Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with new research showing that average asset-based advisory fees increased from 2020 to 2021, suggesting that the phenomenon of “fee compression” from low-cost competition like robo-advisors not only is failing to play out, but may be entirely reversing itself as human advisors create even more value on top of their portfolio management services by offering more and deeper services (and justify charging the same or even higher fees).
Also in industry news this week:
- Massachusetts Secretary of State William Galvin is pushing broker-dealers and RIA custodians to increase the interest rates paid on cash sweep accounts in response to the Federal Reserve’s recent rate hike
- Despite the popularity of the idea of replacing twice-per-year time changes with a permanent daylight savings time, many sleep scientists believe that such a change could be even worse for our bodies than the current system
From there, we have several articles on retirement planning:
- How part-time retirement programs from employers are increasingly available, and how advisors can support clients interested in a phased retirement
- How Social Security claiming strategies are becoming more important amid a wave of pandemic-related retirements
- Why a 401(k) ‘bridge’ could be a useful strategy for retirees to cover their expenses while delaying Social Security and allowing their benefits to grow
We also have a number of articles on advisor training:
- How firms can design training programs that employees will actually implement in their daily work
- What goes into effective advisory firm training programs for junior employees, and why consistency is one of the most important elements
- How external training programs provide structure and fresh ideas that are more difficult to generate through internal firm training programs
We wrap up with three final articles, all about the way we set and perceive our expectations for the future:
- How even the most optimistic predictions sometimes underestimate the eventual outcome of a situation (or vice versa in negative situations), since our tendency to think in linear terms undershoots exponential events
- Why people often feel emptiness when they achieve a long-awaited goal, and how focusing on progress towards that goal (and when achieving a goal, setting a new one that can be progressed towards) can lead to greater happiness in the long run
- Why setting reasonable expectations is key to maintaining happiness (especially when working toward ambitious goals with a low probability of success)
Enjoy the ‘light’ reading!
(Miriam Rozen | AdvisorHub)
The proliferation of low-fee options for asset management over the past decade (including both ‘pure’ robo-advisors like Betterment as well as ‘hybrid’ services like Vanguard’s Personal Advisor Services that combine automated asset management with access to a human advisor) caused many advisors to fear that they would face pressure to lower their fees, reducing their profitability and threatening to disrupt much of the existing advice industry.
But the dreaded “fee compression” phenomenon has largely failed to pass as predicted. Because while asset-based fees on products have fallen in recent years, the net effect of technological competition has not been for advisory firms to dramatically slash fees to keep their clients from fleeing to lower-cost alternatives. Rather, many firms have focused instead on expanding their services, offering deeper financial planning and advice (often specialized to specific types of clients and niches) whose value justifies charging a ‘premium’ over robo-advisors and their ilk. At the same time, firms have adopted some of the very same technology used by the robos to create more efficient processes on the back end – allowing some to slightly lower their total fees, but only while maintaining stable profit margins (in what is more of a ‘fee deflation’ effect, than fee compression).
In fact, according to research from Cerulli Associates, as advisory firms have further reinvested into their value proposition in recent years, average revenue yield (total AUM fees divided by total assets under management) actually increased in 2021 to 0.69% (from 0.66% in 2020). Which suggests that, by pivoting to deeper and more specialized advice, advisory firms have been able to not only justify their existing fees, but that advice-centric services are so valuable they’re able to begin charging higher fees than before. And as more and more advisors deepen their planning expertise and find new ways to provide value for clients, the trend seems likely to continue. Because the flip side of providing more and deeper advice is that it takes more time and resources, meaning firms may need to serve fewer clients per advisor… which ultimately may require them to start charging higher fees to maintain the same level of profitability when providing that deeper value proposition.
