Weekend Reading For Financial Planners (January 25–26)

RIAs See Biggest Asset Market Share Gain Across Industry Channels Over Past Decade But Total Advisor Headcount Remains Stagnant

(Diana Britton | WealthManagement)

Historically, broker-dealers, and large wirehouses in particular, have led the way in terms of advisor headcount and Assets Under Management (AUM). Nevertheless, recent years have seen a shift toward the RIA model, both among advisors (as brokers break away to start their own independent firms),  aspiring advisors (who seek positions that don't rely on an 'eat what you kill' approach), and consumers (who might be attracted to the differentiated service proposition they can experience working with an RIA that isn't manufacturing its own financial services products for sale and instead has an incentive to reinvest into service and the client relationship to retain the client and their ongoing fees).

According to data from research and consulting firm Cerulli Associates, independent RIAs continue to gain on other industry models both in terms of headcount and assets managed, with the channel seeing a one-percentage-point gain in terms of headcount market share in 2023 to 16% (notably, hybrid RIAs also saw a one-percentage-point gain to reach 13% of industry headcount) and a rise from 12% to 16% in terms of asset market share over the previous decade (the largest gain of any channel). Further, while wirehouses continue to lead other channels in terms of market share by total assets under management at 33% (likely buoyed by high- and ultra-high-net-worth clients seeking the high-end services and reputations of these national firms), wirehouses are losing headcount at the fastest rate (with Cerulli expecting the share of wirehouse advisors to fall from 15% to 14% over the next five years, primarily due to gains made by the various RIA channels).

Looking more broadly, though, Cerulli found that total financial advisor headcount has grown by just 0.2% during the past decade to 283,137 (as of the end of 2023), providing more evidence of a possible future talent shortage as older advisors retire and the industry struggles to bring in enough talent to replace them… even as more consumers enter retirement as well (and potentially seek out a new advisor for the first time).

Together, Cerulli's findings suggest that RIAs are at least in a good place relative to other channels when it comes to attracting advisor talent and consumer assets going forward, given the level of independence as well as the income-earning and wealth-building potential they can offer breakaway brokers and a more advice-centric (rather than product-centric) approach to the advisor-client relationship. Nonetheless, given the scale and brand awareness of the wirehouses, and as their own use of fee-based models increases (as opposed to primarily relying on commissions from selling products), competition for clients (and advisors) will likely remain stiff going forward, even amidst the favorable trends for RIAs.

Investors Value Trust In Advisors More Than Performance: Survey

(Elaine Misonzhnik | WealthManagement)

Financial advisors can add value to their clients in a wide variety of ways, from investment and tax planning to cash flow management. Nevertheless, while advisors are providing increasingly comprehensive financial plans, a key element of attracting and retaining clients is providing the specific services that can help their ideal target clients thrive (which doesn't always match what an advisor might assume). Further, a recent study suggests that a major part of what attracts clients to a certain advisor is not a 'tangible' service at all.

According to a survey of 1,000 advisory clients by AdvisorTech firm CapIntel, 72% of respondents said trust is the most important factor when choosing an advisor (with 61% indicating that no longer trusting their advisor would be the top reason they would look for a replacement). In terms of how advisors can best build trust with their clients, 46% of respondents cited a demonstrated understanding of their financial health and goals, 39% said a proven track record, and 31% wanted advisors to provide personalized advice and to equip them with the knowledge to make informed financial decisions. Beyond trust, other qualities frequently described as important include the advisor's investing experience (cited by 50% of those surveyed) and the ability to offer a holistic view of the client's financial picture (46%), with the latter data point suggesting that offering comprehensive planning services remains a compelling proposition for clients.

