Weekend Reading For Financial Planners (September 28–September 29)

Cerulli Study Shows That Investors' Willingness To Pay For Advice Is Rising

(Alec Rich | Citywire RIA)

The last 3 decades have seen a steady advance in technology that has made it easier and cheaper for investors to manage money on their own. First there was the rise of online discount brokerages in the 1990s as the Internet was just taking off (that made buying and selling investments "so easy a baby could do it"). And then in the 2010s came the era of robo-advisors that could automatically recommend and manage an asset-allocated portfolio for an ongoing fee of only around 0.25%.

For most investors, the effect of these technological advances was that it became less of a necessity to hire a financial advisor just to manage their investments (since that could be done for a quarter of the cost of the typical 1% AUM advisory fee). Which led some industry commentators to predict that robo-advisors would threaten human advisors' business model, since few investors would be willing to pay a premium for human advice when a robo-advisor could do the work of managing a portfolio for a fraction of the cost.

But in reality, market research has consistently shown that retail investors have become more, not less, willing to pay for financial advice. The most recent evidence to this effect comes from a Cerulli study showing that affluent investors' willingness to pay for financial advice rose substantially between 2020 and 2023, with male investors' interest in paying for advice increasing from 58% to 63%, and women investors' interest increasing from 52% to 61%.

The increase in willingness to pay for advice reflects changes both among investors themselves as well as the advisors who serve them. On the investor side, peoples' financial lives are as complicated as ever, as tax legislation like the Tax Cuts & Jobs Act and the SECURE and SECURE 2.0 Acts introduced new rules and greatly increased the complexity of tax planning decisions, at the same time that individuals (particularly affluent professionals) also got busier than ever, with work and family commitments leaving a shrinking amount of time to devote to navigating an increasingly challenging financial landscape. Meanwhile, for advisors, the perceived threat of robo-advisors led to a shift in focus towards how to provide value beyond the investment management process with holistic financial advice including retirement, tax, estate planning, and a bevy of other areas.

And so with investors needing financial advice in more and more areas, and an increasing number of advisors able to give that advice (along with public outreach efforts like the CFP Board's marketing campaigns that have raised awareness of financial advisors' abilities to solve financial problems beyond portfolio management), it makes sense that a larger portion of the public is interested in paying to work with an advisor. Which overall bodes well for the industry, and shows that when advisors can demonstrate their value in the work they do (beyond just managing investments), it has real effects in the marketplace as an increase in the number of people who trust (and are willing to pay for) their advice!

Cash Sweep Practices Could Be A "Ticking Time Bomb" For RIAs, According To Legal Experts

(Sam Bojarski | Citywire RIA)

Financial advisors use a number of services to aid in running their business – e.g., technology, compliance support, marketing, and bookkeeping – most of which they pay for directly as a cost of doing business. But one service that often doesn't have a direct cost to the advisor is the custodial platform that they use to hold clients' investment assets. Which isn't because the custodians have decided to hold clients' assets for free, but rather is because the custodians can instead generate far more revenue via the client's assets themselves, in various ways including securities lending, payment for order flow, proprietary funds, and – perhaps most significantly, and recently most controversially – the "spread" earned on cash sweep accounts between the revenue that the custodian earns on clients' uninvested cash and the interest paid to the client.

Brokerage firms' cash sweep practices have been in the news lately because, as rising interest rates over the last few years have increased the annual yields on savings accounts, money market funds, and other cash products to 5% or more, the interest paid on many cash sweep accounts has barely budged above 0%, leading to a massive revenue windfall for brokerage firms at the expense of investors who keep uninvested cash in their brokerage accounts. Which has led to class action lawsuits against firms like LPL, Ameriprise, Wells Fargo, Merrill Lynch, and most recently JPMorgan for allegedly exploiting their customers by paying below-market interest rates on cash sweeps.

