Weekend Reading For Financial Planners (July 29-30)

Advisor Productivity Increasing Along With Adoption Of AdvisorTech Tools, Schwab Study Suggests

(Charles Schwab)

As advisor-facing technology tools have become ubiquitous in recent decades, many firms have built out their tech stacks in order to gain efficiencies, particularly in back-office operations. Which can allow advisors to spend more time on (potentially more profitable) prospect- and client-facing tasks. And in a sign that this investment in tech has paid off for many firms, Charles Schwab's 2023 RIA Benchmarking Study has found that as advisors have built more comprehensive and integrated tech stacks, they have also benefited from improved operational efficiencies.

The benchmarking study, which surveyed 1,300 RIAs with custody relationships at Schwab and TD Ameritrade, found high and increasing adoption by RIAs surveyed across several AdvisorTech categories, with portfolio management, CRM, and financial planning systems all having adoption levels above 90%. Tech categories that saw significant increases in adoption between 2019 and 2022 included trading and rebalancing tools (from 76% to 85%) and document management systems (from 61% to 78%). The study also showed that firms are now leveraging integrations with their CRM systems more often as well, though larger firms appear to be using integrations more frequently, as 47% of firms with more than $250 million in AUM have 3 or more data sources or systems integrated with their CRM (up from 38% in 2019), while only 29% of smaller firms do the same (up from 26% in 2019). RIAs are also more frequently using standardized workflows within their CRM system, with 40% of smaller firms and 50% of larger firms doing so (up from 32% and 42%, respectively, in 2019).

While a causal relationship cannot necessarily be made, data from the benchmarking study suggest that as firms upgrade their tech stacks they are gaining operational efficiency. For example, while Schwab did not report on revenue per professional or revenue per staff metrics, the study did find that between 2019 and 2022, RIAs with more than $250 million in Assets Under Management (AUM) saw increases in their AUM per professional (from $99 million to $108 million), clients per professional (from 53 to 58), and a decline in the annual hours per client for operations and administration (from 17 to 15). And when comparing firms with each other, Schwab found that "Top Performing Firms", the top 20% of firms across 15 metrics, spent around 20% less time annually per client on operations and about 10% more time on client service than other RIAs.

Altogether, data from Schwab’s benchmarking study suggest that RIAs, particularly larger ones (who have more staff resources to not just purchase the parts of their tech stacks but actually learn to use them well), are better learning to leverage the growing number of integrations available between AdvisorTech tools. Which appears to be allowing advisors to spend less time on back-office tasks and additional time with (a growing number of) clients!

SEC Proposal Would Require Brokers, Advisors To Remediate Conflicts Related To Use Of AI

(Mark Schoeff | InvestmentNews)

For more than 20 years, the ongoing evolution of the advisory industry has been driven heavily by advances in technology (the internet, then robo-advisors, now ChatGPT) that make it easier for consumers to leverage technology to manage more and more of their finances themselves (or at least, ‘technology-augmented’), and also allows advisors to evolve their own business models and value propositions to do more on top of what the technology increasingly automates.

Developments in Artificial Intelligence (AI) and related technologies, in particular, have been making headlines regularly for the past several months, as companies roll out new product offerings and observers consider whether (or not) these technologies will enhance or displace certain industries or jobs. Yet while there are many potential benefits to AI (from creating marketing content to speeding data analysis), some finance industry regulators have worried about the potential for AI to be used to harm consumers (whether through deceptive marketing practices, subpar standards for service, or outright fraud), an extension of numerous recent regulatory actions against robo-advisors by the Securities and Exchange Commission (SEC) that similarly found that algorithm automation hype didn’t always live up to its promise.

With these possible pitfalls in mind, the SEC released a proposal aimed at addressing potential conflicts of interest associated with the use of predictive data analytics by investment advisers and broker-dealers when working with clients. Specifically, the SEC proposal would require a firm to eliminate or neutralize the effect of conflicts of interest associated with the use of predictive analytics technologies. Further, the proposal would require firms that have client interactions with these technologies to have written policies and procedures in place to abide by the rules and would implement recordkeeping requirements. SEC Chair Gary Gensler said that while predictive analytics could be used to create unique investment approaches for clients, he expressed concern that the technology could also potentially be used to steer clients towards investments that would be favorable to the firm.

