Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that amid economic and market headwinds, the pace of RIA M&A activity was slower in January and February compared to the same period last year. If this trend continues, 2023 would be the first year in more than a decade to see fewer transactions than the year before, though some industry observers continue to see significant appetite for deals.
Also in industry news this week:
- A recent FINRA arbitration ruling reaffirmed the ability of brokers operating in the independent broker-dealer model to take their clients with them when they change firms
- A bipartisan group of U.S. Senators is considering potential ways to shore up Social Security, from raising the retirement age to 70 to creating a sovereign wealth fund
From there, we have several articles on practice management:
- How advisory firms can leverage their CRM software to run a more efficient practice
- Best practices for firms to consider when choosing training programs
- Why getting back to basics, particularly when it comes to decision making, can help firms overcome challenging market conditions
We also have a number of articles on wealth:
- What being ‘upper-middle class’ actually means in dollar terms
- Why many consumers overestimate the size of the nest egg they will need to have a comfortable retirement
- How advisors and clients might change their expectations for fixed-income investments as interest rates and yields have risen
We wrap up with three final articles, all about taking action:
- Why trying to live a life with ‘no regrets’ can hinder self-improvement
- Why it is important to not let major ‘events’ distract from the overall ‘journey’, whether it is an interpersonal relationship or a client’s retirement
- How a willingness to take imperfect actions can help drive advisory firm growth
Enjoy the ‘light’ reading!
(Jeff Benjamin | InvestmentNews)
RIA Mergers and Acquisitions (M&A) activity has been brisk during the past few years, as heightened demand from acquirers (often larger firms, sometimes infused with Private Equity [PE] capital) drove up valuations, to the benefit of those selling their firms. For instance, 341 RIA M&A transactions were announced in 2022, an 11% increase over 2021 (which itself saw a nearly 50% increase in the number of deals compared to 2020, though the latter year’s deal flow was likely impacted by the onset of the pandemic), according to data from investment bank Echelon Partners.
However, concerns have mounted among industry participants that changes in the economic environment in the past year (from inflation to weak market performance) and rising interest rates (and their impact on firms’ willingness and ability to borrow funds for their acquisitions) have the potential to cool the market for RIA M&A. And according to data from M&A advisory firm DeVoe & Company, the first two months of the year have seen a relatively slower start to deal flow, with 38 transactions being completed through late February compared to 49 during the same period last year. If this trend continues, 2023 would represent the first down year in more than a decade for RIA M&A, according to firm CEO David DeVoe, who noted that fatigue among potential sellers and a pullback from mid-tier buyers have contributed to the slowdown. Though notably, while the number of announced deals has declined, the size of transactions has risen, with 39% of deals involving sellers with more than $1 billion in assets, compared to 16% of deals in the fourth quarter of 2022 and 29% of deals in the first quarter of last year (and DeVoe noted that the pipelines of his firm and nearly all major acquirers are at very high levels), suggesting continued acquirer interest in deals.
Altogether, it remains to be seen whether the downturn in RIA M&A deals experienced so far in 2023 represents a return to ‘normal’ levels after the acquisition frenzy seen in the past couple years, or the start of a longer downtrend resulting from economic and market headwinds. And this environment could have a significant impact on the decision-making of potential sellers as well, as the potential for reduced valuations and less favorable deal structures (if demand among acquirers falls) could lead many to temporarily put off a sale (perhaps until markets rebound and their valuation increases), or consider an internal succession plan (though the length of time to execute one suggests that firm owners will want to plan well in advance to find and develop a potential successor!).
(Mark Schoeff | InvestmentNews)
In recent years, many financial advisors have sought more freedom in running their own practices, often moving away from employee broker-dealer models (e.g., wirehouses and regional broker-dealers) toward Independent Broker-Dealer (IBD) or RIA models that offer more independence. But such moves between models (or between firms within the same model) can create conflict between the departing advisor (who will likely want to continue serving their current clients at their new firm) and their previous firm (which will want to retain the clients and the revenue they generate). Nominally, one of the benefits of the IBD model in particular is that the advisor is an independent contractor, and not an employee (which means there is no advisor employment agreement that might have non-compete or non-solicit provisions); however, clients themselves ultimately still sign account agreements with the broker-dealer itself, for which the advisor is ‘just’ a “registered representative” on the broker-dealer’s behalf… raising the question of whether even an independent broker-dealer might try to assert that the departing advisor can’t take their clients with them.
