Weekend Reading For Financial Planners (October 5–6)

Advisors See Tech As Biggest Driver Of Change In RIA Industry: Schwab Survey

(Alec Rich | Citywire RIA)

While financial planning is often considered to be a "high touch" business, as face-to-face meetings (whether in person or on a video conference) that provide an opportunity to learn about client needs and discuss planning recommendations are often at the center of an advisor's service model. Nevertheless, as the RIA industry has grown in recent years, so has the variety of technology solutions available to support a wide range of functions, from 'traditional' areas such as financial planning and CRM software to emerging use cases (often boosted through Artificial Intelligence [AI] technology), including prospecting and client meeting support.

In fact, technology was most commonly identified as the biggest driver of change in the RIA industry, according to a survey of 1,088 advisors conducted by Charles Schwab, with 43% of respondents citing tech, followed by regulation (22%), clients (18%), and advisors (17%). As noted above, the growing availability of tech solutions to support advisors was the most frequently cited tech-related driver of change for RIAs (by 45% of respondents), followed by AI (21%) and increased client demand for a more digital experience (19%). Notably, while 82% of those surveyed said technology is important to how they work with existing clients, fewer respondents (57%) said tech has become more important for attracting new clients (perhaps suggesting that advisors view software such as client portals [which allow clients to access their investment balances, performance, and planning recommendations, among other data] as an effective way to engage with current clients between meetings, they put an added emphasis on face-to-face interaction when working with prospects). And at a time when advisors have access to significant amounts of client data (though often spread across different software platforms), integrating this data and creating actionable insights from it were cited most often (by 54% of respondents for both) as areas of improvement for effective client data usage.

Further, advisors surveyed most often cited implementation of AI as a factor impacting industry growth in the next 3 years (cited by 54% of respondents), followed by new or changing regulations (52%), merger and acquisition activity (45%) and availability of talent (44%). Looking specifically at regulation, cybersecurity was most frequently cited as a regulatory area to monitor in the next year (by 30% of respondents), followed by AI (23%), perhaps given the Securities and Exchange Commission's stated interest in these areas, and the fiduciary standard (20%), which has come into greater focus in the past year with the introduction of (and subsequent legal challenges to) the Department of Labor's Retirement Security Rule (aka 'Fiduciary Rule 2.0').

Altogether, this survey indicates that many RIAs and their advisors are focused on technology, exploring developing areas in the AdvisorTech landscape (with AI-enabled tools potentially at the forefront) and seeking to better leverage the client data they currently have. Which could ultimately make advisors 'better' (though not necessarily 'faster') by using tech to offer clients a broader and deeper planning experience!

1/3 Of Firms Currently Using AI, Similar Number Fearful Of Implementing It: Orion Survey

(Edward Hayes | Financial Advisor)

One of the hottest topics in financial advice in the past couple years is the potential impact Artificial Intelligence (AI) tools will have on the industry. On the one hand, AI tools could be seen as a threat to human advisors if companies are able to leverage these tools to provide high-quality advice for a fraction of the price of human advisors, while on the other, AI tools also have the potential to empower human advisors to provide advice more efficiently, allowing them to lean into their strengths as humans (e.g., understanding clients' needs and making them feel heard).

A recent survey sponsored by advisor software firm Orion of 206 advisors on its platform reflects these dueling perspectives, with 33% of firms indicating they are already using AI and 42% currently evaluating/testing AI, while 36% of respondents indicated they are fearful about implementing AI in their firm (perhaps concerned in part about the need to balance AI use with relevant regulatory compliance requirements). Overall, 46% of respondents said they plan to leverage AI for the strategic direction of the firm in the next 3 years, though only 28% of respondents indicated that they are very knowledgeable about how to apply AI to their business).

In the end, while AI and related software tools have received significant hype during the past couple years, it's still the early stages for AI-enabled tech and the greatest impacts for advisors could be a decade away. That said, tech-forward advisors currently have several ways to take advantage of the current slate of AI-powered tools, from large language models like ChatGPT to brainstorm content creation ideas and create first drafts of emails to software that facilitates client meeting notetaking to "Custom GPTs" that can fulfill some of the tasks that an advisor might most want to get off of their plate!

