Weekend Reading For Financial Planners (October 31– November 1)

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.

RIAs Expanding Growth Metrics, Leaning Into Client Service As A Differentiator: Schwab Survey

(Alex Ortolani | Publication)

The strong stock market performance seen over the past several years has provided a tailwind to RIAs' total assets under management (AUM), and, for those charging on an AUM basis, to their fee revenue. However, while many firms have seen their overall AUM grow during this period, beneath the surface there could be challenges in terms of organic AUM growth (i.e., AUM growth net of market performance and acquisitions), which could put firms on shakier footing in the event of a market downturn or client attrition.

Amidst this backdrop, RIAs appear to be expanding the metrics they analyze to gauge their growth, according to a survey by Schwab Advisor Services of 1,235 advisors on its platform. While AUM remains the most commonly used growth metric for advisors (with 75% tracking it), 53% are also assessing growth by the number of new clients (up from 40% who reported doing so in last year's survey), 44% track the number of new client referrals (compared to 15% who said the same last year), and 40% follow changes in AUM per client or household (an increase from 27% last year). The most common drivers of future firm growth cited by respondents were client referrals (70%) and offering exceptional client service (60%), with many citing areas of investment to spur growth, including integrating AI tools into their firm's workflow (49%) and increasing their firm's sales and marketing efforts (40%). Notably, respondents were most likely to cite exceptional client service (62%) as a differentiator when acquiring new clients, followed by trusted reputation (57%) and providing holistic advice (43%) (suggesting that as comprehensive planning becomes less of a differentiator, some are trying to separate themselves by how they serve their clients).

In terms of service offerings surveyed firms currently offer, investment management (99%), tax-efficient investment solutions (90%) and tax-efficient planning (90%) topped the list. Amongst areas where advisors are looking to expand during the next three years, insurance advice (cited by 20% of respondents), cryptocurrencies and digital assets (15%), and structured asset lines (14%) were the most commonly cited areas. Tax-aware investment planning appears to be a major focus area for many firms, as 93% indicated that increasing tax efficiency for client investments is either 'somewhat' or a 'very' high priority (though recent IRS guidance suggests there could be limits to the tax-aware investment strategies they're willing to accept).

Altogether, Schwab's RIA survey suggests that RIAs are increasingly recognizing that looking beyond top-line AUM growth can provide a more thorough picture of the firm's growth trajectory. At the same time, given that many firms appear to be leaning into client service to boost growth (and, mathematically, not every firm can offer above-average client service [at least those outside Lake Wobegon]), considering other ways a firm stands out could help it differentiate itself in the eyes of prospective clients.

Schwab Execs Address Competition With Advisors, Cash Sweep Rates, Banking Capabilities

(Jennifer Lea Reed | Financial Advisor)

RIAs can sometimes have a complicated relationship with their custodians. On the one hand, the custodian provides a range of valuable services to help advisors manage their clients' investments. At the same time, advisors are sometimes critical of various custodial practices, from the (low) cash sweep rates offered on client cash to suspicions of competition that arise when major custodians (e.g., Charles Schwab and Fidelity) offer wealth management services to retail investors (that might attract away RIAs' own clients, or win new clients who might have otherwise chosen to work with an RIA).

Speaking at its annual IMPACT conference this week, Schwab CEO Rick Wurster and head of advisor services Jon Beatty addressed several of these issues. Wurster said flatly that Schwab has no plans to offer better rates on the company's cash sweep program, in part because the net interest revenue Schwab earns from client cash (by lending it out at higher rates) helps it pay for the services Schwab provides to advisors who don't pay a custody fee to be on Schwab's platform (though Wurster said firms on the platform could reach out if they'd prefer to pay a custody fee rather than get defaulted into the cash sweep program). Simply put, Schwab has to generate revenue somehow in order to provide RIA custodial services, and as long as RIAs don't pay a custody fee, the revenue has to come from somewhere.

Amidst a recent move by Fidelity to require RIAs to have at least $100 million in AUM to remain on its platform, Schwab reiterated its commitment to serving relatively smaller RIAs (as a firm that has maintained no asset minimums for RIAs to join).

