Weekend Reading For Financial Planners (November 16-17, 2024)

Fidelity RIA Benchmarking Study Shows How High-Performing RIAs Are Growing Their Profits

(Michael Fischer | ThinkAdvisor)

Following a challenging year for RIAs in 2022, when weak stock and bond market performance led to shrinking Assets Under Management (AUM) at many firms, 2023 offered an opportunity for firms to bounce back, not only as equities surged during the year and bonds saw modest gains, but also by reaping the benefits of marketing efforts to boost organic growth (i.e., assets from new clients and additional assets from existing clients), which can serve as a buffer against market drawdowns. At the same time, AUM and top-line revenue only tell part of the story, as expenses play a primary role in determining firm profitability.

According to Fidelity’s 2024 RIA Benchmarking Study, firms with less than $1 billion in assets had an average 3-year AUM Compound Annual Growth Rate (CAGR) of 11% in 2023, while the figure for firms with more than $1 billion of AUM was slightly higher at 12%. Reflecting a desire for further AUM growth, study respondents cited marketing and business development as top strategic priorities (with 66% of smaller firms and 73% of larger firms saying so). Nonetheless, while RIAs’ AUM grew, so too did their expenses, with smaller firms seeing expenses as a percentage of revenue increase slightly to 82% and larger firms seeing a larger jump to 86% (the study flagged software and professional services as areas of rising costs for smaller RIAs alongside compensation and depreciation/amortization for larger firms). Rising expenses appear to have contributed to a decline in firms’ operating margins over the past several years, with smaller firms seeing a decline from 26% to 18% since 2020 and larger firms experiencing a drop from 27% to 14%.

Fidelity’s study also looked specifically at what it called “high-performing firms” (i.e., those ranked in the top quartile based on asset growth, profitability, and revenue generated per employee) to see how these firms differed from their peers. To start, while client referrals were the top source of new clients for both high-performing and other firms (and both types of firms had about the same number of inbound leads), higher-performing firms had a better close rate (73% to 68%), leading to more new clients. In addition, high-performing firms were able to maintain better pricing discipline, offering smaller discounts on average (with a difference between their actual and expected [based on stated fees] revenue of 17 basis points, compared to 23 basis points for other firms). Finally, high-performing firms had lower overall expenses, representing 10.5% of revenue, compared to 18.5% for other firms.

Ultimately, the key point is that while top-line figures such as AUM and revenue growth are no doubt important to a firm’s health, expense control is also a key contributor to its bottom line. And while staffing is often the top expense for many firms, this report suggests that looking to reduce other costs (from software subscriptions to the cost of renting and operating office space) could help firms improve their profitability (and perhaps better weather future market downturns that could cut into AUM growth?).

NASAA Eyes Restrictions For "Advisor" Title Use By (Standalone) Brokers And Agents

(Leo Almazora | InvestmentNews)

In a world where it’s hard to regulate the wide and ever-changing world of advertising, one of the most common frameworks that regulators take is a ‘truth-in-advertising’ approach that simply requires whatever advertisers say or claim to be true and accurate. In recent years, regulators have begun to consider whether this approach should be applied in the world of financial advice, as consumers engage with both advice-providers and brokerage salespeople… all of whom use increasingly similar “financial advisor”, “financial consultant”, “financial planner”, and similar titles, even though only some are actually acting in their capacity as a financial advisor, and others are still legally salespeople representing their company and its products.

In an effort to clear up confusion for consumers (who might otherwise think the registered representative they are working with has a fiduciary duty to work in the consumer’s best interest), the North American Securities Administrators Association (NASAA), which represents state regulators in the United States, is proposing a revision (open to public comment through December 19th) to its broker-dealer conduct model rule (which state regulators could subsequently choose to adopt) that would prohibit the use of the title “adviser” or “advisor” without licensure as either an investment adviser or an investment adviser representative (unless otherwise permitted by law, such as for CPAs who have their own licensing regulations).

This amendment appears similar to the requirements under the Federal-level Regulation Best Interest (Reg BI), issued by the Securities and Exchange Commission in 2019, which limits the ability of standalone broker-dealers (who aren’t at least dually-registered as investment adviser representatives as well) to refer to themselves as “advisors” as a violation of their Disclosure Obligation (as an incorrect description of the capacity in which they are serving). However, like Reg BI, NASAA’s proposed amendment to its model rule appears to leave the door open for dual registrants to use the “advisor” title and engage in “hat switching” from their advisor to broker capacity and back again, which might still lead consumers to assume that everything they receive would be advice. Whereas their fiduciary obligation would really only apply to particular accounts for which the dual-registrant provides advice or manages in their investment adviser capacity and receives compensation (and not the entire client-advisor relationship).

