Nerd's Eye View blog

Helping Nervous Clients Understand The (True) State Of The Social Security System And What It Means For Their Retirement

October 2, 2024 10:15 am 0 Comments CATEGORY: Retirement Planning

Given the frequent news headlines on the (un)sustainability of the Social Security system, many working-age financial advisory clients might harbor doubts about receiving their full estimated Social Security benefits (and many current Social Security recipients might be concerned that they will not continue to receive their full benefits throughout the remainder of their lives). In this environment, financial advisors have the opportunity to add value for their clients not only by giving a clear explanation about the current status of Social Security and the potential legislative changes that could improve its solvency, but also by modeling what (realistic) changes would mean for their clients' financial plans.

To start, while the state of Social Security's trust fund reserves often receives significant media attention, in reality, the bulk of funding for paying out Social Security benefits comes from Federal Insurance Contributions Act (FICA) taxes, more commonly known as payroll taxes (with workers and their employers each paying 6.2% on up to $168,600 of income in 2024 for the Social Security portion of FICA). Which means that even if the trust fund reserves were to become depleted (currently estimated to occur in 2035), the system would continue to pay the majority of benefits that are simply covered by the ongoing receipt of significant payroll tax revenue. In fact, according to the latest annual report of the board of trustees of the Social Security trust funds, Social Security would still be able to pay 83% of scheduled benefits in 2035 when it is expected to be depleted, though this figure would decline to 73% of scheduled benefits by 2098. Which might come as a surprise to clients who assume that the exhaustion of trust fund reserves would mean that no (or very little) benefits would be paid!

Nonetheless, given the disruption that a reduction of benefits would cause recipients of Social Security retirement benefits (particularly those who rely on such benefits for a significant percentage of their retirement income), policymakers have an incentive to enact measures that would allow the system to continue paying out full benefits for decades to come. Such options include single-policy solutions that would wipe out the entire 75-year shortfall (e.g., the board of trustees report estimates that a 3.33 percentage point increase in the payroll tax or a 20.8% reduction in benefits would cover the gap) or a (perhaps more politically feasible) combination of policies that address system revenues and/or costs (e.g., raising the payroll tax wage cap or increasing the Full Retirement Age) that would close the funding gap.

Ultimately, the key point is that financial advisors have the opportunity to add value for their clients by providing context on the state of Social Security (e.g., even if the trust funds are exhausted, the system would still be able to pay out the majority of scheduled benefits) and potential legislative fixes (which, depending on the legislation passed, might not be as severe as some clients assume), as well as leveraging financial planning tools to show the impact of the possible trust fund exhaustion and/or potential policy actions on each client's financial plan (both in dollar terms and how it changes the probability of success of their plan). Which, together, could provide clients with a more realistic picture of what changes to Social Security could mean for their unique situation!

#FASuccess Ep 405: When Being ‘Youthful’ Turns From A Liability To An Asset In Building Your (Long-Term) Advisory Business, With Gaetano Sacco

October 1, 2024 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 405th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Gaetano Sacco. Gaetano is a partner and senior financial advisor at Fountainhead Advisors, an RIA based in Warren, New Jersey, that oversees approximately $900 million in assets under management for 1,000 client households.

What's unique about Gaetano, though, is how after breaking away from an insurance broker-dealer with barely $5M in assets under management, he has been able to quickly build his practice to $75 million in AUM in just 5 years in part by turning what was originally a liability for him in his 20s – being a 'young' advisor who prospective clients didn't always think was credible – into an asset, where Gaetano is now quickly growing his client base of retirees by highlighting how his 'youthfulness' as a 30-something means he's been around long enough to show that he's going to be a financial advisor for the long run, and still young enough that he can do this for another 30 years and actually be their financial advisor for their entire retirement (or basically, the last advisor they'll have to worry about picking in their lifetime).

