Weekend Reading For Financial Planners (November 23–24)

Schwab Execs Discuss Potential Changes For RIAs Amidst CEO Turnover

(Emile Hallez | InvestmentNews)

While Charles Schwab was already the largest RIA custodian, its acquisition of TD Ameritrade cemented its status at the top of the leaderboard, meaning that changes at the company could affect advisors on its platform, but also spur changes at other custodians as well. And amidst a rare transition of CEOs at the firm (with current CEO Walt Bettinger having been in the role for 16 years), some firms might wonder whether big changes might be on the horizon.

Speaking at its annual IMPACT conference this week, Bettinger and incoming CEO Rick Wurster (who will take the reins at the beginning of 2025) noted that while major changes might not be on the horizon (notably, Wurster is currently Schwab's President, suggesting the firm didn't see the need to make a major shakeup), advisors on their platform could see some smaller changes in the months and years ahead.

To start, Schwab is planning to boost its lending services for high-net-worth clients as it seeks to serve as a lending partner for the clients of RIAs on its platform who sometimes look to other major banks for lending (which can then try to lure them away by cross-selling wealth management services as well). Wurster indicated that amidst an expected friendlier regulatory environment towards cryptoassets in the upcoming Trump administration, Schwab would also like to offer clients (ostensibly both retail, and clients of advisors) direct access to crypto investments.

Responding to occasional grumbling from RIAs on its platform that they have to compete with Schwab for client assets (as Schwab continues to offer wealth management services directly as well), Wurster indicated that the company doesn't want to compete with advisors for clients (reiterating an offer Bettinger made that firms could contact him directly if they feel that hasn't been the case), but rather sees an opportunity for both Schwab and RIAs on the platform (which currently account for just 14% of the advice market, he said) to pursue the vast swath of clients currently unserved by either group. On a separate issue of potential concern for certain firms, a Schwab spokesperson indicated that it is reassessing the pricing on its Schwab Advisor Network referral program, which hasn't been adjusted for several years, with a potential upward adjustment making it a more expensive lead generation tool for advisory firms that participate (given that there continues to be such demand for access to the popular advisor referral networks even at its current revenue-sharing cost!).

Altogether, many RIAs might be relieved that after a busy period that included the integration of firms that previously custodied with TD Ameritrade onto the Schwab platform, the coming CEO succession doesn't appear to be leading to major shockwaves or service adjustments. Nevertheless, competitive pressures from smaller and upstart RIA custodians suggest that the firm will have to remain nimble if it wants to keep firms on its platform and maintain its dominant market position.

TradePMR Sale To Robinhood Sends Ripples Through RIA Industry

(Oisin Breen | RIABiz)

The RIA custodial space has been consolidating in recent years, highlighted most prominently by Charles Schwab's acquisition of TD Ameritrade, which left it and Fidelity as two custodial giants, as well as Altruist's acquisition of Shareholder Services Group (SSG) as it tries to position as the #3 independent RIA custodian, with several smaller custodians also seeking to compete in the marketplace (in part by seeking to offer RIAs a more personal relationship than they might get at one of the larger custodians). And now, the success of Schwab and Fidelity in operating both retail brokerage platforms alongside their RIA custodial offerings appears to have tempted one retail brokerage giant to enter the RIA custodial waters.