(Patrick Donachie | Wealth Management)
Last week, the Federal Reserve acted to raise its key interest rate by 0.25% as an initial step to combat the persistently high inflation that has plagued the economy for the last year. As is often the case when rates change, the initial effects were distributed unevenly throughout the financial system. While rates on lending jumped almost immediately (most notably mortgage rates, which quickly reached their highest level in three years), the interest rates offered on deposits like savings accounts have been more sluggish to rise. During this transition period, some banks have been able to take advantage by lending money at higher rates while paying depositors the old, lower rate, reaping extra profits until the deposit rates eventually rise to catch up.
Custodial broker-dealers are among the institutions that have been able to profit from a higher spread between lending and deposit rates. Custodians have long earned money from cash sweep programs, where uninvested cash in customer accounts is lent out by the broker-dealer at a higher rate than the interest paid to the customer, with the difference being the “spread” that is realized as profit. The practice has gained importance as a profit center for broker-dealers and RIA custodians in recent years after many firms eliminated trading fees, but it has also earned some scrutiny from regulators due to factors like lack of transparency, the potential for conflicts of interest, and the typically minuscule amount of interest that most cash sweep accounts actually pay.
So it is not entirely surprising that one of the first reactions from industry regulators to the Fed’s rate hike was to press broker-dealers to raise their cash sweep interest rates. Last week, just a few days after the rate hike was announced, Massachusetts Secretary of State William Galvin sent a letter to six broker-dealers and RIA custodians (TD Ameritrade, Merrill Lynch, LPL Financial, Ameriprise, Securities America, and SoFi) inquiring as to whether they planned to raise interest rates for customers in their sweep programs.
While it remains to be seen whether Galvin’s prodding will actually result in higher cash sweep rates, the reality for financial advisors and their clients is that sweep accounts are rarely a productive place to keep funds, since it is often better to keep the cash invested, or move it out to an external bank account with a more competitive interest rate. So ultimately, it is probably better not to be impacted by whether the interest rates on cash sweeps stay the same or rise by a few basis points, since either way it would probably be earning a higher rate somewhere else… though when all clients inevitably hold some ‘frictional’ cash in their accounts (e.g., for fee sweeps, or ongoing retirement distributions), it’s still preferable to get a little more yield where possible on client cash that has to remain in a sweep account anyway!
(Sumathi Reddy | Wall Street Journal)
In the spring and fall of each year, when most Americans turn their clocks forward and backward at the start and end of daylight savings time, it is common to hear from people agitating for an end to the twice-per-year practice of shifting time. And it is easy to sympathize with these arguments: The change can be a major inconvenience, not just for people with kids and pets but for almost anyone who keeps a regular schedule. Furthermore, the time change has been linked to a range of negative health effects, like an increased risk of heart attack and stroke, stemming from the disruption of our natural rhythm of waking and sleep.
The growing resistance to the time change is reflected in the movement among state and national lawmakers to create permanent daylight saving time: At least 18 states have passed legislation or resolutions to provide for year-round DST. And while none of those bills have taken effect yet because Federal law currently prohibits permanent daylight time, on March 15 the U.S. Senate passed a bill that would remove that barrier by effectively ending the twice-per-year time change nationwide, instead letting states choose to operate on either standard or daylight time year-round.
If the semiannual time change were to go away and just one time system was made permanent, most people would probably prefer to keep daylight savings time: The idea of keeping long evenings in the summer, and of ending the workday when it’s still light out in the winter, has undeniable appeal.
But according to many sleep scientists, permanent daylight time could actually be worse than the current system: Moving permanently from the more “natural” cycle of standard time, they argue, could cause sustained negative effects from the disruption of our normal circadian rhythms. We need sunlight in the morning to wake up and be alert, and darkness in the evening to cue our bodies to fall asleep. Permanent daylight time – where the sun would rise as late as 9 am in the winter and set after 9 pm in the summer in some places – gives us the worst of both worlds in that regard.
