Weekend Reading For Financial Planners (March 29–30)

Advisors Who Are (And Act As) Fiduciaries See Higher Client Satisfaction: Cerulli

(Lilly Riddle | Citywire RIA)

While financial advisors have an important role to play in helping their clients succeed financially, not all advisors are required to act in their client's best interests (with some only required to do so in certain situations). And while consumers are becoming increasingly aware of the concept of a 'fiduciary' (and the growing headcount at RIAs means that more advisors are required to act as fiduciaries), advisors might wonder how the fiduciary designation impacts their business.

According to a survey by research and consulting firm Cerulli Associates, 70% of affluent financial advisory clients who believe their advisor is always obligated to act as a fiduciary indicated they are satisfied with their relationship and aren't seeking out a new advisor. On the other end of the spectrum, only 41% of clients who believe their advisor may put their own interests first indicated they are satisfied with their relationship, suggesting that an advisor's status as a fiduciary could support higher client retention. Overall, 85% of the affluent clients surveyed believed they were in a fiduciary relationship with their financial advice provider and 70% indicated their advisors are obligated to act in their best interest.

Ultimately, the key point is that amidst discussion over how and when different types of advisors should be required to act in their clients' best interests (e.g., the debate surrounding the SEC's Regulation Best Interest and the Department of Labor's proposed Retirement Security Rule), the Cerulli survey suggests that advisors who are required to be fiduciaries (and who follow through on these responsibilities!) could benefit in the long term both through more trusting and stickier client relationships and, perhaps, greater trust among consumers in the financial advice industry as a whole.

Research Highlights Prospects, Challenges Of Serving Younger Clients

(Alex Ortolani | WealthManagement)

Traditionally, those nearing and in retirement have made up the bulk of financial advisory firms' clientele, not only because they face key planning questions (e.g., when can they retire and how much can they afford to spend in retirement) but also because they've often accumulated sufficient assets to be profitably served under an Assets Under Management (AUM)-based fee model. Nonetheless, given that relatively younger clients come to the table with important planning challenges as well (from cash flow and debt management to education planning), many advisors have sought ways to serve this demographic (many of whom have the income, but perhaps not the assets, to support paying a planning fee that is profitable to the firm they work with).

According to a recent survey by research firm J.D. Power, 27% of current 'DIY' investors say they are likely to use a financial advisor in the next 12 months. Notably, this figure is higher among members of Gen Y and Gen Z (37%) and lower among those in Gen X, Baby Boomers, and pre-Boomers (21%). At the same time (and perhaps not surprisingly), older generations make up the vast majority of clients at traditional wealth management firms (with the survey finding that only 11% of clients at these firms are under 40), while younger clients are more likely to use fintech platforms (42% of whose clients are younger than 40).

Nonetheless, while younger generations might appear to be an untapped market for (human) financial advisors, firms (particularly those that charge on an AUM basis) sometimes are challenged to serve these clients profitably (at least in the short run, as working-age clients are likely to see their account balances grow over time due to additional saving and potential inheritances). Some firms have taken a fee-for-service approach, offering subscription-style retainers, project-based fees, or hourly fees for clients who might have the income (but not the assets) to support an advisory fee that makes serving them profitable for the firm. Another approach (discussed in recent Kitces Research on Advisor Productivity), which can be implemented by AUM-based firms, is to charge a minimum planning fee alongside an AUM-based fee (potentially waving the planning fee once a client's assets reach the firm's desired minimum fee threshold). In this way, firms can profitably serve accumulator clients while they are building up their assets and (hopefully) keep them on board as their assets grow over time.

In the end, while there is no shortage of potential financial planning clients (across the age spectrum), taking a 'one size fits all' approach is sometimes not feasible when working with clients of different ages. Nevertheless, firms that want to serve clients in younger generations have a menu of fee models to choose from, allowing them to profitably serve clients who might conceivably stay with the firm for several decades!

