Weekend Reading For Financial Planners (June 28–29)

Advisory Firms See Strong AUM Growth, Though Market Strength Could Be Masking Organic Growth Challenges: Report

(Steve Randall | InvestmentNews)

Financial advisory firms have, on the whole, seen their Assets Under Management (AUM) soar over the past decade, boosting their (asset-based fee) revenue in the process. However, top-line revenue growth doesn’t necessarily tell the full story, as the sources of revenue growth (and their sustainability) and bottom-line profitability (which takes into account the expenses incurred to generate that revenue) are also key metrics for determining a firm’s health.

According to a recent report by Boston Consulting Group, North American wealth managers saw an average of 8.4% annual AUM growth between 2014 and 2024. Notably, though, about half of this growth came from market gains, while 22% came from assets brought to firms by new advisors and another 22% came from organic growth (i.e., assets from new clients or additional assets brought to the firm by current clients). Which suggests that a future prolonged market downturn (and stiff competition for advisor talent) could lead to shrinking AUM at firms that aren’t able to boost their organic growth pipelines (though, the report did highlight that RIAs have seen stronger asset and advisor flows, often at the expense of wirehouses and large broker-dealers). The report also highlighted the growing time and financial costs of regulatory compliance for many firms as a potential challenge for firms.

In this environment, the report offers several potential levers for firms to improve their organic growth, including building brand strength (i.e., finding ways to show how the firm is different in the competitive marketplace for financial advice), leveraging digital tools to enable client acquisition (e.g., in supporting content development), using integrated client data and analytics (to ensure consistent service and reduce client turnover), and (for firms seeking next-gen clients) offering a tech-enabled platform that is attractive to digital natives.

Ultimately, the key point is that while financial advisory firms’ AUM (and the revenue based on these assets) has benefited from market tailwinds over the past decade, maintaining a strong organic growth pipeline can boost firms’ resilience when faced with a future market downturn. Which could also make these firms more attractive for aspiring advisors and those looking for a new home, potentially creating a virtuous cycle for even stronger organic growth in the years ahead!

Estate Tax Exemption Level To Be Made 'Permanent' In Major Tax Bill, Though Key Estate Planning Tasks Will Remain

(Ashlea Ebeling | The Wall Street Journal)

Financial advisors have been paying close attention to the debate over the potential extension of certain measures within the 2017 Tax Cuts and Jobs Act that are set to expire at the end of this year. While much attention has been paid to tax bracket levels and the status of different deductions, the status of the Federal estate tax exemption is also a hot topic, as it would fall from the current $13.99 million per individual to approximately $7.14 million if no legislative action is taken.

However, both legislation passed by the U.S. House of Representatives and a proposal introduced by the Senate Finance Committee not only would set the estate tax exemption level at $15 million for 2026 (and allow it to increase for inflation thereafter), but also would make this elevated level ‘permanent’ (i.e., without a scheduled sunset date). Which would likely be a relief to wealthy clients who might have otherwise considered taking quick action on strategies (e.g., gifting up to the current elevated limit) before the scheduled sunset.

Nevertheless, while fewer clients will be subject to estate taxation at the Federal level if the Republican-proposed legislation is signed into law, many aspects of estate planning will remain relevant for financial advisors and their clients. To start, while the $15 million individual exemption level (which would allow a married couple to pass on up to $30 million free of Federal estate tax) will only apply to the wealthiest clients, many clients might live in a state with its own estate taxes, which tend to get much less attention than the Federal estate tax but often have much lower wealth thresholds than the Federal tax (as low as $1 million, in the case of Oregon) and can have high rates (e.g., a top rate of 35% in Washington as of July 1). Which suggests exploring strategies to mitigate state-level taxes could remain valuable for clients in this position. Further, clients might still be interested in exploring various estate planning tools (e.g., trusts) for purposes other than avoiding estate tax (e.g., control of assets after death) and a wider range of clients would likely benefit from a review of their ‘basic’ estate planning documents (e.g., wills and powers of attorney), whether or not they might be exposed to estate taxation.

