Weekend Reading For Financial Planners (August 16–17)

Microsoft Report Suggests AI Can Take On Many Advisor Duties, Though Investors Continue To Favor Human Advisors

(Diana Britton | WealthManagement)

Since ChatGPT burst onto the scene in late 2022, many financial advisors have been curious about the potential use cases for it and other generative Artificial Intelligence (AI) tools. At the same time, advancements in AI have led to questions as to whether consumers might turn away from human financial advisors and towards AI tools to help them manage their finances.

A report by Microsoft used anonymized user data from its Copilot AI tool to determine "AI Applicability Scores" for a variety of occupations based on whether Copilot users were successfully performing work activities associated with that occupation and whether the AI tool was able to cover a broad share of the work activity associated with that field. Occupations with the highest scores (i.e., whose functions could be most likely to be replaced by AI) included translators and historians, while the lowest scores went to dredge operators and orderlies).

Financial advisors had the 30th-highest score on this measure, putting it in the upper tier of occupations in terms of AI applicability in Microsoft's analysis. However, while it's possible that consumers will use AI for functions that financial advisors also perform (e.g., researching tax laws or investments), a recent survey suggests that AI tools continue to suffer from a "trust penalty" when it comes to more complex tasks. For instance, Northwestern Mutual's 2025 Planning and Progress Study recently found that 56% of U.S. adults surveyed trust human advisors more than AI for creating a retirement plan (while only 13% trust AI more), with similar results for other areas including making asset allocation decisions (53% versus 15%) and creating a savings plan (53% versus 14%).

Which suggests that at the most, AI may fulfill only some of the functions that financial advisors fulfill… in turn implying that the end point of AI is more likely to be financial advisors using the tools themselves to expedite their own work, rather than being replaced by the tools (akin to how the "robo" threat also played out). In fact, the Northwestern Study also found that 47% of respondents said they would prefer to work with a human financial advisor who understands and uses AI to help their clients build financial security (suggesting that taking a 'cyborg approach' of leveraging the unique strengths of humans and AI tools into a practice could be an effective strategy?).

In sum, it appears that while many of the functions performed by a financial advisor could theoretically be done with the assistance of an AI tool, consumers are (at least so far) not convinced that relying on AI is a superior approach, and that AI may more be a tool for advisors than a replacement thereof. Which reflects similar research finding that while investors are open to leveraging technology for certain functions, they still seek out human advisors for what they do best (from making sure the clients feel understood and to work in the clients' best interest by providing financial advice that incorporates the full scope of their goals and concerns).

Morningstar's Latest "Mind The Gap" Report Indicates Investors Miss Out On 15% Of Fund Total Returns

(David Bodamer | WealthManagement)

The increasing amount of available financial 'news' and commentary, as well as a dramatic reduction in the cost of trading in and out of mutual funds and ETFs, can increase the temptation for investors to time the market and trade in and out of investments. Which in turn can exacerbate the so-called "behavior gap", where investors tend to underperform the returns of the underlying funds they invest in (because they often buy after the fund has risen in value and sell when it falls).

The latest edition of Morningstar's annual "Mind the Gap" report suggests that this trend is still prevalent, with the average dollar invested in mutual funds and ETFs earning around 7.0% per year for the decade ending December 31, 2024, compared to overall performance of 8.2% for these funds (with the 1.2 percentage point gap being roughly in line with previous editions of the report). Notably, this 'gap' varies by fund type, with taxable-bond and municipal-bond fund investors capturing 1.2% returns out of 2.2% total returns (losing almost half of available returns), but those in allocation funds (e.g., target-date retirement funds) achieving 6.3% per year dollar-weighted returns compared with 6.5% for the funds' aggregate return (perhaps because investors hold these latter funds for long-term investment objectives). Other characteristics that led to a larger 'gap' included funds that had significant tracking error (in particular, those that underperformed their benchmarks) and those with more volatile cash flows.

Altogether, Morningstar's research (though there are critics of its methodology) into the "behavior gap" suggests a potentially valuable role for financial advisors (that could more than make up for their fees alone in some cases?) in helping clients 'stay the course' with their investment decisions (though 'managing clients' behavior' might not be a particularly effective selling point for advisors) in part by connecting their portfolio design with their goals.

Regulators Aren't Finished Probing Firms' Off-Channel Communications

(Tracey Longo | Financial Advisor)

While texting has become a ubiquitous communication medium in modern life, one potential hangup for advisors in adopting it for client communication is that it – like other digital communications channels – falls under the umbrella of "written communication" (or advertising in the case of communicating with prospects), and the regulations that oblige advisors to retain and archive such communications. Which can be a challenge, because unlike email and social media communications that are generally stored on decentralized servers and cloud networks that compliance can access and oversee directly, text messages typically go directly to an advisor's personal device, are there stored locally, and can be easily deleted – a potential nightmare for compliance departments needing to oversee the communications activities of their advisors.

