Weekend Reading For Financial Planners (June 15-16)

Advisor Teams Best Solos On Per-Advisor AUM, Client Size (But Might Not Be For Everyone): Study

(Leo Almazora | InvestmentNews)

While many financial advisory firms start as solo shops (with one lead advisor, perhaps assisted by an associate advisor, paraplanner, and/or client service associate), some are created as (or evolve into) advisor teams, either working in their own 'silos' (i.e., being solely responsible for their own clients but sharing back-office resources) or in an 'ensemble' (i.e., treating clients as 'belonging' to the firm rather than to a specific advisor). While multi-advisor firms might have the capacity to serve a larger number of clients than solos (given the presence of more advisors to serve these clients), an open question is whether they can do so more efficiently and can therefore grow faster.

According to a new white paper from research and consulting firm Cerulli Associates and broker-dealer platform Osaic, firms operating in a team structure appear to be leveraging their efficiencies to serve higher-net-worth clients and grow faster than solo firms. According to the paper, team-based practices have a median Assets Under Management (AUM) of $100 million per advisor, compared to $72 million for solos, while the average client size for team-based firms is $1.6 million, compared to $1 million for solo advisors. The researchers attributed these advantages in part to teams' ability to benefit from the combined experience of their advisors (who might have expertise in different planning areas), which allows them to offer more financial planning services to clients (4.7 on average, compared to 4.5 for solos) and more services geared toward high-net-worth clients (2.9 versus 2.2). Altogether, team-based firms saw an average of $21 million in net asset inflows in 2023, compared to $8 million for solo practices.  

Notably, one important caveat to the results is that while advisor teams appear to have an advantage over solos when it comes to growth (though they do come with challenges, including building culture, establishing leadership structures, and deciding on a compensation plan), there could be some selection bias at play, as advisors who remain as solos might be happy at the earnings level they're at (with an average of $72M of AUM per advisor in the study, that's still a very good income!) and simply prefer to not grow beyond a certain level. Whereas growth-oriented advisors will inevitably hit their own capacity threshold and have to seek out teams (and the efficiencies they offer) to scale further. Which means teams may not make advisors grow faster, and instead that faster-growth oriented advisors typically end up in teams because their own capacity limitations eventually force them to do so?

Either way, though, the point remains that in the end, advisory firms on a path to growth are almost 'inevitably' on a path to growing a team (unless they very intentionally choose to only rotate bigger clients in and smaller clients out to manage capacity). And advisor teams do appear to be operating more efficiently (from a productivity perspective) and more successful in attracting more affluent clients (with capacity to offer more services), for those who do choose to pursue the teams route?

What Private Equity Interest In RIAs Means For Advisors And Their Clients

(Ian Salisbury | Barron's)

Financial planning firms can make quite successful businesses, given high client retention rates and recurring fee revenue. And while many firms remain independent (or decide to fold into another RIA), the industry in recent years has attracted the attention of Private Equity (PE) firms, which see opportunities to provide an infusion of cash into RIAs that can be used to improve a firm's efficiency (e.g., through better technology) and to fund acquisitions of smaller firms (that could benefit from centralized back-office operations within a larger firm). This extra capital in the industry can also be a boon to firm owners looking to sell (with PE-backed firms accounting for a strong majority of RIA mergers last year), as competition amongst PE-backed buyers can sometimes drive sale prices higher (perhaps higher than what internal successors might be able to pay). Further, clients might benefit if their advisor could spend less time on back-office tasks and more time conducting planning analyses.

Nonetheless, amidst these potential benefits, there are also potential drawbacks for the parties involved. To start, while selling a firm naturally involves a loss of independence for the firm owner, pressures can be different when selling to a PE-backed firm. For instance, given that PE firms sponsor their own funds, advisors under the PE umbrella might feel pressure (perhaps implicit?) to use them in client portfolios, a conflict of interest that would have to be managed (and possibly planting a seed of doubt in some clients' minds that their advisor is operating in their best interest). In addition, the 'endgame' for the PE firms themselves is unclear; while they often look to quickly increase the value of companies they invest in and then 'exit' through an IPO or sale of their stake, large RIAs haven't found significant traction in public markets and some PE firms have been disappointed in interest from other private buyers in their RIA investments. So while the RIAs themselves remain profitable, PE firms might find themselves holding onto their investments longer than they imagined.

