Weekend Reading For Financial Planners (March 16-17)

Final DoL Fiduciary Rule Lands At OMB

(Melanie Waddell | ThinkAdvisor and Emile Hallez | InvestmentNews)

The Department of Labor (DoL), in its role overseeing retirement plans governed by ERISA (e.g., employer-sponsored 401(k) and 403(b) plans), has gone through a multi-year process across 3 presidential administrations in efforts to update its "fiduciary rule" governing the provision of advice on these plans (as well as IRA rollovers in/out of these plans). Amid this backdrop, the DoL released a new proposal in October 2023, dubbed the “Retirement Security Rule: Definition of an Investment Advice Fiduciary” (a.k.a. the Fiduciary Rule 2.0), which would again attempt to reset the line of what constitutes a relationship of trust and confidence between advisors and their clients regarding retirement investments and when a higher (fiduciary) standard should apply to recommendations being provided to retirement plan participants.

Given the dramatic nature of the proposals, public debate over the Retirement Security Rule has been heated, with the DoL receiving more than 19,000 comments. A particularly contentious portion of the proposed rule (and the subject of criticisms from brokerage and insurance industry groups) is a measure applying a fiduciary standard whenever a one-time rollover recommendation is made (not just as part of an ongoing relationship, as covered by PTE 2020-02), and would include those recommending rollovers out of a retirement plan, thereby covering a wide swath of investment advisers, brokers, and even insurance agents recommending annuities and insurance to prospective retirees' retirement assets (that aren't currently covered by Regulation Best Interest because they're not securities). For their part, certain investor advocates have spoken out in favor of the proposals, arguing that the proposed rule would promote stronger fiduciary standards in the financial services industry.

Despite the rule’s expansive (and contentious) provisions, the DoL has moved the proposal forward quickly (at least compared to other regulations), and the final version of the rule was sent on March 8 to the Office of Management and Budget (OMB) for review (which typically take up to 90 days, though it could be finished faster given the priority the Biden administration has put on moving it through). Pending OMB’s review, the administration might decide to make January 1 the effective date for the rule to ensure it is in place before a potential change in the White House following November’s elections (though if Biden is re-elected, his administration could choose to push the effective date back, according to attorney Fred Reish, as it would know that the rule would not be in danger of being reversed following the presidential inauguration).

While the final version of the new DoL fiduciary rule sent to OMB has not been published, some observers think that changes from the original version will be relatively minor. One potential addition could be language clarifying what certain portions of the rule mean in practical terms (something that has been called for by those who have been generally supportive of the rule, including CFP Board), including what documentation is required for rollover recommendations and whether the term “recommendation” will be interpreted in the same way as it is in guidance from the SEC or FINRA. According to Andrew Roberts, CEO of compliance services provider Pension Resource Institute, other possible changes include 2 amendments to Prohibited Transaction Exemption (PTE) 2020-02, that would require firms to publish compensation agreements with third parties and allow investors to inspect companies’ books and records to ensure compliance (which could open the door for litigation and cause companies to make new compliance-related hires), as well as part of the PTE requirements that would allow DoL to revoke eligibility for firms that are convicted of serious crimes or have patterns of noncompliance with rules rather than continue to albeit while claiming it’s “just” a seemingly never-ending series of one-off bad apples (though this could be burdensome on larger institutions with an international presence that face uneven judicial standards abroad?).

In the end, while the DoL's Retirement Security Rule could be enacted relatively soon, and would represent a significant shift toward greater fiduciary standards in the financial services industry, its final disposition will likely play out in the courts, which would decide whether the DoL is 'overreaching' or appropriate in its expansion of fiduciary duty (in particular as it pertains to brokers and insurance agents recommending product sales in IRA rollover transactions). Which means the ultimate questions are not only what is contained in the final DoL fiduciary rule – which should be evident in a month or two when it's released by OMB – but also whether it actually survives its anticipated court challenge from the product manufacturing and distribution firms that were able to strike down the last DoL fiduciary rule!