This week, retail brokerage firm Robinhood announced that it is acquiring RIA custodian TradePMR in a $300 million cash-and-stock deal, signaling its entrance into the RIA custodial market. For TradePMR, the deal offers the opportunity for advisors on its platform to access Robinhood's tech platform, including a client portal that will allow advisors and clients to view managed and self-directed assets in the Robinhood app, though notably advisors on TradePMR already have TradePMR's own robust technology platform that it built for its advisors. In fact, the more significant aspect of the merger is likely not Robinhood's technology and trading capabilities, but the fact that it also could allow RIA firms on the TradePMR platform (which will retain its brand) to get referrals from Robinhood's vast customer base, which includes more than 100,000 accounts with at least $1 million (and while Robinhood has a reputation for serving a relatively younger group of investors, more than 20% of the accounts and assets on the platform are held by those between age 42 and 58, who could be prime targets for an advisory relationship). For its part, Robinhood will add the $40 billion in assets custodied by TradePMR on behalf of 350 RIAs (provided they stay with the platform) to the $160 billion of retail assets it already administers, in what will likely be an eventual consolidation of TradePMR accounts (which currently clear through Wells Fargo) onto the Robinhood clearing platform as well (though that still leaves it well behind Schwab's $4.6 trillion of RIA assets and $9.92 trillion of overall assets).

Nonetheless, the announced acquisition has also engendered skepticism from some industry observers. To start, some question the fit between an RIA custodian (typically a fairly conservative business given the fiduciary and compliance requirements of the firms it serves) and a retail brokerage in Robinhood that has been subject to regulatory fines for gamifying its platform and supervisory failures before its 2021 IPO (though Robinhood has since noted that it has matured and now has more than 200 compliance personnel). Which raises the question of whether firms on the TradePMR platform might look to switch custodians in the wake of the deal to avoid the reputation risk of working with a custodian under the Robinhood umbrella… though notably, given the sheer growth of the Robinhood platform itself as a publicly traded company, may not represent a brand risk to the end client themselves (as the next generation of investors have already been proactively choosing Robinhood for many years now). And in fact, if Robinhood is going to establish an advisor referral program to reach the most affluent of its "next generation" clients, it seems more likely that TradePMR will end up with a waiting list of firms that want into yet another of the highly popular advisor referral networks?

In the end, the Robinhood-TradePMR combination offers significant opportunities for each party to capitalize on the segment of next-generation Robinhood investors who have accumulated enough wealth and the concomitant complexity to seek out a financial advisor (with the former gaining an RIA custodial platform to get paid to refer those clients, and the latter gaining an ability to attract new firms who seek access to potential next-generation retail clients). Though the ultimate success of the deal may still depend more on their ability to join 2 distinct company cultures and integrate each side's technology offerings and customer bases into the combined platform… though in the end, when the reality is that when all of the biggest RIA custodial platforms, including Schwab, Fidelity, and formerly TD Ameritrade, have been able to build and scale an RIA custodian from their retail investor chassis, that the odds seem good for Robinhood-TradePMR as well.

Morningstar Takes Sword To Grade Inflation For Its Fund 'Medalist' Ratings

(Oisin Breen | RIABiz)

Given the thousands of available investment funds, advisors (and DIY retail investors) often seek out ways to filter and evaluate these options to create a smaller list to consider. To meet this need, a variety of investment data and analytics tools are available to better allow advisors to evaluate options to use in client portfolios, with Morningstar leading the way in terms of popularity in the category, according to Kitces Research on Advisor Technology.

In addition to data analytics, Morningstar is well known for its fund ratings, which can provide advisors and investors with a shortcut to determining whether a certain fund might be appropriate. For instance, Morningstar's Rating for Funds (more commonly known as its 'star rating') assigns investment funds a rating between 1 and 5 stars based on backward-looking risk-adjusted performance. Though given that past performance is not always indicative of future returns, Morningstar also offers "Medalist Ratings", forward-looking ratings (where funds receive gold, silver, bronze, neutral, or negative ratings) to project future performance relative to sector and asset class benchmarks.

Notably, for ratings to be useful to advisors and investors, the pool of evaluated funds must receive ratings across the spectrum (i.e., the ratings aren't particularly useful for advisors if most funds receive the top score) and reflect a methodology that reflects important differences among the funds. With this in mind, Morningstar recently cut the Medalist Rating for approximately 41% of its bronze-rated funds, 38% of silver-rated funds, and 33% of gold-rated funds (the downgrades did not impact its 'star ratings'). With its adjusted approach, the firm said that its Medalist Ratings will reflect how much value it thinks a fund can add after fees (and is also, in general, reducing its estimates of how much 'alpha' a fund can add before fees). Funds tracked solely by Morningstar algorithms have already been downgraded, while funds tracked by its analysts will incorporate the new ratings changes slowly, through December of next year.

