Weekend Reading For Financial Planners (November 7–8)

Author: Adam Van Deusen, CFP®

Team Kitces

Adam Van Deusen, CFP®, is a Financial Planning Nerd at Kitces.com, where he hosts the Financial Advisor Technician podcast, writes articles for the Nerd’s Eye View blog (including the popular Weekend Reading for Financial Advisors), and regularly speaks at industry events on a range of technical and practice management topics. He previously worked at a financial planning firm in the Washington, D.C. area and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

SEC Finalizes $1B Threshold For Which RIAs Are 'Small Entities' For Rulemaking Purposes

(Leo Almazora I InvestmentNews)

In an effort to protect consumers, the Securities and Exchange Commission (SEC) creates and updates regulations that must be followed by SEC-registered investment advisers. While these regulations can raise standards of conduct amongst advisers in support of consumer protection, they also come with a compliance cost for firms that are required to follow them (e.g., additional paperwork and time spent training employees). And while larger firms might be able to handle such burdens fairly easily due to their greater headcount (possibly including staffers whose sole role is compliance), complying with new regulations can be a tougher task for smaller firms (where an advisory firm owner might also be the firm's chief compliance officer, amongst wearing many other hats as well!). Which is important, because if regulations become "too burdensome", small firms can be quashed out of business, reducing competition and the breadth of providers serving consumers (and potentially contradicting the SEC's own consumer mission by 'over-regulating').

To help balance this dynamic, whenever the SEC implements new regulations for financial advisors, they are required to do an economic impact analysis to evaluate how the cost of compliance regulation would impact the industry, and whether regulations intended to protect consumers might unduly raise costs so much that consumer access is actually reduced in the process. In turn, to ensure that innovation remains strong and more advisory firms are created over time, the SEC has an additional layer of economic impact analysis it must do to evaluate how new regulations would impact "small" firms as well. Which, up until now, has had a current threshold of RIAs with $25 million of assets under management.

The caveat, though, is that while $25M sounds like a lot to the average consumer, as industry participants know, that is often the asset base for a solo advisor with no staff at all (and by the SEC's data, represents just 3% of all RIAs). In fact, even firms with $100M or several hundred million of AUM are often still only 3–10 person teams, without any dedicated compliance support role… for which, again, new compliance regulations can be especially onerous (yet the SEC has not been explicitly required to consider their impact as a "small" firm once they're over $25M of AUM). It's also worth noting that as many firms first become SEC registered after hitting $100M of AUM, very few SEC-registered firms have qualified as "small" firms for the purposes of the regulatory burden analysis.

Amidst this backdrop (and following calls from Congress and from the Investment Adviser Association, amongst others, to increase the limit), the SEC this week finalized the adoption of new amendments to the "small entity" rules that will lift the amount of regulatory AUM below which an investment adviser can be considered "small" from $25 million to $1 billion. The new threshold represents 75% of RIAs that must be considered as small entities (up from 3%), though paradoxically because assets themselves are still highly concentrated in a select number of mega-firms, this 75% of total firms is still only 3% of industry AUM. Which, arguably, fairly reflects the reality that the majority of advisor firms really are "small businesses", that deserve to be recognized as such when considering the impact of potentially-onerous compliance rulemaking.

Altogether, this change is likely to provide relief for relatively smaller firms in the future, by forcing the SEC to more carefully consider how new regulatory proposals would impact the overwhelming majority of RIAs that don't even have the size capacity for a dedicated compliance role. Notably, the new framework will not alter any existing compliance rules and regulations for RIAs; instead, the end result will likely be a slowing in the pace of new regulations for RIAs going forward, with more scrutiny of any new regulations that could result in particularly onerous due diligence or paperwork documentation (that are more difficult for smaller firms to scale)… a plus for most RIAs that already have to balance compliance with client service, marketing, and the other duties that go into running a firm (and perhaps encourage the formation of new firms, which could allow the industry to serve more clients!).

