Weekend Reading For Financial Planners (June 3-4)

Advisors Working With Younger Clients Have Faster Organic AUM, Revenue Growth, Dimensional Study Finds

(Victoria Zhuang | FinancialPlanning)

The bull market of the 2010s was a boon to financial advisors who charge on an Assets Under Management (AUM) basis, as appreciating client portfolios meant increased firm revenues and growing firms in terms of AUM. Further, a hot Mergers and Acquisitions (M&A) market helped boost the growth of firms as well by acquiring smaller firms. But recent data show that beyond these sources of growth, organic growth for RIAs (i.e., assets from new clients or current clients bringing additional assets under the purview of their advisor) has lagged well behind.

With this in mind, researchers from Dimensional Fund Advisors and Harvard Business School used survey data of financial advisors (87% of which were fee-only independent advisors) collected between 2016 and 2020 to determine what factors help drive AUM and revenue growth. According to their findings, firms that offer education planning and account aggregation services experience higher current and future growth compared to other firms. One possibility is that clients who need education planning services tend to be in their working years and are in the asset accumulation phase (which can increase their advisor’s AUM over time). Other factors that are associated with stronger growth include the use of model portfolios (as well as offering a greater number of them) and the use of small account solutions. In terms of attracting new clients, the researchers found that referrals from current clients or from Centers Of Influence (COIs) – for example, CPAs or attorneys – were associated with stronger growth (with referrals from COIs having twice as large an effect on growth as referrals from current clients).

The researchers also investigated the most pressing challenges faced by the advisors surveyed. These included a lack of a succession plan as well as having an aging client base. For example, firms that lacked a succession plan experienced on average five percentage points lower growth in AUM, revenue, and clients in the following year, with similar lower growth 2 years into the future (possibly reflecting challenges attracting next-generation clients and advisors). Further, firms with a higher fraction of clients older than 70 showed lower growth in these areas (perhaps because these clients are more likely to be drawing down their wealth).

Altogether, the study’s results demonstrate the potential AUM and revenue growth benefits of working with younger clients (though the authors did not appear to evaluate the impact of working with younger clients on overall firm profitability), as well as the value of referrals and having a succession plan in place. Which suggests that at a time when many firms are facing growth challenges, these could be potential generators of AUM growth regardless of the market or M&A environment!

"You're Going To See A Lot Of Us": Goldman Grows RIA Custody Business

(Sam Bojarski | Citywire RIA)

Goldman Sachs made waves in the Spring of 2020 with its acquisition of RIA custodian Folio Institutional, expediting its launch into the highly competitive RIA custody business just as Schwab announced it was acquiring TD Ameritrade and growing clamor began to emerge that RIAs wanted to see more competitive choices amongst RIA custodians. However, Goldman’s entry into the space proved to be slow going, with its first launch partner being announced in the Summer of 2021 and its second coming in the Fall of 2022. But the firm appears to be gaining momentum as it integrates Folio’s capabilities and gains RIA firm adopters.

Earlier this year, Goldman announced partnerships with 2 wirehouse breakaway teams and in May revealed relationships with Ashton Thomas Private Wealth (with $2 billion of AUM) and Prime Capital Investment Advisors ($20 billion AUM). According to Jeremy Eisenstein, co-head of custody sales at Goldman Sachs Advisor Solutions (Goldman’s RIA custodial platform), the firm plans to be “thoughtful and methodical” about the firms Goldman brings onto its platform, with a particular focus on targeting wirehouse breakaways and larger established RIAs – a noted contrast to other new RIA custodian competitors such as Altruist, which has seen assets on its platform skyrocket with its acquisition of RIA custodian Shareholder Services Group and organic growth primarily amongst smaller and startup independent RIAs. And Goldman’s alternative growth approach appears to be very intentionally crafted to play to its core strengths – offering larger firms and breakaways, who tend to work with higher net worth clientele, access to the broader universe of Goldman products and services, including securities-based lines of credit and asset management products (including its suite of alternative investment opportunities), as well as Goldman’s research and investment banking services.

Ultimately, the key point is that at a time of upheaval in the RIA custody space (epitomized by the Charles Schwab-TD Ameritrade integration, which is slated to be completed in September), Goldman represents a notable new custodial alternative for RIAs – particularly those with wealthier clients who could benefit from its suite of high-end capabilities – looking for a new home after (or an alternative to) the ‘Schwabitrade’ merger. Though its apparent go-slow approach suggests that is unlikely to see a major influx of new RIA clients (and will perhaps not accept some that are not good fits for its platform), perhaps signaling that it wants to maintain an air of exclusivity… which arguably fits well into Goldman’s ultra-HNW brand in the first place?