But in February, FINRA arbitrators denied the claims of broker-dealer NexTrend Securities, which sought, among other things, to retain clients of two brokers who resigned from the firm. In addition, the arbitration panel granted the expungement from the brokers’ Forms U-5 of references to their departure because of the defamatory nature of the information.
The ruling appears to confirm that brokers operating in the independent channel (where, unlike wirehouses and regional brokers, they remain independent contractors of the broker-dealer rather than employees) can likely expect (depending on their independent contractor agreements) to be able to maintain their clients if they cut ties with their current broker-dealer. And perhaps send the message to broker-dealers to try to “ding” departing brokers’ Form U-5 disclosures to besmirch the reputation of departing brokers and attempt to dissuade others from leaving.
As the industry continues its ongoing shift from transactional commissions to ongoing fee-based accounts, it seems inevitable that battles over who ‘owns’ the client relationship (and has the right to maintain the relationship and its recurring revenue) will only continue to occur with greater frequency. Nonetheless, the ruling itself is a strong affirmation that when it comes to the IBD model, being ‘independent’ really does mean a greater level of control over the ability to retain client relationships in the event of switching firms. Nonetheless, though, all brokers considering leaving their current firm (whether for another broker-dealer or for and RIA) will still need to be certain they have a clear upfront understanding of who will ‘own’ the client relationship (as individual agreements with the firm may still vary), and also, when they do decide to depart, the relevant procedures (e.g., under the Broker Protocol) that govern whether they will be able to take their clients with them!
(Tracey Longo | Financial Advisor)
Starting in January, those receiving Social Security received an 8.7% Cost Of Living Adjustment (COLA) to their benefits. While this boost will help Social Security recipients keep up with rising prices, the increased benefit payouts could have the follow-on effect of pushing up the date of the Social Security trust fund’s insolvency, which is now estimated to occur in 2032, according to the Congressional Budget Office. And with this date creeping closer, a bipartisan group of U.S. Senators has been formed to consider potential solutions for how to shore up the Social Security system.
Among the potential solutions under consideration include gradually raising the retirement age to 70 (from the current 67 for those born in 1960 or later), raising the taxable wage threshold (up from the current $160,200), increasing the 12.4% payroll tax used to finance Social Security, or changing the formula used for calculating monthly benefits. While proposals to raise the retirement age or taxes could see stiff opposition, another option being floated that appears to have more support from both main parties is to create a new sovereign wealth fund. The fund could involve more than $1.5 trillion in seed money and could invest in projects in the United States (and potentially around the world) with the goal of generating returns to help fund Social Security (possibly reducing the need to reduce benefits or increase taxes).
And so, while the various proposals are in the early stages, the formation of the bipartisan group signals some interest in the Senate to taking action to shore up the Social Security system in advance of the trust fund running out (at which point Social Security would still be able to pay reduced benefits, potentially between 74% and 80% of current benefits over the coming decades). Though ultimately, given the potential for a contentious legislative process, actual changes might be years off (though advisors can still consider ‘stress testing’ client financial plans for potential changes to taxes and benefits!).
(Kate Guillen | Advisor Perspectives)
Customer Relationship Management (CRM) software is one of the most commonly used tools in advisory firms’ tech stacks thanks to its ability to organize vast amounts of information related to prospect and client relationships. In fact, CRM software had the highest adoption among advisors (85.7%) than any other software category, according to the 2021 Kitces Research study on financial advisor technology use, even beating out financial planning software (which had an adoption rate of 83.0%). But while advisors appear to recognize the importance of using a CRM, firms can consider taking time to ensure they are getting the most out of the software they choose.