Advisory Firms Moving Upmarket Face Tough Talent And Outsourcing Calls

(Leo Almazora | InvestmentNews)

Over time, leaders at an advisory firm might decide they want to make a move 'upmarket' to serve wealthier individuals. However, doing so can be a challenging endeavor, not only in attracting these clients (given competition from other firms [including national companies with extensive marketing budgets]) but also in providing a service offering that meets their planning needs (often including advanced tax and estate planning) and justifies the fees they pay (which can be in the tens of thousands of dollars, or higher).

One potential pathway to providing these services is to outsource them (rather than bringing expertise in house). According to data from research and consulting firm Cerulli Associates, on average firms serving high-net-worth clients report outsourcing between three and four services, with tax planning (55%), trust services (40%), risk/insurance services (39%) and estate planning services (37%) leading the way. This strategy can allow a firm to offer key services as part of its client value proposition without making (potentially multiple, expensive) hires, but does require them to find trusted partners and decide how they will be compensated (with Cerulli finding that trust services (54%) and tax work (44%) were most likely to be billed via a separate fee, rather than subsumed into the firm's own fee).

While firms looking to move 'upmarket' might decide to outsource specific services, building a stronger bench of internal advisory talent can prove valuable as well. For example, Cerulli found that ensemble practices have an average client size of $2.3 million, compared to $980,000 for solo practices, while also (expectedly) managing more in total ($330 million on average, compared to $95 million for solos). Part of this could be ensembles' increased likelihood of employing specialized staff (who could meet the specific advanced planning needs of higher-net-worth clients), as 37% do so compared to 8% of solo practices.

Ultimately, the key point is that as firms look to move 'upmarket' they can face the decision of whether to 'buy' (e.g., acquire a tax practice), 'build' (e.g., hire an internal team to handle advanced services), or access certain services through strategic partnerships (e.g., with accounting firms and estate planning attorneys). Which suggests that working with wealthier clients isn't just a matter of attracting them but also entails creating the firm infrastructure needed to serve them well.

IRS Establishes New Correction Program For Fixing IRA Errors

(Ian Berger | The Slott Report)

The federal tax system can be quite complicated for taxpayers (and financial professionals) alike. One area that can be particularly confusing is the treatment of IRAs, given the various rules surrounding their establishment, contributions, rollovers, Required Minimum Distributions (RMDs), and more. Which can sometimes lead taxpayers to (unintentionally) make errors that, if not corrected (which can be a complicated process in its own right), can prove costly in the form of taxes and, potentially, penalties owed.

"SECURE Act 2.0", passed in 2022, charged the IRS to come up with rules to allow IRA owners and custodians to correct mistakes through self-correction (a correction program already exists for employers to correct retirement plan mistakes). The IRS has now introduced a new program, the IRA Compliance Resolution System (ICRS) that will allow IRA owners and custodians to fix certain IRA failures by submitting their proposed correction to the IRS for approval and paying a $3,500 filing fee (the system will become available on May 1, 2027).

Notably, ICRS is limited to correction of only four IRA mistakes (though the IRS said this number could be expanded). Such mistakes include missed RMDs (IRA owners will still be able to use Form 5329 to ask for a penalty waiver for a reasonable cause; the new system could be used by those without a reasonable cause or by IRA custodians who were responsible for missed distributions), IRA establishment failures (i.e., when an IRA owner requests that a custodian establish a particular type of IRA but the custodian opens a different type), non-spouse beneficiary rollovers (while non-spouse beneficiaries cannot do 60-day rollovers of inherited IRAs, they could file for relief if they provide evidence that a custodian, financial advisor, CPA, or attorney led them to believe it could be done), and 60-day rollover failures (though self-certification will remain intact if the IRA owner missed the deadline to cure a 60-day rollover failure for one of 12 specified reasons).

In sum, while the IRS has finally acted to provide a self-correction mechanism for IRA owners, its uses are relatively limited (at least for now) and a taxpayer and their advisor might assess whether the time and financial resources required to go through with it are worth the potential relief granted!

4 Dangerous Assumptions That Can Hurt A Retirement Plan

(Christine Benz | Morningstar)

Part of the challenge of planning for retirement is that the future is inherently unknowable, whether in terms of the trajectory of an individual's remaining working years, how they will make the transition into and through retirement, and how external forces (from market performance to tax policy) will impact the broader environment. While making assumptions to fill in these knowledge gaps makes sense, certain assumptions (particularly if they're not stress-tested) could lead to major disappointment in retirement if they don't end up coming to fruition.

