Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news of a survey indicating that about 90% of financial advisors would switch firms based on bad technology at their current firm, and that 44% have already done so. The survey also suggests that a firm's tech stack can affect its ability to attract and retain clients, with 93% of advisors who said they work with state-of-the-art technology reporting that they have added new clients as a result of another firm's bad technology, and 58% of all advisors surveyed reporting they had lost new business due to bad technology.
Also in industry news this week:
- A House committee has advanced a bill that would extend several expired business-related tax measures from the Tax Cuts and Jobs Act and would increase the value of the Child Tax Credit
- The SEC released its examination priorities for 2024, which include a focus on advisers' adherence to their duty of care and duty of loyalty obligations, including when recommending complex investment products
From there, we have several articles on marketing:
- How financial advisors can address the "Curse of Knowledge" to communicate more effectively with prospects and clients
- How advisors can overcome "impostor syndrome" and market themselves effectively when serving a niche clientele
- How advisory firm owners can better align their staffing and marketing expenses with their growth goals
We also have a number of articles on retirement planning:
- A variety of limits and rules related to retirement planning are changing in 2024, introducing several potential opportunities for financial advisors to use with their clients
- Why financial advisors and retired clients themselves might both be responsible for the relative lack of popularity of immediate annuities, despite the potential benefits they offer
- How retirement income guardrails could help retired clients spend down their assets in a sustainable manner in a variety of market environments
We wrap up with three final articles, all about Artificial Intelligence (AI):
- How Enterprise Large Language Models could help advisory firms overcome the privacy and compliance challenges of using publicly available AI tools
- Why skilled human translators continue to survive amidst competition from AI, and the potential lessons their experience offers for financial advisors
- Why certain AI tools are less cost-effective than human workers for many job functions
Enjoy the 'light' reading!
(Michael Fischer | ThinkAdvisor)
While the business of financial advice requires a certain amount of a face-to-face (or perhaps Zoom window-to-Zoom window) contact with clients, there is no shortage of advisor technology solutions to increase the efficiency of their business and how the advice they provide is prepared and delivered. That said, the quality of different firms' tech stacks can vary widely; while one might be relying on proprietary in-house software developed years (or even decades) ago, others might be willing to adopt the latest available technology from outside vendors. Though given the costs of adopting a new AdvisorTech solution or changing providers within a category (both in terms of the monetary outlay and the time it can take to migrate client data and train advisors on the new tool), firms might wonder whether having a state-of-the-art tech stack is really worth the ongoing switching costs to maintain.
According to a recent study by AdvisorTech provider Advisor360, a sub-par technology experience can hurt a firm's business in terms of keeping both advisors, and clients, on board. For instance, the study found that about 9 in 10 advisors would switch firms because of bad technology at their current firm, with 44% of advisors surveyed already having done so. Overall, 65% of respondents thought their current tech stack needs to be improved, with client onboarding, bad data, as well as a lack of automation and artificial intelligence tools being cited among the biggest problems. In terms of winning (and retaining) clients, 93% of advisors who said they work with state-of-the-art technology said they have added new clients as a result of another firm's bad technology, while 58% of all advisors surveyed said they had lost new business due to bad technology.
Notably, the study doesn't necessarily clarify whether being the "best of the best" in advisor technology really allows a firm to get ahead (and whether advisors or clients will choose a firm on that basis alone), but subpar technology that lags the available alternatives is clearly a detriment that can cost firms both advisor talent and clients. Which suggests that firms at least need to be mindful of not falling materially behind in technology – especially in the 'core' categories (e.g., CRM, financial planning software, and portfolio management tools), even as forward-looking firms try to compete for advisor talent but not only checking all the 'core' boxes but investing into emerging AdvisorTech categories (e.g., advice engagement) as well!
(Melanie Waddell | ThinkAdvisor)
The Tax Cuts and Jobs Act (TCJA), passed in late 2017, was the most substantial tax reform passed in many years, covering a wide range of tax areas, from adjusting tax brackets to merging personal exemptions into an expanded standard deduction. Notably, though, many aspects of the TCJA were not permanent, leaving the decision of whether to extend certain measures to future Congresses.
