Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that a recent study has found that while total financial advisor headcount across all channels only increased by 0.3% in 2023, the RIA space showed significantly more strength, with 10.4% growth, as breakaway brokers and new advisors see the potential benefits of the RIA model. Nevertheless, there is potential for many individual RIAs to expand their staffing further, with the addition of specialized planning and operations roles being seen as a potential avenue to boost firm growth.
Also in industry news this week:
- While the total number of RIA M&A deals in 2023 fell short of a record-setting 2022 amidst an elevated interest rate environment, continued interest from private equity firms and creative deal structures could boost deal flow in 2024
- While the SEC authorized 11 "Spot" Bitcoin ETFs last week, comments from chair Gary Gensler suggest the regulator will look closely at whether RIAs using these products are abiding by their fiduciary duty to their clients
From there, we have several articles on practice management:
- Why the SEC's Investor Advocate and external consumer advocates are urging the regulator to temporarily suspend the use of mandatory arbitration clauses by RIAs
- Key mistakes advisory firms sometimes make when creating employment agreements, from not being clear with employee responsibilities to not detailing how bonuses are determined
- How to differentiate between different types of non-compete agreements, and how firms and advisors can work together to set the terms for a mutually satisfying agreement
We also have a number of articles on retirement:
- How booming stock and housing markets helped the Baby Boomer generation build wealth for retirement, despite earlier predictions that this generation could suffer amid a shift from defined benefit to defined contribution retirement plans
- Why company executives face unique challenges when contemplating retirement, and steps that firm leaders and their clients can take to promote a smooth transition
- A new survey indicates that a majority of workers would prefer to slowly phase out of work rather than retire completely all at once
We wrap up with 3 final articles, all about career development:
- The lessons one advisor learned during the first 20 years of her career
- Why thinking about a career transition not only involves the worker themselves, but also their spouse or other stakeholders
- The advice seasoned advisors would want to give their younger selves
Enjoy the 'light' reading!
RIAs Are A Bright Spot In Attracting Advisor Talent, Though Many Have Yet To Reach Optimal Staffing Levels
(Brooke Southall and Jeffrey Bartsch | RIABiz)
Historically, broker-dealers, and large wirehouses in particular, have led the way in terms of advisor headcount and Assets Under Management (AUM). Nonetheless, recent years have seen a shift toward the RIA model, both among advisors (as brokers break away to start their own independent firms and aspiring advisors seek positions that don't rely on an 'eat what you kill' approach) and consumers (who might be attracted to the differentiated service proposition they can experience working with an RIA that isn't manufacturing its own financial services products for sale).
Recent findings from research and consulting firm Cerulli Associates confirm this trend, with independent RIAs seeing headcount growth of 10.4% in 2023, compared to growth across all channels of only 0.3%. The broader industry could face further challenges as well in the coming years as many seasoned advisors retire; in fact, Cerulli expects the industry to lose more than 109,000 advisors (or 37.5% of the total advisor population) to retirement in the coming decade.
While the RIA space appear to be faring much better than wirehouses and other channels when it comes to attracting talent, there is room for individual firms to grow their client base and, potentially, profitability, by hiring further. For instance, while there were approximately 18,500 in the latest count, these firms have 'just' 78,800 employees. While some advisors might be happy as a solo shop, 3-person team, or similar smaller practice, firms looking to grow could seek to add specialized roles to improve their efficiency and service level. Such roles could include specialized planning support (e.g., advanced financial planning or tax planning) or operations roles (e.g., compliance or marketing) that could take responsibilities off of the firm owner's plate, freeing up their time for more high-value (and, possibly, enjoyable activities). For firms looking to fill these specialist roles, career changers could be a valuable source of talent; for example, a legal professional interested in a career change might be interested in a compliance role, while a tax professional might be interested in moving to a planning firm to focus more on tax planning strategies than on filling out tax returns.
