Weekend Reading For Financial Planners (Dec 10-11) 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.

(Melanie Waddell | ThinkAdvisor)

Up until a few years ago, trading stocks came with a very explicit cost in the form of ticket charges (trading commissions), which could represent a significant percentage of the dollar value of the trade (particularly for small-value purchases or sales). While the rise of ‘discount brokers’ brought these charges below $20, then below $10, and eventually below $5 per trade, there was still a tangible cost for each transaction. However, most brokerages today offer clients ‘free’ trading, leaving many market participants to believe that they can transact at will without the drag of trading costs.

However, the significant increase in retail trading volumes seen in the past few years (perhaps fueled by ‘free’ trading, as well as time spent at home during the pandemic) has raised questions about whether retail traders might face ‘hidden’ fees in the form of suboptimal execution of their trades. This has brought certain practices into the regulatory limelight, including ‘payment for order flow’, by which brokerages receive compensation in return for routing orders to a specific market maker, as well as the potential for wholesalers to systematically give different execution prices for the same trades to different brokers.

And now, the Securities and Exchange Commission (SEC) on December 14 will discuss a new “Regulation Best Execution” rule that would establish a best execution standard; require detailed policies and procedures for brokers and dealers of both equities and bonds; and more robust policies and procedures for entities engaging in certain conflicted transactions with retail customers (possibly a reference to market makers engaged in payment for order flow). This would be the first time the SEC has considered directly defining what it means for a broker to give its clients “best execution” to satisfy agency requirements. Which, notably, would also provide more data to RIAs to fulfill the requirements they have to ensure that they are getting the best execution from their brokerage/custodial platforms!

Ultimately, while such a “Regulation Best Execution” (that would still have to go through the SEC’s normal public comment period, which would no doubt be active given the number of affected entities) could give both consumers and advisors more confidence that they are not being exposed to hidden costs through conflicted and suboptimal execution of their trades, it would also have the potential to cut into the revenue of brokerage and custodial platforms… which, ironically, could lead them to bring back ticket charges to make up for the lost income? Which perhaps raises the question of whether consumers (including advisory firms and their clients) would prefer explicit charges… at least if it helps them reduce or better control costs relative to the unseen costs that can arise from poor trade execution quality?

(Gregg Greenberg | InvestmentNews)

In today’s relatively tight job market, many companies are trying to improve their benefits packages to attract and retain top talent. One popular benefit is offering employees access to a 401(k) or similar tax-advantaged plan to help facilitate their retirement saving. But serving as the plan sponsor comes with many administrative responsibilities, not only to prevent penalties and fines but also to maintain a plan’s qualified tax status. Given that executives often do not have experience managing a 401(k) plan, many companies turn to financial advisors to help manage these responsibilities by providing various fiduciary services.

And according to a recent survey sponsored by Morgan Stanley, engaging with a financial advisor can be a good decision for both plan sponsors and their employees. For instance, 93% of those surveyed (individuals involved in selecting or managing their company’s 401(k) plan) reported that having advisor support in regulatory matters is valuable, while 91% said that their advisor provided them with guidance on critical plan design options as their company scaled. Further, 87% of plan sponsors said that having a financial advisor associated with the plan led to better outcomes for their company, 86% thought doing so increased employee participation, and 86% thought having an advisor resulted in more employees being on track for retirement. Perhaps most relevant for plan advisors, 95% of plan sponsors said engaging with an advisor was worth the cost.

Altogether, the survey shows that advisors have the opportunity to add significant value for retirement plan sponsors and their employees, whether it is in helping create a slate of available investments, outlining the potential features employees might find attractive (e.g., a Roth option or company match), or offering guidance to ensure the plan remains in compliance with relevant regulations. And according to companies who currently work with advisors, this guidance is well worth the fees advisors charge!

(Financial Advisor)

For many firm owners (particularly those just getting off the ground), growing their client base is the top priority in order to increase firm revenue. But the growth of a firm’s client roster also comes with an increasing amount of work, and at some point, advisors hit a ‘capacity wall’ where they are stretched thin (and their overall wellbeing often declines as a result) and start to look to make a hire to ease this burden. Notably, this can apply to larger firms as well, as reaching certain client and revenue thresholds often requires additional hires.

And given the client and asset growth at RIAs during the past decade, the competition for advisory firm talent has heated up to the point that recruitment has become the highest priority for firms, according to Charles Schwab’s 2022 RIA Compensation report, outpacing other priorities (e.g., client acquisition through referrals, which typically takes the top spot) for the first time in the 16-year history of the study. Schwab estimated that the RIA industry will need to hire an additional 70,000 employees during the next five years (not including those hired due to attrition or retirements, or those hired at newly created firms), with firms tending to add a new position for every $360,000 in revenue.