NASAA Updates To Series 63, 65, 66 Exams Going Into Effect

(Tyler York | Achievable)

For many aspiring financial advisors (particularly those planning to work as a registered representative of a broker-dealer or an investment adviser representative of an RIA), taking (and passing) the Series 63, 65, or 66 exams (which cover a range of issues regarding investment products and Federal and state regulation of advisers) is one of the key tests to start working with clients. And given the ever-changing regulatory environment and trends in investment products, the North American Securities Administrators Association (NASAA), which is responsible for writing the exams, updates these tests every 5 to 7 years.

In February, NASAA announced its latest slate of changes to these exams, which go into effect on June 12. Of the three exams, the Series 65 exam (which covers investment adviser regulations and investment vehicles, among other subjects) is seeing the most updates. These include reducing the passing score to 70% from 72%, and changing some of the content of the exam. For instance, the test will no longer cover life settlements, investment real estate, and dark pools, but is adding 12 new concepts, including Special Purpose Acquisition Companies (SPACs), digital assets (e.g., cryptocurrencies), SECURE Act 2.0, Regulation Best Interest, and the new IAR continuing education requirements, among other topics (though with only 130 questions on the exam, NASAA notes that an exam-taker still might not encounter all of the potential topics that could be tested).

The Series 63 (which covers the regulation of investment advisers, broker-dealers and their representatives, as well as ethical practices, among other topics) and the Series 66 (a combination of the Series 63 and 65 exams) exams are seeing relatively fewer changes. Series 63 will see small changes in the balance in the number of questions tested per topic (e.g., regulation of broker-dealers will go from 9 questions to 7 questions, while the number of questions regarding regulations of securities and issuers will increase from 3 questions to 5 questions). For the Series 66, the passing score (73%) will remain the same, however the number of questions regarding economic factors and business information will increase to 8 from 5, while the number of questions about investment vehicles will decrease to 17 from 20. In addition, NASAA removed the same test concepts from the Series 66 as it did from the Series 65 Exam, and added others (a similar, but not identical, list as the Series 65).

And so, upcoming exam-takers will want to be aware of the changes to the exams, which serve to modernize the subject matter tested. Though, ultimately, it can be argued that the material on these exams (focusing on products and regulation) is still just a small slice of the overall education needed to handle the sacred duty of providing comprehensive financial planning advice to clients!

The FAFSA Gets An Overhaul

(Lynn O’Shaughnessy | Wealth Management)

Each Fall marks the beginning of the college application and financial aid process for students and their parents and for those applying for financial aid for the first time (and some returning filers!), filling out the Free Application For Federal Student Aid (FAFSA) can be an intimidating prospect. And so, to help alleviate some of the confusion related to the FAFSA form, Congress in late 2020 approved changes to the FAFSA, as well as the formulas used to determine financial need, which are set to take effect for FAFSA filers later this year.

One of the major changes will be to the FAFSA form itself, which is expected to be simplified, with the number of questions being reduced from 108 to 46, according to a draft version of the new form (which will now be finalized following a comment period that ended in May). Notably, the introduction of the new form will delay the availability of the FAFSA for the 2024-2025 school year until December (it is usually released October 1). Advisors and clients who have filled out the FAFSA before will also notice the renaming of the Expected Family Contribution (EFC, or how much the federal aid formula determines a household can pay for college) to the Student Aid Index (SAI).

Several of the changes to the revamped FAFSA could increase students’ eligibility for aid, depending on their circumstances. For instance, while distributions from grandparent-owned 529 plans were previously reported as untaxed income for the student (reducing their aid eligibility by as much as 50% of the amount of cash support), they will now low longer impact a student’s eligibility for aid. In addition, the federal financial aid formula will become more generous to lower-income students, allowing an additional 1.7 million students to qualify for the maximum Pell Grant (which is worth $7,395 for the 2023-2024 school year).

Other changes could negatively impact need-based aid eligibility for certain students. These include: the elimination of the discount for families with multiple children in college at the same time; a requirement to include all small business and family farm assets on the FAFSA (eliminating an exclusion for those that do not employ more than 100 full-time or full-time equivalent workers); and a requirement that for children of divorced parents, the parent who spent the most money on the child in the previous 12-month period (rather than the parent with whom the student lived with for the majority of the previous year) will be the one to fill out the FAFSA (which will be detrimental to aid eligibility if that parent earns more than the parent with whom the child spent the majority of time).

