Weekend Reading For Financial Planners (February 24-25)

RIA Channel Accelerates Growth Pace But Small Firms Must Better Differentiate To Keep Pace With Fast-Growing Mega-RIAs

(Leo Almazora | InvestmentNews)

The stock and bond market declines experienced in 2022 challenged both advisory firms (many of which saw their Assets Under Management [AUM], and the client fees they earn, decline) and clients themselves (who likely faced declines in the value of their portfolios). At the same time, a study from research and consulting firm Cerulli Associates has found that while assets managed by RIAs declined by 13% in 2022 (due largely to the market declines), the channel continues to thrive in terms of headcount and the number of firms.

According to Cerulli's data, RIA advisor headcount expanded almost 8.6% in 2022, nearly double the annualized growth rate of 4.4% seen during the past 10 years. Cerulli attributed this growth to a number of breakaway brokers transitioning to the RIA channel as well as a large number of new RIAs being established (with the number of independent, retail-focused RIAs growing by 12.3% in 2022). While the number of RIAs continues to grow, client assets remain concentrated among the largest firms, with the 7% of RIAs with at least $1 billion of AUM managing 71% of total RIA assets (and employing 47% of advisors). Potential reasons for this include these firms' greater options to grow inorganically (e.g., through acquisitions of smaller firms, often supported by infusions of capital from private equity firms), their ability to attract breakaway brokers (by offering them autonomy as well as an established technology and back-office platform), and heftier marketing budgets to reach a broader audience of potential clients. 

Nevertheless, despite the challenges of competing with well-funded larger firms, relatively smaller RIAs still have the opportunity to thrive on their own terms, particularly by showing how they are "different" (i.e., by serving a specific ideal target client and offering relevant specialized planning expertise) instead of "better" (i.e., by focusing their marketing on characteristics shared by larger RIAs, such as being a fiduciary or a fee-only advisor) to signal to potential clients that they would be more effective in meeting the client's unique planning needs compared to a larger firm with a more generic (given that they work with a broader range of client types) value proposition!  

Credentials Boost Planners' Confidence And Client Base: Survey

(Michael Fischer | ThinkAdvisor)

Despite the significant stakes involved in working as a financial advisor (i.e., managing the wealth a client has accumulated over the course of a lifetime), the licensing requirements to become a financial advisor (whether as a registered representative of a broker-dealer, an insurance agent, or an investment adviser representative of an RIA) are relatively easy to fulfill (e.g., passing relatively basic licensing exams). At the same time, advisors have many opportunities to go beyond the minimum requirements and further their education and better serve their clients, from obtaining broader credentials (e.g., CFP certification) or specialized designations that focus on the needs of their target clients (e.g., one of a number of retirement-centric designations).

Notably, a recent survey by the College For Financial Planning (which offers a variety of advisor-focused education and certification programs) found that earning additional credentials not only can help advisors provide better advice, but also can boost their bottom line as well. For instance, 80% of those surveyed (which included a sample of the company's graduates who had earned a professional designation, certification, or license) reported becoming more confident in speaking with clients after earning their most recent credential (recent CFP certificants stood out, with 91% saying they had increased confidence). In addition, 69% of respondents reported being more satisfied with their careers after obtaining their recent credential (82% for those who obtained the CFP certification). And when it comes to professional success, 72% saw an increase in their client base after earning their credential, while respondents reported an average 15% increase in their earnings.

Altogether, this survey suggests that completing supplementary certifications and designations can help advisors gain confidence and better serve their clients (with the CFP certification standing out in terms of certain benefits, echoing previous Kitces Research). Further, advisors also have many opportunities beyond formal designations to build their skills and confidence, from externship programs to in-house training to the 'hands on' experience of supporting more senior advisors within the firm and sitting in on client meetings!   

Treasury Proposes Anti-Money Laundering Rule For Financial Advisors

(Gregg Greenberg | InvestmentNews)

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, investment advisers currently are not on the list of financial institutions under the BSA.

Given this potential vulnerability to the financial system (and the potential for investment advisers to identify and report nefarious actors and activity), the Treasury Department this month 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. Under the proposed rule, these investment advisers would be required to file suspicious activity reports (when they identify potentially nefarious activity) and fulfill additional recordkeeping requirements. Examination authority under the new rule would be delegated to the SEC, which would mean that (if the rule is adopted) future SEC exams could include an evaluation of a firm's implementation of AML/CFT requirements.

Altogether, while the proposed rule would add additional compliance (and paperwork) obligations for RIAs (which are also facing a number of SEC-proposed regulations), advisors offering comprehensive planning services 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 that spend less time getting to know their clients?  

