Weekend Reading For Financial Planners (August 31–September 1)

Advisors Are Offering More HNW-Focused Services In Bid To Move 'Upmarket': Benchmarking Study

(John Manganaro | ThinkAdvisor)

As a financial advisory firm attempts to scale (i.e., not just growing in terms of assets under management, but rather increasing its revenue at a faster pace than it hires), one potential way to do so is to move 'upmarket', serving wealthier clients and earning greater fees per client (and per hour of the advisor's time) in the process. However, high-net-worth and ultra-high-net-worth clients often have additional service needs that might not apply to the firm's current client base. Which leads to a key question for the firm of whether it wants to add on services (and the associated costs) to attract these clients (and whether it can do so efficiently and profitably given those additional costs!).

According to the 2024 Raymond James RIA Benchmarking Survey, which surveyed 165 RIAs on the company's platform, the percentage of respondents offering "family office services" doubled from the previous year to 41% from 20%, suggesting that many firms are trying to make the move 'upmarket' to serve wealthier clients seeking these services. Further, the number of firms offering trust services increased to 68% from 48%, and those with investment banking services (which could be a way to attract high-net-worth business owners) rose to 26% from 15% (which makes sense in the context of Raymond James' own capabilities to provide this service themselves for their advisors).

Notably, while a strong majority (80%) of firms offer family office services in-house, those offering trust or investment banking services are more likely to do so through a referral partnership (with 68% of those offering trust services and 80% of investment banking doing so). Which helps to signal how moving "upmarket" is often a combination of both expanding services in-house (the results here suggest that many firms expect to be able to offer family office services in-house in a profitable manner), and also by adding value for clients by expanding the advisor's own network of vetted and trusted third-party providers for trust or investment banking services that the advisor can refer clients out to (and perhaps because it would be expensive to hire individuals with the expertise to cover these areas in-house?).

Ultimately, the key point is that moving 'upmarket' can potentially require an investment by a firm, whether in terms of adding staff (either with particular expertise in areas important to high-net-worth clients or to be able to offer high-touch services) or building relationships with professional partners offering services to these clients, as advisors can bring value to the table through both what they deliver and who they can provide introductions to (and save HNW clients the time of seeking out those relationships themselves). Though the depth of what it takes to really do so effectively means moving upmarket is not necessarily a 'lightweight' endeavor for firms to dabble in; instead, it's more about making the decision to continue to profitably and efficiently serve clients fitting their current ideal target persona, or make a HNW clientele the firm's new ideal target persona and go 'all-in' to pursue them accordingly!

Many Pre-Retirees Feel Unprepared, But Most Will Have Comfortable Retirements, Survey Suggests

(Emile Hallez | InvestmentNews)

After several decades in the workforce (receiving regular paychecks along the way), the prospect of leaving work and relying on accumulated savings (as well as guaranteed income sources like Social Security or a defined-benefit pension) can lead to anxiety for individuals approaching retirement age, particularly for those who feel like they might not have saved 'enough'. A key question, though, is whether these individuals eventually will have financially precarious retirements or end up able to retire in relative comfort.

To address this question, Gallup conducts longitudinal surveys, polling the same individuals over the course of several years. For instance, a recent poll of retirees between ages 65 and 80 found that 79% of respondents said that they have enough money to live comfortably. Notably, when these same individuals were surveyed 20 years earlier, only about half said they expected to have enough money to retire, suggesting that a fair number of individuals either underrate their current savings, overestimate their spending needs in retirement, or perhaps supercharge their savings during their final working years in preparation for retirement. One likely source of anxiety for pre-retirees appears to be their view on the future of the Social Security system. For example, according to a separate survey of 2,000 adults sponsored by Schroder's, 38% of respondents are planning to claim Social Security benefits before age 70 (when they would receive their maximum benefit) because they are concerned that Social Security may run out of money or stop making payments. Though in reality, while the future status of the Social Security system is unclear, even if (absent legislative intervention) Social Security's trust funds are depleted (currently estimated by the Social Security Board of Trustees to occur in 2035), the system would still be able to pay out 83% of scheduled benefits (as most Social Security funding comes from payroll tax revenue), suggesting that some pre-retirees might overstate the potential reduction in the benefits they will receive.

Altogether, these surveys suggest that financial advisors can play a valuable role in providing pre-retirees with a realistic picture of how much retirement income their current (and projected future) assets (as well as Social Security and other guaranteed income benefits) will support, allowing them to make the best retirement decisions (from when to retire to when to start taking Social Security benefits) based on the most accurate information and estimates available!