Ultimately, the key point is that while RIAs are outpacing other channels of financial advice when it comes to headcount growth, there remain opportunities to attract (and retain) new talent – from having well-defined specialist positions, to leveraging the skills of career changers, to creating career tracks that allow new hires to see what their career path might look like at the firm!
(Josh Welsh | InvestmentNews)
While RIA Mergers and Acquisitions (M&A) activity had been brisk for many years, with heightened demand from acquirers (often larger firms, sometimes infused with Private Equity [PE] capital) driving up valuations, the pace of deals started to slow in late 2022 as rising interest rates and other factors served as headwinds to continued deal flow. Which led to expectations that 2023 could see a cooling of M&A activity.
With 2023 in the rearview mirror, it appears that these predictions were largely correct, though the decline in activity might not have been as large as some thought given the stiff headwinds to deals. According to data from investment bank Echelon Partners, while the number of RIA M&A deals declined to 321 announced transactions from a record-high 340 in 2022, the average assets per transaction actually increased by 3.9%, boosted by several large deals. Fidelity found similar results (using different criteria than Echelon) in terms of a dip in deal count, with 226 transactions for the year (down 1.7% from the prior year). According to Fidelity, top acquirors for the year (in terms of the number of deals) included Wealth Enhancement Group (with 15 deals), Focus Financial Partners (13), Hightower Advisors (11), Captrust (9), and Mercer Advisors (9).
Both Echelon and Fidelity noted that PE investors continued to dominate deal flow, participating in 71% of transactions, according to Echelon. And while these buyers faced increased borrowing costs (due to the rising interest rate environment), creativity in deal structures (e.g., structured minority investments with features such as preferred distribution rights) helped buoy the number of deals. Continued strong interest from firm owners in pursuing deals (amid an aging advisor population) was also cited as a driver of deal flow.
Altogether, these findings suggest that while the total number of RIA M&A transactions might have dropped in 2023 (from record highs in previous years), there remains continued appetite from both buyers and sellers for further deals. And if interest rates reverse course, the ensuring lower cost of borrowing could propel a new wave of deals in the coming year!
(Brooke Southall | RIABiz)
With its dramatic price increases over the past decade (coupled with sharp declines along the way!), Bitcoin has caught the imagination of a wide range of investors. But despite entreaties from a range of product providers, the Securities and Exchange Commission (SEC) for several years refused to approve a "Spot" Bitcoin ETF (which would invest directly in 'physical' Spot Bitcoin, rather than in Futures products), citing the lack of a regulated exchange able to monitor Bitcoin trading to detect fraud and manipulation. Nonetheless, after significant anticipation (and a court ruling criticizing the regulator's previous position), the SEC reversed course last week, authorizing 11 Spot Bitcoin Exchange-Traded Funds (ETFs), which began trading last Thursday.
While the SEC approved the new ETFs, a statement from chair Gary Gensler suggests that the regulator did not do so enthusiastically and is planning to keep a close eye not only on the products themselves (and whether they might be subject to price manipulation or other fraudulent activity), but also on regulated advisors and brokers who might want to use these products with their clients, with Gensler specifically citing investment advisers' fiduciary duty under the Investment Advisers Act and the best interest standards for broker-dealers under Regulation Best Interest. He also noted that the approvals were limited to Bitcoin-linked products and does not signal the SEC's views on potential products linked to other crypto assets. "Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto", Gensler concluded.
In the end, while the introduction of "Spot" Bitcoin ETFs provide advisors with a way to provide clients with exposure to Spot Bitcoin prices using its regular custodian (avoiding many of the security and custodial challenges of holding Bitcoin directly), Gensler signaled that the SEC will be scrutinizing advisors' use of these products. Which suggests that RIAs taking advantage of these products could face questions from SEC examiners about whether they are being used in an appropriate manner (given Bitcoin's volatility and the underlying opacity in trading) with their clients!
