Weekend Reading For Financial Planners (May 18-19)

Financial Firms See Dip In Social Media Engagement

(Michael Fischer | ThinkAdvisor)

Social media use is ubiquitous in modern society, from personal accounts used to share photos and (perhaps too many) opinions, to professional accounts that can help a firm drive engagement with prospects and clients alike. However, given the expansive scope of the social media universe, from the wide range of platforms available (e.g., Facebook, LinkedIn, and Instagram) to the types of content that can be produced (e.g., written posts, graphics, videos), creating a social media strategy can feel overwhelming.

Given this challenge (and opportunity), digital marketing firm Hearsay Systems has published its latest annual Social Selling Content Study, which offers insights into social media engagement based on data from 100 global financial services firms and their 13 million published social media posts. Overall, the study found that total social media engagements (i.e., 'liking', commenting on, or sharing a post) fell in 2023 compared to the previous year; while the number of active users on various platforms increased during the year, they appear to be engaging with less of it (signaling to advisors that analyzing engagement can be just as, if not, more important than assessing impressions [i.e., the number of times a post is seen]). 

In terms of platforms, the study found that while posts on Instagram received the most engagement (though the engagement rate dipped to 1.1 from 1.6 per post from the previous year), the site continues to be the least-used in the financial industry (suggesting a possible opening for advisors given the potentially saturated nature of other platforms?). LinkedIn was the most popular platform for financial professionals (posting 51% of their content to the site) and text-based posts performed well on the site (with a 5.8 engagement rate), though it trailed Instagram in terms of overall engagement (with a 0.7 engagement rate). 

With regard to content, original content continued to drive the most engagement (compared to sharing third-party content), and, perhaps surprisingly, text-only posts received more engagement (with a 4.3 engagement rate) than other types (likely because text-only posts were more likely to contain original content). Within wealth management specifically, principles-based posts (i.e., showcasing what a firm or advisor values), which only accounted for 1% of all published content, received the most engagement (a 1.8 engagement rate), followed by posts boosting the firm's corporate brand, and posts related to lifestyle topics (on the other end of the spectrum, posts regarding current news were more common, but less likely to receive high engagement).  

Altogether, this study suggests that advisors who are able to take the time to create original, written social media content that shows followers who the advisor and their firm 'are' could see better returns for the time investment it takes to create them. Notably, advisors do not necessarily have to come up with different content for each platform on which they post; in fact, 1 piece of content can be leveraged across multiple platforms and cover 6 different marketing tactics, efficiently expanding an advisor's social media reach!

SEC, Treasury Department Propose Anti-Money Laundering Rule For RIAs

(Patrick Donachie | WealthManagement)

Under the Bank Secrecy Act (BSA), banks and other major financial institutions are required to fulfill certain "Know Your Customer" (KYC) requirements to prevent criminals, terrorists, and other unsavory actors from using the financial system to pursue their illicit ends. Notably, though, despite managing billions of dollars in assets (and potentially being an attractive medium for illicit actors to park or invest their money), investment advisers currently are not on the list of financial institutions under the BSA.

That could be changing, though, as the Treasury Department earlier this year proposed a new rule that would add certain investment advisers (SEC-registered RIAs and those reporting to the SEC as exempt reporting advisers) to the list of "financial institutions" under the BSA and would require them to implement risk-based Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) programs. 

And this week, the SEC and the Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that would apply customer identification obligations to the same group of advisers as in the Treasury proposal. Under the proposed SEC-FinCEN rule, affected advisers would be required to verify the identity of each of their clients "to the extent reasonable and practicable" (e.g., by obtaining the client's name, birth date, address, and government-issued identification number), maintaining records of the information used to verify the person's identity, and consulting government terrorist watch lists to verify that the client is not listed on them. 

In the end, while these proposed rules would add additional compliance (and paperwork) obligations for RIAs (which are also facing a number of other SEC-proposed regulations), advisers offering comprehensive planning services (as well as their investment custodians) are likely already conducting a certain level due diligence on their clients, as understanding their background and circumstances is an important part of preparing a financial plan. Which could be a 'defense mechanism' for these firms against criminals, as these actors might instead try to park their money with more investment-centric advisers and fund managers that spend less time getting to know their clients?  