In the end, while the amendment to NASAA’s model rule (if adopted by state regulators) would appear to bring state regulation in harmony with the Federal-level Reg BI and prevent standalone broker-dealers and their registered representatives from holding themselves out as “advisors” or “advisers”, but still falls short of comprehensive title reform, which could go further to clarify to consumers that an individual holding themselves out as an “advisor” is really actually an advisor working in their clients’ best interest at all times, and not only for certain parts of their relationship!

RIA Consolidators Top $1.5T In AUM, Resemble Broker-Dealers: Cerulli

(Lilly Riddle | Citywire RIA)

Compared to wirehouses and large regional broker-dealers, individual RIAs have historically been smaller operations, from solo shops to medium-sized ensemble practices. However, while plenty of these relatively smaller RIAs remain, the growth of RIA consolidators (which buy up smaller practices) not only has increased the share of industry AUM among several of these firms, but also has introduced new options for retiring firm owners or those looking to take advantage of the resources of a larger platform.

According to a study by Cerulli Associates, RIA consolidators now account for $1.5 trillion in combined AUM, up 31% over the past year, compared to 17% AUM growth for RIAs as a whole (likely due to the fact that the consolidators are growing both organically through new client assets and inorganically through acquisitions), with advisor headcount at consolidators growing by more than 50% during the past 5 years (now representing 14% of advisors affiliated with RIAs, up from 6% in 2018). Among RIAs surveyed, 74% considered succession planning or an exit strategy as a factor when picking a consolidator affiliation. In addition, the report cited the ‘valuable services’ cited including compliance guidance, integrated tech platforms, and trading and operations support, making them “resemble national broker-dealers [more] than the classic independent RIA”, according to the report.

Altogether, while the rise of RIA consolidators represents a potential opportunity for firm owners looking to sell and/or to access the compliance, tech, and other resources of the larger firm (perhaps so they can spend more time serving clients and adding new ones), it also presents a challenge for smaller RIAs, which could find it tougher to stand out in the eyes of consumers from larger players with sizable marketing budgets (and who, unlike large broker-dealers, have fiduciary responsibilities for their clients). Nonetheless, these smaller firms do have a potential advantage in showing consumers how they are different (e.g., working exclusively with a particular ideal client type or offering specific planning expertise) compared to their larger counterparts (which will naturally serve a much broader range of clients)!

7 Key Year-End Tax Strategies To Save Clients Money

(Sheryl Rowling | Morningstar)

The end of the year can be a busy time for financial advisors, not only because of the ever-creeping holiday season (pre-Black Friday sales, anyone?), but also because of several year-end deadlines. Nevertheless, this also represents a key period where advisors can add significant value to clients in several areas of tax planning, offering the opportunity to end the year the year on a high note in clients’ minds.

Looking at tactics that can reduce a client’s tax bill this year, advisors can look for tax-loss harvesting opportunities in client accounts (though these might be harder to find amidst this year’s relatively strong market returns!). In addition, for clients who are charitably inclined, advisors can analyze the most tax-efficient way to make these gifts (e.g., Qualified Charitable Distributions (QCDs) versus donations of appreciated assets) as well as the timing to do so (e.g., if they might benefit from ‘lumping’ contributions into the current year to make the most of itemized deductions). Advisors can also potentially prevent angry client calls by analyzing their exposure to mutual funds with large expected capital gains distributions (perhaps using a tool like CapGainsValet) and perhaps selling out of those positions before the distribution occurs or delaying purchases of these until afterwards (or, perhaps better yet, buying them in retirement accounts).

Other year-end tax moves can help clients build greater wealth in the future (even if it might mean a slightly larger tax bill this year). For instance, for clients who will have relatively low income during the year (perhaps individuals who have retired but are not yet receiving Social Security benefits), taking advantage of (partial) Roth conversions and/or capital gains harvesting can help them build greater long-term wealth. Also, making sure clients have made their desired (and allowed) retirement contributions for 2024 (as well as adjusting their workplace retirement contributions for 2025, if necessary) can keep clients on track to meet their savings goals.

