as firms' poach' advisors from each other) and instead be a positive-sum approach that expands the pool of advisor talent and the industry's ability to serve more clients!  

Solving The Advisory Firm Turnover Problem

(Scott MacKillop | Advisor Perspectives)

Given the costs involved in attracting new clients, having a high client retention rate is an important part of maintaining a thriving advisory practice (as an advisor can earn their recurring revenue without having to find and onboard a new client each year). The same principle can be applied to a firm's staff, given that a staff departure can require the firm to find and train a new staff member (and can result in clients departing with an advisor as well!). While many best practices for promoting staff retention involved areas such as compensation, benefits, training, and career development, MacKillop (a CEO himself) argues that a firm owner's leadership style can play an important role as well. 

To start, he suggests that firm owners that act like "leaders" are likely to be more effective than those who are seen as "bosses". For instance, while a "boss" is expected to know the answer to every question and directs their subordinates to perform tasks that accomplish firm goals, a "leader" might instead work with their team to create a shared vision of the firm's purpose, remove obstacles to help employees get their jobs done, and ensure communication among team members so they feel connected to the firm's mission. Another way for firm leaders to promote retention is to ensure that employees' roles are matched well with their skills; for instance, an expert on building financial plans might struggle in a role that requires a significant amount of time spent on sales. Other areas of focus for leaders looking to promote retention include actively listening to and addressing employee ideas and concerns (particularly if they offer a competing perspective), making tough decisions quickly (so that potential conflicts do not linger over firm operations), and engaging in open communication (to prevent rumors from spreading). 

In sum, while firm policies compensation and career development can encourage employee retention, firm leaders themselves can promote satisfaction among their staff by working with the team to set a vision for the firm and enabling each member of the team to work to execute the firm's mission to the best of their abilities. Because while leaders might be tempted to maintain close oversight of certain tasks, data from the Kitces Research Study on Advisor Wellbeing show that advisors who feel as though they have the autonomy and expertise to take on their responsibilities are more likely to report greater wellbeing and less interest in leaving their current firm!  

Why Advisory Firms Fail Women Advisors

(Tracey Longo | Financial Advisor)

The wealth management industry continues to be dominated by men in terms of headcount, with women accounting for only 23.7% of CFP professionals and 18% of partners at financial advisory firms. While many firm leaders might seek to hire and promote more women, they might not know what they can do to make their firm a better place for women to work.  

According to the Carson Group's 2023 "State of Women in Wealth Management" report, one key factor inhibiting the rise of women within firms is a lack of sponsorship opportunities (i.e., senior leaders who advocate on behalf of employees who are women to other leaders for opportunities and promotions). While many firms have adopted mentorship programs (where a mentor might let a junior employee know about available opportunities), which can be helpful, the advocacy involved in sponsorship has been found to be a more effective step for helping women advance within the firm. In addition, given that women often take on a heavy share of work at home, firms that prioritize performance over attendance (i.e., assessing an employee based on their actual accomplishments rather than by the amount of time they spend in the office) could have more success attracting and maintaining women.

In the end, this report suggests that firms that build internal cultures that allow women to thrive (e.g., by actively promoting their interests, addressing sexist behaviors, and by offering flexibility) are more likely to attract and retain these workers into the future. Which not only can help a firm ensure they are promoting and offering opportunities to their best employees (man or woman), but also could expand the talent pool available to these firms and the industry as a whole, which could help firms grow their revenue and serve more clients (including prospective clients who might prefer working with an advisor who is a woman!).  

Long-Term Care: An Uncomfortable But Necessary Conversation

(Emile Hallez | InvestmentNews)

Many financial planning clients might assume (or at least hope) that they will remain active and independent until their deaths. Unfortunately, the reality is that many individuals will need some level of care as they age. Of course, the type of care they receive (as well as where they receive it, and from whom), and the costs associated with it can vary, which can make planning conversations on these topics valuable (if challenging). Nevertheless, clients (particularly younger ones) might be reluctant to address these potentially uncomfortable topics (as it can be hard to imagine aging and eventually needing care). 