The use of off-channel communications has led to more than 100 cases being brought by the Securities and Exchange Commission, which have typically involved the use of unapproved platforms such as WhatsApp and iMessage (as well as personal email). Amidst this backdrop, some firms have sought out compliant electronic instant messaging platforms that keep messages secure and archive them properly. However, a July sanction by FINRA of a broker-dealer who was using one of these 'approved' platforms suggests that firms have more to do than "set it and forget it". According to an analysis by attorneys at Eversheds Sutherland, the firm was fined $100,000 for failing to verify that its employees' devices were connected and remained connecting to the archiving service, to verify that employees' messages were being captured by the archiving service, or describe in its written supervisory procedures how principals at the firm should verify that employees' devices were connected and remained connected to the archiving service. This led to an unknown number of business-related messages not being preserved or reviewed by the firm.

Ultimately, the key point is that while a variety of software tools can facilitate instant messaging between advisors and clients in a compliant way, this latest sanction indicates that adopting such a tool doesn't absolve a firm from ensuring that it's being used comprehensively and, more broadly, that off-channel communications remain an area of interest to regulators (and perhaps serve as a reminder to firms to ensure all of their team members are on the same page when it comes to policies surrounding texting?).

Why Americans Might Not See Relief From Rising Insurance Costs Anytime Soon

(Andrew Welsch | Barron's)

Financial planning clients often have a range of potential property and casualty insurance exposures, from their home(s) to their vehicles to other personal property such as boats. And as advisors and their clients will likely be aware, insuring these items has become more expensive in recent years, particularly for those in certain parts of the country.

According to data from the Bank of America Institute (which used internal bank customer data to track insurance payments), median auto and home insurance payments rose 6% during the 12 months that ended May 31, well outpacing the broader inflation rate. Notably, this jump is on top of increased costs experienced during the previous few years as well, with median premium payments up by more than 40% in total since June 2020. Looking specifically at homeowners insurance, Bankrate found a national average cost of $2,341 for $300,000 of dwelling coverage, though rates can vary significantly by state (e.g., the average premium in Florida was $5,409, while the average for Vermont was $839).

For clients weary of additional premium hikes, the future trajectory of rates is uncertain. While goods inflation has slowed from its peak (i.e., prices are increasing at a decreasing rate, not necessarily decreasing in absolute terms), some observers are concerned that tariffs might lead to higher prices on housing and automotive inputs that could drive replacement costs (and insurance premiums) higher. Additionally, clients living in areas prone to natural disasters (e.g., hurricanes in Florida or wildfires in the West), who have been hit particularly hard by premium increases in recent years (or, at the extreme, loss of coverage as insurers pull out of certain risk-prone areas), might not see relief if the pace of these events remains high (with 23 disasters with costs exceeding $1 billion occurring during the past 5 years).

In the end, while insurance has long been a key budget item for financial planning clients, these costs have increased well beyond the broader inflation rate in recent years, particularly for those in disaster-prone areas. Which could offer opportunities for advisors to support them, whether by modeling different trajectories for these costs (e.g., stress testing their plan by using a higher inflation assumptions than what's used for other expenses), helping them shop for less-expensive coverage that still meets their needs, or (for those clients considering making a move) showing them how their insurance costs might change if they do so.

Disability Insurance: A Frequent Client Blind Spot

(Carroll, Hadjian, Collier, and McCoy | Journal of Financial Planning)

When asking a working-age client about their most valuable asset, they might mention their home or an investment account. However, in reality, many of these clients' most valuable asset is their ability to earn income in the years and decades ahead. And while this idea is often discussed in the context of purchasing appropriate life insurance, maintaining adequate disability insurance coverage is sometimes overlooked by clients.

The authors argue that despite its expense (particularly for individual policies), disability insurance can be attractive given the combined chances of a disabling event (with a 2021 review by the Council for Disability Awareness [an insurance trade group] finding that the chances of a healthy 35-year-old experiencing a disability before retirement age are approximately one in four) and the potential impact of a long-term disability on one's income (particularly for high earners). In addition to obtaining disability coverage in the first place, different features can greatly impact the attractiveness of these policies. For instance, own-occupation policies (which state that if the client cannot perform every duty associated with their own occupation, the policy will pay benefits) are more likely to pay out benefits (though tend to have higher premiums) than any-occupation policies (which only pay if the client cannot perform the duties of any occupation for which they are qualified based on education, training, or experience).