CFP Board Adopts Revised Sanctions Guidelines And Fitness Standards

(Melanie Waddell | ThinkAdvisor)

As a part of maintaining its CFP trademark and determining which advisors will be permitted to license its use, CFP Board is responsible for managing its standards of conduct and creating a disciplinary process that is fair to the CFP certificants who use the marks, while also pursuing its mission of protecting the public (and ensuring the CFP marks remain in high esteem). Of course, these disciplinary rules and procedures are subject to change, including in 2021 (when the CFP Board changed its procedural rules and sanctions guidelines to update the suggested sanctions that CFP certificants should receive from the Disciplinary and Ethics Commission when failing to follow the standards of conduct), in 2022 (when it created an appeals commission to hear cases of disciplinary actions imposed on CFP professionals), and in 2023 when it adopted a (further) revised set of procedural rules that, among other changes, transferred some administrative functions from CFP Board’s Enforcement department to the Adjudication department and expand the role of the Disciplinary and Ethics Commission (DEC) Counsel to make the adjudication process more efficient (CFP Board has also released a handbook and a series of videos educating CFP professionals and the public about its enforcement and adjudication process).

This week, following a multi-year process of considering revisions and feedback from CFP professionals and other interested parties, CFP Board announced additional changes to its Sanctions Guidelines and revisions to its Fitness Standards, with the revised Sanctions Guidelines applying to misconduct occurring after July 1 and the revised Fitness Standards applying to candidates for CFP certification who submit an application on or after July 1.

Among other changes, the revised Sanctions Guidelines include a new list of 25 factors that can be either aggravating (i.e., weighs in favor of raising the sanction, including, among others, bias or prejudice and harm to a client or others), mitigating (i.e., weigh in favor of lowering the sanction, including, among others, circumstances outside the respondent’s control and reasonable misinterpretation), both aggravating and mitigating (e.g., acknowledgement of misconduct, cooperation with CFP Board), or should not be considered as contributing to either (e.g., length of experience, remorse).

Changes to the Fitness Standards (which are used to determine whether someone should be eligible and is “fit” to become a CFP certificant in the first place) include edits to the framework for evaluating fitness that identifies when an applicant is permanently barred from seeking CFP certification (e.g., for certain felony convictions), is currently ineligible from seeking certification but might be permitted to get CFP certification in the future (e.g., professional discipline that resulted in a suspension or revocation [currently in effect] of an applicant’s professional service license), or is required to file a Petition for Fitness so that the DEC may determine whether the applicant is fit for certification (e.g., one or more filings or adjudications for personal bankruptcy or business bankruptcy where the applicant was a control person of the business). In addition, CFP Board will now issue a Public Notice if it grants new CFP certification to an applicant who has engaged in previous conduct that would have resulted in a public censure if they were already a CFP professional.

Altogether, these changes represent the CFP Board’s efforts to further clarify and refine appropriate sanctions guidelines and fitness standards for CFP Professionals (who will be interested in how sanctions are determined), candidates (including whether they might be eligible for certification), and the broader public (to better understand CFP Board’s standards for certifying applicants and disciplining certificants). Which, combined with last year’s revisions to the procedural rules, could ultimately better serve CFP certificants (and applicants) and (if enforced well) maintain the public’s confidence (and win more support from advisors themselves?) that CFP Board is actually enforcing its standards effectively and is doing more to clean up its own ‘bad apples’!?

FSI Sues DoL To Toss New Independent Contractor Rule

(Tracey Longo | Financial Advisor)

The use of independent contractors has grown in a variety of industries during the past several years. Doing so allows companies to hire labor without having to offer the full suite of benefits (and provide the full suite of employee protections) they are legally required to provide for bona fide employees. But the growth of this model in certain industries (e.g., Uber/Lyft drivers en masse) has raised concerns, particularly among Democratic officials, that this shift toward an independent contractor model leaves many contractors especially vulnerable, as their income is often more precarious than W-2 employees, they don't get the benefits of W-2 employees, and, by definition, they don't benefit from standard legal protections for employees. This has led to back-and-forth guidance from Washington, as the Obama administration broadened the definition of who counts as an employee (making it more challenging to label a worker an independent contractor), while the Trump administration subsequently narrowed the types of workers who must be considered employees.