In the end, these changes will potentially simplify the FAFSA-filing process as well as affect the amount of aid certain students receive. At the same time, it also presents opportunities for advisors to add value for their clients, whether in educating them on the changes as well as in taking advantage of certain planning strategies (e.g., grandparent-owned 529 plans, which will become significantly more valuable!).

College Scorecard Changes Amid Debate Over Value Of College

(Kayla Jimenez | USA Today)

When it comes to the financial side of planning for college, the cost of attendance (as well as potential aid a student might receive) often take center stage. But because one of the potential reasons to attend college is to improve a student’s career prospects once they graduate, comparing colleges based on the outcomes of their graduates can be a useful exercise. With this in mind, the U.S. Department of Education in 2015 released the College Scorecard – an online tool that includes data about costs, acceptance rates, graduation rates, student body diversity, and earnings data for recent graduates for colleges across the country – to help students and their families make better-informed decisions about where to attend college.

In April, the Department of Education made several updates to the Scorecard that will provide even more information to students and families regarding both undergraduate and (now) graduate programs. The new version of the Scorecard will now include a 4th year of data on the median earnings of former graduates (up from 3 years), including calculations from the National Student Loan Data System and the Internal Revenue Service to help students better understand the earnings and student debt loads of a school’s graduates. And, for the first time, the Scorecard will include information on graduate school fields of study, including earnings and student debt trends for those who attend a certain program.

Ultimately, the key point is that while there are non-monetary benefits to attending college (from being introduced to new fields and ideas to expanding one’s personal network), many students and their families also consider the potential return on the (often significant) monetary investment required to attend college or graduate school. And for financial advisors working with families with children preparing to attend college, the newly updated College Scorecard can provide valuable information to help these families make the best decision based on their unique situation!

Most Colleges Don't Tell Students The True Cost Of An Education

(Paulina Cachero and Francesca Maglione | Bloomberg)

For high school seniors, getting accepted into their preferred college can be a joyful occasion. But for some students, getting the acceptance letter is just the first step in actually being able to attend the school. Because given the increasing average ‘sticker cost’ of attending college, many students depend on receiving aid in order to be able to attend the college of their dreams. But deciphering a college’s financial aid letter can be challenging.

Not only is there no standard format for financial aid letters across colleges, but according to a U.S. Government Accountability Office report, more than 90% of schools either understate the net price of attendance (the total cost of attendance minus grants and scholarships that do not need to be repaid) or do not include it in financial aid letters. Further, colleges sometimes lump together grants (that do not need to be repaid) and loans (that do) in award letters, creating a misleading picture of the financial burden a student will face if they attend that college. This murkiness has led to calls for increased transparency and standardization, and the leaders of 10 higher-education associations have formed a task force to develop standards for financial aid offers that would make it easier for students and their families to understand the true cost of attending a college (though it is unclear when such measures might be implemented).

And so, given the complicated nature of financial aid awards, financial advisors specializing in this area can provide significant value to client families by helping them better understand college financial aid letters and also provide comparisons across colleges. Which could not only clear up confusion for these families, but also potentially help them save tens of thousands of dollars in the process!

Do Clients Really Want Personalized Portfolios?

(Scott MacKillop | Wealth Management)

Consumers today can benefit from an incredible amount of personalization, from a custom drink at the coffee shop to music playlists consisting of a precise menu of songs. And the increasing availability of direct indexing tools (which allow advisors and investors to adjust a market index by investing in its individual components) creates the potential for clients to approach their advisors with a specific list of personalization requests for their investments.

However, MacKillop (CEO of First Ascent Asset Management, which offers direct indexing services) suggests that an influx of client requests to drop certain stocks from an index is unlikely to occur. First, he notes that the reason many clients work with an advisor in the first place is because they do not have well-defined preferences for specific investments and are looking to the advisor to create a portfolio that meets their goals. In addition, direct indexing comes at a cost, as the fee for using these portfolios is typically higher than ETFs representing the underlying indexes.

