Weekend Reading For Financial Planners (Dec 3-4) 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.

(Michael Taffe | Financial Advisor IQ)

2022 has been a challenging year for many financial advisory firms, as weak stock and bond market performance has trickled down to client portfolios and firm revenue (at least for those firms charging on an assets-under-management basis). At the same time, the market volatility, combined with inflation reaching levels not seen in decades, has alarmed many consumers, leading some to seek out a financial advisor and creating organic growth opportunities for firms.

According to research and consulting firm Cerulli Associates, the combination of high inflation and significant market volatility will drive increased demand for financial planning services, with current economic conditions most affecting consumers at the lower end of the wealth spectrum and those nearing retirement. The former group might seek professional advice to help them balance their spending and saving goals during the current inflationary conditions, and those who are aspiring first-time homebuyers might seek planning assistance given the current double-whammy of elevated home prices and rising interest rates. For those nearing retirement, the recent inflation and market volatility might have many individuals rethinking their asset allocation and retirement plans. For these individuals, advisors who leverage advanced retirement income planning techniques could be particularly attractive.

In the end, while economic and market conditions this year have not been kind to many advisors and consumers alike, the current environment could expand the pool of prospective clients for advisors looking to grow their firms. And whether it is by considering a new marketing strategy, bringing on new talent, or creating a targeted value proposition, firms have several ways to take advantage of this potential influx of prospects!

(Patrick Donachie | Wealth Management)

Almost two years after it was first announced, enforcement of the SEC’s new marketing rule began on November 4. The new marketing rule presents RIAs with the opportunity to greatly expand their marketing efforts with new options, from client testimonials to promoting the reviews they’ve received on third-party websites, to provide prospective clients with evidence of the quality of their service. But now that the November 4th enforcement date has passed, the SEC will begin to look at what RIAs are actually doing to ensure that advisors stay within the bounds of the new regulation.

And according to C. Dabney O’Riordan, the former head of the SEC’s Asset Management Unit (now working in the Securities Enforcement Defense Practice at the law firm Quinn Emanuel Urquhart & Sullivan), the SEC will want to send a message when it comes to enforcement and that firms should not expect a gradual run-up to pursuing violations, particularly given the amount of time firms had to prepare for the new rule. She suggests that industry participants consider everything in the new marketing rule as fair game for examiners and enforcers, including the supervision of electronic communications as well as books and records obligations.

Altogether, while the new marketing rule presents firms with a valuable opportunity to expand their use of client testimonials, historical performance data, and more as part of their marketing efforts, it is also important for firms to review their internal policies and procedures to ensure that any marketing campaigns comply with the new regulations (and that all employees are aware of these obligations as well!) to avoid a potentially nasty surprise during their next examination!

(Tracey Longo | Financial Advisor)

The 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 customers of broker-dealer representatives and the clients of advisers at RIAs). Though since Reg BI was issued, industry observers have been waiting for the SEC to actually begin 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 higher requirements.

In June, two years after Reg BI was issued, the SEC brought its first enforcement action under the rule, though it was related to the sale of unrated illiquid debt securities known as L Bonds (which for many customers who bought, probably would have been unsuitable even under the prior years), leaving the question open of how seriously the SEC really intends to enforce Reg BI. In the meantime, investors have begun to take matters into their own hands as well, filing a significant number of Reg BI-related arbitration cases with broker-dealer regulator FINRA. Though some observers think the number of SEC enforcement actions (and arbitration cases) is likely to increase going forward, particularly as consumers question their brokers’ actions during the current down market, and with the SEC releasing bulletins in March and August offering more detailed guidance on the areas they are focusing on and where they have seen deficiencies.

In particular, registered representatives who are dual-hatted as FINRA-registered representatives and SEC-registered investment advisers could be in the crosshairs, as the SEC is also bringing cases against investment advisers under the fiduciary standard, with wrap fee programs at their affiliated broker-dealers coming under particular scrutiny. In settling charges with multiple firms this year, the SEC argued that the firms violated their fiduciary duty by overcharging clients who sat idle in wrap fee programs designed for more frequent traders, and did not provide adequate or promised advisor annual reviews and consultations (so-called “reverse churning”).

