Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that the shift in financial advice from pure investment management to comprehensive financial planning continues, with more individuals becoming CFP professionals than CFAs in the past few years as consumers increasing the diversity of their financial goals.
Also in industry news this week:
- A survey indicates that while financial advisors remain the most trusted source of financial advice, they might increasingly encounter client questions and ideas that originated from social media
- Following the transition of advisors and clients from TD Ameritrade and amid competition from competing RIA custodians, Charles Schwab executives this week highlighted tech investments the custodian has made to improve the advisor experience on the platform
From there, we have several articles on tax planning:
- Why business-owner clients could come under increasing scrutiny from a beefed-up IRS
- The unique tax issues facing freelancers and how advisors can both help them maintain proper records and take advantage of tax-related opportunities
- How advisors can help wealthy clients with certain alternative investments avoid an IRS audit
We also have a number of articles on the value of advice:
- How advisors can use an iterative process to develop high-value services for their clients
- The unique needs of clients in the "sandwich generation" and how advisors can serve them without burning out themselves
- How financial advisors are similar to general practitioners in their ability to make clients feel cared for
We wrap up with 3 final articles, all about wealth:
- Profiles of individuals who retired with $5 million, who have often leveraged this wealth for flexibility rather than luxury
- Recently published data from the Federal Reserve shows that the median net worth of Americans across the range of ages and wealth levels has increased significantly since 2019
- Why clients expecting to receive large inheritances from their Baby Boomer parents or grandparents might receive less than they expect and how advisors can support them
Enjoy the 'light' reading!
(Emile Hallez | InvestmentNews)
In decades past, the term financial advice might have been synonymous with investment advice for many consumers. Because often, investment management was the primary (if not only) service offered by many advisors and those investment advisors who did produce financial plans often did so with the purpose of demonstrating how the investment products they sell could meet their clients' needs.
But in recent years, comprehensive financial planning has seen a renaissance, with a growing number of advisors going beyond investment management (and perhaps insurance sales) to provide a more comprehensive offering, often for a fee (rather than commissions). And it's even being reflected in the professional designations that advisors pursue; for instance, since 2020, the number of CFP professionals is up by 10%, while the number of those achieving the Chartered Financial Analyst designation (CFA, one of the primary credentials for investment professionals) has grown by only 8.6% (a reversal of the preceding years, as over the past 10 years, the number of CFAs grew 61%, outpacing growth of CFP professionals that were up only 37%).
This shift could be attributed in part to the commoditization of investment advice, as robo-advisors typically can provide asset allocation services to clients for a lower fee than what a human advisor might charge. But it appears it's more a function of Americans recognizing their own rising financial complexity, and how advisors can help; for instance, 55% of consumers surveyed by research firm Hearts & Wallets indicated they have between 3 and 5 financial goals, up from 42% 10 years ago (while the percentage of individuals indicating they had no goals declined from 18% to 10%). Given this diversity of goals, more than 70% of those surveyed said comprehensive financial planning is important to them. And interest in financial planning appears to grow as people age, too, with only 35% of Millennials saying financial planning was important to them in 2010, but the rate has nearly doubled since the decade.
Notably, though, the types of goals that consumers are interested in advice for may still not be well-aligned to the services advisors provide, as the Hearts & Wallets study showed that while 39% did have a goal of having enough money to not need to work in retirement, and 32% wanted to be able to stop work altogether, 43% simply said they wanted an advisor to help them plan for a vacation goal, and goals around generating income and preserving and growing investment capital were about as common as goals for buying a new car or a house (at more than 20%).
Ultimately, though, the key point is that there is a shift underway from pure investment management to comprehensive financial planning, as consumers' lives get more complex (leading them to seek advice across a broader range of aspects of their financial lives), which is driving more financial advisors to get their CFP certification and expand their advice services (as they offer a service that robo-advisors or coming artificial intelligence tools might not be able to copy)!
(Holly Deaton| RIA Intel)
Given the broad financial media landscape, there is no shortage of sources of financial news, analysis, and advice for consumers. From 'traditional' media (e.g., business television channels and periodicals) to 'new' media (e.g., blogs and podcasts) to 'social' media (e.g., X/Twitter and TikTok), there is an outlet for investors across generations and levels of tech savviness. A key question, though, is where financial advisors stand as a trusted source of financial advice within this torrent of information?
