Weekend Reading For Financial Planners (Dec 31-Jan 1) 2023

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.

(Jeff Levine | Nerd’s Eye View)

There was a tremendous buzz in the advisor community last week when Congress passed “SECURE Act 2.0”, legislation related to retirement planning to follow up on the original 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, as part of its end-of-year omnibus spending bill. However, as a 4,100+ page piece of legislation, it takes some time to read and fully digest the full scope of its provisions, and so now that the first week of “quick takes” on what advisors need to know has passed, this week has produced a flood of deeper information about what planning opportunities, really, are buried deep in SECURE 2.0.

In fact, while no single change in SECURE 2.0 will require the same level of urgency to consider before year-end as did the original SECURE Act (which had some very time-sensitive end-of-year changes), or have the same level of impact across so many clients’ plans as the SECURE Act’s elimination of the ‘stretch’ IRA for most non-spouse beneficiaries of retirement plans, there are actually far more provisions in SECURE 2.0 than there were in the original version, that may have a significant impact for some clients.

To start, SECURE 2.0 increases the beginning age for Required Minimum Distributions to 73 for individuals born between 1951 and 1959, and to 75 for those born in 1960 or later, creating more potential pre-RMD years for advisors and their clients to consider partial Roth conversions.

In addition, SECURE 2.0 also opens up the possibility of transferring 529 plan balances to Roth IRAs, albeit with a variety of limits and restrictions (e.g., the maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000). Even with these restrictions, this new measure presents planning opportunities both for families with leftover 529 balances after the account beneficiaries have completed their education, as well as for clients who might consider ‘priming the retirement pump’ for children by making a 529 contribution when a child is very young, with the intent of transferring it to a Roth IRA once the account has been in existence for over 15 years (when funds in the account become eligible for transfer to a Roth, subject to specified limits), and then allowing it to compound for decades more (until the child is ready to retire).

Another measure in SECURE 2.0 will affect surviving spouses who inherit retirement accounts from a deceased spouse. In addition to previously available options for the inherited account (e.g., rolling the decedent’s IRA into their own), SECURE 2.0 introduces the ability to elect to be treated as the deceased spouse, which means, among other things, that RMDs for the surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin, and that once RMDs are necessary, the surviving spouse will calculate RMDs using the Uniform Lifetime Table that is used by account owners, rather than the Single Lifetime Table that applies to beneficiaries (and requires a larger percentage of the account to be distributed each year compared to the Uniform Lifetime Table). This planning strategy could be particularly attractive to surviving spouses who inherit retirement accounts from a much younger spouse (allowing them to delay RMDs longer, and to have smaller RMDs, compared to making a spousal rollover or remaining a beneficiary of the account).

It is important to note that the above measures only scratch the surface of the range of items that appear in SECURE 2.0. In addition, it is worth highlighting that SECURE 2.0 did not limit many popular planning strategies (despite being considered in previous proposed legislation), with no new crackdowns on Backdoor Roth or Mega-Backdoor Roth contributions or Roth conversions, among others. It also does not create universal retirement savings accounts for employees whose employers do not offer a plan (as envisioned by the proposed Retirement Savings for Americans Act of 2022).

Ultimately, the key point is that SECURE 2.0 will impact a broad range of financial planning clients, from those saving to retirement to those who retired years ago. And so, advisors can focus on understanding which components of SECURE Act 2.0 will impact their clients the most and identify planning strategies that could prove valuable for their clients in the future. In the end, while SECURE 2.0 presents a dizzying array of new rules related to retirement planning, it gives advisors a significant opportunity to demonstrate ongoing value for their clients!

(Martha White | The New York Times)

The introduction of so-called “robo-advisors” – which offer automated investment management, often at a lower price than working with a human advisor – more than a decade ago led to some predictions that they could eventually replace human advisors. And because the minimum assets to work with a robo-advisor are typically significantly lower than for human advisors charging on an Assets Under Management (AUM) basis, these platforms attracted many younger investors.

But while automated investment management might have worked well for investors during a roaring bull market, the pullback experienced in 2022 has led many younger investors to reach out to human advisors. In addition to offering guidance regarding the best portfolio actions to take during a market downturn (sometimes none!), human advisors can also offer a connection and sense of understanding that is hard to accomplish through a robo-advisor’s intake surveys. For instance, a 2022 Vanguard study found that consumers have different preferences for the planning services they want to be completed by a human and those to be done by a digital solution. Study respondents preferred human advisors for many relationship-building and communications tasks, such as understanding their goals and being empathetic to their personal situation, but preferred digital tools for diversifying investments and simplifying their finances for organized, cohesive management, suggesting that many consumers are looking for ‘cyborg advisors’ that represent the best of both worlds.