But while the fallout from the cash sweep controversy has so far been mostly limited to the brokerage firms themselves, securities attorneys have pointed out that there's a potential liability exposure for RIAs as well. To the extent that financial advisors allow their clients to have uninvested cash sitting in their brokerage accounts and earning almost no interest – either intentionally, or because of a failure to monitor their cash levels – it could be argued that the advisor has violated their fiduciary duty to act in the client's best interest, especially if the advisor also billed their advisory fee on that cash. Which means that, once the initial wave of lawsuits against brokerage firms has subsided, RIAs could eventually also find themselves the targets of legal action for keeping clients' cash in low-yielding sweep accounts.

Of course, the easiest way to avoid receiving a low interest rate on a cash sweep account is to simply not keep uninvested cash in a brokerage account where it would be subject to those low cash sweep rates, and instead either invest it or move it to a higher-earning cash product like a high-yield savings account, cash management account, or money market fund. And even though the Fed's recent decision to lower interest rates means that the market interest rate on cash accounts isn't quite as high as it has been of late, there's still a wide margin between the yield that a client could earn in a savings account or money market fund versus what they would receive in a cash sweep account. Which means that for the time being, having a process for monitoring and managing clients' cash levels may not be just a 'nice-to-have' feature to provide extra value for the client, but a necessity for the advisor to fulfill their fiduciary obligations.

CFP Board Spars With Annuities Industry Over Fiduciary Regulation

(Tracey Longo | Financial Advisor)

Recent years have seen an increasingly intense debate over whether all financial advisors should be subject to a fiduciary standard, including those who are employed as salespeople paid on commission such as broker-dealer representatives and insurance agents. While consumer advocates have pushed for a uniform fiduciary standard that ensures that anyone who hires someone calling themselves a 'financial advisor' can be assured that the advisor is acting in their best interests at all times, the broker-dealer and insurance industries have pushed back hard against such a requirement, including filing lawsuits that resulted in the overturning of both the Department of Labor's first attempt at a uniform fiduciary rule for retirement advice in 2016, as well as DOL's second attempt to impose a fiduciary standard on rollover advice earlier this year.

One of the main arguments by the product sales industry against subjecting all advisors to a uniform fiduciary standard is that doing so would restrict access to financial products and advice for less-affluent investors, with the logic being that a fiduciary obligation imposes a higher cost burden on the advisor that would cause them to only seek out higher-net worth clients in order to remain profitable.

However, in a recent SEC panel discussion, the CFP Board refuted the idea that a fiduciary standard makes advisors less profitable or that it would cut off access to financial advice for lower- and middle-income clients. As their research shows, CFP certificants (who are held to a fiduciary standard at all times when engaged to provide advice to a client) report compensation that is 10% higher than non-CFPs – which aligns with Kitces Research showing that advisors with the CFP designation earn an average of $11,500 more per year on a take-home basis than non-CFP advisors – while at least half of CFP certificants still serve clients with income of under $75,000. That, combined with the fact that over half of CFP certificants are themselves compensated at least partially on a commission basis while still being subject to CFP Board's own fiduciary obligation, means that, at the very least, a fiduciary standard does not appear to be hampering the profitability of registered representatives and insurance agents, nor restricting their ability to serve lower-income households; in fact, it may even serve to improve their profitability while still working with households of all income levels, by simply bringing a higher quality, deeper level of (fiduciary) advice that consumers are willing to pay more for.

For advisors, the key point is that while being required to act in clients' best interests does represent a higher standard of conduct, the data (both from CFP Board and Kitces Research) shows that it doesn't impose a burden on advisors' ability to stay in business or on clients' ability to receive advice. Which may not end the debate between fiduciary advocates and the product sales industry as a whole, but does provide some reassurance to advisors that they can be successful while also acting in the best interest of their clients – while suggesting that perhaps product companies are less concerned about the impact of giving fiduciary advice than they are about being able to continue to market their representatives as "advisors" despite being mainly in the business of distributing products and having little intent to give (fiduciary) advice in the first place?