Ultimately, the key point is that while an infusion of PE capital has juiced mergers and acquisitions activity in the RIA space, the long-run effects of this trend for all parties – advisors, their clients, and the PE firms themselves – remain unclear. Which emphasizes the value for firm owners who are considering selling their firm (whether to a PE-backed firm or otherwise) of looking beyond the headline purchase price and also evaluating the implications of the sale for themselves, their employees, and their clients to ensure it meets all of their goals?

Self-Directed Investors Still Want To Talk To An Advisor: Cerulli

(Jake Indursky | Citywire RIA)

While in the past, working through a broker or advisor was a necessity for consumers to access the equity and fixed-income markets, investors today have a wide range of self-directed options, from controlling the asset allocation in their workplace retirement accounts to opening a taxable brokerage account (where they can pay little to nothing not only to maintain an account but also to trade!). Nonetheless, given the wide range of services offered by advisors beyond portfolio management, many 'DIY' investors eventually reach out to a human advisor for advice.

According to a recent study by research and consulting firm Cerulli Associates, 55% of those surveyed (investors with at least 1 self-directed account) said it was at least somewhat important to be able to talk to a human specialist linked with their account, while 42% of respondents said they would be at least somewhat likely to pay for this service, suggesting that many 'DIY' investors are not wedded to handling their investments themselves. One opportunity to do so could be for an advisor to provide 'just in time' advice to an investor with a pressing planning issue, which could demonstrate the value of a relationship with a human advisor.

Altogether, Cerulli's study indicates that self-directed investors are open to human advice (perhaps, at least initially, on an advice-only basis?), though independent advisors might have to compete with the companies where DIYers hold their accounts (e.g., Charles Schwab, Vanguard), which are increasingly offering human advice services to customers on their platforms. At the same time, it's possible that users of these advice services could eventually turn to an independent advisor when their financial situations get complicated enough or if they need specialized services that the digital platforms might not be able to offer (suggesting that advisors who are able to demonstrate how they are 'different' could find success in an increasingly competitive market for financial advice!).

Practical Considerations For Implementing (Partial) Roth Conversions For Clients

(Wade Pfau, Joe Elsasser, and Steven Jarvis | Advisor Perspectives)

Roth conversions are, in essence, a way to pay income taxes on pre-tax retirement funds in exchange for future tax-free growth and withdrawals. The decision of whether or not to convert pre-tax assets to Roth is, on its surface, a simple one: If the assets in question would be taxed at a lower rate by converting them to Roth and paying tax on them today, versus waiting to pay the tax in the future at higher rates when they are eventually withdrawn, then the Roth conversion makes sense. Conversely, if the opposite is true and the converted funds would be taxed at a lower rate upon withdrawal in the future, then it makes more sense not to convert.

Nonetheless, determining the tax that a client will pay on a Roth conversion today (or on a distribution from a traditional account in the future) is not just a matter of looking at their marginal Federal income tax bracket, but rather the broader range of taxes they might pay that impact their marginal tax rate, including Net Investment Income Tax (NIIT), losing subsidies based on the tax return (e.g., ACA premium subsidies), or income-related Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges. When taking these elements together, an advisor can estimate an "effective marginal rate" (EMR) to represent the net cost on the next dollar withdrawn from a traditional IRA (both now, and in the future). This can be a helpful tool to determine if, when, and how large of a (partial) Roth conversion might be advisable. For instance, while clients might hesitate to engage in a partial Roth conversion that led to them exceeding an IRMAA threshold (and be subject to a [higher] surcharge), it's possible that this could still make sense (as future Required Minimum Distributions [RMDs] from the account could put them in a yet-higher-still marginal tax bracket, would increase the amount of Social Security benefits subject to tax, and/or be subject to NIIT so that the future EMR would be higher than the EMR on the conversion today).