Ultimately, the key point is that it is important for growing firms to be proactive when it comes to talent acquisition. Whether it is by starting the hiring process ‘before’ an additional employee is needed (to give plenty of time to find the right individual) or offering compensation packages and employee career tracks that attract and retain talent, advisory firms can meet their staffing needs and continue their growth, particularly among the heightened competition for talent!

(Sam Bojarski | Citywire RIA)

In the current tight labor market, companies are looking for ways to stand out for potential recruits. While many might start with cash compensation, benefits, as well as schedule and workplace flexibility, have become increasingly important for employees as well (particularly in the wake of the pandemic). And according to a new report from Charles Schwab, this competition is heightened for advisory firms, which will need to make an increasing number of hires in the years ahead as they grow and as veteran employees retire.

According to the report, cash compensation for the median RIA employee is up 16% since 2017, including a 6% annual increase in 2021 (and given the continued tight labor market and inflation experienced in 2022, this figure could be even higher this year). But beyond compensation, Schwab found that the top-performing firms (in terms of growth as well as client and staff attrition) typically offer prospective recruits a documented broader employee value proposition, including workplace flexibility (offered by 74% of top-performing firms), flexible work schedules (73%), investment management and financial planning for employees (69%), and parental leave (66%), among others.

Offering a defined career progression can also serve as a differentiator for firms looking for talent, though the report found that this is more common at larger, top-performing firms (82% of which offer a defined path) compared to 48% at smaller firms (where creating a path might be challenging given that the firm might only have one or two employees!). In addition, 80% of top-performing firms offer staff training and skill development compared to 60% of other firms.

Overall, the Schwab report suggests that firms looking to remain competitive in the competition for advisor talent might have to go beyond cash compensation and ‘traditional’ benefits (e.g., health insurance) to offer employees a broader range of benefits and perks (from greater work flexibility to career development opportunities) to attract and retain top talent in the years ahead!

(Philip Palaveev | Financial Advisor)

Advisory firm employees have a variety of career goals. Some might want to gain the experience needed to one day open their own independent advisory firm, while others might be happy working as an employee advisor for the duration of their careers (and not needing to worry about the hassles of being responsible for ‘everything’ as a firm owner!). Still others might want to rise up the ranks of their firm to become an equity partner, where they can enjoy some of the financial benefits of firm ownership, but without the burden of being responsible for ‘everything’ as the primary or sole owner or founder.

But according to Palaveev, who became a partner at his firm only to quit the firm less than a year later, becoming a partner is not necessarily as glamorous as it might seem. Whether it is the inconsistent nature of take-home pay (which becomes more predicated on the firm’s success than earning a defined salary for a job well done), the cost of buying into the firm, or the additional tax complications of managing K-1 income, becoming a partner brings its own financial planning considerations. Further, becoming a partner closely ties an individual to the other partners and the firm at large, meaning that a good personality fit with both is required to ensure a successful relationship once attaining partner status.

Given these potential complications, Palaveev suggests that aspiring partners first consider whether they believe in the firm and its potential for success – because the reality is that, similar to a marriage, joining as a partner is not about trying to have the influence to change the firm to be what you want it to be, but partnering with the firm because you want to be a part of it and travel alongside it. In practice, this means aspiring partners should ask themselves whether they can imagine spending the rest of their careers (or at least the next decade) being a partner at the firm as it currently exists, working alongside the current partners (or, for those firm owners thinking about bringing on a partner, whether they want to work closely with this individual in the years ahead or would perhaps rather sell to an external buyer). If the answer to either of these questions is ‘no’, aspiring partners will likely want to strongly reconsider their current track, and even if the answer to both is ‘yes’, it is important to take the time to truly consider the benefits, risks, and complications (to their income and otherwise) before committing to a partnership decision that will have a major impact both on their career and financial lives!

(Patrick Donachie | WealthManagement)

Leading up to this year, RIA Mergers and Acquisitions (M&A) activity was on fire, as heightened demand from acquirers (often larger firms, sometimes infused with private equity capital) drove up valuations, to the benefit of those selling their firms. But among the other changes in the economic environment this year (from inflation to weak market performance), rising interest rates (and their impact on firms’ willingness and ability to borrow for acquisitions) have the potential to cool the market for advisory firm M&A.

According to a panel discussion during this week’s MarketCounsel Summit, the increasing cost of capital could lead acquiring firms to be more selective in their acquisitions and change the structure of deals. A survey of buyers by M&A advisory firm Advisor Growth Strategies found that 65% of firm buyers said they had seen a year-to-year boost in inquiries from sellers and that the total number of potential deals had jumped. This means that while a firm with modest organic growth and some investment in their team and business might have attracted significant attention from buyers in years past, acquirers might be choosier in the current interest rate environment in terms of the type of firms they acquire and the terms of the deals. For instance, when it comes to deal structure, while sellers might have received 70% to 80% of a deal at closing, this number is now trending closer to 50%.