Senate Majority Leader Pushes Full Repeal Of Estate Tax

(Bloomberg News)

The 2017 Tax Cuts and Jobs Act (TCJA) had a profound effect on estate tax planning for high-net-worth families, as it doubled the gift and estate tax and Generation-Skipping Tax (GST) exemptions from $5.6 million per person to $11.2 million. By 2025, these exemptions have increased to $13.99 million per person, meaning a couple with nearly $28 million of net worth could pass away this year and owe zero estate tax. However, the expiration of TCJA in 2026 would reduce the exemption to approximately $7 million per person, potentially reexposing more households to estate tax, and increasing estate tax exposure for those already above that threshold.

With this in mind, members of Congress (and, in particular, Republicans, who hold majorities in both the House and the Senate) are in the midst of debating whether or how to extend (or even expand) various measures in the TCJA, including the estate tax exemption. Notably, one possibility being floated is to end the estate tax entirely, a move endorsed by Senate Majority Leader John Thune and currently backed by 46 senators so far as well as House Ways and Means Chair Jason Smith and most House Republicans. According to an estimate by the Committee for a Responsible Federal Budget, eliminating the estate tax would cost an additional $300 billion over a decade, which could mean the cost of doing so might be weighed against other potential policy priorities (from extending TCJA's marginal tax rates to raising the State And Local Tax [SALT] cap) as Republicans seek to pass a tax cut bill through the "reconciliation" process, which allows the passage of budget-related bills with only a simple majority in the Senate (meaning that they wouldn't necessarily have to court Democratic Senators) but, per the associated "Byrd Rule" cannot increase the budget deficit beyond the budget window (typically 10 years).

In sum, while eliminating the estate tax has long been a Republican priority, doing so could require compromises in other areas (whether in terms of limiting additional tax cuts or finding additional sources of revenue), which might instead lead them to 'just' extend the current (historically elevated) exemption. Either way, it appears quite possible that (all but the wealthiest) financial planning clients will continue to see relief from Federal estate tax for the foreseeable future (if not permanently). At the same time, given that several states impose their own estate and/or inheritance taxes (often with significantly lower exemption levels than the Federal threshold), planning for these exposures could remain an important way for advisors to add value for clients facing them!

When Does Sequence Of Return Risk Recede?

(Jeffrey Ptak | Morningstar)

Sequence of return risk, the concept that even if short-term volatility averages out into favorable long-term returns, a retiree could still be in significant trouble if the sequence of those returns is unfavorable, is one of the primary threats to an individual's lifestyle in retirement. And while the first several years of retirement are commonly understood to be the 'danger zone' for sequence risk, clients might be curious to know how far out they must wait until the threat of sequence risk recedes.

Using data from its recent "State of Retirement Income" study, Morningstar researchers looked at sequence risk for an all-equity portfolio (which it assessed could support a 3.1% starting safe withdrawal rate with a 90% probability of not depleting the portfolio). Of the 10% of simulations where the retiree exhausted their savings before the end of retirement, they found that nearly 70% of these 'failures' involved trials where the client's investments had lost value by the end of year five of retirement. On the other hand, those who make it through the first five years of retirement with investment gains had only a 1 in 25 chance of subsequently depleting their savings before reaching the end of retirement, which sank further to 1% by year 15 of retirement (and many of these individuals likely benefited from the upside potential of the sequence of returns as well). Further, an investment gain in just the first year of retirement cut the overall risk of portfolio exhaustion in half.

Ultimately, the key point is that while clients entering retirement are unlikely to maintain an all-equity portfolio (or a fixed withdrawal rate, given the number of more flexible options available), this research indicates the potential value of diversification to dampen losses in one portion of the client's portfolio, particularly in the early years of retirement. Which presents an opportunity for advisors to add value by choosing an appropriate asset allocation and withdrawal strategy for each client, and, for clients whose portfolios make it through the first several years of retirement unscathed, by providing reassurance that the likelihood of exhausting their portfolio will have declined significantly (and, if they experience a positive sequence of returns, offer the ability for the clients to increase their spending level).

Using A "Bucket" Approach To Mitigate Sequence Of Return Risk

(Christine Benz | Morningstar)

Portfolios for retired clients often contain a combination of equities, bonds, and cash to balance out a desire for growth (to fund spending needs later in retirement) with the need for current income. While such a portfolio is sometimes thought of as a unified entity, another approach is to divide assets into several 'buckets', which are used in different ways to generate income (while mitigating the potential for sequence of return risk).