In good news for the advisor community, a survey by Betterment of 1,200 investors across 4 generations taken earlier this year found that advisors are the most trustworthy source for financial advice, with 38% citing advisors as their top choice and 67% of respondents ranking advisors in their top 3 (friends and family were in 2nd place with 15% citing this group as the most trusted source and television shows and news came in 3rd at 11%). Nonetheless, the survey also found that 58% of investors working with an advisor also took advice from a social media influencer, compared to just 15% of those without an advisor (younger investors were more likely to use social media for advice, with 65% of Gen Z and 55% of millennial respondents saying so, compared to 31% of those in Gen X and 4% of Baby Boomers). While it might seem odd that advisory clients would also look to (potentially less vetted) online advice, Betterment's head of behavioral finance Dan Egan suggested that this phenomenon could be similar to individuals first seeking medical advice online (e.g., using WebMD or similar sites) and then taking that information to their doctor for confirmation (or rebuttal).
Altogether, this survey confirms that financial advisors retain a high level of trust among the public. At the same time, it also indicates that advisory clients are interested in looking at many sources of advice, which suggests that advisors (particularly those with younger clients) have a chance to add value by addressing client questions and ideas inspired by social media influencers and other commentators!
(Bruce Kelly | InvestmentNews)
One of the biggest stories in the RIA space in recent years was the announced merger between Charles Schwab and TD Ameritrade, 2 of the largest RIA custodians. And after months of anticipation, 7,000 advisors and their 3.6 million client accounts on the TD Ameritrade platform were transitioned over to the Schwab platform over Labor Day weekend (with some apparent hiccups in the process, though Schwab is maintaining that on the whole, the transition was 'imperfect' but still went relatively smoothly recognizing its sheer size and scope).
Now that the transition is complete (and amid competition from rivals in the custodial space), Schwab executives indicated this week at the annual Schwab IMPACT conference that they are taking steps to improve the experience for advisors on their platform (perhaps in an effort to keep former-TDA RIAs on its platform who have been highlighting the capabilities that Veo had but Schwab Advisor Center does not). Recent improvements Schwab made leading up to the transition included improved digital onboarding capabilities, deepening integration with DocuSign's e-signature technology, and creating an institutional no-transaction-fee fund platform (recently adding investments from American Funds and Pimco), and Schwab has acknowledged that it still has work to do. Schwab executives also indicated their interest in potential Artificial Intelligence (AI) applications that would allow the firm to better serve advisors on its platform (a notable contrast from using AI for managing money or actual financial advice).
In sum, while Schwab has greatly increased its advisor headcount and custodied assets as a result of the TD Ameritrade merger, it now appears focused on finding ways to keep those advisors happy, and acknowledges that it still has work to do to for Schwab Advisor Center to match some of Veo's former capabilities. Because while Schwab might have cemented its place as the largest RIA custodian, its competitors (from second-place Fidelity to upstarts like Altruist) almost certainly would like to take advantage of any dissatisfaction among advisors on the Schwab platform (especially given that many of those who were previously with TD Ameritrade didn't actively choose, or deliberately didn't choose, Schwab in the first place!)!
(Jeff Stimpson | Financial Advisor)
Thanks in part to additional funding from the Inflation Reduction Act, the IRS has announced that it will be boosting its enforcement capabilities and will be shifting more attention onto high-income earners, partnerships, large corporations, and promoters "peddling abusive tax schemes". Which suggests that many high-income or business-owner clients might come under increased scrutiny and potential audits from the tax agency.
The IRS's heightened posture has led some financial and tax advisors to consider which of their clients might be subject to additional scrutiny. These clients could include those who earn income through complex business structures, such as certain partnerships and corporations (particularly those that own smaller subsidiaries), where the flow of income can be complex. Other potential red flags for the IRS could include the use of section 831(b) "micro-captive" structures, irrevocable spendthrift trusts marketed as a way of income tax elimination (rather than deferral), and business owners who (perhaps accidentally) run personal, non-deductible expenses through their corporate entities. And when it comes to partnerships, those with the highest asset values, such as hedge funds and large law firms, could be targets for IRS staff (as well as AI tools the agency is leveraging).