In the financial services space, a variety of workers, from life insurance agents to registered representatives, could potentially be affected by these rules as well. As while amongst financial advisors, being an "independent" whose relationship is structured as an independent contractor is often a proactive choice by the advisor themselves for the sake of autonomy (not because the firm is trying to avoid offering employee protections or benefits), but as independent contractors, they (and their firms) still have to navigate the rules to maintain that status. As the relationship between registered representatives working as independent contractors and their affiliated broker-dealer could come under scrutiny (given the level that registered reps are economically dependent on their broker-dealers, given that the broker-dealer holds the rep's license, and technically clients are clients of and make payments to the broker-dealer, and not the rep).

In January, following an avalanche of comments (more than 55,000!) from financial industry representatives and others, the Department of Labor (DoL) published an employee and independent contractor final rule that would potentially again broaden the type of workers who must be considered employees, while also emphasizing that analyzing cases based on "the totality of the circumstances" provides flexibility in making determinations based on the specific facts of an individual case (perhaps in part in response to critiques from certain parts of the financial services industry and others). However, the final rule has garnered significant opposition from several business trade groups (including the Financial Services Institute [FSI]), which this month filed an amended complaint against the Department of Labor challenging the latest rule and asking the court to declare that the 2021 rule (that includes a narrower definition of which workers must be considered employees) remain in effect. The complaint argues that the rule is “arbitrary and capricious” under the Administrative Procedure Act and violates the Regulatory Flexibility Act. For its part, FSI argued that the new rule would throw into doubt the independent contractor status of registered representatives of broker dealers (potentially putting this business model in jeopardy).

In the end, while the DoL's new rule provides additional clarity on the Biden administration's thinking on the employee-independent contractor issue (that will apply to the broad range of industries), it does not provide a firm answer to whether registered representatives, life insurance agents, and others in the financial services industry will continue to be considered independent contractors or will be labeled as employees going forward. Though given the recent lawsuit, it appears that the courts might be the ones to provide some clarity, whether it might be throwing the rule out (and keeping the 2021 rule in force) or potentially requiring the DoL to offer more specific guidance as to whether those working under the independent broker-dealer model (and perhaps employees in certain other industries where being an independent contractor, rather than an employee, is considered a positive) can maintain their contractor status?

IRS Free Tax Filing Program Launches In 12 Pilot States

(Kate Dore | CNBC)

Advances in software have made it increasingly easy for individuals to file their own taxes. Rather than rely on paper forms and lengthy tables, consumers can now prepare and file their taxes using step-by-step guidance provided by various software products. The downside, though, is that this assistance often comes at the cost of purchasing the software (on top of the taxes owed!). And even for those for whom the software is technically free (whether because they have a relatively simple return and/or meet certain income limits), the software providers often try to upsell these consumers on higher-end tax products.

These tax preparation costs led to calls for the IRS to create its own tax filing software, which consumers could use to file their own taxes without paying any fees or being subject to upselling pitches. And while such proposals languished for years due in part to opposition from private tax-preparation companies (who stand to lose business) and some legislators (who questioned whether such a program was an efficient use of government funds given the available alternatives), the IRS this year is finally debuting its Direct File online portal to allow (a relatively small group of) consumers to file their taxes directly through the IRS website for free.

Following a testing program earlier in the tax season, the IRS this week fully rolled out the program for eligible taxpayers in 12 states (including California, Florida, and New York). The Treasury Department is hoping that at least 100,000 taxpayers will participate in the program, in part to provide the agency with data that could improve the process and potentially roll out the offering to a broader group next year. For this year, in addition to the geographic requirements, eligible taxpayers include those whose income only comes from W-2 employment and take the standard deduction, and the software currently does not support those with self-employment or capital gains income. Further, users of the Direct File service will find that the software has fewer bells and whistles than commercial software (e.g., downloading data directly from a W-2), though the IRS will offer a live chat function for users with questions. While these limits might frustrate some potential users, the IRS has said that it is starting small on purpose to see how the process works and whether returns filed this way are more likely to contain errors.