Last week, bipartisan legislation seeking to extend and/or expand certain parts of TCJA easily passed through the House Ways and Means Committee, though its future is uncertain. Under the Tax Relief for American Families and Workers Act of 2024, businesses would benefit from 100% bonus depreciation (i.e., being able to immediately deduct 100% of the purchase price of eligible assets), a measure that expired at the end of 2022, as well as an expansion of the small-business expensing cap (i.e., the amount of investment a small business can immediately write off) to $1.29 million from $1 million. In addition, the legislation would expand the Child Tax Credit, adjusting it for inflation and increasing the limit on refundability for (typically low income) households for whom the credit exceeds their tax liability. These and other measures in the legislation would be in place through 2025 (when many other provisions in the TCJA are scheduled to sunset) and would be paid for by tighter enforcement of and changes to the COVID-era employee retention credit.
The proposed legislation will now move to the House floor for debate. Though while the agreement was made on a bipartisan basis, it could have trouble making it through the full House and Senate given that the legislation required both parties to make sacrifices (e.g., many Democrats might push for a larger expansion of the amount of the Child Tax Credit in addition to expanding the amount that is refundable). Altogether, while this proposed legislation might not be as impactful as the original TCJA, it could positively benefit certain business owner clients (particularly those whose businesses make capital or R&D investments) as well as some low-income families (who an advisor might work with on a pro bono basis)!
(Tracey Longo | Financial Advisor)
Each year, the Securities and Exchange Commission (SEC) publishes a list of examination priorities, detailing the areas in which the agency plans to focus based on where it believes present potential risks exist to investors and the overall market. Notably, the regulator's 2024 report covers several hot-button issues relevant to the advisor community, including a particular focus on eliminating or fully disclosing conflicts of interest.
The SEC said that when it examines RIAs, it will place a priority of ensuring advisers' adherence to their duty of care and duty of loyalty obligations. In particular, the SEC will focus on investment advice related to complex products (e.g., derivatives and leveraged ETFs), high cost and illiquid products (e.g., variable annuities and non-traded REITs), and "unconventional strategies, including those that purport to address rising interest rates". The regular also said that it will focus on the processes for determining that investment advice is provided in a client's best interest (e.g., making initial and ongoing suitability determinations as well as evaluating costs and risks), economic incentives (e.g., compensation structures) an RIA and its employees may have to recommend certain products, services, or account types, as well as ensuring that disclosures make to investors include all material facts relating to conflicts of interest to allow a client to provide informed consent to the conflict. The SEC also highlighted its plans to continue ensuring compliance with its updated marketing rule.
In its examinations of broker-dealers, the SEC said it will continue to focus on compliance with Regulation Best Interest. Areas of particular interest for the regulator include recommendations with regard to products, investment strategies, and account types; disclosures made to investors regarding conflicts of interest; conflict mitigation practices; processes for reviewing reasonably available alternatives; and factors considered in light of an investor's investment profile (e.g., investment goals and account characteristics). When it comes to recommended products, the SEC said it will focus on complex, high cost, illiquid, and/or proprietary products, as well as microcap securities.
Altogether, the SEC's published priorities for 2024 appear to reflect a desire to ensure that consumers are aware of the conflicts of interest their advisor or broker faces (or, better yet, to have the advisors mitigate or eliminate them where possible). Which helpfully gives advisors a heads up on areas to focus on for their own internal compliance reviews, before they experience a formal examination in the coming year!
(Dan Solin | Advisor Perspectives)
Financial advisors pride themselves on being technical experts in their field, able to assess a variety of clients' financial concerns and recommend appropriate courses of action. At the same time, communicating these assessments and recommendations is also a key part of the job. And given that clients come to the table with varying levels of financial acumen, it can be challenging to ensure that they fully understand an advisor's analysis and recommendations.
Sometimes, advisors can fall into the trap of assuming their clients have a certain level of knowledge on certain financial topics (e.g., an advisor might assume a client knows the difference between traditional and Roth retirement accounts). Known as the "curse of knowledge", this can lead to frustration both for clients (who might not understand what the advisor is communicating) and advisors (who might find that clients are hesitant to adopt their recommendations) alike. And even if the advisor takes the time to explain potentially complicated topics, they could still fall prey to the "illusion of transparency", where they (mistakenly) believe that their explanations are more transparent and easily understood than they are (e.g., while the advisor might explain to a client the difference between traditional and Roth accounts, they might use acronyms or jargon with which the client is unfamiliar).