Ultimately, the key point is that financial advisors can potentially support clients by identifying those whose businesses fall into the latest target categories for the IRS (and might be more prone to an audit) and working with them and their tax advisors to ensure that their activities and records remain in compliance with current tax law!
(Claire Ballentine and Jo Constantz | Bloomberg News)
The rise of the 'gig economy' has been a major theme in work life during the past several years, with 60 million Americans (about 39% of the workforce!) taking on one or more freelance jobs in 2022. And while freelance work can provide more time and location flexibility than a traditional '9-to-5' office job, it also comes with additional responsibilities (and opportunities), particularly when it comes to taxes.
First, freelancers typically are required to make quarterly estimated tax payments and can be subject to penalties if they forget to do so. In order to file their taxes correctly, freelancers can ensure they have the documentation they need by keeping careful, detailed records of their income and expenses (potentially saving all invoices and receipts so that they can be double-checked). In addition, freelancers could consider setting up separate bank accounts and credit cards for their business so that they do not unintentionally confuse personal and business expenses, which could lead them to incorrectly take certain deductions (e.g., for travel or meals). Finally, while company employees often benefit from a company-sponsored retirement plan, freelancers have to set one up on their own, though these plans can come with higher contribution limits compared to those available to company employees!
Altogether, financial advisors can play a valuable role not only in helping clients who are freelancers meet the range of tax-related responsibilities they face, from recordkeeping requirements to estimated tax payments, but also to take advantage of the retirement savings and deduction opportunities (e.g., the QBI deduction) potentially available to them!
(Roger Wohlner | ThinkAdvisor)
With the IRS announcing that it is hiring 3,700 new agents as part of its heightened focus on wealthy taxpayers and others, many financial planning clients could have the (unpleasant) experience of an IRS audit. At the same time, financial advisors (with their knowledge of their clients' income sources and investments) can support clients by helping them better understand their recordkeeping requirements as well as the types of activities or investments that could draw the IRS's attention.
One area of focus for the IRS is the use of pass-through entities, such as S-corps, partnerships, and sole proprietorships. While these are common business structures, they have been identified as a contributor to a shortfall in tax collections and have drawn the IRS's attention. For clients using these structures, having an accurate set of books and ensuring that all revenues and expenses are documented would be helpful in case they are audited. Similarly, having proper documentation is crucial for clients who invest in real estate so that rental income as well as repairs and other expenses are tracked properly. Other areas where proper recordkeeping could save a client from hassle down the line include cryptocurrencies (as recordkeeping practices of digital exchanges can vary widely), employee stock options (to ensure that clients report the exercise price as the cost basis when exercising an option and selling them shortly after), and art and memorabilia (where individuals can deduct many expenses related to ownership as long as the item is treated as an investment to be sold later and not as a collectible to be displayed for their enjoyment).
Ultimately, the key point is that while higher-income clients might come under additional scrutiny from the IRS, financial advisors have an opportunity to add value by working with them (and with their tax professionals) to ensure that appropriate records are maintained in case they are audited!
(Micah Shilanski | Advisor Perspectives)
While financial advisors have many potential ways to provide value to their clients, each client is likely to have a different definition of what value means to them (and this definition might not be immediately apparent to the advisor). Which could tempt an advisor to wield a metaphorical 'sledgehammer of value', overwhelming clients with so many services to demonstrate their value. However, doing so can come at a cost to advisors in terms of efficiency, as they will be providing an ever-wider range of services to clients (and their clients might not care much about many of these services anyway).
With this in mind, advisors might consider ways that they can provide significant value for their clients without creating an overwhelming amount of work for themselves. One option is to provide a similar service to each client that is customized with their specific information. For instance, an advisor looking for a value-add related to estate planning might send their clients a list of their current beneficiaries and ask them to review it to see if any information needs to be updated. While this is more helpful to clients than sending a mass email reminding them to review their estate documents (which requires the client to find the documents and look through them), an advisor could provide even more value by reviewing the documents themselves, noting how much each beneficiary is slated to receive (in dollar terms, which are easier to grasp than percentages), and identifying errors or missing beneficiaries. Even better, the advisor could also send the client step-by-step instructions on how to make any needed beneficiary changes. By going the 'extra mile' for their clients and making it easier for them to complete the necessary tasks, advisors can directly show the value they offer.