Best Practices For Advisors To Comply With New Gmail And Yahoo Email Sender Guidelines

(Kristen Luke | Kaleido Creative Studio)

Spam email is one of the annoyances of modern life, clogging up inboxes and tempting unsuspecting recipients to click on potentially malicious links. While one potential solution might be to have email providers (e.g., Google or Microsoft) greatly restrict bulk emails, many of these messages actually are useful, including the email lists advisors use to market themselves to prospective clients (who have presumably signed up to receive these messages!). With this in mind, Google and Yahoo as of February 1 have introduced new requirements to improve how they filter emails for their recipients (notably, while Google's policy only applies to those who send more than 5,000 emails a day to Gmail users, the following practices can help improve the chances that other senders will have their emails delivered as well). 

Advisors and others can take several steps to adhere to these guidelines. These include sending emails from the firm's own domain rather from a free email address (e.g., using an @firmname.com address rather than @gmail.com), making unsubscribing easy (e.g., by including a 'one-click' option at the bottom of each email), and only including people on the email list who have expressed their desire to be on it (to avoid recipients from marking the firm's emails as spam). More technical measures that can be taken include authenticating the firm's domain using CNAME records and publishing a DMARC policy record in the firm's DNS settings.

In the end, given the potential benefits of maintaining an email list and providing regular, relevant content (e.g., giving website visitors a way to stay in contact with the firm even if they might not be ready to schedule a discovery meeting), taking a few minutes to ensure that these messages actually reach their intended audience (and that those who no longer want to be on the list can remove themselves easily) is likely to be time well spent!

Advisors Tap Into Personalized Content Marketing, With AI Help: Study

(Michael Fischer | ThinkAdvisor)

Content marketing (i.e., creating and distributing written, audio, or visual content on topics of interest to prospective clients) can help an advisor establish themselves as a credible authority by demonstrating their expertise and knowledge as well as differentiate themselves from other advisors (e.g., by showing how they are uniquely qualified to meet the needs of their target client). At the same time, some advisors might think they have insufficient time to commit to a regular content production schedule and decide not to leverage this tactic.

Nevertheless, recent technological developments (particularly the introduction of generative Artificial Intelligence [AI] tools like ChatGPT) have made content marketing easier than ever. For instance, an advisor could 'prompt' one of these generative AI tools to create a blog post on a topic relevant to their clients and then edit the response to include additional details and to match the advisor's personal style. Notably, firms that personalize their content for their target clients tend to have better outcomes. For example, a recent study by Broadridge Advisor Solutions found that 71% of U.S. advisors surveyed who personalize their content marketing are more confident in reaching their practice goals next year, compared with 62% who do not (in addition, 30% of content personalizers were very confident in meeting their goals, compared to 18% of other advisors). Further, those creating personalized content often were not doing so on their own, as half leveraged generative AI tools to help them do so (compared to 38% of non-personalizers).

Ultimately, the key point is that effective content marketing is not just a matter of creating material and sending it out to the world, but rather involves consideration of the needs of an advisor's target clients and creating relevant material on a regular basis. And while this might seem time-consuming, generative AI tools can provide a shortcut to creating content, though spending some time to put a personal touch on its output (and to ensure they are using these tools in compliance with relevant regulations!) could help elevate the content from generic information to valuable (and relevant) insights for prospective clients! 

3 Advisor Marketing Tactics With Zero (Hard Dollar) Cost

(Sara Grillo | Advisor Perspectives)

When it comes to financial advisor marketing, there are no shortage of paid options, from outsourced lead generation services to digital marketing platforms. Nonetheless, effective marketing does not necessarily require a significant outlay in terms of hard dollars; rather, an advisor can instead choose to invest their time to reach potential clients and build relationships.

One 'free' marketing tactic is to leverage social media to find opportunities to demonstrate their expertise by answering consumer questions. For instance, visiting (or creating) a Facebook group focused on personal finance issues can offer the opportunity for advisors to add value for members with specific questions and, over time, show their value to those who might be interested in becoming clients. Next, given the potential value of client referrals, offering a unique client experience (in addition to high-quality planning service) could make them more interested in referring friends or family members. One option would be to hold client events that help foster connections; for example a firm could host an event for clients with children or one for small business owners to help build community among its client base. Finally, while marketing often helps demonstrate an advisor's expertise, volunteering in the community in a non-planning context could be an effective way to give back while potentially making the advisor's name top-of-mind for neighbors when they do need planning services.

