Weekend Reading For Financial Planners (October 18–19)

Affluent Investors Prioritizing Tax-Aware Portfolio Management (And Not Just Total Return): White Paper

(Jennifer Lea Reed | Financial Advisor)

When managing client assets, financial advisors might be tempted to try to achieve the highest absolute return possible in order to help their clients grow their portfolios. However, the net return that clients achieve is also a function of taxation, which can have a significant impact on long-term portfolio growth and client satisfaction (alongside other factors, such as risk capacity and tolerance, which might impact the construction of a portfolio beyond simple return maximization).

According to a white paper and associated survey by research and consulting firm Cerulli Associates and Parametric (a provider of direct indexing and other investment customization services), 80% of affluent investors surveyed said that it's important that their accounts are customized to meet their specific situations and 70% agreed that it's important that their advisors help reduce their tax bill. Looking at advisors, 47% of those surveyed said they currently offer tax planning services to their clients, though 83% said improving tax management capabilities is a top three priority for them going forward.

For those advisors looking to incorporate (or add on to) their tax planning capabilities, the paper offers process and product solutions. At the process level, firms could evaluate their portfolio onboarding processes (e.g., incoming portfolio assessments, tax budgeting), transitioning clients to active tax management (e.g., establishing processes for tax-loss harvesting and tax savings documentation), and distribution optimization (i.e., tax-smart withdrawals). At the product level, firms could consider options such as direct indexing (i.e., buying the individual component stocks within an index) or separately managed accounts, though the white paper notes that these choices will likely vary based on the firm's capabilities and client types (e.g., what functions firms want to keep in house versus outsource).

In the end, the trend amongst comprehensive financial planning firms towards offering increasingly sophisticated tax planning services (while remaining in compliance with relevant regulations) appears to be in line with investor awareness of the importance of tax-informed investment management. Which could allow these firms to differentiate themselves from other sources of investment advice that don't take a similarly granular look into how client portfolios could be managed in a way to both minimize tax burdens and align with the client's ultimate goals.

Schwab To Raise Referral Network Client Threshold From $500K To $2M

(Sam Bojarski | Citywire RIA)

While many financial advisory firms pride themselves on the quality of service they provide their clients, doing so requires getting clients in the door in the first place. Which can lead advisors to spend time and hard dollars on one (or more) marketing tactics to attract new clients, with some firms (particularly newer firms whose owners have time to do so as they build their client base) choosing more time-intensive tactics and others (especially larger firms trying to scale up more quickly) choosing tactics that cost more money but require less time (allowing that time to be spent on serving current clients, while scaling growth more quickly with marketing that 'just' requires allocating more dollars).

One tactic in this latter bucket is the use of custodial referral programs (e.g., Charles Schwab's Schwab Advisor Network and Fidelity's Wealth Advisor Services), by which a custodian directly refers clients to a firm participating in the program. Because even though most platforms have now built their own in-house wealth management offerings, higher-dollar clients with greater complexity are often still referred out to external RIAs in the custodian's network that specialized in such clients (as the custodian would rather refer them to an RIA that is on-platform than risk having the client leave for another advisor on another platform altogether). These referrals come at a price, though, and unlike other advisor lead generation programs where a firm might pay a flat fee for each referral, the custodial programs typically charge the firm a perpetual basis-point fee on each referral that becomes a client.

And now, the bar for complexity that makes Schwab willing to refer out instead of just retaining in-house appears to be rising, as Schwab confirmed last week that, effective January 1, it is raising the client asset minimum for referrals in its program to $2 million from $500,000, signaling a desire to keep more mass affluent clients in-house within its own wealth management offering and 'only' refer out higher-net-worth clients where ostensibly Schwab feels they are still not as competitive. Further, this news comes on the heels of a Schwab announcement earlier this year that it plans to enact a 5% fee increase, so that advisors previously paying 25 basis points will be charged 26.25 basis points (in Schwab's case, paid on the first $2 million in client assets Schwab sends the advisory firm), with similarly increases across each asset tier (Schwab currently charges 10 basis points on assets over $10 million, which would become 10.5 basis points instead).