HNW Individuals Largely Satisfied With Their Financial Advisors, Cite Areas For Improvement: Survey

(Leo Almazora | InvestmentNews)

Financial advisors tend to enjoy high client retention levels (an average of 97% of their clients on a year-to-year basis, per the latest InvestmentNews Advisor Benchmarking Study), 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 (particularly if they are one of the 'top' clients in terms of fees paid), 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.

According to Bank of America's 2024 Study of Wealthy Americans, which surveyed 1,007 adults with at least $3 million in investible assets, 61% of those surveyed reported working with a financial advisor (while financial advisors represented the most common type of advisor used [followed by attorneys and accountants], there still appear to be many wealthy individuals without financial advisors!). Overall, 97% of respondents working with financial advisors were satisfied with the relationship, with 73% indicating that they were very satisfied. Other areas receiving top marks included the quality of service received (also 97% satisfied overall and 73% very satisfied), advisor-client communication (96% satisfied, 68% very satisfied), and understanding the client's needs, goals, and values (95% satisfied, 69% very satisfied).

While there were no areas surveyed where a majority of respondents weren't satisfied (perhaps because they would likely move on from an advisor offering unsatisfactory service in a particular area?), one item with relatively less satisfaction was the financial advisor's fees and expenses (43% were very satisfied) and communication with the client's other advisors (e.g., attorneys or accountants), with 46% saying they were very satisfied. Regarding this latter item, given that 67% of respondents reported having more than one advisor, this could present an opportunity for financial advisors to review this area to ensure clients are receiving service and advice in sync with their other sources of advice (and perhaps serve as a differentiator compared to advisors who don't make an effort to do so!).

In sum, financial advisors appear to be getting high marks from their high-net-worth clients. At the same time, being attuned to potential client pain points (e.g., ensuring all of their advisors are on the same page regarding their financial, tax, and estate plans) could mean the difference between keeping these clients for the long haul versus seeing their loyalty erode over time.

The 60/40 Portfolio Win Rate

(Ben Carlson | A Wealth Of Common Sense)

Given that many investors face some degree of "loss aversion" (i.e., the tendency to experience more negative feelings for a loss than positive feelings that come from a comparable gain), clients might ask their advisor how often a recommended investment strategy experiences gains vs losses (though some research suggests that loss aversion isn't universal when it comes to investing). For instance, they might ask how often a strategy has gains over the course of 1 year, 3 years, or 10 years (some might look to shorter time horizons, though those can be 'noisier').

While much has been written about the 'win rate' (i.e., how often a strategy has a positive return) for individual asset classes (e.g., U.S. stocks), given that few investor portfolios only include a single asset class, Carlson looks at 'win rate' data for a '60/40' portfolio, with 60% invested in the S&P 500 index (representing U.S. large-cap stocks) and 40% in 5-year Treasuries. Going back to 1926, this portfolio has a 64% 'win rate' on a 1-month basis, 81% on a 1-year basis, 95% on a 5-year basis, and 100% on a 10- and 20-year basis. Notably, these win rates were similar to those for a stock-only portfolio for periods shorter than a year, while the 60/40 portfolio had a slightly better 'win rate' for periods of 1 year and longer. And while the above figures are on a nominal basis, even when adjusting for inflation, the win rates for the 60/40 portfolio only decline somewhat, to 60% on a 1-month basis, 71% on a 1-year basis, 84% on a 5-year basis, 89% on a 10-year basis, and 100% on a 20-year basis (indicating that a 60/40 investor would need to extend their time horizon somewhat to ensure positive real returns, at least based on historical data).

In the end, the 60/40 portfolio has provided a strong 'win rate' historically as it combines the growth of stocks with the buoying effect of bonds to help a portfolio grow while reducing drawdowns (in the longer run). Nevertheless, while a client might be interested in learning about a recommended portfolio's 'win rate' (whether 60/40 or otherwise), advisors can add value by introducing other metrics (e.g., geometric return, or the Compound Annual Growth Rate [CAGR]) that might be more relevant to the success of the client's financial plan, because while a portfolio might have a high 'win rate', this growth might not be enough to meet a client's financial goals!

Forecasting The Future Of The 60/40 Portfolio

(Dinah Wisenberg Brin | ThinkAdvisor)

While there are practically infinite possibilities when it comes to building a diversified investment portfolio, one common starting point for many investors is a "60/40 portfolio", consisting of 60% stocks and 40% bonds. The premise behind this portfolio is that the stock portion will help the portfolio grow during periods of strong equity market performance, while the bond portion will provide a steadier (if potentially lower) return and serve as a ballast during stock market downturns. However, doubts about this strategy started to arise in 2022, a rare year that saw poor performance in both stocks and bonds, leading to a -17.9% return for a 60/40 portfolio tracking the S&P 500 and 10-year treasuries.

