Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that a recent study found that clients of advisors providing comprehensive planning services are significantly more satisfied than those receiving a lower tier of service. The study also highlighted the importance of advisors taking the time to build trust with clients and to understand a client’s goals and needs, as this can not only differentiate an advisor from those providing purely transactional investment advice, but also could promote client retention, even in years of poor market performance.
Also in industry news this week:
- Why industry groups representing investment advisers and others have blasted an SEC proposal that would significantly expand its Custody Rule
- A new study suggests that organic client growth and profit margins are the key factors driving RIA valuations, with the firm’s affiliation model having little to no impact
From there, we have several articles on cash flow:
- How the inflation-adjusted ‘net price’ that parents and students pay for college has remained largely unchanged in the past 15 years despite increases in ‘sticker prices’ that well exceed the broader inflation rate
- Why high-net-worth clients might be interested not only in advice for how to make charitable contributions in the most tax-friendly manner, but also in finding appropriate charities to give to that meet their goals
- How a recent study suggests a causal connection between married couples who use a joint bank account and increased relationship happiness
We also have a number of articles on practice management:
- How 1 firm measures its client service standards to ensure it is providing a high-quality client experience
- How owners of growing firms can increase the size of their client base without sacrificing service levels or working endless hours
- Why adding strategic tax planning services could be the key to spurring client growth, and how firms can implement the new service offering
We wrap up with 3 final articles, all about health and wellness:
- How the consumption of ultra-processed foods might lead to a variety of maladies
- Why the United States trails peer countries in terms of life expectancy
- Why taking a ‘mental health day’ might only be a temporary fix for broader issues related to burnout in the workplace and what employers can do to support their employees
Enjoy the ‘light’ reading!
(Edward Hayes | Financial Advisor)
Consumers have a wide range of options available to them when it comes to seeking financial advice, from purely digital tools to one-on-one advice from a human advisor. But even among those working with a human advisor, there is a range of service levels, from providing purely transactional investment advice to comprehensive financial planning. And a recent survey suggests that clients receiving comprehensive planning services are significantly more satisfied with their advisor than those who receive a lower tier of service.
According to market research firm J.D. Power’s 2023 U.S. Full-Service Investor Satisfaction study, which surveyed 6,168 investors who work directly with a human advisor, those clients receiving comprehensive advice reported a satisfaction score of 861 (out of a possible 1,000 points), compared to those who only receive transaction advice, who gave a satisfaction score of 665. However, while those receiving comprehensive advice reported higher satisfaction, they represented a minority of those surveyed, as only 11% of respondents reporting receiving comprehensive advice, compared to 42% getting transactional guidance and 47% receiving goals-based advice. Further, only 57% of those surveyed reported having a financial plan in place; among these clients, 32% said they do not feel their advisor makes recommendations that are in their best interest and 29% said they do not feel their advisor understands their goals and needs. These weaknesses were perhaps reflected in the study’s finding that overall satisfaction among clients fell by 17 points compared to the prior year to 727 (out of 1,000 points), in line with previous declines that occurred during years with weak market performance (suggesting that some of these clients are not seeing significant benefits from their advisor outside of investment management).
Altogether, the J.D. Power study indicates that consumers receive additional benefits from working with an advisor providing comprehensive financial planning services compared to advisors focused largely on investment planning. Further, the study highlights the importance for advisors of taking the time to build trust with clients and to understand a client’s goals and needs, as this can not only differentiate an advisor from those only providing transactional investment advice, but also could improve client satisfaction (and, ultimately, retention), even in years of poor market performance!
(Mark Schoeff | InvestmentNews)
The Securities and Exchange Commission’s (SEC’s) Custody Rule is designed to provide for the safekeeping of investor funds and securities, and to prevent such funds and securities from being misused or misappropriated by investment advisers. First adopted in 1962 (and amended since), the rule essentially called for segregated bank deposits, client notification about the location of their funds and securities, mailed quarterly account statements (from the adviser), and an annual surprise exam by an independent public accountant. Because of these additional compliance burdens, in practice most investment advisers try to avoid custody and simply rely on the use of third-party custodians (e.g., Schwab or Fidelity) instead.