More practically, though, the reality is that the Schwab shift will be relatively limited in industry impact, if only because Schwab has already been narrowing the program for years, and reportedly only has 140 firms even participating (out of 30,000+ RIAs in the country and more than 10,000 already on the Schwab platform). And of the participating firms, they are disproportionately larger firms (that have the capacity to handle a steady flow of Schwab referrals, and the high-net-worth capabilities to win clients at the upper levels of wealth), that already likely have other growth sources as well. Though ironically, to the extent many of the firms most willing to spend on growth (including paying for custodial referrals) are PE-funded firms, Schwab's shift may be a hit to PE-investors in those RIA firms in particular (and the shareholders of those firms that may now struggle further to meet their investor growth goals?).

In sum, Schwab appears to be tightening its referral program in several ways, including the new client asset minimum (which is likely to lead to fewer referrals to firms in its network), the increased ongoing revenue-based fees participating firms will pay, as well as in curating the number of participating firms (which has shrunk from 298 following its acquisition of TD Ameritrade and its AdvisorDirect referral program in 2020 to approximately 140 firms as of the first quarter of this year). Nonetheless, many participating firms (and those aspiring to become one) might decide that these limitations continue to be worth the stream of clients (and their ongoing revenue, even if limited by Schwab's fee) that can come from them, as for growth-hungry firms willing to spend money on marketing, custodial referrals are still a pathway for steady growth in an environment where many organic growth channels continue to struggle?

Advisors, Clients Being Targeted By Sophisticated AI-Powered Scams: NASAA

(Patrick Donachie | Wealth Management)

Given the amount of money they manage (and the wealth of their individual clients), financial advisors have long been the target of scammers. Which has led firms to take a wide variety of protective actions, from enhanced cybersecurity protocols to protect client data to multi-step processes for ensuring that transaction requests are legitimate (particularly in the case of large wire transactions).

Adding to the list of potential threats, officials from the North American Securities Administrators Association said this week (in conjunction with its 2025 Enforcement Report) that financial institutions are reporting increasingly sophisticated Artificial Intelligence (AI)-powered scams that appear to be hyper-realistic requests from clients. Some of these scammers appear to be using tools like FraudGPT and WormGPT, mirror-image versions of typical AI systems that are reconfigured for criminal purposes and are sold on the black market, sometimes to amateur fraudsters who want to improve the believability of their scams. Notably, the scams can target both sides of the advisor-client relationship, with advisory firms receiving communication from fraudsters pretending to be one of their clients and clients receiving fraudulent (but realistic) communications purporting to be from their advisor or financial institution.

Ultimately, the key point is that while advisors might have confidence in their ability to spot scams, AI-powered tools could lead to increasingly sophisticated frauds that could challenge individual and firm defenses. Which suggests that establishing strong cybersecurity policies as well as clear processes for communicating with clients and fulfilling transaction requests (and ensuring that all team members stick to them!) could be even more valuable in order to protect client data and assets (as well as avoid financial damage to the firm itself).

New Paper Proposes Two-Asset Approach For Retirement Income Portfolios

(Ben Mattlin | Financial Advisor)

Given the high stakes involved when a retirement income strategy (e.g., avoiding early portfolio depletion while generating sufficient income to support a retiree's desired lifestyle), significant research effort has been put towards this question, leading to a variety of approaches, from Bill Bengen's well-known "4% Rule" to the Guyton-Klinger "Guardrails" approach.

Adding to this literature (and building on Waring and Siegel's "annually recalculated virtual annuity" strategy), financial statistician Stefan Sharkansky in a recent research paper proposes a retirement income approach that relies on only two assets: Treasury Inflation-Protected Securities (TIPS) and a broad-based U.S. equity index fund. Under his approach, a retiree (or their financial advisor) determines the minimum amount of money needed to support their lifestyle, which serves as a 'floor' for their income. To guarantee that this income 'floor' will be met throughout their retirement, he suggests building a TIPS ladder (i.e., purchasing TIPS with maturities in each year of retirement to fund annual spending needs) to create a stream of income that is guaranteed to keep up with inflation. Then, remaining funds are invested in the broad-market index fund, with income generated from this portion of the portfolio supporting the retiree's discretionary spending needs. In this way, a retiree can be confident that their 'core' spending needs will be met while maintaining the potential for spending upside (or a larger legacy interest) if the equity portion of their portfolio performs well.

