Weekend Reading For Financial Planners (June 14–15)

Survey Finds Investors Put Trust In Human Advisors, More Skeptical Of Algorithm-Based Advice

(Elaine Misonzhnik | WealthManagement)

While the 2020s have offered investors (particularly those invested in U.S. large cap companies) relatively strong returns, this period has been a whirlwind, from the 'COVID crash' and recovery to the 2022 market downturn and, more recently, volatility likely related to ongoing tariff policy. While some investors might choose to handle these changes on their own, many appear to have benefited from their work with a human financial advisor.

According to a survey of U.S. investors by asset manager Natixis, 96% of respondents said they trust their (human) financial advisor when making investment decisions, significantly higher than the 29% who say they trust algorithms (suggesting that consumers continue to impose a "trust penalty" on algorithmic recommendations [e.g., from robo-advisor platforms], which could extend to Artificial Intelligence [AI]-driven advice as well).

Notably, though, the survey identified a disconnect between investors and advisors in terms of expected returns, with U.S.-based investors expecting long-term investment returns of 12.6%, with advisors using a baseline of 7.1% (perhaps creating a talking point for advisors to help level-set client expectations upfront in a relationship).

In terms of demand in specific planning areas, the demand for tax planning jumped to 47% from 32% in 2023 (perhaps reflecting the increased attention to the potential expiration of several measures in the Tax Cuts and Jobs Act). Those surveyed also appear to continue to be concerned with inflation, with 61% ranking it as their top financial fear and only 26% saying they think inflation is in the rearview mirror (possibly opening the door for advisors to have candid conversations with clients about inflation and potential strategies to mitigate its impact).

Altogether, these survey results not only suggest that clients hold a high level of trust in their financial advisors (both in absolute terms and relatively to more digital sources of advice), but also that advisors have opportunities to address clients' key concerns (which today appear to include, among other topics, tax planning and dealing with inflation), providing ongoing value in an evolving market and economic environment in a (client-specific, understanding) way that other sources of advice might not be able to match!

Projected Exam Coverage Will Dip To 11% Of RIAs Under SEC Budget Plan

(Sam Bojarski | Citywire RIA)

As more advisors have adopted the Registered Investment Adviser (RIA) model, the burden of regulating these firms has increased as well. For instance, the Securities and Exchange Commission (SEC) currently oversees nearly 16,000 RIAs, a number that increased by nearly 500 in 2024 alone, potentially stretching the SEC's ability to conduct examinations of firms on a regular basis (approximately every seven years), with the potential for additional staffing cuts at the regular to further challenge is capacity for exams.

According to its budget request for the 2026 fiscal year, the SEC is planning on a net reduction of 447 full-time employees compared to the 2025 fiscal year. The regulator's enforcement division would have 1,178 full-time staffers, down from 1,304 in the enacted 2025 budget, and its examinations division would see a decline from 1,073 staffers to 965 staffers. Amidst this backdrop, the SEC estimated that it will examine 11% of the RIAs it regulates during the 2026 fiscal year (down from 14% in 2024 and 12% in 2025). Overall, the regulator's budget would remain flat year-over-year (and notably, the SEC reports that its funding is 'deficit neutral', as congressional appropriations to run the agency are offset by transaction fees it charges to regulated entities).

In sum, if the SEC's budget proposal is enacted, RIAs could see a slightly lower probability that they will be subject to an examination in the coming year (and perhaps extend the number of years between examinations). Which, coupled with an expected slower pace of rulemaking under new Chair Paul Atkins (compared to the tenure of his predecessor, Gary Gensler), could be welcomed adjustments for some firms (particularly smaller RIAs that have fewer compliance resources available). At the same time, a less-frequent exam schedule (and a generally lighter touch toward regulation) could lead to more abuses that erode consumer trust in the financial advice industry (whether they occur in RIAs or otherwise), perhaps making it harder for fiduciary advisors to convince clients that they truly are acting in their best interests and differentiating from product salespeople who continue to use the "financial advisor" title.