The survey also highlighted a potential opportunity for advisors to refine their communication practices, as 85% of respondents said it is very important for their advisor to communicate their financial picture clearly, but only 62% of those surveyed rated their advisor as "excellent" in clear communication, providing personalized advice, and presenting information in an organized manner. In terms of the frequency of advisor communication, the highest percentage of respondents preferred quarterly (43%), followed by bi-annual (21%), monthly (18%) and annual or on an 'as needed' basis (9%), suggesting a quarterly cadence could be a 'sweet spot' for advisor communication (though it might be worth identifying clients who would prefer a different cadence). The survey also found that communication preferences differ across generations, with younger clients more likely to prefer digital communication (with 69% of Millennials indicating so, compared to 43% of Baby Boomers), indicating that offering multiple methods of contact (or perhaps targeting a specific age demographic) could allow a firm to be aligned with client preferences.

In the end, this survey indicates that clients' emphasis on trust and the factors that can build it (from helping the client explore their goals and values to offering clear, personalized advice based on these findings) not only could help advisors offering comprehensive planning services thrive in the marketplace of human-provided advice, but also amidst competition from digital tools (from robo-advisors to the potential for artificial intelligence-powered financial advice)!

Advisors Focused On Client Tax Savings, Underperforming Investments: Envestnet Study

(Leo Almazora | InvestmentNews)

After the hard upfront work of gathering client data, creating an initial financial plan, presenting it to the client, and implementing chosen planning actions (which can be numerous in a client's first year!), advisors often seek further ways they can add value on an ongoing basis (in part to justify the fees they charge each year). Which can include ways to help their clients save money (e.g., through tax planning) as well as by paying attention to key deadlines and milestones (relieving the clients of the mental burden of doing so in the process).

According to an analysis of how advisors use its AI-driven "Insights Engine", Envestnet found that addressing underperforming products was the top use case for advisors at both RIAs and enterprise firms (with other portfolio management-related tasks such as flagging high-fee products, evaluating high cash holdings, and addressing single stock concentration also making the top ten for RIAs). Tax matters were also high on advisors' to-do lists, as optimizing tax-loss harvesting was the second most-utilized use case. Beyond these areas of potential hard-dollar savings, advisors at RIAs also sought to support clients by keeping abreast of key milestones as well, including by planning for Required Minimum Distributions (RMDs), preparing clients retiring in the current year, and ensuring that the client has a will in place (with all of these appearing in the top ten use cases as well).

Ultimately, the key point is that while much of the initial planning work an advisor performs for a client might be more 'visible', advisors continue to add significant value after the initial plan is set and implemented. Nevertheless, given that some of this work is 'invisible' (i.e., the client might not be aware of the full extent of the work their advisor is performing on their behalf), finding ways to bring this work to light (e.g., through the use of a client service calendar) can help ensure clients (and regulators?) recognize the full scope of their advisor's value proposition (and the hours of work the advisory firm is putting in on the client's behalf)!

Are The Growing Number Of Complex ETFs Worth The Hype?

(Jon Sindreu | The Wall Street Journal)

One of the biggest trends in investment management in recent years has been explosive growth in the use of Exchange-Traded Funds (ETFs), with total inflows surpassing $1 trillion in 2024, in part because they tend to be more tax efficient, have more flexible trading, and are typically less expensive than mutual funds – which has made them a popular way for advisors to implement passive (and sometimes active) investing strategies. And as their use has grown, so too have the available 'flavors' of ETFs, expanding well beyond passive indexes to cover an ever-growing range of complex strategies.

At a time when competing with the scale of large ETF issuers (e.g., Vanguard and BlackRock) has become difficult, many smaller issuers (and some larger players as well) have been issuing ETFs that go beyond simple public equities. For instance, of the new ETFs launched in 2024, 14% either included leverage (e.g., a 2X S&P 500 fund), short-selling (e.g., a short NASDAQ-100 fund), or a single-stock (e.g., a 2X Nvidia fund) in their names (though investors have to dig deeper to understand that the actual returns will not necessarily match the name of the ETF, as in the case of leveraged funds that are designed to provide a multiple of the daily, rather than long-term). Another 11% of new funds mentioned options in their name, with flavors of these funds including those pursuing covered call options strategies (i.e., selling covered calls of the underlying asset, generating income but limiting upside in the process) in both stock and bond markets. Further, an emerging class of ETFs investing in alternative assets (with 1.39% of new funds in 2024 fitting in this group) offer access to various types of investments (e.g., private debt) in an easy-to-access form.