In this episode, we talk in-depth about Gaetano's experience working in insurance sales starting soon after he graduated from college, including why the need to cold-call for business as a relative newcomer was both a challenge and a confidence-builder as he started to gain traction selling insurance products and some standalone financial plans, the factors that ultimately led Gaetano to decide to make the switch from insurance to the RIA channel and leave friends and mentors he had made in the insurance world despite the success he was having there after winning "Financial Planner of the Year" in his region of the company, and how Gaetano, now in his late 30s, has found his age to be an asset, as getting married and having kids has given him new perspectives in life to be able to better related to his clients and prospects, his years of experience shows that he has credible success, and his relatively young age helps him reassure his older clients that he can really be there for them in the long run.

We also talk about how Gaetano has built his current practice up to $75 million in just 5 years in part through client referrals that came after he got really proactive in addressing client concerns (from phone calls to webinars to additional written commentary and even crafting an expertise on PPP loans while they were available) during the COVID-induced market downturn, how Gaetano has since used in-person client appreciation events, including restaurant crawls and entertaining clients at a popular horse race, to both build loyalty among his current clients and to generate warm introductions to the friends that his existing clients bring to these events, and how Gaetano expanded his capable to be able to serve his 150 clients in part by empowering a newer advisor to take on plan-building and client-facing tasks while building his own book of business.

And be certain to listen to the end, where Gaetano shares how joining an advisor study group, and its structured cadence of 2 multi-day meetings every year, has guided him through multiple changes that allowed him to level up his own practice, why Gaetano turned down his first potentially lucrative job offer with an RIA because of the bad vibes he got from the firm and its leadership, and how Gaetano's realization that he wanted to work in the financial advice business for the long run influenced his decision to pursue a more planning-centric career path… that gives him the opportunity to wake up every day excited to meet with his clients (while still being able to maintain a strong work-life balance).

So, whether you're interested in learning about gaining credibility as a 'young' advisor, driving client referrals through a proactive service experience, or the professional benefits of participating in an advisor study group, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Gaetano Sacco.

CEO Peer Groups: A Strategy For Financial Advisors To Build Trust With And Attract Business Owner Clients

September 30, 2024 07:04 am 0 Comments CATEGORY: Personal/Career Development

When it comes to focusing on a niche for financial advisors, business owner clients can be an appealing target as they can have complex financial planning problems ranging from cash flow management to tax planning to acquisition strategies. However, while business owners can be compelling clients, they can also be difficult to find and prospect in the first place. One component that feeds this dynamic is that business owners have many people vying for their attention; another is that business owners have limited time and resources. So, the dilemma for advisors looking to find business owners and convince them to become clients often comes down to finding business owners who can benefit from (and want) financial planning services and demonstrating expertise in a way that can build trust.

An effective strategy for attracting business-owner clients is to engage with a CEO Peer Group. These support groups, typically comprising 10–12 business owners, generally meet monthly and allow members to discuss issues, brainstorm solutions, and share resources. Most importantly, CEO Peer Groups provide space for business owners to work 'on' their businesses – rather than 'in' their businesses – with highly trusted peers.

Advisors have a few options for getting involved in a CEO Peer Group. One is to become a Strategic Partner (SP) and create a new group, serving as both sponsor and host. This option allows advisors to establish themselves as experts and resources for other Peer Group members, where they can also better understand what business owners want and need from the complex situations they discuss with their Peer Group. Additionally, when the advisor shows up and facilitates fruitful discussions every month, providing relevant resources as the group's SP, business owners begin to see the real value the advisor can offer. Group members get to know and trust the advisor in a non-sales environment, making them more likely to become prospects (and then clients) of the advisor.

Instead of engaging with a CEO Peer Group by serving as a Strategic Partner (which can be relatively time intensive), a second way for advisors who are firm owners to engage with peer groups is to become members themselves. This lets them reap the benefits of having both the support and guidance of a Peer Group and access to a level of prospective outreach through networking within the group as a group member. A third way for advisors to engage with a CEO Peer Group is to partner with a peer group moderator to serve as a Center of Influence for the group, allowing the advisor to connect their own network of resources with group members to help solve their various problems, or even providing members with resources through their own planning services to answer questions on issues such as taxes, insurance, and scaling.

