Weekend Reading For Financial Planners (January 18–19)

Schwab Continues To Slash Cash Sweep Yields, Raising Potential Issues For RIAs

(Oisin Breen | RIABiz)

A custodian is one of the most crucial vendors for RIAs that manage client assets. From the core custodial services of trading and holding and keeping records of electronically owned securities, to the ancillary technology from trading to (digital) onboarding that custodians provide to help advisors run their business, a good RIA custodial relationship is crucial to help firms attract and retain clients. And despite this range of benefits, RIAs typically are able to access these services without having to pay any direct platform fees, as the custodians earn money in a variety of other ways, including in today's environment what is often a substantial amount of net interest income derived from the difference between the rate paid on RIA client cash held in platform or related-bank sweep programs, and the rate at which they can otherwise invest or lend the money to others (e.g., through margin loans). Which has become particularly important to the custodians as the industry has moved away from ticket charges for trades and is less and less reliant on mutual funds (and the sub-TA fees they historically generated for RIA custodians).

In an apparent move to maintain their net interest income as the Federal Reserve itself cut rates in the fourth quarter, Charles Schwab (the largest RIA custodian) in September cut its cash sweep yield from 0.45% to 0.2%, then cut further to 0.1% in early December, and finally down to 0.05% in late December (at a time when rates on other cash-like vehicles are still significantly higher, with Schwab itself offering money market funds with yields greater than 4%). Nonetheless, Schwab's relatively low cash sweep yields don't seem to be leading to an outflow of client dollars, as the firm's cash sweep balances actually grew 5% to $393.7 billion between August and November of last year (suggesting that some advisors either didn't notice the change or didn't think it merited changing their cash management practices). Notably, Fidelity (the second-largest RIA custodian) has made a similar change to maintain its net interest income in the face of Federal Reserve rate cuts, announcing that it is planning to convert the default sweep for RIA's non-retirement client cash balances from money market funds (with the largest Fidelity money market fund currently carrying a 7-day yield above 4%) to its in-house cash management product, FCASH (which offers a 2.19% yield). Though notably the Fidelity rates, after the change, will still greatly exceed the latest Schwab cash sweep rates.

Schwab's move comes at a time of increasing scrutiny of brokerage firms' cash sweep programs, with LPL Financial, Wells Fargo, and Morgan Stanley facing probes from the Securities and Exchange Commission over the yields they pay direct clients of their platforms (who engage those firms' RIA advice offerings, and then use the firms' brokerage platforms, where choosing a more-profitable cash sweep for RIA clients in the co-owned brokerage firm is a more direct conflict of interest), and plaintiffs filing lawsuits against those firms and Schwab itself. Further, while the fallout from the cash sweep controversy has so far been mostly limited to the brokerage firms themselves, securities attorneys have pointed out that there's a potential liability exposure for RIAs as well. To the extent that financial advisors allow their clients to have uninvested cash sitting in their brokerage accounts and earning almost no interest – either intentionally, or because of a failure to monitor their cash levels – it could be argued that the advisor has violated their fiduciary duty to act in the client's best interest, especially if the advisor also billed their advisory fee on that cash. Which means that, once the initial wave of lawsuits against brokerage firms has subsided, RIAs could eventually also find themselves the targets of legal action for failing to minimize the amount of clients' cash in low-yielding sweep accounts.

Which ultimately leaves RIAs facing lower cash sweep rates with several potential options. The easiest way to avoid receiving a low interest rate on a cash sweep account is to simply not keep uninvested cash in a brokerage account where it would be subject to those low cash sweep rates, and instead either invest it or move it to a higher-earning cash product like a high-yield savings account, cash management account, or at least trading into a money market fund on the platform. Alternatively, slashed cash sweep rates could be the proverbial 'straw that breaks the camel's back' that drives some firms to look for a new custodian (despite the labor involved in repapering clients and learning new systems) that offers better yields and would thus drive incrementally higher returns for clients themselves. In any case, for the time being, for those RIAs with client assets at the largest custodians, having a process for monitoring and managing clients' cash levels may not be just a 'nice-to-have' feature to provide extra value for the client, but a necessity for the advisor to fulfill their fiduciary obligations and protect their clients from their custodian's own business model?