RIAs Lead The Way Among Advisory Channels In AI Adoption: Survey

(Andrew Foerch | Citywire RIA)

One of the hot topics on the minds of many in the financial advisory industry during the past few years has been the potential (and possible downsides) of Artificial Intelligence-powered tools. While some firms have been early adopters (often using off-the-shelf AI tools and AI features added to tools within their current tech stack), others appear to be taking a more cautious approach (whether because of inertia when it comes to making adjustments to a tech stack or for regulatory or fiduciary concerns).

According to a survey by wealth technology consulting firm F2 Strategy (of 42 firms across multiple advice channels), 74% of wealth management respondents are currently using AI, up from 51% in 2023. RIAs have been at the forefront in adopting AI-powered tools, with 95% using some form of AI (often embedded in third-party software), compared to only 23% in the bank trust channel (perhaps because of the challenges of adopting long-established, and often internally developed, software across a larger advisor base). Advisors also consider themselves to be more knowledgeable about AI than they did two years ago as well, with 60% rating their understanding at a 6/10 or higher, up from 38%.

In terms of use cases, common areas included notetaking and meeting prep, compliance and risk management (e.g., automating compliance review for outbound communications), data extraction and document review, and coding assistance. Notably, while advisors noted that they were more likely to currently use or plan to use AI tools in a variety of categories (e.g., workflow automation, generative AI, and chatbot/natural language processing) compared to 2023, the percentage of advisors using or planning to use AI for predictive analytics actually declined slightly (perhaps suggesting that advisors are first looking to AI to support tactical operational efficiency).

In the end, advisors (particularly at relatively smaller RIAs where new tech can be adopted faster than at larger firms in other channels) appear to be increasingly receptive to incorporating AI tools into their practices, particularly more manual functions. Which could potentially free up time for advisors to focus more on areas that benefit from human touch (whether face-to-face communication with prospects and clients or conducting planning analyses based on a client's unique circumstances) and lead to greater efficiency overall.

How To Evaluate Private Fund Returns When Considering Opportunities For Client Portfolios

(Jack Shannon | Morningstar)

Private assets have gained increased attention in the investment space in recent years, in part due to the 2022 investment environment where both stocks and bonds saw sharp declines and amidst private investment industry efforts to increase the availability of private assets to retail investors. However, given that private investments have different characteristics from their counterparts, evaluating these potential opportunities can be a challenge, even for seasoned investment professionals (e.g., while they can offer investors access to the many businesses and other asset types that aren't traded in public markets, they can also be more opaque and have more limited liquidity).

One possible benefit of investing in private assets is that they offer an "illiquidity premium", or higher returns that investors receive in exchange for a decreased ability to buy and sell the investment. However, comparing the returns of asset classes such as private equity and venture capital to those of publicly traded assets can be challenging. For instance, while mutual fund and ETF returns are time weighted (i.e., they receive your money immediately so the return 'clock' starts immediately), private fund returns are traditionally measured on a money-weighted basis through the calculation of their Internal Rate of Return (IRR), given that calls for investor capital and distributions back to investors are made over time (with the IRR representing the discount rate that makes the present value of cash inflows and outflows equal to zero). Which can lead to misleading comparisons, as early returns of capital (or delayed deployment of investor capital) can inflate the IRR, even if the total multiple returned was the same. Ultimately suggesting that comparisons of IRRs to compounded annualized returns can be misleading.

Another consideration for evaluating private funds is to consider whether mean or median returns are being discussed. Because private fund returns (particularly those for venture capital funds) tend to be skewed to the right (i.e., a few big winners pull up the average returns for the entire group), the average return in a category tends to be higher than the median return. Which highlights the importance of manager selection when it comes to investing in private funds, as well top managers might be able to outperform publicly traded counterparts, it's less likely that a random manager or fund will be able to do the same (and identifying top managers can be a challenge in itself given that the performance of a firm's previous funds are not necessarily known when it raises money for a new fund). Advisors can also potentially make better comparisons to publicly traded funds by using an appropriate benchmark; for instance, a small-cap index fund might be a better benchmark for a private equity fund (that invests in relatively smaller companies) rather than the broader S&P 500.

