Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that the Investment Adviser Association has petitioned the SEC to ask the regulator to change how it defines a small adviser from one with less than $25 million under management to a firm with 100 or fewer employees. The group argued that this change would help more small firms, which tend not to have the same staffing and resources compared to their larger counterparts, as the SEC contemplates a growing number of new and amended rules.
Also in industry news this week:
- A survey suggests that wealthy individuals across all generations are interested in engaging with advisors on social media, with YouTube being the top platform chosen by respondents
- Amid an avalanche of claims for the pandemic-era Employee Retention Credit, the IRS is halting the processing of new claims until 2024 and plans to closely scrutinize those that have already been made
From there, we have several articles on financial choices:
- How advisors can help clients see that there usually are more than 2 options when it comes to making financial decisions
- While clients might be frustrated when their advisor says, "It depends," advisors can add significant value by helping them make the best decision today while working with them to make adjustments over time if circumstances change
- Why having "enough" financial independence might be a better goal than a myopic focus on being able to retire early
We also have a number of articles on marketing to affluent clients:
- How offering a "second-opinion service" can help advisors generate more referrals from clients and centers of influence
- How advisors can help clients plan for the upcoming sunset of the lower gift and estate tax exemptions under the Tax Cuts and Jobs Act
- Why giving prospects room to talk, rather than trying to convince them of the merits of an advisor's strategies, could be a more effective way to convert them into clients
We wrap up with 3 final articles, all about setting and adjusting goals:
- Why, when it comes to career planning, it can be more effective to focus on what one wants to be known for rather than the titles or positions they want to attain
- Why setting flexible goals often can be more effective than fixed or "SMART" goals
- How a "chuck-it list" can be a useful companion to a "bucket list" when it comes to setting goals
Enjoy the 'light' reading!
(Mark Schoeff | InvestmentNews)
The Securities and Exchange Commission (SEC) has been busy during the tenure of Chair Gary Gensler and during the past couple of years has floated several rules related to the growing RIA industry, including a proposed 'outsourcing rule' that would establish formalized due diligence and monitoring obligations for investment advisers who hire third parties to perform certain functions, as well as proposed amendments to the SEC's Custody Rule that would, among other measures, extend custody obligations beyond securities and funds (subject to the current rule) to encompass all assets in a client's portfolio for advisers who manage on a discretionary basis. Many of these specific proposals have been met with pushback from advisers and investment industry groups, which have raised concerns about the compliance and overall administrative burdens they would create for RIAs.
In particular, the Investment Adviser Association (IAA) and other groups have argued that these regulations would impose a particularly onerous burden on smaller advisory firms, which might struggle to implement them in a timely manner, given their available staffing. Notably, the SEC does still have to consider the impact of its rulemaking on small firms; the Regulatory Flexibility Act was enacted decades ago to address the potential disproportionate effect Federal regulations could have in hindering the growth and competitiveness of smaller businesses (which have fewer resources to devote to compliance compared to larger companies). However, in practice, the SEC defines a "small adviser" as one with less than $25M of assets under management, which is only a relatively small percentage of RIAs (such that in practice, it doesn't seem to have slowed the SEC from its rulemaking pace and potential small-adviser impact).
To help ease the regulatory burden on smaller advisers more broadly, the IAA has petitioned the SEC to amend its definition of a small adviser from one that has less than $25 million in Assets Under Management (AUM) (which, ironically, falls below the $100 million AUM threshold for advisers to register with the SEC in the first place), to a firm with 100 or fewer employees, as arguably its employee headcount (or lack thereof) that makes a business 'small' such that it would have challenges complying with new regulations (which was the intention of the Regulatory Flexibility Act to begin with). The key, though, is that while only a limited number of RIAs have less than $25M of AUM, almost all RIAs have fewer than 100 employees; the IAA estimates that a whopping 92% of investment advisers would fall below this threshold, forcing the SEC to view small-to-mid-sized RIAs as their primary consideration when determining whether its proposed regulations are administratively feasible without being an undue burden.
The IAA's petition comes on the heels of legislation passed in the House that would similarly require the SEC to redefine small advisers, though it is unclear whether the SEC will take action based on the petition or whether the Senate will pass legislation similar to that passed in the House. Nonetheless, such a change, if enacted, could substantially slow the pace of SEC rulemaking on RIAs and reduce what is otherwise a concerning rise in compliance burdens many smaller RIAs face, reducing their need to spend more to meet these requirements and thereby helping them remain competitive in an increasingly crowded advice marketplace!