That said, some advisors had raised concerns that Schwab's establishment of 20 wealth management offices around the country would pose new competition for prospective RIA clients. In response, Wurster said advisors in these offices work only with existing Schwab clients referred by branch staff and don't go out in their local market looking for new wealth business (he also reiterated his offer for advisors to email him if they find Schwab competing with them). Which means the expansion of Schwab into wealth management is most likely to impact their advisor referrals to the Schwab Advisor Network (which impacts only about 100 firms that use the program, and where Schwab has already been raising its minimums on referrals – now to $5M minimum – likely for this exact reason). Yet at the same time, when Schwab reportedly serves nearly 30 million consumers, and there are just 134 million households in the U.S. in total, when Schwab "only" pursues clients already on its platform it still competes in a huge swath of the consumer marketplace that RIAs also engage with. (Or viewed differently, up until Schwab expanded into wealth management, all of its clients on-platform would have also ostensibly gone to RIAs for services, and now Schwab intends to pursue and keep those customers in its own version of wealth management services instead.)

Also, to address demand for asset-backed lending services (that could help advisors better serve wealthier clients while also providing a revenue stream to Schwab?), the execs said a coming structured asset lending program will let clients pledge private investments and concentrated stock positions (to complement Schwab's pledged asset line program, which saw advisor balances increase by nearly 60% from a year earlier). In addition, Beatty said that a business bank account for RIAs will debut sometime after the first quarter of 2027, as more and more wealth management firms seek to expand into more holistic services including private banking.

In sum, Schwab (which already stands as the top RIA custodian in terms of assets) appears to be taking steps to differentiate itself (at least from Fidelity) by continuing to serve RIAs across the size spectrum while offering additional services to RIAs and their clients amidst heightened competition amongst RIA custodians. Though, at a more basic level, while the interests of custodians writ large and the RIAs on their platforms converge in many ways, the continued reliance on revenue generated by client activity to fund these services can continue to challenge the (fiduciary) alignment between the two sides (perhaps calling for further exploration of an alternative custody fee model?), especially as Schwab seems to be finding that it can serve wealth management clients itself more profitably than relying primarily on the interest rate spread from RIAs' very limited cash holdings?

SEC Examiners' 2027 Focus Includes Firms' Protections Against AI Phishing, Deepfakes

(Patrick Donachie | Wealth Management)

Whether or not an advisory firm actively employs Artificial Intelligence-powered tools in its business, it is still exposed to the broader world of AI, whether in the form of consumers using AI tools to research different firms (or planning topics) or in scammers leveraging AI to target firms and/or their clients.

Given the increasing prevalence of AI, the Securities and Exchange Commission (SEC) in its recently released 2027 examination priorities guide highlights several areas of focus for upcoming examinations. These include firms' compliance with "relevant rules" relating to preparation against cyberthreats, including AI-generated phishing, messaging, and synthetic or 'deepfake' voice and video used for social engineering (e.g., a firm might receive a convincing-sounding call from a 'client' who requests a wire transfer but is really a scammer using a voice cloning tool). Notably, the use of AI is a two-way street, with the SEC's Examinations Division looking to integrate AI into its examinations and risk assessment (while noting that it won't replace examiner judgment).

Other priorities highlighted in the report include keeping an eye on firms that have grown through M&A activity, those operating from multiple geographically dispersed branch offices, and those that have changed their business models or started advising new types of clients, recommended new asset classes, or provided new services. The regulator is also putting firms on notice regarding conflicts of interest, including various indirect methods of receiving compensation and fees (as discussed in a risk alert issued earlier this year).

Ultimately, the key point is that the SEC appears to be trying to keep up with advances in AI, both in terms of advisory firms' usage of it and the potential threats it poses to client assets and data. Which suggests that firms might consider (re)evaluating their data privacy and cybersecurity practices to ensure that client information is secure and that firm practices and processes reflect emerging capabilities and threats.

