Weekend Reading For Financial Planners (February 28–March 1)

Three-Quarters Of Firms Using AI, Though Many Clients Remain Uncomfortable With The Technology: Surveys

(Leo Almazora | InvestmentNews)

Momentum has been building in the use of Artificial Intelligence (AI) tools amongst financial advisors in recent years, with a growing range of standalone AI software solutions and AI integrations within legacy software products. Nonetheless, given that AI is still an emerging technology, both advisors and their clients appear to continue to have some reservations about its use.

According to Orion’s latest Advisor Wealthtech Survey (which surveyed 571 advisors across industry channels), three-quarters of advisory firms are using AI in some form, with respondents currently seeing the most value in automating administrative work and preparing for client meetings (with fewer advisors leveraging more nascent capabilities, including agentic workflows [6%] and cross-system AI integration [5%]) and identifying compliance monitoring and data management as areas where AI could expand over time. That said, advisors appear to have some concerns around AI adoption, as 49% of respondents cited worries about accuracy, transparency, or client trust as barriers to broader deployment, with 42% expressing uncertainty around compliance and regulation.

Notably, the focus on client trust appears to be well-founded, as a separate survey from research and consulting firm Cerulli Associates found that just 38% of affluent investors are at least somewhat comfortable with AI technology (nearly the same as the 39% who said so in 2024). This level of comfort does vary with age, though, with 60% of those under age 50 expressing comfort with it, but only 42% of those in their 50s and 16% of those over 70 doing so.

Ultimately, the key point is that while AI has the potential to provide greater efficiencies for financial advisors (potentially allowing them to provide a deeper level of client service), possible benefits don’t necessarily come instantly after purchasing a particular product. Rather, ensuring that a particular solution meets the firm’s needs, training advisors and staff to ensure they are comfortable using it well, and clearly explaining to clients (some of whom might be skeptical of their advisor’s use of AI) how the firm is incorporating AI and keeps the client’s data secure.

Many Advisors, Clients Waiting For Other Side To Initiate Legacy Planning Conversations: Report 

(Dinah Wisenberg Brin | ThinkAdvisor)

While estate planning is a core part of the comprehensive planning process, the exact services provided and topics discussed within this area can vary by advisor or firm. Which could lead to confusion on the part of some clients as to whether their advisor can support them in a particular area, especially one (such as considering lifetime gifting options and their ultimate legacy) that might go beyond estate planning documents or tax planning strategies.

According to a survey of more than 400 financial advisors by Wealth.com and The Compound Media, while 46% of clients plan to share some of their wealth in their lifetimes and 55% of those with more than $25 million in assets plan to do so, there appears to be a “legacy planning demand gap”, as 61% of advisors who don’t offer legacy services would consider doing so with stronger client interest and 37% of advisors who are considering adding this service said they’ve hesitated to do so because clients haven’t asked for it (suggesting a possible self-reinforcing feedback loop where some clients might be hesitant to ask about this service because they don’t think their advisor offers it, while advisors might be less incentivized to broach the topic because they don’t think their clients are interested in it). Notably, there do appear to be rewards for initiating this conversation, as the survey found that advisors who arranged regular meetings with all account holders or household partners were more likely to report higher growth or success (e.g., new assets and increased referrals) from legacy planning activities.

In sum, there appear to be returns for advisors who go beyond helping clients establish an estate plan to help them explore (and act on) their legacy goals, including lifetime giving. Though, this survey suggests that taking a proactive approach to doing so might be necessary, as clients might not know how to (or whether it’s appropriate to) start the conversation?

Tax Deferral Proposal In Congress Could Narrow Mutual Funds' Long-Standing Disadvantage

(Steve Randall | InvestmentNews)

While the introduction of mutual funds was a revelation for investors (who were able to access a diversified bundle of stocks or bonds in a single investment), they can come with negative tax implications in the form of taxable capital gains distributions derived from the sale of assets within the fund (but without necessarily a corresponding cash distribution to investors). Which has made mutual funds (particularly actively managed funds that are more likely to have significant capital gains distributions) less competitive amidst the explosive growth of Exchange-Traded Funds (ETFs).