Gen X Grappling With Lack Of Retirement Planning: Survey

(Edward Hayes | Financial Advisor)

Americans across the age spectrum have faced differing environments when it comes to planning for retirement. While older Americans might have been more likely to work at jobs offering defined-benefit pensions (that don't require many choices regarding savings rates or investment options on the part of the worker), their decreasing popularity (alongside the rise of defined-contribution retirement plans) has created a different environment for workers in younger generations.

According to a survey of 2,000 investors by investment manager Schroders, those in Generation X (i.e., those currently between the ages of 44 and 59) see themselves as worse off when it comes to retirement planning than older Baby Boomers or younger Millennials. The survey found that 48% of Gen Xers have done no retirement planning and 54% are concerned about outliving their assets in retirement (compared to 40% of Boomers and 50% of Millennials). In addition, only 27% of Gen Xers surveyed said they work with a financial advisor, compared to 37% of Boomers and 31% of Millennials. Further, only 10% of Gen X respondents plan to wait until age 70 to claim Social Security benefits (when they would receive their maximum monthly benefit), with 43% of them saying they don't want to wait because they are concerned Social Security may run out of money or stop making payments (compared to 24% of Boomers and 37% of Millennials citing this reason), which could limit their retirement spending further.

In the end, while a significant percentage of individuals across the age spectrum have expressed concern about their retirement security, those in Generation X could be particularly vulnerable, as they have spent most of their time in the workforce amidst the decline of defined-benefit pensions but might have been late to making contributions to defined-contribution plans (as potential balance-boosting features such as auto-enrollment are a more recent phenomenon). Which offers financial advisors several opportunities to add value for clients in this group (who might approach an advisor as they realize their potential retirement insecurity and/or after receiving an inheritance from aging parents?), from crafting a savings plan to help them 'catch up' on retirement savings in their later working years to considering whether delaying Social Security benefits could be in their long-term financial interest.

37% Of Advisors Plan To Retire In Next Decade, Keeping M&A Market Hot: Study

(Gregg Greenberg | InvestmentNews)

A much-discussed theme over the past several years has been the graying of the financial advisor population, with the pending retirements of many firm founders potentially having an impact not only on their own firms, but also on the makeup of the industry itself (e.g., if a significant number of founders eschew an internal succession and sell to one of the deal-hungry RIA 'aggregators').

According to data from research and consulting firm Cerulli Associates, 105,887 advisors plan to retire in the coming decade, representing 37.4% of industry headcount and 41.4% of total assets. Nevertheless, despite the expectation that they will be retiring within the next several years, many have not prepared for the transition, with 26% indicating they are unsure of their retirement plans (suggesting that some of these advisors might end up deciding to sell their firms to an external buyer, as doing so typically requires a shorter planning runway than completing an internal succession). Notably, the percentage of those unsure of their retirement plans rises to 30% for independent RIAs, who face greater concerns about succession and retirement planning compared to those who are affiliated with larger wealth managers, with independent advisors citing challenges in finding a qualified buyer (with 86% indicating this is a challenge), structuring deal terms (63%) and valuing their practice accurately (53%).

While there could be an influx of advisors looking to sell their practices in the coming years, there appears to be a healthy number of potential buyers as well, with 48% of advisors indicating that they are interested in acquiring a practice. At the same time, these advisors face challenges consummating deals as well, including the investment of time necessary to finalize a deal (cited by 67% of these firms) and negotiation and style differences with the seller (53%).

Altogether, these data points indicate that advisory firm founders who plan well in advance for their retirement, whether they intend to complete an internal succession or seek an external sale, can give themselves additional time to prepare their firm, seek a suitable buyer and ultimately end up with a better outcome (and perhaps less stress!) for themselves, their team, and their clients!