Where To Put Your Money After The Fed Rate Cut

(Joe Pinsker and Elizaveta Galkina | Wall Street Journal)

In the 14 years prior to 2022, it was extremely difficult to find a place to keep cash that would earn a yield anywhere near the rate of inflation. For much of the period between December 2008 (in the midst of the Global Financial Crisis) and February of 2022 (when pandemic-era supply chain issues caused inflation to spiral upward), the Federal Reserve's Funds Rate sat near 0%, and when it did briefly rise from late 2015 to early 2020, it never exceeded 2.5%. Which meant that interest rates on savings accounts, CDs, money market funds, and other cash-like products whose yields tie closely to the Fed's interest rate, also languished during that period – leading many advisors to reduce or eliminate cash allocations in their clients' portfolios and recommend their clients to only hold the minimum cash needed to cover short-term expenses and emergencies.

As the post-COVID economy heated up, however, and inflation persisted for higher and longer than many economists had predicted, the Fed began raising its interest rate in March of 2022, kicking off what ultimately became a 1 ½ year cycle of rapid rate hikes during which the Funds Rate increased to 5.5% – its highest level since the collapse of the dotcom bubble in early 2001. All of a sudden it was possible to earn annual yields of over 5% on cash, which over the last year has resulted in the yields on many cash accounts actually exceeding the rate of inflation. And so investors began to pile money into high-yield savings accounts, CDs, money market funds, and Treasury bonds in order to receive what was essentially a risk-free positive real return on their cash.

All good things must come to an end, however, and on September 18 the Fed announced the first in what will likely be a series of rate cuts as it aims to achieve a "soft landing" of taming inflation without driving the economy into a recession. Almost immediately, banks in turn began to cut the yields offered on their cash products, auguring a likely end to the era of receiving more than a miniscule return on cash. But that being said, most high yield checking and money market accounts still offer yields from 4.5% to 5% (which is nearly double the most recently published CPI of 2.5%), and for those willing to lock up their cash for a little longer, the median 1-year CD offers a 4.6% rate that will extend for the entire 12-month period until maturity (while savings and money market yields will more likely continue to drift lower as the Fed cuts rates further).

The key point is that, for those who have gotten used to the concept of substantial risk-free returns on cash, the start of a falling rate cycle is an opportunity to reevaluate the plans and goals for their cash on hand. On the one hand, it's still important to have stability for any funds that are needed for short-term goals (like a planned down payment on a house or a wedding), for which case the drop in rates means simply receiving a little less yield on those funds. But on the other hand, for those who have been strategically holding cash as a source of risk-free returns, it may be time to think about whether that cash would be better invested elsewhere – either in a better-yielding cash product, a bond ladder, or even equities, for those who truly don't need the funds until the long term!

Rate Cuts And Historical Market Analogues

(Ben Carlson | A Wealth Of Common Sense)

The Federal Reserve's decision to lower interest rates on September 18 marked the beginning of the 22nd rate-cutting cycle since 1957. And even though every historical scenario that caused the Fed to cut rates was unique in its own way, looking back on that history can at least provide some context to help investors form some expectations about what will happen next.

Because the Fed typically cuts rates either when (1) the economy is beginning to show signs of a slowdown in the form of higher unemployment, lower inflation, and/or lower GDP growth; or (2) when the country has already entered a recession; the prospect of a rate cut might seem like it bodes poorly for equities in the short term, which would suffer the most damage from an economic slowdown. And despite unemployment having crept higher in recent months, the S&P 500 has recently been at or near all-time highs, increasing investors' trepidation around the future outlook as they wait for the proverbial shoe to drop.

However, history shows that U.S. equity returns have overwhelmingly been positive in the wake of rate cuts: Over the previous 21 cutting cycles, the return of the S&P 500 for the 12 months following the initial rate cut averaged 9% when the cut was within 5% of the index's most recent all-time high, and 16% when it wasn't; while the 12-month return was negative in only 4 of those 21 prior cutting cycles. And when looking out to 3 years after the initial cut, the S&P 500 returned a cumulative average of 51% when the cut was within 5% of an all-time high, and 37% when it wasn't.