The decision to release the proposal for public comment was not unanimous, however. In voting against releasing the proposal, SEC Commissioner Hester Peirce suggested that the proposal was overbearing and would discourage advisors from using advanced technologies. In addition, the Investment Adviser Association suggested that existing regulations govern the conduct the proposal is trying to address and that the proposal could impose costs and operational difficulties on advisory firms.

Ultimately, the key point is that while technological advancements offer significant promise for advisors in supporting their clients, they also raise the specter of potential abuse by steering clients to investments or other products that would be financially favorable to the advisor or their firm. Which means that the SEC will ultimately have to weigh whether current regulations regarding conflicts of interest are sufficient to protect investors or whether the potential benefits new proposal outweigh the compliance costs it would impose on advisory firms using these technologies (potentially discouraging well-meaning firms from using them in ways that could help their clients?).

Advisors Remain Americans' Top Source For Financial Advice

(Gregg Greenberg | InvestmentNews)

Consumers have no shortage of potential sources of financial advice, from a professional financial advisor to books and magazines to family and friends. During the past decade, the increasing prevalence of social media has led to the proliferation of financial ‘advice’ available on these networks. And given the growing use of social media, particularly among younger generations, observers might wonder whether these platforms are becoming trusted sources of financial advice for consumers (and perhaps reduce the influence of financial advisors).

However, Northwestern Mutual’s 2023 Planning & Progress Study found that advisors remain consumers’ most trusted source for financial advice. According to the survey of 2,740 U.S. adults aged 18 or older, 31% said a financial advisor was their most trusted source of financial advice, followed by a spouse or partner (17%), family member (14%) and business news (8%). And despite concerns about the growing influence of online financial ‘advice’, only 3% of respondents cited financial influencers or social media as their most trusted source of advice. Even among the youngest respondents, only 6% cited social media as their most trusted source of information.

Further, respondents who currently work with a financial advisor cited greater confidence than others in their ability to achieve their financial goals. For instance, 80% of retirees working with an advisor said they are confident they will have enough money for retirement, while only 58% of other respondents said the same. In addition, 75% of respondents said they are confident they have or will achieve long-term financial security, while only 47% of others said the same (though it is possible that those working with an advisor might have more income and/or assets, which could have influenced their responses).

The top reason cited by those surveyed for turning to an advisor was to work with someone who offers professional expertise they don’t have (cited by 48% of respondents), followed by helping them keep a long-term view (48%) and helping them reduce their financial anxiety and provide peace of mind (44%). And when it comes to the top reasons for selecting an advisor, 54% of respondents said they want someone who understands the priorities for someone in their stage of life, while 51% said they want an advisor with a long track record of experience.

Altogether, this survey suggests that financial advisors remain trusted sources of financial information and that online sources of advice, while popular, might not be as trusted as individuals with whom consumers have a personal relationship. Nonetheless, engaging with consumers online, whether through content publishing or social media use, could potentially be a valuable way for advisors to boost their credibility (particularly when demonstrating their understanding of the issues that matter most to their ideal target clients) and potentially attract prospective clients who might be interested in an ‘offline’ relationship!

4 Steps To Train Anyone To Do Anything

(Kerry Johnson | Advisor Perspectives)

When making a hire, financial advisory firms typically seek out individuals with at least some relevant qualifications, perhaps having completed the required CFP educational coursework (for a client service associate or paraplanner) or having a certain number of years of client-facing experience (for an associate or lead advisor), because doing so can speed the learning curve required of the position. But even well-qualified new hires will likely require at least some instruction in the advisory firm’s particular style, systems, and operating procedures, highlighting the importance of having effective onboarding and training programs.

Johnson suggests a 4-step process for effective training. The first step is to tell the individual what needs to be done and why it is important (so that they understand why learning the task is important). Next, the instructor can show the trainee how to do it so the employee can see how it is done well. Then, the trainee can practice the skill under the supervision of the instructor (so that the instructor can correct any errors). Finally, because new information is often forgotten quickly, the instructor can watch the trainee complete the task again the next day or week (i.e., spaced repetition) to confirm that the trainee will continue to perform the function correctly.