One way for advisors to avoid these tendencies is to engage in more empathetic communication with their clients by actively listening and asking open-ended questions, not only to better understand their financial goals, but also to gauge their level of knowledge (which can allow the advisor to adjust whether and how they explain certain topics). In addition, by using plain language (e.g., by avoiding acronyms [cough cough "bps"]) and by incorporating real-world examples, advisors can help clients understand the analyses and recommendations they are trying to communicate.
Ultimately, the key point is that while the "curse of knowledge" and the "illusion of transparency" can inhibit effective communication between financial advisors and their clients, advisors who take a purposeful approach to better understand their clients' knowledge and information needs and to communicate in a clear way can pave the way for more effective conversations!
(Kristen Luke | Kaleido Creative Studio)
While some financial advisory firms cater to a more generalist client base (taking on clients in a variety of life stages, occupations, etc.), other firms have made the decision to work with a niche clientele that shares a particular characteristic (e.g., seeking help in a specific planning area). But while advisors might feel comfortable working with clients on 'general' financial planning topics (e.g., investment planning or retirement planning), those that choose a niche (e.g., tech employees with equity compensation) might not feel immediately qualified to work with clients in this area. Which can lead to "impostor syndrome", or the fear of being 'found out' as a 'fraud' (even if the advisor really does have more advanced knowledge in the issues facing the niche they serve compared to other advisors).
Luke suggests several ways that can allow advisors to feel more confident in their abilities serving their chosen niche and to market themselves effectively to prospective clients. First, advisors serving a niche can prioritize continuous learning, such as courses, seminars, and industry certifications to add to their knowledge base and to stay up to date with trends and major issues affecting their clients. Next, customizing the firm's website to communicate its niche specialization and customized services can help differentiate its value proposition from more generalist firms in the eyes of the firm's target client. A firm might also consider including client case studies and testimonials in its marketing to build trust and showcase its expertise. In addition, advisors can also build trust with their niche community by creating niche-specific content (e.g., blog posts, videos, and/or white papers) and by engaging with those in the community by interacting with them at in-person events and online forums.
In the end, while there are several potential benefits of working with a niche clientele, committing to this approach can sometimes feel daunting to an advisor, in part because they might not be sure they have the skills needed to serve this group. But by boosting their knowledge (through formal education and/or informally keeping abreast of issues facing their niche) and by communicating their commitment to the niche in their marketing, these advisors can potentially not only increase their confidence in their ability to serve the niche, but also to attract more prospects within it!
(Angie Herbers | ThinkAdvisor)
Growth in clients, assets under management, revenue and, ultimately, profits, is a common goal for financial advisory firms. However, the path to growth is not always clear, which sometimes can lead firm owners to take a haphazard approach to spending money to achieve this goal. And in some cases, the owners might find that these outlays do not bring a commensurate return to the firm in terms of clients, revenue, and profits.
Herbers suggests the first step for firm owners looking to grow their business is to dig into their Profit and Loss (P&L) statement to evaluate how they are spending resources and whether they are actually contributing to the firm's desired growth targets (or whether they are serving as an anchor on profitability). She has found that 2 areas in particular – spending on staffing and on marketing – sometimes demonstrate a misalignment between a firm's expenses and the growth that they are delivering. For instance, she has found that firms often are overstaffed because the advisor hires for the growth they aspire to rather than what it is currently (e.g., hiring staff as if the firm's growth was 20% rather than the 10% that it currently is), which can lead to higher expenses before (potentially) reaching the growth target. She suggests a better solution is to hire in line with the firm's actual growth rate (unless perhaps the firm is supported by outside capital that can support the increased staffing costs). And when it comes to marketing (both expenses for client appreciation to drive referrals and direct marketing to generate prospect leads), understanding the firm's current cost per referral or lead (e.g., if a $10,000 direct marketing budget generated 5 client leads, the cost per lead would be $2,000) and comparing it to industry averages can help determine which strategies are most effective and which might be dropped.
