Weekend Reading for Financial Planners (Jan 22-23)

Author: Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

Facet Wealth Raises $100 Million In Series C (Diana Britton, Wealth Management) - Compensation structures available to financial advisors (and consumers) have shifted over the years, from commission-based models to fees paid for assets under management (AUM). While the AUM model has turned out to be very popular for both advisors and a material segment of consumers willing to delegate assets to an advisor, the minimum amount of assets a client needs to have to be profitable for the advisor in the first place often puts these advisors’ services out of reach for many potential clients (including those with high incomes but few investible assets). A decade ago, robo-advisors stepped in to provide asset allocation assistance for consumers with fewer assets, but these services generally do not provide clients with a more comprehensive financial plan. More recently, a growing number of advisors have adopted subscription or retainer fees that allow clients to receive comprehensive financial planning services without requiring a certain minimum amount of assets. One of the fastest-growing firms using this model, Facet Wealth, announced this week the close of a whopping $100M Series C round of investor capital to further accelerate the growth of their subscription model, which comes on the heels of a $25M funding round in 2020, as Facet has already seen its revenue jump from $2.5 million in 2019 to more than $25 million in 2021. Its 10,000 clients pay an average $3,000/year subscription fee, which is determined by the complexity of their financial situation. Facet said it will use the funding to continue its growth, add tax and estate planning capabilities, and build up its plan implementation capabilities to further leverage its human financial advisors with internally built financial planning software. Notably, at a time when private equity firms have been increasing their acquisitions of AUM firms, the venture capital firms involved in the Facet investment appear to be placing their bets on the subscription model as the Next Big Thing, suggesting that perhaps while AUM represents a solid source of profits today, subscription-based firms could represent a major driver of industry growth in the future!

Advisor Trade Group Wants SEC To Tell RIAs They Can Call Themselves Fiduciaries (Tracey Longo, Financial Advisor) - For many fee-only financial advisors, serving as a fiduciary who operates in a client’s best interest at all times is a key differentiator from brokers who are not bound by the same requirements. However, the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI) muddied the waters on who is a fiduciary, allowing broker-dealers and their brokers to state that they have a “best interests” standard when providing recommendations to their clients, even though the obligation applies only at the time of the broker’s recommendation itself and not during the ongoing and holistic relationship with the broker-dealer. Reg BI also required both RIAs and broker-dealers to file a new form, the Customer/Client Relationship Summary (Form CRS), which describes a firm’s services; the types of client/customer relationships available; fees, costs, conflicts of interest, and the required standard of conduct associated with those relationships and services; and whether the firm and its financial professionals currently have reportable legal or disciplinary history, among other requirements. While many RIAs would like to include on the Form CRS that they are fiduciaries for their clients at all times, as a part of their explanation of their services, the Institute for the Fiduciary Standard has sent a letter to the SEC noting that SEC guidance and staff advice has confused RIAs and compliance professionals into excluding or removing the word “fiduciary” from their CRS. Specifically, in a December 17, 2021 Staff Statement, the SEC said that firms stating they were held to a fiduciary standard were deviating from the SEC’s prescribed language of “we have to act in your best interest and not put our interest ahead of yours” (which makes it impossible for fiduciaries to distinguish their holistic fiduciary obligation from a broker’s only-at-time-of-recommendation standard). The Institute’s letter urged the SEC to provide guidance that in addition to the prescribed language, RIAs should also be able to use elective language describing themselves as fiduciaries in the CRS. Otherwise, ironically, while the Form CRS is meant to provide consumers with the information needed to choose between advisors, the current SEC guidance appears to actually make it more difficult to differentiate between firms with different fiduciary obligations!

