Weekend Reading For Financial Planners (August 30–31)

As Pool Of HNW Clients Expands, Advisors Add High-End Services: Cerulli Study

(Alex Ortolani | WealthManagement)

Over time, some advisors decide to move 'upmarket' and seek to serve increasingly wealthy clients, whether based on the opportunity to explore the planning issues that are most relevant to these clients or to boost their average revenue per client. A key issue, though, is that because many advisors are seeking to serve wealthier clients, this competition can create a need for advisors to differentiate themselves in the eyes of prospective clients.

Notably, though, the pool of High-Net-Worth (HNW) individuals (and their assets) isn't static, with a recent study by research and consulting firm Cerulli Associates estimating that the total advisor-managed HNW industry will surpass $30 trillion in Assets Under Management (AUM) by 2028 (with an expected 9.8% annual growth rate) alongside an increase the number of HNW individuals (defined here as those having at least $5 million in investible assets), whether though building and growing assets and/or inheritances.

In this environment, Cerulli found that advisors appear to be adding services to attract these clients, with advisors serving HNW clients offering an average of 12 services in 2024, up from 10 in 2017 (notably, Kitces Research on Advisor Productivity found that while advisors surveyed on the whole increased the number of services offered between 2018 and 2022, fewer advisors reported offering the most comprehensive plans [defined as offering at least 13 services] in the 2024 study, perhaps as some advisors found the number of services they offered was 'too comprehensive' for the return they received in the form of client fees). A higher percentage of advisors were more likely to provide services in demand by HNW clients, such as charitable planning, trust administration, and private banking than they were in the past, according to the Cerulli study.

In sum, while the expected growth in the number of HNW individuals and the assets they hold is expected to rise in the coming years, competition amongst advisors to serve this group suggests that those best-positioned to add these clients will be able to understand their needs and pain points, provide key services that they seek (while perhaps charging a premium fee given the increased time and hard-dollar costs of doing so), and build teams (and not necessarily just a better tech stack) to do so efficiently (though some advisors might find that they prefer serving a different ideal client persona and avoid the competition for HNW clients altogether!).

SEC Enforcement Actions Drop Sharply, With Focus Shifting To Investor Fraud

(Leo Almazora | InvestmentNews)

With a change in the presidential administration comes new leadership at Federal agencies as well, with the Securities and Exchange Commission (SEC) being most relevant when it comes to the regulation of financial advisors. With the selection of Paul Atkins (who has argued against the SEC's use of 'regulation by enforcement') to lead the agency, President Trump signaled a shift from the tenure of previous Chair Gary Gensler, whose SEC took a much more active approach to rulemaking and enforcement.

The assumption among many industry observers that the transition from Gensler to Atkins would lead to a more targeted approach to enforcement appears to be playing out, with data compiled by law firm King & Spalding indicating that the SEC initiated 67 enforcement actions from February through July, down from 127 in the same period last year (a 47% decrease) and 198 during the same stretch in 2021 (a 66% drop). Among the potential reasons for the drop cited by the firm include a possible focus on clearcut frauds (with almost 50% of cases filed involving securities offerings and almost 25% being brought against investment advisers) rather than technical violations of SEC rules (as the SEC sometimes pursued under Gensler), a pull-forward of enforcement actions during the final months of the Biden administration (with the SEC filing 55 new standalone enforcement actions from January 1 through January 19 this year alone) leaving fewer potential enforcement actions in progress, and a decline in SEC staff headcount (which has seen an approximately 15% decline since the high of 2024).

In the end, time will tell whether the initial drop in cases will be a long-term trend or an artifact of the number of enforcement actions filed in late 2024 and early 2025. Nonetheless, a continued flow of enforcement actions targeting fraudulent activity of certain investment advisers could help support public trust in the financial advice industry (and the type of enforcement actions pursued by the regulator in the months ahead could signal key areas for RIAs and their compliance staff to focus on in preparation for future examinations).

Referrals Key Contributor To New Employee Growth For Large RIAs: Survey

(Eric Rasmussen | Financial Advisor)

As financial planning firms grow their client base and look to scale over time, they typically look to hire staff to handle the range of tasks needed to continue to provide high-quality service to their clients (and to promote advisor wellbeing by not being overwhelmed by a growing body of responsibilities!). A key challenge, though, is creating a strategy to attract high-quality talent.