But in February, the SEC issued a proposal that would amend the custody rule for the first time since 2009. Under the proposed “Safeguarding Rule”, an investment adviser who can make trades on behalf of a client (i.e., has discretion) would be deemed to have custody of the client’s assets. Which would effectively eliminate the authorized trading exception from having custody (under which advisers can make discretionary trades in a client’s account but are not deemed to have custody if they do not have the authority to disburse money to a third party on the client’s behalf) that many RIAs rely on today (thereby substantively shifting a very sizable portion of the wealth management RIA community under the custody rule).
Further, the rule would extend custody obligations beyond securities and funds (subject to the current rule) to encompass all assets in a client’s portfolio, including private securities, real estate, derivatives, crypto assets (that are not securities), and other assets. The amendments would require advisers to enter a written agreement with a qualified custodian to protect such client assets and would require advisers to hold private assets with a qualified custodian unless they can show that doing so would not be reasonable.
During the public comment period for this proposal (which ended earlier this week), some advisor and investment industry groups voiced significant concerns about the burden it would create on advisors and their custodians. In its comment letter to the SEC, the Investment Adviser Association said that the proposed expansion of the definition of custody to include discretionary authority would make trading on behalf of clients “impracticable” and ultimately harm consumers by limiting their investment universe and the number of investment advisers who could bear the burden of complying with the rule. In addition, the Securities Industry and Financial Markets Association its response to the proposal questioned whether any “marginal improvement in asset protection” would justify the burdens and costs placed on advisors, clients, and custodians.
While it is unclear whether the SEC will adopt, amend, or even scrap the proposal in response to feedback from industry representatives and others, the proposed changes as they currently stand would significantly broaden the range of assets that would need to be managed through a qualified custodian (particularly notable at a time when private and alternative investments have become increasingly popular), and would, for the first time, scoop up all investment advisers who manage with discretion (which has become increasingly common in recent years as advisers operate more and more often using centralized model portfolios), further increasing the compliance and papering burden on advisers, particularly those with discretionary trading authority and whose clients hold a range of assets other than registered, publicly traded securities!
(Andrew Foerch | Citywire RIA)
There are a variety of aspects that go into building a successful RIA, from generating a pipeline of new clients to creating a functional tech stack to (if desired) building a staff of dedicated advisors and support professionals. But given the different decisions that go into building an RIA, firm owners who are considering selling their firm might wonder which are the most important.
Consulting firm Advisor Growth Strategies addresses this question in a new report, “Maximizing Independence: Valuation Myths and Realities”, finding that a firm’s organic growth rate net of market performance (which suggests that the business is resilient against client drawdowns resulting from market risk) was the most important factor buyers are looking for when evaluating firms. Beyond organic growth, buyers evaluate a firm’s profit margins as a sign of its “pricing philosophy, expense management, productivity, and efficiency of the client service model”. Other factors that can boost a seller’s valuation, according to the study, include a location in a wealthy or growing geographical market, a focus on a specific client niche, and employing talented next-generation advisors.
The report also identified several factors that are less important when it comes to firm valuation. These include the affiliation model, as the report found, based on an evaluation of 62 sales of RIAs managing $500 million or less in client assets, “no meaningful valuation differences” between sellers of independent RIAs and those who are on their firm’s corporate RIA (it is worth noting that the study was sponsored by LPL Financial, which offers several affiliation models for advisors). Other factors that the report identified as having less of an impact on valuation include having an internal compliance team, successful branding, a unique technology suite and having a differentiated investment thesis (though the report noted that some of these factors could be important for firms looking to conduct an internal transition, as next-generation owners will likely want to buy into a firm with a strong structural framework).
Altogether, this study suggests that for firms looking to sell, optimizing their organic growth and profitability are keys to maximizing their valuation and interest from potential buyers. Though ultimately, these factors are also important for firms who are not contemplating a sale, as client growth and efficiency can help a firm thrive in a variety of market conditions!