Study Finds Huge Wealth Gap In Roth IRA Returns (Ginger Szala, ThinkAdvisor) - Congress created Roth IRAs in 1997 in order to provide individuals with a new way to save that would provide tax-free income in retirement. With income limits to contribute, the Roth was largely targeted at middle- and lower-income Americans. However, higher earners have also found ways to contribute to Roth IRAs, including the ‘backdoor’ Roth IRA (where contributions to a traditional IRA are soon converted into a Roth IRA) and the ‘mega-backdoor’ Roth IRA (where after-tax contributions to a workplace retirement plan are transferred into a Roth IRA), after income limits on Roth conversions were eliminated in 2010. And now, a recent study suggests that higher-income savers are also earning better returns in their Roth IRAs than their counterparts with less income. In fact, the authors found that while those with less than $200,000 in income had average annual returns of 3.6% in their Roth IRAs between 2004 and 2018, those who earned more than $200,000 had an 8.5% annual return. Interestingly, the gap in returns in traditional IRAs was significantly narrower, suggesting that higher-income individuals are specifically putting assets with higher return potential in their Roth IRAs, where they will be able to withdraw the (potentially significant!) earnings tax-free (perhaps thanks to the guidance of financial advisors aiming to maximize asset location?). Which is notable because the ability to not only put public investments, but also private company shares, into Roth IRAs has gotten increased notice this year after ProPublica found that tech mogul Peter Thiel had amassed a $5 billion Roth IRA by putting early-stage private company shares into the account. And while investors need to take care when putting these kinds of investments in a Roth IRA, it does offer the opportunity for higher-income individuals to earn outsized tax-free gains. And so, some Democratic members of Congress have taken note of the significant benefits of Roth IRAs accruing to high-income individuals (compared to the lower-income individuals who were the original target users of the accounts), and have proposed a range of measures, including eliminating backdoor and mega-backdoor Roths, and creating mandatory distributions for high-income individuals with large Roth balances, to try to rectify the situation (although it remains to be seen whether any of these will become law). While future rules around Roth IRAs are being worked out, though, advisors can help clients (and those without advisors!) maximize the tax benefits of their Roth IRAs by allocating assets expected to appreciate significantly into their Roths.

Advisors’ Cryptocurrency Access Expanded As Gemini Buys BITRIA (Financial Advisor) - As investor interest in cryptocurrencies has expanded, so too has the demand among advisors for ways to invest client assets in the emerging asset class. But unlike equities and bonds that can be purchased and held in accounts at a wide range of brokers, investing in crypto directly requires enhanced measures to keep the holdings secure. Sensing the opportunity to provide advisors with direct access to cryptocurrencies, crypto exchange Gemini announced this month that it acquired BITRIA, a digital asset portfolio management platform for financial advisors. Together, advisors will have access to more than 70 cryptocurrencies available on Gemini’s exchange through BITRIA’s Separately Managed Account (SMA) and Digital Turnkey Asset Management Platform (TAMP) offerings. Advisors will also be able to perform portfolio rebalancing and tax-loss harvesting, as well as collect fees through the platform. This offering could be useful for advisors looking to invest in spot cryptocurrencies, rather than ‘just’ Bitcoin Futures ETFs and trusts, whose prices can stray from the spot price. Of course, investments in cryptocurrencies and other speculative assets have to make sense for a given client in the first place, but the combination of Gemini and BITRIA gives advisors a new way to offer cryptocurrencies as part of their broader investment management services.