(Patrick Donachie | Wealth Management)
Investment advisory and broker-dealer firms often include arbitration clauses in their client agreements, which stipulate that any dispute between a client and the firm will be heard not in the court system, but through a third-party arbitrator who hears evidence from both sides and issues a (typically binding) ruling. The financial industry generally favors arbitration because it can be faster and less expensive than the court system; however, unlike a lawsuit heard in court, arbitration hearings do not become public record, which enables firms to save face if found guilty of wrongdoing and limits the ability of prior cases to become precedent for future plaintiffs. In theory, clients and the advisory firms they're challenging might try to agree on whether a case will be heard in a court of law or via arbitration (as each weighs both the costs and whether they think they will receive a more favorable outcome in one form or another), but in practice arbitration clauses are often mandatory with advisory firms, meaning that a client who signs a brokerage or advisory agreement containing the clause loses their right to ever take that firm to court in the event of a dispute. Even if the client believes that might have been the better forum to have their case heard.
Following a request from the House Committee on Appropriations (and calls from a variety of consumer and investor advocacy groups) for the SEC to collect data on this issue, the regulator last year published a report assessing the state of RIA mandatory arbitration clauses, finding that 61% of SEC-registered RIAs have these clauses, with the vast majority using private arbitration forums to hear claims (which can be more costly than the dispute resolution fora used by other firm types, such as the system run by FINRA for adjudicating customer and registered representatives' claims against brokerages).
Subsequently, the SEC's Office of the Investor Advocate (which is charged with, among other things, providing a voice for investors when it comes to regulatory issues) in its 2023 annual report recommended temporarily suspending the use of mandatory arbitration clauses by RIAs "until further exploration of the associated costs and benefits to advisory clients is undertaken", noting that "preemptively limiting the damages available to clients in arbitration, or limiting the types of claims that clients may assert against the advisor in arbitration" could mislead retail clients into not pursuing valid claims. This measure has gained the support of the Public Investors Advocate Bar Association (PIABA), whose members represent investors in disputes with the securities industry and frequently comments on regulatory measures. PIABA cited, among other reasons, the potential for scenarios where the costs of going to arbitration for a client could be more than might receive as an award.
Altogether, while RIAs often differentiate themselves from other advisory firm models on transparency grounds (e.g., in how and how much clients pay in fees), the SEC report demonstrates that the ubiquitous presence of mandatory arbitration clauses and the lack of data surrounding them is an area of relative opacity for RIAs. And while it is unclear whether Congress or the SEC will take action to restrict the use of these clauses, firms can consider on their own whether the potential benefits of using them (e.g., costs to the firm and speed of resolution) outweigh the potential to turn off prospective and current clients (at least those who are aware of their use?).
(Richard Chen | Advisor Perspectives)
Hiring a new employee can come with a range of tasks for an advisory firm owner, from crafting a job listing to engaging in an interview process. In addition, once a candidate has been selected, firms typically create employment agreements that outline the expectations and responsibilities of both the employer and the new hire. And while a firm owner might be tempted to save time by using a standard employment agreement template, several parts of the agreement could merit additional attention and customized language in order to prevent potential problems down the line.
For instance, an employment agreement that clearly describes the employee's roles and responsibilities can ensure that the new hire clearly understands the expectations prior to joining the firm and can prevent disagreements later on if the employee claims that certain job functions go beyond their role in the firm. In addition, appropriate confidentiality, non-competition, and non-solicitation clauses can allow a firm and the employee to be clear on rules surrounding the use of client information as well as the rights and restrictions of employees if they eventually leave the firm.
Another key aspect of an effective employment agreement is to provide sufficient detail on employee compensation terms. For instance, a firm might clarify whether bonuses are fully at the discretion of the firm or whether they are tied to achieving specified business objectives. Other potentially important clauses include provisions to protect against employee misconduct (e.g., obligations not to misuse client information from a previous employer), specifying the rights of employees upon leaving the firm (e.g., clarifying potential severance benefits and what could lead an employee to be terminated "for cause"), and to include enforceable provisions for dispute resolution (e.g., mandatory arbitration clauses that abide by applicable state and federal laws and regulations).