In the end, while these new (and sometimes heavily marketed) ETF issues might be tempting to many advisory firm clients (or might appear in the portfolios of new clients), advisors can add value by digging into the details of how these ETFs work, alongside their potential use cases and shortcomings. Which could ultimately help clients avoid investing in ETFs that don't ultimately meet their investment objectives (and instead invest in those that do, which might turn out to be less complex!).

When To Invest More In Alternatives

(Larry Swedroe | Morningstar)

Diversification is a bedrock principle for many financial advisors when it comes to crafting client portfolios. Nonetheless, while advisors will often diversify across public market assets (e.g., both U.S. and international stocks and bonds), there also exists a world of private market investments (e.g., private equity and private debt) that have the potential to provide additional diversification in client portfolios. However, many advisors have been reluctant to invest client capital in these investments, whether because of their fees (typically well above those of 'vanilla' ETFs) or illiquidity (often requiring investor capital to remain 'locked up' for a certain period, though the 'illiquidity premium' also represents one of the ways such investments can outperform).

Amidst this backdrop, Swedroe argues that the market for private investments has improved significantly, perhaps suggesting a second look at these investments that have sometimes been seen as the purview of endowments and other large investors. For instance, the introduction of interval funds (which typically are required to meet a minimum investor withdrawal requirement) can provide for greater liquidity than their traditional counterparts in private equity, private debt, private real estate, and other private investments (where investor capital can be locked up for several years). These funds also help address the "J-curve effect" (whereby returns in the early years of a fund are affected by the expense ratio being applied to committed, not invested, assets, with investments being made over a three-to-four-year period) by putting assets to work immediately. In addition, a growing number of alternative mutual funds offer access to private instruments at a lower fee than many traditional private funds (e.g., a single expense ratio less than 2% rather than a 2% expense ratio and 20% incentive fee on returns exceeding a certain hurdle rate).

In sum, while investing in alternative assets has become easier and less expensive than ever before, it remains up to advisors to determine whether these investments are appropriate for their clients (or perhaps a subset of them?), potentially offering a differentiated value proposition for those who are willing to put in the time to research options in the alternatives space and implement them in client portfolios.

The Long-Run Downsides Of Covered Call ETFs

(Robert Huebscher | Robert's Substack)

The year 2022 was a painful one for many investors (and advisors), as both equity and fixed-income markets saw sharp declines. Which left many investors (perhaps surprised by the simultaneous decline in both stocks and bonds) looking for equity investments insulated against steep market drops.

While they have been around for many years, covered-call ETFs soared in popularity in this environment (accounting for about 12% of the nearly $2 trillion in ETF inflows over the past two years). At a basic level, these ETFs pursue a strategy of buying an underlying set of stocks (e.g., the S&P 500 index) and then selling call options against those holdings, sacrificing upside (if the underlying stock performs well and exceeds the strike price) in exchange for the income from the sale of the options (though there are design differences across products). Which can help mitigate (but not eliminate) losses on the underlying stocks while still gaining a certain level of exposure to relatively riskier assets.

Nonetheless, Huebscher argues that while covered-call ETFs might outperform in the short run in certain cases, they will tend to trail the returns of broad equity indexes over time (as the upside investors sacrifice by selling calls isn't offset by the option income), leading to relatively less wealth for an investor in the long run. For instance, while popular covered-call ETFs outperformed the S&P 500 in 2022 (e.g., while the Vanguard S&P 500 ETF [VOO] saw an approximately 18% decline, the JPMorgan Equity Premium Income ETF [JEPI] only fell by about 3.5%), these funds have trailed the market in the years since (e.g., VOO gained approximately 26% and 25% in 2023, and 2024, respectively, while JEPI only gained approximately 10% and 12.5% in those years).