(Tracey Longo | Financial Advisor)
The ubiquity of social media in modern life makes it a natural place for financial advisors to engage with prospective clients, including by sharing content to demonstrate their expertise. But given the potential for social media engagement to take up a significant amount of time (that could be used to work with current clients or other business development efforts), advisors might wonder which social media platforms offer the best opportunity for engagement with their ideal target client.
According to the results of a soon-to-be-published report from fintech firm Advisor360, about half of mass affluent and high-net-worth investors surveyed said they are more likely to engage with advisors who use social media. When looking at specific platforms, YouTube was a top performer, with 49% of respondents across different demographics saying they would engage with an advisor on the platform. Drilling down into different age groups, those aged 68-80 said they were most likely to interact with an advisor on YouTube (45%) and LinkedIn (42%), while those from 52-67 preferred YouTube (47%) and Facebook (43%). Looking at younger generations, those between 36 and 51 also cited YouTube (53%) and Facebook (50%) most often, while Instagram (56%) and YouTube (49%) were most popular among those age 20-35.
In addition to differences across age groups in terms of preferred social media platforms, men and women also showed somewhat different preferences. For instance, women favored advisors who use YouTube (47%), followed by Facebook (46%), Instagram (40%) and TikTok (38%); men also had YouTube in the top position (50%), but that platform was followed by LinkedIn, X (formerly Twitter), and Facebook (all at 46%).
Ultimately, the key point is that the target clients for many financial advisors not only use social media, but also appear to be open to engaging with advisors on these platforms. And while creating high-quality content can require an upfront investment of time, the ability to repurpose each piece of content in multiple ways and across key social media platforms can allow an advisor to reach their target audience while minimizing the amount of time they have to spend doing so!
(Richard Rubin | The Wall Street Journal)
In response to the economic shocks caused by the pandemic, Congress passed a series of measures in an effort to keep businesses afloat and help them retain their employees. One of these measures, the Employee Retention Credit (ERC), was created in 2020 to reward businesses and nonprofits for keeping employees on payrolls during the pandemic. While the ERC expired in late 2021, business can still claim the credit by filing amended tax returns until April 2025, which has led to aggressive marketing efforts from companies offering to help business owners claim the credit (though the actual value they provide is often uncertain; while some firms are known to help business owners calculate the size of the tax break they might receive, but not actually determine whether the business is eligible in the first place).
Amid a massive influx of ERC claims (perhaps spurred on by the marketing efforts of companies facilitating the claims), the IRS announced last week that new claims will not be processed until at least 2024. Further, the agency also said it plans to give tougher scrutiny to its existing queue of more than 600,000 requests (with standard wait times extending from 90 days to 180 days) and will allow employers with pending claims or who have already received refunds to withdraw them (if the employers think they no longer qualify). To signal that it is serious about adjudicating ERC claims, the IRS said it has referred thousands of cases for audits (which could result in potential penalties and interest for firms that claimed the credit but were not eligible) and has opened 252 criminal investigations, which have so far led to 15 charges and 6 cases resulting in convictions. To help employers determine whether they can receive the credit, the agency also released a new eligibility checklist.
Altogether, while the ERC can be a valuable tax credit for many employers, the wave of claims received by the IRS in recent months (15% of all claims have been made in the past 90 days) has led to a backlog and increased scrutiny from the tax agency. Which suggests that for financial advisory firms (and their businessowner clients) that might be eligible for the ERC, taking time to evaluate their eligibility (perhaps with the assistance of a tax professional) before making a claim (or reviewing an already-submitted claim) not only could increase the chances that they will receive the correct credit amount, but also could help them avoid penalties if the IRS determines they were ineligible for it in the first place!
(Rick Kahler | Advisor Perspectives)
When it comes to making decisions, financial or otherwise, individuals often frame the choice between 2 options. For example, a financial planning client might frame their options as choosing between saving more versus spending less or staying in a job they do not like versus leaving immediately. But while this kind of dualistic thinking can help simplify complex choices down to 2 options, it can also prevent individuals from exploring possibilities beyond the binary choice they are considering.
For instance, a 55-year-old prospective client might approach a financial advisor to help them decide whether they should retire immediately or continue working until age 65. While these two choices might be viable options, there are a host of alternatives in between, from continuing to work but taking extended sabbaticals to 'semi-retiring' and gradually reducing the number of hours worked per week. Which suggests that financial advisors not only can play an important role in helping clients determine the financial implications of different alternatives (e.g., how much income they might be able to generate depending on when they retire), but also in helping them see that there typically are more than 2 options available for any given decision. For example, an advisor could use a "choice wheel" brainstorming exercise to help clients see that they have several viable options from which to choose.