Notably, firms do not need to start from ‘scratch’ when training each new hire. For example, by compiling an operations manual, firms can have written instructions to provide to new hires. Alternatively, by using screen recording tools such as Loom, instructors can ‘show’ a trainee how to do a task without actually having to sit next to them at a computer. And so, by taking a structured approach to onboarding and training, firms can efficiently raise the skill levels of their employees and ensure that tasks are performed in a consistent and accurate manner!

7 Simple Standard Operating Procedures For Financial Advisors

(Stephen Boswell | Wealth Management)

While a financial advisory firm might have established a ‘way’ of getting certain tasks done, this is often an informal understanding rather than a written protocol. But as new ideas and strategies for running the business get introduced (and as more employees join the firm), the way things ‘get done’ can become muddled. Because of this, setting written Standard Operating Procedures (SOPs) for how key tasks get done can help ensure the firm operates in a consistent manner.

Boswell highlights 7 SOPs that can serve as a starting point for helping a firm systematize its business. For instance, establishing SOPs for client onboarding can ensure that new clients have a positive experience during their few months with the firm. In addition, setting standard processes for client offboarding can ensure that the firm gets feedback from the departed client and leaves the door open for them to return. Next, having SOPs for client reviews can establish the firm’s methods for measuring client satisfaction and encouraging them to leave reviews and refer others to the firm. Also, establishing SOPs for client events can improve the chances that they go off well, building client loyalty. Finally, other potential areas where SOPs could be relevant include strategic alliances (e.g., relationships with centers of influence), the firm’s client service model (i.e., how the firm can allocate its resources for maximum impact), and for team meetings (to ensure they are run efficiently and consistently).

Importantly, the creation and maintenance of these SOPs does not necessarily have to be a top-down affair. While firm leadership might set the big picture for them, having team members be invested in the creation and management of SOPs can build buy-in for them to be applied on a consistent basis. Also, SOPs do not have to be seen as set in stone; as the firm changes, so can its SOPs, and by keeping a written record of them, the firm can ensure new SOPs are understood and applied consistently. And so, by creating SOPs for key firm functions and updating them when necessary, the firm can promote consistency both in how work gets done internally and in the overall client experience!

To Help Your Team Grow, Give Them Space To Struggle

(Kelli Thompson | Harvard Business Review)

When starting an advisory firm (or any business), all tasks that need to be done fall to the business owner to complete. From compliance to financial plans to investment allocations to client service requests and everything in between, it is all up to the advisor. As the advisor’s practice grows, though, and the number of clients increases, the advisor can hit a wall, where the only path forward is to hire someone and begin delegating tasks to them. Otherwise, there just aren’t enough hours in the day to personally do everything that needs to be done. For many, though, delegation is difficult, as the owner might be concerned that the delegated task may not be done correctly, or at least, not done “their way” to the owner’s liking and standards. However, restricting what tasks employees can take on can have the effect of making the firm owner just as busy as they were before (or perhaps more so given the responsibilities of managing employees).

Thompson suggests several strategies reluctant managers can use to feel more comfortable delegating responsibilities to others. First, shifting from a ‘doer’ to a ‘leader’ mindset is important to rewire a manager’s internal ‘reward’ system from being motivated by getting things done themselves to getting satisfaction from empowering others. Next, leaders (and their employees) can work to embrace the discomfort of the learning process. For instance, because it can be difficult to get a task ‘right’ the first time, perfection should not necessarily be the expectation. By giving employees room to fail (and providing constructive feedback to improve their process in the future), managers can create a more supportive culture for staff members taking on new responsibilities. Finally, managers can distinguish between high- and low-stakes tasks. For instance, before letting an associate advisor present a plan summary to a new client, a firm owner might instead help them build their client meeting skills by letting them discuss one portion of a plan with an established client with whom the more junior advisor already has a relationship.

In the end, while both firm owners and employees might recognize the importance of learning, the actual learning process can sometimes be uncomfortable for both sides, as the advisor might worry that a task will be performed incorrectly, and the employee might be concerned that failing will be a setback to their career advancement. But by embracing this discomfort, both parties can foster a culture of growth that can eventually make owners more confident in delegating tasks and employees feel empowered to take on increasingly challenging responsibilities!

Retirement In America: Were We Better Off 50 Years Ago?

