Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that the SEC has issued a risk alert outlining Reg BI-related deficiencies discovered during recent examinations of broker-dealers, from dual-registered advisors not clearly communicating whether they were acting as a commission-based broker or a fee-based investment adviser to firms failing to update their training and compliance systems to meet the requirements of Reg BI.
Also in industry news this week:
- Annuity sales hit record levels in 2022, possibly spurred on by volatile markets and rising interest rates
- A recent survey suggests that an overwhelming percentage of both employers sponsoring retirement plans and their employees are interested in receiving advice from financial advisors
From there, we have several articles on advisor marketing:
- How advisors can get more clients by devoting just two hours per month to marketing
- 5 research-backed tactics advisors can use to improve their marketing ROI
- How finding a ‘patient zero’ can help new firms market to their chosen niche
We also have a number of articles on investing:
- Why falling interest rates were not necessarily the key driver of investment returns during the past 25 years
- Why there might not be a rush among investors to fixed income investments, even as yields reach levels not seen in years
- While Indexed Universal Life policies have been insurance companies’ hottest products in recent years, economic headwinds and concerns about their utility could slow their growth
We wrap up with three final articles, all about Artificial Intelligence (AI):
- How AI could revolutionize a wide range of professions, from education to medicine
- How ChatGPT and other large language models can be used by investment professionals now and in the future
- How AI systems could both create greater efficiencies for human financial advisors and challenge current advisory business models in the years ahead
Enjoy the ‘light’ reading!
Editor's note: This week we learned about the tragic loss of our friend Gavin Spitzner after a battle with leukemia. In addition to having a wealth of knowledge about the RIA industry (which he shared via his "Wealth Management Weekly" blog as well as by occasionally contributing to the Kitces.com "Weekend Reading For Financial Planners" column), Gavin was a kind and generous spirit whose consulting work lifted up many advisors in the industry. Our deepest condolences go out to Gavin's family and friends.
(Jake Martin | AdvisorHub)
The SEC’s Regulation Best Interest, issued in June 2019 and implemented in June 2020, requires brokers to act in their clients’ best interests when making an investment recommendation, by meeting four core obligations: disclosure, care, conflicts of interest, and compliance. While this represented a higher benchmark than the preceding “suitability” standard imposed by FINRA on its members, it fell short of a full fiduciary obligation (creating a gap between the obligations to customers of broker-dealer representatives and the clients of advisers at RIAs). Which has created ongoing questions about how dual-registrants in particular are expected to behave, since they wear both “hats”, spending a portion of their time acting in their capacity as Reg-BI-based brokers and the rest as fiduciary investment advisers… especially since thus far the SEC’s directions in complying with Reg BI have been only a limited number of Reg BI-related enforcement actions (though these have been supplemented by investor-led arbitration cases), and a series of bulletins offering more detailed guidance in select areas they are focusing on and where they have seen deficiencies.
Accordingly, this week the SEC issued a Risk Alert related to dual registrants (who totaled more than 307,500 at the end of 2021, exceeding the number of solely registered broker-dealer representatives [nearly 305,000] for the first time), outlining deficiencies uncovered during recent examinations, including around how firms are disclosing to their clients the capacity in which an adviser is acting, as well as related conflicts. For instance, according to the risk alert, SEC staffers have been finding instances where broker-dealer registered representatives making investment recommendations were not disclosing to clients whether they were acting as a commission-based broker or a fee-based investment adviser at the time of the recommendation.
The SEC Risk Alert also cited firms for not having effective compliance policies and systems tailored to the particular challenges of wearing two hats (broker and RIA) within one business model. Such deficiencies included a failure to provide sufficient guidance and training to their advisors on how to consider reasonably available alternatives (e.g., when it is appropriate to use a brokerage versus advisory account), or to consider costs (e.g., weighing the cost trade-offs of different share classes or fund structures). The SEC also expressed concern that some broker-dealers may be relying too much on surveillance systems that might not have been updated to adequately monitor Reg BI compliance (e.g., monitoring for an inappropriate sale of an annuity to an 80-year-old senior, but not monitoring whether an advisory account was the right recommendation for a client who may not have really wanted or needing ongoing investment management monitoring and implementation and just wanted to execute a trade).
