Weekend Reading For Financial Planners (July 15-16)

Advisors Jumping Onto Threads Could Create Compliance Headaches

(Ryan Neal | InvestmentNews)

Financial advisors have increasingly turned to social media to market their firms to potential clients and to network with their peers as social media platforms proliferated over the past decade. And as new social media platforms have come online, advisors have expanded their presence on these networks, which often offer different functions and audiences (e.g., posting video content to YouTube or reaching professional contacts on LinkedIn). Recently, amid discontent amongst many users with changes made to Twitter (e.g., no longer being able to use the TweetDeck dashboard application on MacOS devices), Meta has stepped in with a new Twitter-like alternative dubbed Threads, a text-based app linked to Instagram.

In its first couple days, Threads surpassed 70 million registrations, facilitated in part by its ability to bring a user's existing Instagram network over to Threads (creating 'instant' followers without needing to build an audience from scratch). However, its potential value for advisors remains unclear. First, because the app is in its "minimum viable product" phase, its full suite of features remains to be seen, as well as whether users will really stick with it (or eventually revert back to Twitter, where their networks are even more established).

Perhaps the bigger challenge of Threads for advisors, though, is that using the new app could create compliance concerns when using the app for advertising or marketing, because of the compliance archiving obligations. For example, while advisor social media archiving tools (e.g., Hearsay Systems, Smarsh, and XY Archive) cover many of the legacy networks, Threads doesn't even have an external API to integrate with those platforms yet… which means it might take time for them to be able to archive messages from Threads (such that advisors using Threads would need to find alternate ways to archive their messages on the app in the meantime). In turn, advisors at larger firms may want to check with their compliance department to see whether professional posting on the new Threads app is even permitted in the first place (given, again, that larger firms may be concerned about their ability to oversee their advisors' social media activity on a new platform without full API integrations yet).

Altogether, while Threads has built up an impressive user base in its first week online, many advisors appear to be taking it slowly when it comes to engaging with the platform, both for utility and compliance purposes. For those firms and advisors who are curious but not ready to dive right in, claiming their username on the platform could at least allow them to post under their preferred name when they are ready to do so. More broadly, advisors can consider how Threads might fit in to their broader social media strategy, whether it is considering the audience they are targeting and developing relevant messaging, or creating content to share!

SEC Overhauls Money-Market Fund Rules To Thwart Further Risk Of Rapid Outflows

(Bloomberg News)

Financial advisors often turn to money market funds as a 'safe' place to park client cash. But unlike bank deposit products that are FDIC insured (up to certain limits) and extremely liquid, money market funds do not come with these guarantees (to compensate for this risk, money market funds sometimes come with higher yields than bank alternatives). As while money market funds, which invest in short-term debt securities (i.e., those maturing in less than 1 year), do typically hold to their principal value and strong liquidity, they came under severe pressure in 2008 as a result of the collapse of Lehman Brothers and related financial crisis (with the Reserve Primary Fund 'breaking the buck' [i.e., falling below the standard $1 net asset value] and imposing a 7-day freeze on redemptions). Which led the Securities and Exchange Commission (SEC) in 2014 to adopt new money market fund rules to discourage similar runs on money market funds in the future.

Nonetheless, these measures proved insufficient, as the COVID-19 pandemic roiled markets in March 2020 and forced the Federal Reserve to step in at the time to again rescue money market funds. In an attempt to prevent similar runs going forward, and to shield remaining shareholders from the costs tied to the high level of redemptions, the SEC this week finalized rules that, among other measures, will impose mandatory liquidity fees (after a 1-year implementation period) on institutional prime and institutional tax-exempt funds when daily redemptions surpass 5% of net assets – setting an upfront expectation that investors in such money market funds may face a 'haircut' if they try to exit during a rush. Which may make money market funds slightly less appealing for those institutions given the incremental additional risk… but that's actually the point, to help investors recognize upfront the risks that money market funds do still face, and if investors don't like those constraints, they should look at other cash equivalent alternatives instead.