Large And Acquired RIAs See Greatest Client, Employee Attrition: Study

(Philip Palaveev | Financial Advisor)

For financial advisory firms, maintaining high client and employee retention levels can be a sign of a healthy business, as solid performance in these metrics signals that a firm is providing a high level of service to its clients and is offering a strong employee value proposition (further, high retention levels can save firms the time and money required to replace lost clients and staff members!). Which suggests that understanding vulnerabilities that lead to attrition (and the factors that can reduce it!) can help a firm maintain client and staff continuity over time.

According to data from advisor leadership education and consulting firm Ensemble Practice, advisory firms in 2023 on average added 11 new clients for every 100 on their roster while losing 4 (for a net of 7 new clients). While this might seem strong, these figures are down from a decade earlier, when firms brought in 12 new clients while losing only 3 (for a net of 9 new clients). Notably, larger firms (defined here as those with more than $1B of Assets Under Management [AUM]) had the highest client turnover rate (4.3%), while smaller firms (i.e., those with under $500M in AUM) saw much less attrition at 1.4% (Palaveev attributes this difference to the increased likelihood that a client at a smaller firm will be served by an advisor with an ownership stake in the firm, whereas a client's advisor at a large firm might not have 'skin in the game' and potentially be less concerned if the client departed). Another group of firms seeing above-average client departures were those that sold equity (in either minority or majority transactions), with an 8.4% client turnover rate, compared to 3.2% for other firms (likely caused by the changes in the client experience that can come when a firm's ownership changes).   

In terms of employee turnover, Ensemble Practice found that 57% of advisory firms surveyed during the past year lost an employee they didn't want to lose, while 36% of firms said that they fired an employee. Similarly to client turnover, overall employee attrition was worse in larger firms (7%) than in smaller firms (5%). Notably, mid-sized firms (i.e., those with between $500M and $1B in AUM) were most likely to have a valued team member leave (with 6% reporting at least one of these departures), compared to 4% for large firms and approximately 0% for small firms (possibly due to the proximity of employees in smaller firms to firm leadership, according to Palaveev). Also, similar to client turnover, acquired firms had more client attrition than other firms, with 100% of these firms reporting the loss of at least 1 employee they wanted to hold on to (though the sample size of these firms was small).

Ultimately, the key point is that while larger firms and those selling a stake appear to be particularly vulnerable to client and employee attrition, firms in this position (or those that are growing larger) could potentially improve these metrics by taking steps to offer a consistent client experience and promoting employee wellbeing. Though notably, firms that don't fall into these categories could also consider proactive actions to reduce the chances of client and employee turnover, whether it is in boosting client engagement or offering the type of cultureand benefitsthat can promote staff retention!   

Retire At 65? It's More Like 62

(Anne Tergesen | The Wall Street Journal)

While there is no 'mandatory' retirement age for Americans (though some specialized jobs have them), certain age milestones could be used as target dates for workers considering when to retire, from age 62 (when they are first eligible for Social Security benefits) to age 65 (when they are eligible for Medicare) to their "full retirement age" (for Social Security benefits) to age 70 (when they can receive the maximum Social Security benefit available to them). And while a recent survey suggests that while current workers plan to retire in their mid-60s on average, in reality they often end up retiring earlier.

According to the latestRetirement Confidence Survey from the Employee Benefit Research Institute, the median expected retirement age for current workers is 65 (with 28% of workers said they expect to retire at this age, up from 23% last year), while the actual median age of retirement among retirees surveyed is 62, indicating that workers on average expect to retire later than they do in reality. Another gap can be seen in how individuals begin retirement, with 52% of current workers expecting to retire gradually (and 36% planning to retire completely at once), whereas, for current retirees, 74% had a "full stop" to work, with only 18% engaging in a gradual transition. Further, current workers appear to overstate the chances that they will work in retirement (either full or part time), as 75% of this group plan to do so, while, in reality, only 30% of current retirees work in retirement.  