In addition to the decision of whether (and how much) to convert in a given year, another consideration is when to complete the Roth conversion. One option is to wait until November or December so that the advisor has a better idea of the client's income picture for the full year and the EMR on a potential conversion. However, waiting until the end of the year could lead the client to miss out on certain benefits from converting earlier in the year. For instance, given that markets tend to rise, converting earlier in the year means that the converted funds will grow in the (tax-free) Roth rather than the (tax-deferred) traditional account. Further, a market downturn that occurs during the year could represent an attractive opportunity for conversion when the prices of assets in the traditional IRA are (temporarily) depressed. With these factors in mind, a potential option is to take a 'barbell' approach, estimating the desired full-year conversion amount, converting some at the beginning, and being opportunistic with the remaining conversion amount (whether taking advantage of a market downturn or waiting until the end of the year).

Ultimately, the key point is that given the fact that many clients have a significant percentage of their retirement assets tied up in tax-deferred accounts, leveraging (partial) Roth conversions can be an attractive strategy to reduce their lifetime tax bill (and perhaps the tax paid by their beneficiaries!). And given the many practical considerations that go into the decision of when and how much to convert in a given year (that can affect the overall tax savings the client receives), this strategy offers a way for financial advisors to add significant (hard dollar) value for their clients!

Why Portfolio Rebalancing Might Be Sub-Optimal For Retirees

(Rajiv Rebello | Advisor Perspectives)

A common task for financial advisors within the investment planning domain is rebalancing client portfolios, which is typically done to reduce volatility resulting from portfolio 'drift'. For instance, if a client starts with a portfolio consisting of 60% equities and 40% bonds, strong equity returns over time could make this asset allocation 'drift' to perhaps 80% equities and 20% bonds, which could lead to increased portfolio volatility (given that equities historically have had greater volatility than bonds). With this in mind, rebalancing a portfolio back to its target allocation (possibly over set time periods or when the asset allocation drifts beyond a preset limit) can counteract this 'drift' and the increased volatility it can introduce. And while portfolio rebalancing can be done throughout a client's life, it could be particularly important as they near and begin retirement, a time period when the downside effects of sequence of return risk (i.e., if early returns are too low for too long, ongoing withdrawals can deplete the portfolio before the 'good' returns finally arrive) are particularly acute.   

With sequence risk in mind, an advisor might decide to regularly rebalance the portfolios of clients nearing and in the first several years of retirement (particularly if the equity portion is above its target allocation) to mitigate sequence risk. Nevertheless, Rebello suggests that because equities tend to offer higher returns over time and because a retiree's portfolio might need to support them for a retirement of 30 years or longer, such rebalancing (that tends to reduce the allocation to equities, given that they tend to return more than bonds over the long run) might be sub-optimal. For instance, running an analysis of 1,000 scenarios based on a 55-year-old couple with $2.8 million in assets, a portfolio allocated to 60% stocks and 40% bonds, and desired annual withdrawals of $200,000, he found that the retirement goal was met in 77% when rebalancing annually and a nearly identical 76% of scenarios when no rebalancing is done. However, the after-tax median portfolio value at age 95 when rebalancing was approximately $6.1 million, less than the $7.7 million median portfolio value when no rebalancing is undertaken and the equity allocation is allowed to drift higher over time.  

Notably, in the previous analysis, while withdrawals when rebalancing were taken so that the portfolio returned to its 60/40 allocation (i.e., by selling equities when they performed better than the bonds in the portfolio), the no-rebalance scenario took withdrawals based on the prevailing allocation percentages in equities and bonds (i.e., if the portfolio moved to 70% equities and 30% bonds, 70% of the withdrawal was taken from equities and 30% of from bonds) . Rebello notes that an advisor could improve on this by taking portfolio withdrawals solely from the bond portion of the portfolio. When this type of "bond tent" strategy is done, drawing down bonds during the dangerous sequence-of-return-risk years and allowing equity allocations to glide higher, the probability of success rises to 79% (greater than the rebalancing strategy) and the median age-95 portfolio value jumps to $10.9 million, dwarfing the final value of both the previously discussed strategies.