The Best Flexible Strategies For Retirement Income

(Amy Arnott | Morningstar)

One of the most valuable services financial advisors offer to clients nearing or in retirement is helping them make the transition from receiving most of their income from a salary to withdrawing money from their portfolio (alongside Social Security benefits and other potential income sources). And with a variety of approaches available for determining how much income a client can take from their portfolio in a given year, advisors have the opportunity to select an option that best fits their clients' priorities (and the ability of the advisor to efficiently manage it).

To help advisors and their clients assess different retirement income approaches, Morningstar tested several strategies to determine the upsides and downsides of each approach (using a 30-year retirement horizon, a 40% equity/60% bond portfolio, and a 90% probability of success). For instance, one approach is to take fixed real withdrawals throughout retirement but forgo the inflation adjustment for the year following a year in which the portfolio has declined in value. According to Morningstar's analysis, this strategy allows for a higher initial withdrawal rate compared to a similar approach that applies inflation adjustments every year (4.2% vs 3.7%) and entails relatively little year-to-year spending change (which might be attractive to retirees who value stability and predictability over maximizing their total spending in retirement).

On the other end of the spectrum is a 'Required Minimum Distribution' (RMD) approach, where the IRS' Single Life Expectancy Table is used to determine the percentage of the portfolio that will be withdrawn each year. While this method is 'safe' in the sense that the portfolio can never be fully depleted due to a certain percentage being withdrawn each year (though portfolio withdrawals could become quite small if it declines in value over time) and offers a higher initial withdrawal rate than the 'fixed' approach (4.7% vs. 3.7%), it also results in the greatest annual cash flow volatility of the different methods tested (because while the percentage withdrawn only changes slightly each year, the amount in dollar terms will vary significantly based on market performance) and typically leaves little money left over (which might be a consideration for those with legacy interests).

A middle ground option is the Guyton-Klinger "Guardrails" approach which allows for upward and downward spending adjustments depending on changes in portfolio value and offers a higher initial withdrawal rate (5.1%) compared to the previous two approaches. While its annual cash flow volatility is higher than that of the 'forgoing inflation' approach, it offers retirees greater lifetime spending than this method. Further, compared to the 'RMD' approach, the "Guardrails" method comes with less annual spending volatility and a greater terminal wealth (for those retirees with legacy interests), while only slightly trailing the 'RMD' method in terms of lifetime spending.

Ultimately, the key point is that different retirement income approaches come with varying tradeoffs, whether it comes to lifetime spending, annual spending volatility, or leftover wealth at death. However, a key takeaway is that the flexible withdrawal strategies discussed tend to be superior to a simple fixed withdrawal method (particularly when it comes to the initial safe withdrawal rate), suggesting that advisors can add value not only by choosing a withdrawal rate strategy, but also by analyzing their clients' unique situations on an ongoing basis (and implementing adjustments when necessary!).

What's Best For Retirement Income: Delay Social Security Or Claim Early And Invest?

(John Manganaro | ThinkAdvisor)

One of the most impactful decisions retirees will make is when to claim Social Security benefits. While some individuals might claim benefits at age 62 or soon after (perhaps because they have little retirement savings and need the benefits to support their lifestyles), others wait until their Full Retirement Age, or possibly until age 70, when they can receive their maximum benefit.

While delaying benefits (and thereby receiving a larger monthly payment for the remainder of their lives) can be an attractive proposition for those who can afford to do so, many still decide to claim early, sometimes with the plan to invest some or all of these benefits in the hopes of earning a better return than they would by waiting to claim. However, an analysis by retirement researcher David Blanchett throws some cold water on this approach, particularly for married couples and those with longer expected lifespans. He found that for individuals, those who live to age 85 and claim early will have an average breakeven return (i.e., the return they will need to achieve on the Social Security benefits invested) of about 7%, which increases to 8% by age 90 and 9% by age 95 (and while clients might note that those breakevens are relatively in line with long-term stock returns, this approach would require an aggressive asset allocation that could result in sharp drawdowns). The breakeven for married couples is even higher (considering spousal survivor benefits), typically increasing the required breakeven return by approximately 1.5% above the breakeven for an individual.

