Weekend Reading For Financial Planners (July 22-23)

RIAs Leaned On Organic Growth To Weather 2022, Schwab Study Shows

(Jeff Benjamin | InvestmentNews)

In years of strong market performance, financial advisory firms can see their Assets Under Management (AUM) grow whether or not they add client assets through organic growth (i.e., onboarding new clients or bringing on additional assets from current clients) or inorganic growth (i.e., gaining client assets through acquisitions). But 2022 was a very different year, with the rare combination of both equity and bond markets seeing sizeable declines, potentially putting a dent in client portfolios and overall AUM for many firms. Nevertheless, a recent study shows that many RIAs were able to leverage organic growth to mitigate the impact of this weak market performance.

According to Charles Schwab's 2023 RIA Benchmarking Study, which is based on a survey of 1,300 RIAs with custody relationships at Schwab and TD Ameritrade, while respondents saw an average 7% decrease in AUM in 2022, average client growth of 6.2% helped prevent AUM from falling further. Firms with less than $250 million in AUM saw an average AUM decline of 5.1%, with 6.2% net organic asset growth (down from 20.1% AUM growth and 9.4% net organic asset growth in 2021), while larger firms experienced a 7.6% drop in AUM and net organic asset growth of 4.1% (down from 21.3% and 7.8% growth, respectively, in 2021).

In addition, Schwab found that "Top Performing Firms", the top 20% of firms across 15 metrics, saw even stronger net organic asset growth at 10.8%, leading these firms, on average, to see no change in their AUM in 2022. Measured on a 5-year compound annual growth rate basis, these firms saw double the revenue growth of other firms and nearly triple the rate of client and net organic asset growth. Among the factors that differentiated these firms from others, top performers were more likely to have a written strategic plan (79% of top firms compared to 51% of other firms), written succession plans (74% compared to 65%), documented client profiles (79% compared to 63%), documented client value propositions (76% compared to 59%), and marketing plans (54% compared to 39%).

The study also asked firms about their top priorities for the coming years. Perhaps unsurprisingly, given the challenging market environment, growth was listed as the top priority among respondents, with recruiting talent (which took the top spot in last year's study) coming in 2nd. In addition to organic growth opportunities, some firms also flagged their interest in inorganic growth, with 38% of firms with more than $1 billion in AUM and 26% of firms with more than $250 million actively seeking to buy another RIA. In terms of hiring, 77% of firms reported making a hire in 2022, with 2/3 of those hires being for new positions (rather than replacing departed employees), and 3/4 of firms said they plan to hire in 2023 (with the median firm planning to hire 4 new roles during the next 5 years).

Altogether, Schwab's benchmarking study demonstrates the importance of organic growth in helping RIAs weather challenging market environments. Which suggests that while firms can see their AUM and revenue grow as a result of client portfolio appreciation during periods of strong market conditions, creating the conditions for strong organic growth (whether through creating a marketing plan, documented client value propositions, or other features associated with the identified top performing firms) can not only further boost growth when market returns are favorable, but also to help blunt the impact of portfolio losses when the next downturn arrives!

Investment Adviser Numbers Escalate While Ideas For Stronger Oversight Remain Stuck

(Mark Schoeff | InvestmentNews)

As more advisors have adopted the Registered Investment Adviser (RIA) model, the burden of the SEC and states to regulate these firms has increased as well. For instance, the Securities and Exchange Commission (SEC) currently oversees 15,000 RIAs and 900 new investment advisers registered with the SEC in 2021 alone. However, SEC examination staff has increased only 4% since 2016 (while the number of SEC-registered RIAs has cumulatively grown by 25%), challenging the regulator's ability to maintain its 14% examination rate – a pace of examining each RIA an average of only once every 7 years.

This pace of examinations has led to calls over the years for potential changes in the regulation of RIAs – with concerns that a once-every-7-years examination rate isn't realistically high enough to detect fraudsters in a timely manner – including the possibility that a Self-Regulatory Organization (SRO) could be employed by the RIA community to ease the burden on the SEC. In fact, this idea was proposed in a bill more than a decade ago that would have opened the door for FINRA (the SRO that regulates broker-dealers) to oversee investment advisers as well. However, the bill never came up to a vote in the House Financial Services Committee, thanks in part to pushback from RIA industry representatives, who argued that regulatory costs on RIAs (many of which are small businesses) would increase under an SRO's oversight.