In sum, financial advisors have the opportunity to balance their marketing spend between hard dollars and time, recognizing the inherent time-versus-money tradeoff involved. Which could suggest that advisors with plenty of time but limited revenue (perhaps those just getting going) might prefer investing in tactics that take more time, while those with plenty of revenue, but limited time (given the need to serve a larger client base) might lean towards hard-dollar marketing investments? 

Index Funds Have Officially Won

(John Rekenthaler | Morningstar)

While investors have been able to purchase shares of stock in individual companies for centuries, the first open-end mutual fund with redeemable shares was established in 1924. This innovation allowed investors to pool their money together to buy shares in a large number of companies (as each individual might not have the capital to purchase shares in all of the companies on their own). For several decades, these mutual funds were actively managed, where the manager of the fund picked what stocks to buy and sell based on the goals of the fund. But in 1976, Vanguard introduced the first publicly available index fund, which 'passively' invested in the components of the S&P 500 index.

While index funds took a significantly different approach compared to their actively managed counterparts, they did not take off immediately. In fact, 20 years after Vanguard's first index fund was launched, passively managed equity mutual funds and Exchange-Traded Funds (ETFs) had amassed about $72 billion in assets, well below the $1.2 trillion of assets in actively managed equity funds. But since then, index funds' share of total fund assets has soared, to the point that this year they overtook actively managed funds in terms of total market share.

While consumers no doubt have benefited from index funds in many ways (e.g., through lower fund fees), the index fund revolution has generated critics as well. For instance, some traders (and active managers) have claimed that index funds distort the market, given that the funds buy stocks based on the components of the target index rather than on the business fundamentals of the individual companies. However, Rekenthaler thinks this argument might be overstated, noting that if index funds were making the market 'irrational', it should actually make active managers' jobs easier (given that a perfectly rational market would be impossible to beat!). More recently, others have noticed that large asset managers like Vanguard and BlackRock control a significant percentage (too much, some say) of shares of publicly traded companies in their roles as index-fund providers (and while their customers' own' the actual shares, the companies can vote the shares they control in company elections). Rekenthaler suggests, though, that it is unclear what the actual dangers are for markets or the companies themselves from this dynamic; for example, an asset manager could be seen as too company-friendly, though board elections tend to go in favor of the company's chosen slate anyway. 

In addition to disrupting the fund management space, index funds have played a major role in shaping the financial advice business as well. For many advisors, their primary (and perhaps highest value) job is no longer picking the 'best' active fund managers for their clients' assets, but rather choosing an appropriate asset allocation for clients, investing in appropriate index funds, and spending more time on their other planning needs (e.g., tax and retirement planning). Which suggests that, in the end, index funds (and robo-advisors, which followed later) did not diminish the importance of financial advisors, but rather led to a shift in their value proposition!    

Bond Ladders Gain Traction In Direct Indexing

(John Manganaro | ThinkAdvisor)

Historically, direct indexing (i.e., buying the individual component stocks within an index rather than an index fund) was developed as a means to unlock the tax losses of individual stocks in an index – even if the index itself was up – and was primarily used only by the most affluent investors (who had the highest tax rates and benefitted the most from the available loss harvesting). However, advances in technology have made it easier for advisors to implement this strategy beyond 'just' their highest net worth clientele, and leverage several uses beyond just tax savings, including implementing a more personalized indexing strategy (e.g., based on a client's preferred ESG/SRI criteria), allowing advisors to 'tilt' an index based on their (or their clients') investment preferences or outlook (e.g., by over- or under-weighting certain investment factors), or helping a client invest 'around' a large, highly appreciated, or concentrated position or one whose human capital is tied up in one company or industry.

While the direct indexing strategy has historically been focused on equities, a recent blog post from Parametric (one of the original HNW direct indexing providers) suggests that advisors could leverage bond ladders (in lieu of using a bond fund) in a similar manner as they use direct indexing for stocks. Like direct indexing, advisors and clients implementing bond ladders can take a rules-based approach (e.g., a ladder made up of equal-weight Treasuries with various maturities) that can be customized to the client's needs (e.g., liquidity needs or their tax situation). Further, while tax savings has long been seen as the primary benefit of direct indexing, bond ladders can potentially even offer more value in this area, as advisors can reinvest the proceeds of bonds that have matured in new bonds (thereby 'resetting' the cost basis), whereas tax-loss harvesting in stocks can lead to an ever-lower cost basis in a particular position (reducing the opportunities for harvesting losses) unless additional funds are added to the account and invested. Also, like equity direct indexing, bond ladders offer the opportunity to implement individual client preferences, such as ESG screens when investing in corporate bonds. 

