Weekend Reading For Financial Planners (March 14–15)

Advisor AI Use Jumps, While CRMs Lead Overall Market Adoption: T3 Survey

(Alec Rich | Citywire RIA)

The advisor technology space is ever-changing, as tracked on our Kitces AdvisorTech Map, with new entrants within software categories emerging each year (in addition to the emergence of new categories altogether). These trends have been clear in the past few years, with the rapid growth of Artificial Intelligence (AI)-powered solutions, whether separate offerings or new features built within legacy software, which has the potential to shake up the AdvisorTech landscape… at least if advisors get comfortable enough to trust and actually use AI-driven solutions.

According to the latest annual T3/Inside Information Software Survey (which received responses from 2,906 advisors, 95% of which work at fee-only RIAs or dually registered firms), advisor AI use rose over the past year, with 52.2% of respondents using AI search and generative language functionality, up from 41.8% the previous year (with ChatGPT, Microsoft Copilot, and Google Gemini leading the way in terms of adoption), and, separately, 42.9% of those surveyed reporting using AI notetaking solutions (which is impressive given that this barely existed just a few years ago).

Individual tools within the notetaking tools category saw their market shares spike during the past year, with category leaders Jump growing from 8.4% to 22.7% and Zocks climbing from 1.7% to 10.2%. Advisors appear to be largely pleased with these solutions, with Jump and Zocks receiving average ratings of 8.55 and 8.35, respectively, on a 10-point scale (the leader in satisfaction was Mili, which had 1.2% market share), all of which lead more 'generic' solutions like Zoom's AI companion that had 6.4% market share but a rating of only 7.66.

The survey also asked advisors their impressions of AI and how it might impact their businesses in the future. Respondents were most confident that AI would raise their back-office efficiency (an average of 7.72 on a 10-point scale) and front-office efficiency (6.45), with streamlining or automating client onboarding functions seeing the greatest predicted impact (6.93). However, similar to prior Kitces Research on Advisor Technology, respondents were more skeptical of using AI to service clients directly, for example by fielding or automatically answering inquiries (4.37) or replacing their entire tech stack with customized AI agents sitting atop a data warehouse (3.98)… which means AI providers have a long ways to go to make advisors more confident in these types of emerging capabilities in the future?

Zooming out to the broader AdvisorTech landscape, CRM programs led the way in terms of category adoption at 91.1% (up from 86.3% the previous year), followed by financial planning software (83.3%, down slightly from 83.8%) and portfolio management software (74.4%, up from 67.5%). Also, while there has been speculation that AI tools could potentially supplant legacy software offerings, this hasn't appeared to come to fruition quite yet, with market leaders maintaining their positions at the top of key categories (e.g., the top three CRM solutions, Orion Redtail, Wealthbox, and the ongoing rise of Advyzon account for approximately 70% of market share, and Salesforce still dominates in larger firms).

Altogether, the results of the T3 survey (reflecting similar findings from Kitces Research on Advisor Technology) suggest that while many advisors are open to exploring how AI tools can provide them with greater efficiency (though Kitces Research on Advisor Wellbeing suggests that adding human team members could be more effective at reducing administrative burdens), particularly on back-office tasks (which could give more advisors more time for face-to-face interaction with prospects and clients), they remain more skeptical at the prospects of AI tools replacing direct client interactions. Also, while new AI tools are constantly emerging (with the potential for AI notetaking tools to add CRM capabilities being a hot topic at this week's T3 conference), advisors appear to continue leaning on their existing software tools, at least for the time being (with the friction involved in changing software solutions within a category potentially giving legacy software providers some breathing room?).

IRS Adds AI Abuse, Capital Gains Fraud To "Dirty Dozen" Tax Scam List

(Stephen Joyce | CFO Dive)

Every year, the IRS releases its "Dirty Dozen" list of tax scams to help consumers be aware of the latest tactics scammers are using to abuse the tax system (and potentially defraud consumers who sometimes pay for help or advice to implement these not-actually-valid tax scams). This year, scams on the list include several repeat offenders, from email-based "phishing" and text-based "smishing" attacks that are used for identity theft, to fake charities that take advantage of the public's generosity.