Guillen identifies five core competencies that help firms run more efficiently and effectively and how a CRM can help with each. First, firms can evaluate their contact management processes within the CRM, including ensuring that client information is up to date and that the data can be filtered as needed (as well as training the team on how to properly categorize and tag clients so that everyone is using the system in the same way). Second, the CRM can be used for task management, providing a centralized location where employees around the firm can track to-dos and their progress. Third, the CRM can be used for calendar management, allowing team members to easily schedule check-ins, prepare for client calls, and plan for the week. Fourth, in addition to organizing the information of current clients, CRMs are an important tool for managing the firm’s pipeline of prospects, from tracking how the firm has engaged with them to planning the next steps needed to build the relationship. Finally, CRMs can be used for account management, ensuring that when a client calls in to the office, anyone at the firm can access their account information and address basic questions without having to rely on more senior team members.
Advisors can also use their CRM to create and manage workflows, which provide a chronological timeline for executing a task and keeping everything documented. For instance, a new client onboarding process workflow can serve as a template for the meetings, calls, data gathering, and other action items that are included in the firm’s onboarding process to ensure that new clients have a consistent experience and that no important tasks fall through the cracks. Other repeatable tasks that can be included in workflows include scheduling quarterly meetings, sending thank you emails after prospecting calls, or sending birthday cards to clients.
Ultimately, the key point is that a firm’s CRM software can be a powerful tool not only to ensure that the firm maintains accurate information about its clients but also to manage the day-to-day tasks required to serve clients and build relationships with prospects. And so, by investing time to clean up data and build new workflows and other systems (and ensuring that all team members know how to use them!), firms can not only ensure they have accurate data, but also gain significant operational efficiencies that can support growth into the future!
(Beverly Flaxington | Advisor Perspectives)
Training and development is crucial for financial advisors, from gaining the technical skills needed to create financial plans to the communication skills to run effective client meetings to understanding the firm’s processes and software tools. But anyone who has been through training programs knows that the quality of the class can be just as important as the material itself when it comes to actually retaining the knowledge being offered (and possibly enjoying the experience?). With this in mind, Flaxington offers several tips for firms considering training programs for their staff.
One of the first tasks for a firm is to consider the purpose of the training it wants to conduct. Because training inevitably takes staff away from their other responsibilities, ensuring that the training is relevant to them and their work will make it more likely they will be engaged and that the firm will receive a better outcome in return for the time and money that go into the training. Relatedly, firms can talk to their staff about their training needs to help determine what might be the most useful option (rather than firm leadership deciding on their own). And when it comes to the training itself, seeking out options that are interactive, action-oriented, and (hopefully) fun can increase the likelihood that participants will be engaged and act on the knowledge gained during the class.
In sum, whether a firm is creating a training program for new hires, seeking to help their service advisors advance to the next level, or wants to have its staff trained on a new technology tool, taking the time to ensure that the training program is both engaging and relevant can help ensure that staff benefit from the training and that it leads to a positive return on the firm’s investment!
(Angie Herbers | Wealth Management)
The past year has been challenging for financial planning firms, as a weak market environment has hurt many firms’ bottom lines and a tight labor market has created a challenging hiring environment. In times like these it can be tempting for firms to make major changes to spark their business, but Herbers suggests that getting ‘back to basics’ and aligning decision making with the firm’s current growth stage can be more effective.
For instance, while innovation is often the lifeblood of young firms trying to reach and serve clients, creativity is not necessarily the optimal path for more mature firms, who could instead benefit from continuing to focus on the processes and client experiences that have helped them grow over time. Another way firms can get ‘back to basics’ is to refine their decision-making process. For example, if a firm experiencing growth challenge is having trouble making decisions regarding the overall direction of the firm, appointing a single decisionmaker (rather than deciding by consensus) can help move the ball forward. At the same time, firm owners can help spur growth by delegating more granular decisions to staff members (recognizing that it can be challenging to cede decision-making authority, particularly when times are tough!), whether it is giving advisors the autonomy to make decisions with and for their clients or letting marketing directors make certain choices on their own.
In the end, while a period of stagnant or declining revenue growth can be challenging for advisory firms, it can also provide an opportunity to step back and assess whether the firm’s processes and decision-making culture are set in a way that will allow the firm to return to a higher-growth stage when the broader operating environment improves!
(Jack Raines | Young Money)
When you think of what it means to be “middle class”, you might think of someone with a moderate income, a comfortable home, and perhaps some savings put away for the future. This stands in contrast to someone in the “upper class”, who might have income well into the six figures, a large home, and significant accumulated assets. But between these two groups sits the "upper-middle class", which has become a more common categorization in the American lexicon (and likely includes many financial advisors and their clients), but the definition of this group is somewhat unclear.