Further, when looking at a selection of ten popular covered-call ETFs, Huebscher found that all of them trailed the annualized S&P 500 performance since their inception date (with the ETF with the longest track record trailing the index by an annualized 623 basis points). Notably, the longest-tenured ETF studied also trailed a global 60/40 portfolio in performance (with 6.8% annualized returns for the 60/40 portfolio and 4.67% for the ETF) and had a higher standard deviation, suggesting that those looking to dampen volatility could potentially do so and achieve greater returns with a relatively simple (and likely less expensive) stock/bond asset allocation rather than using a covered-call ETF.

In the end, while the income produced by a covered-call strategy might be attractive to investors, the limited upside available when using covered-call ETFs tends to overpower these benefits over time, which can lead to lower long-run returns than investing in the underlying assets (or potentially a mix of higher- and lower-risk assets). Which presents an opportunity for advisors to counsel clients (who might express interest in these popular products) to remain focused on their long-run goals (while perhaps exploring alternative ways to manage the client's risk tolerance and capacity!)

A Firm's Step-By-Step Process For Recruiting A New Advisory Firm Employee

(Daniel Yerger | MY Wealth Planners)

As an advisory firm grows, so too does its need to bring on additional staff, whether a client service associate, associate advisor, or other position. And given the importance of each hire (in terms of the costs involved in the hiring process and the new employee's fit within the firm's culture), implementing a structured hiring process increase the chances that the firm finds the best possible candidate.

Yerger describes the process his firm is using to hire an entry-level Wealth Planner Assistant to support the firm's operational needs. After determining the role he wanted to fill (an important first step to avoid hiring for a position that isn't needed!), he created a job posting (copied in full in the linked article) that provided an overview of the position (using plain language to help candidates understand whether it might be appropriate for them), compensation offered (including a salary range and benefits), common tasks of the position, minimum qualifications (focusing on only those qualifications that are truly required for the position), preferred qualifications, details about the hiring process (including the dates associated with each step), and a description of the firm.

The next step for Yerger was to screen the resulting 222 applications the firm received. To facilitate this process, he created a scoring rubric with key elements to differentiate the candidates (including locality, experience, education, whether they are verifiably real [through an analysis of their social media], and whether they actively showed interest in the position [e.g., by including a tailored cover letter for the position]). This winnowed down the field to approximately 35 candidates, whose resumes were then reviewed by Daniel and another employee on a 'blind' basis (e.g., anonymizing information on the resumes). This review allowed them to select 10 individuals (a much more manageable number) to invite for an in-person interview (as well as an invitation to conduct a work-style assessment). During the interviews, Yerger asked each candidate the same questions (written out beforehand) to obtain the same information from each of them. Finally, a candidate was chosen for an offer based on a holistic evaluation of both their interview and their resume (as certain candidates might exceptional interviewers but have a more limited resume than others).

Ultimately, the key point is that taking a methodical, intentional approach to hiring can not only make the process run more efficiently for the firm and help it identify the best possible candidate but also can ensure that candidates (who might apply for future openings!) are treated fairly and respectfully along the way.

Want To Attract Top Talent? Try These Comp Perks

(Sean Allocca and Griffin Kelly | The Daily Upside)

A prominent trend over the past several years has been the competitive landscape for advisor talent (which could accelerate as more members of the aging advisor workforce retire). This environment has led some firms to offer increasingly attractive salaries and pay packages to attract and retain a strong workforce. Nevertheless, some firms have found that many candidates and employees are looking for benefits and perks outside of salary and bonuses, giving firms an opportunity to stand out from the pack by offering a unique employee value proposition.