In sum, a firm's P&L statement can provide a wealth of information into how it is prioritizing its spending and whether this spending is helping it achieve its growth goals. And for those firms seeking better profitability, focusing on the effectiveness of their staffing and marketing expenses could be a valuable starting point for determining whether spending adjustments in these areas might be necessary to promote profitability going forward!
(Christine Benz | Morningstar)
In most years, a combination of legislative measures and inflation lead to a variety of changes to how individuals are able save for retirement and spend down their savings, and 2024 is no different. Notably, these changes also create opportunities for financial advisors to add value for clients across the age spectrum.
For instance, thanks to higher inflation, the income limits for tax brackets increased for 2024, affecting thresholds for both income and capital gains taxes. In addition to affecting how tax a client will pay on their income, these higher thresholds could allow certain clients to take better advantage of strategies such as capital gains harvesting (i.e., realizing capital gains at the 0% capital gains tax rate [which goes up to $47,025 for singles and $94,050 for couples in 2024]) or Roth conversions (i.e., being able to convert more dollars without entering a higher bracket).
In addition, contribution limits for savers are increasing in 2024, with the limit for company retirement plan contributions (e.g., for 401(k) or 403(b) plans) increasing to $23,000 for those under age 50 and $30,500 for those 50 and older), the limit for IRAs increasing to $7,000 (and $8,000 for those 50 and older), and HSA contribution limits rising to $4,150 for those with individual high-deductible health plan coverage and $8,300 for those with family coverage (those 55 and older can also contribute an additional $1,000). Advisors can support clients saving for retirement by ensuring they increase their contributions to meet the new maximum limits (if called for in their financial plan), and check to see which clients are turning 50 or 55 this year, letting them know they are eligible for 'catch up' contributions.
Further, several measures included in "SECURE Act 2.0" go into effect this year. These include indexing the limit for Qualified Charitable Distributions (QCDs) based on the inflation rate (which is resulting in an increase in the QCD limit to $105,000 for 2024), eliminating Required Minimum Distributions (RMDs) for Roth 401(k) accounts (removing a potential reason a client might roll the Roth 401(k) into a Roth IRA), and introducing the ability to rollover 529 assets to a Roth IRA (subject to certain limits and restrictions).
Ultimately, the key point is that the new year brings a range of potential planning opportunities for advisors to offer their clients, whether they are saving for retirement or are in the drawdown phase!
(John Manganaro | ThinkAdvisor)
One of the prime concerns for individuals entering or in retirement is outliving their money, whether because they simply draw down their assets too quickly, or because they face a poor sequence of returns with respect to either markets or when inflation shows up. One potential solution for this concern is the immediate annuity, which offers a buyer a guaranteed stream of income, for the remainder of their life in return (such that they cannot outlive it), in exchange for an upfront premium payment (and notably, those concerned with rising prices can purchase inflation protection that increases the annuity payments they receive). Nonetheless, despite their ability to mitigate one (or both) of the chief concerns of retirees to not run out of money in retirement, immediate annuities remain relatively unpopular among consumers, a phenomenon sometimes dubbed the "annuity puzzle".
In theory, though, it may be that consumers don't buy annuities to solve their lifetime income troubles simply because they're not aware that it's an option, or how lifetime income annuities really work (especially as distinct from some of their more controversial alternative annuity varieties). And given the industry's ongoing shift towards assets under management, the question has also arisen as to whether annuities are failing to reach consumers because (AUM) advisors aren't recommending them.
With this in mind, researchers Karolos Arapakis and Gal Wettstein from the Center for Retirement Research at Boston College explored in a recent study how frequently advisors recommend annuities to their clients and whether these clients accept the recommendation. Using data from a survey of 400 financial professionals, they found that a majority of advisors recommend annuities do so only selectively (to fewer than half of their clients), but that even when advisors do recommend annuities to their clients, the clients often do not take their recommendation. Instead, the results found that only 40% of advisors reporting that at least half of their clients end up buying an annuity, and 30% stated that only 1%-25% of their clients take the annuity recommendation.