All of which makes sense because, after all, the point of the Fed cutting interest rates is to make it easier to borrow money, which is ultimately good for the corporations who use those borrowed funds to invest and grow. And so while there may be a high amount of uncertainty today (especially in the face of an election where both candidates face heavy criticism of their respective economic policies) and there may be further volatility to contend with in the short term, things have tended to work out fine for investors in the past, even during rate cutting cycles – which is a good argument for investors to stay the course through this one as well.

What's Next For The Markets And Economy After The Fed Rate Cut?

(Danny Noonan | Morningstar)

When the Federal Reserve announced on September 18 that it would be lowering interest rates, it marked an official shift in policy from holding rates relatively high to beginning a new cycle of rate cuts. But despite the significance of the shift, the announcement itself didn't have a significant impact on the financial markets – in large part because the Fed's leaders had already signaled that they were ready to begin cutting rates, and the changes were priced into the markets well before the official announcement was made.

Which serves to demonstrate how few ways there really are for any individual investor to take advantage of the Fed's rate cutting. Any obvious move, such as buying longer-term bonds to lock in higher yield, has already been priced into the market to the extent that there's really no short-term advantage to be had. And anything else would be essentially based on pure speculation that would be just as likely to backfire as it is to work out in the end.

Thankfully, for those with a time horizon of more than just a few years, there's little need to worry about the impact that falling interest rates will have on portfolios. Over a 5-plus year period, stocks tend to have positive returns regardless of the economic conditions at the start. And so while there may be uncertainty about the economy in the short term (which may make it wise to create a plan for what to do in the event of a layoff or other short-term financial setback), in the scope of a long-term investment horizon the prospect of the Fed's rate moves essentially amounts to 'noise' that most investors would be better off to simply ignore in favor of focusing on the long term.

Get Your Organic Growth Process In Order Before Pursuing M&A

(Matt Sonnen | Wealth Management)

Organic growth has long been a challenge for advisory firms, which tend to have new client growth rates in the mid-single digits (e.g., 4% to 7%) each year. And as more and more advisors offering comprehensive financial advice have entered the market in recent years (either as new firms, or by breaking away from wirehouses and independent broker-dealers), it gets harder for any one firm to differentiate themselves from all the others, which makes it all the more difficult to market to new clients. Which is why, for firms that have trouble growing organically, it can be tempting to choose a different path and try to grow through Mergers & Acquisitions (M&A) instead.

However, many of the firms that choose the M&A path ultimately struggle to become more than the sum of their combined parts. Because while the resulting firm might be bigger in terms of clients and AUM, it won't necessarily grow any faster than the original firm did on its own, unless it can figure out a way to ignite its own organic growth after the acquisition. Which can be even harder to achieve in a bigger (post-merger) firm if the operations aren't built to work at scale: if the advisory firm was already struggling to achieve a good organic growth rate, rarely is that growth rate ignited in a larger and more complex integrated firm post-acquisition! And while an acquirer can always try to spur more growth by narrowing its search to firms that have their own high organic growth rates, many of those firms might not want to be acquired to begin with, if they've figured out their own path to organic growth!

Ultimately, while M&A can be one route to faster firm growth, it's really most effective only when the acquiring firm has figured out how to achieve healthy organic growth on its own, and has the operational resources to handle an increasing number of clients. With the irony that firms achieving strong organic growth might not even feel an allure for M&A in the first place, as successful organic growth typically comes at a much lower client acquisition cost than mergers and acquisitions anyway. And so before 'flipping the switch' to inorganic growth, then, it's arguably still best for advisory firms to get their own organic growth house in order so they can set themselves up for success once they start acquiring firms (and the advisors and clients that come with them)… or avoid the need to deal with the complexities of acquisitions and integrations in the first place?

6 Considerations For Ensuring The Right Business Exit

(Dr. Guy Baker | Wealth Management)

For advisory firm owners who have never been involved in a business sale before, it might seem like a fairly simple process: Negotiate a selling price, cash the check and walk away, right? Except when the time comes to start thinking about how the sale will actually happen, firm owners often realize there are a lot more considerations and decisions to make than they originally expected – and sometimes this realization can come when it's too late to sidestep any complications that could have been avoided by starting to plan earlier.