More recently, the SEC's Investment Advisory Committee (IAC) on June 22 introduced a proposal recommending, among other things, that the SEC permit third-party examinations of RIAs to increase the pace of examinations of RIAs, perhaps moving from a 7-year cycle to every 4 or 5 years (effectively increasing the examination rate from 14% to 20% to 25%), with higher-risk firms being examined even more frequently. And while third-party exams are not the same thing as an SRO for investment advisers, some observers have raised similar objections, from the potential for an SRO to be less rigorous than the government's own regulators, to the potential for increased costs for RIAs (notably, the IAC also recommended that the SEC request Congressional legislation that would authorize user fees for SEC-registered investment advisers to fund the third-party examiner initiative, which would mean every SEC-registered investment adviser would have an additional annual cost of doing business).

The key point is that as the number of RIAs grows, so too does the required capacity to regulate them in order to protect the broader public. And while it is unclear whether the SEC will adopt the IAC's proposals (which will now be subject to a public comment period), they could potentially create increased burdens for RIAs, both in terms of the frequency of examinations (which require time from firm owners and staff to meet examiners' requests for documentation and other information) and in terms of the regulatory fees they might have to pay to support the SEC's expanded-exam program (which then raises further questions about how user fees would be structured, and whether small firms would at least be able to pay less than larger firms with more size and resources).

In the end, though, the SEC will ultimately have to decide whether the potential benefit to the public of an increased pace of RIA exams (to hopefully spot fraudsters and remove them more quickly) can justify these increased costs for the firms themselves (which could potentially be passed on to clients in the form of higher advisory fees and raise the cost of advice for consumers?).

Wealthy Investors Tend To Pick the First Advisor They Meet

(Holly Deaton | RIAIntel)

When shopping for a new appliance or other major purchase, a consumer might browse the options at multiple stores to find the right fit and the best deal. Similarly, given the potential cost and high level of trust required, one might expect prospective financial planning clients to similarly comparison shop to find the best advisor for their specific needs. However, a recent survey suggests that this isn't the case for many prospects.

According to a survey by Dynasty Financial Partners and Absolute Engagement of 1,000 current financial advisory clients with a minimum of $500,000 of investible assets, 57% of respondents said they chose the first advisor with whom they spoke. In terms of finding their advisor, 46% said they were referred by a family member, friend, or colleague, while 23% were referred by a professional (e.g., an accountant or lawyer), and 23% used social media, blogs, or other online sources. Notably, these results were somewhat different for respondents under age 45, who were about 3X more likely to have found their advisor through online sources rather than via a referral. In addition, younger clients were more likely than others to seek out an advisor because of a specific life event (e.g., receiving an inheritance); this reason was cited by 54% of respondents between ages 35 and 44, compared to 35% of the broader survey cohort.

Overall, these results highlight the potential value for growing firms of building a strong client referral pipeline as well as leveraging Centers Of Influence (COIs) such as attorneys and accountants, particularly for firms whose target clientele skews older. Further, firms looking to work with younger clients, who appear to rely more on online sources of information, could consider ways to boost their online presence, whether it is by maintaining a website that shows how it can solve these individuals' pain points, creating valuable content, or by building a social media presence!

Execs Call For Mandatory Reporting Of Employee Wellbeing Metrics

(Bloomberg News)

The current tight labor market has led many companies to consider how they can attract and retain their employees. The first step, though, for companies is to consider measuring how employees feel about their job and their overall wellbeing. But while some companies compile this data for internal purposes, many do not publish it, making it hard for current and prospective employees to make comparisons between firms.

According to a study by research firm Deloitte, 85% of C-suite executives believe organizations should be required to publicly report their workforce wellbeing metrics (e.g., length of work hours, work-related illnesses, etc.), which they believe could build trust between employees and organizations and help attract talent. Nonetheless, only about half said their companies publicly report their wellbeing metrics. Further, there appears to be a disconnect between how executives view their employees' wellbeing and workers' self-reported results. For instance, while 33% of employees said their mental wellbeing improved last year and 25% said that it had worsened, executives surveyed assessed that 77% of employees had seen improvement and only 3% were worse off. Similar disparities were seen for employees' physical, financial, and social wellbeing as well.

There also appears to be a disconnect between employee expectations for how their companies will promote their wellbeing and whether companies are actually implementing these measures. For example, while 75% of employees expect their employer to provide opportunities to develop their skills and progress in their careers, only 44% of executives surveyed said they do so. Similar differences were seen in other metrics, including practices to support workplace health (e.g., ensuring equitable pay), and helping employees feel connected to a sense of purpose and belonging.