These findings suggest that low adoption of annuities isn't simply a matter of education, or that advisors are not sufficiently incentivized (e.g., due to business model conflicts) to recommend annuities. Instead, the implication is simply that, perhaps, most consumers just really don't want to engage in the trade-off that annuities provide, and that while consumers do fear running out of money in retirement, they're not willing to surrender their liquidity, upside potential, legacy goals, or other financial preferences, in order to get it. (Notwithstanding the fact that so many Americans also think highly of the Social Security system, which has many of the same characteristics as an immediate annuity!)
Retirement researcher David Blanchett has suggested that one reason for poor annuity follow-through from advisors might be that even when advisors do recommend annuities they might not be backing up the recommendation with the same fervor as they might with a suggested portfolio allocation (perhaps because of a lack of advisor understanding of how annuities work or because an annuity purchase could reduce the client assets the advisor will manage [which, under an assets under management fee model could reduce the advisor's revenue]).
Nonetheless, the implication of the recent CRR study is that the lack of annuity adoption from consumers isn't just a matter of advisors not recommending them; it's that often consumers don't want an annuity even when advisors do recommend them, which suggests that there may be a more fundamental problem in how annuities are structured relative to the complex range of goals and preferences that consumers have (of which "not running out of money in retirement" is an important factor, but clearly not the only one)?
(Jennifer Lea Reed | Financial Advisor)
If an individual could know in advance how their portfolio would perform over the course of their retirement, they could be assured in drawing down their portfolio in such a way that they would not deplete their assets. However, in the real world retirees face the specter of "sequence of return risk", where poor portfolio returns during the first decade or so of a retirement (when the retiree is also drawing down their assets to support their lifestyle) can lead to a shortfall in assets where there isn't enough left to generate the growth necessary to support their remaining years (while on the other hand, strong returns early in retirement could lead to significant spending upside later on, as sequence of return risk does cut both ways!).
Given the presence of sequence of return risk, financial advisors can support their clients by helping them to determine how much they can afford to sustainably spend throughout their retirement. One of the most widely known 'rules of thumb' for determining how much an individual can spend in retirement is the "4% Rule" developed by Bill Bengen, which suggests that (based on historical market data), a person who withdrew 4% of their portfolio's value during their first year of retirement, then withdrew the same dollar amount adjusted for inflation in each subsequent year, would never run out of money by the end of a 30-year time horizon – even in the worst case sequence of returns ever experienced in the historical US data. However, elevated stock market valuations in recent years have led some observers to question whether the "4% Rule" will remain effective going forward.
Notably, the "4% Rule" represents a static approach, in that spending adjustments (other than for inflation) are not made throughout retirement (beyond annual adjustments for inflation). However, advisors can also consider more dynamic approaches to retirement spending, where the level of spending adjusts to changes in a client's portfolio value. For example, under a "guardrails" approach, an advisor might recommend an initial withdrawal rate that is subject to change depending on portfolio performance. Using this strategy, strong portfolio returns would allow a client to spend more, while poor performance would require a reduction in spending. The key is that if clients are willing to trim their spending back when times are bad, they're able to start out spending more in the first place, with guardrails strategies often starting at a baseline initial withdrawal rate of 5% or more, rather than the 'traditional' 4% rule. And of course, a guardrails approach also gives the client a clearer framework for how to benefit from strong market performance and raise their spending (whereas spending under the "4% Rule" would keep spending constant, only adjusted for inflation, likely just leaving an even-larger unused legacy in a good market scenario).
Ultimately, the key point is that the relatively low spending threshold of the 4% Rule is derived in part by the implicit assumption that clients will not adjust their spending in retirement (beyond keeping up with inflation). Whereas when retirees actually are ready and willing to make adjustments along the way, it turns out that they can spend more in retirement from the start… with the caveat that sometimes their spending will have to be curtailed (at least a few years) when times are bad, but also have a more direct path to spend more when markets eventually get growing again!!
(Elana Iskowitz | WealthTech Today)
Following the introduction of ChatGPT and other Large Language Models (LLMs) that offer the ability to conduct seemingly human conversations with a chatbot and to generate an array of content, a wide range of industries have sought ways to incorporate these and other Artificial Intelligence (AI) tools into their workflows. The financial advisory space is no different, as AI tools could help with a variety of functions, from serving as a chatbot for client questions to helping generate marketing content. At the same time, the use of AI tools raises privacy and compliance concerns, particularly when they leverage proprietary firm information or private client data.