Ultimately, the key point is that private funds represent a form of active management, albeit one with a steeper learning curve than publicly traded, actively managed mutual funds and ETFs. Which suggests that advisors who are willing to put in the time to evaluate these investments could find opportunities for clients for whom the unique characteristics of private funds might be attractive (and perhaps serve as a differentiator for their practice), while others might elect to stick to public markets and use the time savings for other planning or business management tasks.

A Confluence Of Factors Supporting Private Equity Opportunities

(Larry Swedroe | Morningstar)

When evaluating a potential investment for use in a client's portfolio, an advisor might look at its historical performance characteristics to understand how it might fit in with other portfolio assets. However, because (as the saying goes) "past performance is no guarantee of future results", understanding whether historical returns will be replicated going forward is a different story.

In the case of private equity, while some research has found outperformance of private equity as a whole (when benchmarked to the broad U.S. stock market) so far during the 2000s, Swedroe sees a variety of factors that could make private equity attractive going forward. Such factors include diversification (by being able to tap into the large number of companies that are remaining private for longer than they used to in the past), access to relatively cheap capital (with a low spread between corporate bonds and Treasuries, enabling private equity firms to borrow at attractive rates and allowing public companies to acquire [potentially private equity-owned] private companies at a lower cost), and current valuations (with higher valuations for large-cap growth stocks offering less expensive capital to acquire smaller, cheaper companies [many of which are private]). Another potential factor supporting new private equity investments is the current sluggish market for IPOs and mergers and acquisition activity, as reduced opportunities for current fund investors (e.g., institutional investors required to maintain certain target portfolio allocations) to exit their investments could create room for certain funds to pick up private equity stakes in secondary markets at a discount.

In sum, Swedroe sees several tailwinds for private equity in the current environment, though, as with any asset class, advisors can consider whether the characteristics of private equity (e.g., not only its potential returns but also its relative illiquidity compared to publicly traded investments) are appropriate for a given client and their investment goals.

Alts And The Complexity Trap

(Daniel Yerger | MY Wealth Planners)

Financial advisors (and, often, their clients) are exposed to a wide range of advertising for investment products (often more complex [and relatively higher fee] offerings). In recent years, many managers of funds investing in alternative assets (or 'alts') have turned their attention to wealth managers and retail investors as potential customers as they expand beyond their traditional base of institutional investors. While these might seem like potentially exciting opportunities (as clients could gain access to vehicles that were previously much harder to access), they can sometimes come with unexpected risks compared to their publicly traded counterparts.

To start, alts often come with a greater risk of (near) total loss of capital compared to more commonly used investments. For instance, while an investment in an S&P 500 index fund can certainly lose value during a market downturn, there is little chance that its value will fall to zero (and if it did, it's likely there are bigger problems afoot!), while investments in small startup companies could turn out to be worthless if the businesses fail. Which is likely one reason that the government established the accredited investor rules, which limit investments in certain alt and other assets to those who have a certain level of expertise or meet certain income or net worth thresholds (while income or wealth is a crude proxy for the ability to evaluate these investments, these investors could be more likely to be able to withstand a total loss of a portion of their capital than other investors).

Even for those who are willing to take the chance of total loss for the potential upside of alternative investments (and are otherwise sophisticated investors), understanding the full range of risks that could limit returns. For instance, an investor in a private real estate deal could find that they are asked to contribute more capital to get the project to completion amidst a rising interest rate requirement that increases costs. Or (as has occurred recently) a fund might change the way it charges investors to take a performance-based fee on deals in progress rather than on completed deals where the final return is known (unlike publicly traded funds, which are subject to stricter regulatory guidelines).

In the end, financial advisors have the opportunity to offer value for clients not only by evaluating the benefits and risks of different available investment products (whether publicly traded stocks and bonds or alts), but also by determining whether a certain product is an appropriate match for a particular client's risk tolerance and risk capacity, as many clients might not 'need' to take on the risks associated with certain alt products to meet their financial goals, even if it means missing out on potential upside.