In addition, the agency this year added AI-enabled IRS impersonation by phone to its list, with scammers using robocalls, voice mimicry, and spoofed caller IDs to trick potential victims (the agency noted that it typically contacts taxpayers by mail first [and in any case doesn't leave urgent, threatening prerecorded messages], so any purported calls from the agency might be treated with skepticism).

The IRS also highlighted schemes related to non-cash charitable contributions, including some that involve inflated appraisals of donated property using syndicated conservation easements or art. Other potential scams include those that encourage taxpayers to inflate withholding amounts (sometimes described as "other withholding") to manufacture a larger refund by reporting zero or little income on incorrect forms, and abuse of Form 2439, which normally allows shareholders of certain investment funds or real estate trusts to claim a refundable credit for taxes paid on undistributed capital gains but has been used to make fake claims (sometimes tied to organizations that aren't legitimate investment funds or real estate trusts).

In sum, there continues to be no shortage of scammers targeting the broader public or proffering illegitimate schemes that offer the fraudulent promise of allowing taxpayers to reduce their tax bills. Which presents a valuable role for financial advisors (particularly given that their clients are older and the targets of some of these scams) to encourage clients to contact them for a 'second opinion' when they think they're being targeted with one of these, or other, tax scams.

Some RIA Buyers Hike Earnout Multiples In Hot M&A Market

(Sam Bojarski | Citywire RIA)

The brisk RIA Mergers and Acquisitions (M&A) market of the past few years has led to regular, and sometimes eye-popping headline valuations for acquired firms. At the same time, as acquiring firms seek targets with strong growth prospects (often including established next-generation leadership), the composition of deal compensation could be changing in certain circumstances as well.

To start, it's important to recognize that selling firm owners typically don't receive the entire compensation from the deal upfront (whether in cash and/or equity in the acquiring firm), with deals often including an 'earnout period', where the seller might receive a certain multiple of revenues or assets if they hit certain metrics in these categories over a period of a few years (which provides protection to the buyer, which naturally wants to ensure that most of the firm's clients stick around and that it is set up to attract new clients as well). With so-called RIA aggregators increasingly seeking firms that have structured themselves for future growth, these earnouts are becoming both larger in terms of the proportion of the deal compensation (with one executive observing that earnouts not sometimes represent 20%-30% of enterprise value, up from 10%-20% historically) and longer in terms of the earnout period, in some cases.

Ultimately, the key point is that while total potential deal consideration might rise amidst the current hot M&A market, it is important for potential sellers in particular to recognize that the terms of the deal can impact how much they ultimately receive. Which suggests that while owners of fast-growing firms with a strong team might have greater confidence in hitting earnout targets (and potentially maximizing their return on the deal), other sellers might instead choose to negotiate greater up-front compensation to reduce their risk (though this could come at the cost of total deal value).

How A Total Portfolio Approach Can Improve The 60/40 Portfolio

(Jason Kephart | Morningstar)

One approach to building an investment portfolio is to allocate to stocks and bonds based on the investor's goals as well as their risk tolerance and capacity (perhaps reducing the equity allocation for more risk-averse investors who don't need to achieve higher returns to meet their goals and vice versa for more aggressive investors). However, because different types of stocks and bonds exhibit dissimilar risk and return characteristics, sorting investments based on their performance attributes (rather than their asset class) could lead to portfolios that more accurately match an investor's intentions.

Under such a "total portfolio approach", an investor (or their advisor) would group their investments by risk based on how they tend to act in different market environments. For instance, while high-yield bonds would fall into the bond category on a more traditional asset allocation approach, their potential for higher returns during good times and steep drawdowns during downturns could mean they are more appropriately grouped with riskier equity assets (whereas a stock that exhibits low price volatility and distributes significant income might be better grouped with bonds). Instead of evaluating the portfolio based on the percentage of stocks and bonds, an investor using the total portfolio approach could instead view it as being made up of assets for growth (which would likely include stocks, but also high-yielding bonds) and assets for stability (both bonds and other assets that demonstrate relatively greater stability across different market environments).