With this disparity in mind, the “Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act”, which has been introduced in congress with bipartisan sponsorship, would allow investors to defer taxation of automatically reinvested capital gains distributions until they sell their mutual fund shares, such that (similar to ETFs) the only typical taxation as an ongoing investor would be due to dividend or interest distributions. According to the Investment Company Institute (an asset management trade group pushing for passage of the legislation), approximately 40 million U.S. households own about $7 trillion in long-term mutual fund assets outside of tax-advantaged accounts, suggesting that many investors (and perhaps advisory firm clients) would stand to benefit from the GROWTH Act if passed.

In the end, while the GROWTH Act’s prospects of becoming law are unclear, its passage could have portfolio management implications for advisors and clients who have (potentially legacy) mutual fund holdings in taxable accounts, perhaps reducing the impetus to sell these funds (as clients would no longer have to worry about annual capital gains distributions) given the potential for realizing significant capital gains on the sale (particularly if a [new] client has held the position for many years). And on a forward-looking basis, the GROWTH Act would substantially reduce the gap in tax treatment between mutual funds and ETFs (which due to their underlying creation/redemption system, also typically do not generate taxable capital gains distributions), potentially providing an opening for mutual funds to regain (or at least slow their loss of assets to) ETFs.

The Hidden (0.92%+) Cost Of Investment Income

(Larry Swedroe | Financial Advisor)

For some investors, seeing a dividend payment hit their investment (or bank) account can be a satisfying experience, as it represents a more tangible return on their investment compared to unrealized capital gains. However, investment income has the potential to serve as a drag on total portfolio performance, especially if an investor’s accounts aren’t tended to regularly.

According to an analysis by asset manager Longview Research Partners, accessing the returns of fixed income and other high-yielding assets without receiving dividends and capital gains distributions (in taxable accounts) could be worth 0.92% annually for a typical high-income investor, with greater upside for those living in states with high income taxes or those who can take advantage of certain income-based tax opportunities. To start, for those who aren’t using income for current consumption, distributions can lead to ‘cash drag’ (i.e., the time it takes to reinvest cash distributions) and additional friction given that most fixed-income funds make monthly distributions. On the tax side of the ledger, the analysis finds that tax deferral (by avoiding distributions) offers additional compound growth benefits, while shifting returns from ordinary income to long-term capital gains treatment provides additional tax savings. Also, eliminating distributions can provide greater flexibility for certain financial planning opportunities, from maximizing space for (partial) Roth conversions to staying below key income tax deduction thresholds or IRMAA “cliffs”.

In sum, advisors can offer their clients significant savings (that could match the advisor’s fee in itself?) by executing an investment strategy that minimizes dividend and other distributions in taxable accounts, perhaps through asset location (i.e., putting high-yielding investments in tax-deferred or tax-exempt accounts) or by seeking out investment vehicles that offer greater efficiency when it comes to income distributions.

How Chasing Yield Can Hamper Total Investment Returns

(David Harrell | Morningstar) 

During times of strong equity market performance, relying on asset appreciation can feel like a comfortable choice for many investors. However, given that downturns are inevitable, some prefer to take an income-focused investment approach that focuses on stocks and funds with high dividend yields, which can be seen as ‘insulating’ performance against a decline in share prices.

To start, some stocks with high dividend yields could turn out to be “dividend traps”, where the performance of the underlying company is unable to support this yield for the long run and has to slash its dividend (which often leads to a drop in its share price as well, creating an even more negative situation). Investors might also investigate whether securities with particularly high yields (sometimes advertised in the double digits) are in reality returning capital beyond the income they earn (thereby eroding shareholder value).

In recent years, covered call ETFs (which typically own stocks from a particular index while selling one-month calls on that index, though single-stock option income ETFs have been created as well) have emerged as popular products for those chasing income thanks to their high yields (sometimes in the 8%-10% range). The downside of these strategies, though, is that the options element is essentially adding a cap on the performance of these funds, meaning that during periods of strong performance for the underlying index (such as seen over the last several years for broad-market indices) they might underperform in terms of total return, despite the attractive yield.