To start, after a strong period of equity market returns, some individuals might assume that this performance (or even longer-run average returns) will persist throughout their retirement. While looking at long-term performance can be particularly helpful during one's working years (as it can show why riding out inevitable downturns that arise is worth it), an individual retiree only gets to experience one sequence of returns (which, if negative, could imperil their expected lifestyle spending in retirement, or, if positive, lead to greater spending capabilities). Which suggests that while a baseline assumption might reflect historical returns, running scenarios for lower (or higher) returns could be prudent.

Similar to market returns, it's not difficult to calculate a long-term inflation rate. That said, inflation could be significantly higher (or lower) than historical averages, impacting a client's purchasing power. Which suggests that testing different inflation rates (as well as different inflation patterns to address "sequence of inflation risk") could show how robust a particular retiree's financial plan is against different inflation regimes.

Individuals will also have different goals for how long they wish to work, with some planning for a relatively earlier retirement and others expecting to work well into their late 60s or beyond. This latter group, though, might not recognize the risk that they won't be able to work as long as they expect, whether due to health reasons, the loss of a job, or other reasons. If earned income in these latter years was a key part of the foundation for their spending in retirement, they could end up with a lower sustainable retirement income level in retirement. Similarly, those who expect that an inheritance will support their retirement spending needs (and might overspend or undersave during their working years because of it) could be disappointed if the inheritance doesn't come to fruition (or is smaller than expected).

In sum, given that prospects or clients might come to the table with various assumptions about market and economic performance as well as their future income trajectory, financial advisors can offer significant value not only by putting actual numbers (e.g., historical market or inflation data) to these assumptions, but also (perhaps more importantly) by showing what alternative courses might look like if reality looks significantly different (perhaps leading to planning recommendations that guard against negative contingencies as the client approaches and enters retirement).

A 3-Step Process To Develop Better End-Of-Life Assumptions For Clients

(Ken Steiner | Advisor Perspectives)

There's a long-standing aphorism amongst financial planners about the difficulty in doing retirement planning: if the client could just tell me the precise date they will die, I'd make them the perfect retirement plan. Yet the reality is that no one knows when they are going to pass away; while life insurance companies may be remarkably effective at estimating life expectancies for whole populations based on the law of large numbers, any individual client is a sample size of one (which leads some advisors to input a "reasonably conservative" assumption in their retirement planning software, and plan from there).

However, a one-size-fits-all approach to life expectancy can overshadow factors that could affect a particular client's life expectancy and lead to potentially undesirable outcomes in retirement (e.g., underspending if a too-long life expectancy is used or overspending [and a potential depletion of assets] if a too-short life expectancy is employed).

To start creating a more bespoke life expectancy for a particular client, an advisor could use the Actuaries Longevity Illustrator (ALI), created by the American Academy of Actuaries, which uses mortality tables from the Social Security Administration and then adjusts then for expected future mortality improvement. In addition to offering a large pool of data, this tool also allows for customization for a particular client (e.g., the impact of a client being in "excellent health" or "average health").

Outputs from this tool can also be supplemented by the results from other longevity calculators as well (e.g., those from Northwestern Mutual and John Hancock, among others), which ask for different types of inputs. If the internet calculators suggest a longer lifespan than the ALI suggests, an advisor could subtract years from the client's lifespan (or add years if the other calculators suggest a shorter lifespan), put that number back into the ALI and then determine the 25% probability of survival from the planning horizon section (notably the chosen probability of survival could be adjusted given a particular client's risk tolerance).

In the end, while determining a client's exact future date of death is impossible, a few key data points can improve lifespan assumptions and contribute to more accurate planning projections (though clients and their advisors might still want to test various lifespans, which could be particularly valuable for client couples, given the added uncertainty when two individuals are involved).

How Much Does Having The 'Right' Capital Market Assumptions Matter In Retirement Planning?