In the end, while some clients might be breathing a sigh of relief with the proposal to increase the estate tax exemption limit to $15 million next year, estate planning will remain relevant for individuals across the wealth spectrum, whether in terms of awareness of state-level estate taxes or ensuring that a client’s assets are passed on to their desired recipients (whether individuals or charitable organizations) in their preferred (and most tax-efficient) manner!

Americans Question Legitimacy Of Online Financial Information, Offering An Opportunity For Advisors: Survey

(Griffin Kelly | The Daily Upside)

The information age has made it easier than ever to quickly research (or be fed) information on a wide range of topics of interest. A key problem, though, is the need to verify whether such information is actually correct, as there are limited built-in mechanisms to determine whether a particular article, video, or social media post is factual. This issue is particularly acute in the world of personal finance, as the information sphere in this area has expanded greatly (while the quality of much of this information is questionable).

According to a survey of 1,044 working-age Americans by CFP Board, while 3 in 4 respondents seek out financial information online at least once a month, only 2 in 5 believe this online information is "in their best interests" with the most commonly cited areas of financial misinformation including investment returns, AI-generated financial advice, Social Security, real estate, and tax strategies. Further, 3 in 5 respondents said they regret a decision they made because of financial misinformation, with the most common ‘mistakes’ including delaying a financial decision, making a decision without professional consultation, recommending financial strategies to friends and family, and paying unnecessary fees or expenses.

While the amount of online financial misinformation (and its influence on consumers) might be disturbing, the survey also presents an opportunity for financial advisors to create valuable (and accurate) content that helps consumers make better decisions (notably, 74% of respondents said they were comfortable with implementing information obtained from financial advisors without additional verification). The survey found that YouTube was the most common social media platform where respondents seek financial information (used by 63%), suggesting that video content could be particularly effective (and also have the benefit of demonstrating the advisor’s personality to viewers who might be interested in becoming clients!).

In sum, while this survey suggests that online financial misinformation is common, many consumers appear to be aware of its presence and see professional financial advisors as a source of accurate information. Which suggests that advisor-created content not only could raise the standards of online financial information, but also show consumers how an advisor can solve financial problems for people like them (saving clients the hassle of filtering through online content to determine what is accurate).

How Can "Smart Beta" Go Horribly Right?

(Noah Beck, Que Nguyen, and Xi Liu | Advisor Perspectives)

The 2010s witnessed the increasing popularity of so-called "smart beta", factor-based equity investment strategies, as a variety of factors (e.g., value, quality, low volatility, size, and momentum) had been shown to outperform the broader market over time. However, during the past several years, returns to almost all of these factors have lagged the broader market, raising the question of whether this period represents (relatively) short-term underperformance or might call for a deeper questioning of "smart beta" strategies.

The authors find that while the benefits of factors have persisted over the long run, valuations at a given time (in terms of its ratio to the broader market and how that ratio compares to historical norms) can help determine how they might perform in the shorter run. For instance, in 2017, a low volatility strategy (which had the highest valuation of the factors tested at the time) ended up having the most significant underperformance compared to the market in the subsequent years (-6.19% annual excess return). On the other hand, the quality factor (which had the lowest valuation at the time) was the only factor tested that showed outperformance versus the market (with a 2.16% annual excess return) in the following years.

A silver lining, though, is that the relative underperformance of factor-based strategies has coincided with lower valuations for nearly all of these factors (with quality being the exception), so much so that the valuation ratios of all surveyed strategies today sit below the 23rd percentile of their historical distributions, with most standing at the 5th percentile or below. Which suggests that these strategies could be positioned for a rebound as mean reversion kicks in and brings these strategies closer to their average historical valuations (of course, the timing of such a rebound, or whether it will actually occur, is inherently uncertain).