On the other hand, some money market funds will have higher minimum daily and weekly liquid asset requirements (from 10%–30%, respectively, to 25%–50%) to ameliorate the potential for a liquidity mismatch between fund holdings (some of which have maturities up to a year and can experience price swings during crises) and investor redemption demands (which can be made daily and can be heavy in times of market stress). As the Fed also seeks to reduce the risk that such funds would ever be at risk of 'breaking the buck' in the first place. Though boosting the short-term liquidity requirements of money market funds may also bring down their yield slightly (as they must hold investments with shorter maturities), which again could incrementally reduce their popularity relative to other cash alternatives.

In sum, the SEC's new rules are designed to boost investor confidence in money market funds' ability to hold their principal value and to provide liquidity, even during periods of crisis, but reducing the risk associated with these products with new fee and liquidity requirements could reduce their yields and overall appeal as well. Nevertheless, advisors developing cash management strategies for their clients (the value of which have increased during the current period of elevated interest rates) can work with their clients to consider whether the risks involved in using money market funds is worth the potential for a higher return (though notably most of the new rules are focused on institutional money market funds, not retail funds) compared to alternative place to park cash, such as advisor-facing bank deposit solutions such as Flourish Cash, Max, advisor.cash by StoneCastle, and R&T Deposit Solutions!

Why Do Investors Hire Their Financial Advisor?

(Samantha Lamas | Morningstar)

Prospective clients often approach a financial advisor because they have run into a technical financial issue in which they do not have expertise, whether it is investment management, retirement income planning, or another area. Other individuals might seek out an advisor for emotion-based reasons, whether it is in gaining confidence in their financial security or perhaps a recognition that they tend to make impulsive financial choices during times of stress. And many prospective clients might approach an advisor with needs in both categories (though they might be more reluctant to discuss their emotional concerns right away).

To explore these issues, researchers from Morningstar conducted a survey of 312 advisory firm clients to determine the factors that drove these clients to hire their advisor. And while getting help with specific 'technical' goals or needs (e.g., income and investment management) was a common reason cited, 60% of respondents noted at least 1 emotionally grounded reason (e.g., their degree of comfort making financial decisions or their ability to 'stay the course') for hiring their advisor. These findings suggest that using marketing materials and introductory meetings to demonstrate expertise in the technical areas of interest to their target clients can be a valuable way for advisors to win business, acknowledging prospective clients' potential emotional needs (and the advisor's ability to address them) could be valuable as well (particularly if done in a tactful manner that does not put the prospect on the defensive).

Ultimately, the key point is that advisors have a wide range of ways to provide value for their clients that address both the technical and emotional sides of personal finance. And by crafting a suite of services and messaging that meets both of these needs of their ideal client persona, advisors could potentially expand their pool of (high-quality) prospective clients!

Top 5 Tips For Sharing News Articles On Social Media

(Susan Theder | Financial Advisor)

Social media can be a useful tool for advisors to share original (and repurposed) content with current and prospective clients to demonstrate their expertise. But producing this content can be a heavy lift, and an advisor might not have the time to do so on a weekly, let alone daily, basis. Nevertheless, advisors can also engage with clients and prospects on social media (with a potentially reduced time commitment) by reposting content from other publications and adding their own summary and/or commentary.

Theder suggests that when selecting articles, advisors look for stories that they are interested in and that a social media follower might want to share with their own network (which could increase the advisor's exposure). Notably, reposted articles do not necessarily have to be about financial topics (though advisors might want to avoid particularly contentious topics that could drive followers away); for instance, posting about news and events in the advisor's own city can be particularly effective if their clients are mostly local. Other best practices include posting recent articles (that followers might not have seen before) and avoiding paywalled articles (so that all followers can actually read the article). In addition to linking to the article, advisors can demonstrate their expertise by highlighting key points and offering their opinion on the subject. Further, beyond posting articles and comments, advisors can potentially boost their following by commenting and 'liking' others' posts (Theder suggests a 'rule of thumb' for advisors of engaging with 4ther posts for every post they make).

In sum, advisors do not need to spend hours crafting a blog post or video in order to publish their insights on social media. Rather, by becoming a trusted curator of (and commenter on) outside content, advisors can demonstrate their expertise and provide helpful information to build stronger relationships with both current and prospective clients!

Should Advisors Be Worried About Online Reviews? It Depends.