According to data from Charles Schwab's 2024 RIA Benchmarking Study, the most common perks offered include the opportunity to work on a remote or hybrid basis (offered by 75% of firms surveyed), flexible work schedules (70%), and providing investment management or financial planning services to staff (63%). Less-common perks (that might be valuable to firms with employees who prioritize them!) included health and wellness benefits (41% of firms), Paid Time Off (PTO) for community/pro bono service (36%), part-time work opportunities (36%), charitable donation matching (18%), and reimbursements for commuting costs (13%). Beyond these individual perks, firms can also make adjustments to 'traditional' benefits like PTO, for example by offering separate "family leave" days each year to give employees time to care for family members or others without having to use PTO days (that could have otherwise been applied to vacations).

In the end, financial advisory firms have a large menu of potential perks to choose from to attract and retain talent, which can be selected based on its unique circumstances (e.g., whether client meetings are typically held in the office or remotely could determine the extent of flexible workplace arrangements) and the preferences of its workforce!

Four Mistakes Advisory Firms Make When It Comes To Employee Compensation

(Angie Herbers | Nerd's Eye View)

Human beings respond to incentives, and as a result, compensation is one of the most influential drivers of employee motivation and is often used by employers as a way to guide their team's behaviors. Very frequently, though, employers overlook the fact that it is not actually the money itself that influences their employees but, rather, it is what the money offers to or makes possible for the employee that matters most. And it's those emotional connections to money that ultimately must be tapped effectively in order for compensation incentives to actually create the desired business outcomes.

There are four common mistakes that advisory firms tend to make when creating their compensation structures. The first is designing an incentive structure without a clear focus – or with a focus on too many objectives – as many firm owners try to tie too many metrics to compensation (e.g., revenue, and profit, and client service) rather than on prioritizing one main objective with a clear focus (and a better chance of meeting that objective) for all. A second mistake is using compensation as a way to adjust for benefits; either increasing pay to make up for benefits the company does not offer (e.g., higher pay for no health insurance… but then what happens if the firm adds health insurance later?) or reducing pay to compensate for benefits the company does offer (e.g., reduced pay in exchange for employer contributions to an employee's retirement plan…that the employer was probably going to make anyway for their own benefit!?). A third mistake that firm owners make is offering partnership rights as a form of compensation (i.e., not paying partners a salary for their active role in the business and letting net partnership distributions be the primary or sole compensation), as the income a partner receives for ownership and what an employee receives for work in the business reflect two very different functions.  And the last common mistake is neglecting to update the compensation structure over time, which should be reviewed and updated often to respond to the behaviors that the firm wants to influence (as the needs and demands of the business itself do tend to evolve over time as well).

When it comes to the actual drivers that make employees want to earn compensation, there are four basic feelings that serve as central motivators, and certain types of compensation offered can generally serve to satisfy these feelings for employees:  1) control (regular base salaries that employees can rely on receiving for the role they play in the company), 2) advancement (incentive-based pay that gives employees a sense that what they do is helping them advance through the ranks), 3) assurance (benefits offered to convey that employers care about their employees and are taking measures to provide care for them), and 4) achievement (compensation tied to a career-track plan). And for employees to develop trust in their employers, they need to have at least some of these feelings satisfied by the compensation they receive for the work that they do.

Ultimately, the key point is that if employers take the time to analyze their team's compensation needs and decide which of the four motivational drivers are most important to their employees (and it may be the case that all four are important to a firm), firm owners can better understand which compensation structures would be most beneficial to implement, and why. And when effective compensation structures are in place that satisfy employees' motivational needs, the result often produces more streamlined employee management… not to mention inevitably enhancing the firm's culture and overall morale, as well!

Navigating The Intersection Of Money And Purpose

(Jacob Schroeder | The Root Of All)

Given research showing that income is positively correlated with happiness, individuals might be encouraged to pursue ever-greater income and wealth to promote their overall wellbeing. At the same time, separate research indicates that tying one's self-worth to financial success can lead to greater life dissatisfaction and anxiety (possibly because there's always 'more' money that can be made), suggesting that money alone is not enough to provide for a life of meaning and purpose.