The core of the 'bucket' framework is having a highly liquid (and extremely low risk) component to meet near-term living expenses for at least one year, which can allow a retiree to fund their near-term spending needs without having to sell riskier assets that might have gone down in value (thereby allowing them to participate in a potential market rebound). A client might start by filling this first bucket with an amount equal to one year's worth of spending needs (net of any Social Security or other 'guaranteed' income sources). This amount could be adjusted based on the client's risk tolerance and/or the probability they will face large 'unexpected' expenses. A second bucket might include five to eight years' worth of living expenses, invested largely in high-quality fixed-income investments (or other investments with similar risk/return profiles), the income distributions from which can be used to 'refill' the first bucket as needed. Finally, a third bucket might contain equities and other risk assets to serve as a source of long-term growth.

Notably, the bucket strategy is not a 'set it and forget it' approach, as at least the first bucket will need to be refilled over time as the client uses it for ongoing spending. To cover income needs, a client might first look to income from cash holdings in bucket one, then to income from bonds in bucket two, and dividends from stocks in bucket three (which also can be used to refill the first bucket once spending needs have been met). Next, rebalancing buckets two and three can prevent the overall portfolio from becoming too overweight in one asset class (and the proceeds of this rebalancing can be used to support income needs or refill the first bucket). Finally, if needed, principal withdrawals from the lowest-risk investments in the second bucket could be used to support income or bucket-filling needs (given that they would be less likely to have experienced losses than the riskier assets in the third bucket).

In sum, a bucketing strategy not only can serve as a way to organize a client's assets based on the amount and timeframe of their income needs (and avoid needing to tap riskier assets for income needs, potentially increasing exposure to sequence risk), but also a way for clients to easily visualize the sources of their retirement income and increase their confidence that their advisor has them on a sustainable path to meet their spending needs throughout retirement.

Managing Sequence Of Return Risk With Bucket Strategies Vs A Total Return Rebalancing Approach

(Nerd's Eye View)

A fundamental takeaway from research on safe withdrawal rates is the fact that market volatility really matters during the retiree withdrawal years. Even when long-term returns average out in the end, if the sequence of volatile returns is unfavorable, there is a danger that ongoing distributions during the "bad" years early on could deplete the portfolio before the "good" years ever show up.

As a result, many advisors and their clients use strategies that will avoid taking distributions from asset classes like equities during down years – for instance, setting aside "buckets" as a reserve against market crashes, and/or creating a series of "decision rules" that might simply state outright that equities will only be sold if they're up, otherwise bonds are liquidated instead, and cash/Treasury bills will be used if everything else is down at once.

Yet when such a decision-rules strategy is paired with simple rebalancing, it turns out that the outcome is no better than merely managing the portfolio on a total return basis without the decision rules at all. The key, as it turns out, is that rebalancing alone already has an astonishingly powerful effect to help avoid unfavorable liquidations, as the process systematically ensures that the investments that are up (the most) are sold, and the ones that are down (the most) are actually bought instead.

Which means that, in the end, rebalancing might not get nearly the credit it deserves to accomplish similar – or even better – results than buckets and decision rules alone, and that such approaches are perhaps better purposed as explanatory tools for clients than actual systems for generating cash flows in retirement?

Creating Content With Confidence: 8 Copyright Myths Explained

(Crystal Butler | Advisor Perspectives)

Content marketing is a popular way for advisors to demonstrate their expertise to individuals who fit their ideal client persona. And while advisors often have many good ideas to discuss in their content, they sometimes borrow from the work of others, whether it's a photograph to go along with a blog post or a music clip to use in the background of a YouTube video. Which means that awareness of applicable copyright laws can help ensure that advisors use this content appropriately and don't run afoul of the law.

At a basic level, it's important to understand that just because something is posted online it's free to use, as protections like the Digital Millennium Copyright Act mean that most content online is copyrighted. Further, simply giving credit to the original creator (e.g., including "Photo by X" under a picture used in a blog post) isn't sufficient as well in the absence of explicit permission or a proper content licensing agreement. Even royalty-free images can come with licenses that include limitations (e.g., regarding attribution or usage). Similarly, while it's fine to share a link to a news article, reposting the text entirely (especially if it's behind a paywall) can violate copyright laws (however, engaging in "transformative use", or summarizing the article in your own words, can help avoid potential issues). And even when one pays for a stock photo or licensed music track, there can be licensing limitations regarding how it's used (e.g., digital versus print materials), the duration of the license, and the industries in which it can be used.