In the end, while executives appear to recognize the importance of employee wellbeing for their company's (and their employees') health, they appear not to have a full understanding of what their employees are currently feeling. And amidst the current competitive environment for advisor talent, firms that focus on measuring and taking steps to improve employee wellbeing could be at an advantage in the years ahead!

How Taking A Vacation Improves Your Wellbeing

(Rebecca Zucker | Harvard Business Review)

Vacations can not only be enjoyable at the time, they also can create memories that last for years. But while someone planning a vacation might focus on the location and activities (whether it is heading to the beach or exploring a new city), just the fact that they are going on vacation can bring mental and physical benefits.

No matter what it entails, going on vacation provides an opportunity to get away from the day-to-day grind of the workplace, which can reduce stress and cognitive fatigue as well as boost creativity (e.g., Lin-Manuel Miranda conceived of his hit musical Hamilton while on vacation). And while some individuals might resist going on vacation (perhaps fearing that they will not be seen as dedicated as other workers), one study found that using all of one's vacation time actually increases the chance of getting a promotion or raise, with a separate study indicating that for every additional 10 hours of vacation time that an employee takes, their year-end performance improved 8%. In addition, this latter study found that frequent vacationers were significantly less likely to leave their firm, suggesting that vacations are valuable not only for employees, but for their companies as well. And going beyond the potential professional benefits, vacations can also improve physical wellbeing (e.g., by getting more sleep or by engaging in outdoor activities) and spiritual wellbeing as well (e.g., by giving an individual the time to step back and consider their broader goals).

In sum, while it might not be hard to convince someone that going on a vacation is a good thing, the millions of days of vacation time that go unused every year among Americans suggest that many individuals are forgoing opportunities to get away from the office. Which could ultimately be counterproductive, given the research indicating not only that vacations can improve one's mental wellbeing, but also their professional prospects as well, and also suggests that companies that encourage their employees to take more vacation days could develop a happier, more productive workforce!

The 6 Employee Wellness Trends Of 2023

(Jennifer Goldman | Advisor Perspectives)

The work-life challenges created by the pandemic have led some companies to consider how to better support their staff to promote their wellbeing (and employee retention). While executives might first consider 'traditional' measures like offering more pay or vacation time (both potentially helpful things!), recent years have seen the growth of additional opportunities to promote employee wellness.

For example, some companies offer holistic wellness programs that address the physical, mental, and emotional wellbeing of employees and can include elements such as mindfulness training, nutrition counseling, financial wellness support (perhaps an in-house benefit for advisory firm employees?), and access to mental health resources. One option is to engage with an Employee Assistance Program (EAP), which provides employees with confidential support services, such as counseling, financial advice, legal assistance, and stress management tools. An alternative approach is to leverage technology-driven wellness solutions, such as digital platforms, wearables, and wellness apps, to promote healthier habits (e.g., sleep and exercise).

Notably, companies do not necessarily have to engage with outside providers to promote employee wellness. For instance, firms can promote employee wellbeing by offering flexible work arrangements. Notably, such arrangements do not have to be 'all or nothing' (e.g., full-time remote work); rather, a range of options are available (from offering a compressed workweek to flex time) that can meet the needs of companies and their employees alike. Also, providing multiple outlets for employee feedback (e.g., focus groups, surveys, or employee resource groups) can help a firm better understand their employees' needs and concerns, and adjust their wellbeing offerings accordingly.

Ultimately, the key point is that firms that do not focus on their staff's wellness might fall behind when it comes to employee performance and retention. Which means that firms could stand to benefit not only by taking stock of where their workers stand today, but also by implementing formal wellness programs or other measures to improve employee wellbeing!

The Real Pros And Cons Of Having A Nice Car

(Katie Gatti Tassin | Money With Katie)

For some individuals, buying expensive goods comes easy (whether or not they can actually afford it). But for others, spending on 'luxury' goods does not come naturally (even if they could afford to), whether because they are naturally frugal or because they would prefer to take advantage of the 'miracle' of compound interest and save today in order to have a higher standard of living in the future.

Despite previously writing about the (negative) financial impact of having an expensive car, Gatti Tassin recently purchased a Porsche that cost more than $66,000. While it no doubt was an expensive purchase, she finds that she gets joy every time she gets in the car and is reminded of what she accomplished to buy it (she enjoys the thrill of driving it as well). Further, the Porsche is the most 'affordable' vehicle she has purchased as a percentage of her income (which has grown to the point that she and her husband have a 70% savings rate), making the decision easier.