Fidelity To [Soon] Offer Direct-Indexed Accounts As Small As $5,000 To Retail Investors (Lewis Braham, Barron’s) - Direct indexing offers investors the opportunity to purchase shares of the component companies of an index itself, rather than a mutual fund or ETF tracking the index, creating opportunities for tax-loss harvesting when the prices of individual companies within the index fall. Because of the previous inability to purchase fractional shares and the transaction costs of buying each company in an index, this strategy was generally only available to those with significant assets (in addition, those in higher tax brackets would also get more benefits from the tax-loss harvesting). But with the now-wide availability of fractional share purchases and zero-fee transactions, direct indexing has been opened up to a wider range of investors. And now, Fidelity plans to take the next step by offering its Fidelity Managed FidFolios direct indexing products to individual investors with as little as $5,000 to invest. Investors will initially be able to choose from three account strategies: U.S. Large Cap, International, and Environmental Focus. The latter strategy represents a potential growth area for direct indexing platforms, with Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI) becoming increasingly popular. Rather than relying on the ESG/SRI criteria of a given mutual fund or ETF, direct indexing allows investors to customize the index for their particular preferences (e.g., removing gun manufacturers or tobacco companies). The FidFolios will have an initial expense ratio of 0.40%, creating a fee hurdle to overcome (compared to index ETFs which have expense ratios near zero) through its tax advantages and/or its customization abilities. And while Fidelity’s new offering gives investors the option to take advantage of direct indexing without engaging an advisor (which has traditionally been the access point to direct indexing for investors), the low investment minimum suggests Fidelity might be attracting individuals who might not have made good advisory candidates anyway (at least for those advisors charging based on AUM). Though it also raises the question of whether Fidelity is ‘only’ attempting to bring direct indexing to the masses, or if it will make its new direct-indexing solutions available to RIAs using its custodial platform as well (or if instead, advisors will have to continue looking elsewhere to provide their clients with the range of benefits direct indexing offers?).

Junxure Upgraded And Rebranded As AdvisorEngine CRM (t3 Tech News) - Early robo-advisors found significant success a decade ago attracting retail assets, but with increasing competition (including from the major asset managers), some pivoted to serving human advisors as robo-advisors-for-advisors rather than consumers directly. However, many advisors were not willing to pay the robos for their onboarding technology, preferring that their already-‘free’ custodians improve their own onboarding capabilities. This then led some firms to pivot again, and one robo-advisor-for-advisors, AdvisorEngine, tried to expand its feature set to become a more holistic platform. In 2018, the firm acquired Junxure CRM, not only for its CRM capabilities, but apparently also to obtain Junxure users that might be cross-sold the AdvisorEngine platform (an apparent mismatch given Junxure’s user base’s predilection for deep financial planning and AdvisorEngine’s more investment-centric platform). But after two years, AdvisorEngine owner WisdomTree sold AdvisorEngine (and Junxure) to Franklin Templeton, which potentially saw more value in the Junxure CRM itself. That vision culminated this week with the introduction of AdvisorEngine CRM, an upgraded successor to Junxure. The now-fully-cloud-based CRM will be offered as a stand-alone product, priced per user (the desktop legacy version of the software will be maintained from a security and operational standpoint, but users wanting the latest integrations or cloud-based improvements will need to switch systems). While it remains to be seen how advisors will respond to the new offering, AdvisorEngine’s years of work on the upgraded CRM represent a bet that advisors will seek out high-value software products with increased capabilities and integrations, and presents a notable entrant of new competition to the existing advisor CRM trio of Redtail, Wealthbox, and Salesforce that currently dominate the advisor CRM landscape.

Four Reasons Why Your Marketing Isn’t Connecting With Prospects (Kristen Luke, Advisor Perspectives) - Marketing is often a challenge for advisors, who may struggle to attract new clients through means other than passive referrals from existing satisfied clients. While fee-only RIAs may have been able to stand out from the pack of commission-based advisors in the past, the growth of the fee-only movement ironically means that is no longer a differentiating factor for firms in most areas. In addition, many firms are increasingly making the same claims on their websites (e.g., “we offer comprehensive financial planning and investment management”) without giving clients an idea of how effective they actually are at their job. And when firms offer similar services at similar prices (1% of AUM anyone?) to similar clients (affluent near- and current-retirees), prospects have too many similar choices. Compounding matters is that prospects are not qualified to evaluate advisors, having probably only met with a few at most and having a limited basis to compare. And so, without the ability to evaluate advisors based on their qualifications, prospects turn to other factors, such as price and personal rapport. But instead of competing in these areas (which can be challenging), Luke suggests that advisors instead compete based on their qualifications by specializing in a niche. Instead of being the ‘expert’ for all near-retirees, an advisor, for example, could specialize in serving near-retirees from a major company nearby, and demonstrate their unique deep knowledge of that particular company’s retirement system. With a natural base of prospective clients, marketing can become easier as the advisor can focus on demonstrating their unique qualifications to serve that specific target market, rather than trying to stand out to everyone at once from the pack of advisors with similar qualifications and services. And so, while narrowing the pool of prospective clients can seem like a risk, specializing in a niche can allow an advisor to better demonstrate their expertise to those prospects, simplifying their marketing and attracting more clients as a result!