In the end, while the prospect of claiming Social Security benefits before reaching Full Retirement Age or age 70 might be attractive to clients for a variety of reasons (from the assumption that they have a limited life expectancy to concerns that Social Security will not be able to pay out full benefits in the future), the ability to 'beat' the returns from delaying benefits appears to be a challenging proposition (including for the advisor who would be charged with generating these returns!), suggesting that many clients (particularly those with longer life expectancies and/or are married) could benefit financially from delaying benefits!

Taking A Systematized Approach To Personalizing Retirement Income Strategies For Clients

(Alex Murguía and Wade Pfau | Nerd's Eye View)

As average life expectancy has increased over time, so too has the importance for retirees to ensure that they have sufficient income to cover their needs throughout what could be a 30-year (or longer) retirement. While some advisors may rely on a single 'favorite' income strategy to recommend to clients, recognizing that retirees actually have a range of preferences on how to source their retirement income can help advisors better develop sensible strategies that clients may be more inclined to follow. And the starting point for understanding a client's income preferences to help them choose the right retirement income strategy is to identify the client's retirement income style.

Murguía and Pfau suggest the two strongest constructs that help to determine a client's income preference style are Probability (depending on market returns) versus Safety (sources of income less reliant on market returns), and Optionality (having flexibility to respond to economic developments or changing personal situation) versus Commitment (being dedicated to one retirement income solution). Together, these constructs were used to create a framework that can be used to identify an individual's Retirement Income Style Awareness (RISA) profile.

For advisors, the RISA framework can be used to determine a prospect's or client's preferences, which can then help them design an appropriate and practical retirement income strategy. For example, an individual who expresses a preference for Probability and Optionality would likely appreciate the potential upside from strong market returns and the option to change course as necessary that are offered by a Total Return income strategy. Those who prefer Safety and Commitment may align better with an Income Protection approach, which would involve building a lifetime income floor with simple income annuities. And for those favoring Probability and Commitment, a Risk Wrap strategy (i.e., building a lifetime income floor with deferred annuities offering lifetime withdrawal benefits) could be more appropriate. Finally, those with preferences rooted in Safety and Optionality would likely appreciate a Time Segmentation strategy (e.g., bucketing strategies that use less volatile assets for shorter-term expenses, and more volatile assets offering higher growth potential for future expenses).

Ultimately, the key point is that by having a structured process around assessing retirement income preferences (whether by using a standardized RISA Matrix assessment or informally assessing where a prospect or client will be on the Matrix), an advisor can begin to develop a retirement income strategy that will most likely appeal to a particular prospect or client. By doing so, advisors can not only add value to current clients by ensuring that the client's retirement income strategy matches their preferences, but can also attract new clients by offering a more personalized approach to generating retirement income (while perhaps finding the right balance between the level of personalization provided to each client and the time needed to implement different preferences across their client base?).

Forget Mega-Money Deals, Here's How Smaller RIAs Are Growing

(Alec Rich | Citywire RIA)

A major theme in the RIA industry in the past few years has been the active Mergers and Acquisitions (M&A) market, led by a group of (often private equity-backed) RIA 'aggregators' engaging in 'inorganic growth', scooping up smaller firms whose founders are either looking to retire or to grow under the umbrella of a larger firm. Nevertheless, there remains a robust population of smaller RIAs pursuing 'organic growth' by bringing on new clients (and having current clients bring over more of their assets) through a variety of marketing methods.

At a time when it can be difficult to compete with the advertising budgets of the largest financial firms (RIAs or otherwise), leveraging a variety of platforms to distribute content has proven to be an effective for many firms to demonstrate their expertise to (and show how they can solve the pain points of) their ideal target clients. For instance, firms are reaching clients and prospects through newsletters, blogs, podcasts, and social media posts. In addition, advisors are looking to 'tried and true' methods such as referrals from clients (e.g., by asking for referrals after celebrating successes) and centers of influence (e.g., by finding professionals working with individuals whose money is in 'motion', such as real estate agents or divorce attorneys). In addition to these marketing tactics, some firms are attracting clients by narrowing in on an ideal client persona and refining their service offerings, offering the highest-value services for their target clients (while potentially dropping other services in order to avoid the potential time costs of being 'too' comprehensive).