(John Rekenthaler | Morningstar)

Contemporary discussions of retirement in America often compare the state of retirees today compared to those who retired in decades past. One often-aired criticism of today’s retirement ‘system’ is that the declining prevalence of private sector defined benefit pensions (and the rise of defined contribution plans that put much of the burden of retirement savings on employees themselves) has left today’s retirees in a more precarious position than their predecessors.

To assess whether this is actually the case, Rekenthaler conducted an analysis to see whether the combined Social Security and defined pension benefits for the median private sector retiree in 1973 (he did not include profit-sharing or similar plans, as very few workers had access to them at the time) compared to the Social Security benefits, income from defined contribution plans, and defined benefit plan benefits for the median private sector retiree in 2021. First, he found that the median retiree in 1973 had a Social Security benefit of $1,004 per month (in 2021 dollars). In addition, the median pension benefit for these retirees was $1,071 (in 2021 dollars), but because only 44% of workers participated in pensions, he only allocates $471 ($1,071 x 44%) to the median worker, for a total monthly retirement income of $1,475 (in 2021 dollars).

The median retiree in 2021 received a monthly Social Security benefit of $1,658, a significant improvement to the 1973 retiree, thanks to growing real wages during the intervening period. While retirees in 2021 with defined benefit pension plans received a median benefit of $884 per month, only 11% of workers participated in such a plan, and so Rekenthaler used a $97 ($884 x 11%) monthly benefit for the median retiree in 2021. Next, using Vanguard data indicating a median 401(k) balance for retirees on its platform of $87,725 and an overall participation rate in defined contribution plans of 52%, he calculated a monthly payout from these plans of $190 for the median retiree. Together, these income sources provide the 2021 retiree with $1,945 of monthly income, an improvement of nearly $500 per month compared to the 1971 retiree (primarily due to increased Social Security benefits), albeit still a potentially modest sum depending on the retiree’s spending needs (though retirees might have other sources of income, from assets in IRAs and taxable accounts to home equity that could be tapped).

In sum, despite suggestions that retirees in the past enjoyed a much more prosperous retirement, Rekenthaler’s data suggest that this was not necessarily the case for the median retiree. At the same time, given the importance of saving on one’s own in the modern retirement system, financial advisors can play an important role in helping their clients (including those they serve on a pro bono basis) make savings decisions that will allow them to have a financially sustainable retirement!

Why Financially Successful Retirees Have A Harder Time Getting A Mortgage

(Paula Span | The New York Times)

When imagining a ‘typical’ mortgage applicant, one might envision a newlywed couple buying their first home or perhaps parents looking to move to a house to fit their growing family. However, home loans are frequently used by older Americans as well, both to finance the purchase of their new (or second) retirement home, or often in the form of cash-out refinances used to access the equity that has accrued over time (as home equity represented about 47% of the net worth of homeowners aged 65 to 74 in 2019, according to federal data).

But despite older Americans having often both built some significant retirement wealth, and having higher credit scores on average (compared to their younger counterparts), researchers have found that they are more likely to be rejected for most kinds of mortgages. For instance, a study from the Federal Reserve Bank of Philadelphia found that applicants for refinanced mortgages experienced a rejection rate of 17.5%, those in their 60s saw their applications rejected at a 19% rate, and those older than 70 were rejected 20% of the time (notably, age was a factor across applicant wealth levels). A separate study from the Urban Institute of applicants for all types of mortgages found a rejection rate of 18.7% for those age 75 or older in 2020, compared to 15.4% for those between 65 and 74 and 12.1% for those younger than 65. Despite the fact that, again, retirees typically have greater wealth (to be able to afford the mortgage) and the best credit scores (to indicate that they'll likely repay the mortgage).

These data points raise the question of why older mortgage applicants are rejected at a higher rate than their younger counterparts. To start, the Fed study found that more than half of the rejections of older applicants were due to “insufficient collateral”, perhaps because lenders appraised the homes for less than the applicants had thought. Lenders might also be concerned about mortality risk, as the death of the borrower could lead to the loan being paid off (a form of reinvestment risk for the lender, as in the case of borrower’s death, the lender might not be able to re-lend the proceeds at a similar or higher rate), or the property could end up in foreclosure, which could cost the bank legal fees in order to recover (at least a portion of) the amount left on the mortgage. In addition, a retiree might find that their lack of regular income from employment could reduce the chances of being approved for a loan (as lenders prefer to see regular income from a job, even if the borrower has wealth in retirement accounts that could also be used to repay the loan). And in the current elevated interest rate environment that has raised the cost of borrowing (and the income needed to support payments), older borrowers might find it even harder to be approved for mortgages.