Notably, the country has made the change to permanent daylight savings time once before, back in 1974, and it proved so wildly unpopular that it was reversed within a year (with one significant reason being that sending children to school in the prolonged morning darkness of winter caused an increase in traffic accidents and deaths). And so, even though the idea of permanent daylight time may sound good now, it’s worth first considering the potential downsides – and the lessons of the past – before making such a disruptive change.
(Anne Tergesen and Lauren Weber |The Wall Street Journal)
Retirement is often imagined as a time of relaxation, perhaps playing golf or reading a book on the beach. But an abrupt transition from working full-time to not working at all can be jarring for workers whose lives have been structured around the workweek (and for those who haven’t considered what they actually want to do in retirement). And so, for some retirees, a preferable option could be a ‘semi-retirement’ of working reduced hours at their current employer to ease the transition into retirement, both psychologically and financially.
And while phased retirement offers benefits for employees, recent survey data show that employers also are recognizing the potential benefits of allowing flexible hours as well. According to the Society for Human Resources Management, 23% of employers in the U.S. offered phased retirement arrangements, up from 16% in 2016. For employers, offering phased retirement allows them to both smooth the transition between the seasoned employee and their replacement and manage talent shortages at a time when the workforce (including those in the financial advisory industry!) is aging and the labor market is tight.
The potential for a phased retirement creates several financial planning opportunities. For example, when a worker is able to continue to earn income longer, they not only will reduce their need to draw on their savings, and also potentially be able to continue to contribute to their workplace retirement account! And for workers who are able to keep their health benefits, a phased retirement can affect decision-making regarding Medicare enrollment (and potentially offer significant savings on health insurance premiums if the worker was otherwise planning to retire before becoming eligible for Medicare!)
The key point is that the shift into retirement can be stressful for many retirees, so being able to leave the workforce in a gradual manner can ease the transition into retirement… which more and more employers are showing a willingness to accommodate. And in addition to helping clients plan for a phased retirement, advisory firms might find that they want to implement these programs within their own businesses as well, to promote a smooth transition to the next generation as senior advisors approach their own retirement!
(Michael Sasso and Alexandre Tanzi | Advisor Perspectives)
The pandemic has caused many workers to consider whether they want to stay in their current jobs, or perhaps shift to another company or field that offers better pay or flexibility. But for older workers, the decision is often whether to remain in the workforce at all, or to retire, perhaps earlier than they might have planned. And it appears that many employees are choosing this path, with about 2.4 million workers retiring above ordinary trends since the start of the pandemic, according to research from the Federal Reserve Bank of St. Louis.
Yet while the number of individuals who report being retired has increased, applications for Social Security benefits have been almost flat, based on calculations by the Boston College Center for Retirement Research. And given that Social Security makes up a significant part of the income for many Americans, it raises the question of whether these individuals have left the workforce completely, or in fact have just taken part-time jobs or other work. Considering the potential financial benefits of delaying Social Security, some of these workers might be living off their assets (perhaps benefiting from strong stock market returns during the past decade as well as rising real estate prices) while their benefits increase. Others might be out of the workforce temporarily, but are considering going back to full-time work at some point in the future (and don’t want to start Social Security benefits they might subsequently lose due to the Earnings Test). Still others might be too young to claim Social Security benefits, and could be waiting to reach the minimum age to do so.
For advisors working with clients considering retirement (or those who have already left their jobs but have not claimed Social Security benefits), helping them navigate the Social Security claiming decision can create significant value. For example, reviewing clients’ Social Security statements can help the advisor and the client understand what benefits the client can expect to receive at different claiming ages as well as uncover potential errors that can be fixed. And clients who have reached Full Retirement Age but are nervous about waiting too long to claim their Social Security benefits (because they fear not living long enough to enjoy the higher monthly benefit) can use six-month ‘reversible’ delays as a way to test out delaying Social Security while knowing that they can receive a lump sum for up to six months of retroactive benefits once they do claim.
