Weekend Reading For Financial Planners (July 2-3) 2022

Author: Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for non-profits in the Northern Virginia area. He has an MA from Johns Hopkins University and a BA from the University of Virginia. He can be reached at [email protected]

Read more of Adam’s articles here.

(Dan Tully | Citywire RIA)

The financial advisory industry has been in transition for several years, moving from a focus on using financial advice as a way to sell commission-based products to charging for the advice relationship itself. The recent FINRA 2022 Industry Snapshot suggested this transition is continuing, as the number of broker-dealers and registered representatives fell in 2021, and now a new study shows that RIAs continue to see significant growth as more and more advisors shift from broker-dealer to RIA.

According to the latest ‘Investment Adviser Industry Snapshot’ study from the Investment Adviser Association (IAA) and National Regulatory Services (NRS), the number of SEC-registered RIAs rose 6.7% to 14,806 in 2021 and the number of their non-clerical employees increased by 5.5% to 928,505. In addition, Assets Under Management (AUM) at all RIAs in the aggregate were up 16.7% to $128.4 trillion, while the total number of clients served jumped 6.4% to 64.7 million.

Notably, though, the IAA/NRS study captures the landscape of all RIAs, including both those that work with individuals, and those that are hired by institutions, along with the RIAs that operate as sub-advisors for other institutions (e.g., as sub-advisors for mutual funds). Nonetheless, by total count, the RIA space continues to be made up largely of ‘smaller’ firms, with two-thirds of RIAs managing $1 billion or less in assets, and more than 88% having 50 or fewer non-clerical employees… even as the bulk of assets are held institutionally, with 92.5% of industry assets managed by the few firms with more than $5 billion in AUM. In fact, firms with more than $100 billion in assets saw the most AUM growth in 2021 at 19.3%, (perhaps buoyed in part by brisk M&A activity amongst asset managers), compared to 10.4% for firms between $1 billion and $5 billion of AUM and 6.8% for firms with $100 million to $1 billion in AUM.

Overall, though, the new data still demonstrates not only the ongoing growth in RIA AUM in 2021 (which can be partly attributed to strong market returns last year), but also that the RIA structure is becoming increasingly attractive both for consumers looking for advice and portfolio management, and for advisors looking to start or operate their own firms, as the industry continues its shift from product-based roots towards the value of taking an advice-centric fiduciary approach!

(Holly Deaton | RIAIntel)

Financial advisory industry observers have been noting for several years that the advisor workforce is graying, with a significant percentage of financial advisors approaching retirement, and that a new generation of advisors is needed to ensure continuity for clients. But while there are several options for succession planning (from an internal succession to an acquisition by a larger firm), a new study suggests that many advisors remain concerned about how they will transition their business to the next generation.

According to the study by Cerulli Associates, the average age of advisors has grown to 51, and 37% of financial advisors, collectively controlling $10.4 trillion of assets, are expected to retire within the next 10 years. This trend is especially pronounced among solo advisors, who make up half of those retiring within the next decade. At the same time, Cerulli expects the total advisor headcount to decline at least through the end of 2025 (potentially limiting the pool of potential advisors to take on the clients of those who are retiring).

Amid this backdrop, about a quarter of advisors who are expected to transition their business within the next ten years are unsure of their succession plan. For those who do have a succession plan, transitioning their business to another advisor within their firm (26.6%) or to a junior advisor or family member (19.1%) are the most popular options, with just 13.8% planning for an external sale. For those advisors who are considering an external sale, style differences with the seller and managing the client transition to the buyer are the two biggest challenges to an acquisition.

So while succession planning remains a challenge for advisors nearing retirement, the potentially large number of retiring advisors creates an opportunity for younger advisors to enter the industry and grow (or even acquire their way into) their book of business. The key point, though, is that because succession planning can be challenging for both the retiring advisor and their successor, starting the process early and communicating expectations upfront are vital to ensuring a successful internal transition… though ironically, the ongoing volume of prospective buyers for RIAs means ‘at worst’, the number of advisory firms that exit by external sale may rise simply because such transitions can be done more rapidly than the ‘traditional’ succession approach!?