In the end, financial advisors add value to their clients not only by the technical knowledge they possess, but also by providing clients with peace of mind that their financial situation is in order. Which can mean not only helping them create a plan that allows them to meet their financial goals, but also developing value-adds that make it easier for them to follow through with it!
(Jason Beischel | Barron’s)
Many middle-aged individuals are part of the "sandwich generation", responsible for raising their children while also managing the care of their aging parents. In fact, a 2021 Pew Research Center survey found that 23% of U.S. adults fit this generation, with those in their 40s being the most likely to find themselves in this position. Which can create unique financial planning circumstances for clients to work through with their advisors.
For instance, clients in this situation could be particularly stretched when it comes to their cash flow, as they face expenses not only for themselves, but also for their children and potentially their parents as well. Which suggests that advisors might encourage these clients to have knowledge not only of their own immediate family's income and expenses, but also a clear understanding of what financial support they might expect to provide for their parents so that their financial plan accurately reflects these assumptions. In addition, advisors can encourage clients and their parents to be transparent with one another, not only about their finances (and what kind of control the parents want the client to have), but also about their expectations for housing (e.g., whether the parents are amenable to moving into a senior living community), health care (e.g., ensuring that advance directives and other documents are prepared), and other areas.
Beyond these planning considerations, advisors can also support "sandwiched" clients by offering an empathetic ear as they deal with the stress of managing their own lives and supporting their loved ones (though because doing so can potentially be emotionally draining for advisors as well [particularly ones who are "sandwiched" as well], being attuned to signs of stress or burnout and taking a step back when necessary can help them to continue to serve clients sustainably).
Ultimately, the key point is that the "sandwich generation" phenomenon can be stressful not only for clients in this situation, but also for the financial advisors supporting them. With this in mind, advance preparation (e.g., encouraging the client to have proactive discussions with their parents related to finances well before they need additional assistance) and transparent communication can help ensure clients can remain on track to meet their financial goals while supporting both their children and their aging parents!
(Meg Bartelt | Flow Financial Planning)
Prospective clients often seek out financial advisors for their technical acumen, from their ability to create an appropriate asset allocation to their knowledge of retirement income strategies. But advisors will recognize that they provide clients with much more than just technical finance skills, from helping them set financial goals to serving as a sounding board when clients experience changes in their lives.
Bartelt notes that these latter attributes are similar to the care provided by general practice physicians. While these doctors have the technical skill to assess a patient's health and diagnose a range of conditions (similar to how a financial planner can support a client in a wide range of planning areas), they also serve as an important role as a consistent presence in the patient's life (as they typically will meet at least annually for a 'checkup') and as an empathetic ear for the patient's health concerns. In addition, both types of professionals know when it is necessary to refer a client/patient to a 'specialist' (e.g., an estate attorney in the case of a financial planner or a surgeon for the physician) and can provide them with an informed recommendation.
Altogether, the ability to see the 'full picture' of a client's health or finances, to be a steady presence in a client's/patient's life, and to recommend 'specialists' when necessary can allow both financial planes and doctors to provide value well beyond their technical skills and to help clients feel "cared for". Because while a client almost certainly will value their financial advisor's ability to create and execute a financial plan, the advisor's ability to show that they care about the client and provide peace of mind could be just as valuable!
(Veronica Dagher and Anne Tergesen | The Wall Street Journal)
For many Americans, saving something for retirement can be a challenge, reflected in an analysis from the Employee Benefit Research Institute showing that 49.5% of American families have no savings in tax-advantaged retirement accounts, and another 22% have less than $50,000 saved. But some individuals have managed to save significantly more, with the top 0.1% of savers having at least $5 million stashed in these accounts.
While those with less wealth might expect that such retirees are living lives of luxury, this often is not the case. For some of them, the frugal habits that helped them build such wealth are hard to shake, though many do end up splurging on priorities like travel and charitable giving. Others use this wealth to provide flexibility with their work – while some retired early, others leverage this savings to 'semi-retire' and work fewer hours, and still others continue to work (or even start in a new field) well past 'traditional' retirement age for the sense of purpose it can provide rather than the financial benefits. Having significant retirement savings also gives these individuals greater flexibility in terms of claiming Social Security benefits, with many electing to wait until age 70 to maximize their monthly benefit.