In sum, because each asset class isn't a monolith (with this exercise extending beyond stocks and bonds to other investment types as well), assessing each investment's risk and return characteristics as well as correlations between different assets (though these are subject to change over time) can help prevent an unintended portfolio makeup that might not meet an investor's objectives (and perhaps make it easier for an advisor to explain the role for each investment within a portfolio?).

Is Rental Property A Necessary Part Of A Diversified Asset Mix?

(Meg Bartelt | Flow Financial Planning)

For some investors, owning a mix of stock and bond investments in their portfolio (perhaps in addition to cash holdings and a primary residence) might feel like an acceptable level of asset diversification. Others, though, are attracted to adding rental real estate properties to the mix, given its potential to generate income through rents paid while potentially appreciating in value over time (and perhaps serving as a less volatile stabilizer for their total wealth).

In addition to (hopefully) regular rental income and appreciation, real estate has the potential to offer additional financial benefits, including certain tax advantages (though the lifetime value of these, and not just a single year's effects, would need to be assessed) as well as potential emotional upsides, including a lack of daily pricing and liquidity (reducing the chances an investor might make an emotionally driven, ill-timed sale as they might for publicly traded stocks and bonds) and real estate's tangible nature (unlike a stock, where being able to 'touch' the ownership stake in a company isn't possible).

Nonetheless, an investor must also consider the costs and risks involved with owning rental real estate as well. To start, while an investment portfolio might require the occasional rebalancing trade, real estate necessarily involves maintenance and upkeep (whether led by the landlord themselves or by a paid property manager). In addition, depending on its value and an investor's total assets, a single piece of rental property (especially when combined with a primary residence) could make real estate a significant percentage of their overall wealth (increasing concentration risk). Also, while real estate's relative illiquidity can be a plus in terms of preventing emotionally driven transactions, getting cash out of a property is trickier than merely selling off portfolio assets. Finally, while ongoing rental income received might be attractive, this could reduce an investor's income flexibility for tax planning purposes.

In the end, while rental real estate could be a way to generate 'passive' income, investment portfolios can generate regular income streams as well (whether through income distributions such as dividends or by selling off shares) and could come with fewer complications (also, many investors will find that they already own real estate through their broad-market index funds). Though, given the potential upsides of rental real estate (and the fact that it might 'scratch an itch' for certain investors to hold tangible property), financial advisors who become familiar with the unique investment and tax attributes of rental real estate could position themselves as valued resources for prospects and clients who come to the table with current rental holdings (or plans to buy more).

How To Discuss Portfolio Diversification With Different Types Of Clients

(Samantha Lamas | Morningstar)

While financial planners understand that portfolio diversification entails investing in assets with different performance and risk characteristics to improve risk-adjusted returns, clients might have a different impression of what it means to be diversified. For instance, an investor might think it means allocating to different funds even if they're identical (e.g., prior Morningstar research found that survey respondents would allocate assets across three funds tracking the same index despite the funds having varying expense ratios) or perhaps spreading their assets across different custodians.

To start, an advisor might give a brief, standardized description of what portfolio diversification is (e.g., "Diversification means the investments in your portfolio behave differently. When one asset zigs, the others zag."). But from there, an advisor might frame the value of diversification based on a client's unique risk tolerance or personal situation. For instance, a client who constantly worries about the market might be heartened by understanding that diversification is a hedge against the unknown and guards against being overly exposed to any one area of the market that might fall out of favor. A client nearing retirement might not be as concerned about day-to-day movements but could respond positively to the idea that diversification can smooth the ride for them as they approach and enter retirement. Finally, a client looking to maximize returns (and might be skeptical of a diversified approach) could be responsive to the idea that while diversification isn't meant to achieve the highest possible returns, it expands their opportunity set and increases the chances they will capture whatever part of the market is doing well.