In the end, while the Direct File program is currently limited in scope (and relatively few financial planning clients will likely be eligible, given their frequently complex tax situations), it could represent the first step toward allowing a broader swath of consumers to prepare and file their federal income taxes for free. At the same time, taxpayers with more complex situations might choose to eschew tax preparation software altogether, preferring to work with a human tax preparer given the potential for costly errors or lengthy audits from self-prepared returns!

An Unexpected Double Tax Break For 529-To-Roth Rollovers

(Ed Slott | InvestmentNews)

529 plans offer a tax-efficient means of saving and paying for college expenses. Notably (among other benefits), distributions from 529 plans are tax- and penalty-free to the extent that they are used for the beneficiary's qualifying education costs. Nonetheless, some families interested in saving for college hesitate to contribute to these plans because they are concerned their child will not use all of the funds, and the parents will be subject to taxation and a 10% penalty on the earnings in the plan if they have to withdraw the funds for non-qualified purposes because there was 'excess savings' beyond what was actually needed for qualified higher education expenses.

While there have been several other potential 'outs' for those with ‘leftover’ funds in a 529 plan (e.g., changing the beneficiary to a sibling or a grandchild in the future), a portion of the "SECURE Act 2.0" law passed in late 2022 allowing for (limited) transfers from 529 plans to Roth IRAs received significant attention (as savers might feel more comfortable funding a 529 plan if they knew the excess/remaining balance could be transferred to a Roth IRA without incurring a tax burden). However, this opportunity comes with several restrictions; for example, the 529 plan must have been maintained for 15 years or longer (so it's not a quick backdoor Roth IRA contribution strategy), the annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any 'regular' traditional IRA or Roth IRA contributions that are made for the year (i.e., consumers will not be able to make both a 529 plan-to-Roth IRA transfer and a 'regular' contribution in the same year, they'd simply be funding their annual Roth IRA contribution from their 529 plan instead of their personal savings), and funds used for the rollover must not include contributions to the 529 plan made in the last 5 years (or earnings on those funds).

While these restrictions remain in place, taxpayers currently have an opportunity to ‘double up’ on their ability to make 529-to-Roth rollovers by making a rollover for 2023 by April 15 while still maintaining the ability to make a 2024 rollover as well, meaning that a total of $13,500 ($6,500 for 2023 + $7,000 for 2024, the annual IRA contribution limits) could be transferred from a 529 plan to the beneficiary’s Roth IRA (subject to the relevant requirements, including that the beneficiary would otherwise qualify to make an annual Roth IRA contribution by having compensation, though, unlike regular Roth IRA contributions, there are no income limits for high earners!). Further, Slott notes that SECURE 2.0 appears to allow the 529-to-Roth limits to be applied per beneficiary (rather than per 529 plan owner), meaning that an individual with separate 529 plans for multiple beneficiaries could potentially roll over $13,500 this year (between the 2023 and 2024 limits) for each one that qualifies!

In sum, while many families who contribute to 529 plans will find they have no problem using up the funds (whether for their own children, or perhaps creating a "Dynasty 529 Plan" that could last for generations), the ability to roll over unused 529 funds to a beneficiary’s Roth IRA now provides yet another reason to comfortably fund them (even at the risk of slightly "overfunding" a 529 plan). And given the ability to make these rollovers for both the 2023 and 2024 tax years, advisors can add potentially add value for qualified (and interested) clients with otherwise leftover 529 balances by ensuring that the 2023 rollover is completed before the rapidly approaching April 15 deadline to do so (and that their custodian knows to report the rollover as a 2023 Roth IRA contribution)!

Capital Gains Hikes At Center Of Biden's Second-Term Tax Agenda

(Bloomberg News)

Each year, the president submits a budget proposal outlining their policy priorities in the year ahead. And while this budget always represents an opening volley in the budget debate (as legislators from the opposing party, and even some from the president’s own party, might oppose them), the future of the proposed measures becomes even cloudier during an election year, as the 2 main political parties jockey for control of Congress (with the presidential election as an added factor this year). Nevertheless, the president’s budget proposal can often set the tone for upcoming legislative discussions (and in this case give a preview of President Biden’s priorities if he is reelected).