(Miriam Rozen | AdvisorHub)

The Securities and Exchange Commission (SEC)’s Regulation Best Interest, issued in June 2019, requires brokers to act in their clients’ best interests when making an investment recommendation, by meeting four core obligations: disclosure, care, conflicts of interest, and compliance. While this represented a higher benchmark than the preceding “suitability” standard imposed by FINRA on its members, it fell short of a full fiduciary obligation (creating a gap between the obligations to clients of broker-dealer representatives and advisors at RIAs). Further, since Reg BI was issued, industry observers have been waiting for the SEC to bring enforcement actions under the regulation to see whether and how the SEC will really push broker-dealers and their representatives to live up to its requirements.

And this month, two years after Reg BI was issued, the SEC brought its first enforcement action under the rule, charging broker-dealer Western International Securities, Inc., and five of its brokers, with violations related to their recommendation and sale of $13.3 million of unrated, illiquid, high-risk debt securities known as L bonds to retirees and other retail investors. According to the SEC’s complaint, the broker-dealer and its representatives failed to comply with Reg BI’s “Care Obligation” both because they did not exercise reasonable diligence to understand the risks associated with the L bonds, and also because they recommended them to clients without a reasonable basis to believe they were in the client’s best interest.

While those looking for the SEC to take enforcement action under Reg BI were heartened by this first action, some observers were displeased with its scope. For example, August Iorio, a lawyer representing investors, argued that the complaint focused on areas that could have fallen under the previous suitability standard (selling high-risk, illiquid, unrated bonds to retirees already raises serious suitability concerns), and did not address the conflicts of interest related to brokers recommending commission-based products that are not in a consumer’s best interest (as the high commissions on the offering meant it was especially profitable for the broker-dealer to allow or even encourage their reps to sell the L bonds). In addition, University of Nevada in Las Vegas law professor Benjamin Edwards suggested that this action will not provide further clarity on what it specifically means for a broker to be acting in an investor’s “best interest”.

In the end, while the SEC’s first enforcement action under Reg BI will bring public attention to the regulation and the potential consequences of violations, there appears to be significantly more room for the SEC to bring actions that would clarify what the “best interest” standard means in practice. In the meantime, RIAs will continue to be held to the fiduciary standard, but given broker-dealers’ ability to say they are “acting in their clients’ best interests”, this differentiator could be fading in value, even as the SEC has yet to fully clarify when the brokers’ really are acting in their clients’ best interests or not, and how they will need to change their behavior in the future to live up to the standard they’re claiming in their marketing!

(James Dahle | The White Coat Investor)

After several decades of accumulating assets, individuals often find themselves on the cusp of retirement unsure of what to do with their money to meet their various goals for their post-work years. But while some clients might be most concerned about their asset allocation, there are several other key areas for advisors to consider when working with clients entering the decumulation phase of their financial lives.

The first step for pre-retirees is to take account of their assets and create an investment plan (often with the help of an advisor). This can take into account their retirement income needs, risk tolerance, and legacy preferences, among other factors. Some consumers will arrive at retirement with a significant cash allocation, and advisors can use this opportunity to review the client’s goals and discuss the potential trade-offs that need to be made to implement any changes.

Advisors can also work with clients to create a spend-down plan for their assets. While some clients might be reluctant to spend down any principal (as it can be a difficult transition for a client who has spent their whole life seeing their investment balances grow), others might be spending too much based on their assets. Advisors can also consider a client’s preferred income style (e.g., ‘guaranteed’ income sources or market-based returns) to create a spending plan that meets their desire for safety or optionality.

And just as an investor’s asset allocation and sources of income might change in retirement, other components of a financial plan can be reviewed as well. For example, while a retiree might no longer need disability insurance, appropriate property and casualty insurance will still be an essential part of protecting their assets. In addition, while estate plans are often created at a younger age, a retiree’s preferences and estate planning goals might have changed over time and can be addressed in conjunction with an advisor.

Ultimately, the key point is that the transition from work to retirement raises several challenges for consumers, many of whom will approach an advisor for assistance. And for advisors, it is important to recognize that this transition is not just a matter of dollars and cents, but that it also requires a major psychological shift on the part of the client (not only from accumulation to decumulation, but also from a new routine after several decades of employment!).