In sum, while portfolio rebalancing can reduce volatility, it could end up reducing a client's long-term returns, suggesting that facilitating a "rising equity glide path" in retirement (by not rebalancing a portfolio and allowing equity returns to drift the allocation higher, and/or by taking portfolio withdrawals from the bond allocation) could lead to greater portfolio growth over time with a similar or improved probability that a client's retirement income needs will be met. That said, while this strategy takes advantage of the upside potential of sequence of return risk in retirement, it could also lead to an asset allocation with a much higher allocation to equities than a client might be comfortable with, which means that successful implementation of the strategy not only involves managing the portfolio itself, but also addressing a client's potential concerns that such an aggressive strategy could threaten their retirement income (possibly by framing it as a "bucket" strategy where 'safer' bonds are used to support the retiree's shorter-term income needs and 'riskier' equities are meant to ensure that the portfolio can support their income needs for the long run?).   

Mount Everest And The Decumulation Retirement Portfolio

(Brian Manderscheid | Advisor Perspectives)

While the entire trek up Mount Everest can be perilous, the final stretch to the summit is often referred to as the "death zone" given that even small mistakes made in this area can lead to severe injury or death. While not a similar life-or-death scenario, individuals face a financially precarious time in the few years before and after they retire, when sequence of return risk can threaten the long-term sustainability of their nest egg.

When it comes to creating a retirement income plan, a key component is the asset allocation of the portfolio itself (often framed as an allocation decision between equities and bonds) to provide enough growth to meet a client's income needs throughout retirement while having a measure of 'safety' in case of a sharp stock market downturn early in their retirement. Nonetheless, advisors have more potential tools than asset allocation to create a sustainable income plan for a client. For instance, delaying Social Security benefits can provide the client with a larger monthly benefit throughout the rest of their lives, reducing their reliance on portfolio withdrawals (further, advisors can provide guidance for strategic claiming decisions for client couples as well). At the same time, delaying Social Security could mean that the clients need to withdraw more from their portfolios early in retirement to 'bridge' the gap until they start to receive these benefits. With this in mind, Manderscheid suggests that advisors and their clients could consider annuitizing a portion of the fixed-income allocation of the portfolio to serve as a source of 'guaranteed' income during this period and as longevity insurance for the remainder of their lives (which would offer more value if the clients have a relatively longer life expectancy).

Altogether, while a client's early retirement years are often a time of excitement (as they take advantage of their newfound freedom from work to pursue hobbies, travel, or other interests), it can also be a perilous time financially. Which means that financial advisors can offer significant value by helping them navigate this period, not only through asset allocation, but also considering 'guaranteed' income strategies (from delaying Social Security to annuitizing some assets) that could smooth the ride!

6 Steps For Building The Best Compensation Plan For Your Firm

(Angie Herbers | ThinkAdvisor)

When considering how to best hire and retain employees, the first thing that might come to mind for a firm owner might be the firm's compensation structure. Which could lead them to review industry benchmarking studies to ensure they're offering competitive salaries and bonuses. However, given that each firm is different (whether in terms of the core values, structure, and/or goals), Herbers argues that a more tailored approach to the firm's unique attributes could be a more effective approach to creating a compensation plan.

First, a firm owner can consider the firm's core values. For instance, if exceptional client service is a core value, then the compensation plan will want to incentivize this over other metrics (e.g., the number of clients an advisor serves). Another factor influencing compensation will be the firm's service model; for instance,a firm that charges on an hourly basis might pay its staff differently than a firm where fees are based on Assets Under Management (AUM). In addition, organizational structure can play a role in compensation; for example, firms with advisory teams might offer a fixed salary and a bonus based on the team's performance, whereas a firm with siloed advisors might primarily determine advisor pay as a percentage of the revenue they produce. Further, a firm's growth trajectory can affect its compensation plan; because advisors often would prefer to work at a high-growth firm (as they could see their compensation growing alongside the firm's growth), slower-growth firms might have to offer higher initial salaries to attract and retain talent. Finally, creating career tracks that show employees an achievable pathway to career growth (and can be influenced by the previously discussed factors) can resolve many employee questions around compensation (and the potential for it to grow in the future).

Ultimately, the key point is that there is no 'standard' compensation plan in the wealth management industry; rather, firms that design their compensation plans based on their values, goals, and structure can increase the chances that they not only will be able to attract and retain top talent, but also encourage employees to work in a way that meets the firm's unique goals!  