Ultimately, the key point is that while stocks and funds with higher yields aren’t necessarily inferior to their lower-yielding counterparts (though tax treatment of distributions also needs to be taken into account when investing in taxable accounts), the sense of security that can come with high dividend yields can potentially come at the cost of underperformance in terms of total returns. Which presents an opportunity for financial advisors to offer value for their clients by being attentive to concerns about income generation and downside risk protection and helping them craft an investment plan (perhaps incorporating “decision rules” and portfolio rebalancing to manage sequence of return risk?) that best meets their needs.

The 'Yield-Split' Method Of Asset Location To Improve Tax Efficiency Of Index Funds

(Chris Murray | Nerd’s Eye View)

Financial advisors have many ways to add value to clients’ investment portfolios, from selecting an appropriate asset allocation to rebalancing when appropriate. However, because the investor ultimately only gets to spend what they can keep after taxes, another important way advisors can add value to a portfolio is to improve its tax efficiency; after all, if the same returns can be generated in a more tax-efficient manner, in the end, investors will generate more spendable wealth (a form of ‘tax alpha’). And when it comes to individual investors and their typical mix of investment accounts and retirement accounts, one of the best ways to enhance portfolio tax efficiency is through strategic asset location, where the advisor places assets into taxable or tax-advantaged accounts depending on the assets’ specific characteristics.

Implementing an asset location strategy begins with identifying the yield, tax rate, and potential tax drag of each investment in an individual’s portfolio. The investments are then sorted into an asset location priority list based largely on tax efficiency, which can be used to help identify where to house each type of investment, with the least tax-efficient holdings being placed into the most tax-advantaged account. Which means a stock fund with a low yield (and low tax drag) might be placed in a taxable account, whereas a high-yield bond fund (with high tax drag) might be placed in a tax-deferred account, thereby reducing the amount of taxable investment income in the current year.

In addition to using asset location to strategically place investments, advisors could further enhance tax efficiency by replacing the use of broad-based index funds with a corresponding pair of funds – one low-yield tax-efficient fund and another higher-yield, tax-inefficient fund. This process, called “yield splitting”, emulates broad-based index funds in such a way that allows for their component (low- and high-yielding) parts to be invested into separate accounts by tax efficiency.

For example, with a yield-split asset location strategy, rather than investing in a single total-stock-market index fund, an advisor would instead invest in both a low-yield growth index fund and a higher-yield value index fund. The intent would be to maintain a similar return overall, but also to allow the advisor to invest the funds separately, placing the higher-yield value fund in a tax-advantaged account and the low-yield growth fund into a taxable account. Similarly, replacing a total-bond-market fund with a high-yield corporate bond fund invested in a tax-deferred or tax-exempt account and a lower-yielding Treasury bond fund invested in a taxable account would potentially reduce the tax drag while maintaining comparable expected returns.

Over time, asset location can reduce the ongoing tax drag of the portfolio by nearly 10 basis points per year (of hard-dollar tax savings!), and layering the yield split methodology on top can double the asset location tax alpha by another 10 basis points (to a total of 20 bps). Cumulatively, this can add up to a 6% increase in long-term wealth accumulation over an investor’s multi-decade time horizon, simply by restructuring (i.e., yield-splitting) their core index holdings into the component parts for better asset location.

Ultimately, the key point is that while asset location is already a beneficial strategy to create tax alpha, the tax efficiency of a portfolio could be further improved upon with a yield-splitting approach to allow for even more-finely-tuned asset location implementation… all while maintaining a substantively identical overall risk/return profile for the portfolio as a whole. This not only leads to potentially significant tax savings for clients – particularly those who have the capacity for both tax-advantaged and taxable account holdings, and who pay a high Federal tax rate (and/or who live in states with high tax rates) – but also provides a tangible way for the advisor to demonstrate their own value!

Helping Clients Close The "Bank Of Mom And Dad" 

(Martha White | The New York Times)

When their children are growing up, parents naturally take on the costs of raising them, from providing the basics of food and shelter to other expenses like entertainment and activities. While the transition to adulthood and greater independence often means that children begin to generate their own income and handle their expenses, some continue to turn to their parents for regular financial support.