According to a survey of (primarily large) RIAs by Financial Advisor, referrals from current employees and outside sources were the most common source of new hires (with approximately 73% of firms surveyed using each of these tactics), followed by LinkedIn (56%), internet advertising (43%) and college placement programs (29%). Once firms bring employees onboard, these relationships appear to be fairly sticky, with only 10% of respondents reporting that they've lost an employee to another firm during the past year (and nearly all firms appear to be either holding steady or growing their employee headcount, with only 4% of firms laying off employees during the past two years).

Notably, while a strong majority of firms (68%) reported that many of their employees work from home, almost all of those that do require employees to be in the office during at least part of the week, with only 7% of firms that let employees work outside of the office allowing them to do so full-time. Which suggests that most firms are looking to hire locally (or finding individuals willing to relocate), as full-time remote work appears to be a less popular option.

Altogether, this survey suggests that while advisory firms often look to referrals as a source of new clients, they can also leverage referrals from current employees and others when it comes to making a new hire. Which could save firms time and money in the hunt for new talent (and give the firm a form of pre-vetting if a candidate comes recommended from a current employee!).

Why The Devil Is In The Details When It Comes To The Advisability Of Roth Contributions And Conversions

(William Bernstein and Edward McQuarrie | Advisor Perspectives)

From the moment they were introduced in the Taxpayer Relief Act of 1997, the Roth IRA has been an incredibly popular retirement vehicle, thanks to its 'unlimited' potential for generating tax-free growth. Of course, the caveat is that Roth-style accounts are only tax free because the contributions into the account are made on an after-tax basis (unlike traditional retirement accounts, which enjoy a tax deduction on the initial contribution) and any amounts converted to a Roth as part of a (partial) Roth conversion are treated as ordinary income for tax purposes.

There are certain circumstances where contributing to Roth accounts typically is an advantageous move. For instance, a teenager with earned income from a part-time job will likely have a 0% Federal marginal tax rate so making contributions to a Roth IRA using these funds (or perhaps via a "match" from a generous parent or grandparent) will likely pay off as they will almost certainly have a higher tax rate in retirement. On the other hand, an individual in a high tax bracket (particularly if they live in a state with a high income tax as well) might find that making traditional contributions (and getting the up-front tax deduction) is advantageous (as the marginal rate they pay today could be higher than the rate they will face in retirement), though they might combine pre-tax contributions to a workplace retirement plan with backdoor Roth contributions to tap into the benefits Roth accounts have to offer (given that their income is likely too high to make deductible IRA contributions).

The authors further argue that a client's circumstances will dictate when (partial) Roth conversions are a beneficial choice. One circumstance that favors Roth conversions is when a client's marginal tax rate in retirement is significantly less than that of the beneficiary on the account (e.g., it could make sense for a client in the 24% bracket to make partial Roth conversions if their beneficiary is likely to be in the 37% bracket), particularly because the beneficiary will be subject to the "10-year rule" and therefore have a limited amount of time to spread out the tax impact if they inherit a traditional IRA (they will still be subject to the 10-year rule when inheriting a Roth but distributions will be Federal income tax-free).

On the other hand, the authors see less value in trying to arbitrage the client's own current and future tax rates when the current rate is above the lowest levels (e.g., a client currently in the 22% or 24% bracket), as the client will owe taxes on the converted amount immediately and only see a return over time in the form of smaller Required Minimum Distributions (RMDs) that will (hopefully) be made at a lower tax rate than was paid on the conversion. They also note that making the conversion 'locks in' the current tax rate, when it's possible that the client might have other options to reduce the rate and amount of tax paid on their RMDs (e.g., by making Qualified Charitable Distributions, if they're charitably inclined).

Ultimately, the key point is that financial advisors can offer significant value by showing clients how the decision to make Roth contributions or engage in (partial) Roth conversions might differ on a year-by-year basis as their circumstances (e.g., income in a particular year) change and how such a flexible approach can help them maximize their long-term wealth and legacy goals!