The White House released its fiscal year 2025 budget proposal this week, which includes a wide range of potential measures that could impact financial planning clients, particularly those with relatively high incomes. These proposals include increasing the top personal income tax rate to 39.6% from 37% on income above $400,000 for single filers and $450,000 for joint filers and increasing the Net Investment Income Tax (NIIT) rate to 5% from 3.8% on income above $400,000. Another measure that could affect planning considerations is a proposal that would change the “stepped-up basis” rule (i.e., when an individual dies, the basis of the assets that they owned is increased [or “stepped up”] to their value as of the date of the individual’s death) by treating unrealized gains as taxable income for the final year of the taxpayer’s life (though the proposal would exempt the first $5 million of unrealized gains per individual and would have a carve-out for family-run businesses). Other proposals include limiting the use of tax-preferenced retirement vehicles by ultrawealthy individuals (though the specifics of potential measures are unclear) and changing the rules surrounding private placement life insurance and private placement annuities. While many of the proposed measures would increase taxes for certain clients, the budget also calls for increasing the child tax credit to $3,600 for children under age 6 and to $3,000 for older children (up from $2,000 today).

Ultimately, the key point is that while a president’s budget is more of a ‘wish list’ rather than a series of specific proposals that are likely to be enacted in the near future (and in the current case, many of the measures resemble similar items from President Biden’s previous budget and legislative proposals that have yet to be adopted), it could give a preview of topics that will be debated in Congress and on the election trail. Further, with many pieces of the Tax Cuts and Jobs Act (TCJA) set to sunset at the end of 2025, tax matters (including whether to extend certain TCJA provisions) are likely to be at the forefront of political discussions in the coming year, offering advisors an opportunity to add value to their clients by staying up to date with the latest proposals (and, perhaps more importantly, laws that are actually passed!) and their related planning considerations.

Hightower CEO Says RIA Acquisition Prices Remain Reasonable

(Gregg Greenberg | InvestmentNews)

Following a period of significant growth in RIA Mergers and Acquisitions (M&A) activity, 2023 saw a pullback in deal flow – with the number of RIA M&A transactions declining to 321 transactions from a record-high 340 in 2022, according to investment bank Echelon Partners – amid rising interest rates (that can increase the cost of financing deals) and other headwinds. Nonetheless, many market participants remained positive that underlying factors driving M&A activity (e.g., infusions of Private Equity [PE] capital into large buyers and a large number of retirements among RIA founders) would mean that deals could soon pick up.

According to M&A consulting and advisory firm DeVoe & Company, these predictions appear to have come to fruition, with the firm recording 49 announced transactions so far in 2024, up from 41 during the same period last year. For his part, Bob Oros, chairman and CEO of RIA aggregator Hightower Advisors shares the positive view of the RIA M&A environment, noting that there remain plenty of potential acquisition targets to meet the needs of firms looking to grow (and that these potential buyers, often with the backing of PE capital, have the dollars to consummate these deals). Further, when it comes to assessing potential acquisition targets, Oros said top considerations include the quality of the leadership team (in particular, leaders who are focused on client relationships and the client experience) as well as the firm’s ability to grow organically over multiple years.

Altogether, these findings suggest that while the total number of RIA M&A transactions might have dropped in 2023 (from record highs in previous years), there remains continued appetite from buyers for firms that are a good fit, suggesting that owners of growing, sustainable firms who are considering a sale could receive strong offers (though some owners might find that positioning their firm for a sale could reduce their desire to actually sell it!).

The Intricacies Of Integrating RIAs

(Gregg Greenberg | InvestmentNews)

Most RIAs primarily grow their Assets Under Management (AUM) through organic growth, whether it is by attracting new clients, or in managing an increasing percentage of current clients’ assets. While this approach can lead to a steady pace of growth, firms seeking an immediate jolt to their AUM can also look to inorganic growth (i.e., buying other firms). And while the most obvious consideration of doing so might be the purchase price, the ability to properly integrate the acquired firm into the buying firm also can play a major role in determining whether the deal is successful in the long run.