(Phillip Levine | Brookings Institution)
While the prices of a wide variety of goods and services have seen large increases during the past couple of years, the rising cost of attending college has demanded the attention of parents and students for the past several decades. For instance, at 4-year public and private institutions, the total cost of attendance, adjusted for inflation, almost tripled between 1979-80 and 2020-21. But the total cost of attendance (i.e., the ‘sticker price’) does not tell the full story, as the ‘net price’ students actually pay can be significantly less than the ‘sticker price’ thanks to grants (i.e., scholarships) offered by colleges for students with financial need.
Overall, the total cost of attendance (which includes tuition, fees, room, and board) at both public and non-profit private 4-year institutions increased by around 27% (above the broader inflation rate) between 2006-07 and 2019-20 and has declined by 7-8% in real terms in the years since then (notably, while the nominal cost has increased at a similar pace since 2020, overall inflation has been higher as well, leading to a decline in the inflation-adjusted cost of attendance). However, average net prices (which take into account grants from the college that do not need to be repaid) rose at a more modest pace between 2006-07 and 2019-20 (increasing by 13% and 7% in real terms at public and private colleges, respectively) and have reversed course since then, so that, overall, average net prices are largely unchanged in real terms since the 2006-07 school year.
Financial advisors (and the public writ large) have several resources available that can help clients get an estimate of how much the ‘net price’ they might pay for their student at a given college. For instance, the U.S. Department of Education’s College Scorecard includes net price data, including the average annual cost a family can expect to pay depending on their income (notably, these are just estimates and do not take into account other circumstances of a student’s situation). Another resource is MyinTuition, a website developed by Levine that provides both a best estimate of what a student’s financial aid award might look like (at a specific school chosen) based on data from current students whose families have similar financial characteristics, and a 90% confidence interval to convey the uncertainty about the estimate. Advisors who want to perform more comprehensive analyses of college costs can also consider software options such as College Aid Pro or Collegiate Funding Solutions.
Ultimately, the key point is that headlines citing the increasing cost of college do not necessarily tell the whole story, particularly for those who are eligible for need-based grant aid. And even for those families who might not qualify for need-based aid, ‘merit aid’ (i.e., discounts offered to certain students that are not based on income) is also offered by many schools and can result in a tuition bill significantly less than the ‘sticker price’!
(Leslie Albrecht | MarketWatch)
When financial advisors discuss charitable gift planning with clients, it is often in the context of the best tools to do so (e.g., Donor-Advised Funds [DAFs] or Qualified Charitable Distributions [QCDs]) for tax and estate planning purposes. But for some high-net-worth individuals who are charitably minded, another challenging problem can be finding suitable organizations to receive their donations.
Clients who are planning to donate large amounts of money might have different criteria for who receives it. For instance, they might only want to donate to certain types of organizations or could be concerned about whether the recipient will use the donation effectively. These concerns can sometimes lead donors to contribute to DAFs or private foundations (reaping a potential tax benefit), where the money can sit (or grow) until a grant is made to a charitable organization (which has led to some criticism of these vehicles). Though it is worth noting that this ‘problem’ of finding worthy recipients of donations is not universal, and some ultra-HNW individuals haven’t had problems finding organizations to receive their philanthropy (e.g., MacKenzie Scott, who as of late 2022 had given away $14 billion to some 1,500 organizations, largely in the past few years).
In the end, many successful individuals who have amassed significant assets and are philanthropically minded will want to ensure that money they give to others meets certain goals. Which perhaps presents an opportunity for advisors working with these individuals to add value not only by helping them get the most tax and estate planning benefits from their giving, but also by helping them find suitable recipients for their donations!
When a couple is about to get married, there are many decisions to make, from deciding where to live to choosing a destination for their honeymoon. Another decision that is less fun, but could be consequential for the relationship, is how they plan to handle their finances as a married couple. This includes the choice of using totally separate bank accounts, combining their accounts into joint accounts, or maintaining both separate and joint accounts.