(Whit Lanier | Wealth Management)

When shopping for a product or service, consumers often look to online reviews for 'social proof' that a certain purchase will be worth their money. Sites like Yelp and Google Reviews can provide a wealth of information to consumers (though parsing the reviews can sometimes be necessary to get a full picture of the product or service in question), but also present a challenge for companies, who can do little to control the content of these reviews (which they might find misleading). And with the SEC's new marketing rule providing additional guidance to advisors on how they can engage with these third-party reviews, advisors might not only be concerned with how they are being portrayed in online reviews, but also with ensuring they remain compliant with SEC regulations when using (presumably positive) reviews in their marketing materials.

But Lanier (the founder and CEO of Amplify Reviews, which seeks to help advisors to leverage third-party reviews in a compliant manner) suggests that taking a 'wait and see' approach comes with its own risks as well. For instance, advisors who do not encourage their clients to leave reviews could find that their pages on review websites might include reviews from former clients or prospects with an axe to grind (and a lightly reviewed firm could find that nearly all of its reviews are negative!). In addition, firms that do not seek reviews could find themselves falling behind competitors who do solicit them and build a large base of (positive) ratings that could make them look more attractive to prospects in comparison.

Instead, Lanier suggests that advisors can take matters into their own hands by inviting current clients to leave reviews, which can then be posted on the firm's website (while meeting the SEC marketing rule's "due diligence" [i.e., ensuring that questionnaires or surveys used can allow a client to leave either positive or negative responses] and "disclosure" [i.e., when the rating was given and the period of time it was based on, the identity of the third party that created and tabulated the rating, and if applicable, any compensation that was provided by the advisor for obtaining or using the rating] requirements). Not only can such reviews provide 'social proof' on the advisor's website, but it can also boost the site's Search Engine Optimization (SEO) as well.

Ultimately, the key point is that while online reviews come with potential pitfalls for advisors (in the form of negative reviews or compliance concerns), the potential benefits of leveraging them could outweigh these risks. Because advisors tend to enjoy extremely high retention rates, letting prospects hear from (largely satisfied) current clients can provide them with more confidence that the advisor might be a good fit for their needs!

4 Tips For Elevating Your Social Media Presence

(Crystal Butler | Advisor Perspectives)

Considering it barely existed 20 years ago, social media has exploded into one of the most popular (and, sometimes, time-consuming) daily activities for Americans. Which provides financial advisors the opportunity to reach a wide range of prospective clients, particularly for advisors who take an active approach in managing their profiles and the content they post.

First, advisors can review their current social media profiles not only to confirm that they are up to date, but also to consider ways to make them stand out from other firms. For instance, while the "About" section of a social media profile can be used to provide general information about the firm and its services, it can alternatively be used as a way to communicate the firm's unique value proposition and to offer a "call to action" to get the visitor engaged with the firm. Advisors can also consider whether the cover photos and profile pictures they are using are compelling (e.g., by using high-quality images that align with the firm's brand), as they are usually the first thing visitors see when the firm shares a post!

In terms of content, advisors can consider creating a quarterly social media content calendar. Doing so can not only help the firm understand what content they will need to create, but also can ensure that their social media profiles have a consistent pace of activity (as not posting for multiple weeks in a row could hinder engagement). Also, firms can ensure that clients and visitors to their website know where to find them on social media by posting links to the firm's various social media profiles on the site and perhaps also including them in the email signatures of firm staff and in client and prospect newsletters.

In sum, because social media can be a useful marketing tool for advisors and their firms, investing time in managing profiles and content can help boost engagement on these platforms, and, hopefully attract more prospective clients, though (given the seemingly unlimited amount of time that could be spent managing social media) firms can also consider the time spent on social media marketing in the context of other marketing tactics (that might have a lower client acquisition cost) and business needs!

Understanding "Fat FIRE": The Comprehensive Guide To A Luxurious Early Retirement

(Nick Maggiulli | Of Dollars And Data)

When the "Financial Independence, Retire Early" (FIRE) movement is discussed, it is often in terms of its adherents' frugal spending habits, as reducing expenses can be an important part of building sufficient assets to support what could be a 40-year or longer retirement. But while this approach (also called "Lean FIRE") is popular among some of its followers, another FIRE style, dubbed "Fat FIRE", can provide a more luxurious lifestyle for those who can afford it.