In the end, the current market downturn has not only reduced consumers’ portfolios, but also shaken the confidence of some individuals in their ability to handle their investments themselves or through a robo-solution. And given that many current users of robo-advisors likely still do not have sufficient assets to work with many advisors charging on an AUM basis, firms that offer a fee-for-service model (e.g., subscription or hourly fees) could be best positioned to take advantage of the current disillusionment of investors (many of whom earn sufficient income to pay an advisor’s fee) with their robo-advisors!

(Rob Burgess | WealthManagement)

While all financial planning firms use technology in one way or another, the breadth and depth of their tech stacks can vary significantly. Some firms see technology as a way to improve their operational efficiency, and others leverage both advisor- and client-facing software solutions to create a more integrated experience for clients.

And according to a recent survey by WealthManagement IQ, there is a wide gap between the firms looking to set themselves apart using technology and those treating it as a baseline requirement. Of the advisors surveyed, 28% said their firms were “Innovators” that invest in technology to differentiate themselves and seek to provide an improved client experience. The majority of respondents, 59%, said they were “Operators” that invest in technology mostly to improve operations and efficiency. The final 13% of those surveyed identified as “Laggards”, working at firms that do not make technology a priority or leverage what they already have. Perhaps unsurprisingly, 51% of Innovators reported being very satisfied with their current tech stack, while 27% of Operator firms and 15% of Laggards reported the same.

The firms’ self-categorization was also reflected in the value they receive from using different types of advisor technology. For instance, 46% of Innovators said client communication tools deliver strong Return On Investment (ROI) for their firm, while 36% of Operators and 34% of laggards reported the same. Similarly, 40% of Innovators reported strong ROI from digital workflow automation tools, compared to only 25% of Operators and 14% of Laggards.

Ultimately, the key point is that advisory firms can use technology solutions to gain operational efficiencies, but also to provide better service for their clients. And as consumers seek a more tech-enhanced advisory experience, firms that are seen as being the most innovative in this regard could be those that experience more growth in the years ahead!

(Financial Advisor)

An advisory firm’s tech stack represents one of its most important investments, as it can both improve back-office efficiency and serve as a helpful client-facing tool to keep clients engaged with the planning process. And as the advisor FinTech landscape continues to develop and grow, firms have more choices than ever to upgrade their suite of technology solutions.

But a recent survey sponsored by advisor technology company Advisor360° suggests that many advisors at large firms are unhappy with their firm’s current tech stack and that client growth has suffered because of it. According to the survey of 300 financial advisors and executives from large broker-dealers, RIAs, and bank trust companies (the average respondent works at a firm with more than 1,000 employees and $5 billion in assets), only 3% of advisors surveyed described their tech stack as “integrated and innovative” (while 58% described it a “modern”). In fact, 52% of advisors said they have lost prospects because their firms’ tech did not meet expectations and 25% said existing clients have left because of the firm’s tech stack. Further, the approximately 80% of advisors who classified their technology as “modern” reported more than 6% growth in new client assets under management in the previous year, while those who lagged in technology reported growth of more than 1%.

In terms of areas where their technology is performing well, 63% of respondents said it delivers robust financial planning advice, 59% said it allows efficient marketing to their existing clients, and 59% said it allows them to deepen relationships with clients. Lagging areas included automation (56%) followed by functionality (44%) and integrated tools and apps (43%).

Altogether, the survey shows that advisors at larger firms see significant room for improvement in the tech stack available to them, suggesting that these firms could improve the experience for both their employees and their clients by upgrading to more innovative software. At the same time, the survey also suggests a potential advantage for smaller firms, which can be more nimble in testing, purchasing, and introducing technology to fewer individuals than the thousands of advisors at larger RIAs or broker-dealers!

(Charesse Spiller | Journal Of Financial Planning)

Over time, a firm’s tech stack can become a ‘Frankenstein’ of software tools, some of whose functions are not used by the firm, while others overlap with each other. Given that a firm’s technology needs change over time, and that AdvisorTech software tools frequently add new features, conducting an annual tech stack audit can help ensure firms are getting the most out of their technology budget.