Ultimately, the key point is that for advisors who work with (or would like to work with!) business owners, CEO Peer Groups can provide an organic way to connect with, market to, and ultimately onboard new clients. Whether serving as a Strategic Partner, a group member, or a Center of Influence, CEO Peer Groups can provide advisors with a valuable opportunity to learn from like-minded business owners to help them expand their own network of trusted peers!

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

September 27, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that a recent study by Cerulli has shown a sharp increase in the number of affluent investors willing to pay for advice, which on the one hand reflects the increasing financial complexity in peoples' lives (while they've also gotten busier than ever at work and at home) to the extent that they're more willing to work with someone to navigate those financial challenges; while also highlighting the progress advisors have made in providing more value beyond 'just' portfolio management – and in demonstrate that value to the public.

Also in industry news this week:

As brokerage firms have faced a wave of lawsuits regarding the low interest rates paid on cash sweep accounts, some legal experts believe that RIAs could also be targeted for legal action if they allow clients' uninvested cash to sit in a cash sweep account rather than investing it or moving it to a higher-yielding cash account
In a recent SEC panel discussion, the CFP Board pushed back against claims by the broker-dealer and insurance industries that a uniform fiduciary duty would impose a heavy cost burden on commission-based advisors (and therefore restrict access to financial products and advice for lower- and middle-income consumers) with data showing that CFP certificants, who are held to a fiduciary standard, actually earn more income on average while still serving lower-income clients

From there, we have several articles on investing in the wake of the Federal Reserve's recent decision to cut interest rates:

How the Fed's rate cuts will translate into lower interest rates on cash products like savings accounts, CDs, and money market funds (meaning cash may no longer be a 'free' source of 5%+ returns)
How markets have historically tended to fare surprisingly well following rate cuts, providing some comfort for long-term investors even in the midst of short-term economic uncertainty
Why there's little that investors can do today to take advantage of the recent rate cut (since it was already largely priced into markets) – but it may not ultimately matter much to investors with a longer time horizon, for whom a rate cycle is just a blip in the long-term picture

We also have a number of articles on Mergers & Acquisitions:

Why firms seeking to pursue growth inorganically via M&A will be more successful if they can first figure out how to achieve sustainable organic growth
What business owners (including RIA owners themselves, as well as business owners whom advisors serve) can consider when planning a business exit strategy, and why it's best to start planning several years before the date of the expected sale
How the headline "multiple" of an M&A deal can be misleading, since it may contain caveats like unrealistic performance-based incentives that make the true economics of the deal less attractive for the seller

We wrap up with 3 final articles, all about advisor dress and office decor:

Why the once-ubiquitous necktie has fallen out of fashion, even amid formal attire (although in the end it's not so much about what's in fashion as about what the advisor can wear to feel their best in front of clients)
How advisors use their office décor to project their unique attributes and spark conversations with clients, from personal mementos to an outdoor natural environment
Why even though advisors may feel most 'authentic' in casual attire, they may still find it easier to land clients (particularly if they have less experience or professional accomplishment) if they dress similarly to what clients may expect an advisor to wear

Enjoy the 'light' reading!

Why Pre-Tax Retirement Contributions Are Better Than Roth In Peak Earning Years (Even If Tax Rates Increase)

September 25, 2024 07:03 am 0 Comments CATEGORY: Taxes

Over the last 60 years, the top Federal marginal tax bracket has steadily decreased from over 90% in the 1950s and 60s to 'just' 37% today. However, with the national debt expanding rapidly, observers of U.S. tax policy are predicting that Congress will inevitably be forced to again increase tax rates in order to raise revenue and balance the national budget – and that the current regime of relatively low tax rates will prove to be a temporary phenomenon.