Why The Value Of A Roth Conversion Is Calculated Using (True) Marginal Tax Rates

(Ben Henry-Moreland | Nerd's Eye View)

Roth conversions are, in essence, a way to pay income taxes on pre-tax retirement funds in exchange for future tax-free growth and withdrawals. The decision of whether or not to convert pre-tax assets to Roth is, on its surface, a simple one: if the assets in question would be taxed at a lower rate by converting them to Roth and paying tax on them today, versus waiting to pay the tax in the future when they are eventually withdrawn, then the Roth conversion makes sense. Conversely, if the opposite is true and the converted funds would be taxed at a lower rate upon withdrawal in the future, then it makes more sense not to convert.

But what exactly is the tax rate that should be used to perform this analysis? It's common to look at an individual's current level of taxable income, determine which Federal and/or state income tax bracket they fall under based on that income, and assume that would be the rate at which the individual will be taxed on any funds they convert to Roth (or the amount of tax savings they would realize in the future by reducing the amount of their pre-tax withdrawals).

However, for many individuals, the tax bracket alone doesn't accurately reflect the real impact of the Roth conversion. Because of the structure of the tax code, there are often 'add-on' effects created by adding or subtracting income – and these effects aren't accounted for when simply looking at one's tax bracket.

For example, when an individual is receiving Social Security benefits, adding income in the form of a Roth conversion could increase the amount of Social Security benefits that are taxed so that the increase in taxable income caused by the Roth conversion is more than 'just' the amount of funds converted – in effect, the increase in income can magnify the tax impact of the conversion beyond what the tax bracket alone would imply. However, the same effects are also true on the 'other' end of the Roth conversion, where any reduction in tax caused by replacing pre-tax withdrawals with tax-free Roth withdrawals could also be magnified by an accompanying decrease in the taxability of Social Security benefits.

The upshot is that the conventional wisdom of deciding whether (or how much) to convert to Roth based on tax brackets alone won't always lead to a well-informed decision. Instead, finding the 'true' marginal rate of the conversion (i.e., the increase or decrease in tax that is solely attributable to the conversion itself) is the only way to fully account for its impact. Additionally, understanding the true marginal rate can make it possible to time conversions in order to minimize the negative add-on effects (e.g., avoiding Roth conversions when doing so will also increase the taxation of Social Security benefits) and maximize the positive effects (e.g., using funds converted to Roth to reduce pre-tax withdrawals when doing so will decrease the taxation of Social Security) – thus maximizing the overall value of the decision to convert assets to Roth.

Key Features That Improve The Accuracy Of Roth Conversion Software Tools

(John Manganaro | ThinkAdvisor)

Given the many factors (from current and future income to the taxation of Social Security benefits) that go into calculating the potential value of a (partial) Roth conversion, many advisors turn to software tools to support the decision-making process. However, when evaluating such tools, advisors will want to evaluate whether they are taking into account the full swath of considerations related to these transactions.

For instance, a tool that only considers the assets in the retirement account in question will offer an incomplete picture, as other assets and sources of income will play important roles in determining a client's current and future marginal tax rates. Software used for this calculation should also account for inflation adjustments to tax brackets as well as to the thresholds for Income-Related Monthly Adjustment Amount (IRMAA) surcharges (as keeping them static could make it look like a client will be in a higher future bracket or IRMAA tier than they would be in reality as both are indexed for inflation over time). Similarly, advisors might seek out software that allows for future adjustments to model what happens if one spouse in a client couple dies (as the survivor's tax situation might differ from what they faced as a couple). Finally, given that clients often earmark Roth accounts for legacy interests (to maximize the number of years they compound and provide beneficiaries with a larger Federal income tax-free inheritance) software that accounts for the beneficiary's tax situation (e.g., their expected marginal tax rate upon inheritance) will provide a more accurate analysis of the potential benefit of a Roth conversion.

In sum, given the number of factors that go into deciding whether a (partial) Roth conversion is a smart move in a given year (and, if so, deciding how much to convert), identifying software tools that take as many of these into account as possible (or doing so when running one's own calculations) can boost an advisor's confidence that they are making the best possible recommendations to their clients.

Storytelling In Financial Advising: The Key To Emotional Connection

(Greg Bogich | WealthManagement)

Financial advicers typically are (rightly) proud about the depth of their technical financial planning knowledge and their ability to help solve clients' financial pain points and allow them to achieve their goals. Nonetheless, getting into too much detail on the technical side of things when meeting with a prospect or client can leave the counterpart confused (and, in the case of a prospect, potentially less likely to become a client).