Altogether, while the relative underperformance of some factor-based strategies over the past several years (amidst the dominance of broad-market indexes that are heavily weighted towards the so-called ‘Magnificent Seven’ stocks) might have some advisors questioning the value of well-known investment factors, the authors suggest their former popularity might have contributed to this multi-year weakness and that lower sentiment (at least in terms of current valuations) towards "smart beta" strategies could serve as a tailwind in the years ahead.

Assessing The (Under-) Performance Of Actively Managed Funds

(Larry Swedroe | WealthManagement)

For many years, actively managed funds dominated the investment landscape. However, recent decades have seen the growing popularity of passively managed funds amongst both financial advisors and retail investors. Given that actively managed funds tend to have higher tax ratios (and often greater tax impacts), a key question, though, is whether active fund managers have shown the ability to outperform their passive fund counterparts.

According to the 2024 edition of the S&P Dow Jones Indices SPIVA Scorecard, actively managed funds have had a hard time competing with passive funds over the past 20 years, with 94.1% of all domestic actively managed funds underperforming the U.S. broad-market S&P 1500 Composite Index in terms of returns. Looking within 18 domestic fund categories (e.g., large-cap, mid-cap, small-cap, value, growth, and real estate), only two categories saw less than 90% of the actively managed funds underperform their benchmark. In addition, 97.3% of domestic actively managed funds underperformed the S&P 1500 Composite on a risk-adjusted basis (and only 48.5% of domestic funds even survived the full 20-year period!). Notably, outperformance by individual actively managed funds tended to be fleeting, with the persistence of top-quartile performance being less than what would be expected by chance (e.g., only 2% of all large-cap equity funds remained in the top half of fund performance over the five-year period ending in 2024)

Similar trends were also seen amongst international funds, with 92.5% of actively managed global funds underperforming the S&P World Index and 88.3% of these funds underperforming their benchmark (with 97.5% of global funds underperforming the benchmark on a risk-adjusted basis) and fixed-income funds, where the percentage of underperforming actively managed funds ranged from 79.3% to 95.8%, depending on the category, indicating that active management’s underperformance wasn’t limited to the U.S. equity market.

In sum, while actively managed funds already have a high bar to clear compared to their passive counterparts (because of their typically higher expense ratios and tax consequences), the SPIVA data indicate that actively managed funds have tended to underperform their passively managed counterparts even before these factors are taken into consideration. And while a very limited number of actively managed funds have outperformed their benchmark over time, advisors might take into consideration whether the effort it takes to try to identify these ‘winners’ is worth the time investment (though advisors who are willing to do so might offer value by identifying actively managed funds with characteristics that meet the unique needs of particular clients?).

The (Uncertain) Payoff From Alternative Investments

(Aswath Damodaran | Musings on Markets)

Alternative investments (which run the gamut from private market investment vehicles such as private equity and private debt to gold and collectibles) are sometimes viewed as a constructive addition to a portfolio for two potential reasons: a low correlation to public market investments (which can improve the risk-return profile of the portfolio) and an ability to generate excess returns compared to their publicly traded counterparts. Which has drawn the attention of many institutional investors over the years (particularly to private equity, venture capital, and hedge funds). Now, with many alternative investment funds seeking to expand their reach to retail investors (and their advisors), Damodaran assesses whether they might be appropriate for consumer portfolios.

To start, he questions whether the correlation argument holds, particularly for investments in private businesses (e.g., private equity and venture capital). For instance, he suggests that because, unlike publicly traded equities, these vehicles aren’t priced on a daily basis, seemingly low correlations could be an artifact of delayed marks on such funds’ assets and that during sharp equity market downturns (when low-correlated assets would be particularly valuable), private funds might, in reality, experience similar losses as their publicly traded counterparts. Also, on the potential for excess returns, he suggests that much of the ‘low hanging fruit’ has already been picked by early investors in these fund categories and that, amidst a growing number of offerings, identifying fund managers that are likely to outperform over an extended period of time going forward could be a challenging endeavor.