The Pew Research Center defines the “middle class” as individuals earning between two-thirds and twice the median household income, which was $70,784 in 2021 ($46,000 for single-person households). From this Raines draws the line of “upper-middle class” as those earning between 1.5-2.5x the median income. Using this (somewhat arbitrary) measurement, a household would qualify as “upper-middle class" if it earns between $106,176 and $176,960 (or between $69,000 and $115,000 for a single-income household). Of course, because cost of living varies across cities, it can help to look further into the data by locality, which can be determined using a calculator provided by the website DQYDJ. For instance, with a median household income of $113,440, the income range for “upper-middle class” for households in San Francisco is $170,160 to $283,600, significantly higher than the national median.
At the same time, even if an individual has income above what might qualify as “upper-middle class” they still might not feel ‘rich’, perhaps because they are comparing their income to that of their friends and colleagues rather than the population at large (i.e., it’s easy to think you’re in the “middle class” if you make $200,000 but everyone around you does as well!). This effect can show up for many financial planning clients, who might have high income or significant wealth when compared to the broader population but might be worried about their financial situation compared to their contemporaries (or the advisor’s other clients!). Which can provide advisors an opportunity for advisors to help their clients refocus on whether they remain on track to meet their own financial goals, and, more broadly, consider whether they are truly living the life they want to live (regardless of how they label themselves!).
(Ben Carlson | A Wealth Of Common Sense)
While individuals are largely tasked with saving for their own retirements, knowing how much is needed to retire comfortably can be challenging for consumers. Oftentimes, the uncertainty surrounding retirement can lead individuals to expect that they need more than they might otherwise.
For instance, in a recent Bloomberg survey of investors in the United States and Canada, 42.6% of respondents thought that $5 million of retirement savings would be enough, while 31.4% thought $3 million would be sufficient (notably, only 2.9% of respondents thought having less than $1 million would be enough!). But other data suggest that individuals might not need to save as much as they might think. For example, a 2018 report from EBRI found that, on average, in the first 20 years of retirement, individuals with less than $200,000 saved only spent down about a quarter of their assets, those with $500,000 or more saved had only spent down less than 12% of their money, and that 1/3 or retirees, no matter their starting assets, actually increased their nest egg in the first two decades of retirement!
Of course, retirement income planning is an area where financial advisors can provide significant value, whether it is helping clients who are still working determine whether they are saving enough for retirement or designing an income strategy for current retirees. Further, advisors can help clients understand how their spending might change in retirement (and that their expenses in retirement will quite possibly be lower than they are during their working years!). In the end, because it is challenging for consumers to make accurate estimates of their retirement savings needs, advisors can play an important role in helping clients create a realistic financial plan that meets their individual needs, both during their working years and in retirement!
(Jason Zweig | The Wall Street Journal)
During the past few decades, investors had gotten used to earning returns on their fixed-income holdings both from rising prices for their current bond holdings (amid a lower interest rate environment) as well as from the yield these bonds offered. But the steady rise in interest rates experienced in 2022 has changed this dynamic, as investors experienced sharp losses as bond prices fell amid the rising interest rates. And now, with the Federal Reserve potentially poised to raise interest rates further, bond investors might be bracing for further losses.
But Zweig argues that the newly elevated interest rate environment can be beneficial for many investors. For example, while newly purchased bonds offered minimal yield during the low-interest-rate environment of the 2010s (which led some income-seeking investors to look to lower-quality bonds for higher yields), bonds purchased today offer the prospect of significantly higher income, with 6-month U.S. Treasury bills currently yielding about 5% on an annualized basis. Inflation-wary investors could also look to Treasury Inflation Protected Securities (TIPS), with newly purchased TIPS offering a return of more than 1.6% above inflation if held for the next 20 years. Also, increased yields on high-quality bonds can also make taking risks in other parts of a clients’ portfolio safer, as the fixed-income yields can serve as a buffer even if the riskier bets lead to losses (notably, advisors and investors can experiment with the “risk reduction calculator” provided by DepositAccounts.com to see how much could be put in safe and risky assets to ensure they at least break even or come out ahead).