According to a recent research note from Morgan Stanley, a combination of declining interest rates and inflation could lead stock-bond correlations to move towards historical norms in the short run (with lower correlations than experienced the past couple years), increasing the attractiveness of a 60/40 portfolio. In the longer term, the note cites several factors that could increase correlations between stocks and bonds, including the potential for generative Artificial Intelligence (AI) to create a supply shock that boosts economic growth and reduces inflation or the possibility that advancements in renewable energy to lower energy costs and increase productivity. However, both of these developments could provide tailwinds to both stocks and bonds, suggesting that investors might not mind positive correlations in this case. The open question, though, is whether these positive correlations would persist during a stock market downturn (diminishing the value of such a strategy); to hedge against this possibility, the note suggests investors could look to incorporate asset classes beyond 'traditional' stocks and bonds.

Altogether, while few advisors might use a 'pure' 60/40 portfolio with their clients (given that a client's age, risk tolerance, or other factors might call for a stronger tilt in one direction of the other, or the inclusion of additional asset classes), keeping an eye on the correlations between the assets within a client's portfolio over longer stretches can help an advisor decide whether the client continues to receive the diversification benefits of such an approach or whether adjustments might be called for!

Is It Time For Individual Investors To Look Beyond The Traditional 60/40 Portfolio?

(John Paglia | Journal of Financial Planning)

The benefits of diversification are well-known in the investment community, as properly diversified portfolios can provide better risk-adjusted returns than a portfolio invested in a single asset class and/or only a few concentrated investments (as the chances that the value of an individual stock goes to 0 is significantly higher than the odds that all of the stocks in the S&P 500 will do so!). With this in mind, advisors often recommend that clients invest in a mix of stocks (often both U.S. and international stocks) as well as bonds (whether U.S. Treasuries, corporate bonds, and/or international bonds). Nevertheless, stock and bonds are not the only two broad asset classes available to investors, and alternative investments (e.g., private equity, private debt, hedge funds, and venture capital), which have traditionally attracted capital from institutional investors, becoming increasingly accessible to individual investors.

The key question, though, is whether 'alts' make sense for individual investors (and advisory client portfolios). On the plus side, Paglia cites research showing that institutional investors have achieved greater returns (particularly over longer time periods) and experienced improved diversification benefits by allocating to alts within their broader portfolios compared to 'only' investing in public markets. Given these potential benefits, he suggests that individual investors consider allocating at least 10% of their portfolio to private investments, or even more depending on their goals and liquidity needs.

At the same time, he notes that investments in alts come with risks (some of which typically aren't associated with public investments). For instance, certain alt investments will come with capital lockup or liquidity risk, as an investor might not be able to exit an alt fund for a certain period of time, perhaps 10-12 years, or otherwise might only be able to at a steep discount to the fund's fair market value (though notably, this is likely a contributor to the performance of alt funds, as their managers can hold on to investments for extended periods without having to be concerned about investor redemptions). Other risks include fund manager risk (i.e., fund performance could change if a manager who outperforms the target benchmark leaves and is replaced by a less effective fund manager), economic risk, and valuation risk (though these can often apply to public investments as well).

Ultimately, the key point is that given the investment universe extends well beyond publicly traded stocks and bonds, financial advisors might consider whether the inclusion of 'alternative' investments in their clients' portfolios could potentially improve long-run returns and/or dampen volatility. Further, given that alts can be trickier to invest in compared to publicly traded stocks and bonds (e.g., finding appropriate fund(s) and managers whose strategies, performance, and lockup periods match client needs), advisors that do choose to put in the work to craft an effective allocation to alts (or outsource this task to a vetted firm who can do so) could differentiate themselves from other firms, particularly for clients who are looking to access alternative asset classes!

3 Things Advisor Websites Need To Convert Referrals

(Kalli Fedusenko | Advisor Perspectives)

Client referrals are a key part of the marketing strategy for many financial advisory firms (in fact, Kitces Research on Advisor Marketing found that this tactic was the most commonly used among those surveyed). However, simply asking clients to make referrals (or hoping that they do!) isn't necessarily enough to generate a steady pipeline of prospects. Part of the reason is that an individual considering working with an advisor might ask multiple friends for referrals, meaning that they might end up with 2-3 different 'recommended' advisors to consider. At which point, many will turn to each of the advisors' websites to gather more information and to determine whether they might be a good "fit" as a client.