In the end, regulation is only effective if it is enforced, and the question remains about whether and how the SEC will really enforce Reg BI in a more stringent manner – given that thus far, its enforcement efforts have primarily focused on areas that would have already been violations of the old suitability rule, or have been prosecuted under the already-more-stringent RIA fiduciary standards. Still, growing regulatory actions this year – coupled with the rising pressure of investors taking it upon themselves to file more arbitration cases – suggests that broker-dealers and their registered representatives can expect greater attention and scrutiny when it comes to acting in their clients’ best interests.

(Gerry Herbison | Journal Of Financial Planning)

Given the enormous impact hiring has on the success of an advisory firm, having an effective talent acquisition process (whether it is for an associate advisor, client service associate, or other positions) is essential to not only find effective individuals, but also to maintain the firm’s culture and client service standards. And with the current tight market for advisor talent, many firms are approaching hiring as an ongoing process rather than an ad hoc activity.

According to Herbison, the first key to effective hiring is to always be on the lookout for potential employees. Whether it is on social media, at industry conferences, or during other networking opportunities, firm owners who are able to identify talented individuals who might also be a personality fit for the firm can get ahead of the hiring game (rather than starting from scratch when they want to make a new hire). In addition, it is important for firms to think ahead for the next two or three positions they will want to fill. Because it could take up to 18 months for a new employee to be hired and brought up to speed, bringing in a quality individual before the firm ‘really’ needs them can be an effective practice.

Next, it is important for firm owners to hone their management skills (or to add effective ‘people managers’ to the team). This means ensuring employees have what they need (e.g., technology) to be successful, communicating expectations and feedback in a clear way, and being accessible to employees (if they have a question or need help).

Finally, firms that are effective in hiring use compensation as motivation. Notably, compensation goes well beyond salary to include time off, schedule flexibility, location flexibility, professional development stipends, and other perks and benefits that can help attract and retain talent. And because different employees are likely to have different preferences, offering flexible benefits can help ensure team members are compensated in the way they prefer (although this might be easier for smaller firms to implement).

Ultimately, the key point is that in the competition for advisor talent, the firms that are most proactive are likely to be those that are most successful in hiring. From always being on the lookout for new employees, to sharpening management skills and upping their compensation game, firm owners have several ways to make it more likely that they will find the employees they need, when they need them!

(Caleb Brown | ThinkAdvisor)

Many financial advisory firms start out with a single advisor-owner taking on the full range of financial planning, business development, and operational duties (and many stay that way!). And as a firm grows, the owner often brings on additional talent to take on the increasing number of tasks that need to be completed. At the same time, it is important to match up employees with the roles that most closely match their skills and interests to keep them operating at their highest level (and to keep them with the firm).

One way to classify individuals in a firm is by separating “Finders, Minders, and Grinders”, a categorization coined by David Maister in his book Managing The Professional Service Firm. In an advisory firm, Finders are those who specialize in business development and enjoy meeting new people. Next, Minders are those who enjoy building relationships with clients and ensuring their needs are being taken care of. Finally, Grinders are those in backstage roles within the firm who are responsible for completing the behind-the-scenes work for the Minder to effectively manage the relationship.

Given the different strengths of each of these groups, it is important to recognize when an employee might be in the wrong ‘seat’ for their given skills; for example, while a Minder enjoys communicating with clients, they might not excel in a business development role that requires cold introductions to prospective clients. In addition, firm owners will want to consider whether an employee’s duties cut across multiple classifications. For instance, a Grinder who is responsible for processing client paperwork might not enjoy also being the person who communicates with the client when changes are needed.

Ultimately, the key point is that it is important for firm owners to be mindful of their employees’ strengths and whether they match their current positions. In addition, when bringing on new talent, comparing the candidate’s strengths (identified through personality tests or other means) with the requirements of the role being filled can help ensure they will excel in their new position!