In sum, Sharkansky's proposed approach combines features of both fixed withdrawal rate policies (e.g., high confidence that a certain amount of desired spending will be met) with flexible approaches (e.g., potential spending upside when market performance is strong) into a single strategy (though it also reflects potential downsides from each, from limiting total upside in the case of the former to having variable total income in the case of the latter). And while it might appear simple on the surface, it also provides ways for advisors to add value in the implementation process, whether in determining the spending 'floor' a client needs, building an appropriate TIPS ladder to meet it, and/or tapping into the equity portion of the portfolio to generate additional income in a sustainable manner.

How Clients Can Sustain Real Withdrawals Beyond 30 Years

(Edward McQuarrie | Journal of Financial Planning)

With life expectancy increasing over the past several decades, retirees (particularly couples) client portfolios might need to support a retirement that could extend beyond 30 years. Given this timespan, inflation (particularly if it occurs early in their retired years) represents a key risk to ensuring sustainable and consistent spending over the course of a client's retirement.

Given this backdrop, some retirement researchers have explored the potential benefits of incorporating Treasury Inflation-Protected Securities (TIPS) into retirement portfolios, as they provide protection against inflation while also offering an additional yield. A problem, though, for retirees relying on TIPS to protect against longevity risk is that the longest available maturity is 30 years. For retirees who retired relatively early or who have longer life expectancies, this could mean that they couldn't guarantee sustaining this stream of real income beyond the 30-year period.

With this in mind, McQuarrie explores two alternative ways to 'extend' safe real withdrawals beyond 30 years. First, a retiree could use the yield available on TIPS (specifically, the amount that exceeds what is needed to fund a steady withdrawal rate) to extend the "ladder" (i.e., purchasing TIPS with maturities in each year of retirement to fund annual spending needs) by purchasing additional TIPS to extend the length of the inflation-protected income. For example, a retiree looking to withdraw 4% each year (adjusted for inflation) from their portfolio of TIPS and who is able to purchase TIPS yielding 2% would be able to extend their 'ladder' by 4.7 years. Notably, this strategy is only effective when TIPS yields are at least 1.25%; anything below that would lead to a withdrawal rate of less than 4% for the 30-year period.

A second option to extend sustainable withdrawals is to take the additional yield generated by TIPS (beyond that needed to fund annual withdrawals) and invest it in stocks. Given the strong long-run returns offered by stocks (and the 30-year horizon for needing to use the invested funds), such a strategy could add additional years onto a TIPS 'ladder', dependent on returns that are achieved. For instance, with a TIPS yield of 2% and a 4% real return from equities, a retiree could extend their 'ladder' by 8.4 years. While offering greater upside than by purchasing additional TIPS, this strategy does introduce some risk (e.g., if a particularly deep and lengthy market downturn were to occur), so particularly risk-avoidant clients might prefer the former approach.

Ultimately, the key point is that advisors have multiple ways to support clients looking to protect against inflation risk for a potential retirement lasting longer than 30 years. In addition, advisors can offer value for clients by being aware of periods when TIPS yields are particularly attractive (and can therefore generate greater inflation-protected income) to build a 'ladder' and by exploring other possible options (e.g., perhaps delaying claiming Social Security, whose cost-of-living adjustments make it a particularly valuable stream of inflation-protected income).