Ultimately, the key point is that while diversification is at the heart of many advisors' approaches to portfolio management, the definition of diversification in the investment context and what it means for their financial future might not be so clear to clients. Which suggests that taking the time to explain the upsides (and limitations) of portfolio diversification in a way that meets clients where they are in terms of their risk tolerance and financial goals could give them greater confidence in this approach and help prevent misunderstandings down the line.

Exercises To Help Clients Overcome The Challenge Of Goal-Setting

(Brendan Pheasant and Meghaan Lurtz | Journal of Financial Planning)

While an advisor focused solely on a client's portfolio might seek to achieve the strongest returns no matter a client's life situation, comprehensive financial planners might instead start with a client's goals before deciding on a portfolio management approach better tailored to the client's unique needs (e.g., when they plan to retire). However, clients might not have perfect insight into their financial and lifestyle goals (if they've thought about them at all), which can make this an imprecise exercise.

For instance, prior research has shown that clients will often change their goals when presented with a 'master list' of potential goals (as the list might include goals the individual might not have previously considered. Also, a client might find it challenging to think about both short- and long-term goals (particularly if they're currently facing an acute short-term 'pain point'). In addition, clients might create new goals or change existing goals over time (which could make prior planning moves counterproductive).

Given the gray areas around goal-setting, several exercises can be employed to better reveal client goals and allow for greater flexibility over time. To start, the aforementioned 'master list' of goals technique can expand what clients might think is possible when it comes to potential goals. Another technique is to engage in a "pre-mortem", imagining a failed financial plan and working backward to identify potential blind spots that could negatively impact their plan (e.g., a 'failed' retirement where a client is bored or aimless could be prevented by pursuing new hobbies or avocations during their working years). Clients could also engage in "safe-to-fail" experiments with new or future goals, where trying a potential goal on for size can allow for reflection on whether they want to continue pursuing it (e.g., a client who dreams of spending several months each year in France in retirement might start by spending two weeks there each year to determine their favorite cities [or whether they want to keep the goal in the first place]).

In sum, goal-setting isn't a "set it and forget it" exercise, but rather an ongoing iterative process that can impact financial planning decisions as well. Nonetheless, by encouraging clients to think expansively and encouraging open lines of communication, financial advisors can increase the chances that a client's portfolio and financial plan are supportive of the client's current and future lifestyle goals.

An Alternative Approach To Setting SMART Goals

(Mark Brinser | Stewardship Advisors)

The ability to achieve a particular goal often can be influenced by how it is written out. For example, a more general goal (e.g., "I want to be financially secure") isn't particularly specific (e.g., financial security might mean different things to different people), doesn't come with tracking markers (to help the goal-setter understand whether they're on the right track to achieve it), and doesn't come with a timeline (which could make it easier to forget or procrastinate on).

With this in mind, the "SMART" goal-setting framework can provide a much greater level of specificity to goal standards. While the specific words that each letter represent can sometimes vary, one way the SMART acronym can be laid out is that goals should be Specific, Measurable, Attainable, Realistic, and Tangible, which cover many of the potential pitfalls of more generalist goals. While creating a goal using the SMART framework might increase the chances that it's achieved, this structure can feel antiseptic and rigid for what might otherwise be an inspiring goal.

Amidst this backdrop, Brinser suggests that an alternative reading of SMART goals might be those that are Significant (i.e., resonate with the individual setting it), Meaningful (for the goal-setter rather than based on what others might think is important), Attracting (meaning the goal-setter will be excited to put in the work needed to achieve it rather than relying on grit alone), Rewarding (those that provide benefits to the goal-setter on the journey to achieving the larger goal), and Timely (ensuring that the goal-setter has enough time to commit to achieve the goal and that the time is 'right' for this particular goal). Such an approach could be more inspiring and encourage clients to "dream big" rather than pursue more rigid goals.

In the end, while the traditional SMART goals framework can improve a more haphazard process, it's important to recognize that goals (particularly lifestyle goals for clients) aren't just another task to be achieved, but rather objectives that can improve the quality of their lives, suggesting that incorporating factors such as meaning and ongoing rewards to the goal-setting process could lead to greater fulfillment along the way (in addition to potentially increasing the chances that the client is inspired to meet the goal).