Overall, the current interest rate environment and its impact on acquiring firms could have a significant impact on the decision-making of potential sellers, as reduced valuations and less favorable deal structures could lead many to temporarily put off a sale (perhaps until markets rebound and their valuation increases), or consider an internal succession plan (though the length of time to execute one suggests that firm owners will want to plan well in advance to find and develop a potential successor!).

(Julia Carpenter | The Wall Street Journal)

When a relationship moves beyond the dating stage to a more committed partnership (whether it is marriage or otherwise), the partners’ financial interests also become intertwined to some extent (given that they might be living together, or at least have some common expenses). But there are myriad ways for couples to organize their money, from those who pool their money into joint accounts as much as possible (as retirement accounts and other vehicles do not allow for joint ownership) to those who keep their accounts totally separate (with many options in between).

Some research studies suggest that couples who pool their money tend to be happier in the long term and that doing so facilitates major financial goals (e.g., purchasing a house or saving for retirement) given the larger pot of money to work with and the greater security that can come from having two incomes. In addition, pooling money has been found to increase accountability for each partner, as income and spending are more transparent in these relationships.

But using joint accounts can be uncomfortable for many individuals. Some might have had a bad experience in a prior relationship or saw friends or family members struggle after a relationship ended. But while these partners might want to keep their accounts relatively separate, there are still ways to create a shared vision for their financial lives. This could include regular ‘check-ins’ to discuss the state of each partner’s finances and goals, or perhaps wanting to have their income flow to an account they own and then pooling funds in a joint account with their partner to cover monthly expenses.

Ultimately, the key point is that while research suggests that couples are likely to be happier and wealthier when they pool their money, the decision to do so is influenced by a range of practical and psychological factors. And advisors can play an important role when working with couples (whether they are entering a relationship or are unsatisfied with their current financial arrangement) to help them explore their priorities when it comes to controlling their money and creating a system that meets both partners’ preferences!

(Sarah Newcomb | Morningstar)

Over the course of their career, advisors will almost certainly encounter clients who spend more than their income and/or assets permit. This can lead to difficult conversations, as the advisor has to explain that the client is on an unsustainable path. But when clients do recognize they have an overspending problem, Newcomb suggests that a structured approach can help them overcome it.

The first step to combatting overspending is for the individual to admit that they have a problem and to explore the potential reasons for the habit. For example, an advisor could encourage their client to think about a time when they overspent and consider what they were feeling leading up to and after making the purchase. This can help identify triggers for overspending activity (in Newcomb’s case, these include feeling bored, depressed, or insecure).

The next step is for the individual to connect how their spending is related to their needs. For instance, while a sense of security, belonging, esteem, and meaning are all important, achieving these needs does not necessarily require spending money. By encouraging a client to explore what gives them these feelings (e.g., does a client buy a new car every two years because it gives them a sense of esteem), an advisor can then work with the client to develop potential alternative strategies to meet these needs without spending quite as much money (or none at all). For example, a client who likes to give expensive gifts to give themselves meaning might instead choose to spend more time with their loved ones to maintain that feeling while spending less money.

In the end, combatting overspending is not a simple process, and falling back on previous habits is common. But as a consistent presence in their clients’ lives, advisors can play an important role in helping clients explore strategies to overcome this pattern (from identifying the root causes to crafting a financial purpose statement) and holding them accountable for following through!

(Joy Lere | Finding Joy)

Parents often spend significant amounts of time (and money) trying to ensure their kids grow up to be successful, grateful adults. But many wealthy parents are concerned that the money they spend on their kids could inhibit this growth and particularly want to avoid their kids developing a sense of entitlement. This can raise questions for parents as to how they can give their children what they need without stunting their development into responsible adults.

The first key for parents to recognize is that the quality of their relationship with their children outweighs the cost of anything they buy them. For instance, during the holiday season, children might value the time spent with their parents more than the presents they receive (at least after the initial shine of the new toy wears off). Further, when it comes to making purchases, it is important for parents to separate their children’s “wants” from their “needs” and help the children develop an understanding of the difference between the two. In addition, parents can help their children develop the ability to delay gratification by not giving in to all of their requests (even if it means weathering tantrums in the meantime!).

Parents can also support their children’s growth by actively discussing money with them. This is best done in an honest, positive manner (e.g., by discussing the different types of financial accounts or investments their parents use) without making the children feel responsible for solving any money problems their parents might have. In addition, parents can help children understand that earning money requires work, and perhaps encourage an entrepreneurial spirit in them (lemonade stand anyone?) to help them better understand what it takes to earn money and what they want to do with the money they do earn.