(Justin Fitzpatrick | Nerd's Eye View)

"How much can I spend in retirement?" is perhaps the most fundamental question a client brings to their advisor. Answering it well requires a range of assumptions – from estimating average investment returns to understanding correlations across asset classes. These assumptions are rooted in Capital Market Assumptions (CMAs), which project how different assets might perform in the future. However, for many advisors, using these assumptions isn't always comfortable. Advisors want to help clients set a secure, reliable retirement plan, yet even the most comprehensive assumptions will inevitably deviate from reality at least to some degree. Which poses the question: How much error is acceptable, and how can advisors use these assumptions to set reasonable expectations for clients while maintaining their trust?

Ideally, retirement spending would align perfectly with a client's needs – neither too much nor too little. Yet, even with the most accurate CMAs, financial advice rarely aligns flawlessly with reality. Sequence of return risk, for example, means that even two identical clients retiring less than 18 months apart can experience wildly different sustainable spending levels. In some historical periods, the amount that a retiree could safely spend in retirement would have looked incredibly risky at the beginning of their retirement – and vice versa. Beyond market variables, clients bring their own behaviors and preferences into play. For instance, many retirees begin retirement by underspending to avoid depleting their resources – a choice that often diverges from the 'best guess' assumptions of CMAs and creates additional room for unexpected market conditions.

The good news is that CMAs can still provide a range of realistic spending limits, and, even better, most financial plans are not static one-and-done roadmaps. Advisors who actively monitor and adjust a client's plan as markets shift can mitigate the inherent uncertainty of CMAs, reducing the risk of overspending or underspending over time. Importantly, CMAs are most valuable when viewed as flexible tools rather than fixed forecasts – allowing advisors to refine assumptions as markets evolve and client needs change. This adaptive approach not only helps clients navigate uncertainties but also distinguishes advisors who are committed to continuous monitoring, enhancing client satisfaction and peace of mind.

Ultimately, the key point is that while 'perfect' CMAs may offer accurate predictions about general market conditions, they will still fall short of telling a client how much they can spend. Market fluctuations, sequence of returns, and personal spending behaviors all create unpredictable variations that CMAs cannot fully capture. However, by proactively monitoring and adjusting portfolio spending, advisors and clients can take advantage of the high points, guard against the lows, and, overall, ensure greater peace of mind!

An Email Marketing Playbook That Converts Leads Into Clients

(Patrick Di Cesare | XY Planning Network Blog)

Content marketing is a common practice for financial advisors, whether in publishing a blog, creating a podcast, or posting insights on social media. While an advisor might build a sizeable audience over time, doing so doesn't necessarily translate into readers or listeners actually reaching out to take the next step towards becoming a client. Which suggests that an intentional approach to nurturing leads can help deliver a stronger return on investment for the time spent creating content.

One popular tactic advisors use to help readers or listeners move down the marketing funnel is to create a 'lead magnet', or a resource that interested individuals can access in return for providing their contact information. Lead magnets aren't created equal, however, and advisors will often find that those which target their ideal client and their particular needs will be more effective than generic information. For instance, instead of providing a PDF outlining "10 common retirement mistakes", an advisor might instead focus on the specific needs of their target client (e.g., "Supercharging your retirement savings as a small business owner"). To go further, an advisor could offer a customized assessment or calculator (e.g., measuring their retirement readiness) to provide a more bespoke resource (notably, these are easier to produce these days using AI, including "vibecoding" tools).

With a lead's contact information in hand, the next step for some advisors is to start them on an email 'drip' campaign to continue demonstrating the advisor's expertise and to help them learn more about their firm. While such campaigns can be effective (though it can sometimes take time for recipients to reach out based on this approach), advisors could consider more direct outreach (e.g., a personalized email or phone call) given that the lead has provided their contact information (as they might be feeling an acute pain point and could be ready to start an advice relationship). For individuals who aren't ready to work with the advisor, staying in touch via email (e.g., by sending content relevant to their interests and showing them what an initial meeting would be like while also making it easy for them to reach out when they are ready) can keep the lines of communication open.