Creative Planning Takes On PE Investment With Eye-Popping 23X EBITDA Valuation

(Ian Wenik | Citywire RIA)

One of the top themes in the RIA industry in the past few years has been the increased interest from Private Equity (PE) firms in investing into advisory firms, in part due to planning firms' recurring revenue, and in part because of the desire for larger firms to grow through acquisitions as owners of smaller firms look to sell. Ideally, there are added benefits from the operational efficiencies that can come when part of a larger firm with more shared resources, and the potential that a larger advisory firm gets higher valuation multiples because of its increased size and financial stability. And as more PE firms have entered the space, so too has the competition for attractive RIA investments (which in recent years has pushed valuations even higher).

Amidst the continued PE interest in the RIA space, it was reported that Creative Planning, one of the largest RIAs in the country with approximately $375 billion in AUM, took on a minority investment from PE Firm TPG at a multiple of roughly 23x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), giving Creative Planning a $16B enterprise valuation. Notably, this multiple appears to top the 20x-21x multiple received by Fisher Investments ($275B AUM) in its sale of a minority stake this past summer, and drastically outpaces the 13.2X earnings multiple RIA aggregator Focus Financial Partners received in its take-private sale last year.

Creative Planning CEO Peter Mallouk indicated that the firm could use the investment (and TPG's in-house expertise) to drive marketing as it seeks to become a nationally recognized brand (as while Creative is one of the largest RIAs, its AUM [and name recognition] pales in comparison to that of the largest national wirehouses and broker-dealers) and boost organic growth.

Though from the broader industry perspective, what is perhaps most notable about the valuation of Creative Planning (compared to its 'aggregator' brethren) is that Creative Planning has primarily acquired firms into its existing culture, capabilities, and service offerings; in other words, unlike many other acquirers, the firm actually provides less flexibility to the advisors at firms that are acquired, for the sake of delivering a more consistent advice process and experience to end clients, and having a more consistent offering to market for organic growth purposes…which the marketplace appears to be rewarding with a higher valuation. As a result, Creative Planning's deal may spur a greater focus from other acquirers to be 'less accommodating' and more 'assimilative' in their acquisition approach…potentially increasing the disruption of acquired firms (unless, ideally, they're already well-aligned to the acquirer) in pursuit of a more fully integrated end firm that the marketplace puts an enterprise value premium upon.

Ultimately, the key point is that Creative Planning's recent valuation suggests that PE firms could be prioritizing a firm's depth of integration and consistency (and the growth prospects it supports), and not just its size, when making investments and setting a value for advisory firms. Which could be instructive for RIAs across the size spectrum considering a sale (partial or full), as consistency of the advisor and client experiences, coupled with demonstrated organic growth (and the prospects for future growth), appears to be earning these firms a premium valuation from acquirers in the marketplace!

Is Now The Time For Those Nearing And In Retirement To Reduce Their Stock Exposure?

(Christine Benz | Morningstar)

Since the end of the 2022 bear market, stocks have experienced strong returns, with the S&P 500 rising more than 50% during the past 2 years. Despite this strong performance, Benz suggests, perhaps counterintuitively to some clients, now could be a good time for individuals nearing or in retirement to trim back their stock exposures.

To start, the recent run-up in stocks might have moved some individuals' portfolios out of line with their target asset allocation (and could now be significantly overweight stocks). While a younger client might have a wider 'tolerance band' for portfolio drift and be willing to accept the additional downside that could come with a potential stock market decline, those nearing or in retirement might have a lower threshold given the potential for sequence of return risk to (potentially permanently) impair their portfolio and its ability to generate income in retirement. For this latter group, Benz suggests that trimming their equity allocation (perhaps doing so within tax-advantaged accounts to avoid incurring possible capital gains) could be a prudent risk-management move (even if it might create 'FOMO' if stocks continue to climb higher!). Further, she notes that in comparison to a few years ago when most bonds and cash instruments offered meager yields, interest rates today offer greater opportunities to generate yield from short- and intermediate-term bonds, as well as from money market funds and other cash-like instruments, without being exposed to the level of volatility seen in the stock market.

In sum, while the recent run-up in stocks might tempt some clients to want to increase their equity exposure, advisors can play a potentially valuable role by keeping their asset allocation on track to meet their financial goals, including by reducing sequence of return risk for those nearing and in the early years of retirement.