Instead, MacKillop argues that the most likely use cases of direct indexing for advisors will be for certain situations that the advisor, rather than the client, identifies themselves. For instance, direct indexing could be useful when a client has a legacy position with large, embedded gains or holds a significant amount of employer stock (in which case an index might be adjusted to avoid investing in these positions, or perhaps even the entire industry they fall within). In addition, some clients might benefit from the potential tax-loss harvesting benefits provided by direct indexing (as some components within a larger index are likely to fall in value, even when the broader index has appreciated). And while clients might not have disparate preferences for adjusting an index, some might have very specific Environmental, Social, and Corporate Governance (ESG) values that they would like reflected in their portfolio.

In the end, while direct indexing offers a range of potential use cases for advisors and their clients, MacKillop suggests that client-initiated portfolio customization is unlikely to be a common occurrence for advisors. Which means that advisors can instead add value by understanding these potential uses for direct indexing and implementing them for clients who could stand to benefit the most from them!

The Ultimate Blue Chip Buy-And-Hold Doesn't Hold Up

(John Rekenthaler | Morningstar)

In recent months, the largest stocks (in terms of market capitalization) have been driving the positive returns of the S&P 500. Some investors might view these companies as giants with seemingly ever-increasing stock prices and perhaps use a strategy of investing in them and letting these investments ride for years to come (hopefully accruing significant gains in the process).

But an analysis of some of the “blue chip” stocks (i.e., those of companies that are thought to be the most reliable and durable) from the 1980s suggests that investing in today’s largest companies and letting them ride might lead to returns that trail the broader market. For example, of the 9 largest U.S.-based and listed companies in 1986 (led by IBM), only 2 (Merck and ExxonMobil) outperformed the broader Wilshire 5000 index over the following 35 years (and one of these companies, General Motors, went bankrupt, rending its shares worthless). Whether an investor used a market-weighted, equal-weighted, or equal-weighted and rebalanced portfolio of these nine stocks, they would have significantly underperformed the broader market during this time period.

So while companies like Apple and Microsoft appear to have dominant positions today, Rekenthaler’s analysis suggests that previous market leaders have not necessarily been able to maintain this momentum. Which suggests that holding index funds that adjust weightings and members over time could be a better strategy to not only profit from today’s leaders, but from tomorrow’s as well!

Are You Playing It Too Safe With Clients' Investments?

(John Manganaro | ThinkAdvisor)

Over the years, (perhaps less scrupulous) investment advisors have sometimes had the reputation for recommending that clients purchase investments that are excessively risky given the client’s risk tolerance (willingness to take risk) and risk capacity (the investor’s financial ability to withstand a certain drawdown without preventing them from achieving their goals). And while fiduciary financial advisors typically will not recommend an investment that is clearly beyond a client’s risk tolerance and capacity, creating a portfolio that is perfectly aligned with this 2-dimensional approach to risk can be challenging, due in part to the difficulties of measuring the client’s risk tolerance (though software can help) and in creating a matching portfolio based on what the advisor finds.

Related to this challenge, a group of researchers sought to determine whether advisors are creating portfolios in line with client’s “elicited risk” (i.e., the client’s risk tolerance as determined by advisors using information about the client). Using data from a Canadian financial services company, the researchers found that advisors tended to create portfolios that were less risky (and had lower potential returns) given their client’s elicited risk, potentially hindering the growth of their clients’ portfolios. One potential reason for this is that some advisors were treating their clients’ elicited risk as an upper bound for the risk level of the portfolio they would create for them (meaning that the portfolio risk level would either match or lag this upper bound). This effect could be influenced by regulatory guidelines, as advisors could be more likely to be penalized for implementing a portfolio that is considered to be too risky for a client rather than one that falls below the client’s risk threshold (i.e., while a client might leave an advisor who they consider to be underperforming, they might be less likely to make a complaint to regulators that their portfolio was invested too conservatively).

In sum, this research indicates that while advisors studied were actively managing risk on behalf of their clients (a good thing!), they were not necessarily implementing portfolios in line with their client’s risk tolerance and capacity and showed a bias for conservatism. And so, while advisors might already be conscious of ensuring their clients’ portfolios are not invested too aggressively (which could draw the ire of regulators and the client alike), they could also consider whether they are creating portfolios that are too conservative (which could promote capital preservation, but not necessarily the growth needed to meet client goals)!