For RIA aggregator Mercer Advisors, which has acquired 85 firms since 2016, integration is a deliberate process. Their first step is operational integration between Mercer and the acquired firm, bringing their back offices and the technologies together (a key factor to get ‘right’, given that many sellers are often looking to join a larger platform that offers a better tech stack and back-office efficiency). This is followed by the unification of service offerings and cultural assimilation (so that the acquired firm eventually becomes a seamless part of the Mercer brand). Together, these steps can take 12-18 months, indicating that even for seasoned acquirors, integrating an acquired firm takes time (and staffing to manage).

In the end, the acquisition of one RIA by another is only the first step in joining the firms together. Which has implications for all players involved, from the buyer (who will want to ensure a smooth integration so that staff and clients of the acquired firm stick around), to the seller (which, if they are retiring, often want to know that their staff and clients will be well served in the new firm), to the acquired firm’s advisors (who will want to provide seamless service for their clients) and clients (who will want to be assured that their wealth remains in good hands)!

Why The Headline Purchase Price For An RIA Merger Transaction Doesn't Tell The Whole Story

(Richard Chen | Advisor Perspectives)

Whenever one company buys another, both firms (and outside parties who might be interested in industry valuations) are often focused on the top-line purchase price. However, deals often include terms that can lead to price adjustments to protect the buyer and seller in case of meaningful changes to the business between the time the agreement is signed and the deal is completed, or even for a certain period after closing.

For RIA M&A activity, terms outlining potential downward price adjustments can mean that sellers end up receiving less than the headline price. For instance, a buyer might include terms allowing for a downward price adjustment if there is a loss of clients, a drop in revenues, or a decline in earnings from the acquired business after closing (though the parties can negotiate to allow for some attrition without causing a price adjustment). Other downward purchase-price adjustments can include working capital adjustments (if the working capital available to the buyer at closing is less than a pre-determined target), net-asset adjustments (if the net assets of the seller are lower than expected at closing), indemnification claims (if the buyer incurs losses due to breaches of representations, warranties, or covenants by the seller), and/or contingent liabilities (if the seller has liabilities that are contingent on future events).

For their part, sellers can negotiate earnout terms that can add to the headline purchase price. For instance, a seller might receive fixed payments if certain performance targets are met (e.g., if revenues increase by a certain percentage in the year after closing). Alternatively, a seller could earn a percentage of any increases in the business’ revenue or profits during a specified period after closing (e.g., 25% of any increase in client revenues for a predetermined period).

Ultimately, the key point is that while the purchase price in a deal is what tends to make headlines, the actual price a buyer ends up paying and a seller receives can be significantly different depending on the terms of the deal. Which offers an opportunity for both buyers and sellers of RIAs to negotiate terms that protect their respective interests while a deal is being completed and even after it is consummated (and suggests that both parties will want to carefully read and negotiate the terms offered in a proposed agreement!).

How Generative AI Will Transform Knowledge Work

(Maryam Alavi and George Westerman | Harvard Business Review)

Technological disruption has come to many industries, from robotics transforming the way goods are manufactured to computer applications changing the structure of many businesses (e.g., ridesharing). While many occupations have been transformed as a result of technological advances (which have sometimes led to a reduced number of jobs available in certain fields), knowledge workers (i.e., those whose jobs involve cognitive processing of information to generate value-added outputs), including financial advisors, have often considered themselves better protected against encroachment from tech-based solutions (with the thinking that while tech can perform manual or ‘structured’ tasks, responsibilities that necessitate creativity or empathy would be harder to replicate by technology).

Nonetheless, recent advances in generative Artificial Intelligence (AI) tools (e.g., ChatGPT and others), which have shown tremendous ability for creativity and seemingly thoughtful responses to user prompts, have called into question whether knowledge workers will be immune from major technological disruption. But rather than replace knowledge workers, Alavi and Westerman argue that generative AI tools are more likely to improve the ability of these workers to perform their jobs. For instance, generative AI tools can free up a worker’s mental capacity (so that they can focus on tasks that require less structured thinking) by handling repetitive elements of an individual’s job (e.g., scheduling appointments or summarizing meeting notes). AI tools can also help boost a worker’s creativity, whether in brainstorming ideas for an article or refining a business proposal, and in training (given the ability of certain tools to provide real-time feedback while never running out of patience with the learner).