With this in mind, ensuring that their website is "referral friendly" can help increase the number of referred prospects who take the next step and schedule a discovery call. To start, an effective "process" page can demonstrate to a referred individual whether they will be a "fit" for the firm. For instance, a website that paints a clear picture of the advisor's ideal client persona will allow referred prospects to see that the advisor serves people like them and will understand their specific situation and planning needs. Next, advisors can use their "about" page to help referred individuals better understand the advisor's personality and values (e.g., by discussing everything from their pets to their "why" for being a financial advisor), starting the process of creating a personal connection between the prospect and the advisor. Finally, including client testimonials on the website (in accordance with the SEC's marketing rule) can provide a referred individual with additional "social proof" of an advisor's value beyond the recommendation of their friend or family member (though this personal recommendation is extremely valuable as well).

In sum, an advisor website that shows who the advisor works with, who the advisor "is", and how current and previous clients have found value working with the advisor can be a force multiplier for an advisor's client referral program. Further, these website features not only can help attract individuals who have been referred to the advisor, but also other website visitors (who might have found the advisor through a search engine or a "find an advisor" tool) by allowing them to see whether they'd be a good fit and encouraging them to take the next step to becoming a client.

Lessons Learned From Referring Business To Advisors

(Dan Solin | Advisor Perspectives)

While client referrals are a common source of prospects for financial advisors, referrals also can come from other sources, including centers of influence (e.g., accountants and estate attorneys) as well as from other advisors (e.g., if they want to find a good advisor fit for a prospect who isn't a good match for their firm). Notably, winning referrals from this latter group can require a different set of skills (and the answers to different types of questions) than other referral types (given that other advisors likely will have thoughts on what makes a 'good' advisor!).

First, showing enthusiasm and appreciation for the other advisor's outreach not only can demonstrate the attitude that an advisor will bring to working with the prospective client, but also genuine gratitude for the consideration of the referring advisor (which could generate more referrals in the future!). Next, demonstrating curiosity about the prospect's situation rather than 'just' explaining their qualifications can help the referring advisor see that the other advisor is truly interested in whether the prospect will be a good fit. On a related note, advisors who are upfront about their fee structure and any asset minimums can help the referring advisor determine whether the prospect would be a good match (and avoid the potentially embarrassing situation of referring an individual who doesn't meet these thresholds). Finally, advisors who are able to explain their planning and investment philosophies in a clear way will help the referring advisor understand whether the prospect (and any prospects that come across their radar in the future!) would be a good fit.

In the end, while many advisors might seek to impress a referring advisor with their qualifications or planning process, those making referrals might also be evaluating their counterpart's emotional intelligence (i.e., the ability to show empathy and adjust one's communication style to connect with others), both in terms of the potential connection between the prospect and the advisor, but also whether the referring advisor and the potential recipient of the referral can build a relationship that could be fruitful for both for years to come!

Customer Referrals Are Contagious

(Rachel Gershon, Zhenling Jiang, Will Fraser, and Jitendra Gupta | Harvard Business Review)

New client growth is the lifeblood of financial planning firms and there are myriad strategies for attracting qualified prospects, but many of these come with a hard-dollar or time cost for the firm. Which is why many advisors seek to leverage client referrals, which have a lower average client acquisition cost than most other marketing tactics studied in Kitces Research on Advisor Marketing. And while advisors might ask all of their clients to make referrals, research suggests that a certain group of clients might be particularly amenable to doing so.

Using experimental and real-world data from a range of industries, the authors demonstrate a concept they call "referral contagion", whereby individuals who came to a business by way of a referral are more likely to refer others to the company than customers who found it by other means. One reason is that referred customers perceive the act of referring as more socially appropriate than others (e.g., while other customers might hesitate to recommend a company to a friend, referred customers [who have experienced the benefits of receiving a referral!], are less likely to be reluctant to do so). Further, the authors found that companies can boost referrals by these clients by reminding them that they themselves were referred (making the 'norm' of referring more salient and making them more comfortable with referring others). Notably, while some firms might worry that having a number of clients in the same network could create a negative contagion effect if one member of the network has a bad experience (though this might be less of a concern for financial advisors, given traditionally high client retention rates), the authors found that when a referred individual stops working with a company, this decision didn't significantly impact the engagement of the customers they referred (indicating that while positive network effects are strong, negative effects are much less prevalent!).