In the end, parenting is one of the most challenging jobs out there and there is no single ‘best’ way to instill positive financial habits in children. But by being open and honest about earning, saving, spending, and giving money, parents can help develop attitudes and habits in their children that could last a lifetime!

(Simone Stolzoff | Every)

For some people, the optimal career path is a straight line. Perhaps they start in an entry-level position, then add responsibilities, move up into the management ranks, and finally retire as an executive, all within the same company (or perhaps the same industry). But many people find that their career path does not follow this linear path, perhaps because they no longer want to be in management, or maybe because they want to try a job in a different industry. At the same time, this more winding path can be challenging psychologically, as you can often question whether you are making the ‘right’ choice.

To help overcome these concerns, Stolzoff first suggests thinking hard about your values, rather than your career goals for the distant future (which are subject to change!). Focusing on what you value in a job (e.g., meaning or flexibility), you can remain open to a wide variety of experiences that meet these criteria instead of limiting yourself to positions that are along a singular path to a distant career goal. In addition, it is important to acknowledge that job-related decisions are typically not irreversible. Even if you start a new job that turns out not to be a good fit, you will likely have many options for a new position at a different company.

Further, it is important to recognize that the formal responsibilities of a job do not necessarily determine its overall purpose or meaning for you. For instance, one study asked janitors who worked at the same hospital about their happiness with their jobs. They found that those who thought their work didn’t require much skill were much less engaged than those who saw themselves as an important part of the overall healing system of the hospital. So even if a job doesn’t seem like it will have a significant impact on its face, you can often discover meaning in many positions (though it’s important to recognize that while a job can be a source of meaning in your life, working is not necessarily the meaning of life).

At the end of the day, while it’s easy to recognize that no two career paths are the same, it can be hard in the moment to actually make a jump to a job that might not have been on the original path you imagined. So whether you are an employee advisor thinking about starting your own firm, or are currently in another industry and are thinking about a career in financial advice, by following your values and recognizing that most decisions aren’t forever, you can feel confident in whatever decision you make!

(Eric Barker | Barking Up The Wrong Tree)

For many companies, December brings annual performance evaluations and promotion decisions. But for many white-collar jobs like financial planning, there is often not a clear path to promotion (i.e., while someone in sales might be able to get promoted for hitting a certain revenue target, the work of service-based positions can be hard to quantify). This can leave many employees wondering why one person was promoted while they weren’t (especially if the other person seems like a jerk!).

Given the often-opaque nature of promotions, Barker suggests several ways employees can make themselves more promotable. The first is to assess the characteristics of the employees who do get promoted in their company. For example, an associate planner might think the key to promotion is assembling picture-perfect plans for the lead advisor to review, while their firm puts a larger priority on their interactions with clients.

In addition, while many individuals try to be modest about their accomplishments (to not appear to be a braggart), it is hard for managers to recommend an individual for promotion if they are not aware of what they have contributed during the year. Whether it is in a written ‘brag sheet’ to help their manager write their evaluation or discussing accomplishments during encounters with leadership, there are several ways to make those in charge aware of your accomplishments. Relatedly, getting promoted often takes political skill and networking. While few people want to be seen as a brown-noser, getting in front of key decision-makers in the company and accomplishing tasks that help the firm’s bottom line can help make an employee more promotable.

Ultimately, the key point is that while there is to ‘secret sauce’ to getting promoted, understanding what it takes to be promoted in your specific company and letting those deciding on promotions know how you have supported the firm during the year can make it more likely that you will advance within your firm!

(Faith Hill | The Atlantic)

For some, the pandemic led to more time spent alone in 2020 and into 2021, as many firms shifted to remote work and social gatherings were less common. For others, though, this period saw a significant decrease in their alone time, for example, families juggling remote work obligations while supporting their kids’ remote schooling from home. Either way, this was a stressful period for many Americans.

But now that much of work and social life has returned to ‘normal’ (although the shift toward remote or hybrid work could be longer-lasting), many individuals are left to contemplate how they want to spend ‘alone time’ going forward. For those who live alone and work remotely, getting back out into the world and around other people might be refreshing. Though notably, this doesn’t mean having to attend crowded parties or go on a trip with a friend; instead, just being around others (e.g., in an exercise class or at a museum) can provide a sense of togetherness without having to strike up a conversation with strangers. Similarly, those who had little ability to have quiet time during the past few years might also enjoy going on a “self-date”; this could be as simple as a long walk alone or as elaborate as a solo trip to get away from the hustle of daily life.

Ultimately, the key point is that solitude does not necessarily have to mean isolation or loneliness, and purposefully planning this alone time can make it even more enjoyable. So whether it is taking yourself to the movies, or just having a nice long bath, savoring time alone can help you relax and recharge for the busy week ahead!

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.