One way advisors can broach the long-term care conversation is to start with a qualitative discussion of where and from whom the client might want to receive care, rather than on a quantitative conversation about their potential financial exposures and possible products that could meet their needs. For example, while one client might be amenable to moving into a continuing care retirement community or similar facility, another might want to receive care at home (from a family member or a home health aide) for as long as possible. Armed with this information, an advisor could then provide an estimate on how much such care (with the understanding that costs could change significantly before the client actually needs the services!) could cost and how this potential cost could be addressed, whether through self-insuring (i.e., paying from accumulated assets, which might be attractive to those with significant wealth, those who are unmarried [i.e., their assets are not needed to support another individual], or who have limited legacy interests), a traditional long-term care insurance policy (which provide a daily benefit to offset the cost of care, though these policies have become more expensive and difficult to obtain in recent years), or a hybrid life insurance/long-term care policy (which pairs life and long-term care insurance into a single policy). Further, an advisor can ensure that a client has prepared the appropriate documents (e.g., an effective power of attorney) to allow loved ones to act on their behalf if necessary down the line. 

Ultimately, the key point is that financial advisors can add value for clients not only in assessing the potential cost of future long-term care needs and offering potential ways to foot the bill, but also in getting the conversation started in the first place and encouraging clients to consider their care preferences so that when the time comes where care is needed, they find themselves in an environment of their choosing that is also financially sustainable!

Is Long-Term Care Too Expensive?

(Rick Kahler | Advisor Perspectives)

When an advisor assesses the sustainability of a client's financial plan (e.g., using Monte Carlo analysis), typically a certain level of spending is often assumed (adjusted for inflation), with the analysis focusing on a wide range of sequences of investment returns for the client's portfolio. However, while the spending trajectory for the 'average' retiree has been found to resemble the shape of a smile (with inflation-adjusted spending gradually falling over the course of retirement, before rising again as health care costs increase near the end of life), an individual retiree might experience a different path, including sharper increases in spending if they require facility-based long-term care, that represent potential outlier events (and challenges to the 'success' of their plan).

While it is well known that long-term care (whether in an assisted living, nursing, or memory care facility) can be expensive, unfortunately for advisors looking to provide accurate cost estimates, these expenses are hard to estimate. To start, while facilities might provide a base monthly 'rent' for residents at a certain care level, this amount often does not represent the total charges a client will face. For instance, a facility might charge extra when staff assistance is needed for tasks like dressing or bathing, meaning that the total costs accrued could be hundreds, or even thousands, of dollars more. Further, over the past several years, long-term care costs have been rising faster than inflation, making an estimate of how much a client might pay years, or possibly decades, into the future a challenge. 

Altogether, the variable (and increasing) costs of long-term care suggest a conservative approach when conducting a 'stress test' on a client's financial plan for potential future long-term care costs, whether by taking the monthly rent from a representative local facility and adding a supplement for potential additional charges, and/or by using an assumed inflation rate for long-term care costs greater than that used for other expenses!

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). 

In sum, 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).

How A Few Minutes Of Exercise Can Unleash Creativity

(Sam Pyrah | The Guardian)

It's common knowledge that regular exercise is good for one's health. However, recent research suggests that the benefits of movement can extend beyond health to productivity as well, particularly when it comes to creative thinking.

In particular, movement has been associated with "divergent thinking" (i.e., thinking about creative, 'outside of the box' ideas). For instance, a recent review of relevant research found that divergent thinking was enhanced after light exercise, such as walking at a natural pace. One hypothesis to explain the mechanism for this creativity boost could be the improved blood circulation caused by exercise, which brings fresh oxygen to the brain and increasing the production of proteins that promote the growth and survival of brain cells. Notably, light movements might be more effective than rigorous exercise, as the former allows the mind to wander, whereas the latter (think an intense run) is more likely to draw the individual's attention to the stress of the exercise itself. Which means that one does not have to work up a sweat to get these creativity-boosting benefits.

Ultimately, the key point is that while focused time sitting (or standing) at a desk might be effective for pushing through a detailed work task, getting up and moving could help an individual think of creative solutions to tough problems. And so, for financial advisors this could mean getting outside for a walk to brainstorm potential solutions to a client's planning issue (or perhaps new ideas for marketing content), and then coming back inside to test whether these new ideas are feasible and to choose the best option! 