In sum, there are many tax moves financial advisors can make to add value for their clients as the year comes to a close. And to make sure they get credit for these otherwise ‘invisible’ tasks, advisors also can consider proactively letting clients know about the year-end work they are doing on their behalf and how much it could be saving them in taxes to demonstrate the ongoing (often hard-dollar) value they provide!

Don't Fall Into The Tax-Deferment Trap

(Frank Pape | WealthManagement)

Taxpayers tend to seek to minimize their tax burden as much as possible (within legal limits). And financial planning clients are no exception, frequently looking to their advisors for tax planning ideas that can minimize their tax bill in the current year. However, consistently trying to minimize current-year taxes can often lead to a higher tax bill down the road (and a larger total lifetime tax bill). For instance, a recent retiree might avoid making withdrawals from their traditional IRA (which are treated as ordinary income for tax purposes) in order to minimize their tax bill; however, if they continue to allow their traditional IRA to grow, by the time RMDs begin they could end up with a higher marginal tax rate than they would have if they had paid some taxes (perhaps as part of a Roth conversion strategy) while they were in a relatively low tax bracket earlier in retirement.

Rather than seeking to minimize current-year taxes, Pape suggests that advisors and their clients not only take a longer-term view of the clients’ tax situation, but also do so in a way that syncs with their desired lifestyle. To start, an advisor can start a discussion about the client’s values and goals for retirement. For example, a tax-efficient retirement income withdrawal plan will look different depending on when the client wants to make large purchases (e.g., a vacation home), wants to gift to children or others (i.e., during their lifetime or at death), and their charitable intentions (i.e., on an ongoing basis or as a bequest). This information can then be used to craft tax-aware strategies for asset allocation (which might prioritize other goals rather than just tax avoidance [i.e., having a portfolio diversified beyond municipal bonds]), asset location, and income withdrawals that allow clients to meet their desired spending levels while minimizing their lifetime tax bill.

Ultimately, the key point is that financial advisors can support clients by encouraging them to zoom out from their current-year tax bill to take a more holistic view of their tax situation and lifestyle. Which can create planning opportunities that can help clients both reduce their tax bills both today and in the long run while ensuring their assets can support their lifestyle and legacy goals!

How RMDs Can Improve A Client's Portfolio

(Christine Benz | Morningstar)

While those who invest in traditional IRAs and 401(k)s typically are able to enjoy up-front tax savings and tax-deferred growth, the tax bill will come eventually, often (at least for those who don’t rely on withdrawals from these accounts to fund their retirement lifestyle needs before this time) once they reach the required beginning date for Required Minimum Distributions (RMDs), currently age 73 (though increasing to age 75 for those born in 1960 or later). And while taking RMDs (or at least paying the taxes due on them) typically isn’t an enjoyable activity for clients, advisors can make the most of the requirement by using the opportunity to make adjustments to the client’s portfolio.

To start, advisors can survey the client’s asset allocation to determine whether any rebalancing is necessary. For instance, if a client has built up a significant cash balance in their traditional IRA (and does not need it for lifestyle expenses), they might choose to take the RMD in cash and then invest it in underweight asset classes in their brokerage account. Though perhaps more relevant today (a time when equities have seek significant gains), an advisor might choose to sell equities in the client’s IRA to fund the RMD to bring the asset allocation closer to its target (and perhaps reinvest that cash in underweight asset classes in the client’s taxable brokerage account). Another option for advisors is to trim positions that have experienced undesirable changes, such as an expense-ratio hike or the loss of key managers. And even if the client’s asset allocation remains within rebalancing thresholds, advisors can add value by transferring shares with the most attractive tax efficiency characteristics from the IRA to their taxable account (to minimize future tax drag).

In the end, while RMDs are a fact of life for many retired clients, advisors have ways to make the most of the situation, whether by strategically choosing the assets to use to fund the RMD or, perhaps, to minimize the tax bite of RMDs for charitably minded clients by engaging in Qualified Charitable Distributions (QCDs)!

19 Financial Advisor Email Marketing Tips

(The Advisor Coach)

As anyone with an inbox knows, email has become a popular marketing method for companies across the full range of industries. And financial advisors are no exception, often engaging in email campaigns to nurture those on the distribution list and encourage them to take the next step to becoming a client. Nonetheless, not all emails are created equal, and taking a strategic approach to using this tool can mean the difference between sending scattershot messages into the ether with little hope for replies and creating engaging messages that recipients will want to open.