These potential benefits are highly relevant in the financial advisor realm as well, whether an advisor uses a generative AI tool to help create draft emails to clients, meeting summaries, and blog posts (which the advisor can later refine if needed), or even create “Custom GPTs”, bots that can perform specific tasks, such as client data gathering. Which ultimately suggests that, rather than being a threat to their business, financial advicers who leverage generative AI tools could in reality find themselves being more productive than ever before!

What The Birth Of The Spreadsheet Teaches Us About Generative AI

(Tim Harford)

Before computer-based spreadsheets became available in the late 1970s, accountants and other professionals spent a significant amount of their time running calculations through calculators and manually inputting the data into paper spreadsheets. But even when digital spreadsheet programs were introduced, they were often used similarly to their paper counterparts, with professionals still using calculators and inputting the results into the computer program. Only later did users realize the time-saving benefits of having the spreadsheet program serve as both the calculator and output display.

Harford suggests that a similar trend could occur with the use of generative AI tools, which offer the promise of reducing the amount of time needed to complete certain tasks. For example, generative AI tools might be used to complete relatively simple tasks (e.g., analyzing client statements and pre-filling forms with the relevant data), freeing up professionals’ time for more complex endeavors (e.g., working with a client to develop a financial plan). And just as the spreadsheet did not lead to a dramatic reduction of individuals working in the accounting industry (which had 339,000 accountants and clerks in 1980 and 1.4 million accountants and auditors today), generative AI might transform the way professionals work within an industry rather than eliminate their jobs wholesale. Nonetheless, Harford does warn that professionals will need to be careful when using generative AI tools to avoid the perils that come from the use (abuse?) of spreadsheets (e.g., creating Excel models with overly rosy assumptions).

Ultimately, the key point is that while generative AI tools offer a wider variety of potential use cases compared to the digital spreadsheet, the way spreadsheet programs were adopted and used could be instructive for the future path of the adoption of AI tools. For financial advisors, this could mean having an open mind to using AI tools in creative ways while ensuring the continued quality of the plans and recommendations the advisor provides to clients (and that they remain compliant with relevant regulations)!

The Present And Future Of AI In The Financial Advice Industry

(Elana Iskowitz | WealthTech Today)

At a time when breathless headlines suggest that companies that do not adopt AI-powered tools could fall behind their competition in the coming years, advisory firm owners might wonder whether they are sufficiently leveraging available tools within their tech stack. With this in mind, a survey of the current advisor-centric AI landscape and what might come in the future could help inform a firm’s decisions.

To start, some advisors might not realize that they are benefiting from AI technology embedded in the software they currently use. For instance, popular portfolio management software Orion uses AI to help advisors with portfolio comparisons. In addition, a variety of standalone tools powered by AI can allow advisors to save time both when prospecting (e.g., Catchlight, which predicts which leads are more likely to become clients) and when serving current clients (e.g., Pulse360, which provides client meeting automation and advisor compliance).

While a range of external software tools are currently available, some industry experts suggest that the future of AI for advisory firms could be customized tools that use firm-specific data to speed processes and generate recommendations. Though notably, firms will likely need to have sufficient data and will need to mitigate privacy and regulatory concerns to implement these successfully, suggesting that AI tools might initially be more effective for creating insights that advisors consider (and adjust) themselves before presenting them to clients rather than the clients accessing the AI tools directly (though client-facing tools that support less advice-centric tasks like data gathering could initially be more common).

In sum, the potential applications of AI-powered tools for financial advisors are only starting to emerge. Which suggests that firms might take differing approaches to adopting this technology, as some might look for a ‘first mover advantage’ and quickly adopt available software (or create their own!), while others might be willing to wait for the space to mature and use the tools that are found to be best in class (to avoid the potential time and dollar costs of adopting tools that might not be effective for their needs).

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.