(Bob Lai | Tawcan)

In the traditional concept of retirement, an individual might work for 40 or more years before transitioning to a life of leisure after retiring sometime in their 60s. But many individuals have decided to deviate from this model, either by working into their 70s and beyond (even though they have sufficient assets to quit their jobs), or by leaving the working world significantly earlier than ‘traditional’ retirement age.

The archetype of this latter group is the Financial Independence Retire Early (FIRE) movement, whose followers seek to maintain a sufficiently high savings rate throughout their working years to generate sufficient assets to have the option to retire (or at least not be reliant on a certain income to support their lifestyle) well before their 60s.

For Lai, who has been pursuing financial independence for the past ten years, several lessons have stuck, particularly the importance of enjoying the journey to financial independence rather than being myopically focused on the goal itself. This includes considering why they want to be financially independent in the first place (because while some individuals might just want to be able to get away from a job or career they don’t like, they will still have to consider what they want to do with their time once they quit!). In addition, while it can be tempting for someone pursuing FIRE to cut spending as much as possible to increase their savings rate, they might not want to neglect spending that can increase their happiness during their working years (as this spending can not only increase joy along the journey, but also make it more likely an individual will not fall off the path to financial independence!).

The key point is that while many individuals have the goal of becoming financially independent (and/or retiring early), the journey can be just as important as the destination. And advisors have many ways to help clients on this path, from assisting them to create a savings plan, to exploring different types of ‘retirement’, and ultimately developing a spending plan that increases the likelihood that they will remain financially independent throughout the rest of their lives!

(Sam Dogen | The Financial Samurai)

For many people, the classic image of retirement is a life of relaxation, perhaps including volunteering, but definitely not additional work. Nonetheless, this view of retirement is becoming increasingly outdated, as those who ‘retire’ from full-time work (whether at ‘normal’ retirement age or earlier) often find that their days are just as full as they were before they left their full-time jobs and often include paid work.

Dogen calls this path “fake” retirement because even though he left his full-time job in 2012 at age 34, his days have been full of consulting work, taking care of his kids, writing a blog and book, and other activities. Among the lessons he has taken from this period, the need for flexibility has been one of the most important. This includes incorporating a flexible safe withdrawal rate (as financial conditions change over time) and expecting one’s financial needs and desires to change over time (as individuals’ predictions about their future selves tend not to be particularly accurate).

In addition, Dogen has a renewed respect for the freedom that comes with no longer having a full-time job. While it can initially feel liberating to wake up without an alarm clock or travel on a whim, having some structure and commitments in one’s daily life can help avoid restlessness. Similarly, one’s chosen profession often makes up a large part of their identity, so this will need to be replaced in retirement. Because most people want to contribute something meaningful to the world, retirees often find ways to fill this need, whether it is through volunteering or perhaps part-time work (which can be less stressful than a full-time career, as the retiree knows that they don’t need to generate income from their job to meet their needs!).

In the end, ‘retirement’ today often does not mean a life of pure leisure, but rather a transition to activities that bring meaning and fulfillment to the retiree. And whether they are working with clients who want to retire in their 30s or 70s, advisors can help them explore their goals and develop a plan to ensure they are on a path to a successful retirement (whether it is ‘fake’ or not!).

(Ross Levin | Financial Advisor)

Most organizations are hierarchical in nature, and financial planning firms are no different. From executives to lead advisors, associate advisors, paraplanners, administrative staff, and others, there is often a clear structure within firms. At the same time, each member of the team has an important role to play, so it is important for those ‘higher’ up the ladder to ensure that everyone in the firm feels empowered to do the best job possible.

For Levin, the co-founder of Accredited Investors Wealth Management, doing so starts with considering co-workers as colleagues. This process starts when new hires are brought on board, as his firm has created an onboarding process that allows new employees to work with a range of team members, as well as Levin himself holding one-on-one meetings with new hires to understand their interests and backgrounds. This process continues throughout an employee’s career, as the firm tries to help them see how their work is contributing to the impact of the firm on clients’ lives. This includes both formal and informal feedback (e.g., encouraging employees to share stories of how a colleague made their lives easier) as well as a firm-wide profit-sharing program in recognition of the team’s effort.