(Eliza De Pardo | RIABiz)

This year has seen inflation reach levels not seen for several decades, pinching the budgets of consumers. And given the current tight labor market, many companies have responded by increasing employees’ base salaries to ensure they can maintain their standard of living in the inflationary environment (and perhaps discourage them from seeking a pay raise at another company).

But when it comes to financial advisory firms, in particular, De Pardo cautions against maintaining (or implementing) an annual Cost Of Living Adjustment (COLA) to base pay. First off, adjusting base pay to inflation creates a ‘permanent’ increase in the firm’s fixed costs, as employee salaries will continue to be adjusted upward for inflation (and while this was less painful during years of 2% inflation, continued elevated inflation could make COLA-related expenses could be an anchor on firms’ bottom lines). In addition, increasing employee pay with a firm-wide COLA does not incentivize performance or reward the strongest employees. If a firm does want to implement a COLA, De Pardo recommends doing so on a one-off basis (rather than creating an ongoing expectation); this could be an effective tactic for firms with employees who have seen their rents or other fixed expenses jump well beyond the broader inflation rate this year.

Instead of an ongoing COLA, De Pardo recommends that firms either convert to, or expand, a system of incentive pay to attract and retain talent. The first step is to communicate the size of the incentive opportunity at the start of the performance period (perhaps something for firms to consider before the end of the calendar year!). Notably, within the incentive structure, it is important for performance objectives to be relevant to each role (so that employees can directly influence the result and track and measure their progress throughout the year). And so, by using incentive pay, firms can reward their most effective employees while managing the overall cost of their compensation plan.

Altogether, at a time when inflation is eroding the purchasing power of employees (and when the market for advisor talent is tight), providing appropriate compensation is vital for firms to attract and retain team members. And while some might be tempted to implement (or continue) a broad-based COLA, using an incentive compensation plan can provide the firm with more flexibility and be a more effective way to align firm and employee interests!

(Cinthia Murphy | ETF Think Tank)

The Exchange-Traded Fund (ETF) market has exploded in recent years, with total ETF assets growing from $1.3 trillion in 2012 to about $6.1 trillion today (and the number of listed ETFs has increased as well, from 935 net creations in 2021 alone). This is due in part to several advantages compared to the mutual fund structure, including (often) lower costs, increased portfolio transparency, intraday liquidity (though some might argue this is a downside for those tempted to trade actively!), and tax efficiency (which is particularly noticeable this time of year, as capital gains distributions are much less common among ETFs than mutual funds).

While ETFs have several potential advantages over mutual funds for consumers and advisory firm clients, there are several benefits for advisors to being an ETF provider as well. First, advisors running bespoke investment strategies can run them through a single investment product (or multiple, if they want to separate different strategies) rather than adjusting client accounts on an individual basis, potentially saving significant time. In addition, creating an ETF can allow advisors to access audiences beyond their current clients (as any investor can purchase an ETF), and, given the typically low price of a single ETF share, to investors who might not meet the firm’s asset management minimums. Launching an ETF can also be a significant branding and marketing opportunity for the advisory firm by linking the ETF to the other services it offers.

In the end, ETFs have been a massive disruptor to the asset management industry, taking significant market share from actively managed mutual funds. They not only present a tax-savings opportunity for consumers, but a potential way for advisors to increase their efficiency and generate additional revenue!

(Pat Cleary | Alpha Architect)

Financial advisors have a wide range of options when it comes to investing their clients’ assets, from purchasing individual securities to leveraging professionally managed mutual funds and, increasingly, using ETFs. And while some advisors are satisfied with the offerings available in the fund marketplace, others pursue customized strategies that can’t be met with off-the-shelf products. And while many advisors have turned to tools like Separately Managed Accounts (SMAs) and direct indexing, declining costs (with the breakeven point for operating an ETF falling from $100 million of assets under management closer to $25 million) have opened up an additional opportunity to more advisors: starting their own ETF.