However, attempting to untangle the connections between money and purpose can be a tricky endeavor. One the one hand, it's clear that money by itself is insufficient to buy purpose. For instance, gambling on the latest meme stock can potentially lead to significant financial gains but not necessarily stronger friendships or mental health (and could detract from these if all of one's time is spent trying to identify the 'next big thing'!). On the other hand, money can help individuals nurture what gives them purpose. For example, having more money can allow an individual to pursue interests (whether hobbies or a new business idea) and relationships that can drive purpose and that they might not be able to take on if they needed to work long hours simply to get by. Further, having sufficient wealth can allow individuals to give some of it away, which has been shown to provide a significant boost to happiness (more so than spending on oneself).

Altogether, while financial advisors are well-positioned to help clients grow their wealth and achieve their financial goals, linking this financial journey to what brings meaning and purpose to their lives can potentially help them lead more fulfilling lives (particularly after retirement, when the sense of purpose from paid work is no longer present). Further, while financial advisors tend to show high levels of wellbeing, according to Kitces Research (in part due to their ability to improve the lives of their clients!), they could also potentially look inward to consider whether their own professional and personal lives are aligned in a way that promotes a deeper sense of meaning and fulfillment.

The Superpower Of Saying No

(Blair Duquesnay | The Belle Curve)

Many professionals face an ever-growing list of demands on their time, whether from work, family, hobbies, or volunteer pursuits. And while it can be tempting to always seek out 'more', doing so can eventually lead to burnout and the loss of appreciation for what each of these activities can provide.

Which suggests that taking a step back to consider whether saying 'no' to a certain activity might be worthwhile. For instance, an individual with young children might choose to take a less stressful position at work for a few years to balance their mental capacity. Or someone looking to make a big professional move (e.g., starting a financial planning firm?) might reduce the hours they spend volunteering for a couple of years. For Duquesnay, her substantial professional and family obligations led her to resign from a non-profit board so she could focus on what's most important to her at this point in her life (which has also given her the courage to say 'no' to additional opportunities that have presented themselves as well).

Notably, this concept can also apply to the financial planning process, as clients who pursue an abundance of goals might find that their attention is frequently divided and that their goals end up only partially fulfilled. Which might suggest a role for advisors in helping clients winnow down their list of financial and lifestyle goals to what is most meaningful to them, potentially increasing the odds that they achieve them in the process (while leaving the door open for new priorities that might emerge over time) and giving them room to enjoy the journey along the way!

Do You Have A "Deeper Yes"?

(Jesse Cramer | The Best Interest)

Given that both are finite resources, being able to budget one's time and money to focus on what's most important can be a productive endeavor. Nevertheless, given that this exercise necessarily involves saying 'no' to certain purchases or activities (that are not necessarily easy to cut off of one's list), doing so is not necessarily easy.

One way to facilitate the ability to focus on what's most important is to explore one's "deeper yes", or the core sense of purpose that can drive decision-making. For example, a client might have to decide between buying a new car and taking their extended family on a major vacation. While both choices have potential upsides, if they determine that their "deeper yes" is spending more quality time with their family, the decision can become much clearer. This concept can apply to advisors as well. For instance, having a clear ideal target client archetype (whether in terms of service needs, stage of life, personality fit, or otherwise) can make it easier to say 'no' to prospects who might offer the potential of additional revenue but also come with additional costs, whether in terms of the time needed to meet their planning needs or the emotional burden of dealing with a challenging personality (though this can be easier to do when an advisor already has sufficient revenue to 'keep the lights on'!).

In the end, in a world of infinite wants and finite resources, a "deeper yes" can serve as a helpful filter for both advisors and clients when making difficult choices and ultimately lead to a more meaningful (and perhaps less stressful) 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.