From a financial planning perspective, the seeming implication of a likely rise in future tax rates would be that, given a choice between being taxed on income today or deferring that tax to the future, it makes more sense to be taxed today when taxes are lower than they'll be in the future. For example, if taxes were expected to rise in the future, it would be better to contribute to a Roth retirement account (which is taxed on the contribution, but not upon withdrawal) than to a traditional pre-tax account (which is tax-deductible today but is taxable on withdrawal). As a result, there's a common line of thinking that people saving for retirement should avoid pre-tax retirement accounts entirely and contribute (or convert existing pre-tax assets) to Roth instead – regardless of which tax bracket they're in today.

While it's true that the top marginal tax rate has decreased dramatically since the mid-20th century, the difference in the actual tax paid by most Americans has been far more modest. Because not only were very few households actually subject to the 1950s-era top tax rates (which were triggered at the equivalent of over $2 million of income in today's dollars), but the long decline in nominal tax rates has also come with the elimination of many loopholes and deductions that have resulted in more income being subject to tax. Which means that it seems less likely that Congress will simply raise the marginal tax brackets in the future than that they will further reduce the benefits of current tax planning strategies – possibly including those of Roth accounts themselves!

Furthermore, focusing only on tax rates at a national level ignores the fact that an individual's own tax rate is likely to change much more during their lifetime based on their own income and life circumstances. In particular, those nearing retirement may see a large swing from the upper tax brackets as they reach their peak earning years, to the lowest brackets upon retirement, and eventually stabilizing somewhere in the middle once they start receiving income from Social Security and Required Minimum Distributions (RMDs). Which creates a tax planning opportunity to make pre-tax contributions while in the peak earning years, and then to convert funds to Roth after retirement – and as long as those funds can be converted at a lower tax rate than they were contributed, it still makes sense to contribute them to a pre-tax account.

Ultimately, while the idea that we currently live in an anomalously low-tax environment that will inevitably reverse course has its appeal, basing one's tax planning decisions around that assumption is still risky. Because even if taxes do creep up nationally, individuals who are already in the highest tax brackets today are still likely to be in a lower bracket upon retirement – which makes it better to contribute to a pre-tax account today and then withdraw (or convert) the funds at a lower rate later on!

#FASuccess Ep 404: The Evolution Of Specializing In College Planning To Work With Mid-Career Professionals Who Save, With Ann Garcia

September 24, 2024 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 404th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Ann Garcia. Ann is a partner of Independent Progressive Advisors, an RIA based in Portland, Oregon, that oversees approximately $115 million in assets under management for 120 client households.

What's unique about Ann, though, is how she crafted a nationally recognized expertise in college financial planning, and the ways that specialization has evolved as Ann’s advisory business itself has evolved its focus on serving mid-career professionals balancing the competing priorities of saving for college and their own retirements.

In this episode, we talk in-depth about Ann’s path to becoming a recognized college planning expert, which started by becoming the in-house expert within her firm by researching answers to common client questions about funding college for their children, how Ann leveraged the emails she had already been sending to clients to answer their college funding questions to compose the initial articles of a blog on college planning (and how the blog’s singular focus on its college planning specialization allowed Ann to relatively quickly earn acknowledgement and hyperlink traffic back from national publications like the The New York Times), and how Ann has further leveraged this expertise and media exposure to publish a book and build an online course on college planning, allowing her to serve families that she knows need her help but aren’t necessarily a fit for her advisory firm’s core wealth management services.

We also talk about how Ann’s media appearances and college planning expertise have helped her attract clients and grow her firm by serving mid-career professionals balancing college planning with other financial goals (to the point where Ann and her business partner are navigating capacity constraints as they reach 120 client households), how Ann started out on her own as an advisor by buying the practice of a retiring advisor (retaining all but one of her clients in the process) and using that as the foundation to build the practice Ann ultimately wanted it to become, and how Ann’s decision early on in her career to take as many prospect meetings as possible, even if she knew they wouldn’t likely become clients, helped her get in the repetitions necessary to refine her communication and sales process to the point where now prospects who are a good fit almost always become clients after meeting with her.