Ultimately, the key point is that many factors go into an individual’s decision on when to retire, from the desire to leave their job to their savings and Social Security benefits, and, more recently, the impact of the pandemic. And the recent data showing that individuals are retiring at a faster pace than they are claiming Social Security suggests that advisors will have many opportunities to help clients navigate this transition period!
(Mary Beth Franklin | InvestmentNews)
Workers face several significant financial decisions when considering when to retire. From assessing whether their savings will last through an extended retirement to deciding when to claim Social Security benefits, the retirement income puzzle can be complicated (which often leads many pre-retirees to work with an advisor!).
The decision on when to claim Social Security benefits can be particularly challenging for clients, given the number of factors involved. For example, while delaying Social Security can create significant long-run financial benefits, workers who might want to do so, but also want to retire before reaching age 70 (when it is no longer beneficial to continue delaying Social Security), have to find a way to generate sufficient income to meet their expenses during this period. And for those retirees without a defined-benefit pension (or an annuity) to lean on, another option is to create a Social Security ‘bridge’ by using 401(k) (or other retirement) assets as a substitute until they claim Social Security benefits.
As described by the Boston College Center for Retirement Research, this strategy involves using 401(k) assets to pay retirees an amount equivalent to their Social Security benefits until they decide to claim, thereby ‘buying’ a higher Social Security benefit. The researchers suggest that this ‘bridge’ strategy could be included as an option within employer 401(k) plans, thereby making it easier for workers to implement the strategy. And not only does the strategy potentially work on paper, but about a third of workers surveyed about the option said they would be interested in implementing it.
Notwithstanding the potential for the ‘bridge’ strategy to become more popular within 401(k) plans, financial advisors have the opportunity to implement a similar strategy now within client portfolios (while also considering tax efficiency and tax bracket arbitrage opportunities when deciding on which accounts to draw from in retirement), which not only facilitates an often-favorable delay in starting Social Security benefits themselves, but may be the key to getting clients comfortable with retirement in the first place. As in the end, whether a client uses the ‘bridge’, an annuity, or decides to continue working, the key point is that being able to delay Social Security and increase the monthly benefit during the remainder of their retirement can often be a lucrative strategy!
(Beverly Flaxington | Advisor Perspectives)
Individuals spend most of their first two decades learning, moving from the basics in elementary school to developing a specialty in college or a graduate program. And for financial advisors, this education can continue with the technical coursework needed to be an effective practitioner. But in addition to this advisor-driven education, firms often provide training for their employees… though making this training ‘stick’ with employees can be a challenge.
The key is to recognize that when it comes to training, learning new things and being able to do them are two different issues. An individual could take a class and learn a concept, but might not understand how to implement it in their daily work. Further, training that is not given in the context of an individual’s specific field is less likely to be effective (e.g., a general sales course as opposed to advisor-specific sales training).
The individuals giving the training matter as well; educators who are experts in the material and the industry are more likely to be effective than professional trainers (who offer training across a variety of fields). In addition, the training should be supplemented with sustainability in the form of reminders, updates, or practice sessions to ensure that employees actually implement what they learned (one of the benefits of experiential-based learning). Finally, while firm management might have ideas on what skills they want employees to develop, understanding what the employees themselves will find interesting and useful can make the training more effective.
Ultimately, the key point is that receiving training on a topic does not necessarily mean that an employee will subsequently be able to implement it back in the office. But by making the training more relevant to the audience and by offering opportunities to practice what they have learned, firms can get a better return on their training investments.
(Angie Herbers | ThinkAdvisor)
New financial advisors fresh out of an undergraduate or certificate program are likely to be familiar with many of the technical aspects of financial planning. But actually doing planning and working with clients often requires junior employees to develop the ‘soft skills’ needed to be an effective advisor. In addition, these employees are going to want to see a path to advance in the field. Altogether, firms that implement effective training programs for junior employees will not only better develop the senior advisors of the future, but will also enhance their loyalty to the firm.