In sum, dualistic thinking is prevalent throughout modern society, from individual financial and career decisions to national policy debates. However, in reality, there are almost always more than two options available, and financial advisors can add value by helping their clients expand their field of vision when it comes to making decisions, which ultimately could lead to the client choosing a more satisfying option they had not previously considered!
(Jesse Cramer | The Best Interest)
While humans tend to crave certainty, the reality is that the future is inherently unknowable. Which can make decision-making challenging, as even if one makes the 'right' decision given the circumstances today, this choice could go awry if events take an unexpected turn. And in the world of financial advice, while clients might want their advisor to give them a definitive 'yes' or 'no' answer to their questions, advisors often have to respond with the less-satisfying response 'it depends'.
Of course, answering a client's question with "it depends" does not mean that the advisor cannot provide value for their client (or give them confidence in the decisions they make today). Rather, they can help the client make the best choice for their given circumstances today, and then be there in the future to assess whether adjustments to their financial plan are necessary. For instance, a recently retired client might approach an advisor for help determining how much they can spend sustainably each year in retirement. In this case, an advisor's answer is likely to differ significantly depending on whether it is a one-time recommendation (that will not change throughout the client's retirement) or an initial recommendation with the opportunity for adjustments to spending throughout the retirement period.
Ultimately, the key point is that in a complex world, there are very few situations where a decision made today is certain to succeed many years into the future. Nonetheless, this does not necessarily have to lead to 'analysis paralysis'; rather, by making the a decision today based on available information and revisiting it going forward as circumstances change, individuals can have greater confidence that they will succeed in the long run. And given the ongoing relationship between many financial advisors and their clients, advisors are well-positioned to help their clients lead successful financial lives, even if the answer to a particular long-term question today is 'it depends'!
(Meg Bartelt | Flow Financial Planning)
During the past decade the Financial Independence, Early Retirement (FIRE) movement has gained popularity, with its adherents often striving to maximize their incomes and minimize their expenses to achieve a level of financial independence that makes paid work no longer necessary. Nonetheless, the sacrifices that are sometimes necessary to achieve FIRE (e.g., working in a high-paying job that might not be enjoyable, or maintaining a level of frugality that limits one's lifestyle options), such a path might not be attractive for many individuals.
Instead of thinking about financial independence as a single destination (i.e., no longer needing to work to support one's lifestyle), Bartelt suggests that there is a spectrum of financial independence. For instance, while retirement might be at the far end of the spectrum, other levels of financial independence could be achieved with a lesser amount of savings, such as having enough money to quit your job without having another one lined up, take a sabbatical, leave a bad living situation, start a business, or help out a family member if they have a big medical event. Notably, achieving these milestones provides a level of flexibility sought after by many pursuing financial independence but does not require saving the significant amount of money (and the sacrifices that might be necessary to earn it) needed to support a multi-decade retirement.
In the end, while many individuals want to retire from work at some point, that specific destination is not the only available source of financial independence. Rather, individuals who save and invest over the course of their careers can find that they not only have achieved significant flexibility in their lives (to pursue another job or other opportunities that present themselves) but also can gain the peace of mind that comes with being able to handle financial challenges that come their way!
(John Bowen | Financial Advisor)
For some advisors, working with high-net-worth clients is an attractive proposition, whether because of a desire to work on the planning issues that wealthier issues face or the opportunity to earn greater revenue per client. At the same time, attracting wealthier clients can be challenging, as the pool of prospective clients grows shallower as an advisor moves up the wealth ladder and because many of these individuals already work with a financial advisor.
Nevertheless, Bowen believes that the level of uncertainty permeating society today (in the economy and otherwise) presents an opportunity for advisors to seek out wealthier clients. One strategy to do so is to leverage referrals from both clients and from Centers Of Influence (COIs) such as accountants and estate attorneys. While these are already popular sources of prospective clients for many advisors (e.g., research from CEG Insights found that 75.5% of advisors get the bulk of their new clients from client referrals, while 70.8% of advisors said their best clients came from a COI introduction), asking these individuals for referrals in an unstructured way might not be particularly effective.