Notably, research has found that differences in mortgage application rejection rates based on age do vary based on the mortgage product. For instance, the Urban Institute study found that while there was a significant gap between older and younger applicants for cash-out refinances (where the mortgage recipient receives a large, up-front sum of money), there was no difference in the rate of rejection for Home Equity Lines Of Credit (HELOCs) across age groups (perhaps because the homeowner will tend to gradually access money from the HELOC, and lenders tend to focus less on the borrower’s income when the equity in the home already provides ample collateral).

In the end, financial advisors can add value for their clients (of any age) by helping them improve their chances of being approved for the mortgage solution that meets their needs. And for retired clients, this could mean creating ‘new’ sources of income (e.g., by starting regular distributions from retirement accounts) or paying down other debt to reduce their debt-to-income ratio, or, for those with home equity, considering a reverse mortgage if a traditional cash-out refinance isn’t viable!?

How To Deal With The Coming Social Security Shortfall

(Peter Coy | The New York Times)

Social Security benefits make up a significant portion of income for many retirees, so the continued ability of the program to make full benefit payments is analyzed regularly. And while the bulk of the funds needed to pay Social Security benefits come from payroll taxes from current workers, in recent years the program has had to dip into the “trust fund” in order to cover the full benefits owed. And according to the latest annual report from the Social Security and Medicare Trustees, the trust fund supporting retirees will run out of money in 2033, at which point (based on current tax rates) only 77% of current benefits would be covered. Further, the Congressional Budget Office in June released an even bleaker assessment, predicting that the trust fund would run out in 2032.

While discussions about the state of the trust fund often center on potential solutions to shore it up (from raising the retirement age to increasing the payroll tax), a more fundamental question for policymakers is how long the trust fund should be expected to last, as this could shape their policy choices for strengthening the system. For instance, before 1965, the Social Security trustees made trust fund projections “into perpetuity” on the assumption that the factors affecting benefit costs and revenues would level off after 85 or 90 years. In 1965, reflecting the inherent uncertainty of planning into perpetuity, this period was shortened to 75 years (roughly the length of time an individual might start paying payroll taxes and eventually receive benefits).

The 75-year time horizon for policy interventions has been hotly debated among those who study Social Security. While the current length has its supporters, some suggest a longer time horizon, arguing that it would be more conservative and leave more breathing room in case changes to demographics or the economy reduce tax inflows or the balance of the trust fund. Others think a shorter time horizon, such as 20 years, would be acceptable, as the long run is harder to predict and because such solutions would likely be less ‘painful’ than those required to keep the trust fund solvent for longer periods (though new measures to shore up the system would be required at some point).

Ultimately, the key point is that due to the importance of Social Security benefits to the livelihoods of many retirees (who tend to vote in elections), Congress is likely to act before major Social Security benefit cuts are required (though, given the tax increases or benefit reductions that might be required to shore up the system, they might kick the can down the road for as long as possible). But for younger clients (who might not access Social Security benefits for several decades), the time horizon used when crafting these policies could not only determine how much (more?) they will pay into the system during their careers, but also how much (and whether?) they will receive in benefits when they do retire, suggesting that advisors could consider such policy changes and projections when building clients’ financial plans!

10 Harsh Lessons From 10 Years Of Entrepreneurship

(Darius Foroux)

Many entrepreneurially-minded financial advisors dream of one day starting their own planning firm. While they might be enticed by the prospect of setting their own schedule, working with their ideal clients, and the ability to own their business, starting any company inevitably brings challenges as well. Based on his personal entrepreneurial journey, Foroux lists a series of “harsh” lessons he learned that could be applied to any business, including financial advice.