In addition to helping clients evaluate policy terms, advisors can offer support by helping clients determine an appropriate amount of coverage based on their needs. For instance, while a client's employer might offer group coverage, it might not be sufficient to cover the lost income from an extended period of disability, perhaps calling for research into individual disability policies (in addition, benefits from any employer-paid coverage will be taxable, which could reduce the after-tax value of the disability benefits). Also, it's important to determine the benefit that will actually be paid on a particular policy; for instance, group disability coverage is frequently based on salary (and not bonuses or commissions) and can sometimes include a cap (which, for high-income clients, could be much lower than the standard 60% of salary often covered by these policies).

Ultimately, the key point is that because disability coverage is often overlooked by clients, advisors can offer significant value not only by highlighting the potential value of this coverage and determining the potential need for a given client (including exploring the cost/benefit tradeoff), but also digging into the specific terms of a given policy to ensure that they fit the client's needs.

A Framework For Helping Clients Determine The 'Right' Amount Of Insurance For Their Needs

(Victor Haghani and James White | Advisor Perspectives)

While a client might intuitively understand the need for different insurance policies, choosing the 'right' balance among premiums, deductibles, and coverage levels can be a challenging endeavor and an area where financial advisors can offer value.

Haghani and White highlight the potential benefits of an "expected utility" framework for evaluating financial decisions in the face of uncertainty. For instance, if a client with a $2 million net worth owned a $1 million home that had a 0.5% chance of total loss in a given year, a $1 million x 0.005 = $5,000 premium would be actuarially fair. While buying such a policy wouldn't enhance the client's risk-adjusted wealth (as the premium represents the exact value of the asset times the chances it will need to be replaced), the client has significantly reduced its risk of needing to replace an asset that represents 50% of its net worth.

However, because insurance premiums also include a margin for the issuing company (covering expenses, commissions, and profit), the decision of whether (and how much) to insure can become trickier. Given this fact, the authors (who created a calculator to help address this issue) suggest that advisors and their clients take into account several factors when making the decision, including the amount of the client's total wealth represented by the asset (e.g., it will likely make more sense to insure against loss to a home rather than a dishwasher), the client's risk tolerance (with a higher risk tolerance perhaps leading clients to self-insure against certain potential exposures), and their ability to cover different levels of loss (which could call for increasing the deductible on the policy, leading to lower premiums).

In sum, while clients often have a distaste for paying insurance premiums in general (as they might never receive a payout on a particular policy), advisors can help them strike a balance that reflects their most significant exposures, risk tolerance, and ability to absorb losses in order to avoid a major loss that would be severely detrimental to their financial goals while not paying for coverage that exceeds their unique needs.

RIAs Fear Litigation, E&O Hikes, Fiduciary Issues With Private Assets In 401(k)s

(Tracey Longo | Financial Advisor)

President Trump last week signed an Executive Order that intends to ease access to private equity, real estate, cryptocurrencies, and other alternative assets in retirement plans subject to the Employee Retirement Income Security Act (ERISA). The order directs the Labor Department to clarify the government's position on the fiduciary responsibilities associated with offering asset allocation funds that include alternative holdings (guidance which will be particularly notable for financial advisors who offer business-owner clients retirement plan fiduciary services). The order also directs the Secretary of Labor to coordinate with the Treasury Department, the Securities and Exchange Commission (SEC), and other Federal regulators to determine whether rule changes are necessary to assist the effort (the SEC is also asked to facilitate access to alternative assets for participant-directed retirement plans).

Proponents of easing access to alternative investments in workplace retirement plans suggest that such a move would allow a broader range of investors to access investments that have largely been used by wealthier and institutional investors and potentially provide greater diversification for retirement savings by giving investors access to private companies. However, some industry observers are concerned that the growth of private assets in 401(k) plans could raise legal exposures (perhaps leading to higher Errors & Omissions insurance premiums) for RIAs advising on 401(k) plans for business-owner clients, as high-fee funds that underperform could draw class-action lawsuits. An added challenge could be the inclusion of alternative assets within target retirement date and other multi-asset funds, where it might not be obvious that the fund includes such assets. Which could ultimately create more complex investment options and increase the challenge to advisors on 401(k) plans looking to fulfill their fiduciary responsibilities to their clients.

In the end, while the process of adding alternative investments to 401(k) plan offerings (and the final rules adopted by key regulators) will play out over the coming months, this latest order suggests that the momentum towards expanding the reach of these investments for retail investors continues. Which not only could lead to fresh questions from prospective and current clients as to whether they might be a good fit for their portfolios but also increased challenges for RIAs that advise on business-owner client 401(k) plans (whether in conducting due diligence on funds offered in the plan and/or in mitigating potential legal exposures).