Creating A Steady Retirement Paycheck From A (Volatile) Retirement Portfolio

(Nerd's Eye View)

For prospective retirees who don't simply want to annuitize most or all of their wealth, determining how best to invest a retirement portfolio to generate income is a substantial challenge. Not only because of the need to invest for enough growth to sustain inflation-adjusting retirement distributions over time, and managing portfolio volatility to avoid triggering an adverse sequence of returns in the first place…but also because, as retirement investing has evolved beyond simple strategies like "buy the bonds and spend the coupons" and into more total return strategies, it's surprisingly difficult to come up with a system to actually generate the distributions themselves.

After all, most prospective retirees who are looking at making the transition away from work have spent the better part of 40 years paying their ongoing bills from a steady series of monthly or perhaps bi-weekly paychecks. Which means the most straightforward way to facilitate retirement is simply to re-create those ongoing retirement paychecks. Except as noted, modern retirement portfolios – especially those that include both income and growth (i.e., capital gains) components – aren't necessarily conducive to generating consistent retirement paychecks. At least not without creating a system behind the scenes to ensure the cash will be there as needed.

Over the years, advisors have created a number of different systematic approaches to address the retirement paychecks challenge. For some, it's about investing into a "traditional" income-generating portfolio of bonds and dividend-paying stocks (perhaps supplemented today by income-generating alternatives like REITs), and simply passing through the income as received. For others, it may start with accumulating interest and dividends, but then "topping up" the portfolio's cash with periodic liquidations of capital gains. For still others, with the ongoing decline of transaction costs, the approach has shifted to simply keeping all cash fully invested, and making liquidations as needed in real-time to generate retirement distributions without any cash drag at all!

Whatever the particular methodology, though, any advisor needs to be able to answer a number of important questions about their mechanical process of generating retirement paychecks, including how they will handle dividends and interest, whether there will be a cash position (or not), how capital gains liquidations will be handled (in various up- and down-market scenarios), the frequency of distributions (monthly, quarterly, or annual?), the sources of distributions from various account types, and how those distributions will be coordinated with the rest of the client's retirement income picture (from Social Security to pensions and annuities to reverse mortgages).

The bottom line, though, is simply to recognize that the mechanical challenge of how to actually generate those retirement "paychecks" that transitioning retirees are accustomed to, is an entirely separate matter from just investing the retirement portfolio itself, and entails a number of distinct policy-based decisions about how to standardize a process for a wide range of retirees. In turn, advisors might even consider creating Withdrawal Policy Statements to then codify the processes they will use to generate retirement income withdrawals, just as an Investment Policy Statement is used to codify the processes used to invest the retirement portfolio itself!

How Donor-Advised Funds Could Be Particularly Valuable For Clients In 2025

(Ben Mattlin | Financial Advisor)

Charitably minded clients have a wide range of options when it comes to making donations, from cash to appreciated investments to (for those who qualify) Qualified Charitable Distributions (QCDs). Another tool, Donor-Advised Funds (DAFs) offer clients the opportunity to 'clump' contributions into a particular year (to maximize the amount of donations that exceed the standard deduction, which was increased significantly under the 2017 Tax Cuts and Jobs Act) while offering flexibility on when grants are made to charities themselves.

Notably, the passage of the One Big Beautiful Bill Act (OBBBA) this year could make DAFs even more attractive for clients this year. Under the OBBBA, starting in 2026 only itemized charitable contributions that exceed 0.5% of a taxpayer's Adjusted Gross Income (AGI) can be deducted. Which means that donations made in 2025 (to a DAF or otherwise) will be eligible for a full deduction, but not those after (perhaps providing an incentive to donate multiple years of planned giving to a DAF now, particularly for higher-income clients for whom the 0.5% MAGI floor is more meaningful). In addition, with OBBBA reducing the value of itemized deductions by 2/37 for taxpayers in the 37% bracket (effectively capping the maximum benefit of itemized deductions to 35% of their value), high-income clients could therefore see an additional tax benefit by clumping deductions in 2025 (whether by giving to a DAF or otherwise).