How Some Fund Investors Are Getting Sucked Into A "Coretex"

(Jeffrey Ptak | Morningstar)

Equity investors (particularly those with a tilt towards U.S. equities) have largely been rewarded for staying the course over the past 15+ years, seeing strong overall returns and experiencing relatively short downturns (at least compared to those seen in the first decade of the 21st century). The relative strength of (U.S.) equities over this period, however, has likely led to increased allocations to this market segment for many investors, whether because they have avoided rebalancing to a preset asset allocation or because they wanted to join the party in a relatively hot asset class.

Looking at the universe of U.S. mutual funds and ETFs (excluding money market funds, fund-of-funds, and feeder funds), equity funds as of the end of August accounted for 76% of fund assets (with fixed income trailing with 22% of assets), exceeding the 30-year average (72%) and the highest level seen since May 2008 (though still below the all-time high of 82% in August 2000). Also, within the equities, allocations to U.S. equities have increased to 80% of all equity fund assets versus 76% in 2016 (notably, U.S. stocks make up 60–65% of the leading global equity indexes, suggesting overweighting to them by U.S. fund investors).

Looking inside the equity sleeve further shows that assets appear to be piling into 'core' or 'blend' funds compared to value or growth funds. For instance, while the large blend category accounted for 22% of fund assets in 2016, this share increased to 30% by March of this year (with mid-cap and small-cap blend funds seeing market share gains as well). On the other hand, large-cap value funds accounted for 19% of assets as of earlier this year, down from 21% in 2016, while large-cap growth funds also saw their market share fall, to 19% from 25%. Overall, core funds have taken in $2 trillion in inflows during the period, while other styles have seen $1.4 billion in outflows (perhaps reflecting the attractiveness of U.S. broad-market index funds, both from an expense perspective and for the returns they've achieved during the period).

In the end, the relative success of large-cap U.S. stocks in recent years has rewarded those invested in this market segment; it could lead some investors to put aside diversification principles that they might have previously held to (particularly during previous downturns when having a more diversified portfolio might have paid off!). Which suggests that financial advisors can provide value for their clients by keeping them focused on their target asset allocation (and by making any needed trades to actually maintain it!) and, perhaps, by serving as a sounding board when the (inevitable?) temptation to lean further into a hot asset class arises.

Diversification All The Way Down

(Larry Swedroe | Alpha Architect)

Some consider diversification to be one of the only 'free lunches' when it comes to investing, offering the opportunity to smooth the investment ride without having to lean on strategies that might cost more in terms of time or expenses. That said, diversification can mean different things to different investors (e.g., one investor might feel like they're diversified by investing in a broad-market U.S. equity index fund, while another might insist on a global market allocation, while still another might hope to achieve diversification at the investment factor level), indicating that there is no single approach that will suit everyone.

A recent research paper from ISS and Columbia University examines the potential benefits of different approaches to diversification, including diversification within factors (i.e., different measures of value), across factors (i.e., two types of value, momentum, and quality), and across time (i.e., adjusting factor weights by an ensemble of three timing models). Overall, the authors found value from additional levels of diversification. For instance, by splitting the value factor into 'cyclical value' (e.g., book-to-price and earnings yield) and 'enhanced value' (e.g., economic profit, intangible capital, and free cash flow), the authors found that the two measures of value aren't interchangeable and that combining them could give a fuller picture of value exposure.

Looking at diversification across factors, the authors found that the multifactor portfolio outperformed each of its individual sleeves on a risk-adjusted basis (due in part to the weak correlations between the factors), making a case for combining factors rather than leaning on one favorite. On the other hand, the authors found that timing factors might only help modestly (suggesting that diversification could be more valuable than forecasting conditions for particular assets).

Altogether, this paper highlights that investment diversification can offer benefits not only at the asset class level, but also at the factor level as well. Which suggests that interested advisors could benefit from looking 'beneath the hood' on factor-based strategies they employ to determine whether they are making a heavy bet on a particular factor (and/or a particular way of measuring that factor).

Finding The Optimal Rebalancing Frequency – Time Horizons Vs Tolerance Bands

(Nerd's Eye View)

Rebalancing plays a crucial role in ongoing portfolio management, both to ensure that the overall risk of the portfolio doesn't drift higher (as risky investments can out-compound the conservative ones in the long run), and to potentially take advantage of sell-high buy-low opportunities. The caveat: it's not entirely clear how often a portfolio should be rebalanced, in order to achieve these goals.