Altogether, the SEC’s risk alert indicates that some broker-dealers have been slow to implement sufficient policies and procedures to fully comply with Reg BI, and highlights in particular the need for dual-hatted representatives to provide clients with more clarity on when they are acting as a commission-based broker and when they were acting as a fiduciary investment adviser. And while the guidance of the recent Risk Alert helps to clarify the SEC’s Reg BI enforcement priorities, continued shortfalls by some broker-dealers and their representatives perhaps suggest that further enforcement actions (and related penalties) might be needed to spur broker-dealers to live up to Reg BI’s (as well as the RIA fiduciary) higher requirements?
(Gregg Greenberg | InvestmentNews)
Last year was painful for many investors, who not only experienced a bear market in stocks, but also, amid rising interest rates, weak performance in their fixed-income investments (often meant to serve as a stabilizer during periods of weak economic performance). And this volatility across many asset classes appears to have driven many investors to seek out fixed annuity products, which offer the potential for ‘guaranteed’ growth and downside protection.
According to life insurance industry-funded research firm LIMRA, total annuity sales in 2022 rose to a record $310.6 billion, a 22% increase from the previous year and 17% higher than the previous record set in 2008 (another notable down year for the stock market). This was driven in part by surging sales of fixed-rate deferred annuities ($112.1 billion for 2022, more than double the sales of 2021) as well as fixed index annuities ($79.4 billion in 2022, up 25% from 2021), as investors potentially sought the more stable income and downside protection offered by these products (notably, traditional variable sales fell 29% from 2021, perhaps reflecting less risk appetite among annuity purchasers). Further, amid rising payout rates, single premium immediate annuity sales grew 44% in 2022 to $9.1 billion and deferred income annuity sales were up 24% to $2.1 billion.
In the end, while the market volatility and rising interest rate environment of 2022 likely contributed to the growth of annuity sales, the surge seen in 2022 also demonstrates the value of identifying client retirement income preferences, as advisors who do so can help clients proactively develop an appropriate income strategy rather than reactively responding to the next round of market volatility!
(Tracey Longo | Financial Advisor)
The competition for talent amid a continued tight labor market was one of the primary themes of 2022. And in the hunt for ways to better attract talent, many companies appear to be looking to their benefits packages, including their 401(k) offerings, presenting an opportunity for financial advisors who help companies design and implement these plans.
According to Vestwell’s 2023 Retirement Trends Report, 90% of both small business employers and employees surveyed are interested in working with a financial advisor to guide them through their retirement plan options. Among the services they most value from advisors, employers highlighted investment recommendations and management (cited by 65% of respondents), educating employees (62%), plan design recommendations (57%), plan administration (54%), and fiduciary oversight (51%).
Amid the competition for talent, 44% of employers said they were considering plan design changes, and 41% of employers increased their company match in the past year (with 31% introducing auto-enrollment and 18% relaxing eligibility standards). Notably, 70% of plan advisors reported that the market volatility experienced in 2022 did not affect their retirement business in the small plan market, perhaps reflecting a renewed focus by employers on their retirement benefits packages as they seek to attract and retain talent.
Overall, the study suggests that there is a strong appetite among employers and their employees for advice regarding their retirement accounts. Which potentially creates a significant opportunity for advisors to generate revenue by helping companies achieve their goals for the plans and providing planning services to their employees!
(Sara Grillo | Advisor Perspectives)
Advisors typically get into the financial advice business to actually provide financial advice rather than spend time marketing their services. But given that attracting clients is necessary to have a business in the first place, business development is a necessity for growing firms. At the same time, marketing to prospective clients does not necessarily have to come at a cost of significant time or money.
For advisors who want to spend minimal time and money on marketing, Grillo suggests a series of actions that might only take two hours each month. The first step is to write a monthly email newsletter that answers a question that came up during client or prospect meetings during the month (and these questions can easily be tracked in a Word document or a notetaking program like OneNote or Evernote). To keep writing time under 30 minutes, she suggests following a template that first sets up the misconceptions about a topic (e.g., how marginal tax rates work) and then is followed by the advisor’s insights on the subject. After sending out the newsletter, the next step is to analyze data from the firm’s email marketing tool (e.g., Constant Contact or MailChimp) to find out who opened the email and who clicked a link inside it (which can indicate high interest in the subject). The advisor can then call or email these individuals with further information on the topic; this shows a level of personal attention that is not often seen. The email newsletter can also be repurposed as a social media post by boiling the content down into a single sentence that can drive engagement (e.g., “How come everybody thinks the 32% tax bracket means you pay 32% of your income in taxes”?); the advisor can then follow up with those who engage with the post.