First, a firm owner can consider how they want to conduct the audit, which can be performed themselves (though this can take time away from other responsibilities!), by a staff member, or by an outside consultant. Once the ‘auditor’ is chosen, they can dig into the firm’s current tech stack, not only listing the full range of tools being used, but also talking to staff members to learn about how they are being used. Next, the auditor can reach out to current vendors and explore their websites to see whether there are software features the firm is not currently utilizing (which can save significant money if a firm finds out that a desired function can be performed using its current software rather than a newly purchased tool!). With the full list of the capabilities of its current software, the auditor can then look for redundancies, potentially discovering tools that could be removed from the tech stack without a loss of productivity for the firm.

Ultimately, the key point is that while a tech stack audit requires an investment by the firm (whether in ‘hard’ dollars by hiring an outside consultant or ‘soft’ dollars in the form of the firm owner’s or an employee’s time), doing an audit can provide returns in the form of improved operational efficiency (as new software features are discovered and redundancies are eliminated) as well as cost savings by removing unneeded programs. Further, by making a tech audit an annual routine rather than a one-time event, firms can ensure that their tech stack continues to meet its needs (and its budget!) over time.

(Bob Veres | Advisor Perspectives)

Whether an advisor is starting a new firm or is upgrading their current tech stack, there are a wide range of AdvisorTech solutions from which to choose. But given the variety of offerings, particularly in popular categories such as financial planning software and CRM, it can be challenging to figure out the ‘best’ option to choose. In practice, most advisors tend to choose from a common ‘hub’ of 2-3 of the most popular choices in each of the key areas (CRM, financial planning software, and portfolio management tools), and then add incrementally from there. However, in practice this results in a lot of similarities in the advisor tech stack from one firm to the next, and can lead to a lot of ‘undiscovered’ technology that advisors might otherwise use to differentiate themselves.

To help find the ‘next new tech’, advisor tech research studies surveying advisors can provide a window into not only which tools are most popular, but also which generate the highest advisor satisfaction… even if they’re lesser known tools. And based on the latest data from Veres’ firm Inside Information and T3, which runs the largest annual AdvisorTech conference conduct an annual software survey that asks advisors about their current tech stack and how they rate each tool within it, there is an ‘alternative tech stack’ that is beginning to emerge, comprised of a full suite of lesser-known (but arguably more ‘modern’) advisor tech tools.

For instance, financial planning software is at the core of an advisor’s tech stack. But many of the largest programs try to work for the full range of clients, from young families to retirees. Advisors who want to go deeper for their clients could supplement a ‘base’ financial planning program with a tool like Elements (which links to client accounts and tracks a variety of statistics from their savings rate to their debt-to-income ratio) for working-age clients, Income Lab for advanced calculations for pre-retirees and retired clients, or Holistiplan for more in-depth tax planning analysis for the most sophisticated and complex clients.

Another core part of an advisor’s tech stack is its custodial provider. But many advisors find that their custodian’s client onboarding processes (e.g., filling out and signing forms) leaves something to be desired. This is where a tool like Nest Wealth can help. Nest sits on top of the advisor’s CRM, and when a new account (or an account transfer) is needed, automatically pulls the necessary forms and creates a series of ‘quizzes’ for the advisor and client to fill out that includes the data needed to fill out all of the forms. The program then links these answers to the range of forms, and sends them to the clients for e-signature.

Then there are the tools that advisors might not ‘know’ they need, but can enhance their operations, or their client engagement. These include workflow management tools like Hubly that overlay and go beyond the workflow offerings of many CRM systems, automated client communication software like Knudge to help clients stay on top of (and get ‘nudges’ for) their financial planning to-dos, and remote meeting experience platforms like Econiq to enrich the Zoom experience for client meetings. While these tools might not be seen as ‘required’ parts of an advisor tech stack, they can improve the experience for advisors and their clients alike.

Ultimately, the key point is that the ‘best’ tools for an advisor’s tech stack are not necessarily those with the largest booths at advisor conferences. By reviewing information in AdvisorTech surveys such as the T3/Inside Information Software Survey and the Kitces Research study on financial advisor technology use, advisors can find software tools that could not only represent upgrades within categories they currently use, but also new categories and options that can allow them to improve their efficiency and provide deeper service for their clients!

(Katie Greifeld | Bloomberg)

The growing popularity of Exchange-Traded Funds (ETFs) has been a persistent theme in the investment world during the past decade. Though notably, much of the shift in assets from mutual funds to ETFs have been on the equity aide, with fixed-income mutual funds seeing more inflows than bond ETFs each year between 2019 and 2021.