In sum, gifts to donor-advised funds could be particularly valuable for clients (particularly those at the higher end of the income spectrum) in 2025, given certain OBBBA-related changes affecting the value of charitable donations that are set to take effect next year. Which could provide an opportunity for advisors to offer potential hard-dollar tax savings for charitably minded clients by the end of the year by helping them craft a giving strategy (in terms of how much to give, the assets chosen to donate, and the vehicle [DAF or otherwise] used) that meets their giving goals while taking advantage of available tax benefits.

Comparing Custodian-Based DAFs With Community Foundations For More Effective Client Giving

(Sheryl Rowling | Morningstar)

Donor-advised funds (DAFs) have become more popular in recent years for a variety of reasons, including the ability to create a lasting family giving legacy, the lack of annual distribution requirements (unlike private foundations), and the ability to "clump" charitable donations into a particular year to maximize their deductibility (while making grants to individual organizations over time). At the same time, the number of DAF sponsors has increased as well, offering clients different options in terms of costs and services when it comes to housing a DAF.

Perhaps the more commonly known options for establishing a DAF are those affiliated with corporate custodians, which include many nationally recognized brokerages (e.g., Fidelity Charitable and Vanguard Charitable) as well as DAF-specific companies (e.g., Daffy). This avenue offers donors relative simplicity (e.g., easy management of grants and investments within the DAF) and relatively lower costs (i.e., annual fees paid on funds left in the DAF). An alternative option is to establish a DAF with a community foundation; while this option can sometimes come with higher expenses (given that these organizations typically don't have the scale of the national custodians), they can offer donors a more personalized touch and deeper guidance when it comes to evaluating potential grantees in their local community.

Which suggests the choice of DAF sponsor involves a range of considerations, including whether the client already has particular grantee organizations in mind (which might favor the more streamlined, lower cost approach provided by custodians) or whether they'd prefer more bespoke services and want to focus on a particular community (in which case a community foundation might fit the bill). Which offers a chance for advisors to offer value both by helping clients consider the financial aspects of their giving (e.g., doing so in the most tax-efficient way possible), but also in ensuring that their assets end up funding the charitable causes they prioritize (and don't end up 'forgotten' in the DAF for an extended period).

How "Proportion Dominance" Gets In The Way Of Effective Giving

(Matthew Coleman | Behavioral Scientist)

While many financial planning clients are charitably minded, given the seemingly infinite number of potential organizations to donate to, actually choosing a recipient can be difficult. And while clients might look to make the greatest possible impact with their giving, certain psychological phenomena can influence which organizations end up receiving these donations.

One factor influencing giving is the concept of "proportion dominance", the preference for making relative progress towards a goal at the expense of absolute impact. In a foundational paper on the topic, researchers engaged in experiments that individuals tended to favor charitable interventions that saved a greater proportion of lives overall but a lower total proportion. For instance, people preferred a program that saved 225 out of 300 people (75%) over one that saved 230 out of 920 people (25%), even though more people would be helped by the latter program in absolute terms. In the real world, this can lead individuals to donate to causes where they feel like they can make a greater relative impact (e.g., filling a need for food donations in a small town) rather than a larger absolute impact (e.g., a similar donation that could feed more individuals within a much larger community).

Given that donors will often understandably want to support worthy causes in their local community (where they can 'see' the relatively large impact it could have), Coleman suggests that such donations could be paired with donations to an organization found to have a high impact in absolute terms (e.g., donating to a local animal shelter as well as to an effective organization that works to prevent childhood disease globally) to meet a desire for both relative and absolute impact. Another potential tactic is for an individual to target a certain number of people to help with their donations as a giving goal and identify organizations that can best allow them to meet this number.

In sum, while some clients might be reluctant to donate to an effort where it seems like their donation is just a 'drop in the bucket', focusing on the absolute impact they can have (in terms of the number of people helped) can potentially encourage them to donate more over time and leave an even bigger legacy through their giving.

You're Not Supposed To Remember The Book

(Horace Bianchon)

An avid reader is likely to read hundreds of books (if not more) over the course of their lifetimes, from their school years to explorations later in life. A common frustration, though, for readers (particularly given the investment of time needed to read a complete book) is that they might not be able to recall all of the details of a book they read after a certain amount of time has passed.