With the remaining time in the two-hour marketing budget, advisors can build relationships by sending handwritten thank you notes to individuals who did something nice for their firm in the previous month. These could be centers of influence (e.g., CPAs, estate attorneys), community leaders, or clients who made a referral, among other potential recipients. At a time when much communication takes place online, a handwritten note can show a high level of gratitude that could be returned in cooperation that drives more prospects to the advisor’s firm.
Ultimately, the key point is that marketing does not necessarily need to be a full-time activity for advisors. By creating engaging content, reaching out to those who respond to it, and showing gratitude to those who have supported their business, advisors can drive client growth without sacrificing a substantial amount of time!
(Susan Theder | Financial Advisor)
Advisors trying to create a marketing strategy are faced with a wide range of marketing tactics to choose from, from content creation to marketing events to paid referrals and beyond. To help quantify the value of these tactics (and their cost in both time and hard dollars), the 2022 Kitces Report on How Financial Planners Actually Market Their Services analyzed how often certain tactics were used by advisors and whether they were successful in generating prospective clients. And from this data, Theder has identified five tactics to help advisors improve the return on their marketing investments.
One theme from the Kitces Research study was the importance of creating a clear marketing plan, which can then help focus the firm’s marketing efforts. Key questions to answer include the intended audience (i.e., the firm’s ideal client persona), where this audience can be found (e.g., what social channels or websites do they use), as well as identifying the ‘problems’ the firm can solve for prospective clients.
Next, Search Engine Optimization (SEO) can be a low-cost tactic to drive traffic to the firm’s website. For instance, while it can be challenging to appear as a top result for short queries (e.g., “Social Security”), firms can leverage content on their website to gain a higher spot in the search results for ‘long-tail queries’ (e.g., “When should I take Social Security”?). By providing specific keywords related to the query in the title of the content, going in depth on a single topic, and including at least two links to other content on the website, among other actions, firms can increase the chances that their site will rise in the search ranking. In addition, firms can improve their ‘local’ SEO (e.g., for individuals who search for ‘financial advisor near me’) by claiming and completing their Google My Business profile to demonstrate the firm’s value for prospective clients.
Drip email campaigns also can be an effective tool for advisors. While firms might already have a regular email newsletter that they send to current clients, creating valuable, educational, and timely content to send to prospects (whose information can be collected using lead-generation tools like e-books or newsletters) can help demonstrate the firm’s expertise and keep them top-of-mind for prospects.
Also, firms are increasingly finding that webinars and virtual seminars can be effective marketing tools. These allow advisors to provide valuable content while demonstrating their expertise to viewers for little monetary outlay. Further, webinar content can be repurposed for other marketing tactics, such as social media posts and videos uploaded to YouTube.
In the end, the goal of many advisor marketing efforts is to keep the firm at the top of prospects’ minds for when they are ready to engage with an advisor. And by creating a clear marketing plan, generating valuable content, and by making it easily found by their ideal target clients, firms can generate a growing number of prospects in an efficient manner!
(Kristen Luke | Advisor Perspectives)
Those starting a financial advisory firm frequently select a client ‘niche’ that they want to target, which can help differentiate themselves and their service offering from more generalist firms. Of course, the advisor must find a way to get in front of individuals in this niche to start the flow of prospective clients. One way of doing so is leveraging a ‘patient zero’ to reach individuals within the niche.
In epidemiology, a ‘patient zero’ is a person identified as the first to become infected with an illness or disease in an outbreak. While this is usually a negative, for advisors, a ‘patient zero’ can be used to spread the word of the advisor’s service offering and trustworthiness (rather than a disease!) to individuals within the advisor’s selected niche. The key, then, is to find an individual who can best serve as this ‘patient’. Typically, this individual will be highly connected to the firm’s niche, be a natural ‘connector’ (i.e., individuals who know a large number of people and regularly make introductions), and have professional or personal experience working with the advisor (preferably as a client). For instance, a new client can often be a ‘patient zero’, as they are usually enthusiastic about the advisor-client relationship during the first few months of working with the advisor.