Altogether, these statistics likely reflect the difficulty for workers both in predicting their future health and job security (which could impact their ability to work) as well as their future selves' preferences (i.e., the "end of history illusion", which shows that individuals tend to have a hard time envisioning the ways they will be different in the future). Further, because current workers appear to expect to work longer and claim Social Security benefits later than current retirees did, they might find themselves with fewer financial resources to support their retirement (by having more work-free years and lower Social Security benefits). Which suggests that financial advisors can add value to clients by 'stress testing' their retirement plan for a variety of circumstances, including (a potentially forced) retirement (much) earlier than they expect to help clients better understand the potential range of outcomes (and possibly make changes to their financial plan depending on their retirement lifestyle goals, though these could change too)! 

7 Steps To Make An Early Retirement Dream Come True

(Cheryl Winokur Munk | Barron's)

While many individuals plan to work until 'traditional' retirement age (perhaps sometime in their 60s) or even beyond, others have a goal to retire earlier. While doing so can allow them to have more time to be active during their "go-go" years (i.e., when they are more likely to be healthy and physically active), financial advisors can play a valuable role helping clients consider the ramifications of this choice based on a range of financial and lifestyle factors.

To start, an advisor can help clients contemplating early retirement consider the 'why' behind their choice and play 'devil's advocate' to ensure they have thought through all of their potential options (including how they plan to fill their time during retirement). For instance, if they are 'just' tired of their current job, they might instead to find a different position or perhaps explore part-time work (which could bolster their financial position). Advisors also can help by showing the wider range of potential outcomes for their financial plan given the extended retirement period, including the potential impact of the (unknown) future sequence of returns they will experience (both to the downsideor the upside). In addition, advisors can start a conversation about how the client plans to get health insurance in early retirement (e.g., through COBRA or a marketplace plan) and when they might begin claiming Social Security benefits (and the consequences of this choice for their retirement income).

In the end, while the decision to retire early could be the right one for many clients, advisors can play an important role in helping them ensure they have fully thought through both the financial and lifestyle consequences of the decision. Though, importantly, this conversation does not necessarily have to be a one-time activity close to their planned early retirement date; rather, by exploring clients' retirement preferences regularly (perhaps checking in to see if their feelings have changed at each annual meeting), advisors could give themselves (and their clients) more lead time to explore the implications of different options and to make changes to the client's financial plan to make it more robust for an extended retirement! 

Is Planning For Age 95 Longevity Overkill?

(Leo Almazora | InvestmentNews)

One of the challenges of retirement income planning for financial advisors is that a client's life exact life expectancy is unknown. Because if a client somehow knew that they would 'only' live to age 80, they might change their spending habits accordingly (e.g., spending more earlier in retirement knowing that their nest egg would not have to last beyond age 80). However, because there is no way to know how long a client will live (and because of a common desire to make conservative longevity estimates to reduce the chances that the client's portfolio will be depleted over the course of an extended retirement), an advisor using financial planning software (where client life expectancy is often a key input) might be tempted to set a client's expected longevity at age 95 (or even beyond!). 

Nonetheless, while using an extended longevity estimate can reduce the chances that a client's portfolio will be exhausted due to a lengthy retirement, doing so can lead to a reduction in the amount of retirement income available to a client each year compared to a shorter life expectancy. With this in mind, a whitepaper from healthcare data and software company HealthView Servicesexplores the potential for advisors to make more customized life expectancy projections based on a client's health. For instance, while a 65-year-old female with no chronic conditions has a life expectancy of 90 (88 for a similarly healthy male), a female of the same age with diabetes has a life expectancy of age 82 (79 for a male). Similarly, while a healthy 65-year-old male has a 19.3% chance of living to age 95 or beyond, this percentage falls if he has a chronic medical condition (e.g., to 12.5% if he has high cholesterol) and is reduced even further if he has multiple conditions.