Most Advisors Are Terrible At Niche Marketing. Don’t Be Like Most Advisors. (Patrick Brewer, ThinkAdvisor) - Financial advisors have many choices when it comes to marketing, from building a better website to creating content to enhancing their Search Engine Optimization (SEO) capabilities. However, throwing money at these options without a specific target client in mind is generally not the path to success. Instead, Brewer advises that specializing in a niche can help advisors focus their communications, be more intentional with their marketing budget, and scale their practice more effectively. Having a niche allows an advisor to focus their marketing messages with a specific type of client in mind. This lets prospects know that you are the expert in the area that is important to them, rather than one out of a pack of generalist advisors. Serving a niche also allows advisors to spend their marketing budgets more effectively. For example, an advisor with a niche of serving corporate lawyers could start a podcast focusing on the financial issues that corporate lawyers face in particular, and then build on the podcast with a monthly email newsletter for this audience. In this way, the advisor spends their time and money speaking directly to their target market, rather than throwing their firm’s name out to an audience who could be served by a much broader pool of advisors. Serving a niche can also help the firm scale more efficiently by building a team and tech stack that best serves the needs of the target client, rather than a diverse group of prospects with varying needs. The key point, though, is simply that in the end, specializing in a niche can enhance the effectiveness of a firm’s marketing and ultimately lead to better growth by converting a much higher percentage of a more targeted group of prospects!

Why Boldness Wins (Robert Sofia, InvestmentNews) - If financial advisory marketing could be summed up in one word, what would it be? Sofia suggests words like Generic? Conservative? Bland? One word that probably does not come to mind is bold, but Sofia argues that advisory firms need to be bold in their marketing to stand out from the pack of firms with similar offerings. He offers an example of the marketing campaigns he put together for two advisors looking to promote a seminar on retirement and inflation. One advisor insisted on using an advertisement with a long list of details and pictures of retirees. The other took Sofia’s suggestion to use a picture of a floating piggy bank with the words “Inflation. Will it rob you?” on it and ended up getting four times as many responses as the advisor who took the traditional approach. And so, to be bold, Sofia suggests that advisor marketing should be brave, polarizing, and simple. Being brave in advisor marketing means moving away from logos and websites that look the same as the competition (does every firm's website need a lighthouse?). For example, the logo for Sofia’s marketing firm is a red octopus wearing sunglasses. The next step is to be polarizing to attract attention. One way to do so is through the firm’s name, and in Sofia’s case, he named his firm Snappy Kraken (instead of something blander like Sofia Marketing Services). Finally, simplicity is the key to making a bold marketing plan stick. For example, Nike’s “Just Do It” slogan is easy to remember and to mentally connect back to the company. And while advisory firms should be aware of betraying their brand or values with a too-bold marketing campaign, there is very likely significant room for most firms to expand outside of their marketing comfort zone. As Nike would say, Just Do It.