While it can be hard for some parents to resist the urge to support their children (even after they are well into adulthood), doing so can potentially create a sense of dependency and could lead to a lack of initiative on the child’s part. Further, depending on the level of support being provided and the parents’ own circumstances, this regular drain on cash flow could threaten the parents’ financial plans for the future. In fact, a survey by the trade group LIMRA found that 17% of middle-aged respondents (who had at least $150,000 in investible assets) said they supported children 26 or older, with more than half of this sub-group indicating that this financial support affects their own retirement savings.

Notably, this situation can be frustrating for financial advisors, who might see their clients heading down a perilous financial path if they don’t make a change to their support for their children. With this in mind, one way to potentially get their attention is to show their projected cash flow over the course of their retirements if they continue providing financial support and if they cut it off, which could help the clients see the potentially dramatic effects of such a recurring expense. For clients who are interested in reducing or cutting off financial support for their adult children, advisors can serve as helpful resources as well, from helping them create a plan that will stick (e.g., a scheduled stepdown of support and putting it in writing to make it harder to backtrack) to perhaps playing the role of the child to help the clients practice what can be a difficult conversation.

In sum, while parents typically have good intentions when it comes to financially supporting adult children, doing so can potentially be detrimental for both the parents’ financial situation and the children’s transition to independence. Which can put financial advisors in a helpful third-party role to help clients better understand the effects of their actions and take the actions needed to put themselves on a better track!

Why Clients Often Aren't Giving Enough Money To Their Kids And Grandkids

(Elliott Appel | Kindness Financial Planning)

While retirees with more limited means might need to be careful with their spending to avoid depleting their assets before death (perhaps leaving anything left over to family or charity), certain wealthier individuals will have amassed more assets than could reasonably be spent given their lifestyles (and even accounting for contingencies such as long-term care needs). Nonetheless, some individuals in the latter group might be reluctant to gift during their lifetimes, even if they plan to leave assets to these same individuals at their deaths.

Notably, lifetime gifting can often be more impactful than leaving assets at death. For instance, a child or grandchild would likely benefit more from getting support to buy a home in their 20s or 30s (when they might have relatively little wealth and tighter cash flow) than from receiving an inheritance down the line when they might have built up sufficient assets themselves (while clients might understand for themselves that the same dollar is worth more today than it is in the future, they might not apply it to their kids as well!). While some parents or grandparents might choose specific avenues of support (e.g., paying for tuition, childcare, or a family vacation), giving unrestricted cash can sometimes be more valuable both because it allows the recipient to choose how it’s used, demonstrates trust between the person making the gift and the recipient, and can serve as a ‘trial’ for receiving a larger inheritance down the line (though unrestricted cash might not be the best option if the recipient might use it to pay for an addiction or other detrimental activity).

In addition, lifetime gifting can come with financial benefits as well, including possibly keeping the givers’ estate under federal and/or state estate tax thresholds (which can be relatively low in certain states!) without eating into the exemption amount (if gifts remain below the annual gift tax exclusion). Parents reluctant to give cash gifts during their lifetimes could also consider giving their heirs the ‘gift’ of Roth conversions (as the recipients will not owe taxes on this portion of their inheritance).

Ultimately, the key point is that while wealthy clients are often focused on the assets they plan to leave to their children and grandchildren at their deaths, in reality they can often make a greater impact through lifetime gifting (which comes with the bonus of being able to see the recipients benefit from their generosity!). Which could be a helpful conversation point for advisors who have clients whose wealth allows them to give more during their lives with little impact on the probability of success of their financial plans.

Intra-Family Loans As A Planning Tool

(Assunta (Susie) McLane | Wealth Management)

Helping a child (or grandchild) purchase their first home (or making another major purchase) is a common goal of many financial advisory clients who are parents and grandparents. But when supporting a child or grandchild, it is important to keep in mind the Internal Revenue Code’s annual gift tax exclusion limit ($19,000 in 2026) to avoid using any of the giver’s lifetime gift tax exemption, which could potentially increase future estate tax exposure.