Further, he argues that even if an individual successfully identified a particular fund with low correlations and/or excess returns, other hurdles might make them less attractive for retail investors. To start, these funds often come with hefty management expenses (particularly compared to passively managed public market funds), creating a hurdle for their purported benefits to clear. In addition, given that the relative illiquidity of private funds is often cited as a reason for their (potentially) attractive performance characteristics, retail investors (and their advisors) will need to be sure that an allocation to illiquid funds reflects their anticipated (and perhaps unanticipated?) cash flow needs.

Ultimately, the key point is that while alternative investments increasingly are being advertised to financial advisors (and retail investors), Damodaran suggests that care is needed when assessing whether a particular fund is appropriate for a client’s portfolio, both in determining whether it can deliver on any promises of correlation and alpha and whether these benefits outweigh the expenses and liquidity constraints that can come with them.

6 Questions To Make An Advisor Squirm

(Rubin Miller | Fortunes & Frictions)

Many financial experts have written lists of questions consumers might ask of potential financial advisors to understand whether they might be a good fit. Though while advisors might be prepared to respond to common questions from prospects (e.g., what services they provide, how they get paid), Miller offers several potentially ‘unexpected’ questions that might be more challenging to answer.

First, a prospect might ask an advisor to describe their investment philosophy in five words or less, which can help them avoid an advisor with multiple, possibly competing, investment philosophies and increase the chances that they will understand the advisor’s investment planning recommendations if they do become a client. Next, a prospect could ask how many years of fund manager outperformance the advisor would require before determining that the manager is skilled versus lucky (with Miller suggesting that a prospect should hesitate if the advisor answers anything less than 15 years). A prospect might also ask what will happen if the advisor sells the firm, retires, or dies unexpectedly (perhaps avoiding advisors who don’t have a clear succession plan in place).

While prospects often ask about an advisor’s fees, they might push further by asking the advisor why their fees aren’t higher (which can draw out the limitations of the advisor’s service rather than just their well-rehearsed pitch about their value proposition). Similarly, a prospect could ask an advisor to describe the weakest part of their firm’s capabilities (as a firm can’t be the best at all parts of the planning process, though they might be particularly adept at the areas most important to their ideal target client!). Finally, a prospect can ask the advisor to describe the conflicts of interest they have with their clients and how they manage them (likely avoiding advisors who claim not to have any or who give an unsatisfying answer as to how they are managed!).

In the end, while a financial advisor might create a convincing prepared pitch to a prospect, being prepared to answer potentially tricky questions honestly and completely could be the factor that leads the prospect to choose them over other firms!

A Framework For Assessing And Developing Your Sales Skills

(J.J. Peller | Journal of Financial Planning)

While financial advicers might not see themselves first as salespeople, sales skills can be important, not only in convincing prospects to become clients, but also in advocating for oneself when it comes to promotions or new business opportunities. Which suggests that taking the time to assess and develop one’s sales skills could be a worthwhile investment.

To start, an advisor might first do a simple gut check to determine the sales-related activities they enjoy and the ones they don’t (which can provide insight into areas to lean into and skills to develop). Next, identifying role models (who have proven to be effective in sales) and observing them in action can provide valuable insights and tactics for a next-generation advisor to emulate (e.g., an advisor might assess how a more senior advisor engages in active listening with prospects). Also, putting these tactics into practice can be an opportunity for both self-reflection (e.g., what went well and what didn’t) and to get feedback from others in the meeting (as they might have seen a positive or negative action that you might have missed).

While sales is a multifaceted process, Peller suggests there are three key skills for advisors to focus on. First is to deeply believe in the value they and their firm can deliver, which can allow them to come across with conviction and as a genuine individual when meeting with prospects. Next, being effective at sales is often a matter of being able to ask questions in a genuinely curious way (e.g., showing actual interest in the answer rather than asking a leading question intended to elicit a certain response). Finally, while some might think that an advisor’s pitch is the most important part of the sales process, being a good listener is also a crucial component (including the ability to tolerate periods of silence, as they can often lead prospects to express themselves more fully).