After identifying a few potential ‘patients’, an advisor can evaluate them by asking to meet one-on-one to get their feedback on the advisor’s business (honoring them by asking for their opinion and expertise while also planting the seed for introductions and referrals). When wrapping up the conversation, important questions to ask potential ‘patients’ include asking what other opportunities they recommend for the advisor to get in front of others in the niche, as well as whether there is anyone else in the niche they recommend speaking to. If the individual has ideas, the advisor can ask them for introductions to gauge their willingness to do so on an ongoing basis in the future.
Once a ‘patient zero’ is selected, advisors can maximize their ability to spread the word by providing them with tools to make it easier for them to discuss the advisor and their work. For example, advisors could provide their ‘patient’ with a podcast, e-book, recorded webinar, or video to give to others in their network (and given the ‘patient’s’ enthusiasm for the advisor, getting them to do so is unlikely to be challenging!).
Ultimately, the key point is that identifying a ‘patient zero’ can be an effective way to jump-start marketing for an advisor working with a niche. And, eventually, new clients will begin to ‘infect’ others, helping spread the word of the advisor’s value proposition even further!
(Nick Maggiulli | Of Dollars And Data)
The four decades from the early 1980s through the early 2020s saw a dramatic decline in interest rates. During this period, the U.S. stock market saw explosive growth, which has led some observers to suggest that the tailwinds created by falling interest rates (e.g., reduced yields on fixed income products can make equities more attractive) were perhaps the primary driver of the lofty stock returns during the period (and, by extension, that a period of increasing rates could dampen stock returns going forward).
However, Maggiulli’s analysis of interest rates (as represented by the 10-Year Treasury rate) and real U.S. stock returns during the past century suggest that while there have been several periods where changes in interest rates and stock returns had a strong inverse correlation (i.e., falling interest rates were associated with higher stock returns, and vice versa), these periods were largely concentrated in the 1980s (when interest rates dropped precipitously). Outside of this period, the relationship between the change in interest rates and stock performance is much weaker. Further, the limited relationship between changes in interest rates and stock returns holds true over decades as well, with some decades showing an inverse relationship (e.g., the 1980s) while others have a positive relationship (e.g., the 2000s).
Rather than changes in interest rates, Maggiulli suggests that company earnings could be the primary driver of strong stock returns outside periods of extreme changes in interest rates. For instance, the total change in the real prices and real earnings of the S&P 500 between May 1997 and September 2022 (when the 10-year Treasury rate fell decreased from 6.7% to 3.5%) were nearly identical. This period can be contrasted with the prior fifteen-year period (between September 1982 and May 1997), when the real price of the S&P 500 increased by 281% and real earnings only rose by about 82%; this period saw a sharp drop in interest rates (with the 10-Year Treasury rate falling from 12.3% to 6.7%), suggesting that investors were willing to pay more for stocks amid sharply falling interest rates (which reduced yields on fixed income products, making them comparatively less attractive than stocks).
And so, given that current interest rates are well below levels seen in the early 1980s, Maggiulli suggests that, absent a severe interest rate shock, company earnings are likely to be a more important driver for stock market returns going forward. Which means that despite the dire warnings of some pundits, advisors and their clients do not necessarily need to assume that higher interest rates will necessarily lead to dampened stock market returns!
(Ben Carlson | A Wealth Of Common Sense)
During the past decade, with interest rates at historically low levels, investors were challenged to earn significant yields from cash or fixed-income instruments. But now, with interest rates rising to levels not seen in many years, bonds and cash savings products could become increasingly attractive. The question, though, is whether investors will turn from riskier (but potentially higher return) investments like stocks to these instruments.