Ultimately, the key point is that content marketing isn't a 'set it and forget it' strategy, but rather one that gains effectiveness when combined with personalization and active outreach from an advisor. Which could pay off in the end with more clients (and, perhaps, more referrals from new clients who have ready advisor resources to recommend to coworkers, friends, or others in similar situations).

An Advisor's Best Testimonial Might Be A Near-Miss

(Jeff Feazell | Advisor Perspectives)

Client testimonials can be a powerful marketing tool for financial advisors, as they can provide 'social proof' to prospects that the advisor provides valuable services to their (real life) clients. A key question for advisors, though, is deciding who to feature in published testimonials (e.g., if a firm films client-provided testimonials to be featured on their website).

A logical place to start for client testimonials would be those who have been enthusiastic about the firm from the get-go, perhaps one who decided to become a client after the first discovery meeting, has seen their financial situation improve in the years since, and who has contributed several referrals. While the energy of such clients might be contagious, looking beyond this group could reflect the feelings of a wider group of prospect types.

For example, some prospects come to an advisor curious about what they have to offer but skeptical about whether the time and financial commitment of working with them will be worth it (for some couples, this could manifest with one eager spouse and one who is more reluctant). For these individuals, hearing a testimonial from an advisor's current client who was also initially skeptical (but who has since had their mind changed after going through the client experience) could be particularly effective. Such "hidden champions" might not stand out as strong testimonial providers at first glance, but could be particularly effective at reaching those who might be on the fence about reaching out to schedule an introductory call or discovery meeting (e.g., by talking about what almost stopped them from reaching out and what changed their mind).

In the end, while testimonials (when incorporated into a firm's marketing plan compliantly) can be a useful marketing tactic, their value lies not just in the enthusiasm of those providing them, but also in the ability of potential clients to see themselves in these (now-satisfied) clients. Which suggests that expanding the aperture of potential testimonial providers could help an advisor 'reach' both enthusiastic and circumspect individuals.

Those Awful "Meet The Team" Pages Are Torture

(Sara Grillo | Advisor Perspectives)

A common feature on advisory firm websites is a "meet the team" page that lets visitors see who works at the firm and learn a little bit about them. However, many of these pages end up looking the same across firms (e.g., rows of staff members with their pictures, titles, and credentials), suggesting a potential opportunity for firms that want to use this part of their website to differentiate themselves in the eyes of potential clients.

One way to better leverage a meet the team page is to use it to inspire a website visitor by explaining what the firm cares about, how teammates work together, and how this teamwork translates into successful client outcomes. For instance, rather than just including a mission statement, a firm might give quotes (or include videos) from team members explaining what the mission means to them and their experience improving their clients' lives.

Also, while staff biographies are common on meet the team pages, moving beyond credentials and experience can provide visitors with a better idea of the team's personality. For instance, the page could include team members' answers to questions such as "Why do you love going to work every day?", "What is your most meaningful relationship with a client and why?", or "What one word would you use to summarize the values of the firm?". In addition, rather than just including a single static headshot, each team member's spot on the meet the team page could include a three-picture series that flips sequentially and includes a serious, less serious, and non-serious picture to give visitors a sense of their personality. Similarly, a team video posted to the website might go beyond employees sitting at a conference table to include features such as a guided tour of the office or quick interviews that draw out team members' personalities.

Ultimately, the key point is that the meet the team page represents a valuable piece of real estate on an advisory firm's website. Which suggests that using it to demonstrate the firm's and its employees' personalities authentically can help visitors better understand what it would be like to work with the firm and whether its culture is a good fit for them.

Field-Tested Advice For Time-Crunched Parents

(Brett and Kate McKay | Art of Manliness)

Becoming a parent is a major life transition, not only in the need to provide care for a new child, but also in how added responsibilities take time (that might have been used previously for other professional or personal pursuits). Which suggests that taking an intentional approach to time management can be even more valuable as a parent to be able to take advantage of professional and social opportunities while caring for a child (and maintaining a strong relationship with one's spouse or partner).