In sum, while a newer advisor might not have gone through formal sales training (as many advisors who started in the product sales world did), they can take matters into their own hands by assessing their strengths and weaknesses, identifying advisors at their firm or in their network with strong sales skills to observe, and seeking regular feedback to hone their sales skills and move their career forward.

A 5-Step Prospecting Process To Sell Your Advisor Value With Greater Confidence And Trust

(Stephanie Bogan | Nerd’s Eye View)

For many financial advisors, choosing their profession was based on a genuine desire to help others achieve their financial goals. Yet, while these advisors recognize the importance of business development to grow their firms, they are also very often intimidated by the process of adopting sales techniques to convert leads to clients. It can feel stressful at best and disingenuous at worst. Sometimes, advisors can fall prey to the ‘scarcity’ mindset, which compels them to take any and all prospects who consider engaging them, regardless of whether there is a good fit. This inevitably leads to unsatisfying (and even unprofitable) client relationships and resentment for the sales process itself, making it harder to serve the firm’s full client base. These factors can understandably create a crisis of confidence for advisors, who struggle to market themselves and showcase the value they offer in a genuine manner, despite the business imperative to do so.

Nonetheless, there are ways for advisors to build their confidence through a ‘no-stress’ sales process that can help them tell their story and quote their fees without apology or hesitation. And by using such a process, advisors will have a systematic way to identify the right clients for their practice and filter out the wrong ones. Implementing a no-stress sales process involves five steps: 1) the initial inquiry; 2) a brief ‘Learn More’ call to screen prospects for fit; 3) the Discovery Meeting to collect further insight into the client’s needs and goals, clarify expectations and next steps; 4) preparation of a 1-page financial plan that reviews the client’s situation and that defines the value the advisor can add through the relationship; and 5) the 2nd meeting to present the plan, review recommendations, quote a fee, and, if the fit is right, extend an offer.

Core to the no-stress sales process is establishing trust equity with the prospect. This entails the advisor explaining that they deliver their clients’ desired outcomes and that throughout the relationship, the advisor will see, hear, and understand the client’s goals and needs. The end result is that prospects will have a naturally implicit understanding that if they engage with the advisor, the advisor will be there to help them solve their problems. Importantly, using the no-stress sales process can help advisors seamlessly transmute their knowledge of the value that they can deliver to prospects so that they, too, perceive that value.

Ultimately, the key point is that the no-stress sales process offers advisors a structured approach to help them genuinely convey their expertise, credibility, and character while expressing their value with confidence to attract the right clients for their firm. And instead of making advisors shy away from the often-dreaded fee conversation, this process can help them feel more confident (and even convince prospects) that the fee they charge is an honest reflection of the value they offer!

The Most Exclusive Credit Cards Are About To Get More Expensive

(Imani Moise and Jacob Passy | The Wall Street Journal)

Credit cards are ubiquitous in modern society, with Americans typically having one or more cards on hand at any given time. Notably, though, no two cards are alike, giving credit card companies the opportunity to market different products to consumers up and down the income (and credit score) spectrums.

At the high end of this spectrum are so-called "ultra-premium" cards, which often come with an annual fee of more than $500, a slew of benefits and perks, and (to some) a certain level of ‘status’. Two of the most popular cards in this category, the Chase Sapphire Reserve and the American Express Platinum, are becoming even more expensive, with Chase increasing the annual fee on the card to $795 from $550 and American Express expected to raise the $695 fee on the Platinum later this year. In Chase’s case, the increased annual fee came alongside revamped benefits for the card, including hotel, dining, and entertainment credits, which, if used in their entirety, could more than offset the fee (though the time and hassle involved with taking full advantage of those credits might be unpalatable to some). Other benefits that come with these high-end cards can include increased point-earning rates on certain spending categories (compared to lower-fee cards), airport lounge access, and greater travel protections (e.g., primary rental car collision damage waiver insurance and trip cancellation/interruption insurance), though different cardholders will likely value these differently depending on their unique spending and travel habits.