For family members who want to make a larger contribution to a home purchase without creating gift tax consequences, an alternative option is to finance the home through an intra-family loan. The key to intra-family lending is that, for the loan to be honored by the IRS (i.e., not be considered a gift), it must be treated as a bona fide loan, including loan terms at a “market” rate of interest that should be at least as high as the so-called “Applicable Federal Rates” (AFRs), which are published by the IRS in monthly Revenue Rulings (while the IRS publishes different AFRs for a range of purposes, the rates for intra-family loans can be found in Table 1 of each Revenue Ruling document) and include rates for short-term (3 years or fewer), medium-term (more than 3 years but fewer than 9 years) and long-term (9 years or longer) loans.

What can make an intra-family loan particularly attractive for the borrower is that the applicable AFR is typically much lower than commercial mortgage rates (often in the 150-200 basis point range). In addition to providing the borrower with significant interest-rate savings (and, notably, the intra-family mortgage interest is an eligible itemized deduction for the borrower as long as it is used to purchase a residence and the loan is properly recorded), the loan can serve as a source of income for the family member lending the money, as the AFR could exceed the rate they would receive on certificates of deposit or other cash instruments.

At the same time, intra-family loans come with a range of risks, particularly for the lender. For instance, these loans are significantly less liquid than other cash instruments, so an advisor can help clients assess whether making such a loan would make sense for their overall income needs. In addition, while commercial mortgage loans typically go through a thorough underwriting process, an intra-family lender will have to assess the borrower’s credit risk on their own (and accept the potential default risk, which can have gift tax consequences). Relatedly, an intra-family loan can create interpersonal tension as well, particularly if the borrower becomes late on payments.

Altogether, advisors can play an important role in helping clients consider the potential benefits and risks of an intra-family mortgage (and perhaps facilitating a family conversation to set expectations and remove ambiguity), whether they are first-time homebuyers looking to save on interest costs or have significant assets looking to support a family member’s home purchase (and receive some interest income in the process). In addition, an advisor can support clients by referring them to a suitable ‘middle man’ (e.g., National Family Mortgage) to ensure the loan is handled correctly, from drafting up the promissory note between the parties to managing loan payments, so that they do not run afoul of gift tax concerns!

The Empathy Delusion: Why Many Financial Advisors May Be Making The Riskiest Bet Of Their Careers

(Dan Haylett | LinkedIn)

In recent years, there have been no shortage of news stories about how AI could ‘disrupt’ various industries (and employment within them), with financial advice being no exception. A common rebuttal from many professionals (including some financial advisors), though, is that their current (and future) clients will prioritize having a human on their side and will be resistant to working primarily with an AI tool (even if it might be less expensive and/or easier to access).

For instance, financial advisors might point to the emergence of robo-advisors in the last decade and speculation at the time that they could put some advisors out of business (given that they came at a price much less than most human advisors), which largely didn’t come to fruition. Also, some industry observers suggest that AI will actually make financial advisors more effective by helping them save time on back-office work that can then be applied to client-facing activities. Other considerations include human advisors’ ability to build trust and engage in empathy with clients as well as the challenges consumer-facing AI-based advisors might have clearing regulatory hurdles to manage consumers’ assets.

Haylett, however, suggests that these hypotheses might not be as solid as advisors might assume when it comes to advances in AI capabilities. For instance, while robo-advisors focused primarily on asset allocation and tax-loss harvesting, AI tools have the potential to engage in a much wider spectrum of planning activities (e.g., reading clients’ tax and estate documents and suggesting action items). Next, while advisor-focused AI tools do have the potential to increase advisors’ client-facing time, they could cover an increasing scope of the planning process (suggesting that if a consumer-facing tool were available, some might question why they need to work with a [likely more expensive] human advisor). Also, as they have improved, AI tools have become more adept at conversing with users (with younger adults showing a willingness to use AI chatbots for mental health advice), suggesting that human advisors’ ability to respond to client questions and concerns might not be the ‘moat’ they might assume. Also, regulators might look favorably on an AI tool that has embedded client-centric tendencies compared to a human advisor that might have messier incentives and conflicts of interest.