Previous research into this question often used survey data to determine whether the types of accounts a couple uses are correlated with their happiness in the marriage. And while these studies typically found that those with joint accounts were, on average, happier than those who kept their bank accounts separate, it’s possible that couples who were more trusting of one another (which could lead to a happier relationship) choose to have joint bank accounts, rather than the use of joint bank accounts itself leading to greater happiness.
With this in mind, a group of researchers from Indiana University sought to test whether there is a causal (and not just correlational) relationship between whether a couple merges their finances and happiness in the relationship. To do so, the researchers recruited 230 couples, who were either engaged or newly married (all were first marriages) and had not yet combined their finances and divided the couples into 3 groups: 1 group was told to keep separate accounts, 1 was told to open a joint account, and the final group was allowed to make the decision on their own. The researchers then surveyed the couples several times over the next 2 years and found that couples who were told to open joint bank accounts reported substantially higher relationship quality than the individuals in the other 2 groups. Given that the couples were assigned randomly to the 3 groups, this result suggests a causal relationship between having a joint account and happiness in the marriage (perhaps because having a joint account forced the partners to communicate more about income and expenses, or possibly because getting a more intimate view of their partners’ financial activities built more trust).
In the end, the decision of whether to combine finances is both functional (i.e., whether to pay bills out of a joint account or separate accounts) and emotional (i.e., while some individuals might see having a joint account as a sign of trust, others might want to maintain a separate account to feel more independent). But this study suggests that many newly married couples who do decide to use a joint account could be making a deposit toward the overall happiness of their relationship!
(Ross Levin | Financial Advisor)
Financial advicers are in the business of providing high-quality financial advice to their clients. But actually quantifying the level of service clients receive can be challenging. And so, Levin and his firm, Accredited Investors Wealth Management broke down their standards of care into 5 measurable subject areas: meaningful client interactions; discussion letters; high-priority tasks; overdue tasks; and transaction alerts.
Accredited Investors’ standards of care call for at least 3 meaningful client interactions a year, where the firm meets with them about their planning and important topics. And beyond the sheer number of meetings, ensuring meaningful interactions also means reviewing client agendas to ensure the firm is covering what needs to be covered and to avoid having an out-of-date interaction plan. Then, the firm sends the client a discussion letter (within a week of a meeting 90% of the time and within 2 weeks 100% of the time) outlining what was discussed, what is left to do, who is responsible (i.e., the advisor or the client), and when items are expected to be completed.
Outside of the meeting process, the firm expects all of its high-priority tasks (i.e., something that is usually both urgent and important [e.g., required minimum distributions] or something the firm committed to doing for the client) to be completed by the end of the month. The firm also tracks overdue tasks; with 600 client families and tens of thousands of tasks throughout the year, managing these tasks is important, and the firm’s standard is to have fewer than 5 tasks overdue per wealth manager. Another area the firm tracks is transaction alerts, ensuring that whenever money flows into client investment accounts, the investment team is informed whether the funds should be invested or remain in cash (which can help avoid a situation where client funds are not invested when they should be and the firm has to potentially give the client a fee credit to make up for lost investment gains).
Ultimately, the key point is that quantifying the level of service being provided to clients can help a firm have a more accurate picture of whether it is living up to its own standards. Which can ultimately lead to greater client satisfaction, retention, and a more successful practice!
(Sheryl Rowling | Morningstar)
When a firm first opens its doors, the owner is often the only employee, charged with handling all aspects of building their practice. But over time, as the firm grows, the owner could eventually hit a capacity ‘wall’ where they can no longer handle all of the responsibilities on their own (at least without reducing service levels or working for an excessive number of hours, which could lead to burnout). For firm owners in this situation, adding staff can be one way to ameliorate the situation.