Ultimately, the key point is that while few advisors likely rely solely on Morningstar Medalist Ratings when evaluating funds, the firm's revised ratings approach and subsequent downgrades of certain funds could provide advisors with greater clarity into the true potential value offered by different funds (and potentially could lead to questions from eagle-eyed clients who might wonder why they are invested in funds that received downgrades?).

How Advisors Build Retirement Income Portfolios, In 7 Charts

(David Blanchett | ThinkAdvisor)

One potential way for financial advisors to add value for their clients is to create asset allocations that reflect their clients' age, goals, and risk tolerance. For instance, the asset allocation for a mid-career professional in their accumulation stage might be more aggressive than that of a client in their first year of retirement (as the advisor for the latter seeks to mitigate sequence of return risk). Nonetheless, there is no universally agreed upon strategy to craft portfolios for retired clients, with advisors using several different approaches.

With this in mind, Prudential surveyed 198 advisors to evaluate their approaches to building retirement income portfolios. To start, 80% of respondents indicated that they use specific portfolios targeted to retirees, with advisors who indicated that they were somewhat or very knowledgeable about retirement income planning being more likely to say this was the case (suggesting potential benefits for clients who seek out an advisor who specializes in this area). When it comes to how their clients prefer to generate income in retirement, the survey found that about half of retired clients prefer to live off of income (e.g., dividends) rather than selling some shares to fund their income needs (indicating that some clients could be resistant to a 'total return' approach to portfolio construction that seeks to generate income through both dividends and capital gains from the sale of shares).

When asked about which asset class allocations should be higher for retirement portfolios, respondents were most likely to cite long-term bonds (56%), U.S. large-cap stocks (46%) and Treasury Inflation-Protected Securities (TIPS), with 37% (notably, those who said they were very knowledgeable about retirement income planning were more likely to choose TIPS and long-term bonds than other respondents). Looking specifically at how advisors change bond allocations, 43% indicated they make changes in response to market conditions and 25% said they engage in income-duration matching, while 25% said they use relatively constant allocations (indicating many advisors are taking an active approach to managing these bond allocations).

Altogether, this survey suggests that advisors who have knowledge and experience in working with retirees could offer their clients a more sophisticated approach to crafting portfolios that can sustainably meet these clients' retirement income needs and ultimately differentiate themselves from firms who work with a broader pool of clients.

Does The Frequency Of Retirement Withdrawals Matter?

(John Manganaro | ThinkAdvisor)

During a client's accumulation phase, retirement contributions often are made at regular intervals (e.g., bi-weekly) as a result of contributions to workplace retirement accounts that occur in tandem with their pay periods. However, when clients transition to retirement there is not necessarily a set interval for when account withdrawals are made to fund their income needs. Which might leave advisors supporting these clients wondering whether there is an ideal interval (e.g., monthly, quarterly, or annually) for making these withdrawals to optimize the sustainability of the client's portfolio.

A recent paper by Stephen Horan looks at this question, using simulated and historical returns to explore whether the frequency in which withdrawals are taken affects portfolio sustainability. He finds that when money is invested for roughly equivalent periods of time, withdrawal frequency has essentially no effect on retirement withdrawal sustainability. Rather, the key determining factor for portfolio sustainability is the ability to maximize the duration of time over which capital is invested (particularly so for assets in tax-deferred accounts). With this in mind, Horan recommends that advisors time withdrawals to match clients' income needs rather than relying on a more mechanical approach that could lead to withdrawals (and time out of the market for those assets) before the funds are needed.