The conventional wisdom is to rebalance a portfolio at least once per year, and possibly even more frequently, such as quarterly or monthly. A deeper look, however, reveals that more frequent rebalancing will on average have little impact on risk reduction, even less benefit from a return perspective, and just racks up unnecessary transaction costs along the way.

Instead, an alternate rebalancing methodology is to allow portfolio allocations to drift slightly and trigger a rebalancing trade only if a target threshold is reached. If the investments grow in line and the relative weightings don't change, no rebalancing trade occurs. However, if these "rebalancing tolerance bands" are breached, the investment – and only the investment – that crosses the line, is then bought or sold to bring it back within the bands.

The one caveat to the process of tolerance band rebalancing is that it requires ongoing active monitoring of the portfolio itself, to ensure that you know when a threshold has been reached (though portfolio rebalancing software tools can help advisors track each investment, its rebalancing thresholds, and even automatically calculate and queue up the rebalancing trades necessary to bring the portfolio in line again). Further, at a time of minimal trading costs, enacting a chosen rebalancing strategy might not come with the expenses it might have in the past. Which suggests that enacting a chosen rebalancing approach could be time- and cost- effective, though advisors might still have to convince certain skeptical clients that rebalancing is appropriate for them (given that they might become beholden to the 'hot' asset in their portfolio!).

5 Ways Federal Student-Loan Rules Have Just Changed

(Cheryl Winokur Munk | The Wall Street Journal)

Last year's "One Big Beautiful Bill Act" (OBBBA) introduced a wide range of tax-related measures, many of which (e.g., the temporary increase to the deductibility of State And Local Taxes [SALT]) commanded significant attention. However, the law also included several measures related to student loan planning, many of which went into effect on July 1 of this year.

To start, OBBBA imposed a lifetime maximum loan limit (which includes both undergraduate and any graduate studies) of $257,500 for new undergraduate student borrowers whose loans are disbursed on or after July 1. For loans first disbursed between July 1 of this year and June 30, 2027, the interest rate is 6.52% and students will pay a loan fee of 1.057% for loans disbursed before October 1 of next year. Also, a student's enrollment status has come to the forefront, as while previously students were eligible for the same loan amounts whether they were enrolled on a full- or part-time basis, now students enrolled less than full time (i.e., taking 6 to 11 credits) will receive a proportional total loan amount. In addition, schools can set a lower loan limit than the maximum allowed as long as it applies to all borrowers in the same program of study (meaning that a student's choice of major could affect the federal loan amounts available to them).

In addition to limits on student borrowing (including aggregate limits and separate annual limits for undergraduate and graduate loans), the law added limits to parental borrowing as well, with dependent undergraduate students now being able to receive up to $20,000 annually from parental Direct PLUS loans, with an overall aggregate limit of $65,000 (whereas parents could previously borrow up to the cost of a school's attendance minus any aid received). Parent loans have a fixed interest rate of 9.07% for loans disbursed between July 1, 2026, and June 30, 2027 (and come with a 4.228% loan fee for loans disbursed before October 1, 2027).

Changes to repayment options are also going into effect, as students with federal loans first disbursed on or after July 1 will be required to repay the loans under the Repayment Assistance Plan (RAP, the new income-driven repayment option) or the new Tiered Standard Plan (which basis the monthly payment owed on the amount of the borrower's principal balance at the time they enter the plan, the interest rate on the loans, and the length of the plan). Parent PLUS loans will now only be eligible for the Tiered Standard Plan and not an income-driven repayment plan.

Altogether, the recent changes to the student loan environment could serve as an impetus for a meeting topic with clients who might be considering student loans for a child in the future, as they could alter how they plan to support their student. In addition, the changes could spark a broader conversation regarding which colleges the student might consider (given the costs and potential borrowing involved) as well as the costs and benefits for students considering pursuing a graduate program in the future (as the cost of some programs, combined with federal undergraduate loans taken out, could put them over the new aggregate borrowing limit).