On the negative side, she has found that having a more expensive car requires more of her attention and has led to an increased level of anxiety about something bad happening to it. For instance, on a recent night when the weather forecast was predicting hail, she decided to move her car to a parking garage so it would not get damaged. She also spends much more time maintaining the car's appearance than she might with a lower-cost vehicle (though she takes pride in doing so). While not necessarily quantifiable, these mental and time costs add to the hard dollars on the car.

In sum, buying any luxury good, whether it is a car or otherwise, is both a financial and emotional decision. Which suggests that financial advisors can play a key role not only in helping clients assess whether they can 'afford' to make a certain purchase, but also in exploring how doing so would affect their ability to achieve their broader goals!

The True Cost Of Owning A Second Home

(Kristin McKenna | Darrow Wealth Management)

For many individuals, owning a vacation home is an enticing proposition. Some might be attracted by the potential financial benefits of doing so (e.g., earning income from renting it out or not having to pay for hotels or a rental home on vacation), while others might be interested for emotional reasons (e.g., having a place for the whole family to meet up, even after the kids move out of the house). Nonetheless, it is also important for potential homebuyers (and their advisors) to consider the costs associated with a second home as well.

The largest cost involved in buying a vacation home is likely to be the purchase price of the home itself. A cash purchase would come with the opportunity cost of not being able to invest those funds (or spend them on something else), while obtaining a mortgage comes with an interest cost (which could be burdensome considering today's elevated rates compared to previous years). In addition, prospective buyers can factor in property tax and insurance costs (the latter of which could be particularly expensive if the home is in an area prone to natural disasters). Also, buyers will also have to consider the costs of furnishing the home, from appliances and furniture, as well as ongoing maintenance costs. Further, in addition to the financial costs, owning a second home can generate time costs as well, such as the time needed to find appropriate service professionals to maintain the vacation home (or the time taking care of it themselves), which can be tricky to handle if the property is far away from the owner's primary home (alternatively, hiring a property management service would cost additional money).

Ultimately, the key point is that while purchasing a vacation home might be a goal for many financial planning clients, they might not consider the full scope of costs involved in doing so. Which means that advisors can add significant value by helping clients plan well in advance for the purchase and by helping them understand how doing so would affect their other financial goals and the projected success of their overall financial plan!

Overdoing Delayed Gratification

(Life After The Daily Grind)

The ability to delay gratification is often seen as a virtue, whether it is saving money (that could otherwise be spent today) for retirement or maintaining a healthy diet (forgoing the opportunity to enjoy junk food today in the hopes of having a healthier life in the future). Because while those who constantly live in the present (i.e., the You Only Live Once [YOLO] lifestyle) might have fun today, their finances and health might not be able to support this lifestyle well into the future.

Nonetheless, it is possible for one to engage in too much delayed gratification. For instance, while it might be financially healthy to save for the future, prioritizing savings over all other spending preferences could lead to a limited or unhappy life today by denying oneself of enjoyable experiences (e.g., a vacation or a meal out with friends). Further, it is important to recognize that because no one is guaranteed to live to a certain age, an individual might never be able to actually use all of their savings if they die prematurely. And so, rather than be at one delayed gratification extreme or the other, taking the middle road could provide a balance between enjoying oneself today and making investments toward the future (whether in terms of finances or otherwise).

Financial advisors can probably recall clients who have been at both ends of the delayed gratification spectrum, from those who spend in a way that will likely lead to them depleting their assets, to those who have a hard time transitioning from 'saving' mode to 'spending' mode. But by helping their clients consider both their present and future selves (e.g., by using George Kinder's Life Planning questions or other tools to promote both near- and long-term thinking) advisors can help them strike a sustainable balance that allows them to live their best life today and in the future!

Pick 2

(Daniel Yerger | MY Wealth Planners)

While there are many potential career trajectories for new financial planning graduates and career changers, one popular path is to work at an established firm for a certain period of time to build technical skills and a client base, and then eventually leave to start one's own firm (taking the skills and, potentially, the clients with them). This might seem like a good deal for the planner, but a firm is unlikely to see it that way, as they will be training and paying the advisor only for them to leave, potentially taking firm clients (and their revenue) with them.

Because of this dynamic, both advisors and firms tend to make sacrifices to protect their interests. While an advisor might like to be well compensated, provided with clients, and have 'ownership' over these client relationships (i.e., clients could follow the advisor to a new firm, if they choose to do so), Yerger argues that the advisor is unlikely to find such a job (given the sacrifices a firm would have to make to offer all 3 features) and instead will have to settle for 2 out of the 3 characteristics. For instance, an advisor could choose a job that offers good compensation and is provided with clients but does not offer 'ownership' over the client relationship (often through the use of non-compete or non-solicit agreements that prevent the advisor from working with 'their' clients for a certain period after departing the firm). Alternatively, the advisor could choose a position that is well compensated and offers ownership of the client relationship but does not provide the advisor with clients (e.g., taking a 'sales'-type job where the advisor spends much of their time trying to obtain clients) or a position where they are provided with clients and 'own' the relationship but are not compensated well for the amount of work they put in (e.g., a 'call center' job where the advisor works with a high volume of low-revenue clients).