Ultimately, the key point for advisors and their clients is that the new higher interest rate environment might require an adjustment in expectations for fixed-income returns; while these assets might be less likely to provide capital gains going forward, increased yields can potentially both boost investor income and steady overall portfolio returns!
(Dan Solin | Advisor Perspectives)
Most people have regrets that they have built up over the course of their lives. In fact, one survey of 15,000 people in 105 countries found that 82% said they wished they had done some things differently at some point. Whether it is spending too much time at work or not enough time developing relationships with friends and family, individuals almost inevitably make decisions that they later regret.
On the opposite end of the spectrum, some individuals have taken on the motto of “no regrets”, viewing their previous decisions positively regardless of the outcomes (or the impact of the decision on others). But Solin argues that pursuing a life of “no regrets”, or at least not acting on them (e.g., one study found that while psychopaths are capable of feeling regret, it does not cause them to change their behavior) is not necessarily healthy, as learning from regrets can help you make positive changes in your life and help avoid making similar mistakes in the future, particularly if your action (or inaction) harmed another individual.
In the end, while making a decision that you later regret is never fun, it can serve as an important opportunity for reflection and behavioral change. So instead of pursuing a motto of “no regrets”, perhaps a better goal is to try to avoid experiencing the same regret twice?
(Seth Godin | Seth’s Blog)
When we think back on key moments in our personal or professional lives, ‘events’ often come to mind first. Whether it is your college graduation or the day you earned the CFP marks, these events (which happen on a specific date and then are done) are undoubtedly meaningful. At the same time, it is important to place these events in the context of a broader ongoing journey. For example, while a college graduation is an event, a lifetime of learning is a journey; a wedding is an event, while a marriage is a journey. And the distinction matters, because in the end we tend to focus more on the events… while Godin argues that doing so really just distracts us from the journeys that are what we truly care about.
The difference between events and journeys can be seen in the financial advisor context as well. For example, while many clients might be focused on their target retirement date (an ‘event’), retirement itself is a potentially decades-long journey that requires regular reevaluation (e.g., assessing whether they are spending on a sustainable basis). Or, for an advisor, while having a new client come onboard is an event (and one to celebrate!), the advisor’s ongoing relationship with the client (and how the advisor scales up the number of relationships they can support as their client base grows) is a journey. For instance, if an advisor puts in hours of work creating an initial plan for a client but then does not regularly check in with the client to see if they have new needs or if their goals have changed, the plan can become less effective, and the client might become increasingly dissatisfied with the ongoing journey of their advisory relationship.
Ultimately, the key point is that while it can be tempting to focus energy on individual events (e.g., remembering a wedding or preparing for an annual client meeting), it is important to step back and consider the broader journey, whether it is nurturing the relationship with your spouse or providing valuable ongoing service to clients throughout the year!
(Stephanie Bogan | Limitless Advisor)
There are many potential reasons to not take action, whether it is in your personal or professional life. For many, the fear of not being able to execute on an idea perfectly (and potentially failing) holds them back from executing on a new idea. But Bogan argues that because perfection is impossible, a willingness to take imperfect actions can lead to success.
In the world of financial planning, one action that advisors sometimes put off is the decision to raise their fees. While doing so can boost revenue (and perhaps match an increasing amount of work being performed on behalf of clients), it can not only be nerve-wracking to communicate the fee increase to clients, but also to risk clients leaving the firm as a result of the higher fees. But a decision like this does not have to be a one-time, all-or-nothing affair. Rather, once an advisor feels relatively comfortable with how they want to communicate their decision (as feeling 100% sure is unlikely to be possible), they can practice on a client-by-client basis (perhaps starting with smaller clients first). Because while the first couple conversations might be bumpy, the advisor can refine their pitch and gain more confidence for future client meetings (particularly if the advisor realizes clients often take this change in stride!).
In sum, the aphorism “perfect is the enemy of good” is often applicable for financial advisors considering actions that can feel challenging to implement. And so, whether an advisor is considering raising their fees, starting a podcast, or establishing a niche, a willingness to take imperfect action can be an important first step toward building a better business!
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.