Unlike those pursuing "Lean FIRE", who frequently minimize their expenses and maximize their savings rate to build up sufficient assets (often calculated using the "4% rule") to support a (sometimes-reduced) lifestyle without needing to work again, those pursuing "Fat FIRE" attempt to build up sufficient assets to maintain their pre-retirement lifestyle, or even spend more than they did during their earning years. Another potential benefit of this later approach is that while those pursuing "Lean FIRE" might find that their retirement is at risk if they encounter unexpected expenses or a poor sequence of returns, "Fat FIRE" allows for a greater cushion of assets that can allow an individual to stay retired (though negative shocks could necessitate spending adjustments).

Of course, this requires those pursuing "Fat FIRE" to save up significantly more money to support these expenses, meaning this is more likely to be an option for high-wage earners or business owners expecting a liquidity event and might require more years of work to achieve (reducing the number of years in retirement). Further, like other forms of early retirement, having significant assets does not necessarily replace the sense of purpose (and social connections) that can come with a job, suggesting that those pursuing "Fat FIRE" could consider how they will find meaning in retirement (perhaps through volunteering or even part-time work they enjoy).

In the end, accumulating the assets to achieve "Fat FIRE" is not dissimilar from building a nest egg for 'traditional' retirement (where retirees with means often seek to maintain, or even improve their pre-retirement lifestyle), but just occurs on an accelerated timeline with a longer expected retirement period. Which means that advisors can help support clients considering "Fat FIRE" not only modeling how much of a nest egg they will need to support their spending both before and after retiring, but also by helping them explore why they want to "FIRE" in the first place and how they will continue to thrive during a retirement potentially lasting several decades!

An Investing Road Map For Retirees

(Christine Benz | Morningstar)

After several decades of working and saving, the transition into retirement can be tricky. Not only can retirement involve a major lifestyle shift (i.e., how to fill all of those hours that were previously spent at work) but also a financial transition from accumulating assets to spending them down. With this in mind, Benz suggests a 'road map' that can help retirees stay on track.

The first step for a retiree is to take stock of how their expenses have changed. Because some costs can decrease in retirement (e.g., commuting expenses) while others can increase (e.g., leisure travel), an individual's budget could shift dramatically between their working years and retirement. Next, a retiree can consider how much they will make in 'guaranteed' income (e.g., Social Security or a defined-benefit pension), as doing so can help them estimate how much they will need to withdraw from their portfolio to meet their expenses (and perhaps consider delaying Social Security to receive a higher benefit). Relatedly, retirees (particularly those with limited Social Security and/or pension income) can think about whether to take some of their assets and purchase an income annuity, which can increase the amount of 'guaranteed' income they will have throughout retirement and help mitigate longevity risk.

Retirees can also take steps to increase the chances their resources will last throughout their retirement. This can include ensuring they have proper insurance coverage, being flexible with their withdrawal rate (particularly when weak markets reduce the value of their portfolio), and considering taking a part-time job (which can provide income and reduce needed portfolio withdrawals). Retirees can also pay attention to potential tax planning opportunities, such as considering partial Roth conversions in the years before Required Minimum Distributions (RMDs). Finally, retirees can review their estate planning documents to ensure that they continue to reflect their wishes, not only after their death, but also in case they become unable to handle their own financial affairs.

Ultimately, the key point is that while the transition to retirement can be exciting, it can also be stressful and complicated (which is why many retirees turn to financial advisors for financial support!). But by taking a checklist approach, retirees (and their advisors) can increase the chances that their assets will support them throughout their remaining years!

A 4% Rule Alternative That Won't Confuse Clients (Much)

(John Manganaro | ThinkAdvisor)

One of the most common questions advisors receive from clients contemplating or in retirement is how much they can sustainably spend on an annual basis. This is because calculating such a number is predicated on an unknowable future, and is dependent on a variety of factors, including the (unknown) length of the client's retirement, the asset allocation used (and whatever subsequent market performance will actually turn out to be), and the client's desired (and actual, as life changes) spending. Many strategies have been proposed to answer this question, from the relatively simple "4% Rule" (i.e., withdrawing 4% of a portfolio's value during the first year of retirement, then withdrawing the same dollar amount adjusted for inflation in each subsequent year), to more complicated strategies that use continuous updating of Monte Carlo analyses and other techniques that account for the uncertainty involved in retirement income planning upfront and ongoing.