In the end, while organic growth can be a challenging proposition for some firms in the competitive marketplace for financial advice, the variety of potential ways to reach prospects (and the large percentage of the public that still isn't working with an advisor!) presents opportunities for RIAs of all sizes to grow in 2025 and into the future without having to rely on M&A. At the same time, strong organic growth also can position a firm well for a future acquisition (by demonstrating the ability to scale effectively and onboard and serve new clients, or an eventual sale (as organic growth remains a key metric when valuing a firm)!

Eight Tips To Leverage Earned Media For More Referrals

(Kalli Fedusenko | Advisor Perspectives)

Given the high stakes involved when choosing a financial advisor, prospective clients will often seek evidence of an advisor's expertise and credibility, which could come from a friend (i.e., "social proof") or another source they trust, such as a media outlet they find credible. This latter option offers a potential way for advisors to get their message out to prospective clients (at no hard dollar cost!), though these "earned media" opportunities can require advisors to be proactive.

One way to get the attention of media outlets is to create content worth sharing, which could be research findings (relevant to the advisor's target client), a book, or perhaps a rebuttal to inaccurate financial advice being spread online (putting out a press release related to a major piece of content can help grab the attention of reporters as well). In addition to written content, making appearances on finance-related podcasts or webinars can help an advisor gain visibility and the attention of the news media. For advisory firms with a local client base, hosting an event (e.g., a volunteer opportunity) and opening it up to the public can attract coverage from local media outlets. Finally, advisors belonging to membership associations or similar groups can see if the organization curates a list of advisors available to answer media inquiries, which could lead to becoming a trusted expert on a given topic.

Ultimately, the key point is that given the hard dollar and time costs involved in advisor marketing, seeking earned media opportunities can be a cost-effective way to gain credibility in the eyes of target prospects (and serve as material to include on an advisor's website!). Nevertheless, doing so does take a bit of work to get on the radar of the media to start with, suggesting that just as an advisor can show how they provide value for their clients, they can also demonstrate (through engaging, useful content and incisive remarks) how they can support reporters as well!

How To Host An Effective Client Event

(Elyse Stoner and Angela York | NAPFA Advisor)

Client events have long been a staple of advisory firms' calendars and can create closer ties between advisors and their clients (hopefully boosting client loyalty and retention over time) and lead to introductions to planning prospects (whether clients bring them to the event or are encouraged to refer them based on their deeper relationship with their advisor). Nevertheless, the potential time and hard dollar cost of holding such events can sometimes leave advisors frustrated if they don't see a clear 'return' from them (e.g., in the form of new clients).

To start, Stoner and York suggest that the best events are aligned with client interests, reflecting the passions and preferences of the firm's ideal target client (e.g., an event type many might enjoy or a planning topic important to them) rather than doing a more generic event. Next, effective events often have a collaborative atmosphere (e.g., by incorporating breakout sessions), providing time for clients (and their guests) to connect with each other, allowing them to share experiences and solidifying the advisor's role as a community builder. Finally, events can be used to gather strategic feedback from clients, not only to get their thoughts regarding the firm's service or new initiatives, but also to learn more about them (e.g., if an advisor hosts a wine-tasting event, asking clients about their favorite bottle could provide valuable information for the next time the advisor wants to send a thoughtful client appreciation gift!)

In sum, client events do not necessarily have to lead to an immediate influx of prospect referrals to be considered a success (and don't have to cost a significant amount of money to put on!). Rather, the rewards from an effective client event can come over time, whether in the form of greater client loyalty, an expanded professional network, and/or valuable information that can be used to refine the firm's services.

How To Keep Up With The News Without Getting Overwhelmed

(Rebecca Knight | Harvard Business Review)

In the 21st century, it can be challenging to avoid the onslaught of news sources, from websites to social media feeds to print publications. And while staying abreast of information relevant to the community, country, and world can be a productive activity (particularly if there's a constructive action you can take in response to it), some research suggests that overconsumption of news can be associated with mental stress. Which creates a dilemma: how to consume news in a productive way without spending too much time, mental bandwidth, and emotional energy on doing so?