How Contingent Deferred Annuities Could Help Solve The "Decumulation Dilemma"

(David Blanchett | ThinkAdvisor)

Whether managed by themselves or by a financial advisor, many retirees rely on withdrawals from their retirement accounts and other investments to support their income needs in retirement. However, this approach can be subject to sequence of return risk, the idea that even if short-term volatility averages out into favorable long-term returns, a retiree could still be in significant trouble if the sequence of those returns are unfavorable (i.e., with the bad returns occurring at the beginning of retirement). To combat sequence risk, some retirees choose to annuitize a portion of their retirement assets to generate a stream of 'guaranteed' lifetime income to hedge against sequence of return risk (as well as longevity risk). Nevertheless, this approach can come with downsides as well, including the potential loss of access to the annuitized assets (which could be particularly important if the retiree has a strong legacy interest).

With this in mind, Blanchett suggests that a Contingent Deferred Annuity (CDA) could be a helpful way for retirees to insure against a poor sequence of returns while maintaining control over their assets. A CDA acts as insurance overlay, covering part or all of a portfolio; in return for an annual fee, the CDA will provide lifetime income (based on the terms of the insurance overlay) if the retiree's portfolio becomes depleted. While retirees are able to maintain control over their assets (e.g., maintain access to them for spending or legacy interests), their (or their advisor's) investment discretion may be subject to certain restrictions (as the insurance company has an interest in the insured assets not being invested in a way they can't hedge against). At the same time, using a CDA to insure certain assets could be attractive to a financial advisor who might not be able to easily bill for their services in certain annuity structures (but could bill on the assets in the insured portfolio). In addition, CDAs are becoming increasingly accessible through advisor technology platforms, reducing the friction involved in implementing them.

In the end, advisors can provide value by recognizing their clients' retirement income styles and choosing a retirement income strategy accordingly. For those with full confidence in long-term market returns, underlying guarantees may not be necessary, and those who don't want to take any market risk may not want to invest at all. However, for particular client segments, the CDA structure is aiming to find a balance of serving clients who are willing to stay invested in markets but are willing to give up some long-term upside (as a result of the annuity costs) in exchange for having some income floor in place in the event of an unfavorable sequence of market returns that is otherwise beyond their control.

Using A Bond Tent To Navigate The Retirement Danger Zone

(Nerd's Eye View)

The final decade leading up to retirement, and the first decade of retirement itself, form a "retirement danger zone", where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this "portfolio size effect", the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through.

And because the consequences of a bear market can be so severe when the portfolio's value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year.

Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes, and the market cycle takes over. Which means while it's necessary to be conservative to defend against the portfolio size effect, it's not necessary to reduce equity exposure indefinitely.

Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rebuilds again through the first half of retirement. From the fixed income perspective, the strategy to protect against the retirement danger zone and the risks that come with the portfolio size effect is to build a "bond tent" – an upside-down V-shaped extra allocation to bonds that gets built up in the final years before retirement and gets spent down in the early years of retirement. This allows the portfolio to take shelter in the tent during the riskiest years of being exposed to the portfolio size effect – not because bonds have an appealing return, but simply because they reduce the volatility risk that becomes so severe at the portfolio's maximal size.

Ultimately, the key point is that with research suggesting that some pre-retirement decreasing glidepath in equities (and building of the bond position) is appropriate, some kind of V-shaped equity glidepath – or building a bond tent in which the retiree can take shelter during the 'retirement danger zone' when the risk of the portfolio size effect is greatest – appears to be more effective than the 'traditional' lifecycle or target date fund asset allocation glidepath, that just gets lower and lower throughout retirement, and may actually be amplifying the risk of a bad sequence of market returns (by reducing exposure to a post-decline stock market recovery)!

Tell A Story For Organic Growth

(Beverly Flaxington | Advisor Perspectives)

While financial advisors recognize that they provide significant value to their clients, explaining this value to prospects can sometimes be challenging given the technical nature of many financial planning activities. With this in mind, using stories of how the advisor provided value to a client can potentially lead to better connections with prospects who might not be familiar with the minutiae of the planning process.

To start, a good story starts with a 'trigger', or the reason the client approached the advisor (bonus points if the client in question's trigger matches that of the prospect at hand!). Next, the advisor can outline what they did to help the client, which could include how the advisor was able to identify the client's key pain points, analyzed the client's financial situation, and recommended helpful solutions (which could be an opportunity for an advisor to move beyond a list of planning services they offer to get into 'how' they offer them). Finally, a good story will have a 'happy' ending, perhaps demonstrating how the client was put on a better path and now has less stress in their lives. Notably, stories can be particularly effective when an advisor targets their marketing to an ideal client persona, as stories from current clients could be more applicable to these prospects than to a more general audience.