6 Ways To Fuel Organic Growth

(Ray Sclafani | ClientWise)

One of the key indicators for a financial advisory firm's health is its ability to grow organically, whether it is trying to increase its client headcount and total assets (which, for firms that charge on an AUM basis, can help it weather market downturns) or is looking to maintain a healthy client base given a certain level of inevitable client attrition. With this in mind, Sclafani offers six ways firms can potentially boost their organic growth.

To start, given that client referrals are a top source of growth for many firms, taking an intentional approach to identifying the firm's "loyal client advocates" (i.e., the firm's most vocal supporters and connectors), deepening these relationships, and showing them how they can help friends and family benefit from the firm's services can provide for a more focused approach to driving referrals. More quantitatively, firms can analyze the "total relationship value" (i.e., adding a client's current revenue and the annual revenue of those whom they have sent to the firm in the past three years) to identify top referral sources.

Also, firms can consider how their employees' skills match up with different parts of the business development process and assign roles accordingly. For example, one team member might be adept at creating marketing content while another might be more proficient at nurturing leads. Firms can also create a more focused marketing plan (e.g., by redefining the firm's value proposition and applying this message consistently across different platforms) and set intentional goals for new client growth (e.g., by building a five-year forecast for new clients and revenue per client based on the firm's ideal client profile). Another potential opportunity comes from leveraging the firm's CRM system to track opportunities with current clients and their heirs (reviewing these as a team to avoid any from slipping through the cracks). More broadly, firms can work to reframe their culture around growth, making client acquisition an expectation across the team, sharing effective strategies, and celebrating successes.

Ultimately, the key point is that unlocking organic growth is not necessarily a matter of a flashy marketing strategy, but rather a function of an entire advisory team working to identify key opportunities and leverage each other's strengths, all towards a goal of building a thriving business together!

A Trillion-Dollar Opportunity Advisors Can't Ignore

(Cary Carbonaro | Financial Advisor)

In decades past, financial advisors might have been tempted to focus on the men within opposite-sex couples, whether because they were the top earner or, perhaps, because they could better relate to them (as most advisors were, and still are, men themselves). And if an advisor was proactive when it came to a woman client, it was often in the context of the loss of their spouse or a divorce (to keep their assets with the firm). However, amidst the growing earning power and wealth of women (with women-controlled wealth expected to exceed $30 trillion in 2030), taking a broader view towards serving women could help firms remain relevant and profitable in the coming decades.

To start, while widowhood or divorce are no doubt major life changes where a woman could reach out to a financial advisor, firms could look to add (or maintain relationships with) women client going through other events. For instance, a woman going through a career change (or is returning to the workforce) could benefit from planning guidance in terms of financial support during a career gap or in analyzing how different job offers would impact their financial plan. Also, financial advisors can support clients who are getting married or remarried, both in the quantitative elements of merging two financial lives but also on the qualitative side by encouraging the partners to assess their goals and values when it comes to money. Later in life, women going through menopause could benefit from a review of their retirement plans, healthcare costs, and mental health support (given the unique experience of each woman). Also, women who are unmarried and childfree can benefit from estate planning support that recognizes their unique situation (e.g., in identifying beneficiaries, a healthcare proxy, and power of attorney).

Carbonaro also identifies strategies firms can consider implementing to better serve women clients. These include shifting from product-centered to client-centered planning (e.g., using behavioral finance assessments and life-stage planning to discover what matters most to the client), building life-centered planning models (e.g. a focus on retirement security, caregiving costs, and life transitions rather than on investment returns), creating content that speaks to women (e.g., covering topics such as longevity, legacy, philanthropy, and purpose), developing an inclusive, female-friendly practice (i.e., creating a welcoming space and practicing empathetic listening), and offering services that help women clients make proactive decisions about priority topics such as elder care, long-term care insurance, estate planning, and family dynamics.