One key to a successful email marketing campaign is to segment recipients to provide them with the content that is most relevant to their needs. For instance, a firm working with retirees and small business owners will likely want to send different emails to prospects who fall into each category given that their pain points and planning needs will likely differ significantly. This segmenting can be done up front by using a lead magnet targeted to their specific needs (e.g., if a website visitor provides their email to receive a white paper on “10 ways for retirees to minimize their taxes”, it’s likely they fall into the retiree bucket). Notably, advisors can consider planning out automated email sequences to recent additions to their email list, saving themselves time while using a cadence that can be refined over time (after reviewing click-through and other data to see which emails tend to get the best engagement). Also, having a relevant ‘call to action’ within the email (e.g., a link to schedule a discovery meeting) can make it easier for recipients to take the next step to becoming a client once they are ready to do so (on the opposite end of the spectrum, making it easy to unsubscribe from the email list shows respect for those who made the jump to join the list in the first place but who discovers the advisor might not be a fit for their needs).

In sum, effective advisor email campaigns tend to target a specific group of prospects with a well-honed message (informed by data on previous emails sent) that helps them understand how the advisor can help them solve their pain points and are executed with timing that keeps recipients engaged without overwhelming their inboxes!

The Ideal Welcome Email Sequence

(Stephen Boswell | WealthManagement)

Getting an individual to sign up for an advisory firm’s email list can be a small victory, whether they were referred to the firm or found their website independently. And while many advisors send content (e.g., blog posts, podcasts, or videos) to their full email list, starting new recipients with a ‘welcome sequence’ of emails can potentially increase their engagement and the chances that they will take the next step to becoming a client.

Boswell suggests a 3-email sequence for new additions to a firm’s email list (which can be automated using an email marketing platform). The first email, sent immediately after the recipient signs up for the advisor’s list, is a warm welcome that introduces the firm, its mission, and what the recipient can expect from its newsletter. This email can also include a short video to showcase the team (and their personalities!) as well as a subtle call to action (e.g., encouraging the recipient to explore the firm’s website or check out its social media channels). A second email, sent 3 days later, can include a resource (e.g., white paper, blog post, or video) on a topic relevant to a common challenge the firm’s prospects face to demonstrate the firm’s expertise and that it works with people like the recipient. Finally, the third email, sent 7 days later, can share a high-level overview of the firm’s planning process to give the recipient an idea of what it would be like to become a client. It can also include a more direct invitation (and perhaps a scheduling link) to schedule a consultation to discuss their situation.

Ultimately, the key point is that an initial series of emails can make a new member of a firm’s email list feel welcomed without being overwhelmed by information or sales pitches. And by providing genuine insights in these and future emails, firms can stand out from the pack of sales-focused emails and show recipients the type of high-quality advice they can expect to receive (personalized for their own situation) if they do decide to become a client.

Choosing The Right Email Campaign Software For Financial Advisors

(XY Planning Network Blog)

Email is a primary marketing tool for financial advisory firms, though given the number of tasks on a typical advisor’s plate, sitting down to manually send emails to prospects might not be the most efficient use of their time. With this in mind, a variety of email campaign software tools are available that can help automate and refine this process to increase this tactic’s effectiveness.

There are several features common to popular email marketing platforms (e.g., Constant Contact, Levitate, MailChimp, and MailerLite) that will be of use to many advisory firms, including the ability to send mass blast emails (i.e., the same email to all members of the firm’s email list), analytics and reporting (e.g. open rates and click-through rates), automated email sequences (e.g., a series of onboarding emails for new clients), and content posting on social media (offering the opportunity to repurpose content across multiple platforms). For advisors with more specialized needs, certain platforms will have more advanced features, including texting capabilities, direct integration with their CRM software, content calendars, greater personalization of messages, and website and landing page creation. Each of these tools varies on price as well, with the cost depending on the number of contacts and the program’s specific features.

In the end, the email marketing software marketplace provides advisors with choices to meet their exact needs (and budgets) when it comes to email marketing, from relatively simple automated email blasts to more advanced artificial intelligence-supported personalization!

Burying The Lede: College Tuition Has Been In A Decade-Long Decline

(David Rosowsky | Forbes)

A commonly held belief is that college tuition costs not only continue to increase each year, but also do so at a pace exceeding the broader inflation rate. Which has led many parents to wonder whether they’ll be able to afford the price of admission (perhaps without them or their children leaving with high student loan balances) when their student is ready to start college.