To Get A Better Night’s Sleep, First Fix Your Day (Andrea Petersen, The Wall Street Journal) - Getting a good night’s sleep can be difficult for busy professionals, and the pandemic has made the situation worse for many individuals. In fact, more than half of Americans said they had experienced more sleep disturbances during the pandemic, according to a March 2021 survey. And while some contributors to poor sleep are unavoidable, individuals can create conditions to give them a better chance of a good night’s sleep. The first step is to have a regular wake-up time and to get around natural light as soon as possible after waking up. This alerts your body that it is time to wake up, and keeps your circadian rhythm normal. Similarly, having regular times for meals and exercise can also keep your body in rhythm and promote better sleep. Ending any caffeine intake by mid-afternoon, and moderating alcohol consumption (which can disturb sleep even if it initially leads to grogginess) is also helpful. In addition, while short naps (i.e., 20 minutes or less) can recharge an individual’s alertness, longer naps can disrupt the body’s sleep appetite at night. And for those who have stressful thoughts as they try to fall asleep, writing down any concerns in a journal (as well as things for which they are grateful) well in advance of going to bed can help clear and relax the mind. The key point is that there are many ways to promote better sleep, and most of them occur well before bedtime.

How To Design A Home Gym That You’ll Actually Use (Tim McKeough, The New York Times) - While exercise bikes and other home fitness equipment have been around for years, the amount of exercise taking place at home exploded during the pandemic, which temporarily closed many gyms and fitness studios. Of course, all of the exercise equipment being purchased takes up space, so designing an efficient and aesthetically pleasing home gym can enhance the at-home workout experience and prevent the new purchases from creeping into the rest of the living space. While many individuals put their home gyms in their basement (out of the way of the main living space), others choose more prominent spots, such as a guest room or home office. Once the space for the home gym is selected, considering potential layouts is the next step. For example, those with treadmills need to leave space behind them in case someone falls off, and some equipment needs to be positioned to plug into electrical outlets. Flooring in a home gym should be durable and easy to clean. Interlocking rubber-tile or vinyl flooring (similar to what is found in commercial gyms), or a series of cushioned mats, can be used to ensure comfort and safety. In addition, the proper lighting can make the home gym more inviting, and dimmer switches can allow light levels to be adjusted for various activities. Finally, a home gym can be finished off with complementary furniture (to catch your breath between exercises!) or appliances, such as a small refrigerator to be able to have cold water on hand mid-workout. Ultimately, at a time when many people are trying to fulfill their New Year’s Resolutions to exercise more often, creating a well-designed home gym can make that goal easier to achieve!

How To Live A Rich Life (Ramit Sethi, I Will Teach You To Be Rich) - When wealth is portrayed in movies and on television, it often involves huge houses, fancy cars, and other expensive material possessions. But for many people, these trappings do not bring significant happiness, and a ‘rich’ life to them means something very different. And so, Sethi suggests that a rich life is your ideal life, where you are able to spend on the things that bring joy and excitement to you. For him this means tailored clothing, treating his parents to special experiences, and travel to amazing places (but not fancy cars or watches), while for others this could mean being able to spend more time with their kids, being able to buy anything from the grocery store without feeling guilty, or buying a new pair of shoes each year. A rich life should be tailored to an individual’s personal desires, and not those of their peers. It should also give the individual control over their destiny, whether that means being able to take a new job or move to a new city. Building a rich life does not have to happen all at once, and you are likely to make mistakes along the way (maybe that new job didn’t work out). And while some people see retirement as the time to knock items off of a ‘bucket list’ of life goals, Sethi urges individuals to start living their rich lives today, whether that means buying popcorn at the movies or planning an extravagant trip for next year. Of course, a rich life does not just have to be about you, but can also involve generosity toward family members, friends, and causes that you care about. The key point is that a rich life will look different to each person, which is crucial to explore in the client discovery process (beyond just gathering quantitative data). And for advisors unfamiliar or uncomfortable with how to structure those conversations, programs like George Kinder’s Life Planning and Carol Anderson’s Money Quotient can help financial advisors to explore what a rich life means for their clients!

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, as well as Gavin Spitzner's "Wealth Management Weekly" blog.