Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that a recent survey indicates financial advisors are the most trusted source of financial advice for consumers across generations, and are particularly trusted among wealthier individuals. Further, the survey results suggest that advisors who offer comprehensive services tailored to the needs of their target clients are likely to be more successful both retaining their current clients and in attracting clients who might be dissatisfied with their current advisor and their service offering.
Also in industry news this week:
- The SEC agreed to a series of settlements with 9 RIAs resulting from charges of improper use of hypothetical returns in advertising under the regulator's marketing rule
- How several CEOs of large RIAs and AdvisorTech companies have found that receiving funding from private equity firms and taking the responsibility for the high growth expectations that come with those dollars can potentially cost them their jobs, or at least turn their leadership positions into jobs they no longer want
From there, we have several articles on retirement planning:
- How advisors can use "retirement mentorship" programs to help clients nearing retirement feel more confident making the transition
- While many clients look forward to the freedom retirement provides, those leaving the workplace can potentially lose certain things as well, from their sense of identity to structure in their daily lives
- The range of paths available to those who have achieved financial independence that can provide purpose and fulfillment
We also have a number of articles on practice management:
- Why setting clear expectations and demonstrating a culture of professionalism are crucial for firms looking to make a successful hire
- What job candidates are looking for in the current tight advisor labor market and how firms can woo their top prospects effectively
- How firm owners can avoid potential pitfalls when hiring and training next-generation advisors
We wrap up with 3 final articles, all about the psychology of decision-making:
- While it might be tempting to lament previous decisions that were (or weren't made), the likelihood that these choices would have turned out exactly as one might imagine is low
- How advisors can help their clients make the most of the inevitable "plot twists" that arise in life
- Strategies advisors can use to overcome the common reluctance to ask for help
Enjoy the 'light' reading!
(Steve Randall | InvestmentNews)
Financial advisors can provide significant value to their clients, not just in helping clients grow their savings and have a financially successful retirement, but also in providing peace of mind that their financial plan is built to weather the ups and downs of the markets and the broader economy. And a recent survey by Northwestern Mutual shows that advisory firm clients not only have a great deal of trust in their advisors, but also have more confidence in their financial situations.
Among respondents with at least $1 million of investible assets, 53% said a financial advisor is their most trusted source for financial advice, far outpacing their spouse or partner (11%), business news (10%), and other options. Further, advisors were also cited as the most trusted source of advice for the broader survey population (identified by 31% of respondents), more than a spouse/partner (17%) or family member (14%). And despite concerns that young adults might be looking more to (sometimes unreliable) social media sources for financial advice, nearly 4X as many individuals said they trust an advisor more than social media and financial influencers.
For individuals who work with an advisor, the top reasons cited were offering professional expertise the client does not have and helping them keep a long-term view so they can achieve goals (both cited by 48% of respondents), followed by reducing their financial anxiety and providing peace of mind (44%) and helping them plan and stay organized and disciplined (43%). Notably, while professional expertise was the most-cited factor by those in the Baby Boomer generation and older (66%), the ability of an advisor to save them time was the most commonly mentioned factor for those in Gen Z (44%), suggesting that advisors could consider different approaches to their marketing messages depending on the generation they are targeting.
Northwestern Mutual also asked respondents with at least $1 million of investible assets about the factors that would be important if they were to change their advisor. Finding an advisor that offers more comprehensive financial guidance was the most-cited factor (48%), followed by having a better understanding of the client's life stage and priorities (34%), having new ideas and a more modern approach (30%) and being more closely aligned with the client's values (29%).
Altogether, these survey results suggest that financial advisors are a trusted and valuable source of advice in the eyes of the general public, and particularly so among those with significant assets. Further, the results suggest that advisors who offer comprehensive services tailored to the needs of their target clients could be more successful in both retaining their current clients and attracting clients who might be dissatisfied with their current advisor!