Altogether, having stories of client successes can help advisors explain their value in practical terms that could be understood by clients with a range of financial expertise (or offer an opportunity for current clients to better explain the advisor's value when recommending the advisor to friends or family!).

Best Story Wins

(Morgan Housel | Collaborative Fund)

While individuals often spend 12 or more years in school, it's very unlikely that they will remember everything they were taught (or even a significant percentage of it), particularly when it comes to technical topics that are hard to parse. However, these lessons can be easier to remember (at least in broad terms) when told in the form of a story, which offers teachers and those creating content (including financial advisors) an opportunity to craft a message that is more likely to 'stick' for those that hear or read it.

Often, a famous individual associated with an idea isn't necessarily the one who first identified it, but rather the person who was able to best communicate it in the form of a story. For instance, Benjamin Graham is well-known as one of the preeminent thinkers when it comes to valuing companies, thanks in part to his ability to clearly communicate his ideas in writing (e.g., through his book Security Analysis, written with David Dodd and first published in 1934), while John Burr Williams, who developed many valuation concepts still in use today, is not nearly as well known. In the advisor context, stories not only can help make sense of complicated planning issues for prospects and clients, but also could serve as a differentiator for advisors (at a time when it is more challenging to do so).

In the end, a financial advisor doesn't necessarily have to come up with novel analyses or planning recommendations to be successful; rather, being able to take established (albeit technical) planning concepts, apply them to a client's situation, and communicate their findings clearly (perhaps in the form of a story told verbally in discovery meetings and/or in written form on their website) could allow them to retain and grow a base of clients who better understand the 'why' of their advisor's recommendations (and might be more likely to implement them!).

5 Types Of Stories For Advisors To Use With Clients And Prospects

(Don Connelly)

Stories are a common part of everyday life, whether they are memorable fictional tales or an easy-to-understand breakdown of complicated topics. And given that financial planning is a particularly technical field, advisors will likely find they frequently have opportunities to tell stories that can calm client nerves and win over prospects.

For instance, an advisor with a good 'who I am' story that includes personal experiences and demonstrates their 'human side' will likely come across as more likeable and relatable to prospects compared to an advisor who relies on a standard biography listing their education and accomplishments. Advisors can also use stories to establish trust with prospects and clients, for instance by providing examples that show they go the extra mile for their clients and act in their best interests rather than seeing them as merely sources of revenue for their firm. For current clients, advisors can use a story to get them off the fence from implementing a planning recommendation by helping them envision the future they want (and how the recommendation can lead them there). Advisors can also use stories to help calm clients during volatile markets (e.g., by explaining how the client would trust an experienced pilot to get them through turbulence in the air, the seasoned advisor is there to help them do the same when it comes to market volatility) and to explain their value and fees (e.g., a story that explains that just as a client might not choose the least expensive option when it comes to brain surgery or a skydiving parachute, the advisor can provide critical value that [often more than] justifies their fee).

Ultimately, the key point is that having prepared stories ready in their 'back pocket' for a variety of common circumstances and questions they face can help financial advisors better connect with clients and prospects alike and more effectively communicate the unique value they provide!

Why Families Are Shutting Down The 'Bank Of Mom And Dad'

(Veronica Dagher | The Wall Street Journal)

While parents are responsible for financially supporting their kids their younger years, once children leave school and enter the workforce, the question of whether to continue to offer financial support (and how much to provide) becomes a trickier question that can have ramifications for parents' mental and financial wellbeing.

For parents, providing financial support for their adult children can feel like a natural extension of the care they have provided for their kids' first 18 years. According to a survey sponsored by Credit Karma, 32% of American parents with children over the age of 18 support them financially, with the most common ways including allowing their children to live at home (64% of those who provide support) and paying some or all of their monthly bills (49%). While 50% of these parents said they provide financial support because it's their duty as a parent, 59% of these parents said doing so causes them mental stress. This could be in part to the financial strain that providing continued support to adult children can create, with 76% of these parents saying that financially supporting their children impacts their finances, 52% reporting that they had to cut back on their current living expenses, and 27% responding that doing so is forcing them to push back their retirement date.