Ultimately, the key point is that while estimating a client's life expectancy can be challenging, an advisor does not necessarily have to work from a blank slate, whether it is in adjusting for a client's health conditions or whether they are working with a single client or a couple (as the chances that one member of a couple will have extended longevity is greater than that for a single client). Because by having a better estimate of a client's life expectancy, the advisor can create a retirement income plan that more accurately reflects the number of years the client's portfolio needs to last (and, in the case of those with relatively shorter life expectancies, be able to spend more during their remaining years), though having a contingency plan in case of a longer-than-expected lifespan could remain a prudent strategy?     

The Rise Of Model Portfolios

(Tania Mitra | Citywire RIA)

As many financial advisors have shifted their service models from a focus primarily (or entirely) on investment management to comprehensive financial planning, they naturally have less time to focus on creating and managing customized portfolios for each client…and less need to do so, when their value isn't necessarily derived from the portfolio management side of their offering in the first place. Fortunately, these advisors have a range of options available to support a more systematized and standardized investment planning service to clients, such as Turnkey Asset-Management Platforms (TAMPs).

Another available option to support the investment planning process is the use of model portfolios, internal or third-party investment models that allow an advisor to spend less time constructing an asset allocation while retaining control and discretion to implement the trades themselves (typically using trading and rebalancing software). Notably, the use of model portfolios has grown significantly in recent years, with data from Morningstar showing a 48% jump in their use between June 2021 and June 2023. Further, according to a report from research and consulting firm Cerulli Associates, 12% of advisors are primarily outsourcing portfolio construction using model portfolios, while another 22% use models but tailor them to their own (or their clients') specifications. Among firms that use model portfolios, 77% said they help their firm manage risk, 69% said they add an extra layer of due diligence in the investment process, and 66% said models enhance their ability to tailor portfolios to client-specific needs (e.g., tax-efficient models for high-net-worth clients, income models, and alternative sleeves), according to a survey last year by model portfolio provider Natixis Investment Managers.

In sum, advisors appear to be increasingly turning to model portfolios (whether sourced from a home office, centralized within their own investment team to all their advisors, or via a model marketplace) that offer the opportunity to save time on building an asset allocation…while still allowing the advisor to craft client-specific advice and make client-specific portfolio modifications as appropriate. Which ultimately creates more scale for the advisory firm, and frees up time for advisors to focus on the services their target clients need the most (while also presenting an opportunity for advisors whose unique value proposition is investment management to differentiate themselves!). 

How Do Model Portfolios Improve The Client Experience?

(Josh Welsh | InvestmentNews)

Using model portfolios can save an advisor the time it would take to build (and rebalance) a customized portfolio for each of their clients, time that they might instead choose to spend on other planning topics (e.g., tax or retirement planning). Nonetheless, model portfolios still require an investment of an advisor's time to reap the maximum benefits from this tool for their clients.

To start, advisors can first decide whether they want to build their own model portfolios (the more time-intensive option) or use a third party's (whether it is one offered by their home office or available from different providers on model marketplaces). And even if they choose the latter option, it will likely take time for an advisor to gain an intimate familiarity with the model and its components to be able to explain it clearly to its clients and understand how it is likely to perform in different market environments.  In addition, some advisors might choose to make modifications to the selected models, or perhaps their client might want to add or remove a certain investment to the model. Further, while the implementation of a model portfolio can be easier than having bespoke portfolios for each client, these portfolios still need to be managed over time, whether it is in conducting regular rebalances or taking advantage of tax-loss harvesting opportunities (though this can be made easier using trading and rebalancing software).

Ultimately, the key point is that while the use of model portfolios can create a more streamlined investment management process for advisors, it is not necessarily a "set it and forget it" solution. Nonetheless, by conducting sufficient upfront due diligence and ensuring that the model continues to meet their clients' goals, advisors can take advantage of the overall time savings model portfolios can provide while having additional time to focus on their clients' other planning needs!