(Lisa Fu | AdvisorHub)
Almost 2 years after it was first announced, enforcement of the SEC's new marketing rule began in November of last year. The new marketing rule presents RIAs with the opportunity to greatly expand their marketing efforts with new options, from client testimonials to promoting the reviews they've received on third-party websites, to provide prospective clients with evidence of the quality of their service. Last September, the SEC issued a risk alert putting advisors on notice that examiners will be conducting a number of reviews to evaluate how firms are complying with the new rule, including scrutiny of how advisors are incorporating performance metrics in their advertisements.
Last month, the SEC announced that it settled its first charges related to the new marketing rule with a firm that allegedly making misleading statements in marketing materials regarding hypothetical performance data related to a cryptocurrency strategy it offered. And this week, the regulator announced settlements with 9 RIAs resulting in combined fines of $850,000 for advertising hypothetical performance to the general public on their websites without adopting and/or implementing policies and procedures required by the marketing rule (in addition, 2 firms were charged with failing to maintain copies of their advertisements). In the announcement, the SEC emphasized that because (the typically strong) hypothetical returns in advertisements tend to be attention-grabbing for the general public (for whom the advertised strategy might not be appropriate), RIAs are required to ensure these marketing messages are targeted at individuals whose likely financial situation and investment objectives match the particular investment strategy (as well as to adopt and implement policies and procedures that ensure this is the case).
Ultimately, the key point is that while the SEC has heavily scrutinized the use of hypothetical performance in advertising for many years, its restrictive stance is codified in the updated Marketing Rule. And the recent string of settlements indicates that the regulator is scrutinizing performance data in advertising and that firms will want to ensure their performance advertising fits within the guidelines!
7 Advisory Industry Chief Executives Are Stepping Aside For CEO 'Operators' As PE Backers Seek Changes In Adverse Market
(Oisin Breen | RIABiz)
One of the major themes in the RIA and AdvisorTech spaces in recent years has been the influx of Private Equity (PE) dollars into the industry, attracted by the healthy profit margins achieved by many firms and the opportunity for tech vendors to serve them. However, some of the firm executives who made the decision to take on this outside cash (whether to access liquidity from their firm or to fund further expansion) have found out that doing so, and taking the responsibility for the high growth expectations that come with those dollars, can potentially cost them their jobs (or at least turn their leadership positions into jobs they no longer want).
As notably, in the past several months, the CEOs of 7 advisory firms and technology companies (including mega-RIAs like Allworth Financial, SageView Advisory Group, and Edelman Financial Engines, as well as tech companies like Orion Advisor Solutions, SMArtX, and InvestCloud, among others) have departed, with all but 1 having signed off on large funding rounds from, or sales of their firms to, PE firms between June 2020 and May 2022 – the recent peak of high-flying private equity transactions upon which it has become increasingly difficult to generate additional EBITDA (earnings) growth.
Observers note that some of these transitions could be the result of the PE firms looking for change in a more challenging market environment (with weak market performance in 2022 leading to revenue and margin pressure at some RIAs, as well as the higher interest rate environment making raising capital and growth through mergers and acquisitions more expensive). On the other hand, PE funders (and the founders themselves) might simply be looking to transition their growing businesses away from the 'startup' style of their founding CEOs (who typically have spent most of their time managing the earlier stages of their company's growth) to scaled-firm 'operators' with previous experience running larger enterprises (who also could be more amenable to taking direction from the PE backers).
Ultimately, the key point is that while firm founders who sell their firms or receive major cash infusions from outside sources might wish to stay on and guide their business into its next growth stage, their long-term future at the company is sometimes no longer in their hands and could be imperiled if business results do not meet the expectations of funders (who might have a different vision for how the firm should be run). And even for founders who retain control and the ability to hold onto their leadership position, the demands placed upon the CEO after accepting outside capital – and the associated growth expectations – can turn the CEO role into one that founders may no longer enjoy as they once did. Which means that for founders, their future in their business is determined not only by whether they decide to sell their firm and relinquish control, but if they decide to raise capital to continue to growth it, whom they raise capital with, and the attached growth expectations, matter a lot, too!