With this in mind, taking a 'storytelling' approach can potentially help prospects and clients better understand what the advisor wants to explain (and the value they can offer). Effective stories often come with similar features, including a 'hero' (in this case, an anonymized client), their struggle (with enough specificity to evoke a personal connection), a guide (the advisor), and the solution (the planning recommendation and its result, clearly defined). Such stories are also relatable to the client, particularly in the 'struggle' and 'solution' section, and incorporate numbers when they can be understood effectively and add to the emotional resonance. For example, an advisor might discuss a client who "was giving herself an ulcer worrying about having to work until she was 80", which might resonate with a prospect or client who's feeling the same way. Or, when discussing a solution, the advisor might say "we were able to build a retirement income plan that allowed the client to sustainably spend $5,000 per month" rather than "we built a plan that had a 75.24% probability of success using Monte Carlo analysis" (as the latter might be quite confusing to many prospects and clients).

In the end, because the effectiveness of an advisor's communication is in part a function of their client's or prospect's ability to understand it, toning down the use of jargon and numbers and increasing the use of relatable stories could lead to greater client understanding and, ultimately, trust and confidence in their advisor and their planning recommendations!

Summarizing: A Tool For Helping Clients Feel Understood

(Derek Hagen | Meaningful Money)

Financial advisors often come into client meetings with an agenda and a list of key points they want to get across. While this can be a great way to ensure the conversation is organized, it's also valuable to recognize that meetings are two-way conversations and that a client's comments could change the tenor of the meeting (e.g., if they've had a major change in how they want to approach their financial life).

In order to help clients feel understood (and avoid the impression that the advisor is reading from a script or taking a 'one size fits all' approach to serving clients), one key skill for advisors is the ability to summarize a client's comments. Rather than simple parroting of what the client says, an effective summary reflects back the most meaningful parts of what a client just said (e.g., a strong emotion, a value, or a moment of ambivalence). For instance, an advisor might say "It sounds like you're excited about this new opportunity, but you're also scared about what you're leaving behind" when a client is facing a key choice rather than diving right into the financial implications of each option. In addition, it's important to note that summaries aren't an attempt to solve the problem or give advice, but rather an opportunity to help the client sort through their own thoughts (or discover something new along the way). Notably, those who are relatively new to the practice of summarizing can start small, for instance by noticing one important thing a client says and reflect it back (and, if unsure whether they did so correctly, can ask "Did I get that right?").

Ultimately, the key point is that because financial planning clients want to be 'heard' by their advisor (one of the features that helps human advisors stand out from digital advice solutions), taking the time to summarize a client's comments can both confirm to the client that the advisor understands their situation and give the advisor confidence that they are working from the right baseline information when analyzing the client's situation and preparing planning recommendations!

Rhetoric: An Underrated Skill To Help Advisors Grow With Intention

(Ryann Thomas | XY Planning Network)

The term "rhetoric" might conjure images of ancient philosophers or perhaps a mandatory college course. But in reality, financial advisors already use rhetoric in their day-to-day activities, from how they present themselves on their website to how they communicate with clients. Which presents them with the opportunity to harness rhetorical concepts to more effectively market themselves to prospects and communicate with clients.

Advisors are likely already using three rhetorical concepts – ethos, pathos, and logos – perhaps without knowing it. Ethos refers to the advisor's credibility and trust built with clients, in particular consistency between what an advisor says and how they show up. Pathos refers to the emotional connection advisors can build with their clients, often built through storytelling, which can allow the prospect or client to see how the advisor provides not only planning services but also agency and peace of mind. Finally, logos is the logic and structure behind an advisor's work and often shows up in the form of systemization of the client experience and the advisor's workflows.

Notably, advisors can leverage these three concepts to scale their firms more effectively. To start, building a consistent brand voice (e.g., by creating a voice and tone guide for use in content and marketing materials) can ensure that the advisor that prospects and clients meet with is the same person they 'met' through their blog, podcast, or other marketing materials (notably, such a guide could be particularly valuable for advisors who leverage artificial intelligence tools to help craft content and marketing materials to ensure that any output 'sounds' like them). Next, crafting a set of stories (e.g., the advisor's origin story and a few client transformation stories) that can be deployed in prospect and client meetings can reduce the pressure to create stories on the spot during meetings. Finally, creating process documents, templates, and internal cheat sheets for the advisor and their staff to use can ensure consistency and reduce the time it takes to complete regular processes.