To Attract And Retain The Best, RIAs Need To Tailor Their Incentives

(Carolyn Armitage | Citywire RIA)

In the current highly competitive environment for advisor talent, firms might look for an edge when it comes to attracting and retaining employees. One way to do so is by offering exceptional compensation packages, though this might not be as simple as offering a high base salary, as prospective and current employees might be looking beyond the headline number to bonuses, equity ownership, and non-monetary perks.

To start, advisory firms often pair a base salary with a cash bonus. Notably, firms can tailor this bonus to meet its desired goals; for instance, it could be tied to revenue, net new client assets, or even client satisfaction (though employees might want to feel like they have an influence over the metric and, therefore, their bonus?). In addition to (or instead of) a cash bonus, some firms might offer equity in the business to employees, both as an incentive and as a way to create 'psychological ownership' in the firm (though there are other ways to accomplish this goal). Notably, firms have flexibility when it comes to issuing equity in terms of the rights that come with it (e.g., voting rights or information rights about the firm's financials), though pulling these levers could influence how attractive employees view this benefit. Finally, firms can consider non-monetary benefits and perks, such as paid time off policies, flexible work schedules, or work-from-home benefits, that could make it more attractive to employees.

In the end, firm owners have a variety of options when it comes to creating incentives that better attract and retain talent, with flexibility to adjust them based on the firm's needs and its employees' preferences (e.g., some employees might prefer near-term cash compensation over the promise of long-term equity growth). Which offers the opportunity to stand out in a crowded market for advisory talent based on a unique incentive or a package that attracts employees who are aligned with the firm's goals!  

How To Attract And Retain Gen Y And Gen Z Employees

(Caleb Brown | New Planner Recruiting)

When thinking about how to make their firm attractive to new (and current) employees, a firm owner might consider what they would want themselves. However, given that new hires are often in different generations and/or life stages, they might prioritize different aspects of compensation and company culture when it comes to deciding where to work (and whether to stay there).

With this in mind, advisor recruiting firm New Planner Recruiting conducted a survey of 665 Gen Y (whose ages range from approximately 30-45) and 275 Gen Z (roughly under 30 years old) financial planners to determine what makes a firm attractive to them and the factors that would make them want to stick with their current firm. Notably, respondents in both generations identified the same top priorities when it comes to assessing a potential new opportunity, with firm location topping the list, followed by company culture, team member personalities (compensation came in fifth place). Which suggests that firms looking to attract employees in this demographic might use their website or hiring process to demonstrate the company's culture (e.g., by posting a video of what it's like to work at the firm on the website) and the personalities of its current staff (e.g., by including video bios of current employees on the firm's website).

When it comes to the benefits that were most requested and valued, health insurance topped the list for those in Gen Y (perhaps because they are no longer eligible to be on their parents' plans), followed by paid time off, and incentive compensation. Gen Z's order was slightly different, with incentive compensation at the top, followed by paid time off and health insurance. Further, equity ownership was identified by respondents in both generations as an important factor for their desire to remain at their firm (with those in Gen Z more likely to say so). Other key retention factors identified include mentorship and training, client interaction, and compensation.  

Altogether, these survey results suggest that many of the factors that attract those in Gen Y and Gen Z to advisory firms do not necessarily have to cost the firm significant hard dollars, whether it is creating a strong company culture or developing a training and mentorship program that allows them to develop as an advisor and see a growth path for themselves into the future!

Overcoming Limiting Beliefs For Success And Satisfaction

(Arlene Moss | XY Planning Network)

For many financial advisors, one of the best parts of the job is the ability to create and implement a plan that gives clients more confidence in their financial futures and allows them to live their best lives. At the same time, advisors can sometimes struggle with their own confidence, perhaps experiencing "impostor syndrome" (i.e., "the persistent inability to believe that one's success is deserved or has been achieved as a result of one's own efforts or skills"). This is often the result of "limiting beliefs" (i.e., "the things you believe to be absolute that can impact your outlook, more specifically your growth and success"), which can manifest in several ways in the advisor context, from being afraid that no clients will want to work with them (e.g., because of the advisor's age) to believing their personal background (e.g., if their family did not have much money growing up) prevents them from being an effective advisor.