(Karen DeMasters | Financial Advisor)
After several decades of working and saving, the transition into retirement can be tricky. Not only can retirement involve a major lifestyle shift (i.e., how to fill all of those hours that were previously spent at work) but also a financial transition from accumulating assets to spending them down. And while financial advisors can comment on this transition based on the experiences of their retired clients, very few will have experienced this transition (and the changes that go along with it) themselves.
With this in mind, Mike Lynch, managing director of applied insights at Hartford Funds, came up with the idea for a "retirement mentorship" program that advisors can incorporate into their practices. With such a program, advisors can connect currently retired clients with clients nearing retirement to allow the former to share their firsthand experiences of transitioning into retirement (particularly if they are having a 'successful' retirement) and answer the questions of the soon-to-be retirees. Notably, advisors have significant flexibility in implementing such a program, both in terms of how often the clients meet (e.g., whether it is a one-off event or an ongoing relationship) as well as the medium to be used (e.g., an in-person meeting or videoconferencing). In addition, the mentorship 'match' can be tailored to the needs of the pre-retiree and the experience of the retired client; for instance, pre-retirees who are considering moving to a new state once they leave their jobs could be paired with retired clients who did the same.
In sum, a "retirement mentorship" program can not only help clients nearing retirement better understand what retirement will look like, but also can build a stronger advisor-client relationship by showing the advisor listened to their concerns and put in the effort to find a match with an appropriate client 'mentor'!
(Jonathan Clements | HumbleDollar)
When considering what they are most looking forward to in retirement, the freedom that comes with no longer being bound to a specific job (and the regular work schedule it often requires) comes to mind for many individuals. But while retirees gain a significant amount of time (and the freedom to decide what they want to do with it), they also stand to 'lose' certain features that come with working life.
One of the primary' losses' (and the one that drives many pre-retirees and retirees to work with a financial advisor) is the fact that they will no longer receive a regular paycheck and, rather than contributing to their savings, will be drawing down their nest egg. Beyond dollars and cents, though, retirees also can face the loss of their identity (e.g., saying "I'm retired" rather than "I'm an engineer" might feel uncomfortable for many, particularly if they retire early) as well as a sense of purpose (as they will no longer be required to engage in productive work daily), though these can potentially be replaced by activities that provide these benefits in retirement (perhaps volunteering or another pursuit). Also, some retirees who previously held positions of high status or power might feel a loss when they are no longer working.
In addition, after a career of regular 9-to-5 work, some professionals might find the transition to retirement, where they are not necessarily required to be in a certain place at a specific time, jarring, at least until they can come up with a new routine. Further, retirees can lose their 'community' of co-workers, with whom they might have worked for years or decades (particularly if they move away from where they lived during their working years).
In the end, while retirement can be a highly enjoyable experience (and something to look forward to), it is important for those approaching retirement to recognize that the lifestyle changes that come with retirement are not necessarily positive. Which suggests that financial advisors can play an important role not only in helping clients have a financially successful retirement, but a personally fulfilling one as well!
(Winnie Jiang, Claire Harbour, and Antoine Tirard | The Business Times)
One of the challenges for many retirees is the transition from a life of structured, full-time work to a period (that could last for 20 years or longer) without the meaning and purpose that work can provide. And for those who adhere to the Financial Independence Retire Early (FIRE) movement and build sufficient resources so that full-time work is no longer necessary, such a transition can be even more stark as they might be looking ahead to 50 years or more of unstructured time.