In sum, while some current ultra-premium cardholders (and those intrigued by the signup offers available on these cards) will likely take increased annual fees in stride, others might balk at the higher fees and can consider downgrading their card. For example, moving from the Sapphire Reserve to the Chase Sapphire Preferred (which comes with an $95 annual fee) would allow a cardholder to keep their Ultimate Rewards points (Chase’s points currency) and the ability to transfer them to various airlines and hotels that partner with Chase (typically the highest-value redemption option for credit card points) while paying a much lower fee. The key point, though, is that while maximizing credit card points can be a lucrative activity (particularly when it comes to cashing them in for higher-end travel an individual might not have purchased in cash), each individual’s willingness to pay (in time and money) to support this endeavor will vary widely (suggesting that while some will seek higher-end products, others might be happy with a simple no-fee cash-back card).

How To (Properly) Use Your Credit Card Points When Booking Travel

(Andrew Dressel | Abundo Wealth)

Today, it’s easier than ever to rack up a serious cache of credit card points, whether from enticing sign-up bonuses or regular spending. And while it might be nice to see a healthy points balance on the credit card company’s website and dream about the vacation it might fund, getting the most value out of these points can be a trickier endeavor. Nonetheless, by taking an organized approach to managing and using points, individuals can get significant value (and memorable trips) from them.

To start, an individual can consider whether they want to use their points for more frequent travel or more luxurious travel. For instance, one traveler might prefer to save up points for a long-haul business class flight (that they very likely wouldn’t have paid for in cash), while another might seek to get as many hotel nights as possible from their points by staying at less luxurious properties. The next step is to understand the value of credit card points and their transfer partners. For instance, while cardholders might be allowed to cash out points at a value of one cent per point (e.g., 10,000 points would be worth 10,000 x 0.01 = $100), it is often more lucrative to book travel through the credit card company’s portal (where points might be worth 1.25 cents per point or more) or to transfer points to hotels and airlines that partner with the credit card company (where redemptions can often be worth 2 cents per point or more, depending on the number of points required and the cash price). Typically, business and first-class flights will offer some of the highest value for points (sometimes more than 10 cents per point), though many travelers will prefer to stretch their points for multiple economy-class flights rather than a single premium-class flight.

Ultimately, the key point is that credit card points are only valuable if they are actually used and the ‘best’ use of them will likely depend on an individual’s personal travel preferences (but be certain to get at least the value available from converting them into cash!)

Why High-Income, Reward-Earning Customers Are Attractive To Credit Card Companies

(Patrick McKenzie | Bits About Money)

Given the typically sky-high interest rates associated with credit cards, observers might assume that a credit card company’s most profitable customers are those who regularly carry balances and are charged interest while those who pay off their balance in full every month (and who might appear to make money from their use of credit cards by redeeming credit card rewards) might be less attractive.

However, this is not necessarily the case, as the most important way credit card companies generate revenue is the interchange fees (which entail a percentage charge on the amount spent plus optionally a per-transaction fee) that are ultimately charged to card-accepting businesses (and can be passed on [at least in part] to its customers in the form of higher prices). Importantly, these fees are not consistent across credit card users; rather, interchange fees tend to be higher when purchases are made using ‘premium’ credit cards (that tend to be available to individuals with higher incomes and credit scores and offer higher credit card rewards).

Which means that credit card companies are incentivized to seek out high-income consumers for their products, both because of the higher interchange fee and because they are likely to spend more in absolute terms (generating greater interchange revenue) than their lower-income counterparts. Notably, this applies even if the high-income user always pays off their balance in full and earn more rewards than their lower-spending counterparts (as the companies carefully assess their actual cost of issuing rewards and [hopefully, on their part] ensure that they’re not paying out more than they are receiving in interchange fees across their portfolio).

In the end, while those who are adept at maximizing the points they earn and the rewards they redeem from credit cards might turn a personal ‘profit’ from their use (netting out the increased costs they paid through ‘hidden’ interchange fees), credit card issuers still tend to profit on their overall portfolio, particularly when big spenders use high-end cards!

---

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.