However, the reality of college tuition is much more nuanced, and perhaps more optimistic than might be assumed. According to data from the College Board, while published college tuition and fees rose last year, they did so at a slower pace than inflation. Notably, the picture looks even better when considering the ‘average net price’ (the cost students actually pay for tuition [not including room and board costs] after institutional and grant aid is deducted); for private universities the average net price of tuition was $16,510 for the 2024-2025 academic year, down from $19,330 in 2006-2007 (adjusted by the broader inflation rate to 2024 dollars), while the average net price at public colleges for in-state students was $2,480, down from $4,340 in 2012-2013 (adjusted for inflation). Amidst this backdrop, undergraduate student loan borrowing declined for the 13th consecutive year, with students and parents borrowing $99 billion in Federal and non-Federal loans during the 2023-2024 academic year, down from an inflation-adjusted peak of $159 billion in 2010.

In sum, while the ‘sticker price’ of college tuition might be increasing in absolute terms, the picture appears to be rosier when comparing these figures to the broader inflation rate and especially considering the average net cost once a college’s financial aid awards (both need-based and non-need-based merit aid) are considered. Which might surprise many clients and perhaps broaden their view (depending on their financial means) of what colleges might fit within their budgets (and perhaps lead advisors to adjust the assumed inflation rate for tuition in their financial planning models?).

Why High School Grades Could Be Worth $100,000

(Ron Lieber | The New York Times)

When parents and students hear the term ‘financial aid’ for college the first thing that comes to mind is likely to be need-based aid, which might feel out of reach for more affluent families (though it is often still worth filling out the FAFSA form just in case!). However, in recent years, increased competition amongst colleges (and the need for some to admit a full complement of students) has led to increasingly attractive offers of ‘merit aid’, which can greatly defray (or even totally cover) the cost of admission for the types of students they desire.

When it comes to offering merit aid, a student’s high school grades are often at the forefront, with some colleges offering automatic grants for having certain GPAs (sometimes combined with standardized test scores) and others incorporating grades as one part their decision. Which means that a student’s academic performance starting their freshman year of high school not only can make a difference when it comes to the college(s) they are admitted to, but also how much they might pay (perhaps spurring some parents to have a discussion with their students about the importance of taking high school grades seriously). And while the use of merit aid started with just a few colleges looking to raise their academic profiles, this use has spread much wider, meaning that parents and students who might have targeted in-state public schools based on their (relatively low) costs could find that out-of-state schools and private institutions are, in reality, well within their financial reach.

Ultimately, the key point is that merit aid offers opportunities both for colleges (who can seek to raise their academic profiles and target families with just enough merit aid to convince their students to come) and for college-bound students and their families, who (particularly if the student has strong grades) could find themselves in the driver’s seat when it comes to choosing among (often very generous) aid packages from a wide range of colleges!

How To Check The ROI Of Academic Programs

(Lynn O’Shaughnessy | WealthManagement)

Given the often significant financial investment involved in going to college, students (and parents) tend to expect to get a return on this investment in the form of higher earnings after graduation compared to those who don’t attend college (though, notably, college not only can open up the possibility of higher salaries, but also access to a wider range of jobs that might meet the student’s strengths and interests).

With this in mind, the Foundation for Research on Equal Opportunity (FREOPP) has created a database that allows users to understand the differences in average Return On Investment (ROI), measured as the increase in lifetime earnings minus the cost of attendance, not only among different colleges, but also among the majors offered at each college. At a broad level, all types of higher education programs studied show a better-than-even chance of receiving a positive ROI, with bachelor’s degree and doctoral and professional degree programs having the highest likelihood (77%) of having a positive ROI (the lowest positive-ROI degree types were associate degrees and master’s degrees, with 57% of programs in each offering a positive ROI). On average, bachelor’s degrees offered an ROI of $160,000, with certain majors (e.g., engineering, computer science, nursing, and economics) offering ROIs of $500,000 or more. Notably, when looking at specific majors, ROI can vary significantly by school; for instance, while the average ROI for a psychology major at Trinity College in Connecticut was $1.47 million, the ROI for this major at The New School was negative $643,000 (suggesting that students interested in a particular field might investigate the contributors to student success at different schools and compare costs between programs).

Altogether, the FREOPP database provides a useful tool to help families investigate whether the degree type, school, and major their student is considering might have a positive ROI. At the same time, the wide range of outcomes seen in the database (and the fact that they’re aggregated averages) suggests that future financial success not only comes from the degree and school chosen, but also a student’s initiative and drive to complete their degree and make the most of their time in school!

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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.