While many observers of the FIRE movement focus on the "RE" portion of the acronym, the authors' research found that, in reality, those who have achieved "FI" often take one of 3 paths, which often involve some paid work that can replace the sense of purpose that can be lost when they are no longer working full time. The first path for those who have 'FIREd' is to maintain a sense of direction by filling their lives with activities that keep them intrinsically motivated. For instance, an individual who built their wealth by starting, building, and selling a company might decide to start a new company that takes up significantly less of their time or perhaps join a struggling startup to help it grow. A second path is to explore a variety of projects and activities that can help an individual discover a new 'purpose' beyond their previous work. For instance, an individual might try teaching or consulting to provide value to others without being bound to work certain hours of the week. Finally, some individuals try a more relaxed lifestyle where they decompress from their (often hectic) previous careers and focus on activities like spending time with family or traveling (and importantly, those who choose this path are not committing to it for life, but rather have the option to transitioning to one of the other paths if they choose to do so).
Ultimately, the key point is that many individuals are choosing to eschew the 'traditional' retirement path and are either 'retiring' early (whether on a permanent basis or in the form of semi-retirement or sabbaticals). Though in many cases, the term 'retirement' is a misnomer, as these individuals might choose to take on paid work, just on their own terms. Which offers an opportunity for financial advisors not only to help clients determine they are financially ready for one of these types of 'retirement', but also whether they have thought through what they want this period of their lives to look like!
(Angie Herbers | ThinkAdvisor)
Whether a firm is making its first hire or its tenth, the stakes are high to make sure it gets the decision 'right'. From the work involved in selecting a candidate to the time spent training them and the potential damage to company culture from bringing on a bad 'fit' (as well as the costs of hiring a new employee to replace them), firms have an incentive to avoid potentially costly mistakes in the hiring process.
First, it is important for a firm to know the job it is hiring for and to stick to it. For instance, a firm hiring a lead advisor that has only found candidates with associate advisor-level qualifications might decide to hire one of these individuals instead (at the associate level). However, doing so can not only lead to disappointment on the part of the new hire (who thought they were applying for a lead advisor role) but can cost the firm as well (as they might need to hire a new lead advisor anyway). Second, firms can help set expectations for job candidates by being honest about expectations for the new hire's capacity. For example, an advisor who is used to serving 40 clients at their previous firm might not be comfortable working with 100 if that is the expectation.
Firms can also increase the chances that they will make a successful hire by paying fair wages. Notably, this does not necessarily mean basing pay on industry benchmarking studies, but rather on what the firm can afford, as a firm might end up resenting the hire if doing so cuts into profitability. Relatedly, it is important for firms to be prepared to accept a 'no' answer from a job candidate without feeling pressured to 'sweeten' the offer (as doing so could signal a firm's desperation or that they lowballed the candidate with the initial offer). Finally, firms can attract strong candidates by building a culture that treats their advisors like professionals who can be trusted to serve their clients at a high level while tending to personal needs (e.g., by taking breaks during the day) rather than forcing them to conform to a certain schedule.
In sum, while the hiring process will look different across advisory firms, there are common practices that can help ensure a good match will be made for both the firm and interested candidates. Which can ultimately pay off for years to come through better advisor performance and improved employee retention!
(Victoria Zhuang | Financial Planning)
While the overall labor market is tight, the market for advisor talent has been even tighter as the industry sees a wave of senior advisor retirements and continued attrition among rookie advisors. Which means that many firms have had to 'up their game' when it comes to being attractive to job candidates, though doing so does not necessarily require a significant cash outlay.
Compensation is often at the top of many job candidates' minds, and many might be looking for incentive beyond salary and bonuses. For instance, some firms are considering offering equity stakes (or clearly defined paths to become a partner) to provide candidates with extra incentives. In addition, firms that offer better benefits packages could be more attractive to prospective employees.
Candidates might also be looking to gauge the level of support they can expect to receive from a new firm. For example, a lead advisor might assess whether a firm's tech stack or back-office operations are superior to those of their current firm when deciding whether to make a move. Also, candidates might consider how a firm will help them gain more clients (e.g., by having established marketing strategies or referral networks).