Looking at a variety of historical periods, Carlson found that investors have often been reluctant to turn to bonds, even when they offered historically high yields. For instance, in the fall of 1981, an investor could buy a 30-year Treasury bond with a 15% rate. But investors hesitated to do so, perhaps because elevated inflation levels at the time made the real yield on these bonds significantly lower (though the real yield would improve in the following years as inflation fell). Another notable period was 1987, when interest rates rose from 7% at the start of the year to 10% leading up to the ‘Black Monday’ stock market crash in October. Despite the promise of 10% government bond returns (assumed to be free of default risk), investors were reluctant to buy them, perhaps because stocks in 1987 were up 40% prior to the crash.
Today, with yields on 1-year Treasury bills approaching 5%, the question becomes whether investors will flee more volatile stocks for these fixed-income returns. Carlson suggests that while those saving for a near- or intermediate-term goal might seek to benefit from these yields, others might maintain their equity positions figuring that they will provide higher returns (particularly if nominal bond yields continue to lag behind the inflation rate).
And so, while advisors might expect renewed client interest in bonds as a result of improving yields, the historical experience suggests that a rush to fixed income amid higher rates is not guaranteed. And regardless of whether clients want more fixed income exposure, advisors can continue to add value for their clients by helping them understand the roles of equity and fixed income allocations in their asset allocation and how rising yields could impact their portfolio returns (and volatility) going forward.
(Leslie Scism | The Wall Street Journal)
Indexed Universal Life (IUL) insurance policies have been hot products for life insurance companies, growing from 4% of life insurance sales (as measured by new annualized premiums) in 2008 to 28% of sales by the third quarter of 2022. These policies are often marketed as a way for policyholders to earn higher returns than previous universal life policies (where the crediting rates were pegged to bond rates) by providing a participation mechanism that delivers a portion of the upside price return of the stock market while simultaneously protecting against losses (though upside gains are often capped as well).
However, the enthusiasm for these products appears to have waned over the course of 2022, with sales only up 2% in the third quarter compared to the prior year (compared to a 33% year-over-year jump in the first half of the year), perhaps due to a combination of weak stock market returns (possibly reducing consumer interest in products tied to equity market indices), inflation hitting consumers’ budgets (reducing their ability to pay for IUL premiums), and higher interest rates making premium-financed IUL strategies less appealing as well. In addition, while the downside protection of the policies helped policyholders avoid the sharp negative returns experienced by those investing in the stock market directly, they still faced the fees and charges associated with the policies that could not be covered by market gains within the policy (perhaps surprising many policyholders who were used to their investment gains within the policy more than covering premiums owed).
Further, state insurance regulators are considering stricter rules on IUL marketing materials aimed at consumers, particularly hypothetical return projections that may be overly rosy and could overpromise unrealistic return expectations for the policies. Because policyholders count on the policy’s accrued savings to help pay rising death-benefit charges as they age (as well as ongoing interest payments if premium-financed), lower-than-expected returns (or higher-than-expected borrowing rates) while taking ongoing loans against the policy for spending purposes could leave them stuck with a significant tax bill (as if loans against the policy get large enough, the borrower might face the prospect of surrendering the policy, which can also create a tax burden!).
Ultimately, the key point is that regulators (and even certain insurance industry advocacy groups like the Coalition of Concerned Insurance Professionals) are concerned about how IUL policies are being marketed to consumers, particularly when it comes to assumed rates of return and borrowing costs. Which means not only the potential for additional regulation to curtail their use, but also the potential that advisors may find new clients coming in with existing ‘legacy IUL’ or other permanent life insurance policies, where the advisor still needs to understand the mechanics of the policy to help the client decide whether to hold it or cancel it, or, if it has a sizable loan, whether to ‘rescue’ it!
(Kiko Llaneras, Andrea Rizzi, and José Álvarez | El País)
The term Artificial Intelligence (AI) might conjure up a variety of images, from Deep Blue, the computer that defeated chess champion Garry Kasparov in 1997, to Watson, IBM’s computer that defeated two Jeopardy! champions in 2011. But just in the past few years, AI systems have become ubiquitous in day-to-day life, with applications ranging from recommendation systems (e.g., those used by YouTube and Netflix) to voice assistants (e.g., Siri or Alexa). And recent advances suggest that AI could have an even larger impact on society in the future.