Nevertheless, even for parents who want to cut (or reduce) financial ties to their children, doing so can be challenging given the emotional ties involved. For those looking to make a change, starting a conversation with an adult child can be a first step to open the dialogue on how the parents' financial support might change over time. In addition, rather than treating a reduction in support as a penalty or punishment (which could create a rift between the parent and their child), framing it as promoting the adult child's financial independence could be a more positive spin. Further, setting specific dates and/or financial targets (e.g., the child needs to find an apartment by a certain date, but the parent will provide a specific amount of rent support for the first 3 months) and sticking to them can help avoid the tendency for the status quo to continue indefinitely.

In the end, while parents want to support their children, (indefinite) financial support not only can potentially stunt an adult child's transition into adulthood, but also lead to mental and financial strain on the parents themselves. Which suggests a valuable role for financial advisors, both in helping parents evaluate the impact of this financial support on their own financial goals and in serving as an accountability partner for parents who do decide to make the (often difficult) decision to reduce or halt financial support for their adult children.

The Perils Of "Helicopter Money"

(Alina Fisch | Contessa Capital Advisors)

The term "helicopter parent" has become a common part of the cultural lexicon in recent years, used to describe an individual who hovers over every aspect of their children's lives, from frequently interjecting themselves at school to managing their kids' friendships. And while "helicopter parent" behavior often is the result of good intentions good intentions (e.g., wanting to see their child succeed and avoid danger), this behavior not only can limit a child's sense of independence as they near and enter adulthood, but also can create stress for the parent themselves (who might be juggling their own work and other responsibilities as well).

And while some parents might not think about calling a child's teacher to contest every grade they receive, the question of how to handle money with kids can be a trickier one. Because while parents might want the best for their children, limitless spending can both strain the parents' finances and distort their children's views of money (e.g., where it comes from and the true cost of different purchases). To start addressing this challenge, communicating the lesson early on to children that there is not an unlimited amount of money for them (or their parents) to spend can kick off a conversation around spending boundaries. For older children, this might mean increasing transparency about the family's finances, both on quantitative (e.g., how much certain major expenses cost) and qualitative (e.g., establishing family money values) levels. This can help lead to better budgeting practices on the child's part (and a better understanding that their parents don't have unlimited money to spend). For instance, Fisch transitioned her son from a weekly allowance to a monthly one to help him build budgeting skills (given that if he spends it all in the first week there won't be anything left for the rest of the month).

At the end of the day, while few parents want to drop unlimited amounts of money from a 'helicopter' for their children's wants and 'needs', defining and implementing the opposite of spoiled can be challenging. Nonetheless, by starting a discussion about the opportunities and limits of money (and implementing practices that reflect these factors), parents can help their kids build a healthier relationship with money that could follow them into adulthood.

Laps Of Luxury

(Heather Joelle Boneparth | Our Tiny Rebellions)

For those who can afford them, individuals often look to purchase higher-quality goods, whether because they are made to last longer or better reflect their tastes and style. Nonetheless, while this approach might work for adults spending on themselves (given they know their individual financial situation and might have well-developed tastes), buying higher-end goods for children can raise several potential issues.

To start, choosing more expensive options over cheaper alternatives could habituate children to a certain level of goods or experiences without understanding the financial implications of the purchase. For instance, a child whose parents have paid for high-end clothing might be surprised that they can no longer afford these brands once they have to make these purchases with their own money. In addition, kids might not even appreciate the level of spending their parents are providing, whether it's preferring a cheap sheet cake over a designer birthday cake or enjoying a hotel pool on vacation whether it's at a luxury property or a more standard resort. Further, given that kids tend to damage and lose goods often, encouraging them to value what they have (whether high end or not) can be a valuable lesson (given that they won't be able to get their parents to order 'free' replacements indefinitely!).

Ultimately, the key point is that while some parents might want to provide their kids with a more comfortable childhood than they had themselves, this approach could unintentionally skew their child's perceptions of spending (e.g., by setting a 'floor' on what level of quality [and price] is acceptable) and strain the parents' finances in the process. And while finding the exact 'line' between quality and extravagance can be tricky to define, making a conscious effort to expose kids to different levels of spending could provide them with a more accurate sense of what is 'normal' and the financial tradeoffs that come from buying more expensive goods and experiences.

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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.