And be certain to listen to the end, where Ann shares her advice for families going through the college planning process, including the importance of starting these conversations with kids early in their high school years to set expectations for how much the family can afford to pay for college in the first place, how Ann’s volunteer service as a NAPFA study group leader not only helped her connect with advisors with a wide range of experiences, but also enabled her to build a valuable network of COIs in her local community to support her clients, and why Ann decided to leave a firm that did offer her career growth and prestige opportunities to start out on her own instead… so that she could work exclusively with clients that she wanted to work with, who shared her own values.

So, whether you’re interested in learning about how to build nationally recognized expertise in a client niche, helping client families plan for college, or how acquiring a retiring advisor’s firm can jump-start an advisor’s own practice, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Ann Garcia.

7 New Lessons Learned Building A Fee-Only RIA From Scratch: Years 3–5

September 23, 2024 07:01 am 0 Comments CATEGORY: Practice Management

Starting a new firm can be a nerve-wracking time for an entrepreneurially minded financial advisor, as making the jump involves a significant amount of professional and financial risk. Nonetheless, after a year or 2 in business, some firm owners will find that their plate is becoming full and their available time is shrinking as they balance servicing current clients with marketing for new ones and also possibly managing staff. Which presents an opportunity for the firm owner to step back and assess whether they want to change any of the practices that they've established in their first years in business to make the next several years both professionally and personally rewarding.

In this guest post, Jake Northrup, founder of Experience Your Wealth, LLC, discusses 7 lessons he learned in years 3–5 of building his RIA and the changes he subsequently made to his service model, client base, and daily schedule, offering guidance to firm owners who may need to navigate some of the same challenges that come with scaling their advisory business.

When an advisor opens a firm, they might have little to no revenue but a good deal of time to manage their practice. Which means that when their first clients come on board, they might be tempted to overservice them to demonstrate the value that they can provide. Nevertheless, as a client base grows, maintaining such a level of service can take up more time that the advisor may have available, particularly given the added responsibilities of running their growing business. In Jake's case, after deciding that he was overservicing clients during the earlier years of his practice, he started scheduling fewer standard meetings and limited the number of after-meeting action items, freeing up his time and mental bandwidth for other activities to grow and run his firm.

In addition, he also found that he preferred working with certain types of planning clients over others, leading him to refine his niche and ideal client persona over time. While Jake had originally worked with equity compensation clients, current or aspiring business owners, and young professionals with student loans of $100,000 or more, he realized that he didn't care as much for student loan planning, which led him to make the difficult decision to transition 20% of his client base who primarily needed student loan planning.

Jake also learned key lessons on managing daily schedules. For instance, because he disliked the traditional 9–5 work schedule, he offered his team significant flexibility in deciding when they worked. However, this lack of structure actually put more pressure on team members because it didn't allow for sufficient collaboration time, leading him to implement a more standard work schedule that still offered some flexibility during the day and virtual coworking sessions for the team. For himself, Jake time blocked his schedule to ensure that he prioritized his personal life and wellbeing (e.g., taking vacations) and organized his workday to leverage the times of day when he has the most energy. He also conducted a "time audit" based on Dan Martell's 2-dimensional DRIP Matrix system to help him identify tasks based not just on their revenue potential but also their ability to energize and light him up.

Ultimately, the key point is that a new financial advisory firm owner's original vision for their practice is likely to change over time, which can create challenging decision points (e.g., when to hire new staff and whether to adjust the firm's ideal client persona). Nevertheless, as Jake has found, there are strategies to help firm owners mold their business to meet personal and professional needs, which can help them support greater wellbeing for themselves and a more sustainable business in the long run!