In the end, rhetoric is not just a tool for professional debaters but can also offer a valuable framework for advisors to offer more consistent communication and performance. Which could ultimately lead to greater trust with prospects and more sustainable growth over time.

Don't Try To Get Rich Twice

(Ben Carlson | A Wealth Of Common Sense)

There are many possible ways to become wealthy, whether by experiencing a windfall or old-fashioned saving and investing over an extended period. Many individuals will reach a level of wealth that can cover their lifestyle expenses under even conservative return assumptions.

However, even when one has acquired enough wealth to be fully financially independent, the temptation to take risks to grow that wealth further can be tempting. While a certain amount of risk-taking is understandable (e.g., investing in assets that are expected to match, if not beat, inflation in order to not lose purchasing power over time), the wealthy are confronted with a range of 'opportunities' to grow even wealthier. For instance, they might come across an unscrupulous investment advisor promising high returns, hold concentrated positions (e.g., continuing to have a large amount of their wealth tied up in their employer's stock), or use too much leverage. Which can ultimately lead them to lose some (or all) of their wealth when they were in a perfectly comfortable position to begin with.

Ultimately, the key point is that given the temptation for wealthy individuals to "get rich twice", financial advisors are well positioned to help clients consider their goals and craft financial and investment plans to reach them without taking undue risk or falling prey to a fraudulent scheme (with some clients likely being surprised that they don't 'need' to take as much risk as they might assume!).

Receiving A Windfall? Stop Obsessing About Taxes And Start Obsessing About Your Life.

(Meg Bartelt | Flow Financial Planning)

Given the variety of planning opportunities available, a common instigating event for an individual to seek out a financial planner is the receipt of a large financial windfall (e.g., experiencing a company IPO or receiving a large inheritance).

For some recipients (and their financial advisors), the first instinct might be to figure out how to manage the tax implications of the windfall to maximize the total assets they will ultimately receive. For instance, an advisor might create a strategic plan for exercising Incentive Stock Options [ISOs] to minimize taxes or leverage tools such as exchange funds to gain diversification without immediately selling and incurring taxes. However, Bartelt argues that a potentially bigger issue beyond immediate tax considerations is for the client to consider how they want to use the windfall to bring greater happiness and meaning to their life. Because while seeing a larger number on an account statement might provide positive feelings in the short run, being able to use the money to gain financial freedom, spend more quality time with friends or family, and/or pursue a career or volunteer opportunities that provide a sense of purpose could ultimately be more valuable in the long run.

In the end, while financial advisors are well equipped to help clients maximize the value of a windfall, their value can also extend to helping clients consider how they might apply it to live their best lives (which might mean not squeezing every possible cent out of the amount received!).

A Few Laws Of Getting (And Feeling) Rich

(Morgan Housel | Collaborative Fund)

At least in dollar terms, being "rich" can be measured in both absolute (e.g., reaching $X in wealth) and relative (e.g., being in the top X% of Americans in terms of net worth). However, the goal for many individuals isn't just a certain wealth 'number' but rather how it can be leveraged to create a happy, meaningful life.

For instance, it can be easy to say, "If I had $X, then I would really be happy." The problem, though, is that once that level is reached, it can be hard to continue to strive for a perpetual 'more' (also, as daily tabloid fodder can attest to, the lives of the rich and/or famous aren't necessarily trouble-free). In addition, achieving a certain level of wealth or status can complicate interpersonal relationships, whether it's finding people who are willing to speak the truth to you or encountering backlash from those who are envious of your wealth (and are ready to pounce on any fall from grace). Another variant of this problem is the emotional challenges of handling money and kids; on the one hand, many parents understandably want their children to have as many opportunities as possible, but also want to avoid their kids feeling entitled (and avoid conflicts between their children if one feels like the others are favored). Finally, given that expectations can sometimes rise faster than income (and can be harder to change), those who have amassed wealth can face a challenge adjusting their standards of living if they do encounter financial hardship.

In sum, the challenges of wealth present many opportunities for financial advisors to add value for high-net-worth clients, whether at a financial (e.g., crafting portfolios that meet their goals and avoid severe downside risk) or an emotional level (e.g., exploring and focusing on what really matters to them beyond a simple number on an account statement)!

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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 "Wealth Management Today" blog.