How To Be Resilient: 5 Steps To Success When Life Gets Hard

(Eric Barker | Barking Up The Wrong Tree)

Modern life can be stressful, whether it is dealing with competing professional and personal priorities, or just digesting the latest news of the day. One trait that can help you not only get through the week, but also thrive, is resilience. But resilience does not necessarily come naturally; instead, research outlined in the book Tomorrowmind: Thriving at Work with Resilience, Creativity, and Connection – Now and in an Uncertain Future by Gabriella Rosen Kellerman and Martin Seligman suggests that practicing a series of exercises can help develop this skill and increase the chances you will be able to handle whatever comes your way in the future.

The first key area to practice is emotional regulation, or the ability to handle the wide range of emotions you feel during the day. This can be done in 2 steps: first, the next time you feel a strong negative emotion, slow down and get some distance (preventing you from taking an action you might regret later); second, reappraise and consider whether your current situation is objectively that bad and whether the feelings you are experiencing are useful. Then, once you have built the ability to regulate your emotions, building a sense of optimism can help you see that your current predicament is only for now (one exercise to practice optimism is to imagine what your “Best Possible Self” would look like at some point in the future, which can help you chart the path to get yourself there).

After cultivating a sense of optimism, the next step is to practice cognitive agility, or the ability to consider many possibilities before focusing and acting on only one option (this can be particularly helpful for individuals who tend to ‘catastrophize’, or immediately jump to the worst-case scenario). Next, cultivating a sense of self-compassion can help you forgive yourself when you inevitably make mistakes. This can be done by imagining how you would respond if a friend or loved one were in the same position (as you might find you would use kinder language with others than you would with yourself). Finally, resiliency can also be built by developing a sense of self-efficacy, or the belief in your ability to exercise control over what you do and the things that affect your life. One way to do so is to have “mastery experiences”, as mastering one skill can make you more confident that you can handle other challenges that come your way.

Ultimately, the key point is that while resiliency is often the key to overcoming challenges you face, building this skill can take time and practice. But by focusing on five key areas (emotional regulation, optimism, cognitive agility, self-compassion, and self-efficacy), you could find yourself better able to handle whatever life throws at you!

Pain Is Part Of The Process

(Mark Manson)

If you had the option, you might decide to avoid experiencing pain as much as possible, whether it is an annoying headache or the psychological pain that comes from having a difficult experience. But Manson argues that sometimes experiencing and overcoming this latter kind of pain can help you become a more resilient person.

For instance, many of the most meaningful goals require sacrifices and risk along the way; therefore, working through painful experiences (e.g., failing the first time you try something) is often required to achieve one’s ultimate aims (while at the same time recognizing that happiness can come from the journey itself and not just the destination). Manson also cites lessons from the Buddha, who taught that because we have the power to decide how we interpret pain, it can be used as an opportunity for growth and self-improvement. This suggests that taking on the responsibility of dealing with the inevitable pain in our lives is a more productive practice than trying to blame others or engage in a fruitless quest to avoid pain altogether.

In the end, we are all bound to experience some pain in life, whether it is professional struggles or challenges in one’s personal life. But instead of dwelling on the negative feelings it can create, taking the opportunity to learn from these tough periods could ultimately make you a happier, more resilient person!

Don't Make Plans, Give Gifts

(Maddie Burton | Your Five-Year Plan)

For financial planners, it can be tempting to always be looking ahead to the future, whether it is in helping a client create a plan that will allow them to retire in 10 years or, in their own lives, achieving their next big financial milestone. But focusing on planning for the future is not necessarily a fruitful practice, first because research suggests that we have a hard time predicting how we will be different in the future (i.e., the “End of History Illusion”), but also because it can sometimes distract us from making the most of our lives today. At the same time, those who only focus on their well-being today, or being “plan-avoidant”, can come at a cost to their future selves.

While you might recognize yourself or your clients as being either a “planner” or “plan-avoidant” (or perhaps sharing some aspects of both), Burton suggests that there is a better way to think about life and money: what she calls a “gift-giving framework”. Under this framework, the gift-giver values their present self’s experience equally to that of their future self. For instance, a person might give a “gift” to their present self that does not come at the expense of their future self (e.g., going on a vacation today while also contributing to a retirement plan). They can also give a “gift” to their future selves that does not sacrifice all enjoyment today (e.g., building a reasonably sized emergency fund is a “gift” to a future self that might experience a financial shock).

Ultimately, the key point is that life is experienced in the real world and not within a financial plan. And by adopting a “gift-giving” mindset that values both your present and future selves equally, you (and your clients) could start making more financial decisions that allow you to live your best life, both today and in the future!

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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.