Ultimately, the key point is that effectively leveraging client referrals as a marketing tactic for financial advisors is not just a matter of asking all clients for referrals at once, but rather an organized effort targeting the 'right' clients at the 'right' time, and the above research suggests that clients who were previously referred to the firm could be a good place for advisors to start!

The Surprisingly Profound Power Of Thank-You Notes

(Abdullah Shihipar | The Atlantic)

Writing a thank-you note is a common way to show gratitude to someone on a specific occasion, such as after receiving a gift, being hosted in their home, or being interviewed for a job. However, a discrete action is not necessarily required for an individual to initiate a thank-you note; rather, expressing appreciation to friends, family, and colleagues throughout the year not only can help cement these relationships, but also contribute to feelings of gratitude in the process.

'Notably', these communications do not have to be extended letters, but rather can be short written notes that express the sender's gratitude for how the recipient has contributed to their life. And compared to a thank-you note for a gift (or similar event where a note is traditionally expected), the surprise of receiving such a note could have a profound impact on the recipient. Further, while individuals considering sending such notes might be concerned that their writing will be scrutinized or that the recipient will feel awkward receiving it, one study found that recipients were genuinely touched and found the notes to be warmer and more competently written than the senders had predicted they would. Separately, making a practice of sending these thank-you notes can help the sender feel less lonely and more connected, as doing so necessarily requires them to create a mental list of individuals who have supported them throughout the year.

In the end, while writing thank-you notes is often viewed as a part of proper etiquette (and a potential chore), doing so can also be an opportunity to build social (and professional) ties, particularly if the recipient doesn't 'expect' to receive one!

The Case Against (Handwritten) Thank-You Notes

(Erin White | The Wall Street Journal)

For some people, writing a thank-you note is a meaningful and enjoyable experience, offering an opportunity to show handwritten gratitude to someone who gave a gift or did a favor to the note writer. However, for others this task is a major chore, forcing them to buy notecards, stamps, and take the time to write a thoughtful message. Which might leave them looking for alternate (and less time-intensive) options to offer thanks.

White argues that written thank-you notes might have been seen as standard in decades past, modern technology provides many other options for thoughtfully offering thanks to others. At the most basic (and perhaps most personal) level, an in-person thanks can be a thoughtful choice. Alternatively, a thanks the next time you talk to the recipient on the phone or on video chat could be appropriate as well (e.g., "Thanks for this scarf, it's been keeping me warm all winter"). Sending pictures or recorded videos could be a quick and thoughtful way to offer thanks as well (e.g., taking a video of a child enjoying a toy gifted to them). Perhaps the quickest methods are to send a text message or email of thanks; while these might feel impersonal, it can still convey gratitude to the recipient.

Ultimately, the key point is that while written thank-you notes have long been seen as the 'gold standard' for offering thanks, perhaps the most important thing is to offer thanks in the first place. Which means that rather than stressing over writing a note (unless you enjoy doing so!), following through with an alternate option can ensure that the person who gave a gift or did a favor for you will feel recognized.

A 4-Sentence Structure For Writing Thoughtful Thank-You Notes

(Emily Post Etiquette)

After your recent wedding, you've bought thank-you notes and have sat down at the table ready to write notes for the gifts you received. However, you seem to have come down with a case of writer's block, unsure of what to write to each person (and wanting to avoid writing the same thing to each person).

To make writing thank-you notes easier, a 4-sentence approach could be considered. The first sentence can be used to explicitly thank the recipient for the gift they gave or the favor they performed (e.g., "Thank you for attending my wedding and for the generous cash gift."). Then, the 2nd sentence can personalize the note with thanks for the thought behind the gift or the effort the recipient put into helping you out (e.g., "I know you had to travel a long way, but we were so glad that you were able to attend."). A 3rd sentence can shift the focus to the future, perhaps expressing hope for seeing the recipient of the note again in the near future (e.g., "The gift will come in handy as we furnish our new home, which we hope you will come and visit soon!"). Finally, the 4th sentence provides an opportunity to repeat the thanks from the first sentence or offer an original thought (e.g., "Your friendship means so much to us and we were so glad you were able to help us celebrate our big day.").

Altogether, using this structure, thank-you note writers can compose their notes efficiently (particularly valuable after a major event where many thank-you notes are 'due'!) while demonstrating that they took the time to compose a personalized message to the recipient (and could serve as a guide to kids who might not know where to start when it comes to thank-you notes for relatives and others who give them gifts!).

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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.