How Clients Could Inadvertently End Up With Private Equity Exposure In Their 401(k)s

(Joshua Hemmert | Barron's)

In an effort to increase participation in workplace retirement plans (and to have workers invest in assets appropriate for their projected retirement age), a number of companies have instituted 'auto-enrollment' policies that automatically enroll employees in the workplace retirement plan, often with a target-date retirement fund selected as the default investment (and while employees can choose to opt-out, data suggest that such programs have led to higher participation in workplace plans).

While target-date retirement funds have traditionally included allocations to publicly traded equities and bonds, the recent push for greater investor access to private market funds could lead to private equity funds being included in the asset mix of target-date funds. Hemmert (who was part of the team that launched JPMorgan's first target-date funds) argues that the risk-reward, liquidity, and volatility characteristics of private equity do not necessarily make it an attractive addition to these funds, particularly when the inclusion of such private funds (which typically have higher fees than the index funds that often compose target-date funds) could increase the overall expense ratio of investors in target-date funds. Further, investors in their company's default target-date option might not realize they've added this exposure (even if it does fit their investment objectives).

Altogether, while a financial advisor might not necessarily choose a target-date fund for a client (instead selecting their own mix of investments from available options), they might find that many new clients (and perhaps participants in their firm's own 401(k) plan or the plans of business-owner clients they advise on) are invested in these funds and could in the near future be exposed to different private market investments (which could also find their way into model portfolios or allocation funds the advisor uses themselves for their clients), presenting an opportunity to determine whether such an investment mix is appropriate for their particular situation and, if not, suggesting an alternative asset allocation.

Why Be An LP When You Can Be A GP?

(Josh Brown)

Index investing has become a popular approach for advisors and retail investors alike, as these funds frequently beat their actively managed counterparts in terms of returns while charging lower fees in the process. Which creates an issue for asset managers looking to earn more fund fee revenue than they can get from single-digit-basis-point index fund fees.

An emerging opportunity for these companies is to create funds consisting of private assets and marketing them to retail investors (and the advisors that serve them). Traditionally the purview of institutional investors and the wealthiest individual investors, these companies can promote them to retail investors as an opportunity to tap into assets unavailable in an index fund consisting of only publicly traded stocks (and to advisors as a way to diversify their clients' portfolios). However, Brown notes that the challenges of selecting traditional actively managed funds are magnified when it comes to evaluating private market funds (given characteristics of the latter, including relative illiquidity and the challenge of doing due diligence on underlying investments). With this in mind, he notes that advisors and investors considering exposure to private market investments might instead just buy the shares of the publicly traded companies that sponsor these funds. By purchasing the shares of these companies, they can gain indirect exposure to private markets (by being an 'owner' of the fees generated by private market funds) while benefiting from the relative simplicity (and liquidity) of purchasing a publicly traded company.

Ultimately, the key point is that, given the complexity of evaluating and investing in private market funds, such investments aren't the only way to gain exposure to private markets. Which could be an attractive option for certain advisors and investors (though many might decide to stick with their current index fund allocations and avoid any tilt towards private markets in the first place!).

4 Ways To Retire Abroad, From Extended Visits To Golden Visas

(Susan Milligan | AARP)

Retirement often serves as an opportunity for individuals to move elsewhere, as they are no longer tied to a certain location to be near their job. Often, this means moving to warmer climates or closer to children. However, some retirees choose to make an even bigger jump and move to another country, whether to immerse themselves in a foreign culture and/or to take advantage of a lower cost of living.

Notably, there are several ways to 'retire' abroad, which don't necessarily involve moving full-time. To start, some retirees might choose to spend an extended period in a certain country (perhaps three months) to test the waters before considering a full-time move (or do three-month stays in multiple countries each year to expand their reach). For instance, in much of Europe and Latin America, Americans can stay up to 90 days during any 180-day period and up to 180 days total in a year on a routine tourist visa. For those who have retired from full-time work but want to continue to work remotely (perhaps part time), digital nomad visas (which allow an individual to live and work remotely in another country, often for up to 12 months) are available in more than 70 countries.

For those looking to make a lengthier move abroad, several countries offer "non-lucrative" or "non-working" visas for retirees or others who don't intend to work while living there. Qualification for these often depends on being able to demonstrate the ability to support oneself financially as well as proof of health insurance. Another option for more than 100 countries is a "golden visa", which confers legal residency status after making an (often six-figure) investment in the host country (e.g., buying shares in a business, investing in a stock or bond fund, or, in some cases, purchasing real estate).