When it comes to hiring, one tactic is not to wait until a staff member is desperately needed, but rather to ‘prehire’ before a need arises. This can allow the firm to always be adequately staffed and provide a high level of client service while allowing flexibility for vacations and sick time. Of course, making a hire itself does not necessarily free up time for an advisor (and the hiring and training process can take time away from the advisor’s other duties), so it is important for an advisor to actually delegate tasks off of their plate to the new employee. In some cases, the advisor might be able to complete the task faster than the new employee (at least at the beginning), delegating an increasing number of tasks can pay off in the long run by freeing up time for higher-leverage business activities (or additional free time). For example, the advisor could first ask themselves whether the task actually needs to be done and, if so, whether the task must be done by the advisor; in many cases, the advisor can free up time by either avoiding unnecessary tasks or delegating those that someone else could complete.
In the end, growing a financial planning practice while maintaining high standards of client service is a challenge that many advisors face. But by being proactive with hiring, and actually empowering new hires to take on tasks that might otherwise be completed by the advisor, the firm can potentially serve an expanding pool of clients without leading to burnout for themselves and the members of the team!
(Angie Herbers | Citywire RIA)
Successful financial planning firms often look for ways to spur their growth further, perhaps through improving client service, investing in new technology, or boosting their marketing budget. But Herbers suggests that the most powerful way to spur growth is to add a valuable service that customers need and are not getting elsewhere. And she argues that the best service that fits these criteria is strategic tax planning.
While tax planning is an integral part of the comprehensive planning process for most advisors (perhaps implementing strategies like tax-loss harvesting or Roth conversions), offering more proactive, strategic tax planning guidance (e.g., recommending that business-owner clients set up cash-balance pension plans to defer income on earnings or helping clients in high-tax states mitigate taxes on asset appreciation by establishing gift trusts in states without an income tax) could provide a range of benefits to the business, including driving client referrals (as clients tell their friends how much value they got from their advisor), promoting referrals from accounting firms (who might welcome working with a firm that provides forward-looking tax planning that compliments their tax preparation and technical guidance services), and potentially boosting the firm’s assets under management (and revenue) by reducing the amount of client assets ‘lost’ to taxes.
Once a firm decides to upgrade its tax planning offerings, it can consider how to implement it in its practice (and ensure it remains in compliance with regulations about offering tax planning services). Possible options include using automated tax planning software or even buying a tax accounting firm (which are typically available at a lower multiple of revenue than RIA and are a way to not only acquire talent with tax expertise, but also a pool of potential new clients). It is also important to decide how tax planning will be integrated into the firm’s existing client experience, for example by including a specific tax planning meeting as part of the onboarding process as well as annual reviews for current clients.
Ultimately, the key point is that adding tax planning services can allow a firm’s clients to keep more of their hard-earned dollars, which could build loyalty among current clients, attract new prospects through referrals, and help an already successful firm grow into the future!
(Sally Wadyka | The New York Times)
Walking through a modern grocery store presents a shopper with a seemingly infinite number of food options to purchase. Nutrition experts characterize food in a variety of ways, including whether an item is “unprocessed” or “minimally processed” (e.g., fresh fruit, vegetables, or rice), “processed” (e.g., oils, butter, some canned foods), or “ultra-processed” (often characterized by their inclusion of ingredients that are not used in homemade recipes, such as hydrogenated oils, protein isolates, and chemical additives). And while nutritionists have preached for years the value of a diet rich in fruits and vegetables, scientists have recently explored the health effects of eating a diet heavy in Ultra-Processed Foods (UPFs), particularly as they become more common in the modern diet.
For instance, one 2022 study of more than 10,000 U.S. adults found that the more UPFs an individual ate, the more likely they were to report mild depression or feelings of anxiety (particularly among those eating 60% or more of their calories from UPFs). Another study, which followed nearly 11,000 Brazilian adults over a decade, found a correlation between eating UPFs and worse cognitive function. Interestingly, those who ate UPFs, but otherwise had a healthy diet, did not see a decline, and researchers do not know what constitutes a ‘safe’ quantity of UPFs (i.e., it is unclear whether UPFs might cause health problems because they are eaten as a substitute for more nutritious food, or because their contents are inherently harmful). It is also worth noting that the results of these studies are correlational and not causal (i.e., the researchers did not force a random sample of individuals to eat pork rinds, so it is unclear whether eating UPFs caused the poor health outcomes, or perhaps individuals with preexisting poor health were more likely to eat UPFs), and it remains unclear why UPFs might cause negative health effects (though researchers are zeroing in on how UPFs influence gut health).