But this trend has shifted, at least temporarily, in 2022, as fixed-income mutual funds have experienced $446 billion in outflows, while bond ETFs have seen $154 billion of inflows (though fixed-income mutual funds, buoyed by their dominant position in retirement plans continue to far exceed their ETF counterparts in terms of total assets held, with $4.5 trillion sitting in bond mutual funds compared to $1.3 trillion in ETFs as of September). The outflows from mutual funds could be explained in part by the weak bond market performance experienced this year, as some investors might have been spooked and sold their mutual fund positions (or perhaps saw an opportunity to switch to a similar ETF while incurring fewer capital gains). On the ETF side, much of the influx of assets has gone to short-dated, cash-like products, which could reflect a ‘flight to safety’ among some investors looking to avoid riskier equity funds or longer-duration bond products in the current volatile market environment.

In the end, whether or not inflows into bond ETFs continue to outpace those going into mutual funds, the growth of the fixed-income ETF marketplace presents advisors with additional options for adding bond exposure to their client portfolios, in a potentially more tax-efficient, liquid, and transparent structure than similar mutual funds!

(Jeff Benjamin | InvestmentNews)

When an advisor looks to add fixed-income exposure to a client’s portfolio they can choose between buying individual bonds or a bond fund, in the form of a mutual fund or ETF. And while the fund option has been popular due to the relative ease of buying and selling a diversified set of bonds compared to purchasing them individually, improved technology solutions and this year’s bond market downturn appear to have led to an increase in the popularity of individual bond purchases.

According to data analyzed by Dave Rudd, president of fixed income distribution and trading firm InspereX, individual investors held $4.31 trillion worth of debt securities at the end of the third quarter of 2022, up from $3.29 trillion a year earlier, while fixed-income ownership through funds fell to $5.05 trillion from $5.86 trillion a year prior. And according to a survey of advisors conducted by InspereX, advisors are increasingly turning to individual bonds to improve client relationships, hedge inflation, and add alpha. Among advisors using individual bonds, 82% are building bond ladders to diversify across short- and long-dated bonds. According to Rudd, technological advancements that increase access and transparency around bond trading have been a key driver in this shift toward individual bond purchases.

In a year when many clients saw the value of their bond funds (often considered the ‘safe’ portion of their portfolio) decline, some might find buying individual bonds (and the increased confidence in the income they will generate if held until maturity) within the fixed-income portion of their portfolio an attractive proposition (although the benefits of doing so could be overrated). Though ultimately, the rising interest rate environment that contributed to the drop in bond prices is likely to be a bigger driver of improved returns (through higher yields) going forward than the decision to purchase bonds individually or through a fund!

(Howard Marks| Oaktree Capital)

Cycles are a regular part of the investment process, as different asset classes wax and wane in terms of performance over time. These cycles can be seen in the short term, as seen by the ups and downs of different types of investments from year to year. At the same time, there are also longer-term cycles that can help determine which investment strategies are more likely to work in the long run. And when these cycles turn, a ‘sea change’ can occur that can shift how advisors broadly approach investing.

Based on his more than five decades in the investment world, Marks has identified two of these ‘sea changes’. The first occurred in the 1970s, when investors shifted from prioritizing company quality when investing in both equity and bonds (eschewing lower-grade issues even if they offered higher potential returns), to assessing investments in terms of the risk-reward tradeoff. This attitude shift opened up the potential to invest in riskier company stocks and lower-grade bonds, as long as the investor was compensated for this risk (an attitude that is almost universal today).

The second ‘sea change’ occurred in the early 1980s with the beginning of a four-decade period of declining interest rates. Marks suggests this environment helped grow the economy (by reducing companies’ cost of capital as well as consumers’ borrowing costs), improve equity returns (in part due to increased profitability), and boost investor risk taking (as bond yields declined along with interest rates), including an increase in the use of leverage.

But now, in an environment where inflation reached 40-year highs and interest rates are at levels not seen in more than a decade, Marks thinks the investing world might be on the cusp of a third ‘sea change’ as interest rates potentially settle at an elevated level many individuals have not experienced during their investment careers. This could mean that many of the investment strategies that have been successful during the past decade (or perhaps even the last four decades) might not be as successful going forward in the new environment.

Ultimately, the key point is that while it can be easy for investment advisors to get bogged down in day-to-day market news and fluctuations, it is also important to zoom out and be aware of the larger forces that could impact the market environment. And for Marks, this means preparing for a potentially higher interest rate environment (and its possible impacts on stock and bond returns) going forward!

(Stephanie Bogan | Advisor Perspectives)

For advisory firm owners, there are many potential investments they can make to meet their business goals, from hiring additional staff members to improving the firm’s tech stack. But Bogan suggests that the change with the highest Return On Investment (ROI) is for firm owners to change their own mindsets about their business.