In sum, there are a variety of options for individuals considering spending extended time abroad in retirement (though there are many other logistical considerations for those making a move, from considering health care and financial management options to how to handle Social Security benefits). Which makes financial advisors well-positioned to ensure their clients are prepared financially for such a goal and that they have thought through the full implications of moving abroad.

The Ups And Downs Of Life As A Digital Nomad

(Emily Bratt | The Guardian)

Whereas work has traditionally been performed in an office, factory, or other centralized location, advancements in technology have made it increasingly feasible to work remotely. And while remote work is often performed in one's home, some workers have taken this opportunity to the extreme by becoming "digital nomads" who work while traveling the world.

At first glance, such a life might seek glamorous, whether it's the ability to complete the workday and see the sunset on an exotic beach or be able to check out several different countries without having to take a PTO day. And for those used to living in cities with a high cost of living, moving amongst lower cost of living cities and countries can potentially save money as well. On the other hand, many digital nomads have found challenges with this life, both in practical terms (e.g., managing operating from different time zones than a home office, handling medical issues in new countries) and in terms of psychological challenges (e.g., difficulty maintaining long-term relationships, feelings of groundlessness). Others found that while they initially embarked on their digital nomad adventures because of their love of travel and visiting new locations, the time spent on logistics (and daily work) ate into the time available to enjoy their new locales (and often left them exhausted).

Altogether, while the digital nomad life might seem attractive from the outside, moving from location to location frequently can bring its own set of challenges. Which offers financial advisors the opportunity to support clients considering such a move not only by helping them plan for it financially, but also by exploring other options (e.g., an unpaid sabbatical) that might allow them to scratch their long-term travel itch with potentially less stress along the way!

Cross-Border Financial Planning: Issues When Advising International Clients

(Ashley Murphy | Nerd's Eye View)

As the growing international economy and prevalence of virtual communication continue to flatten the world, millions of individuals are finding it easier to cross national borders, leaving their native countries for opportunities to work and live abroad, whether going from the US to other countries or coming from other countries to work and live in the US. Yet crossing international borders introduces a number of unique issues and challenges, from financial reporting obligations to tax complexities, moving money across currencies to moving retirement benefits between countries. Which on the one hand creates a unique opportunity for financial planners to specialize in the needs of cross-border clients to differentiate themselves, but also increases the burden of what financial advisors must learn to be able to effectively provide advice to an international clientele.

The types of services cross-border planning clients require from financial advisors can often be categorized by their particular stage of transition with respect to crossing national borders. These stages include 1) Pre-Move, 2) Acclimation, 3) Global Integration, and 4) Retirement and Independence.  Each comes with unique planning issues, and by identifying the specific transition stage that applies to their client, financial advisors can more readily pinpoint their international clients' current needs and anticipate what they may require in the future. For example, clients in the Pre-Move stage may need help with immigration logistics and pre-move planning, banking and cash management, and ironing out family issues (e.g., identifying education standards for children, work options for spouses and other family members, etc.), whereas clients in the Acclimation stage may need help with worldwide tax questions and establishing or transitioning retirement plans. Clients in the Global Integration stage might need more help with longer-term immigration planning and coordinating and allocating their worldwide assets, and clients in the last retirement and independence stage may have the 'usual' planning needs (e.g., retirement and estate planning), but advisors will need to understand the international aspects of these areas to help their clients effectively.

Cross-border planning clients also have unique considerations that financial advisors must take into account when helping them set their financial planning goals. For nearly every international client, advisors should know how long the client expects to stay in their destination country; the US and foreign tax implications of all income sources, including any capital gains; the protocols in place for foreign investment and performance reporting; and the account transfers that the client will need to make, along with the logistical issues that may arise from those transfers (especially when these transfers are between different countries).

In addition to helping clients identify goals, advisors also must be familiar with the resources and services that their clients will need to make progress toward and realize their goals. For instance, advisors should be able to identify appropriate products (e.g., life insurance, disability insurance, investment funds, etc.), suitable broker-dealers or custodians to service their clients (as many won't accept international clients, due to the additional compliance burdens), and competent experts to step in when specialized services are needed (e.g., international tax planning professionals and estate planning attorneys).

Ultimately, the key point is that while advisors with international and cross-border planning clients need to understand a wide range of rules applicable to the other countries in which their clients reside and be able to access services and products that their clients may need, there are resources and specialists available to the advisor that can help them serve their clients effectively. And because of the growing community of expats around the globe, financial advisors may find it worthwhile to establish competency in these cross-border financial planning issues to help their international clients…no matter where they may live!

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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.