Ultimately, the key point is that it can be easy to run afoul of copyright law when using content online for an advisor's own marketing purposes. Which means that taking preventative and corrective steps (e.g., auditing the firm's website and marketing materials for potentially copyrighted content and setting clear standards for staff when it comes to content sourcing) can help a firm avoid legal trouble while still benefiting from the wide array of content available online!

A Comprehensive Guide To Maximizing Video Impact On Financial Advisor Websites

(Kalli Fedusenko | Journal Of Financial Planning)

While advisors have long written newsletters and blogs aimed at prospects, advancements in technology have allowed many to expand into other forms of media, including podcasts and video, extending the reach of their marketing to an increasingly tech-savvy population. In particular, video can be a powerful way to engage with an audience, whether they are on their computers or their smartphones.

For advisors interested in producing video content, considering a few best practices can improve the return on the time invested in producing the videos. To start (given ever-decreasing attention spans), creating videos that are two minutes or less can ensure they are concise and engaging. For instance, an advisor might consider making short videos covering a different topic in each one rather than a lengthier video discussing several issues (other potential uses of video could be to answer common client questions, explaining the firm's planning process, or helping viewers better get to know the advisor). Next, once the video is created, hosting it on YouTube (or a similar platform) and embedding it on the firm's website can ensure optimal load times (without sacrificing site performance) and avoid visitors leaving the firm's site for the video hosting platform. Further, adding captions or providing transcripts to videos not only can ensure they are accessible to all website visitors, but also support Search Engine Optimization (SEO) performance as well, making them more likely to be found.

In sum, producing short-form videos can be a way for an advisor to demonstrate both their expertise and personality, giving prospective clients a richer idea of what it might be like to work with them and keeping the particular advisor top-of-mind when they are ready to pursue a financial planning engagement.

How A Content Marketing Firm Produces Its Own Blog Posts

(Tamilore Oladipo | Buffer)

Writing blog content can be an effective way for financial advisors to gain recognition as a thought leader and connect with potential clients. Nonetheless, while blog writing might be free in terms of hard-dollar costs, it can potentially take up a significant amount of time. Which suggests that taking a methodical approach to producing blog content could pay off not only in terms of increased readership, but also more time for the advisor to take on other tasks.

With this in mind, content distribution platform Buffer suggests a six-step approach to writing and distributing blog posts. The first step is to create a plan for the post, by brainstorming topics, defining the goal for the article, and identifying the target audience. Next, conducting keyword research (e.g., using tools like Ahrefs or Semrush) can help identify key terms, which if emphasized in the post, can help it rise up the search rankings and get in front of the target audience. With the topic and keywords in hand, creating an outline that divides up the article into sections (e.g., using H2 and H3 headings) can ensure that the final post is organized and has a consistent flow. Then, after drafting the post itself, taking time to edit it (whether through a self-edit, consulting with a colleague or using tools like Grammarly to catch spelling and syntax errors). Finally, not only distributing the post on the firm's or advisor's blog, but also repurposing it across different platforms (e.g., social media threads or scripts for videos) can extend its reach further.

Altogether, given the time investment involved in producing blog content, taking time to ensure that it is organized, well-written, and distributed widely can increase the chances that the time invested in producing it pays off in the form of greater engagement and, hopefully, more interest from prospective clients!

A Reminder On The Importance Of Sleep For Brain Health

(Jess Alderman, Kathryn Birkenbach, and Peter Attia | Peter Attia MD)

A good night of sleep can leave an individual feeling refreshed in the morning and perhaps perform at a higher level during their workday (perhaps without the aid of coffee!?). Nonetheless, a key question though is whether achieving sufficient levels of sleep is beneficial for one's overall health.