The key point is that while firms are often focused on providing exceptional service to clients, it’s also important for leaders to create a work environment where employees feel respected and appreciated. And at a time when many senior advisors are nearing retirement, successfully cultivating the next generation of advisors can not only lead to more satisfied employees, but also help ensure the firm remains successful well into the future!

(Stuart Silverman and Philip Palaveev | Financial Advisor)

No financial planning firm operates on an island. From a solo practitioner to a national RIA, firms have a range of external strategic partners – which could include a private equity owner, custodian, or affiliated accounting practice – that play important roles in a firm’s success. And just as it is important to build and maintain a solid relationship with clients, it is also crucial to do with these external partners as well.

To start, it is important for a firm to understand how its partners measure success. For example, an advisory firm with private equity backers will want to understand what firm growth rate the investor expects (as the firm itself might have different expectations!). In addition, it’s important to understand the partner’s culture; for instance, an advisory firm and an affiliated accounting firm could have very different sales cultures. It’s also important to treat the partner’s employees with respect and to foster personal connections between the two companies; doing so can help both sides ensure their needs are being met.

Of course, challenging situations and conversations will arise in any strategic partnership. And while many of these can be resolved thanks to regular relationship-building work, there might be some situations that require a more thorough discussion is necessary. In these cases, advisory firms can try to reboot the relationship, particularly when it is with a ‘permanent’ partner such as an external equity owner. And in cases where the partnership cannot be mended, it might be better to terminate the relationship rather than endure years of frustration and poor results.

The key point is that strategic partnerships work best when there is a feeling of mutual empowerment between the parties. For advisory firms, this not only requires upfront due diligence of the prospective partner, but also the same attention, communication, and cultivation required by all long-term relationships!

(Caleb Brown | ThinkAdvisor)

The current tight job market has led to wage increases for employees in a variety of industries. And at a time when many advisors are retiring, new (and existing) advisory firm employees are likely to revisit their compensation at their current firm and consider whether they could be paid more elsewhere. This trend also means that it could be a good time for advisory firm owners to consider whether their firm compensation structure is well-suited to attract and retain employees.

The simplest structure is straight compensation, where the employee gets a specified salary with no opportunity for a bonus. While it makes it easy for both the firm and employees to understand how much will be paid over the course of the year, it doesn’t incentivize team members to deliver results beyond their basic job responsibilities. Firms that generate commissions from product sales often offer employees a base salary plus a split of the commissions they generate. This provides the employee with upside potential in their compensation but can be difficult to administer and can cause conflicts of interest if the employee recommends a commission-paying product over an alternative.

Other firms offer employees salaries plus a bonus. This allows employees to earn a stable monthly salary while sharing in the success of the firm. In order to prevent employee frustration when using this structure, it is important for the bonus metrics to be clear to employees and to link the employee’s individual performance (and not just firm revenue, which can vary based on the ups and downs of the market) to the bonus payout. Another option is a salary-plus-fee-split structure, where team members earn a salary plus a set percentage of revenue they generate for the firm. But while this creates incentives for ongoing client retention (because the advisor’s revenue split from the client will stop if the client leaves) and advisor retention (as it might be hard to leave a lucrative long-term fee split), it could also disincentivize seasoned advisors from going beyond their basic job requirements once the split from their current clients gets to a certain level.

In the end, dollar compensation is only one element of attracting and retaining talent (along with benefits, company culture, and other factors), but it could become increasingly important if the labor market remains tight. And even for firms that are not currently looking to add staff, taking a look at the compensation structure could help retain current employees and better align it with the firm’s goals!

(Meghaan Lurtz | Nerd’s Eye View)

Taking time away from the office can have many benefits for advisors, from the personal (e.g., spending time with family and exploring new places) to the professional (e.g., resting and recharging to help prevent burnout). At the same time, being away from work (whether it is working fewer hours during the week or taking full vacation days off) means having less time for client engagement, business development, and other firm activities. This raises the question of how advisors can most effectively balance their work obligations with the benefits of taking time off.