At the same time, firms can woo candidates by showing a personal touch that goes beyond pay and benefits. For instance, a firm that learns about a candidates' hobbies or interests might send a small gift that shows its interviewers were listening. Alternatively, a handwritten card can be a personal touch that can help the firm stand out from others that might be recruiting a given individual.
Ultimately, the key point is firms can make themselves more attractive to prospective employees not only by offering competitive compensation, but also by building a strong company culture and showing a personal touch during the recruitment process!
(Penny Phillips | Wealth Management)
Whereas in the past, the typical career path toward becoming a financial advisor was to build up a book of business on one's own, the rise of the fiduciary advice model (in which the quality of advice provided to the client really does matter to the firm's success) in recent years has allowed a new career path to emerge: that of the associate advisor, who generally takes on financial planning tasks, like data gathering and analysis, to support the lead advisor so that they can focus more on managing the client relationship and bringing in new business. And as the associate gains experience and trust among existing clients, they can gradually take over some of the lead roles themselves, to be supported by new associate advisors of their own – thus allowing the firm to transition its clients from the founder to the next generation of advisors.
Nevertheless, hiring and nurturing a new associate advisor is easier said than done and advisory firm owners looking to do so can encounter pitfalls along the way. For instance, during the hiring process, firm owners might be tempted to look for an applicant who has a combination of technical skills and the ability to come into the practice and generate revenue quickly (either by finding new clients or by cultivating opportunities within the current client base). However, these "unicorns" are hard to find and a firm owner could spend significant amounts of time (that could instead be used training a less-experienced hire) looking for one.
Next, it is important for firm owners to set proper expectations with a new advisor. For instance, within the first month the new hire should be able to answer questions such as "How will I know I have successfully integrated into the practice", "What should I be aiming to achieve on an ongoing basis in my role", "How will I know if I have had a successful week", and "How will I know if I am progressing in my role". And while the development process for a new hire to become a self-sufficient advisor can take years, firm owners can speed the process by an organized, 3-phase training process that includes shadowing lead advisors in as many meetings and conversations as possible, then practicing skills in a controlled environment (e.g., practice responding to a client email), and finally leading initiatives (e.g., taking charge of a client household relationship).
Finally, firm owners can consider taking steps to bridge the likely generational differences between the new hire and themselves. For example, those in Gen Y and Gen Z tend to thrive on positive reinforcement, a culture of collaboration and teamwork, and when they are serving a greater mission and vision (an environment that might look different than the one the firm owner might have 'grown up' in). Further, the firm owner can check in regularly with the associate advisor to ensure that both sides have a solid understanding of the junior advisor's aspirations (e.g., while a firm owner might assume the junior advisor is interested in eventually buying them out, the junior advisor might change their mind at some point).
In the end, while hiring and training a new advisor does not come with a guarantee of success, advisory firm owners can take steps to increase the chances that their expectations for the new hire will be met. And while doing so can take a significant commitment of time, successfully nurturing a next-gen advisor can free up the owner's capacity, help spur growth, and ultimately increase the chances that the firm and its clients will remain in good hands for years to come!
(Nick Maggiulli | Of Dollars And Data)
Everyone likely has at least a few regrets in life, whether it is a job opportunity not taken or a romantic relationship not pursued. And while it can be painful to think about these 'lost' opportunities, such mental exercises often assume that if you had made the 'correct' decision everything would have gone perfectly.
However, in reality, life is often much messier. For instance, when it comes to investments it can be tempting to think about the profits you could have earned had you made a certain investment (e.g., buying Apple stock many years ago). In a real-world example, basketball player Magic Johnson, early in his career, signed a sponsorship deal with Converse (which offered more money) rather than Nike (which offered shares of the company). He would later calculate that if he had taken the Nike deal and held on to the shares, they would be worth nearly $5 billion today. However, it is probably unrealistic to assume that Johnson would have held onto those Nike shares throughout the full-time period, whether because he might have sold them to fund his lifestyle needs or because doing so would have required the fortitude to hold on through multiple drawdowns of more than 40% during those years.