Ultimately, the key point is that advisor trading technology has made it easier to implement strategies like direct indexing for stocks, and now for bond ladders as well, to the point where advisors might consider implementing these strategies with a broader range of clients and use cases (and not just high-net-worth clients seeking high-dollar tax loss harvesting benefits). At the same time, given that advisors will be looking for different platform capabilities depending on their needs (e.g., client portal for personalized portfolios or advanced trading capabilities for custom investment strategies), a platform that pursues a 'niche' by offering advanced tools for one of the major use cases (for its part, Parametric offers a bond ladder solution) could be particularly attractive to advisors, especially if that use becomes increasingly popular!

Why Not 100% Equities?

(Cliff Asness | AQR)

While there are few ironclad rules when it comes to investing, 2 popular beliefs are that investors should hold a mix of stocks and bonds (with the assumption that the less-volatile bond allocation can steady the portfolio during equity downturns), and that younger investors should have a greater allocation to stocks compared to older investors (given the potential for a poor sequence of returns to derail an individual's retirement when the investor is older, relative to the long time horizon for recovery that a younger investor still has). 

However, a recent paper challenges these assumptions, arguing that investors would be better off investing in a portfolio of 50% domestic stocks and 50% international stocks (i.e., 100% in 'diversified' equities) throughout their lifetimes rather than in target-date funds (which tend to follow the 2 popular beliefs outlined above by investing in both stocks and bonds, adjusting the allocation towards bonds as the individual nears retirement age). The researchers cite the superior long-term returns of stocks compared to bonds to argue that investors would build greater wealth with their approach than by using target-date funds (or similar asset allocation approaches on their own or with the assistance of a financial advisor) and that advisors and regulators should be more open to this equity-heavy strategy. 

For his part, Asness finds the arguments in the paper wanting. To start, he notes that it is well understood that stocks have historically provided a greater long-term return than bonds (which is to be expected given that stock investments have come with greater risk than bonds). He suggests that a more important question is whether a 100% equity portfolio would provide a greater return for the risk taken compared to a portfolio with a mix of stocks and bonds (i.e., investors might require significantly greater upside potential in return for taking on much greater risk). Further, the 100% equity approach does not take into account the risk preferences of the investor themselves; for example, some investors might seek to maximize their wealth and are willing to risk a poor sequence of returns to do so (in which an equity-dominant portfolio might be appropriate), while others might be willing to sacrifice return upside for a steadier ride along the way and greater assurance of the income they will have available in retirement (or would outright be at greater risk of retirement failure by talking on 'too much' in equities and increasing their sequence of return risk). Asness also argues that the returns in the sample period of the paper (1890-2019 for the U.S., with later start dates for certain other countries) might not represent the returns that an individual today will receive given that equity valuations today are higher than they were during much of the sample period (and could therefore portend weaker returns going forward compared to the sample period).    

In sum, while the researchers argue for an approach that is superior 'on paper', implementing a 100% equity strategy for clients could prove difficult, given the potential for increased volatility compared to a more balanced asset allocation, the impact of withdrawals (for retired clients) versus portfolios that investors can just buy-and-hold (and not use) forever, and possible underperformance if stocks perform worse going forward than they did in the sample period. Which offers an opportunity for financial advisors to offer significant value, not only by evaluating different investment strategies (and the research behind them), but also by understanding the unique needs and risk tolerance of their clients, along with their cash flow needs to navigate sequence of return risk, to help them stay the course and meet their financial goals!  

Why The 'Tweener' Phenomenon Will Drive RIA M&A In 2024

(David Selig | Citywire RIA)

While RIA Mergers and Acquisitions (M&A) activity had been brisk for many years, with heightened demand from acquirers (frequently larger firms infused with Private Equity [PE] capital) driving up valuations, the pace of deals started to slow in late 2022 as rising interest rates and other factors served as headwinds to continued deal flow. And while RIA deal flow dipped in 2023 (to 321 transactions, down from 340 in 2022, according to data from investment bank Echelon Partners), the decline might not have been as steep as expected given the rising rate environment (and its resulting increase in the cost of borrowing).

Entering 2024, Selig, the founder and CEO of M&A advisory firm Advice Dynamics Partners, believes the ongoing wave of consolidation among RIAs will remain resilient, as "tweener" firms (which he defines as those with between $1 billion and $10 billion in AUM) face a range of competitive pressures and potentially seek partners. For instance, he notes that firms in this bracket often need to hire many (expensive) staff members in the coming years to build capacity and take over when the founder (eventually) retires, need to grow significantly in the next 5-10 years to remain relevant in their local market (but don't necessarily have the cash flow to support this growth), and/or realize that current (high) valuations mean that employees are not likely to be able to pay market value for the firm. At the same time, PE-backed larger RIAs continue to have appetite for deals, with valuations (in terms of earnings multiples) remaining strong since the 2021-2022 peak and deal structures being fair to sellers, potentially making deals attractive to sellers.