Ultimately, the key point is that while drafting an effective employment agreement might take additional time up front, doing so can prevent additional headaches for an advisory firm (and for its employees) in the long run!
(Lisa Larrivee | XY Planning Network)
When an advisor accepts a position at a new firm, they are often confronted with a range of paperwork, from tax documents to benefit forms. The longest and most detailed document they might encounter is the employment agreement. While it might be tempting to give it a quick look-over before signing, a more detailed review is often warranted, as these agreements not only influence what employment will look like at the particular firm, but also can restrict the employee's behavior if they were to leave for a different firm or to start their own practice.
Many firms will include some type of non-compete clause in their employment agreements (or in a separate document) to prevent departing advisors from taking clients with them. These agreements come in a variety of flavors, which can also impact how legally enforceable they are (notably, a variety of states have specific provisions either outlawing or greatly restricting these clauses). At the most restrictive level, a comprehensive non-compete might prohibit a former employee from acting as a financial advisor, or providing any related services, to a firm that competes with their (former) employer. Given that advisory firms are in competition with each other, this style of clause could prohibit the former advisor from working in the profession altogether (though this level of restrictiveness often makes these harder to enforce). Alternatively, a non-accept clause is somewhat less restrictive, allowing the former employee to remain in the advice industry while prohibiting them from accepting the business of a client from the previous firm (even if the client approached the advisor on their own initiative). Alternatively, a non-solicit agreement can prevent advisors from directly soliciting clients from their former firm, while allowing the advisor to accept these clients' business if the client finds them organically.
In sum, while non-compete and similar agreements can help a firm protect its interests, new employees can help ensure their future business prospects are not unduly restricted by reviewing proposed agreements and suggesting amendments where necessary. Further, employers and employees can work on such agreements in a collaborative manner (perhaps using a customizable agreement template or, for more complicated situations, with assistance from legal professionals) so that both sides understand the restrictions and how they apply to different types of clients (e.g., clients that the advisor brought with them versus clients sourced by the firm itself)!
(Steven Malanga | City Journal)
The employer-based retirement system in America has shifted significantly over the past several decades, typified by the transition away from private sector defined benefit retirement plans (which covered about 46% of workers in the 1970s but only 15% today) and towards defined contribution retirement plans. This change led some commentators to predict that many Baby Boomers (those born between 1946 and 1964), who were in their prime working years during this transition and had to navigate the new defined contribution system, would end up with meager retirements, whether due to inadequate contributions, poor market performance, or a combination of the two.
However, despite some of these dire predictions, Baby Boomers as a whole appear to be well-positioned financially for successful retirements. Many in this generation have benefited from strong market performance during their working years (despite multiple major market drawdowns along the way) and significant home price appreciation (particularly in the past few years), which, combined with their Social Security benefits, leaves certain retirees with a range of potential income streams from which to draw to support their lifestyle, even if Social Security might represent their only 'guaranteed' source of income. In addition, the transition from defined-benefit plans to defined-contribution plans could leave many of the spouses and children of workers (at least those with significant savings in retirement accounts) better off, as this savings could represent a greater benefit than they might have received from a defined-benefit pension, particularly if the covered worker and/or their spouse died early in their retirement.
In the end, while Baby Boomers faced many bumps along the way (from the tech bubble to the Great Recession), many are defying gloomy predictions and have amassed sufficient assets for a prosperous retirement (though this wealth is not universal, and some Boomers will end up relying on Social Security to fund most or all of their retirements). At the same time, the continued need to manage these assets (e.g., potentially adjusting their asset allocation as they transition from work to retirement) presents a significant opportunity for financial advisors to work with those in this generation (and, potentially, their beneficiaries)!
(Rick Smith, Maggie Wilderotter, and Dennis Carey | Harvard Business Review)
Financial advisors working with pre-retirees can play a valuable role not only in helping their clients prepare financially for retirement but also psychologically as well, as this transition can be jarring for those who have worked a 9-to-5 (or longer) for 40+ years. At the same time, some advisory firm owners might find that they have not done much planning for their own retirements, perhaps assuming that they will work well past 'normal' retirement age or that they will be able to ease into the transition.