Notably, this finding could provide backing for a 'paycheck' approach to retirement income withdrawals (i.e., generating retirement income and depositing it into a client's bank account on a bi-weekly or monthly basis, similar to the paychecks they would have received during their working years), which can provide for (nearly) the exact amount of income clients require (maximizing 'time in market' for the remaining assets) while potentially mitigating the psychological 'pain' that clients can feel when making less-frequent, larger withdrawals (resulting in a sharp decline in their portfolio balance) from investment accounts to fund retirement income needs.

How Do You Actually Create A Steady Retirement Paycheck From A Volatile Retirement Portfolio?

(Nerd's Eye View)

For prospective retirees who don't simply want to annuitize most or all of their wealth, determining how best to invest a retirement portfolio to generate income is a substantial challenge. Not only because of the need to invest for enough growth to sustain inflation-adjusting retirement distributions over time, and managing portfolio volatility to avoid triggering an adverse sequence of returns in the first place, but also because, as retirement investing has evolved beyond simple strategies like "buy the bonds and spend the coupons" and into more total return strategies, it's surprisingly difficult to come up with a system to actually generate the distributions themselves.

After all, most prospective retirees who are looking at making the transition away from work have spent the better part of 40 years paying their ongoing bills from a steady series of monthly or perhaps bi-weekly paychecks. Which means the most straightforward way to facilitate retirement is simply to re-create those ongoing retirement paychecks. Except as noted, modern retirement portfolios – especially those that include both income and growth (i.e., capital gains) components – aren't necessarily conducive to generating consistent retirement paychecks. At least not without creating a system behind the scenes to ensure the cash will be there as needed.

Over the years, advisors have created a number of different systematic approaches to address the retirement paychecks challenge. For some, it's about investing into a "traditional" income-generating portfolio of bonds and dividend-paying stocks (perhaps supplemented today by income-generating alternatives like REITs and MLPs), and simply passing through the income as received. For others, it may start with accumulating interest and dividends, but then "topping up" the portfolio's cash with periodic liquidations of capital gains. For still others, with the ongoing decline of transaction costs, the approach has shifted to simply keeping all cash fully invested, and making liquidations as needed in real-time to generate retirement distributions without any cash drag at all!

Whatever the particular methodology, though, any advisor needs to be able to answer a number of important questions about their mechanical process of generating retirement paychecks, including how they will handle dividends and interest, whether there will be a cash position (or not), how capital gains liquidations will be handled (in various up- and down-market scenarios), the frequency of distributions (monthly, quarterly, or annual?), the sources of distributions from various account types, and how those distributions will be coordinated with the rest of the client's retirement income picture (from Social Security to pensions and annuities to reverse mortgages).

The bottom line, though, is simply to recognize that the mechanical challenge of how to actually generate those retirement "paychecks" that transitioning retirees are accustomed to, is an entirely separate matter from just investing the retirement portfolio itself and entails a number of distinct policy-based decisions about how to standardize a process for a wide range of retirees. In turn, advisors might even consider creating Withdrawal Policy Statements to then codify the processes they will use to generate retirement income withdrawals, just as an Investment Policy Statement is used to codify the processes used to invest the retirement portfolio itself!

How Profits Interests Can Help RIAs Retain Top Talent

(Richard Chen | Advisor Perspectives)

While many financial planning firms compensate employees with a salary and perhaps a cash bonus, firms looking to reward top employees and align their interests with that of the firm itself will sometimes offer employees the opportunity to buy into the company through an equity purchase. However, given that offers of equity can come with a range of consequences (e.g., diluting the value of stakes of current owners), some firms might limit equity offers to only a few employees.