Leveraging Tech To Customize Model Portfolios

(Josh Schwaber | Advisor Perspectives)

While the use of model portfolios has the potential to streamline advisors' investment management services, the time it takes to create or select the appropriate model portfolios, adjust them if desired, and manage them on an ongoing basis can cut into their time-saving benefits. With this in mind, advisor-facing software can make all of these processes more efficient for an advisor.

First, investment data and analytics tools can help an advisor assess different models and determine which might best meet their clients' needs based on certain performance, volatility, or other characteristics. Once a model is selected, these tools can also help an advisor assess the impact of possible adjustments to the model (e.g., if a client has a concentrated stock position, the advisor might look to underweight that sector in the model). Then, when it comes to implementation, leveraging portfolio management or specialized trading and rebalancing software can help an advisor invest client assets using the model (and any adjustments made) quicker than processing the trades manually (and support rebalancing or tax-loss harvesting trades made over time). Finally, an advisor's portfolio management program and/or separate performance reporting software can help them track the performance of the chosen model portfolio (with any adjustment made) to confirm that it continues to meet client needs.

In sum, while the use of model portfolios already simplifies one part of the investment management process for advisors, leveraging appropriate software tools can provide an advisor with additional time savings and data to better serve their clients (though an advisor might weigh the costs and benefits of using the features of their current tech stack versus adding a new piece that could support model portfolio implementation?).  

Doing The Work: Thoughts On The Path Of The Profession

(Daniel Yerger | MY Wealth Planners)

One of the key issues facing the financial planning industry is the expected upcoming wave of advisor retirements, which could leave a shortage of 75,000 advisors by 2033 (which could both leave firms with a lack of qualified staff to serve their clients, and a dearth of planners available to serve the needs of the broader pool consumers seeking financial advice). To confront this problem, Yerger explores potential levers that the industry (and individual firms) could pull to increase the number of qualified planning professionals, though each these options come with tradeoffs.

To start, changes to the two-part education requirement to become a CFP professional could open the door to more new advisors, though there could be pushback from those who prefer the status quo. While the requirement to complete a CFP Board-registered education program helps ensure that CFP professionals have a certain educational baseline in key topics related to financial planning, the value of the other part of CFP Board's education requirement, that an individual has a bachelor's degree, is perhaps more questionable, primarily because the degree can be in any major. While there might be some signaling value in showing that an individual had the fortitude to complete a bachelor's degree, this requirement could limit the number of aspiring planners (given the time and monetary costs of attending college), including career changers, perhaps without significantly improving the quality of advice an individual might deliver (given that CFP candidates are already required to complete planning-specific coursework). With this in mind, CFP Board's Competency Standards Commission, which is currently evaluating the requirements to become a CFP professional, might choose to adjust this requirement to require the degree to come in a planning related field or perhaps require additional education (e.g., graduate work), though this could further limit the pool of potential candidates (as some might elect to choose a different field with fewer education requirements), or, alternatively, adjust or eliminate the bachelor's degree requirement, which could open the door to additional candidates but potentially invite pushback from firms for lowering the current standards (as a similar scenario resulted from CFP Board's attempted 'CFP Lite' experiment). 

A second area of potential change is in CFP Board's experience requirement, which currently offers 4,000- and 6,000-hour paths to fulfill it. Specifically, Yerger questions the effectiveness of the latter path, as this experience only needs to cover one element of the planning process and can be fulfilled in a variety of ways that do not include client-facing experience (or even working in a financial planning firm). With this in mind, he wonders whether a financial planning residency program, similar to that of the medical profession, might better prepare aspiring planners (though an insufficient number of firms might be willing to offer one, given the time and monetary costs of doing so?). An alternative might be to require CFP candidates to "grind it out" through internships and entry-level positions before being granted the certification (a path used by lawyers and CPAs), which might be a more flexible option. With either plan, though, a certain level of pay and work-life balance would need to be offered to attract a sufficient number of candidates to the profession (e.g., by offering entry-level planners a competitive salary and benefits and support client work without requiring them to meet business development quotas).