The Slow And Low Exercise Elite Athletes Swear By

(Jen Murphy | The Wall Street Journal)

It would seem logical to assume that the greater intensity of exercise one takes on, the greater the health benefits. However, recent research suggests that while shorter, high-intensity cardiovascular training (i.e., exercise that leaves a person breathless) can have its benefits, longer, lower-intensity workouts are a crucial part of a fitness routine.

The American College of Sports Medicine has adopted a 5-"Zone" model for the intensity of exercise, ranging from Zone 1 (less than 57% of one's estimated maximum heart rate) to Zone 5 (greater than 96% of the maximum). While these zones can be measured using smart watches or fitness trackers, an individual can get a rough estimate of what "zone" a certain type of exercise produces for them using the "talk test". For instance, an individual would be able to effortlessly carry a conversation when operating in Zone 1 (e.g., a light walk), but would not be able to maintain more than 3 sentences in Zone 3 (e.g., a brisk run), and wouldn't be able to speak at all in Zone 5 (e.g., an all-out sprint).

Recent research suggests that a potential 'sweet spot' for training falls in Zone 2, where one's heart rate is between 57% and 63% of their maximum, or where they could still talk but have every few words interrupted by an audible breath. Depending on a person's fitness level (e.g., Zone 2 exercise will likely be more intense for a professional athlete than for other individuals), such exercises could include a relaxed jog or an easy bike ride. The key, though, is that Zone 2 exercise works best when taken on for a extended period, perhaps an average of 3-5 hours per week (and can be combined with more-intense cardio or strength workouts). Research suggests that Zone 2 exercise is effective because it helps stimulate mitochondria, which convert fats and carbohydrates into energy. Over time, this exercise can help individuals produce energy more efficiently and achieve better health outcomes. 

In sum, it's not necessary to always 'feel the burn' to gain benefits from exercise. At the same time, consistency appears to be key, suggesting that setting aside regular periods throughout the week (perhaps using time blocking) for regular Zone 2 exercise (which could involve a brisk walk-and-talk when a work call is on the schedule) could lead to significant improvements in one's health over time!   

Blood-Sugar Tracking Is A Health Trend. Is It A Good Idea?

(Alex Janin | The Wall Street Journal)

About 15% of Americans have diabetes, a chronic condition where the body is unable to properly regulate blood sugar levels, which can cause serious health problems like heart disease, vision loss, and kidney disease. For those with diabetes, a key part of managing the condition is regularly checking their blood sugar to ensure it remains at an appropriate level. Which leads many individuals with diabetes to use a Continuous Glucose Monitor (CGM), a device which allow individuals to continuously monitor their blood sugar levels. 

In addition to those who need them to manage their diabetes, CGMs have become popular among some individuals without diabetes who intensely monitor their health data. While CGMs up until now have required a prescription (meaning that those without diabetes had to convince a doctor to prescribe one), a new over-the-counter CGM has been cleared by the FDA for wider use, allowing the broader population to use these devices. 

However, many doctors are skeptical about the benefits for otherwise healthy individuals of using a CGM, in part because the readings can cause unnecessary stress when unexpected blood sugar spikes or dips occur (which do not necessarily require immediate action from individuals without diabetes) and because the many influences on blood sugar (e.g., the types of food eaten, exercise, and sleep) mean that changes in blood sugar can be caused by relatively benign forces. Nevertheless, one group that could potentially benefit from using a CGM are those with prediabetes, where blood sugar levels are higher than normal but do not reach levels that would merit a diabetes diagnosis. For these individuals, wearing a CGM could remind them about the impact of unhealthy eating habits (e.g., eating sugary foods) on their blood sugar and, as one study found, encourage them to engage in physical activity (which can help prevent the onset of Type 2 diabetes).

Ultimately, the key point is that while a CGM can be a lifesaving tool for those with diabetes, for many other individuals, the information it provides might be outweighed by the stress its readings can cause. Which suggests that focusing on healthy habits (e.g., healthy eating, exercise, and sleep), rather than day-to-day fluctuations in biometric data could be a more sustainable way to maintain a healthy lifestyle!

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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.