With this in mind, advisory firms could create "Enterprise LLMs", or a private version of ChatGPT. Unlike public tools, enterprise LLMs are not open to the public, are hosted inside the firm's infrastructure, are trained only on data owned by or specific to the company, and only provide contextual information to parties that have authorized access. In this way, firms could leverage the power of LLMs while addressing concerns about the misuse or mishandling of sensitive information. For example, such an LLM could become the company's 'smartest' employee by being trained on the entirety of a firm's data, from market research to internal communications. Which could ultimately make the firm's human employees significantly more productive by having a centralized and easily accessed node of information.
Altogether, AI tools offer a range of potential functions that could be customized to a firm's needs and internal data, from summarizing client meeting transcripts to extracting data from financial documents to finding potential compliance trouble spots. Which suggests that in the long run, the most likely legacy of ChatGPT and AI for financial planning could be to help them increase their productivity by streamlining more of the middle and back office tasks and processes!
(Timothy Lee | Full Stack Economics)
The growing popularity and abilities of Artificial Intelligence (AI) tools has led to speculation that they could replace human workers in a variety of white-collar industries. One job that would seem ripe for replacement by AI is language translation (which has come under threat in recent years from a variety of machine translation tools that have emerged). However, many human translators not only continue to survive, but also thrive.
It turns out that human translators have a variety of 'defenses' against potential replacement by AI or other automated tools. For instance, customers are often willing to pay a premium for human translation for high-value work (e.g., financial documents) where accuracy is paramount. In addition, human translators with experience in technical fields (e.g., law or medicine) are often sought after to ensure they use the correct technical jargon (e.g., consider the multiple meanings of the word 'trust' and how it might be translated!). Human translators also have found work joining forces with AI tools, offering 'hybrid' translation services where a computer produces the initial translation and a human checks it for errors (and while human translators typically are paid less for this service, it requires less time so that they can potentially make similar incomes by reviewing more translations in the same working hours). These different avenues are beneficial to consumers as well, as those needing a precise translation can continue to use more accurate human translators, while someone who only needs a rough translation can use a (less expensive) hybrid or machine-only service.
Like translators, some observers have wondered whether AI tools could put financial advisors' jobs in jeopardy. But given the high stakes of financial advice (where errors could be extremely costly) and the technical, complex nature of the field, it's possible that AI tools could instead serve as force multipliers, rather than replacements, for human advisors, helping them gather data and summarize information more quickly and serve their clients more efficiently (though, as with translation, some consumers with less complicated situations might choose a less expensive digital tool?)!
(Saritha Rai | Bloomberg News)
Recently released large language models, such as ChatGPT, have wowed users with their ability to comprehend natural human language and offer creative responses (and led to speculation that they could replace many jobs and lead to massive unemployment). In addition, AI tools leveraging computer vision, or the ability of machines to derive meaningful information from digital images and other visual inputs, have led to predictions that they could replace humans whose job involves interpreting images.
However, a recent study from the Massachusetts Institute of Technology suggests that given the current costs to install and operate computer vision systems, 'only' 23% of workers (measured in terms of dollar wages) could be effectively replaced by these tools. The study found that while computer vision tools could be most cost effective in areas such as retail, transportation, warehousing, and health care and less so in fields such as construction or real estate. One case study considered a bakery, where one of the jobs bakers take on is to visually inspect ingredients for quality control. While an AI tool could potentially fulfill this function, because it only represents a small percentage of the baker's overall responsibilities, it is unlikely that purchasing and operating a computer vision solution would be cost effective.
Ultimately, the key point is that while AI tools can handle many functions currently performed by human workers, the expense involved in buying and operating these systems could make them cost prohibitive. Though given that potential technological advancements could reduce the cost of these systems, the recent research suggests that workers in vulnerable fields could potentially make themselves more difficult to replace by being able to perform a wider range of functions that could be more difficult for a single AI tool to replicate!
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.