To start, a new (or seasoned) parent might write down their full list of personal and professional activities and identify those that might be reduced or dropped entirely. For instance, an individual who previously attended three professional conferences per year might trim this travel back to once per year to free up more time at home (and reduce the time their counterpart spends solo parenting at home!). Similarly, taking a look at kids' activities regularly (and perhaps setting a maximum per week) can limit the time crunch spent on them while prioritizing those that are most engaging.

Another set of tactics for getting the most out of (more limited) time involves being purposeful about schedules. For instance, having a weekly parents-only meeting can ensure each partner is on the same page with regard to the schedule for the week ahead and look at bigger-picture issues while also offering an opportunity to express appreciation for each other. For those with older kids, a weekly family meeting can ensure the full family is on board with the schedule ahead and to reinforce the family's culture. Beyond the macro schedule, parents can also try to make the most of time 'pockets' that they have (e.g., waiting to pick up a child from a practice or rehearsal), whether in terms of finding time to read, chat with friends, or even exercise. Also, finding opportunities to outsource certain tasks (e.g., yardwork) could free up time that could be used for socializing with friends or other enjoyable, non-parenting activities.

In the end, while raising children can be a highly meaningful experience, it can cut into the time (and money) available for other activities that create meaning for a parent. Nevertheless, by creating an organizational system, prioritizing personal and professional activities, maintaining open lines of communication, and making the most of available free time, parents can better maintain a sense of balance in their lives.

The Case For Bringing Back Chores

(Khe Hy)

Many of today's parents can likely recall facing a long list of chores when they were younger, from washing the dishes to mowing the lawn. While they might have been compensated (modestly) for these, in general chores are often seen as part of the responsibility of being a member of the family. In recent years, though, angst about college admissions and career prospects has led some parents to cut back on the time their kids spend on chores, instead prioritizing various academic and extracurricular activities that could improve their future prospects. For instance, a parent might be willing to clean the house if it gives their child more time to study for a test or participate in an activity that could look good on a college application.

Hy argues, though, that such a tradeoff might come with downsides. First, chores can help a child build a strong work ethic (while also freeing up time for their parents!), which might not have an immediate benefit in terms of academic achievement, but could provide dividends in the long run through greater perseverance when encountering less enjoyable tasks at school or in a future career. Also, chores can help a child see themselves as a contributor to their family 'community', which could translate down the line in greater civic and community engagement (rather than being focused solely on one's parochial interests). Further, chores can show a child the value of completing a task for its own sake (e.g., the satisfaction and visual benefits that come from a made bed) rather than for some larger purpose (e.g., volunteering because it will look good on a future application).

In sum, while kids today seem busier than ever and face (often conflicting) pressures, taking time out for household chores could be valuable in both supporting their family and in developing character traits that could serve them well in the long run!

The Lessons About Parenting And Money In A $7 Stuffie

(Veronica Dagher | The Wall Street Journal)

Being a parent means making a constant (and, often, exhausting) stream of decisions, from what to serve for dinner to what to do on the weekend. Some of these decisions include a financial element, which can add additional layers of complication, from sticking to a financial plan to imparting positive money lessons on the children themselves.

In Dagher's case, this dilemma recently came to a head when her son asked her for a stuffed toy during a recent grocery store visit (to help him round out a 'collection'). From a financial perspective, the $7 purchase is relatively small, though she wondered what precedent it would set, both in terms of a sense of instant gratification for her son as well as the financial outlay for her (as those who think about things in terms of the time value of money might see a greater cost from making regular 'small' purchases). Also, while there's a chance the stuffed toy could eventually be tossed in the pile of other ones he already has, there's a chance that it builds value well beyond its $7 sticker price (e.g., in Dagher's case, she continues to keep a stuffed dog her father bought for her as a child soon before he died suddenly).

In the end, Dagher's dilemma (she eventually bought the toy for her son) is a good example of the challenges parents face when seemingly mundane daily decisions are imbued with much greater meaning. Given the potential to be paralyzed by indecision, though, perhaps the greater lesson is that parents might do their best on a daily basis and hope that over the long run, their love and care for their children will ultimately pay off in the form of well-adjusted (and, hopefully, financially savvy) adults (whether or not they buy the stuffed animal)!

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

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "WealthTech Today" blog.