Such a training program can be divided into four elements: personal development, professional development, exceptional service, and managing expectations. Personal development means treating junior employees who want to pursue a client-facing role as professionals (similar to a medical residency program), allowing them to start building relationships with firm clients (perhaps under the wing of a more senior advisor) rather than having them do back-office work for an extended period before having any client interaction. Next, supporting employee professional development can not only include enhancing their technical skills (particularly in areas of weakness), but also the interpersonal skills needed to work with clients and advance within the firm. Further, junior advisors can also be trained in the firm’s exceptional service standards, including expectations for client communication, developing the ability to put themselves in a client’s shoes, and how to talk to clients about difficult issues such as divorce and death. Finally, it is important to empower junior advisors to assess their own performance (rather than rely on feedback from senior advisors) and to develop a sense of accountability and an ability to manage time efficiently.
It is important to recognize that this type of training cannot be completed in a couple of weeks or with a few meetings with senior advisors. Rather, this training involves more of an ongoing mentoring relationship than a classroom approach and junior employees can be engaged monthly (if not more often) for at least three years. And while this entails a significant investment for the firm, having skilled, confident, and loyal employees is likely to pay dividends well into the future.
(Philip Palaveev | The Ensemble Practice)
Training for financial advisors can be a career-long endeavor in order to stay on top of trends in practice management and financial planning trends (and to fulfill Continuing Education requirements!). And while internal training programs within firms can be a useful way to train newer advisors on firm culture and best practices, they can often be challenging to implement on an ad hoc basis. In fact, Palaveev’s firm (which runs an advisor training program for next-generation leaders) found that 35% of advisory firms have no internal business development training, and 27% of firms have no leadership or management training. So while internal training programs can be useful, advisors and their firms also can find significant value in external training programs as well.
In addition to the fact that using an external training program means the firm doesn’t have to spend the time and resources to build its own in the first place, external training programs can also be valuable because they are intentionally structured to develop a range of essential skills. And rather than using ad hoc internal training sessions or trying to find the best book on a given topic, external programs can be designed specifically around the areas where an advisor might need to develop. Also, external training brings structure by holding sessions at specific times, to help ensure that participants actually attend the training (whereas it can be easy to put off reading the latest journal article on a given topic). In addition, external training can expose firms and advisors to new ideas, both from instructors as well as the other participants, who can bring skills and methods that other participants might not have considered before.
Ultimately, the key point is that while it can be tempting to rely on less-expensive internal training programs, firms can potentially get significant value from having their advisors complete external training programs. Not only can this training improve the advisor’s individual skills, but it can also bring fresh ideas and practices that can improve the firm’s operations as a whole!
(Nick Maggiulli | Of Dollars And Data)
In the early days of the pandemic, when cities were locking down, businesses were shutting their doors, and the stock market was suffering some of its worst days in history, few people knew whether or not we were on the precipice of a 2008-level crisis of mass business closures, high unemployment, and prolonged economic stagnation. As it turned out, in those days even the most optimistic of us likely did not predict how quickly the economy would recover from the early shock of the pandemic: Thanks to quick government action to slash interest rates and send cash to individuals and businesses, as well as a relatively seamless shift to remote work by employers across the country, the economy charged back in the second half of 2020 and the S&P 500 reached a new all-time high within five months of bottoming out.
When events move forward and gain momentum (such as in the economic and stock market recovery of late 2020), humans are often bad at predicting just how far in one direction or the other those events will go. On the positive side, we often underestimate just how high a stock can rise, or how a portfolio can grow in value over several decades, which Maggiulli attributes to our human predisposition to think in linear terms (and conversely, our inability to instinctively process compounding growth). When we envision something linearly and it turns out to grow exponentially, our linear estimate will badly undershoot the actual result. (Thus, for instance, why most retirees tend to underestimate the dramatic upside results that tend to occur with conservative retirement spending strategies.)