In a recent paper published in the Journal of Financial Planning, Javier Estrada proposes a different method for retirement income planning using what he calls a "coverage ratio" (introduced in a previous paper), which represents the number of years of withdrawals supported by a strategy (i.e., a chosen asset allocation and initial withdrawal rate) relative to the length of the retirement period considered. For example, a coverage ratio of 1 would mean that the strategy would be predicted to last exactly through the retiree's expected lifetime, while a coverage ratio above 1 would mean that the retiree would be expected to have assets left over. This improves on standard Monte Carlo analysis, which gives a simple percentage of successful outcomes (i.e., the retiree does not run out of money) by taking into account how early or late a strategy fails.

For instance, 'traditional' Monte Carlo analysis might just show a 92% probability of success – without clarity of what those 8% failures mean – while Estrada's coverage ratio approach might reflect a coverage ratio of 0.97, which implies that if the client had a 30-year retirement goal, the 'failure' still covered 97% of those years (which means the portfolio "failure" was simply because it ran out of money in the 29th year instead). Which is valuable information, as overall, a retiree would likely be more confident in a strategy if the 1st year they might run out of money was in year 29 of retirement, rather than a plan where an extreme failure might result in depletion in year 15. In addition, the method provides some further context regarding how much of a bequest would be available at their death (and/or how much longer the retirement plan would last if it turns out the retiree lives longer than expected). Which is important, as the advisor and client must still 'guess' at what their retirement time horizon is going to be (at the risk they over- or under-estimate their longevity).

In the previous paper, Estrada proposed that retirees could apply their utility function (i.e., how much satisfaction they get from different amounts of spending) to the range of available strategies and their resulting coverage ratios to make the optimal strategy choice. But because the concept of utility functions might be foreign to many retirees (and can be hard to measure), he suggests in the new paper that retirees (and their advisors) can instead benefit by considering the whole distribution of coverage ratios (or specific percentiles of interest) for a given strategy (paying particular attention to scenarios in which the strategy fails to see when the failure occurs), and not just the average coverage ratio (which can obscure low-probability but high-impact failures).

Ultimately, the key point is that while advisors can provide significant value to their clients by helping them create a sustainable retirement income plan, it's important to present the alternatives in a way that clients can understand (for which the traditional Monte Carlo probability of success has in practice been challenging because of its implicit "fail or not" outcomes that in reality are not so black-and-white). By using strategies such as risk-based guardrails or Estrada's proposed coverage ratio, advisors can help clients choose a withdrawal strategy that clients can relate to more directly when making decisions… while still ensuring it is likely to be sustainable and meet both their retirement income and legacy preferences!

The Myth Of AI-Driven Unemployment

(Keun Lee | Project Syndicate)

The introduction of new Artificial Intelligence (AI) platforms like ChatGPT has led to predictions that AI could be the source of dramatic economic gains this century and beyond. At the same time, innovations in AI have raised concerns about the potential for major job losses (with some estimates suggesting that 47% of all jobs in the US could be automated in the coming years), as companies turn to AI (and away from human employees) for everything from computer programming to graphic design (though perhaps not financial advice).

However, Lee suggests that predictions of massive AI-induced unemployment might be overblown. First, AI has the potential to boost jobs through product innovation, as the introduction of new or better goods tends to increase demand and the need for employees to produce that good (though this benefit can be mitigated to some extent by the "business-stealing effect", in which 1 firm's innovation leads to job losses in its competitors, at least until these other firms catch up with the latest technology). For example, Li and fellow researcher Jisun Lim found that a 1-percentage-point increase in the share of employment by product-innovating firms tends to lead to a 0.1-percentage-point increase in that sector's net job growth rate in the long run.