Planning For The Tax Implications Of Student Loan Forgiveness

(Medora Lee | USA Today)

Given the amount of student loan debt an individual can amass over the course of undergraduate and/or graduate studies (as well as the uncertain income they will earn after entering the workforce), the federal student loan system has offered borrowers the opportunity to have remaining debt canceled after a certain period. Which can provide significant financial relief to certain borrowers (particularly those on income-driven repayment plans who might not have paid down much of their original balances if their income post-graduation was consistently modest) but also come with an unexpected tax bill.

The issue for borrowers benefiting from student loan forgiveness is that the balance of canceled student loan debt can be taxable (with few exceptions, most prominently including amounts forgiven through the Public Service Loan Forgiveness program). Which not only can add to an individual's income (creating additional tax exposure and perhaps putting them in a higher tax bracket) but also could affect their eligibility for income-restricted deductions and credits.

In the end, while loan forgiveness (which could be worth tens of thousands of dollars) typically is worth more than the tax bill owed on any taxable forgiven loan amounts, it can still create a noticeable tax burden (particularly for individuals with relatively lower incomes who might typically have a very small federal income tax bill). Which suggests that advance planning for this event could help the borrower identify the potential tax impact of loan forgiveness and the liquidity they will need to pay their (likely higher than usual) tax bill.

Some Students Turning To Private Lenders Amidst New Federal Loan Restrictions

(Oyin Adedoyin | The Wall Street Journal)

While the federal student loan program garners much of the attention when it comes to borrowing for undergraduate or graduate studies, an ecosystem of private student loan providers offers an alternative source of college funding.

Federal student loans come with a range of attractive features, including fixed rates, income-driven repayment plans, forgiveness opportunities, and typically don't require a credit check to obtain. Which often makes them more attractive in many borrowers' eyes compared to private student loans, which can determine both eligibility and interest rates based on a borrower's credit history and/or income (private student loans can come with a higher interest rate than federal loans, though not always, so some borrowers might see a financial advantage from going this route, particularly if they don't expect to benefit from the other features available from federal student loans).

While federal student loans might be more attractive in many cases, amidst changes to federal borrowing rules that recently went into effect (including annual and lifetime limits on undergraduate and graduate loans), more students (and, sometimes, their parents) appear to be turning to the private market for loans, with Sallie Mae (one of the largest private student-loan lenders) expecting a 12% to 14% increase in private loan originations (with other lenders seeing stronger growth).

In sum, as students and their parents might find that federal student loans won't meet the total cost of their education (with new limits particularly hitting those in longer, more expensive programs such as medical school), some might turn to the private student loan market to cover any gaps. Which presents an opportunity for financial advisors to support clients in identifying available loan options, assessing the implications of different loan programs (e.g., balancing a possible lower rate on a private loan versus the potential repayment flexibility on federal loans), and, more broadly, putting the cost of education (including the impact of any student loan borrowing) in the context of the client's overall financial plan!

The Cat-And-Mouse Game Between Premium Credit-Card Companies And Points Junkies

(Ben Glickman and Oyin Adedoyin | The Wall Street Journal)

Credit cards represent different things to different users, as some see them as a convenient way to make purchases and build their credit history while others view them as a source of emergency liquidity when their cash flow is tight. For others, though, the main attraction of credit cards is the possibility of earning cash back or travel rewards for their day-to-day spending.

With a wide range of cards and rewards available, individuals can choose how much time they want to devote to pursuing rewards. For instance, on the one end of the spectrum, an individual might be happy putting their purchases on a simple cash back card, perhaps earning 2% on all purchases that could be applied as a statement credit on their account (or perhaps earmarked as a funding source for an upcoming trip). Moving further across the spectrum, some individuals look to maximize credit card rewards through a range of multi-card strategies. To start, a credit card user might put spending on different cards depending on its category-based rewards (e.g., one card might offer 3 hotel points for spending at restaurants while another might offer 3 frequent flier miles for travel spending).

The fastest way to accumulate a stockpile of credit card rewards, however, lies in the ability to earn an (often large) sign-up bonus for opening a new card (e.g., a card might offer 100,000 points for spending $5,000 in three months, a return of 20 points per dollar). Which leads some individuals to engage in 'churning', or repeatedly opening (and sometimes closing) credit card accounts to obtain the sign-up bonus.