While these beliefs can feel omnipresent, a variety of strategies are available to help an advisor overcome them and have more confidence in their work. For instance, the "WOOP" (Wish, Outcome, Obstacle Plan) technique can be implemented to overcome limiting beliefs that pop up. This tactic involves first identifying the desired outcome and what it would look like (e.g., meet 5 potential prospects at a networking event), then recognizing obstacles that might be in the way (e.g., being shy about introducing yourself to new people), and finally creating a plan in advance (e.g., asking known acquaintances at the event to offer a warm introduction). Other 'internal' tactics include reinforcement of one's value (e.g., identifying and celebrating personal successes), mindfulness (i.e., acknowledging when limiting belief pop into your head and consciously shifting your thoughts away from it), and positive affirmations (to directly counter limiting beliefs). Notably, overcoming impostor syndrome and/or limiting beliefs does not have to be done alone. For instance, by working with a "mastermind group" or support partner, you can get your thoughts out into the open, have an outlet for sharing 'wins', and receive encouragement (and reminders of your value) when times get tough.

Ultimately, the key point is that while limiting beliefs are common and can be discouraging, advisors have a variety of techniques to choose from to help identify and overcome them. Because in the end, it's often the case that these beliefs don't reflect the reality that you are an effective, worthy advisor!  

It's Time To Fire Your Inner Critic

(Joy Lere | Finding Joy)

Sometimes the voice in your head is an ally, encouraging you to take a risk or congratulating you for a job well done. But other times, these thoughts can become self-critical or even shaming. This can include thinking and speaking in absolutes (e.g., saying "I always…" or "I never…"), replaying past failures or ruminating over mistakes, an excessive focus on what you "should" or "shouldn't" be doing, or assuming that others share these critical thoughts about yourself.

One potential way out of this self-criticism is to instead engage in "self-compassion", or "choosing to be charitable and understanding toward yourself when you suffer, fail, or fall short". Developing self-compassion starts with being aware of the self-critical words you say to yourself (whether in your inner monologue or out loud) and then involves finding a new voice and internal script, perhaps by channeling someone who builds you up or by considering how you would speak to a friend in a similar situation (as it's often easier to be kind to others than it is to be gracious with oneself!). Which can ultimately get you "unstuck" and give you "permission" to move forward when things go wrong!

In sum, self-compassion is not just a potential antidote to self-critical thoughts, but also can foster courage, confidence, resilience, and a sense of empowerment to overcome obstacles and mistakes, whether real or assumed!

6 Research-Backed Ways To Deal With Negative Thoughts

(Eric Barker | Barking Up The Wrong Tree)

Over the course of a day, you might have hundreds or thousands of thoughts racing through your head. While some of these might be positive or neutral, often it's the negative thoughts that stick around (which could make it harder to focus on work or other pursuits). And while you might want to focus on the positives, actually moving on from the negative thoughts can be harder than anticipated.

With this in mind, Barker suggests a 6-step approach to identifying and overcoming these thoughts. The first step is to recognize the thought and acknowledge that while it is undeniably 'there' (in your head), it's not necessarily true. Next, labeling the thought (e.g., "There's my impostor syndrome symphony again") can put it in its place as something that can be observed and dealt with rather than something that is innate to you. After labeling the thought, the next step is to let it go, avoiding a 'debate' with it (which could dig up other negative thoughts). This can allow you to defuse the thought by shifting the focus away from yourself to the thought (e.g., instead of thinking "I can't do this", shifting to "I'm having the thought that I can't do this"). After defusing the thought, practicing mindfulness by turning your attention away from the thought to something more productive in the 'real world' can help your mind make the transition away from it. Finally, once you've moved beyond the negative thought, finding a way to act based on your values can help restore your sense of purpose (and perhaps counter future negative thoughts about your worth).

In the end, while negative thoughts are inevitable, treating them as the (potentially false) intangible ideas that they are rather than a real-world truth can make it easier to move on from them. Though given their ubiquity and persistence, this method can take practice (so don't blame yourself if it doesn't work perfectly the first time!).     

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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.