In sum, both today and going forward, serving women is not necessarily a market niche, but rather is likely to be a core part of many firms' identities as this group amasses increasing wealth and increasingly seeks out advisors who can meet their planning needs (many of which are also applicable to men as well!).

40 Million Opportunities To Lead With Advice

(Philipp Hecker | Advisor Perspectives)

Many consumers decide to reach out to a financial planner when they feel a particular financial 'pain point' (which could be the result of a positive or negative event). Which presents advisors with the opportunity to differentiate themselves (and perhaps reach more prospects than they might expect) by showing how they are a specialist in helping clients resolve one of these issues.

For instance, advisors working with pre-retirees and retirees have several opportunities to add significant value. For instance, more than four million Americans will reach age 62 this year, with many wondering whether they should claim their benefits immediately or delay doing so (a question on which a financial advisor is well-positioned to offer recommendations). Pre-retirees might also wonder whether they should make 'catch up' contributions to their retirement accounts; with this period beginning at age 50 (and the new "max saver" contributions being available to those turning 60-63 this year), 19 million Americans fall into this bucket.

Advisors are also well-positioned to support prospective clients of all ages who are making major life transitions. These include buying or selling a home (which an estimated eight million Americans will do each year), where an advisor can support a buyer in determining how much house they might reasonably afford, exploring financing options, and evaluating the tax implications of the purchase (or a seller on maximizing sales proceeds, managing tax implications, and evaluating future housing options). For those moving, advisors can also provide guidance on the tax implications of leaving their current state (as many clients might be surprised at the total tax burden faced in different states). Also, with about five million Americans getting married or divorced in a given year, advisors can help new clients both evaluate their quantitative financial picture and encourage them to hold qualitative discussions on what they want their financial future to look like.

Altogether, advisors are well positioned to support clients reaching major milestones, offering a pool of millions of potential prospects to reach. And with many individuals hitting each milestone each year, an advisor doesn't necessarily have to be an expert in all of these areas, but rather could very likely boost their leads by being seen as the expert in just one of these topics!

Predictions About AI And Work

(Cal Newport)

The arrival of ChatGPT onto the scene in late 2022 led to a wide range of predictions about how it and other Large Language Models (LLMs) might shape how work gets done, with potential positive (greater efficiency for individual workers) and negative (a possible rise in unemployment due to companies using AI rather than human workers for certain tasks). In the following 2+ years, the picture has become somewhat clearer about the top initial uses of AI-powered tools (while the future naturally remains uncertain).

While initial predictions about the utility of LLMs centered on their ability to create written products (e.g., drafting emails or other relatively low-stakes communications), Newport notes that this doesn't seem to be the primary use case at the moment (outside of high school and college students looking to take a shortcut on their writing assignments), with one 2024 survey finding that only approximately 5.4% of internet users had used ChatGPT to help write emails and letters (further, this total includes individuals who might have used it once and don't do so regularly).

Instead, the primary use case of LLMs so far appears to be in conducting 'smart search', with individuals opting to use these tools (which can provide ready-made answers to queries) rather than traditional search engines (which require a user to click through to one or more websites in the results). For instance, one survey found that 27% of American respondents had used AI instead of classic search engines (though, like the previous survey, some of the respondents might have tried it out once for this function and don't use it regularly). Another top use of LLMs has been in computer programming, with various tools offering individuals without a programming background the opportunity to create their own simple programs (though AI tools have yet to replace the need for the experience-based architecture design and debugging skills of seasoned programmers).

Newport predicts that AI tools' ability to engage in natural language processing will be the next big use case for the technology. For example, an Excel user might be able to speak commands to manipulate a spreadsheet rather than having to learn how to use various formulas and sequences. On the other hand, he is cooler on the short-term potential of AI "agents" (i.e., bots that can complete tasks automatically) based on slowing progress on creating these agents (with scaling laws that led to major advances in LLMs beginning to falter, leading to more fine tuning of models using reinforcement learning rather than making larger leaps similar to those seen previously). This could mean that while advances could be more likely in areas where problems can be described by pairs of prompts and correct answers (e.g., math, computer programming, and logical reasoning) than in activities that are more esoteric and bespoke to a given context (e.g., personalized financial planning analyses?).