An alternative approach for firms that want to retain top talent and allow these individuals to share in the profits of the firm is to offer them profits interests, which come with benefits for both the employees and the firm itself. Profits interests can be structured to give an employee a share in the future profits of the business or in the proceeds if the firm is eventually sold. Notably, these benefits are based on future growth of the firm from the time of the grant, so that current owners aren't giving away value based on the current state of their business (and, unlike a cash bonus, a profits interests grant doesn't come with an upfront cash cost). In addition, unlike traditional equity, profits interests typically don't come with voting rights, meaning that current owners can maintain control over business decision-making.  For employees, profits interests can be attractive because they don't require an initial outlay of money (unlike an offer to purchase equity in the company), allowing them to participate in the upside of the firm's performance without putting their personal financial capital at risk. Further, because the profits interests are structured based on firm profitability above its current value, they typically don't generate a tax burden for employees at the time of the grant (though future profits distributions or the proceeds of a sale of the firm would be taxed).

In sum, when structured and documented correctly, profits interests can offer firms a highly customizable (and tax efficient) way to recognize top talent, aligning the interest of the firm and these employees without requiring upfront cash expenditures from either party!

The Pitfalls Of Profit Sharing

(Brett Davidson | FP Advance)

While financial planning firms have many ways to compensate employees, a common tactic to retain top-performing individuals is to offer them the chance to 'buy in' to the firm through an equity stake. Which can tie their financial fortunes to those of the firm and encourage them to continue their strong performance.

However, Davidson suggests that the decision to offer equity grants is not an open-and-shut case. To start, some employees might not see an equity grant as a sufficient incentive, perhaps preferring salary adjustments and bonuses that directly reflect their work (and don't require an upfront cash outlay on their part). Also, while a firm looking to grow might hire additional staff to meet the demands of its increasing client count, some equity holders might push back against such an action based on the costs associated with new employees (which could reduce firm profitability, at least in the short run), particularly if they don't have a full picture of the firm's financial projections and strategic plan. Finally, the option to buy into a firm might not be seen as a particularly attractive incentive during periods of reduced profitability for the firm due to an extended market downturn or heightened expenses during a period of internal growth.

Altogether, while firms might decide to offer certain employees the option to buy an equity stake, doing so has potential risks for both parties that can be considered. Which suggests that firms could also consider other means of rewarding employees (and creating a sense of psychological ownership in the firm), from financial measures such as increased salaries or bonuses to non-financial benefits such as training and career path opportunities and a voice in firm decision-making.

How Fair Is Your Firm's Compensation?

(Philip Palaveev | Financial Advisor)

When it comes to compensation (or wealth for that matter), many individuals care not just about their absolute income level (i.e., how much they make in dollar terms), but also their relative income (i.e., how their income compares to their peers or coworkers). Which can create dilemmas within financial advisory firms (and other businesses), as designing 'fair' compensation structures can be a tricky endeavor.

To start, a firm's compensation structure can show what it values. For instance, should the highest-paid employee be the CEO (who oversees all aspects of the firm but doesn't directly bring in new clients or serve existing ones) or a top advisor (who might directly generate the most revenue for the firm)? In addition, total compensation is likely to differ between partners with an equity stake in the firm and those who don't, suggesting a need for a fair process to be given the opportunity to become an owner. Another tricky element related to compensation and fairness is how to handle bonuses. For example, during an extended market downturn, employees might be working harder than ever (e.g., fielding calls from nervous clients) but the firm could be struggling for revenue as AUM-based fees decline, creating a dilemma for a firm that will want to reward this hard work (and not demotivate employees) while maintaining sound financial footing.

Ultimately, the key point is that none of these questions have easy or clear answers that are universally applicable. Which suggests that establishing a well-defined process for determining compensation that is communicated to and understood by the full firm (and matches the culture firm management wants to establish) could be the most important decision of all?

Intermittent Fasting Works For Weight Loss, But Not Much Else

(Alex Janin | The Wall Street Journal)

Every now and then a new health 'hack' comes around that promises a boost to current health and/or future longevity. One such practice that gained popularity in recent years is 'intermittent fasting', which can range from time-restricted eating (i.e., only eating during a limited window during the day) to multiple full-day fasts each month and has been shown in animal studies to boost longevity.