Values, Purpose, Action: A 3-Part Approach To Establish A "Statement Of Financial Purpose" And Unlock Deeper, More Meaningful Planning Conversations With Clients

(Jeremy Walter and Andy Baxley | Nerd's Eye View)

The shift in the financial advice industry from numbers-based strategies to a more holistic, values-driven framework over time has opened the door to deeper, more meaningful conversations but also presents a challenge for clients who may struggle to define their values or articulate a sense of purpose. With this in mind, helping clients craft an informative, values-based statement of financial purpose can both allow clients to better articulate their goals and values and help advisors make more effective planning recommendations.

This process begins by helping clients define their core values. This can involve asking reflective questions, such as "What does a perfect day look like to you?" or "How do you define success, security, and a life well-lived?" These questions encourage clients to uncover important themes – such as business growth, building a legacy, or prioritizing simplicity and family time – that guide their decisions. Typically, these values fall into two categories: realized values, which are already present in a client's life, and aspirational values, which represent qualities they want to embody. Advisors can then ask follow-up questions to further explore and deepen these themes, helping clients gain even greater clarity.

Once the client's values have been established, the next step is to articulate a statement of financial purpose – a concise expression that captures the "why" behind the client's financial decisions. This statement should go beyond superficial goals or what the client believes they should say, instead reflecting their true, deeply held priorities. Advisors play a crucial role here by helping clients draft, refine, and finalize a statement that feels authentic and actionable. This statement of financial purpose serves as an anchor for the client, providing clarity and direction as they make future financial decisions.

After the statement of financial purpose is created, the focus shifts to taking action. Advisors can help clients use their statement as a guide for assessing financial goals – both existing and future ones. Clients can reflect on whether their current goals are helping them get closer to living out their values or whether they need to revise their plan to better reflect what truly matters. The statement can also be used to establish new goals, ranging from more immediate, short-term objectives to larger, more ambitious stretch goals that, while challenging, may ultimately be more fulfilling. As clients begin to articulate and live by their values, advisors can revisit the statement periodically to ensure it remains relevant and aligned with evolving goals, and to assess whether adjustments are needed to better reflect their client's reality.

Ultimately, the key point is that understanding a client's values and purpose can unlock deeper, more meaningful financial planning conversations, enabling more fulfilling client discussions and allowing clients to do more with their money. And by aligning financial decisions with a clear statement of purpose, clients can foster a more intentional and meaningful relationship with their wealth!

A Primer On Prediction Markets

(Victoria Liu and Djavaneh Bierwirth | Wharton Initiative on Financial Policy and Regulation)

While not new, prediction markets have risen significantly in the public consciousness over the past couple of years with the expansion of online offerings, an increasing number of participants, and the more frequent use of their results appearing in the news.

Prediction markets typically are designed to allow traders to bet on the outcome of a specific event. Many of these are in 'winer-take-all' format (reflecting the market's expectation that a certain outcome will happen), with other event contracts including index contracts (which reveals the market expectation of the mean result) and spread betting (which shows the market expectation of the median result). A 'winner-take-all' market might predict the outcome of an election, a particular event occurring by a certain date, or whether the price of a certain commodity will reach a certain value by a particular date.

The accuracy of a betting market depends in large part on its designed. For instance, a well-designed betting market will have clear event definitions and outcomes that can be easily verified, agreed-upon sources of data to determine results, well-designed incentives that reward accurate predictions, and safeguards against market manipulation and spam (notably, prediction markets have come into question in recent months on several of these measures, though it's unclear whether these concerns will deter bettors). In addition, markets with more accurate predictions tend to be those with informed bettors (e.g., those who are willing to analyze available data to make a prediction rather than speculatively guessing about an outcome).

Altogether, while prediction markets have the potential to offer informed guesses about future outcomes, it remains to be seen whether they will primarily serve as effective tools at predicting real-world events or a new way for individuals to gamble on their hunches?