But it’s also worth noting that this effect can also occur on the downside, causing us to underestimate the magnitude of potential negative changes. This phenomenon, known as normalcy bias, has been blamed for everything from the refusal of residents to evacuate in the path of wildfires and hurricanes, to the slowness of businesses to recognize and adapt to disruptive technology (e.g., Blockbuster turning down Netflix’s offer of a merger in the early 2000s), to the public response to the pandemic itself (where resistance, first to masks and then to vaccines, has acted as a drag on efforts to contain COVID-19 and its variants).
In both cases, people’s default ways of thinking and seeing the world cause them to fail to envision the velocity with which major change events take shape. And though many of us will never be able to fully and intuitively grasp the effects of compounding (since human brains are so hard-wired against doing so), we do have the ability to examine our own default thinking and understand where we could be off in our predictions. Ultimately, the ability to process new information – and be comfortable with letting go of our initial predictions when new evidence indicates otherwise – can help us overcome these biases and avoid the consequences of underestimating the upside or downside of a given situation.
(Arthur Brooks | The Atlantic)
Goals are an important topic for financial advisors and their clients. Financial planning often revolves around a client’s goals: To hold a dream job, build generational wealth, and retire comfortably are among the many goals that clients pay their advisors handsomely to help them achieve.
And yet, when a person reaches a goal – even one that they have worked long and hard to reach – they often do not find themselves as happy as they may have envisioned (a fact that can be attested to by the number of retirees who get divorced or start a new career after finding themselves dissatisfied with the retirement lifestyle they had finally attained).
As it turns out, people tend to get more satisfaction from progress than from accomplishment, which in practice means that a person is likely to be happier working toward a goal (so long as they are actually making progress toward it) than the outcome of actually reaching it. Hitting a goal, by definition, means a cessation of that forward progress – And since the progress was what actually gives the person happiness and meaning, the termination of that progress will naturally result in feeling empty and drifting.
The idea that “the journey is more important than the destination” is not new, but for advisors who build up the importance of achieving goals to their clients – when the achievement itself may end out with the client being less happy in the long run – it may be worth reframing that approach as helping them work toward those goals (and encourage them to recognize and enjoy that progress along the way). And when a client does reach a long-awaited goal, helping them to set the next goal – so they can start the journey of forward progress all over again – may be the best way to help them truly enjoy the fruits of their work.
(Morgan Housel | Collaborative Fund)
People often use probabilities to make decisions. Actions with high probabilities of success are generally considered preferable to those with low probabilities – any advisor who has presented a Monte Carlo simulation to clients will tell you that most clients would prefer to see their probability of a “successful” retirement go up than down.
However, just because an outcome is probable (or even exceedingly probable), that doesn’t make it certain (or even desirable). People work to achieve improbable outcomes every day, because the potential rewards of doing so are worth the long odds against them. Only about 30% of small businesses make it beyond 10 years in business, yet people continue to start them – not because it is a sure path to success, but because of the life-changing possibilities if the entrepreneur does succeed. Or to view it another way, there would be little need (and scant enthusiasm) for an NCAA basketball tournament if the higher-seeded schools beat the lower-seeded ones in every game!
But even if probability isn’t always the primary guide we should use to decide our actions, it can still have a significant role in how we set our expectations – at least, if we want to be happy with our decisions. Setting reasonable expectations can ground us and keep us from getting discouraged by setbacks. And in trying for low-probability, high-reward outcomes (like investing in startups), repeated failures can become unbearable if the expectations for each event are unreasonably high, reducing the likelihood of sticking around for the one success that could make everything worth it.
Ultimately, having reasonable expectations doesn’t mean we should only try for outcomes with a high probability of success. Rather, it means that those who do succeed in low-probability outcomes are rewarded all the more for their ambition with the satisfaction of exceeding expectations, while those who do not succeed – but have met their expectation of the most likely outcome – may find it still feels worthwhile to keep trying until they do succeed.
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, as well as Gavin Spitzner's "Wealth Management Weekly" blog.