Given that this can be costly to credit card companies, which must pay for the rewards, (particularly if the user stops spending on the card after reaching the sign-up bonus threshold, as the issuer would not receive additional interchange fee revenue from them), some have taken steps to limit users' ability to open their cards. These include limits on cards opened in a certain period (e.g., not approving an additional card if an individual has opened five cards in the past two years), limiting the number of times a particular card can be opened (e.g., limiting an individual to only hold one of a particular card at a given time), and 'lifetime language' limits for sign-up bonuses (i.e., only allowing an individual to get the sign-up bonus on a particular card once). While the consequences of catching the credit card companies' attention sometimes can be minor (e.g., the inability to open a new card for a certain time period), those determined to have been egregious in their activity have experienced harsher penalties (e.g., having all of their accounts with the issuer closed).

Ultimately, the key point is that when it comes to credit card rewards (or certain tax-aware investment strategies) it's possible to go 'too far' when it comes to taking advantage of an apparent opportunity, which can come with negative financial consequences (which could negate some or all of the benefits from engaging in it in the first place). Which suggests that individuals might decide for themselves how much time and effort they want to put into a given opportunity and their personal 'risk tolerance' for whether they want to approach the 'danger zone' of activities that could attract a credit card company's (or a regulator's) attention.

The Retirement Travel 'Trap'

(Jordan Grumet | The Purpose Code)

When individuals are asked what they plan to do more of in retirement, travel is often at the top of their list. Which means that many financial advisors might plan for significant increases to the travel budget when creating a retirement income plan for such clients. Nonetheless, it could be valuable for such clients to step back and consider why they're interested in traveling in the first place.

To start, a client might consider whether they see travel as an opportunity to experience new places and cultures or whether it's more of a check-the-box item of visiting certain places. While the former could provide lasting memories, a focus on the latter could create an insatiable desire for more travel (to cross off more locations from the list). Also, an individual or couple might consider opportunities to travel with others, as doing so could enrich the experience (and, hopefully, the relationship). Further, those looking to travel in retirement might think about when they plan to take on certain trips, as they could find that they have the energy to do so during their earlier 'go-go' years but have less stamina for certain trips during their later 'slow-go' years (they also might balance the benefits of travel with how it can interrupt the sense of 'flow' that could come from an engaging life at home).

In the end, while travel can be a meaningful and enjoyable experience, different individuals are likely to have varying preferences in terms of how often they want to take trips, the duration of each trip, with whom they want to travel, and how often they want to stay at home in a given year. Which suggests that advisors could work with clients to help them focus their future travel goals, both to ensure they get the most out of the trips they do take and to better estimate the cost of this budget line item.

Are Airport VIP Packages Really Worth The Price?

(Dawn Gilbertson | The Wall Street Journal)

While the ability to be transported across the country (or across the world) in just a matter of minutes by airplane is a minor miracle in itself (compared to the days, weeks, or months such a trip might have taken in the past), the actual experience of flying can feel tedious. This can start upon arrival at the airport, where a series of obstacles (from check-in to security to waiting for and boarding the plane itself) await passengers.

At the same time, there are several ways to make this experience run more smoothly, from enrolling in programs like TSA PreCheck to speed up the security process to holding a credit card that provides lounge access. For those willing to pay, though, several airlines offer 'VIP' packages that aim to provide a seamless experience from the time a traveler arrives at the airport until they board the plane. Costing anywhere from $350 to $700 and up, these packages typically include personalized service from a staffer who can do everything from speeding the check-in and security process to arranging transportation and access to the airline's lounge as well as expedited entry onto the plane itself (sometimes including a ride across the tarmac directly to the plane, avoiding the ritual line-up at the gate). Which could be attractive for those who want to reduce hassle and gain a certain amount of privacy (but perhaps aren't at the level where they can afford private jet travel).

In sum, these airport VIP packages offer a higher level of service (at a cost) for those looking to enhance their travel experience (or at least reduce the annoyances). Which could make the flying process more palatable for some travelers, while others might prefer to apply the money these services cost on hotels, food, or experiences once they arrive at their destination?

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.