The ability of AI systems to quickly process massive quantities of information creates many potential benefits for humans. These could include speeding up scientific and medical discoveries (e.g., an AI system that recently predicted the shape of nearly every known protein). And on the education front, adaptive learning tools powered by AI could help create more tailored educational experiences for students. On a more day-to-day level, the generative AI system ChatGPT can respond to a wide range of natural language prompts in a range of styles (e.g., write a sonnet about factor investing). While this could prove helpful on a standalone basis, integrating this technology with ubiquitous voice assistants such as Siri or Alexa could significantly expand their functionality.
At the same time, AI is not without its potential risks. At a broad level, ensuring that AI remains ‘aligned’ with human interests is a concern of many industry participants. In addition, AI systems have the potential to threaten a range of jobs, from computer programing to creative tasks that were previously thought to be largely immune to replacement by digital tools. Though one possibility is that in the future there will be many ‘cyborg’ positions, manned by humans who are able to best leverage AI systems (e.g., those who can best provide prompts to ChatGPT to get an accurate response).
Altogether, the pace of AI improvement has quickened rapidly during the past several years, advancing from being able to beat the top human chess players to creating high-quality art. And while the future course of AI applications remains to be seen, it appears that AI will play a significant role in both day-to-day life and society as a whole in the years to come!
(Justin Carbonneau | Validea)
In recent weeks, the Internet has been abuzz exploring the possibilities of ChatGPT, a generative Artificial Intelligence (AI) system that allows users to ‘prompt’ the program by asking questions and making requests, from providing a recipe for chocolate chip cookies to answering whether it might replace financial advisors. But beyond these novel functions, questions remain about its potential uses and the future trajectory of AI as a whole.
In the near term, ChatGPT could have the biggest impact on the speed of research. Instead of having to perform multiple Internet searches and combining information from various sources, a single prompt to ChatGPT or a similar tool could provide a concise summary of the issue at hand in significantly less time. Further, large language models like ChatGPT can help process large quantities of unstructured text or numerical data into a more useful format (which could be potentially useful for financial advisors who have to work with reams of client data).
Nevertheless, ChatGPT is not without its shortcomings. For instance, the tool will sometimes produce an incorrect output (and if users feel the need to verify ChatGPT’s output, much of the efficiency gains from using it could be lost). And in the world of education, ChatGPT’s ability to produce natural-sounding language has raised concerns that students could simply write papers by prompting ChatGPT and copying its output (though ChatGPT’s creators this week released a tool to help identify text created by AI tools).
Altogether, while it might seem like a novel tool today, ChatGPT and other AI tools have the potential to significantly upend research, writing, and creative processes in the future as their capabilities advance. And advisors could stand to benefit from these capabilities as they are integrated into tools across the AdvisorTech landscape!
(Ryan Neal | InvestmentNews)
Financial advisors have faced a range of potential technological threats over the years, from online brokerages that allowed consumers to buy and sell stocks on their own (rather than through a broker) to the introduction of robo-advisors, which provide automated asset allocation at a lower price point than many advisors. But while these technologies have shifted the work of advisors (e.g., the move toward more comprehensive financial planning from ‘just’ investment management), human advisors have not been displaced by their ‘tech’ counterparts.
But the introduction of more advanced technology tools, including those that incorporate Artificial Intelligence (AI), could pose a greater threat to advisors. For instance, given that one study showed that it is possible to form emotional bonds between and a computer for the sake of mental health therapy, the idea that humans could trust an AI tool to not only crunch financial numbers but also understand the psychological side of advice does not seem far-fetched.
At the same time, advisors have benefited in many ways from advances in financial technology, with the most effective often being ‘cyborg’ advisors who gain the back-office efficiencies provided by technology and spending more time with clients providing the services clients prefer to get from a human rather than technology. And generative AI systems like ChatGPT could allow advisors to produce content more quickly (e.g., prompting it to produce a blog post on Roth conversions) and only have to edit it themselves.
Ultimately, the key point is that while previous predictions about the coming demise of human financial advisors have been proven false, the ways in which advisors serve their clients and operate their businesses are likely to continue evolving in the future as more advanced financial technology and AI-powered systems are developed. And so, while AI systems might not replace human advisors tomorrow, technological advancement could narrow the areas where humans provide superior service, perhaps prompting further adjustments to the advisor value proposition?
We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.