In sum, while it can be tempting to look back and lament decisions that were (or were not) made, the likelihood that these choices would have turned out exactly as one might imagine is low. Which suggests that advisors can add value to clients experiencing this feeling by helping them shift their focus to the future, which they still have the opportunity to shape!
(Joy Lere | Finding Joy)
Unforeseen, unwelcome events are bound to occur in life, whether it is an unexpected job loss or an injury or illness (in Lere's case, a torn rotator cuff just 24 hours into a family vacation in Switzerland). While these types of circumstances can be viewed as negative "plot twists" in an individual's life story, how they respond to them can determine whether they will be a temporary dip in the positive arc of their life trajectory or something that leads to more negative outcomes.
When one of these plot twists occurs, it can be tempting to think "if only" a different decision had been made (e.g., "If only I had been more careful, I wouldn't have gotten injured"). But doing so is rarely helpful, as what occurred in the past is done and cannot be changed. Rather, accepting "what is" rather than ruminating on "what was" can help an individual accept their current situation and decide on the best path for moving forward.
Abrupt transitions also can offer an opportunity to reimagine and reinvent one's life. For instance, an advisor who assumed they were on track to succeed their current firm's owner might be shocked to find out one day that the owner decided instead to sell to an outside buyer. While this might be an immediate disappointment, it could open the possibility for the advisor to start their own firm, something they might not have considered before while everything was "on track".
Finally, plot twists can serve as a valuable reminder to reassess one's readiness for potential future transitions that might occur. For instance, a friend's serious illness can serve as a call to ensure that one's estate documents are in order and that loved ones would have the information, instructions, and resources needed to respond if necessary.
Ultimately, the key point is that while life is inherently unpredictable, being prepared for unexpected events and having contingency plans in place can help prevent such plot twists from having long-term negative effects. And financial advisors have an opportunity not just to ready themselves for such contingencies, but also to add value to their clients by preparing them for a range of possible outcomes (both personal and financial) and helping them move forward in a positive direction when they inevitably occur!
(Manfred F.R. Kets de Vries | Harvard Business Review)
Being self-reliant is often viewed as a virtue in American society. But while independence and self-sufficiency can be valuable traits, too much of an emphasis on "going it alone" can get in the way of progress when one needs assistance, whether because they are unsure how to proceed or if they feel overwhelmed. And while there are many factors that can make it harder to ask for help, a variety of practices are available that can make it easier to do so, which can ultimately lead to a happier and more productive life.
There is no shortage of potential perceived barriers when it comes to asking for help. For instance, some might view asking for help as a sign of vulnerability or weakness (e.g., worrying that asking a colleague a technical question will make them think less of one's abilities). Others might fear losing control (e.g., relying on a teammate to help finish a project), particularly if they have trust issues. Reluctance to ask for help also can occur by overempathizing with others, or assuming that the request for help will be a burden on the recipient.
To rewrite these "inner scripts", individuals can consider several options that can make asking for help easier. For instance, seeking the counsel a third-party (perhaps a mentor, coach, or therapist) can help get these issues out into the open, and the trusted partner can help form a plan to ask for help. Further, reframing the situation can make it easier to ask for assistance. For instance, rather than worrying that asking a subordinate to take on a challenging project will be an imposition on their time, a manager could instead mentally reframe the situation as putting their trust in the employee and giving them an opportunity to take on a task that could help them advance in their career. In addition, communicating more freely, rather than keeping issues bottled up, can help an individual better get their challenges into the open and can unearth unexpected help (e.g., a spouse might be willing to take on extra housework if they know their partner is feeling overwhelmed).
In sum, while asking for help does not always come naturally, there are several ways individuals can overcome these mental barriers and gain the benefits of leveraging the advice and talents of others, from better productivity to less stress. And while financial advisors might be used to being recipients of requests for help from prospects and clients, seeking help themselves (e.g., asking clients for referrals) can be a valuable practice as well!
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.