Looking at humans, some research has found that intermittent fasting can offer results for those looking to lose weight, often as the result of eating fewer calories each day (as there is only so much one can eat in a certain number of hours). One clinical trial found that a study group engaging in a type of intermittent fasting lost roughly 8% of their body weight on average and saw a small improvement in the body's processing of glucose, but didn't show benefits in other health and longevity markers such as inflammation. Further, some followers have found that intermittent fasting can come with negative side effects, from challenges maintaining muscle mass to bad moods during fasting periods.

Altogether, while studies on intermittent fasting have shown some benefits for those looking to lose weight, the practice doesn't appear to be the secret to better health and longevity that some thought it might be (based in part on animal studies), perhaps suggesting that a bigger contributor to health might be what (and how much) individuals eat rather than when they do so.

Could Ice Cream Possibly Be Good For You?

(David Merritt Johns | The Atlantic)

While many people would prefer to eat in a healthy manner, sometimes it can be hard to resist the call of relatively unhealthy foods. And while it might be easy to rationalize some of these decisions (carrot cake counts as a serving of vegetables, right?), a curious scientific finding suggests that individuals might be able to have their ice cream and eat it too.

Researchers have long tested the nutritional value of different dairy products, sometimes finding that intake of relatively low-fat dairy items like yogurt and milk are associated with positive health outcomes. However, several studies have also linked ice cream (not necessarily thought of as a health food) to similarly positive health effects. While scientists have been reluctant to publish these findings (moreso than the correlations between seemingly more nutritious dairy products and health), many are are reluctant to dismiss it completely given the number of times it has been replicated by different research groups (which suggests that it might not be the result of a data error in a single study). Further, ice cream does have some 'less bad' characteristics compared to certain other foods. For instance, ice cream's glycemic index (a measure of how rapidly a food boosts blood sugar) is lower than that of (seemingly healthier) brown rice. In addition, if individuals substitute ice cream for a different food that is less healthy, they might be better off nutritionally.

Ultimately, the key point is that while eating ice cream for every meal might not be the healthiest habit, these findings suggest that indulging every now and then could potentially be seen as part of a healthy diet rather than as purely a guilty pleasure.

Do People In 'Blue Zones' Actually Live Longer?

(Dana Smith | The New York Times)

While humans have long sought the 'fountain of youth' (or at least habits they can adopt to live longer), researchers have also been on the hunt for groups of people who seem to have discovered (consciously or inadvertently) the key to a longer life.

One such line of investigation has revolved around "Blue Zones", geographic pockets where residents seem to achieve significantly greater longevity, with many living beyond age 100. These "Blue Zones" span the globe, from Sardinia in Italy to Okinawa, Japan, to Loma Linda, California. Researchers have identified several potential characteristics that make these areas (and their residents) unique, including propensities for nutritious diets, physical activity, and strong communities, and the "Blue Zone" concept has subsequently spawned commercial activity, from books to a television series.

Nonetheless, some researchers are skeptical about the "Blue Zone" concept. To start, many of the identified "Blue Zones" are in isolated areas with relatively poor recordkeeping, suggesting that documents showing a significant number of centenarians might not reflect their true age. In addition, many of the alleged characteristics of "Blue Zones" are correlational and lack research backing to show their causal influence on longevity in these areas. Further, areas previously identified as "Blue Zones" have not necessarily maintained that status over time, as their average longevity figures decline (perhaps as unhealthy aspects of modern life creep into these areas).

In the end, while specific "Blue Zones" might not actually be remarkable pockets of longevity, many of the characteristics associated with them (e.g., strong social ties and healthy lifestyles) are likely contributors to longer and healthier lives, even if they don't guarantee that those who abide by them will live to age 100 and beyond.

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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.