One way to improve news consumption is to 'go deep' on topics that are most relevant to you while only having a "headline-level" awareness of other issues. This practice, along with focusing on sources of 'hard' news rather than 'hot takes' (particularly when it comes to social media), can help reduce the amount of time spent consuming news. In addition, controlling when news is consumed can also limit the amount of time spent reading it (and thinking about it afterward). For instance, you might reserve a block of time in the evening, well before bed, to see what happened during the day (thereby avoiding interruptions to work and preventing obtrusive thoughts from disrupting your sleep). Relatedly, minimizing the number of news-related interruptions (e.g., cell phone notifications from news organizations) can help prevent the temptation to consume the news outside of the prescribed block of time. Finally, reading the news on paper (e.g., hard-copy newspapers or magazines) rather than online can help you better control what you consume and minimize potential distractions (e.g., the often-toxic comment sections found at the bottom of news articles).

In the end, controlling what news you access as well as when and how you do so can help you strike a balance between the value of being aware of the world around you (and inspire opportunities for action) and the stress that can come from being bombarded with news (or commenters) that are outside of your control.

Know Thyself

(Joy Lere | Finding Joy)

Stress is a common part of life, whether it comes from work, home, or the broader world. While it can't be avoided, understanding the triggers that most frequently cause you stress (and what leads to deeper worry) can help you take proactive action to mitigate them going forward and reduce overall stress levels, suggesting that regular self-reflection could offer significant value.

For instance, you might consider which relationships (personal or professional) drain you rather than provide energy (which might call for a reassessment of how you interact with the former group). Similarly, you can consider the times when you are most unhappy (e.g., what's happening, what are you doing, and who are you with) and consider ways to avoid those situations. In addition, given that stress can sometimes arise when problems or tasks are avoided, understanding why you are putting them off and considering ways to confront them can help take the stressor off of your plate (even if it might be uncomfortable to do so). Another potentially valuable practice is to consider whether a stressor is within or outside of your control (and then redirecting time and mental energy away from the latter group and towards the former). Further, you can consider whether the goals you're pursuing are your own (the pursuit of which will likely be more fulfilling) rather than those imposed externally (e.g., societal "shoulds"), which can lead to a never-ending treadmill of trying to meet others' (perhaps assumed?) expectations.

Ultimately, the key point is that while financial planners are experts at asking clients deep questions to better understand their goals and concerns when it comes to money, turning the tables and engaging in self-evaluation can be a valuable way to reveal what causes oneself to be stressed and to start down the path of making changes to reduce these burdens!

Thinking Your Way Out Of Problems Doesn't Work

(Darius Foroux)

Being a thoughtful person can be a positive trait, for instance in being conscientious and considerate of others. However, this can potentially go to an extreme, where it's tempting to constantly overthink matters ("was that [seemingly innocuous] comment I made in the meeting actually awkward?"), leading to regular stress.

One way to start breaking the overthinking habit is to engage in the mindfulness practice of 'observing' your thoughts. For instance, when a stressful thought arises, you might consider whether it is valid and relevant and, if not, try to set it aside and move on to more important matters. The second (and sometimes also challenging) step is to separate 'you' from your thoughts. By recognizing that intrusive thoughts and a restless mind are natural occurrences, you can be more forgiving of yourself rather than treating the thoughts as a judgment of your character or decision-making. This can then help you turn your attention to the 'real world' outside of your head and live more in the moment, whether at work, home, or otherwise.

Altogether, while it can be tempting to overthink a given issue (whether financial planning-related or otherwise), living life 'in your head' typically is less fulfilling (and more stressful) than being more 'present' throughout the day. And while these practices can take time to develop (given the constant pull of the mind), being aware of your thoughts and separating them from your self-image can help you break free of overthinking tendencies (while still maintaining a certain level of conscientiousness and consideration of others!).

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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.