On the other hand, the impact of process innovation (i.e., the introduction of a new method of production, in this case AI tools) is less clear, as increased labor productivity can reduce the number of workers needed, while reduced production costs (and the price of goods) could spur increased demand and more investment by the business (potentially in hiring new workers). Altogether, Lee suggests the process effect could be neutral on employment, which, combined with the potential boost to jobs from product innovation, could lead to a net increase in employment due to AI.

In the end, predicting the future course of employment is challenging in normal conditions, and could be made even more difficult by a potentially game-changing innovation like AI. But Lee suggests that AI could not only prove to be a boost to the economy overall, but also, despite worries to the contrary, potentially a net contributor to employment in the long run.

A $100 Billion Wealth Migration Tilts US Economy's Center Of Gravity South

(Michael Sasso and Alexandre Tanzi | Bloomberg)

The increasing feasibility and acceptability of remote work during and in the wake of the pandemic has opened up opportunities for individuals (who no longer need to live near a physical office) to relocate elsewhere in the country while keeping their current job. And recent data show that the Southern, and particularly Southeastern, United States has been the beneficiary of much of this internal migration.

For example, the Southeast is home to 10 of the 15 fastest-growing American large cities and accounted for more than 2/3 of all job growth in the US since early 2020. A wave of transplants brought about $100 billion in new income to the Southeast in 2020 and 2021 alone, with the Northeast seeing a loss of about $60 billion in income. In fact, 6 states (Florida, Texas, Georgia, Tennessee, North Carolina, and South Carolina) recently surpassed the Northeast in terms of aggregated share of national GDP. Notably, it is not just remote workers driving this growth, with a record number of firms moving south after the pandemic as well. Individuals and companies cite a wide range of reasons for moving south, from the warmer weather to lower taxes to lower real estate prices (and perhaps a combination of these and other factors).

For financial advisors living in the region, this influx of (often high-income) transplants could provide a boon for business, and for those operating remotely, relocating to the South could be an attractive option. At the same time, states seeing out-migration could enact measures to keep residents there (and attract new ones), such as tax incentives for retirees (though they might have a hard time changing the weather), which could lead to an increasing competition for residents, companies, and the money they bring!

The Evolution Of Financial Advice

(Ben Carlson | A Wealth Of Common Sense)

Today, it is easier than ever for individuals to invest in the stock market. With just a few clicks to sign up on an online brokerage platform, a consumer can be trading stocks, Exchange-Traded Funds (ETFs) and other investments quickly and at a low price (with $0 ticket charges and typically narrow bid-ask spreads available).

But the ease of investing and receiving financial advice is a relatively recent phenomenon. For instance, while wild speculation in the stock market contributed to the stock market crash in 1929 and the Great Depression, only a little more than 1% of the population actually owned stocks at that time (owing not only to the challenge of actually buying stocks, but also that few Americans likely had sufficient extra income to invest). Individual stock ownership started to increase after World War II along with incomes, with Merrill Lynch taking out the first modern advertisement for the stock market in 1948 (a 7,000-word article that took up an entire page in The New York Times, receiving 3 million responses.

Over the coming decades, more Americans would purchase stocks, often at the advice of brokers whose business was to sell consumers on certain stocks, receiving a commission in the process. Still, as of the early-1980s, fewer than 20% of households owned stocks. However, in the 1980s and into the 1990s, the rise of mutual funds would draw even more money into the stock market, and declining commissions and bid-ask spreads made it less expensive for consumers to trade. Further buoyed by a bull market and the increasing prevalence of defined-contribution retirement plans, stock ownership rose to nearly 60% by the year 2000.

And now, in addition to having many (inexpensive) options for investing, it has also never been easier to get financial advice at a variety of price points (and fee styles), whether it is a robo-advisor managing investments or a human financial advisor creating, implementing, and monitoring a comprehensive financial plan. And over the past couple of decades (which have included 2 massive bear markets and the more recent rise and fall of 'meme stocks'), many investors have realized that easy, low-cost trading can lead to behavioral issues (i.e., Fear Of Missing Out [FOMO]), which suggests that while human financial advisors are no longer a 'gatekeeper' to investing, their ability to build trusting relationships with clients and help them follow through on a financial plan (including an appropriate asset allocation) could help the financial advice business to continue to thrive in the years ahead!

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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.