Weekend Reading For Financial Planners (September 21–September 22)

September 20, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that the North American Securities Administrators Association (NASAA) released the latest edition its annual survey outlining the state of state-registered RIAs, showing that the number of state-registered firms and their assets declined slightly in 2023 (perhaps due to many firms seeing their AUM hit the $100 million mark amidst strong market performance and organic growth and moving up to SEC registration, or being acquired by an SEC-registered firm). Further, the survey showed the continued predominance of the AUM fee model amongst state-registered firms (at the same time, more than half of firms said they charge on a fixed-fee or hourly basis, suggesting many firms utilize multiple fee models) and identified the most common areas of regulatory enforcement during the year, with failure to register as an investment advisor or investment advisor representative and fraud topping the list.

Also in industry news this week:

A coalition of organizations representing financial advisors is pressing Congress to include tax breaks for financial advisory fees amidst expected negotiations to address the pending expiration of several provisions of the Tax Cuts and Jobs Act
A recent survey indicates that client referrals remain the chief source of new clients for many financial advisory firms, many of which have expanded their client geographic footprint during the past few years

From there, we have several articles on investment and tax planning:

As the cost of implementing a direct indexing strategy continues to drop, financial advisors can play a valuable role in helping clients determine whether it is a valuable opportunity
How considering the transition costs involved in moving to a direct indexing approach can help advisors avoid creating a potentially costly tax bill for certain clients with significant embedded gains
Why a "segmented ETF" strategy could be simpler and less expensive to implement than a direct indexing approach

We also have a number of articles on advisor marketing:

A research-backed list of potential opportunities for advisors looking to attract next-gen clients, from encouraging online reviews and testimonials to crafting a consistent message to deploy through digital marketing channels
Why assessing (and potentially adjusting) a firm's client value proposition could drive more client growth than additional marketing spending in isolation
How firms can craft an effective client survey to reveal the firm's strengths and potential areas to improve to promote client retention and referrals

We wrap up with 3 final articles, all about books:

8 tips to make it easier to read more books, from creating a more conducive home environment to establishing accountability measures
How to decide whether to move on from an unfinished book or whether to see it through until the end
Why it's often hard to retain details when reading non-fiction books and how including opportunities for regular, interactive feedback could lead to greater comprehension

Enjoy the 'light' reading!

Kitces & Carl Ep 147: Preparing An Advisory Firm For The Risk Of A Market (And Revenue) Decline

September 19, 2024 07:02 am 0 Comments CATEGORY: Kitces & Carl Podcast

Given the general trend of advisory firms charging on some percentage of assets under management, market growth can also be a strong indicator of advisory firm growth. For firms with revenue tied to portfolio performance, the additional income that can accompany a healthy market outlook allows firms to dedicate more resources to marketing and other processes to help grow the firm. However, while this business model has worked well with the strong markets that have dominated the last 15 years, there is also an inherent risk that comes with inevitable market corrections, bear market years, and recessions, which poses the question: How can advisors structure their firms to protect against market corrections?

In the 147th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors (especially those who joined the industry after the last correction) can protect their business against the market volatility risk inherent to a business model that uses AUM fees.

As a starting point, a firm's profit margin is usually the first line of protection against a bad market. The average established firm has a profit margin of 20–30% after employee, technology, and operational expenses during 'good' market years. During bear market years (or quarters), any AUM-correlated profit margin will have a corresponding drop, and that profit margin may then drop to 0%. However, unless the profit margin drops below 0%, an advisory firm will likely be able to remain operational as is, without being forced to make difficult decisions to shrink the business. While maintaining a 0% profit margin for a quarter or few may not be pleasant, the advisory firm that is aware of this 'feast-and-famine' cycle and is prepared for it can situate itself to pull through bear markets with minimal business adjustments.

To better visualize how a recession would impact a firm's long-term growth, advisory firm owners may want to model how their business would be affected by several quarters of 'bad markets' and consider how they would need to answer these questions: How would payroll get impacted? What expenses would need to be adjusted? How would several quarters of bad markets impact the firm owner's ability to pay themselves and maintain their lifestyle? These considerations can help advisors better understand their options and the adjustments that would need to be made in the short- and long-term.