Ultimately, the key point is that the need to bring new talent into financial planning is an industry-wide imperative as it seeks to develop into a bona fide profession similar to medicine, law, and accountancy, as well as increase the number of clients that can be served. And while CFP Board plays a major role in setting standards for the planning industry, firms have an opportunity to help grow the number of qualified advisors as well by offering more positions that allow junior advisors to develop their skills while earning a livable salary, (though the question of whether firms might feel obligated to do so is much thornier!).  

The Planning Profession Is Leading Us To A Better World

(Bob Veres | Advisor Perspectives)

In the earlier days of the financial advice industry, those dispensing advice (who typically were investment or insurance salespeople) offered clients recommendations (though these were not necessarily required to be the best available option for the client) and received a commission in return. While sales-based models still exist, many new options have emerged over time that not only have benefitted many clients, but also put the planning industry at the vanguard of better business relationships more broadly.

To start, the introduction of fee-only financial planning brought advisors and their clients to the 'same side of the table', reducing the conflicts of interest advisors faced when providing clients with recommendations. Further, the adoption of the fiduciary standard by many advisors not only provided consumers with a way to tell whether their advisor would act in their clients' best interest, but, as Veres suggests, could serve as a model for other industries and society as a whole in exploring the benefits of putting another's interest ahead of one's one (whether it is a client, customer, employee, or simply a fellow citizen). Finally, the shift amongst many financial advice professionals from primarily focusing on the dollars and cents of planning (e.g., finding ways to maximize client wealth) to helping clients use their wealth to live more fulfilling lives (e.g., through goal-setting, coaching, or life planning) could inspire a broader cultural conversation about what it means to prosper in the modern era.

In the end, while financial planning is just one industry out of many, the tremendous impact advisors can have on their clients' lives (that can further resonate through their families and communities!) suggests that changes in how financial advisors operate could have repercussions that extend to the broader business world and to society as a whole, from building relationships of trust to exploring the role of money in creating a better life (and world)!

Amidst Market Turbulence, The U.S. Wealth Management Industry Converges

(John Euart, Jonathan Godsall, Vlad Golyk, and Jill Zucker | McKinsey)

The wealth management industry is made up of several segments, from large national wirehouses to regional broker-dealers and independent RIAs. While these firm types differ both in their scale and in the way they serve clients, McKinsey has found that their practices are converging in several key areas. 

To start, wealth management firms are offering a broader range of services, often becoming a "one-stop-shop"' for clients. For wirehouses and broker-dealers with affiliated banks, this could mean offering both banking and wealth management services under one umbrella, but even RIAs have the opportunity to offer cash management planning services to clients thanks to new advisor-facing platforms. Next, the range of firm types are seeking to serve clients outside of their 'traditional' wealth demographic. For instance, while wirehouses have often sought to serve higher-net-worth clients, they have been expanding lately into lower wealth segments through digital advice tools. At the same time, broker-dealers and RIAs have been expanding not just to serve high-net-worth households, but also ultra-high-net-worth ones as well (driven in part by the number of brokers breaking away from wirehouses). In addition, firms are expanding beyond traditional marketing approaches such as client referrals and centers of influence, including by adding retirement plan advisory services, acquiring tax and insurance practices, and (particularly in the case of RIAs), marketing directly to their ideal client persona (rather than to a broader pool of potential prospects). Finally, firms of all sizes have been making more investments in their tech stacks(with technology spending increasing by 19% in 2022 alone!), with the introduction of artificial intelligence tools potentially leading to further advancements in AdvisorTech. 

Altogether, McKinsey's report suggests that wirehouses and broker-dealers are increasingly adopting many of the characteristics that have made RIAs unique (from a focus on comprehensive planning services rather than 'just' investment management to offering an upgraded tech stack to their advisors), which (in addition to these firms' larger marketing budgets) could make it more challenging for smaller firms to stand out and attract clients. Nevertheless, by focusing on how a firm is 'different' – whether in terms of the specific client type they serve, the specialized expertise they offer, or how they offer their planning services to clients – RIAs could continue to thrive amidst stiff competition from larger, national firms!