In a world where consumers can access high-quality financial plans (and 24/7 responsiveness) from AI programs at a significantly lower cost (and potentially better performance at performing planning analyses and crafting recommendations than the typical human advisor), he suggests that the value of human advisors would come in orchestrating AI tools, leaning into behavioral strategy (i.e., managing the gap between what a client should do and what they actually do) and leaning into life design for clients rather than functions that could be performed well by AI tools. Also, advisors in this world could end up serving fewer clients at a deeper level (while AI tools could reduce time spent on certain tasks this could be exceeded by additional time spent getting to know clients’ situations and helping them design the lives they seek).

Altogether, the world that Haylett describes (which he suggests could arrive within the next few years) doesn’t necessarily mean the end of financial planning as a profession, but rather a rethinking of the value that human advisors can provide (and what consumers will be willing to pay for). Which suggests that advisors might not only consider how they might incorporate AI-powered tools in their practices today, but also whether they’re offering the level of service that clients might seek from human advisors in the future?

AI And The Economics Of The Human Touch

(Adam Ozimek | Agglomerations)

Of the many potential impacts of AI, one of the most disruptive would be the potential shock it could send through the workforce, particularly if the need for certain occupations or roles is reduced sharply (or eliminated entirely). This idea has been fueled by many industry leaders and other observers, leading workers to question whether their job and skills might be in the crosshairs.

However, Ozimek argues that there are many jobs where consumers prefer a ‘human touch’, even if a technological substitute is available. For instance, the invention of the phonograph and the player piano in the late 1800s meant that going to a live music event was no longer necessary to enjoy a particular composition. However, this didn’t lead to the end of live musical performances, with many consumers willing to spend hundreds of dollars on tickets for certain shows today (even if the live recording itself is available). More recently, while the advent of the internet age meant that consumers can buy just about any good or service they want to online, sales remains a common job category (even if the number of individuals in certain fields, such as travel agents, might have decreased over time).

Ozimek suggests that the human touch is a ‘normal good’, or one where the demand for it increases as income rises. For instance, high-end restaurants are typically more heavily staffed than their less-expensive counterparts and individuals might seek out an expert for guidance before buying an expensive watch. With this in mind, advances in AI could mean that while certain jobs or roles could be reduced (particularly in areas where one’s humanness doesn’t necessarily add significant value), those with the financial means could still be willing to pay a premium (over the cost of an AI solution) for experiences where a human is able to add value.

In sum, while certain occupations have seen a decline in the number of workers in it (whether outright or on a per capita basis) amidst technological advances, few have seen outright elimination (sorry elevator operators) and many that have a technological substitute continue to thrive thanks to the desire amongst consumers for interacting with a human (and perhaps the “trust penalty” tech solutions can face). Which could be supportive for financial advisors in particular, as relatively affluent clients might continue to seek a human advisor (particularly if they are seen as providing a high level of service and care) even if AI ‘advisors’ become available (though perhaps the latter could provide a higher level of planning to relatively less affluent consumers who might have a harder time accessing it today?).

The Dangers Of “Vibe Reporting” About AI

(Cal Newport)

When perusing the news, rarely a week goes by without seeing headlines that say a company has laid off a major number of employees and suggest that AI was the cause. Which can make it seem like AI-related job losses are currently heavy and could snowball into massive levels of unemployment over time.

Newport suggests, however, that many of these headlines and stories are engaging in what he calls “vibe reporting”, where events (e.g., layoffs) are interpreted in a way (e.g., they came amidst greater use of AI) to create a scary-sounding headline that draws in readers without explicitly proving a causal connection between the two. For instance, Amazon recently made headlines for laying off 16,000 workers and some publications linked this to AI adoption, for example by using a quote from the company’s CEO noting that jobs will be impacted by AI over time, leaving readers with the impression that AI adoption led to the layoffs. The reality, though, (per a blog post by the company) was that the layoffs are better attributed to Amazon’s desire to trim layers of management bureaucracy (which built up amidst a pandemic-era hiring boom). So while Amazon has also built up its AI capabilities during the past few years, its AI adoption doesn’t appear to be the cause of the recent round of layoffs.

In the end, while AI has the potential to be disruptive to the labor market, given the incentive for publications to publish splashy or scary headlines to draw in the attention of readers it’s up to consumers of news to go a layer deeper to understand whether layoffs or other negative changes are actually caused by AI or are merely associated with the “vibe” that AI eliminated the jobs.

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