According to the latest Kitces Research study on Advisor Wellbeing, the median number of weekly hours worked and annual vacation days taken vary by position, where associate advisors tend to work more hours than lead advisors or executives, and where lead advisors tend to take more vacation than their counterparts. Further, median hours worked and vacation days taken also vary based on the advisor’s status within the firm. For example, firm owners and employees work a median of 45 hours per week, while solo producers work a median of 40 hours per week. In addition, solo producers also take more vacation days than owners and employees.

Further, work hours and vacation days appear to be correlated with adviser wellbeing. For instance, the Kitces Research study found that advisors who reported very low quality-of-life scores took about 15 vacation days each year and worked about 43 hours per week. Advisors with very high quality-of-life scores took 29 vacation days each year and worked 38 hours per week, suggesting that advisors who work long hours may not be offsetting their regular work hours with vacation days, which could be a source of relaxation.

Given the various benefits of having time away from work, advisors have several options to reduce their weekly work hours and add vacation days to their calendar. For instance, designating a schedule based on realistic working hours can help them structure their time in a way that will help them meet their goal. Also, setting expectations for clients is especially important, both in terms of vacation days (by letting them know at the beginning of the engagement that the advisor will not be available during certain vacation periods) and during the workweek (which advisors can do by including their availability for replies in their email signature). In addition, bringing on new employees to share the work burden can free up time for firm owners, but they need to be careful not to allow this newfound time to be consumed by management responsibilities!

Ultimately, the key point is that taking time away from the office is a key contributor to an advisor’s overall wellbeing. And for advisors who would like to work fewer hours per week or take more vacation days (or both!), setting clear expectations with clients and co-workers is an important first step toward creating more high-quality free time!

(Caleb Brown | New Planner Recruiting)

Many advisors (and their clients) take vacations in the summer, offering an opportunity for relaxation and decompression away from the office (at least for those who successfully pry themselves away from work email!). And while experienced advisors have an understanding of what needs to be done to prepare for time away from the office, newer advisors, especially those who just graduated from college, might need a reminder of the firm’s best practices.

First, it’s important for a new (or current) advisor to communicate their leave intentions well in advance so the firm can ensure the employee’s responsibilities are covered in their absence. This is especially important for new advisors who have accepted a job offer but have not started at the firm; management will likely be frustrated if the new advisor has a vacation planned for the week after their start date!

In the days leading up to taking leave, it’s important for an advisor to prepare their teammates for their absence. This can include compiling a list of items that need to be completed, as well as documenting any processes or procedures that fall under the new advisor’s purview. One method for doing so is to use screen recording software (e.g., Loom) to show teammates how to complete different tasks. Finally, it’s important not to forget an out-of-office message for the advisor’s work email, phone, and any internal messaging system. This lets coworkers and clients know that the new advisor will be out of the office as well as the person to contact if they require assistance before the advisor returns to work.

Ultimately, the key point is that ensuring nothing will fall through the cracks while an advisor is on vacation can make the time off significantly more relaxing. In addition, for new advisors, doing so shows respect for your firm, clients, and co-workers, which will help them get off on the right foot in the new job!

(Rachel Feintzeig | The Wall Street Journal)

Planning a vacation requires many steps, from the personal (e.g., buying plane tickets, booking a hotel) to the professional (e.g., putting your leave on the team calendar, ensuring co-workers can cover your responsibilities while you’re out). And for many professionals, the final piece of preparation can help make or break a vacation: the out-of-office message.

At its core, the out-of-office message informs those who email you of the dates you will be out of the office as well as contact information with the person they can get in touch with if they need urgent assistance. Beyond this basic framework, though, some people add an extra flair to their messages, such as including where they are heading on vacation, whether they plan to check their email occasionally, or even having the message created by a group of Icelandic horses. Whatever additions you choose to add to your message, it is important to keep the tone respectful, as it can be sent not only to familiar correspondents, but also to external partners (or prospective clients!). In addition, keeping the message brief is a way of showing that you respect the recipient’s time.

In the end, the out-of-office message is not just a way to let others know you will be on vacation, but also can help you enjoy your vacation more knowing that any pressing matters can be handled in your absence and other messages can wait until your return. Because setting boundaries for your time with co-workers and clients is an important part of gaining control of your time not just on vacation, but also during the regular workweek as well!

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, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.