Foroux first discusses the difficulties entrepreneurs face in their first few years of business, from the time that it takes to build up a strong client base to the lack of revenue generated early on. He also highlights that while a business owner might not have to physically work all day, their business is likely to be on their mind even when they are ‘off the clock’ (though he suggests that while this can be mentally taxing, it can also help the business owner be prepared for contingencies that arise). Given these challenges, he notes the importance of having the support of a spouse or other family members, who can provide a psychological boost during tough times.

In addition, Foroux suggests that the discipline of the owner (in the form of doing what they say, showing up on time, executing on goals, and being consistent) is a key factor in the success of a business, and that a lack of discipline is often the source of a business’ failure. Relatedly, he notes that while it can be easy for entrepreneurs to be tempted by the latest ‘shiny object’ (e.g., upgrades to the office or a flashy new logo), it is important to first consider whether the expense will help the business generate more revenue and potentially avoid those that will not do so.

In the end, Foroux concludes that while the entrepreneurial journey can be challenging along the way, those who succeed tend to not want to go back to life as an employee. Similarly, while financial advisors might encounter challenges (as well as thrills) in the early months and years of firm ownership, those who are able to overcome these hurdles, remain disciplined, and leverage a support network can achieve a feeling of entrepreneurial success that is hard to match!

Just Do It Now

(Joseph Wells)

During a given day, you might be faced with dozens of ‘small’ tasks that you could complete now (within a few minutes) or put off until later on. While it might seem easier to defer these tasks until sometime in the future (after all, there is probably something ‘better’ you could be doing right now), Wells suggests that knocking these tasks off when they arise can free up headspace and promote a sense of order in your life.

Wells abides by the motto “just do it now”, a general rule that he will do a task that takes less than 2 minutes when it comes up instead of putting it off for later. For instance, at work, this could mean answering a co-workers email that enables them to move forward on a project, while at home this could be putting his dirty dishes in the dishwasher instead of letting them pile up in the sink (in one episode where he failed to put this into practice, he left an empty package containing beef drippings on the counter instead of throwing it out immediately, which eventually led to a very soggy drawer that took much longer to clean out). Because completing a task immediately not only clears off your mental to-do list (or keeps your desk just a bit cleaner), but also prevents many small chores from accumulating into a longer list that you really won’t want to work through.

By knocking these ‘small’ tasks off, Wells suggests you can cultivate a sense of inner calm by keeping your mental to-do list shorter and creating a tidier physical environment. And while doing these tasks can take time away from more time-intensive goals, having a more peaceful headspace could be a valuable asset when the time comes to focus on larger projects!

The 5-Step Program I Used To Fool My Brain Into Liking Hard Things

(Eric Kulbiej | Better Humans)

Even the most disciplined individual has likely faced a task that they just did not want to complete, whether because it was difficult or because it would take them a long time to complete. In these scenarios, your brain (which is hard-wired to seek pleasure and avoid pain) can be the enemy of productivity, encouraging you to do something else that will be more enjoyable (a snack, anyone?).

But Kulbiej suggests individuals can take steps to ‘trick’ their brains into liking hard things, which can potentially lead to a significant productivity boost. The first step is to ‘call out’ your brain when it tries to sabotage your productivity. For instance, in the evening, it can be tempting to watch 'just' one more episode of a tv show (Brain: "You don't even need to get up from the couch!") instead of cleaning up the dishes from dinner. Next, it is important to recognize that discomfort is only temporary. For example, while writing the first words of a blog post can be challenging, the following sentences and paragraphs often flow much more easily.

The third step is to break down any big, scary tasks into bite-sized pieces. Because while ‘getting fit’ might seem like a major challenge, starting with a 10-minute bike ride today to get a fitness habit started is not as daunting. In addition, shifting your perspective from one of obligation to one of opportunity (i.e., I get to do this rather than I have to do this) can create a more positive mindset and prevent you from being distracted. Finally, rewarding yourself (and your brain) for making progress on the tough task (e.g., taking a stretch break or getting outside) can incentivize yourself to hit the next milestone on the path to completion.

In sum, while humans might be naturally predisposed to taking the ‘easiest’ course of action, overcoming this tendency is necessary in order to achieve major accomplishments. And so, by taking steps to ‘trick’ your brain that the task in front of you is not so difficult, you can get the snowball of progress rolling and take on the major challenges you face!

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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.