The author argues, however, that doing so would be incredibly difficult (especially given the amount of non-book knowledge an individual already has to keep in their memory!) and that much of the value of books can be gained without having to recall every single detail. To start, while an individual might not be able to give an extended synopsis of a particular book (whether fiction or non-fiction), it's very likely that they'll be able to give its main thesis. In addition, much of a book's content has already been integrated within the individual's existing knowledge (e.g., a compelling argument in a book could lead an individual to 'update' their previous belief of a subject in the moment, even if might not be able to remember years later exactly where this knowledge came from). Finally, at a more basic level, readers don't necessarily need to 'gain' long-term knowledge from a book for it to be useful; rather the enjoyment of exploring an interesting topic or a compelling fictional narrative can make the investment in reading a book worth it in itself.

Ultimately, the key point is that the frustration that can come from feeling like the contents of a book weren't permanently absorbed is perhaps unfounded, as a reader has likely gained significant benefits from the book already, whether in adding to their broader view of the world or in the more fundamental enjoyment of time spent on focused reading (particularly at a time when so much content is either short-form or delivered via other types of media).

Do You Know How To Do A Deep Dive?

(Ryan Holiday)

In the Internet era, it's easier than ever to learn about a particular topic on demand. However, reading a single article (or perhaps a Wikipedia page) might only provide a cursory knowledge of a particular subject. In those cases where an individual wants to learn more, taking a 'deep dive' can provide broader and deeper understanding of the topic at hand.

For Holiday, his 'deep dive' was into Abraham Lincoln. In his case, he didn't stop at a single biography, but rather engaged with multiple sources of information, from first-hand diaries to works of art to interviews with documentarians and biographers. Notably, this effort wasn't in the cause of writing a Lincoln biography of his own, but rather to distill this body of knowledge into a clear understanding of the many facets of Lincoln's life. In fact, one of Holiday's discoveries was that Lincon engaged in 'deep dives' himself, culminating in the Gettysburg Address, which at just 271 words long, was impactful as the result of years of deep study into language, history, law, politics, and other areas.

In the end, at a time when it's easy to have inch-deep knowledge of a wide variety of subjects, the ability to go deeper can be an asset. For financial advisors in particular, there are no shortage of ways to do a 'deep dive' into a planning topic of interest (whether through books, podcasts, conferences or other resources) to ultimately provide better advice to their clients.

5 Steps To Become An Expert At Anything

(Eric Barker | Barking Up The Wrong Tree)

While having a broad base of knowledge can be helpful, becoming an expert in a particular subject can be a particularly gratifying (and perhaps lucrative, in the case of professional acumen) pursuit. The problem, though, is that there isn't necessarily a clear path to become a true expert in a given subject. Nevertheless, in the book Accelerated Expertise, a group of researchers lay out key behaviors and practices that can lead to greater mastery.

The first step to expertise is to grasp the key concepts involved in the subject at hand. For instance, understanding the fundamental principles behind a topic (and not just individual facts) can help an individual make stronger arguments and better handle uncertainty (e.g., the difference between a 'cook' who follows a recipe and a 'chef' who creates their own). Next, the path to expertise should feel difficult (i.e., if one feels like an expert after a limited amount of study, they might be suffering from the Dunning-Kruger effect).

Next, taking time to learn tends to offer better results than trying to cram knowledge-building into a short period of time (as the latter practice tends to result in quicker knowledge 'decay'). In addition, getting feedback along the way is crucial, as an individual with prior expertise in the topic can help evaluate understanding and suggest additional resources for study. Finally, focusing on retention (in part by 'overlearning' and spacing out knowledge checks over time) can ensure that newly gained expertise sticks for the long haul.

Altogether, the researchers suggest that expertise is gained through an extended period of challenging and disciplined study (and the help of mentors along the way). For financial advisors, this suggests that mastery of the craft could require a combination of learning the technical aspects of the profession through study and the 'art' of it over time as well through real-world experience, along with gaining feedback and insights from colleagues along the way.

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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.