Creating and operating an ETF can have several advantages for an advisor and their clients. For instance, the Tax Cuts and Jobs Act eliminated the deductibility of investment advisory fees, but some of this tax benefit can be regained through using an advisor’s ETF, as the management fees in an ETF can be netted against dividends, interest, and income, implicitly making them tax-deductible. In addition, firms can gain operational efficiencies by managing the assets within a single ETF, rather than a broad range of separate client accounts using the same strategy. Further, onboarding clients can become much easier, as their assets can be invested in the advisor’s ETF rather than going through the more time-consuming process of creating and investing an SMA.

At the same time, creating an ETF comes with costs as well. These include the costs to start (often $50,000) and operate the fund, the complexity of transferring current client assets into the ETF, as well as additional compliance considerations (e.g., because the advisor is creating an affiliated fund conflict of interest, they will need to update their disclosures and implement systems to manage and document that investing client assets in the affiliated fund is in the clients’ best interest). Further, the transparency of ETFs can expose the advisor’s intellectual property (in the case of unique strategies), or, alternatively, reveal a weak value proposition (if the investment strategy is not as sophisticated as clients might have assumed).

Altogether, an advisor’s decision of whether to create an ETF hinges on a variety of factors, including their clients’ assets (in terms of both their quantity and characteristics) that will be transferred into the fund as well as weighing the time and money costs of starting and managing the fund with the potential benefits in both of these areas. But given the declining monetary costs of doing so, and a growing number of white label providers (including Alpha Architect, ETF Architect, and others) to handle many of the operational aspects of running the fund, creating an ETF could become an increasingly popular strategy for RIAs in the years ahead!

(Sam Bojarski | CityWire RIA)

For years, Separately Managed Accounts (SMAs) have been popular tools for RIAs and their (particularly high-net-worth) clients. With SMAs, clients benefit from customized portfolio recommendations from their advisors while gaining tax efficiencies compared to mutual funds (e.g., by being able to tax-loss harvest positions within the account), and advisors receive a fee in return. But with the growing popularity of ETFs, some RIAs have converted their SMA strategies into an ETF.

SMAs can be converted to an ETF using a “351 transfer”, part of the tax code that allows tax-free property transfers in exchange for stocks. Importantly, for the 351 transfer to take place, the portfolio must be adequately diversified: no more than 25% of the portfolio can be invested in a single securities issuer, and no more than 50% can be invested in five or fewer securities.

Notably, creating an ETF and transferring client assets requires a significant amount of work and money (often $200,000 per year in operational costs), so advisors will want to consider whether the amount of funds managed by the new ETF (and its associated expense ratio) will make up for the costs. To help ease the time burden, advisors considering creating an ETF can choose to work with a white labeling service, which handles many of the operational aspects of launching and operating an ETF. But advisors may still endure a lengthy back-and-forth with the current custodian, ETF custodian, and white labeling service, as repapering clients is necessary, along with communicating cost basis and other information.

Despite the costs, converting an SMA strategy into an ETF can have benefits for both advisors (who often find the ETF easier to use versus individual SMAs) and for their current and potential clients (who can benefit from reduced expenses compared to an SMA as well as a lower minimum investment). In the end, it’s up to each advisor to determine whether the benefits of the ETF wrapper are greater than the costs of converting SMA assets (as well as in comparison to alternate strategies like direct indexing!).

(Melody Wilding | Harvard Business Review)

When starting a new job or position, an employee is typically presented with a list of job responsibilities. At the same time, most workers at some point end up having to take on tasks that fall outside the scope of their listed job description. And while some of these duties can sometimes further your professional development and standing within the firm, it is also important to recognize when it is best to say ‘no’ to such requests.

One situation where it is best to decline ‘extra’ work is when your primary job responsibilities will suffer, which can not only negatively affect the work you do for the company, but also your performance evaluation down the line. In these cases, it can help to let the requestor know that while you understand their request, you cannot take it on because you would either be unable to put in quality work on the extra project or that by taking it on you would be letting down teammates who rely on your work. Relatedly, when a request is unreasonable (e.g., there is no way it can be completed in the time allotted), you can either ask for additional time or resources, or perhaps suggest another employee or team member who might be better suited to the task.