In the end, because it 'takes two to tango' when it comes to M&A activity, continued interest among capital-flush buyers combined with competitive and succession pressures (as well as strong valuations) faced by smaller firms suggest that RIA deal flow could remain strong going forward. In addition, the prospect of potential interest rate cuts (reducing the cost of debt-financed deals) and a potential wave of firm owner retirements could further boost the potential number of deals in the year(s) ahead!

Can America Turn A Productivity 'Boomlet' Into A Boom?

(Talmon Joseph Smith | The New York Times)

The U.S. economy has experienced a wild ride during the past few years, from the abrupt slowdown at the start of the pandemic to levels of inflation not seen for decades. In addition, productivity (typically defined as the total amount of output the economy produces per hour worked by its labor force) has gyrated as well, falling in 2021 and 2022 before rising 2.7% in 2023. In fact, the last 2 quarters have seen productivity growth more than double the rate from 2005 to 2019.

This productivity 'boomlet' has led to analysis about its possible causes and whether it is sustainable (as productivity growth can lead to both greater profitability for businesses and higher wages for workers). One potential cause was the impetus for businesses to operate in a more streamlined manner amid pandemic-influenced labor shortages. Such productivity gains could come from better use of technology, or perhaps slimming down its product offerings (e.g., one successful New York-based startup hamburger chain limited its menu to 9 items to allow its staff to operate more efficiently). Other potential reasons include reduced rent costs (fueled by a commercial construction boom), a reduction of input costs to more normal levels after supply shocks experienced in 2022, and efficiency gains from the remote work movement (e.g., reduced commute times and the ability to hire workers located anywhere in the country). 

Altogether, while the current productivity 'boomlet' is certainly welcomed, it remains to be seen whether it will be durable (though the nascent introduction of AI tools could serve as an impetus for further productivity gains). In the financial advisory space specifically, while many planning firms have long had strong productivity (due in part to being a relatively capital-light and scalable business), changes in how a firm conduct its business (e.g., implementing a 3-person team model to optimize advisor productivity) as well as technological innovations (including the use of AI tools) could lead to further efficiency gains into the future!    

The Trends That Will Matter To Advisors In 2024

(Bob Veres | Advisor Perspectives)

The turning of the calendar presents the opportunity for pundits and prognosticators to make predictions for the coming year (and, if they're honest, look back on the predictions they made in the previous year). Taking this task on, veteran industry commentator Bob Veres looks back on where he 'missed' in his previous year's predictions and the trends he sees going forward. 

Last year, Veres predicted that the robust pace of RIA M&A would slow, due in part because of the poor market performance in 2022 (tightening advisory firm profit margins) and a potential drying up of private equity funding for acquirors. This prediction turned out not to be true (as while M&A deal flow slowed somewhat during 2023 it is not showing signs of a major pullback) and Veres now expects strong deal flow to continue. Going forward, he predicts that a consequence of founders selling their firms to larger acquirors rather than to internal successors will be a trend of next-generation advisors breaking away from these larger firms to start their own firms to focus on working with clients in their own generation (and potentially within a more specific niche), offer additional value through "coaching" (i.e., helping clients identify their life goals in addition to creating and executing a financial plan), and to provide client service and run operations as they see fit (e.g., implementing a more modern technology stack).  

In the world of advisor technology, Veres expects that AI will play a growing role, perhaps sooner than many advisors expect. Shorter-term trends could include greater adoption of existing AI-powered tools (e.g., FPAlpha, Holistiplan, and VRGL) and a growing number of use cases. Further into the future, the ability for advisory firms to more easily code their own customized software with the help of AI tools could dramatically shake up the AdvisorTech space. Separately, Veres expects data warehouses to become more popular for advisors, allowing them to keep all client data in one place, where it can be accessed by the range of tools in its tech stack (offering more seamless workflow than the [often incomplete] integrations between the tools themselves). Finally, given advances in onboarding automation, he expects advisors to be more willing to change custodians (given that it can take significantly less time to 'repaper' clients to the new custodian).  

In the end, while the future is inherently unknowable, exploring current (and potential) industry trends and the reasons behind them can potentially help advisors be proactive rather than reactive, whether it is in thinking about succession planning, offering next-generation advisors opportunities to grow within the firm, or adopting technology tools that can boost back-office efficiency and client engagement!

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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.