Newport is also skeptical about the near-term arrival of "superintelligent" AI models (that many AI companies and their leaders [perhaps 'talking their book' to raise more funding] have said are just over the horizon) given the scaling problems currently occurring and the leaps in capabilities that would be necessary by the AI models to reach certain "superintelligent" levels.

In the end, while LLMs and other AI tools have no doubt offered certain opportunities for workers, including financial advisors, to operate more efficiently, some of the bolder claims about how AI might impact the workplace have yet to come to pass. What remains to be seen, though, is whether innovations in the near future will lead to enhanced AI-powered products (e.g., in the financial advisor space, perhaps more AI functionality embedded within common advisor software) or (less likely in Newport's view), larger leaps that change the way work is performed (and who [or what] performs it) more broadly.

The Benefits Of Being "Illegible" In A World With AI

(Pradyumna Prasad)

Advancements in AI technology have led to a wide range of predictions about how it will affect work in the 21st century and beyond, from those who see it as a force multiplier for human workers (allowing them to bypass manual tasks and focus on high-level thinking) to those who see AI tools having the potential to replace the vast majority of white-collar workers. When listening to more extreme predictions, workers (or soon-to-be workers, who might be most affected by advances in AI) might consider how they might 'AI-proof' their careers.

Some of the greatest advances in AI have come in areas where there are clear 'right' and 'wrong' answers, such as in mathematics and computer science, as AI companies can repetitively 'train' their models to home in on the correct solutions to these problems. However, AI models have a harder time with more "illegible" tasks that benefit from 'feel' and might not have a single correct answer. For instance, an individual who can navigate ambiguous human preferences and synthesize disparate information that doesn't have a distinct 'right' and 'wrong' answer could find themselves positioned to thrive even in a world of increasingly powerful AI tools.

Notably, the ability to understand the preferences of individuals and synthesize information is a hallmark of effective financial advisors (particularly when it comes to more qualitative areas such as retirement and cash flow planning compared to pure investment management), suggesting that while AI tools might help advisors improve their efficiency (e.g., through document processing and meeting notetaking capabilities), there is likely to remain an important role for human financial advisors into the future to help their clients navigate their unique situations and offer recommendations for the problems they face – which often don't lend themselves to a single 'right' solution!

Not A Coder? With AI, Just Having An Idea Can Be Enough

(Kevin Roose | The New York Times)

One area in which AI models have been particularly successful is computer programming, being able to conduct a variety of programming tasks and serving as an assistant to expert coders. Notably, these features can also benefit those who aren't computer experts through what has been dubbed "vibecoding", or allowing hobbyists to build fully functioning apps and websites by typing prompts into a text box.

Tools such as Replit and Bolt allow users to build programs using natural language commands instead of typing in code themselves (and sometimes the AI tool will need additional input from the user to refine the program). For example, Roose was able to create an app that would suggest options to build out a lunch based on a photograph of the contents of his refrigerator. Though, as he notes, human supervision is still necessary with these endeavors, as AI tools can make mistakes (e.g., when building a website for a local tire shop, an AI tool made up fake reviews from the store's Yelp page and added them to a testimonials page). Which perhaps suggests that, at least at the moment, they are best suited for personal or low-stakes projects rather than more serious endeavors.

In the world of financial advice, advisors might take advantage of AI-powered tools to build "Custom GPTs" (that can perform functions such as processing different types of meeting transcripts), calculators that perform a variety of functions, or other tools. Which suggests that curious advisors (who might not have a coding background) might not need to wait for a certain functionality to appear in commercially available software, but rather can try to produce it themselves alongside an AI 'assistant' (while keeping compliance and fiduciary responsibilities in mind)!

---

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or send an email to [email protected] to suggest any articles you think would be a good fit for 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.