Importantly, it's essential to be mindful of the emotional toll along with the logistical side of bracing for a recession. In a bad market, advisors are constantly required to absorb client uncertainty and fear – often while they are equally unsure of what will happen. And, for advisors who are also firm owners, the toll grows as employees are also emotionally stretched to absorb the chaos of an uncertain market – and even more so if owners need to let an employee go to keep the business afloat. Emotional preparation usually poses a different challenge than reviewing a business plan. However, much as how a firm needs a certain level of profit margin to ensure that it will have the resources it needs during tough times, so too can advisors ensure they have the resources they need to maintain their own emotional wellbeing. Even basic self-care practices like maintaining a healthy diet, getting enough sleep, and exercising can provide a crucial barrier against the emotional and physical strain of stress.

Ultimately, the key point is that market corrections, slow years, bear markets, and recessions are inherent risks for firms with revenue models that rely on assets under management. However, advisors who are mindful of the effects of these trends can proactively make small adjustments before an emergency strikes – better protecting their clients and their firms in the long run!

AI May Transform Your Advisor Practice In 10 Years, But It Still Won’t Do Much In 2 Years

September 18, 2024 07:03 am 0 Comments CATEGORY: Technology & Advisor FinTech

In the nearly 2 years since the launch of ChatGPT, there has been an explosion of new technology solutions incorporating Artificial Intelligence (AI). Today, AI is now almost ubiquitous across many of the tools that we use, from smartphone cameras to search engines to office productivity software. For financial advisors, too, a ballooning number of new advisor-focused AI tools has appeared over the last 24 months, purporting to save advisors' time and staffing needs by automatically performing previously manual tasks like creating meeting agendas, generating marketing materials, and even analyzing and recommending financial planning strategies.

And yet, despite the flood of new AI tools and the assurances that advisors hear from software providers and AI proponents that AI will soon prove to be life-changing in its ability to 'intelligently' perform any task that the user asks of it, the impact that AI will have in the long term is still unclear. Much like how other forms of technology in the past 30 years (such as online shopping in the early internet era and blockchain solutions in the late 2020s) went through early hype phases only to have the bubble burst when many of the business models based on the new technology proved to be unsustainable, AI is going through its own speculative phase where new AI solutions are popping up for nearly every use case imaginable – except, as the lessons from previous technology bubbles have shown, many of the use cases currently being offered for AI won't actually prove valuable enough to build successful solutions.

But the likelihood that many of today's AI solutions may fall flat in the short term doesn't necessarily mean that AI won't ultimately bring significant benefits for advisors; it just means those benefits may take a long time –possibly a decade or more – to become evident. At least to some extent, this will be the result of generative AI's ability to grow over time, as AI technology itself becomes more reliable and capable of a broader range of functions. Additionally, as it becomes clearer which AI use cases provide real value, those applications will gradually gain traction among advisors and may even become integral to how they serve clients and manage their businesses.

For the time being, however, it may be helpful for advisors to take a realistic approach to the value that AI tools will provide, especially in an environment where technology providers often make bold claims about their solutions' ability to save time and reduce costs. Some of the capabilities of today's AI tools (e.g., automating workflows or retrieving client information using a chatbot) may be useful to some extent, but if the processes that they replace don't take that much time to begin with, then the tools' benefits may not justify the additional cost to implement them. On the other hand, if the tool really does help advisors meaningfully cut the time they spend on inefficient tasks – such as client meeting preparation and follow-up – then they're more likely to be worth the cost outlay.

The key point is that, like any technology, AI itself isn't the solution to making advisors better and more successful; rather, it's a foundation on which solutions can be built to help advisors address specific challenges while maximizing the technology's current capabilities. For now, getting the most out of AI may mean focusing on more narrowly targeted AI solutions (rather than those offering a mosaic of tools, only some of which may hold real value) – as these are more likely to address the advisor's actual needs, instead of trying to be the "One Solution" for everything, regardless of whether the problem truly needs solving!