In interviews with corporate executives in a range of fields nearing retirement age and those who have already made the transition, the authors identified many of the challenges they face and how business leaders can better prepare for a more meaningful retirement. First, executives can broaden their horizons by thinking beyond their current role and considering their values and personal mission. By crafting a purposeful vision for retirement, executives can move beyond 'obvious' next moves (e.g., public company executives transitioning to corporate board service) to pursuing paths they might not have otherwise considered. With this framework established, they can then vet the range of options available to them; otherwise, the lack of opportunities can seem overwhelming. Importantly, opportunities in retirement do not have to be all-or-nothing decisions; exploring part-time options or limited engagements can leave the door open to pursue a variety of opportunities over the course of retirement. Perhaps most importantly, starting to plan well in advance of an executive's actual retirement can provide plenty of time to consider the vision they want to set for themselves and the options available to them.
In sum, while the transition to retirement can be challenging for all workers, it can be particularly difficult for executives who might have tied their identity to the prestige, long working hours, and sense of being needed that can come with such a position. Which means that whether an advisor is working with a client who is an executive or is considering how to transition from their own business, preparing well in advance and maintaining a wide aperture for available opportunities can facilitate this transition and increase the chances of having a meaningful, fulfilling retirement!
(Michael Fischer | ThinkAdvisor)
Retirement often is portrayed as an all-at-once decision, where an employee goes to work on a Friday and is (permanently) unemployed by Monday. Though in reality retirement often comes in many forms, including semi-retirement (where the individual transitions from full-time to part-time status before eventually leaving the workforce altogether). And a recent survey suggests many current workers are exploring these more flexible options.
According to the survey from Principal Financial Group, 52% of employees said they want to gradually decrease the amount of time working in their current field before eventually stopping work, while only 36% said they plan to move immediately from working full-time to not working at all. This phased retirement style was most favored by those in Gen X, with 67% of those surveyed favoring this approach, followed by Millennials (56%), Gen Z (38%) and Baby Boomers (40%). While current workers appear to desire a gradual transition to retirement, a strong majority (72%) of current retirees surveyed said they went immediately from full-time work to not working at all. At the same time, many of those who did take a phased approach have found success, with 75% of those working fewer hours or in a transitional career expressing satisfaction with their current employment.
While companies vary in their application of phased retirements (with 16% of those surveyed reporting that they work with employees on such plans on a regular basis, and 30% saying that they do so occasionally), there are a variety of potential benefits of doing so, including keeping the expertise of tenured workers within the company, allowing for a more effective knowledge transfer from these workers to their replacements. Further, companies could look to hire transitioning workers from other companies on a part-time basis, gaining their expertise without committing to a full-time hire (that is likely to be very expensive given their experience).
This survey suggests that financial advisors might find that many of their clients are not planning for an all-at-once retirement, but rather might be open to a more gradual transition. Which can provide the opportunities for the advisor to add value not only in assessing the effects of such a move on the client's financial plan compared to a more traditional approach, but also in planning for the contingency that the client will change their mind down the line (whether by choice or if health or other circumstances dictate a more abrupt retirement)!
(Blair duQuesnay | The Belle Curve)
Wisdom is often gained through experience (both the good and the bad). For duQuesnay, reaching 20 years in the financial advice industry has left her with a variety of lessons to share with aspiring advisors.
First, she urges new advisors to be patient. While recent graduates or career changers might be itching to lead on a client relationship, gaining experience by sitting in on and participating in client meetings with seasoned advisors can provide valuable perspective (that is hard to gain from academic study alone), from watching how they react to client questions and comments to how they adapt when the conversation veers from the meeting agenda. Next, she suggests that in the financial advice business, emotional intelligence is more important than intellectual intelligence. Because while advisors do need technical skill to craft effective financial plans, she believes the ability to relate to clients and understand their motivations is more important for success as an advisor. Relatedly, she suggests that learning about clients' lives is the most effective way to build a financial plan for them, as the advisor will better understand the clients' motivations and the clients will be able to relate better to the plan that is created.