And in cases where you do decide to take on the extra work, creating boundaries is important. For example, the task should come with a clear ‘exit strategy’ to prevent it from becoming an open-ended commitment. In addition, taking on a new project could be a good opportunity to open a conversation regarding increased compensation to reflect your additional responsibilities.

Ultimately, the key point is that there is a careful balance to maintain between being a ‘team player’ and taking on too much work, which can lead to burnout and an overall decline in output. And for managers, it is important to recognize when you are making an ‘ask’ of an employee beyond their standard responsibilities and whether it is actually in the firm’s best interest for them to take on this new task!

(Ryan Holiday | Medium)

Modern life can often feel overwhelming when considering the range of things one has to do in a day, from work to family life to (hopefully) having time for hobbies and interests. Sometimes, it can feel satisfying to check everything off of your to-do list (shout-out to my fellow Myers Briggs Js!) knowing that you handled everything yourself. And while completing tasks yourself (whether they are work responsibilities or personal chores) can ensure things get done in the way you prefer, it can also reduce the amount of time you have for more fun activities, or just relaxing.

One way to create more time in your day is to outsource certain tasks. At home, this might mean hiring cleaners, landscapers, or a meal delivery service to reduce the amount of time you have to spend on those activities outside of work. And when it comes to the work of financial advice, there are a number of ways to get outside help, from outsourcing investment management and lead generation to hiring a new employee to take some of the work burden off of your shoulders. In addition, you can consider ways to automate tasks, whether personal (e.g., automatic bill pay) or professional (seeking out integrations within your tech stack).

Ultimately, the key point is that while self-sufficiency is often seen as a virtue, by putting the world on your shoulders you might be missing out on opportunities to take on more important responsibilities, or to just relax. And given that Kitces Research shows that advisors with the highest quality of life tend to be those that work fewer hours and take more vacations, outsourcing certain tasks (though perhaps not everything) and leveraging automation can not only help you be more productive, but happier as well!

(Joy Lere | Finding Joy)

The holiday season can be a time of great joy, but also of great stress as well. Between end-of-year work deadlines, holiday gatherings, and family obligations, there is plenty going on. Because of this, it can be a good time to consider the wide range of boundaries in your life to ensure that you make it through the holiday season happy and on track for an even better year in 2023.

When people consider their boundaries, they often think about their relationships with others. This time of year, it can be easy to feel obligated to see every relative or say yes to every holiday party invitation you receive. And even though saying ‘no’ might be the best choice (to avoid burnout), doing so can often be challenging because we are afraid of how the other person might feel. But Lere suggests that we often overestimate how much something matters to someone else and that individuals can build a sense of control over their lives (and better boundaries) by saying ‘no’ more often.

In addition to setting boundaries with others, it is also important to set boundaries with yourself. For instance, sometimes we give into temptation and do something that feels good in the moment but that we know we’ll regret down the line. One way to combat this is by using the “6×10 Question” which asks you to consider how you will feel about a given choice in 10 minutes, 10 hours, 10 days, 10 weeks, 10 months, and 10 years. By slowing down and considering the long-term ramifications of a decision, you might be more likely to make decisions that your future self will appreciate.

Other boundaries to potentially consider, depending on your situation, include those with time and energy (e.g., how to balance holiday events with regular work and family obligations), money (e.g., creating a gift budget), food and alcohol (Lere suggests trying to “Eat, Drink, and Be Merry” rather than “Eat and Drink to Be Merry”), relationships (you don’t have to discuss your relationship status with your Aunt), and parenting (no need to act on every unsolicited piece of advice that comes your way).

In the end, boundaries can not only help you make better decisions, but also improve your mental health as well. And so, now might be a good time to reevaluate your boundaries (and perhaps help clients do as well) to help you feel more empowered during the holiday season and beyond!

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.