Instead, Bowen suggests that advisors could not only receive more referrals, but also convert more of these prospects into clients, by offering a "second-opinion service". With this tactic, an advisor can offer to provide friends and family of current clients (or the clients of a COI partner) a free analysis of where the prospect's financial situation is now, where they want to be in the future, and the best ways the advisor sees to close that gap. Doing so provides an incentive for clients and COIs to make a referral (as the recipient will receive free, helpful advice) and could encourage more prospects to sign on with the advisor (if the advisor is able to show the prospect could be on a better path compared to working on their own or with their current advisor).
Ultimately, the key point is that while winning high-net-worth clients can be challenging, advisors who are able to demonstrate their expertise and how they offer a differentiated value proposition are more likely to find success. And by offering a free 'second opinion meeting', advisors can potentially increase the flow of prospective clients referred by current clients and COIs!
(Ashlea Ebeling | The Wall Street Journal)
The Tax Cuts and Jobs Act (TCJA), passed in late 2017, introduced a wide range of changes to the tax system, from reduced individual and corporate tax brackets to modifications to various credits and deductions. But while some of these measures were permanent (e.g., a single 21% tax rate for corporations), many are slated to 'sunset' after the year 2025 and revert back to their previous levels (though some dollar amounts will be adjusted for inflation).
One of the major parts of the TCJA that is slated to sunset after 2025 is the increased combined gift and estate tax exemption (i.e., the amount that can be given away during one's life or at death free of federal estate tax) included in the legislation. For 2023, the exemption stands at $12.92 million per individual (or $25.84 million per married couple) and, according to an estimate from attorney Peter Tucci, could reach $14 million per person in 2025 before being cut in half to about $7 million in 2026 (if Congress allows the higher exemption amount to sunset).
Given that the federal estate tax rate rises quickly to 40% (once taxable estates go beyond $1,000,000), wealthy households (and their heirs) stand to see significant tax savings by moving assets out of their taxable estates by the end of 2025 (or, more morbidly, if they die before that date). This has led some individuals to speed up their gifting; in 2023, individuals can make gifts of up to $17,000 per recipient without having to file a gift tax return (meaning that a couple could gift up to $34,000 to each of their children, grandchildren, or other recipients without eating into their lifetime gift tax exemption). Another method being considered by many is to transfer assets (potentially up to the current combined exemption amount) into trusts (e.g., 'dynasty trusts' that can potentially support multiple generations of descendants) to take advantage of the (potentially temporary) higher exemption amount (as well as to avoid having the future growth of these assets be subject to estate tax).
In the end, while many clients might be eager to take advantage of the higher exemption amount before it sunsets at the end of 2025, financial advisors can add value to these individuals not only by identifying estate planning tools that might be most appropriate for a given client's situation, but also by taking a wider view to ensure that such moves are made within the bounds of the client's broader financial goals, as clients will want to ensure they maintain control over sufficient assets to meet their lifestyle needs for what could be several decades before they pass away!
(Dan Solin | Advisor Perspectives)
A meeting with a high-net-worth prospect is a prime opportunity for an advisor to grow their assets under management and revenue, but it can also be a challenging proposition, especially if the prospect is likely to hold different perspectives than the advisor (e.g., a desire to invest in alternative investments, when the advisor typically invests in passively managed index funds). In these cases, the advisor might spend significant time preparing a data-filled presentation to demonstrate the effectiveness of their style. However, given the challenges of persuading others in general (as well as the potential for the prospect to become defensive), Solin suggests that an alternative style is more likely to succeed.
The first step to this approach actually occurs before the meeting, when the advisor can ask the prospect about the issues they would like to address (as they might not match the topics the advisor would choose on their own!). Next, rather than trying to spend as much time as possible convincing the prospect of their merits, an advisor can instead focus on getting the prospect to talk as much as possible. By preparing questions in advance, the advisor can show their interest in the prospect's situation and encourage them to open up, which can eventually lead to opportunities for the advisor to demonstrate their expertise (rather than trying to overwhelm the prospect up front). In addition, an advisor could leverage a senior executive at their firm (particularly if the individual has a high profile and is known to the prospect), not to convince the prospect of the advisor's approach, but rather to show genuine interest in the prospect and their needs (potentially making the prospect feel more comfortable and 'seen' by the firm).
Altogether, while it might be tempting for an advisor meeting with a high-net-worth prospect to try to overwhelm them with facts and data supporting their planning and investment approach (as this might be the type of approach an analytically minded advisor might want themselves if they were the prospect!), such a strategy is less likely to be effective than one that allows the advisor to demonstrate their interest in the prospect's needs and perspective and to show how they are the right advisor to help them achieve their goals!