In the end, UPFs can be tempting, not only because they are often delicious, but also because they can be less expensive and more convenient than less-processed alternatives. And while questions remain about the full effects of UPFs, some research suggests that investing time and money into eating fresh and minimally processed foods could be a valuable investment in your long-term health and well-being!
(Selena Simmons-Duffin | NPR)
One of the most amazing changes of the past couple of centuries has been the dramatic increase in life expectancy, both in the United States and around the world, driven in part by reduced infant mortality as well as medical innovations that have allowed adults to live longer. And while there were some bumps in the road along the way, the trajectory of life expectancy in the United States and among peer countries (in terms of development) moved steadily upward until the COVID-19 pandemic led to a (hopefully temporary) decline. However, life expectancy in the United States has regularly lagged that of its peer countries for the past couple decades (e.g., in 2021 life expectancy in the United States was 76.1 years, compared to 82.4 years for its peers), raising questions of why this is the case and how it could be fixed.
Notably, recent increases in mortality in the United States are not confined to older individuals who were more susceptible to severe cases of COVID, but also include, according to recent studies, new mothers as well as children and adolescents. One prior report sought to explore this phenomenon and identified a range of factors that could be contributing to the disparity in life expectancy between the United States and peer countries. These included commonly cited factors such as poor diets and sedentary lifestyles (whose effects can be felt years down the line), but also issues such as drug use (including opioids), car crashes, and violence that help explain the sharp difference in the number of Americans who die before age 50 compared to those in peer countries. Notably, Americans have a higher survival rate after age 75 compared to other countries, indicating that deaths at younger ages play a considerable role in the gap with peer countries in terms of overall life expectancy (though these figures do not measure potential differences in quality of life at older ages).
Ultimately, the key point is that there is no single factor that can account for the disparity in life expectancy between the United States and peer countries, and potential solutions are likely to be multi-faceted (and possibly involve changes both at the societal and individual levels). And hopefully, the United States will not only resume the long-term upward path of life expectancy, but also eventually draw even with (or perhaps, one day, surpass) its peer countries.
(Jonathan Malesic | The Atlantic)
In a hard-charging work environment, there might be some days when a person might feel like they might just need a break. Not necessarily a multi-day vacation, but rather a mental break from the stresses of the office. In these cases, many individuals take ‘mental health days’.
While the term ‘mental health day’ is commonly used, it does not have a fixed definition. For some, it means taking a day off from work or school to actually address mental health challenges (perhaps by meeting with a therapist). For others, it’s just a day to relax at home or outdoors and to try to avoid addressing the mental load of work (and family)-related issues. Further, there is no set way to ‘take’ a mental health day; for some, it means using a precious vacation day, while others might use a sick day (if available at their job) with the thinking they would not be able to function well at work otherwise.
But while ‘mental health days’ can provide a temporary reprieve, some research suggests that they are merely a temporary fix for the larger issue of workplace burnout. For instance, while a worker might be able to take a day off, their workload might not necessarily decrease, and they could spend additional hours in the office when they return. Notably, according to researchers Christina Maslach and Michael Leiter, heavy workload is one of the 6 major aspects of a job in which a mismatch between an individual and their work can lead to burnout (the others are control, reward, community, fairness, and values). So even if a worker is able to get a temporary reprieve from their workload (whether through a ‘mental health day’ or a longer break), they could still be on the path to burnout if there is a misalignment in other parts of their job.
In the end, while ‘mental health days’ can provide workers with a break from the grind of the office, they also can be seen as a symptom of the broader problem of workplace burnout. Which means that while businesses (financial planning firms or otherwise) could offer their employees additional ‘personal days’ to let them take a break, addressing larger issues (from creating a strong work culture to ensuring employees have plenty of vacation days [and are encouraged to actually use them]), could create a healthier, happier, and more resilient workforce!
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.