Strong communication skills are also an important part of finding success as a financial advisor. Beyond the ability to build rapport with clients, advisors sometimes also have to engage in difficult conversations, whether it is suggesting that the client will have to work longer to meet their retirement spending goals or walking a client back from a major change to their asset allocation during a bear market. Though notably, good communication does not necessarily mean an advisor's ability to present a financial plan well; often, the best course of action for an advisor is to sit back and listen to a client's preferences or concerns, or to allow for (potentially awkward) silence when a client is thinking about a question the advisor has asked.
Finally, duQuesnay notes that while working as a financial advisor is one of the best jobs around, it can be stressful, not only because of the hard work that goes into serving clients (and potentially building a business), but also due to the psychological burden that comes from managing clients' life savings. With this in mind, crafting a wellbeing practice (whether physical, mental, and/or spiritual) can increase the chances that an advisor will be able to thrive in the profession for the long haul.
Altogether, duQuesnay's hard-won suggestions offer a framework for newer advisors to succeed in their careers, which not only will benefit themselves personally, but also allow them to better serve their clients!
(Herminia Ibarra | Harvard Business Review)
Advice about career transitions (e.g., changing industries mid-career) is often centered on the worker themselves and what choice will be best for their career prospects and personal satisfaction. At the same time, many workers are not operating in a vacuum, as they might have a spouse (whose own career ambitions could influence the decision) or family members who depend on the worker's financial support.
With this in mind, Ibarra, suggests a 2-pronged approach to thinking creatively about a potential career transition. The first step is for both the potential career changer and their primary stakeholder (often a spouse or life partner) to create a list of possible selves (e.g., what jobs do they want to pursue, where they will live) and then compare notes. This exercise can reveal where each partner's goals might be in sync (e.g., perhaps both partners want to take a sabbatical to travel the world) while others might be in conflict (e.g., one partner wants to take a job in another city, while the other is unable to move elsewhere if they want to advance in their current company).
At the same time, it also can be valuable to brainstorm with those outside one's immediate family, as spouses and others might have a hard time envisioning the worker taking on a totally new professional identity. With this in mind, finding a group of like-minded individuals (e.g., those in a similar career stage or who are contemplating a change) can allow those considering a career change to speak openly and relate to each other's concerns without having a personal stake in the ultimate choice.
In the end, because an individual's career choices not only affect themselves, but also those closest to them, a combination of collaborative exploration and brainstorming (with both 'insiders' and 'outsiders') can often lead to better outcomes not only for a worker, but also for their spouse and/or other key stakeholders as well!
(Ben Mattlin | Financial Advisor)
Over the course of a career, financial advisors are bound to make some mistakes, or at least learn hard-won lessons that they wished they had learned earlier. With this in mind, Mattlin interviewed a variety of advisors to find out about the lessons they wish they knew earlier in their careers.
Some advisors emphasized avoiding cookie-cutter approaches to advice, instead recommending that advisors dig deep into their clients' lives to better understand their wants, needs, and wishes. Given that these (often difficult) conversations require significant trust in the advisor-client relationship, being able to read behavioral signals and to cultivate a relationship over time are both crucial. Also, an attitude of flexibility can help advisors adapt client plans when their circumstances change.
Other advisors focused on career and personal development advice. These lessons include seeking out mentors when possible (both within and outside the financial advice industry) and taking time out to ensure balance between an advisor's personal and professional lives (e.g., finding time for outside activities and sufficient sleep). Also, advisory firm owners cited the importance of focusing on running their business in addition to working with clients, as transitioning from employee advisor to firm owner can come with a variety of challenges.
Altogether, while these advisors were largely satisfied with the course of their careers, they often wished they could apply these lessons learned earlier. Nonetheless, this list provides an opportunity for others to learn from and apply their wisdom as they continue on their own journeys as financial advisors!
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.