(Rachel Feintzeig | The Wall Street Journal)
Some individuals might imagine their career trajectory as a straight line, starting out in an entry-level position before climbing the corporate ladder to positions of ever-increasing responsibility (and pay), perhaps with the goal of one day becoming a senior executive. But such paths are uncommon, as many aspects of a career trajectory are out of an individual's control, from whether the positions they seek will still be available when they are qualified for them to whether their company will still be around in 10 or 20 years.
Rather than reaching for the highest possible rung on the corporate ladder, career development expert Helen Tupper suggests that individuals instead ask themselves, "What is it that I want to be known for?". For instance, while an individual might think they want to one day be the CEO of their company, what they really might want is to have the opportunity to be a decisive leader, a much broader goal that could be achieved in a variety of job opportunities (e.g., leading an internal committee), perhaps even at a different organization. And while individuals often come to this realization after a major shock to their career (e.g., if they are laid off or the company is sold to a larger firm), conducting this exercise now can help a worker prepare for changes that might alter their current path.
In the world of financial advice, new planners sometimes join a firm in an entry-level position with the hopes of moving up to one day becoming a lead advisor, and eventually a partner or owner of the firm. Of course, because 'stuff happens', whether it is a firm owner who decides to sell their firm or the employee decides that they are not a cultural fit, such goals are not always fulfilled. Alternatively, by being flexible with their goals (e.g., wanting to lead a firm), an advisor could consider alternate paths in addition to their current trajectory (e.g., moving to another firm or starting their own!).
One popular way to set goals is to use the "SMART" framework, by which an individual creates goals that are Specific, Measurable, Achievable, Relevant, and Time-Bound. Rather than setting a less well-defined goal (e.g., "I want to exercise more"), SMART goals (e.g., "I want to exercise 45 minutes per day, 5 days per week for the next 6 months") provide more clarity for what one actually wants to achieve and includes achievable measurements to help see if it is on track to be completed.
However, Foroux suggests that SMART goals are not appropriate for every situation. Because while a SMART goal might be effective for something over which the goal-setter has significant control (e.g., how much they exercise each day), other goals are influenced by outside forces. For example, an individual might set a SMART goal of increasing their net worth by $50,000 each year for the next 10 years. While this goal might meet all of the SMART criteria, it is not totally within the client's control, as market performance, their job situation, and other factors will determine whether or not they achieve it.
In circumstances where an individual does not have full control over whether a goal will be achieved, Foroux suggests that they set a "flexible" goal rather than a SMART or "fixed" one. For instance, in the above example, a market downturn early in the year might leave the individual well behind their annual goal; if they keep the fixed mindset, they might be tempted to make risky market bets or stress themselves out by working overtime hours in order to achieve it. Instead, having the more flexible goals of increasing their net worth and keeping their financial plan on track provides more latitude, especially in the short run (i.e., they might remain on track to meet other financial goals if their net worth only increases by $40,000 rather than $50,000 in a given year).
Ultimately, the key point is that setting fixed goals (whether using SMART criteria or otherwise) can lead an individual to have a myopic focus on achieving them, even if their ability to do so is not necessarily in their control. Which suggests that financial advisors can add value for their clients not only by helping them set goals, but also by helping them determine which ones are better treated as flexible versus fixed.
(Valerie Tiberius | The Washington Post)
Many individuals create a 'bucket list', or a list of goals they want to achieve (e.g., travel to every continent or learn a new language) before they 'kick the bucket'. Such a list can help individuals stay focused on what they want to achieve, and crossing items off can provide a sense of satisfaction. Nonetheless, because an individual's priorities are likely to change over time, and they might face health, financial, or time constraints, it can become difficult to achieve all of the items on the list.
In fact, Tiberius suggests that individuals could consider creating a separate "chuck-it" list of items that they no longer want on their bucket list, perhaps because they no longer have the desire or capacity to do them. And while letting go of a goal might feel disappointing at first (especially for those with an achiever mindset!), she suggests that doing so can actually be a liberating experience, as an individual will no longer feel pressure to achieve the goal for the sake of completion and can instead focus on the goals that are most important to them and/or have a greater chance of being achieved.
In the end, while creating a bucket list can help organize one's goals, it does not have to be a static exercise. Rather, by regularly reviewing it and taking off certain goals (i.e., the "chuck-it" list) and perhaps adding new ones on, the bucket list can more accurately reflect what an individual wants to (and might be able to) achieve!
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.