In the end, while having $5 million or more saved for retirement can provide a high level of financial security (particularly if it does not have to support an excessive level of spending!), there are many paths individuals with this level of wealth can take with their spending, giving, and legacy interests. Which suggests that advisors serving these clients can play an important role not only with planning issues such as maintaining an appropriate asset allocation and Social Security claiming strategies, but also in helping clients decide how they want to use their savings (and where they want it to go upon their deaths), whether that means retiring early (or not at all), years of world travel, or just spending more time with family!
(Nick Maggiulli | Of Dollars And Data)
Since 2019, Americans have experienced a wide range of changes when it comes to their finances, from the Covid-related stock market decline (and subsequent recovery) to rapidly increasing home prices to inflation levels not experienced in decades. Given all of these factors, an observer might have a hard time estimating the net effect of these changes on Americans' wealth (take a guess before reading on!).
According to the Federal Reserve Board's Survey of Consumer Finances, the median inflation-adjusted net worth (including real estate assets and liabilities) for Americans rose to $192,700 from $141,145 in 2019, signaling that rising asset values and other factors outweighed higher costs and pandemic-related disruptions (the mean net worth rose to $1,059,470 in 2022, skewed upward by the massive fortunes of the extremely wealthy). Notably, the median net worth now exceeds the previous high achieved before the Great Recession (as the housing and stock market downturns sharply reduced the value of Americans' assets in the following years). And looking at the longer-term picture, the median inflation-adjusted net worth among U.S. households has more than doubled since 1989, rising from $93,600 to $192,700 in 2022.
Of course, Americans' net worths vary across a variety of factors. For instance, net worth tends to increase with age, with the median individual under age 35 having a net worth of about $39,000 (more than double what this group had in 2019!), while the median American between the ages of 65 and 74 has a net worth of $410,000 (notably, this pattern changes beyond this age bracket, as those aged 75 and older have a median net worth of about $335,000). It can also be helpful to consider net worth by percentile. For instance, the median net worth for those between ages 65 and 74 at the 25th wealth percentile is about $87,000, while it is $1.18 million at the 75th percentile and approximately $3 million at the 90th percentile!
Altogether, the Federal Reserve data suggest that despite several potential headwinds, Americans (at least on average) appear to be seeing wealth gains. Which suggests a potentially increased role for advisors in helping a broader swath of Americans preserve, and grow, their wealth!
(Ann Logue | Insider)
As those in the "Baby Boomer" generation have entered their retirement years, researchers (and potential heirs) are considering how those in this generation will transfer their wealth upon their deaths. Because with the 55.8 million Americans over age 65 holding about half of America's wealth ($96.4 trillion, according to the Federal Reserve), there is the potential for a massive wealth transfer to younger generations as Boomers pass away in the years ahead.
But despite the hopes of many that their parents, grandparents, or others will leave them with a tidy sum of money, most younger Americans are unlikely to see a massive windfall. For example, the Boomers themselves might have received less than expected, as one study found that between 1989 and 2007 (when Boomers might have expected to receive an inheritance from their parents in the "Silent Generation"), the number of households reporting an inheritance actually fell by 2.5 percentage points. In addition, the amount of money an individual is likely to receive (if they do receive an inheritance) varies widely based on where they sit on the wealth spectrum. For instance, a 2019 study found that while families among the wealthiest 1% of Americans who said they received an inheritance in the prior 3 years reported inheriting an average of $719,000, those in the 51%-90% wealth range got an average of $46,000, and those in the bottom 50% of the wealth distribution received an average of $9,700. Which suggests the biggest signal that an individual might receive a large inheritance is already having significant wealth themselves.
Notably, financial advisors can play an important role in supporting both those interested in leaving money to their heirs as well as those expecting to receive an inheritance. For the former, ensuring that their plan is designed to preserve assets (rather than deplete them) and considering ways to reduce potential major expenses (e.g., by using long-term care insurance) could increase the chances that they are able to leave a desired bequest to their heirs (advisors also could help these clients create a family mission statement to increase transparency among the generations). And for those assuming that they will receive an inheritance (or, even more speculatively, a certain amount), advisors can not only put these expectations into perspective (i.e., the chances that their parent or grandparent might deplete their assets or give less than expected), but also show how an expected inheritance might (or might not!) affect their financial plan (and, potentially, the client's spending behavior in the meantime!).
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.