For example, firm owners may not realize that if a business structured as a C corporation owns any assets with embedded gains (like real estate), then those assets will be double-taxed if the business is liquidated – first at the corporate level (on the embedded gain when the asset is sold) and then at the individual level (when the corporation's stock itself is sold or redeemed) – unless the business is switched to an S corporation at least 5 years before selling the assets. Additionally, business owners often don't fully account for the impact that taxes will have on the amount that they'll end up receiving from their sale (i.e. their "walkaway money"), which might result in accepting a sales price that doesn't allow them to live the lifestyle they want in retirement – especially if they now have to pay out-of-pocket for expenses like health insurance that were previously paid by the business!

Ultimately, in order for the firm owner to best achieve their post-business exit goals – whether that's to remain involved with the business in some way, or to walk away entirely – it's best not to wait to start planning until it's time to start looking for a buyer. Rather, the planning process may need to begin several years before the planned sales date in order for the sales price, deal structure, and tax implications to fully align with what the owner wants. Which makes these considerations helpful not only for advisors planning to sell their own firms, but also for business owner clients whom advisors can help navigate the sales process as well.

M&A Math Reveals Misleading Multiples

(Allen Darby | Citywire RIA)

When Mergers & Acquisition (M&A) deals are announced in the media, there's often an emphasis on the "multiple": that is, the deal's sales price divided by the business's revenue or perhaps its annual earnings (i.e., the firm's multiple-of-revenue or multiple-of-EBITDA price). But while the "headline" multiple is what usually gets all the attention, the often-hidden details underlying that headline number show that not all multiples are created equal.

For instance, the terms of a sale might specify that the buyer will pay 8X earnings on the initial sale, and an additional 4X later on, contingent on the buyer hitting specified growth targets within a certain period of time. And so while the "headline" multiple as advertised might be 12X (i.e., the initial 8X plus the deferred 4X), the seller is only guaranteed to receive 8X – and depending on how aggressively the growth targets are set by the buyer, they may never receive all, some, or any of the additional 4X. Which means that the "12X" deal is, in reality, more likely to be only an 8X deal when everything is said and done. Or alternatively, it might mean that the 12X deal is really only 12X if the seller stays on for several more years to help achieve those growth targets, which means they received a deal that might be only 8X the value that the business would ultimately have been worth by the time they actually get to leave and retire.

And so when seeing M&A deals as advertised in the press, it's important to recognize that the headline multiple might have several caveats that can make it less impressive than it seems (and less realistic that any other advisor would really get a similar price for a similar firm… at least within similar contingencies). And for firm owners looking to sell, a failure to look beyond the headline multiple being offered can lead the seller to expect terms that are either unrealistic (if they don't want so many post-deal contingencies), or alternatively could lead them to stretch for a multiple "like what the other advisors are getting" that in reality has contingencies they wouldn't have actually wanted to take on. Which means in the end, understanding all of deal terms and surrounding considerations – including not only the numbers themselves, payment timing, and tax implications, but also the cultural fit and quality of life at the acquiring firm – can help firm founders make the deal that's really best for themselves, their firms, and their clients.

The Knotty Death Of The Necktie

(Adam Gopnik | The New Yorker)

For over a century, the necktie has been a standard part of formal menswear. Even as fashions changed from decade to decade, and the ties themselves grew alternately skinny or wide; solid, striped, or floral; they remained a persistent sight at venues ranging from business meetings to nightclubs.

However, starting during the 2010s, the tie began to lose its ubiquity as "business casual" became increasingly the norm in workplaces – although on dress-to-impress occasions like client meetings and job interviews, it would have still been nearly unthinkable not to wear one. But the tieless trend really started to pick up steam during the COVID pandemic, when Zoom replaced in-person meetings (which made it feel fairly ridiculous to wear a tie in one's own home office, especially when there were kids doing remote learning in the next room over). Today, even when wearing a suit, even current and former Presidents feel comfortable going with the "open collar" look.