How To Talk To Clients About Prediction Markets

(Joe Halpern | Advisor Perspectives)

The past year has seen an explosion in the amount of money being bet on prediction markets (e.g., Polymarket and Kalshi), which allow users to place bets on a wide range of questions and reap financial rewards if they are correct (or incur losses if they're wrong). Alongside the rapid growth of online sports betting platforms, it's easier than ever for individuals to make wagers that might otherwise have required going to a casino or purchasing a complicated derivatives contract.

Nonetheless, given the potentially addictive nature of these platforms (e.g., given the constant pricing changes, number of potential bets, and the tendency for an individual to think they 'know' more than other bettors), users have the potential to lose significant amounts of money. Which could turn into a planning issue for financial advisors whose clients are actively involved in prediction markets (as few will likely create a 'budget' for this activity as they might for other items on their cash flow statement!).

When encountering a client who is active on prediction market platforms, a first potential step is to avoid the urge to lecture or dismiss their interest. Rather, establishing a framework for their participation can make the financial stakes clear and prevent particularly damaging financial outcomes. For instance, this activity could be put within a larger bucket of 'speculative' activity, which might otherwise (or also) include day trading or sports betting, with a limit on total positions (e.g., no more than 2% of their total investible assets). This can provide grounding if the advisor identifies an escalation in losses from engaging in prediction market activity (which could be a sign of gambling addiction that might merit a referral to an outside professional for support).

In the end, while some clients might see prediction market activity as a fun (and potentially profitable) hobby, the potential for major losses makes it a potential discussion point for financial advisors (who might be better-positioned to identify possible troublesome behavior before even a spouse!). And for clients who might be curious about prediction markets more broadly, advisors can contrast them to long-term investing in the stock and bond markets (e.g., that the latter involve the [partial] ownership of a company or its debt) and how their portfolio is aligned to weather a range of potential events that might occur in the broader world.

"Is This Insider Information?" The Prediction Market Bets Driving A Campus Frenzy

(Long, Dugan, Mattioli, and Au-Yeung| The Wall Street Journal)

While prediction markets are sometimes used to predict more serious news events (e.g., a Federal Reserve rate decision or an upcoming election), the number of questions to bet on extends well beyond what might appear on the front page of the newspaper. In addition, these markets appear to be pursuing younger users to increase liquidity in these markets (and profits for the companies behind them).

Leading up to the recent Super Bowl, users of prediction markets could bet not only on the outcome of the game (and many statistical results within it), but also on whether certain celebrities would be in attendance at the game. Unlike the game-related bets (where the outcome is uncertain until the game is played), the latter questions were knowable in advance to anyone who knew a particular celebrity's travel schedule. For instance, several members of a University of Miami fraternity appeared to make money off of a prediction that businessman Jeff Bezos would not attend the game, perhaps thanks to a tip from Bezos' stepson, a member of the fraternity. Other college students weren't so lucky in predicting whether actor Mark Wahlberg would attend (a question that attracted $24 million in bets on the prediction market Kalshi), as a rumor originating within fraternities at Clemson University (where Wahlberg's daughter is a student) that he would be at the game proved to be false.

Prediction markets appear to be gaining popularity amongst college students, in part because unlike sportsbooks, which are required by most states to bar bettors younger than 21, the prediction markets are regulated as derivatives contracts by the Commodity Futures Trading Commission and allow users aged 18 and up. The platforms themselves appear to be encouraging these younger bettors in a variety of ways, from sponsored social media posts to relationships with key influencers. This has raised a variety of potential concerns, including whether these students might be losing serious amounts of money on their prediction market bets, how much inside information is available on certain bets, and, in the sports world, whether prediction markets on college athletics could encourage the manipulation of outcomes.

In sum, prediction markets aren't just made up of serious prognosticators grappling with the major questions of the day, but also of amateurs placing bets on seemingly trivial matters. And while relatively older financial planning clients might not be making bets on prediction markets (or might not have heard about prediction markets in the first place), their children or grandchildren might be quite active (perhaps leading to financial questions when it comes to gifting and estate planning down the line?).

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or send an email to [email protected] to suggest any articles you think would be a good fit for 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 "WealthTech Today" blog.