While human brains take in massive amounts of information (11 million bits per second!), the brain can only process a much more limited amount (50 bits per second). Given this gap, and a world of many potential dangers, our brains are hard-wired with a survival mindset, with the subconscious leading the way. And while this can be helpful to avoid physical dangers (e.g., a tiger on the hunt), this mindset can also seep into other ‘dangerous’ business decisions. In the advisor context, such a situation might occur when a prospect asks for a discount on the firm’s fee, as an unconscious survival mindset might suggest giving them the discount (think of the lost revenue if you say no and they don’t become a client!). But this can lead to regret later, as the advisor might end up spending the same number of hours servicing this client, but is compensated less.

Advisory firm owners who want to break out of the survival mindset can engage in what Bogan calls a “double-down” exercise to push themselves beyond their conditioned boundaries. This process includes considering where the advisor is now (in terms of revenue, income, hours worked per week and days off per year) and then writing down their goals for these same items. The next step is to double each of these goals and then see how they feel (if the advisor doesn’t feel scared, they can double these numbers again!). The advisor can then write down every potential issue that is stopping them from reaching these newly doubled goals, consider whether some might be mindset-related, and brainstorm ways to overcome them in order to ultimately move to a higher level of performance.

While an advisor can go through this exercise alone, they can also consider making an investment in a coach, who can help them sort through the limiting mindsets in their head and expand the goals they think are possible. And while this monetary investment might seem risky during the current economic and market environment, getting in the right headspace could pay off in significant returns when conditions do improve!

(Philip Pearlman | Prime Cuts Newsletter)

As the year comes to a close, many individuals will make New Year’s Resolutions. And after a month where the temptations to eat more and be more sedentary are hard to resist, a common resolution is to exercise more in the coming year. But because this goal is overly broad, creating a more detailed plan to pursue it (which will probably come naturally to many advisors!) can make it more likely that it will become a successful resolution.

To start, you can consider whether you are a beginner on your fitness journey or are more advanced. Those just getting started might want to pursue more modest goals in order to prevent injury and make it more likely that they will succeed (at which point they might be more motivated to pursue loftier targets!), while those who are more advanced can consider more audacious goals (Ran a half marathon this year? Make it a full marathon in 2023!). In addition, it is important to pursue the types of exercise that you will enjoy and will help you reach your fitness goals (e.g., take up a regular swimming practice if you find that more enjoyable than running), as doing so will make it less likely that you will put off training. Next, set a structure for your exercise, for example by setting a target to reach by year-end (perhaps being able to complete a certain number of pull-ups for those emphasizing strength training or a certain distance and time goal for those running, biking, or swimming). Then be sure to write down these targets so that you can remind yourself what you are working towards as you train throughout the year!

In the end, a resolution to exercise more is not just an investment in your wellbeing today, but also one of the best ways to increase your “healthspan”, the number of years you have in good health where you can pursue your desired interests free of chronic diseases and other health-related impairments. And given that financial advisors have a front-row seat to the consequences of shorter or longer healthspans (as they see their clients age and their activities change over time), this could serve as further motivation for taking on a healthier lifestyle in 2023!

(Ryan Holiday)

While setting a goal is relatively easy, creating a plan to reach it is often more difficult. Still more challenging is actually executing the plan, as inevitable bumps in the road spring up. But by creating good habits, you can increase the chances that you will follow through with their plan, and, ultimately, achieve your goal.

First, it is important to recognize that rather than being achieved at once, goals tend to be attained as the result of small changes to habits. For example, if your goal is to read more, you can start by reading one page each day for a week and then increasing the amount to two pages the next week. This will make it more likely that you build a consistent reading habit rather than trying to finish an entire book the first week. In addition, because most goals take a significant amount of time to complete (and often longer than you think), building a foundation of good habits can be more valuable than an initial short burst of progress and a subsequent period of inactivity.

Another way to build more consistent habits is to try to get important things done first thing in the morning, as work and family responsibilities can suck up time later in the day. For instance, if your goal is fitness-related, you could plan to exercise soon after waking up (and perhaps consider putting your workout clothes next to your bed the night before to ease the transition!). Relatedly, creating a habit of going to bed at the same time each night can ensure that you get enough rest to have the energy to take on these most important tasks when you wake up in the morning.

The key point is that there is no single ‘most important’ habit, but rather that by building consistent practices (even seemingly small ones), you can increase your chances of making steady progress towards achieving your goals!

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.