But even though neckties to some may increasingly feel like a relic of a more-formal past – much like previously indispensable accessories like fedora hats and smoking jackets eventually became passé to subsequent generations – there are still plenty of people who, having come up in an era when ties were inescapable, feel more comfortable with a tie on than without one. And so while fashion commentators have long proclaimed the "death of the necktie" as if they will soon disappear from store shelves and closets altogether, the reality is that there is now simply less of an obligation to wear a tie for people who don't want to wear one. And ultimately, for a business centered around building trust with clients, being able to sit across the table and project empathy and confidence is more important than the presence or absence of any one fashion accessory.

How Financial Advisors Use Office Décor To Break The Ice

(Steve Garmhausen | Barron's)

When a financial advisor brings a client into their office, what the client sees has a subtle – or sometimes not-so-subtle – effect on how they perceive the advisor themselves. To that end, the way advisors decorate their office is often an extension of the advisor's brand; that is, a signal of the kind of feelings that the advisor wants the client to associate them with.

At a high level, there are a number of best practices, gleaned from studies in the counseling and psychotherapy fields, around the type of environment that an advisor can establish in their office to create the ideal client experience – from the lighting and colors to the placement of furniture and even the texture of objects within the office. However, to avoid becoming too generic in their layout, many advisors often add their own personal touches to bring their own stories into the mix and occasionally spark conversations.

The tactics might change depending on the effect that the advisor wants to have on the client. If the intent is to create a deeper personal connection, the advisor might display some objects with specific personal connections attached to them – as in one case where the advisor put up paintings of a popular local bar owned by his family, and a signed baseball from a bachelor party. In other cases, the intent may be to simply awe the client, as one advisor does by proceeding clients past a massive collection of music and sports memorabilia. And in still other cases, the advisor may want to create as calming and relaxed of an environment as possible, such as the firm owner who holds client meetings on an outdoor patio, letting the California scenery serve as décor (with a glass of wine or bourbon to further enhance the relaxation part).

In any case, advisors who are mindful of the impression that their office environment creates with clients can design a space that reflects the feelings that the advisor wants to bring closest to the surface when they meet with the client. Whether that's personal objects, artwork, or simply a nice Zoom backdrop, advisors can use the space around them to enhance and reinforce their brand while creating a deeper connection with the clients they serve.

How "Cool" Should Advisors Dress?

(Dan Solin | Advisor Perspectives)

For some advisors – particularly those on the younger end of the spectrum – there's an inherent tension around how to dress when meeting with clients and prospects. On the one hand, advisors hear all the time about the importance of authenticity in building deep and trusting client relationships – which would suggest that, if someone feels the most comfortable being their authentic self while wearing shorts and a T-shirt, then that's what they should wear when talking to clients.

But on the other hand, there's also the reality that clients often have expectations for how they feel a financial advisor should dress, and if the advisor's appearance is too far out of line with those expectations, the client may end up seeing them in a more negative light. Which is particularly case with younger and less experienced advisors (who are ironically usually the likeliest to be more comfortable with "dressing down"), since without established bona fides like a large client base or many years in business the client has little other than appearance on which to base their perception of the advisor's competence and trustworthiness.

If it seems a little unfair that the advisors who would most want to dress casually would benefit the least by doing so, it is – at least a little bit. However, the good news is that, after attaining at least some demonstrable experience and success, it begins to matter less and less how an advisor chooses to dress. As Nassim Taleb famously wrote, at some level people may want the professionals whom they trust to look the opposite of how society says they "should" look; e.g., the surgeon who "looks like a butcher" is more likely to have achieved success on merit alone than the one who may have simply gotten there by looking the part. However, that's really only the case once the professional has achieved a certain level of success to begin with: If neither surgeon had any experience at all, there would be nothing but appearance to go off of when deciding between the two.

So for those who want to survive in their first few years in the advisory business – and often those first few years are really just about survival – there's nothing inherently wrong in dressing "authentically". However, if they find themselves struggling to find or convert clients, it may be wise to look at how most other advisors are dressing, and decide whether it's worth sacrificing a little "authenticity" today in order to stay in business long enough to wear what's most comfortable later on.

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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.