A recent study looked into this question by following participants who filled out a baseline sleep quality questionnaire in 2000-2001 (with nearly all of them also filling out a second questionnaire in 2005-2006) that asked about six "poor sleep characteristics" (PSCs, e.g., daytime sleepiness, early morning awakening, and difficulty initiating or maintaining sleep). The participants underwent a brain MRI scan 15 years after the first questionnaire and the results were analyzed to determine the "brain age" for each subject. Following this exercise, the researchers found that having a greater number of PSCs was associated with more advanced brain aging, as those with 2-3 PSCs had a brain age that was 1.9 years older than those with 0-1 PSCs and those with greater than 3 PSCs had a brain age that was 3.5 years older. In particularly, difficulty initiating sleep and early morning awakening were associated with the greatest increases in brain aging. Notably, though, this was an observational study, meaning that while it identified a correlation between PSCs and brain age (which, itself, is not necessarily indicative of a particular medical condition), it doesn't provide evidence of causation (which is hard to come by in sleep-related issues given the difficulty [and ethical challenges] of long-term randomized control trials of sleep deprivation).

Nevertheless, this study provides another data point to the theory that poor sleep is associated with negative health outcomes and relates to other research findings suggested that sleep can support learning and memory, promote mental health, and be a preventative measure against dementia. Which suggests that regularly having good nights of sleep not only could help you feel better in the short run but, perhaps, also have better health outcomes in the long run.

How To Arrange Your Room For The Best Sleep

(Louryn Strampe | WIRED)

When it comes to maintaining good 'sleep hygiene', much of the discussion surrounds things like routines (i.e., going to bed and waking up at about the same time each night) and various gadgets (e.g., sleep trackers) that can help an individual maintain good sleep habits. However, in addition to these, how one's bedroom is arranged might be an overlooked (and free) way to improve sleep as well.

To start, the positioning of the bed within the bedroom can affect sleep quality. For instance, if it is located next to an air vent, temperature changes during the night could affect sleep. Or, if one wall in the bedroom is shared with a (potentially noisy) neighbor, moving the bed alongside a solid, quiet wall could assist with sleep as well. The presence of electronics can negatively affect sleep as well (whether as a distraction or based on the blue light they emit that can disrupt sleep), suggesting that maintaining a screen-free zone in the bedroom (or at least keep the smartphone out of easy, tempting reach?) could promote better sleep as well. A bedroom's lighting can influence sleep as well, as maintaining darkness in the room during the night while allowing some sunlight in the morning can help cue the body's circadian rhythm for when it's time to sleep or wake up. Finally, keeping one's bedroom relatively tidy can reduce distraction and create a more comfortable environment for sleep.

Ultimately, the key point is that achieving sufficient sleep is not just a matter of will or routine, but also a function of the environment where one sleeps as well. Which suggests that "straighten up your room" might not just be good advice for kids, but for adults as well?

7 Assumptions About Sleep (And How To Actually Get More Rest)

(Stephanie Vozza | Fast Company)

Given that no two people have the same sleep habits, coming up with universal 'rules' for sleep is impossible. Nevertheless, in the absence of definitive certain assumptions about sleep have emerged over time that could end up being counterproductive for achieving consistent rest.

To start, while many individuals target eight hours of sleep at night, some sleep researchers suggest that the specific number of hours of sleep is less important than the quality of that sleep (which, while hard to measure, can be signaled by whether an individual feels refreshed during the day). Also, certain sleep habits that might seem helpful for sleep can actually hurt sleep quantity and quality. For instance, relaxing in bed for an extended period before sleeping can weaken the body's association between the bed and sleep. In addition, while drinking alcohol in the late evening can induce drowsiness and help an individual get to sleep quicker, it can have a sharply negative impact on sleep quality. Further, some might assume that a few lower-quality nights of sleep during the workweek could be made up through longer sleep sessions over the weekend; however, recovering from such 'sleep debt' isn't as simple as extended sleep over a couple of nights (which could also disrupt one's sleep routine as well). Finally, it's important to recognize that it's normal to experience "sleep inertia", or drowsiness for the first 30 to 60 minutes after waking up, even after a good night's sleep (though fatigue experienced throughout the day could be a sign of poor sleep).

In the end, while there is no one recipe for getting sufficient high-quality sleep (as sleep length and timing tends to vary over a lifetime), finding the routine that works for oneself and sticking to it could be the simplest path to feeling energized each day (or at least most of them?).

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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.