Similarly, Yerger suggests that advisory firms have to pick 2 of the following 3 features: low wage costs, client retention, and staff loyalty. For example, a firm that has strong client retention and staff loyalty will likely have to pay premium costs to attract and retain staff (notably, this is the path Yerger has taken with his firm). Other options include having low wage costs and high client retention at the cost of low staff loyalty (as these employees will feel overworked and underpaid), which forces the firm to recruit and onboard new staff members often, or to have low wage costs and high staff loyalty but poor client retention (perhaps by offering low-value services that do not take much staff effort).

In the end, a mutually beneficial relationship between firms and their advisors is likely to require some level of sacrifice from each side as well as clear communication upfront about both sides' expectations for the position both now and into the future. Doing so could not only lead to better matches between firms and advisors, but, as Yerger notes, also could benefit the financial advice industry as a whole, which, given the number of expected retirements among senior advisors, is likely going to require an influx of advisor talent to profitably serve a broad base of clients well into the future!

How To Evaluate A Firm Beyond The Obvious

(Jason Diamond | Wealth Management)

When an advisor is considering moving to a new firm, some of the more obvious considerations include a potential pay bump, the new firm's tech stack, and whether the new firm will require the advisor to move to a new city. But Diamond suggests that advisors thinking about a switch also look 'under the hood' of the potential new firm to get a better sense of whether the move would make sense in the long run.

For instance, an advisor might want to know who will 'own' client relationships at the new firm. For instance, the advisor might consider whether they have to sign a non-solicit agreement, and, if so, whether it applies to all of the advisor's clients or perhaps just those that they gain after joining the new firm. Advisors might also consider where the new firm might be heading in the future. For example, it could be helpful to know whether the firm has a succession plan in place (and whether the advisor might be able to be a part of it) or if the firm might be bought by a larger firm in the near future (in which case the current company culture could change significantly). On a more practical level, the advisor can also investigate whether the new firm has strong referral and growth mechanisms from which they could benefit, as well as a strong operations team and tech stack (which could allow the advisor to spend more time on higher-leverage activities).

In the end, transitioning between firms is a major endeavor that can entail a serious amount of work and risk (particularly if the advisor might not be able to solicit their previous clients for a certain period). With this in mind, taking a more holistic and detailed look at a potential new firm can increase the chances that the advisor will make the best decision, whether it is to make the move or stay where they are now!

5 Ways To Future-Proof Your Career In The Age Of AI

(Dorie Clark and Tomas Chamorro-Premuzic | Harvard Business Review)

The introduction of increasingly advanced Artificial Intelligence (AI) platforms has brought excitement for the possibilities it might bring, from advances in medical technology to a more efficient workday. At the same time, it has raised concerns as well, including the possibility that it could displace a significant number of workers, including those in 'creative' fields such as graphic design that were previously thought to be more resistant to being replaced by AI tools. With this in mind, Clark and Chamorro-Premuzic suggest a series of steps workers can take to demonstrate value in a way that will be difficult to replicate using AI.

For instance, the authors recommend taking steps to improve one's 'personal brand'. Because while AI tools can generate significant quantities of content, this output can often come across as generic. Because of this, those with strong personal brands will be sought out for insights that go beyond 'predictable' or boilerplate responses (which are often provided by AI tools). Relatedly, being viewed as a recognized expert in one's field can increase one's job security; because AI tools sometimes will 'hallucinate' and give incorrect responses, being seen as a reliable source of information (and perhaps someone that will be sought out to vet AI-generated research) could enhance one's job security. Another opportunity to stand out is to double down on the 'real world', for example, by engaging in research that involves interviewing other humans or by going to conferences or other networking opportunities, options that AI tools do not necessarily have.

Notably, engaging with AI tools does not have to be a zero-sum game where either human workers or AI tools 'win'. Rather, for financial advisors or other professionals, leveraging the abilities of AI tools (from summarizing large amounts of text to generating ideas for blog content) while offering the skills that only humans with certain expertise can provide (at least for now), could not only lead one to keep their job, but to increase their efficiency and productivity in the process!

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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.