Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that RIA custodial platform Altruist announced that it is offering its portfolio accounting software for free to advisors who custody with the firm, offering the opportunity to advisory firms to reduce the costs of their tech stacks and perhaps presaging competition among custodians to offer more software capabilities for their advisory firm clients!
Also in industry news this week:
- After experiencing a downturn over the past few quarters, RIA M&A activity ticked higher in the 3rd quarter amid continued interest from sellers and increasing costs for internal succession
- A recent study shows that housing-related costs are more likely than healthcare spending to cause unexpected spending shocks for retirees
From there, we have several articles on investment planning:
- How expense ratios for index funds can vary, even for an issuer's funds tracking the same index
- While ETF fees have tended to fall over time, this fee compression appears to be slowing as investors show interest in actively managed funds and some issuers raise their funds' expense ratios
- How investors in actively managed mutual funds are sensitive to higher fees and the factors that increase this sensitivity
We also have a number of articles on advisor marketing:
- Best practices for advisors using webinars to market to prospective clients
- How to create an effective email newsletter, from identifying the target audience to developing a unique voice
- Why structure and discipline are crucial elements for creating a successful advisor podcast
We wrap up with 3 final articles, all about how to work more efficiently:
- How advisors can use 4 different types of leverage to boost their incomes
- How calculating the "Return On Hassle" can provide clarity into the full costs and returns of a particular investment or decision
- How both "macro" and "micro" focus can contribute to productive, fulfilling work
Enjoy the 'light' reading!
(Ryan Neal | InvestmentNews)
The rapid growth of the advisor technology universe in recent years has provided advisors with a number of new options to build their tech stack, not just within 'traditional' categories such as CRM and financial planning software, but also in 'new' categories such as advice engagement and sales enablement. And while advisor technology can help firms scale their businesses by improving back-office efficiencies, this software comes at a price, and the total cost of a robust tech stack can easily add up to more than ten thousand dollars per advisor for a firm (and can be particularly burdensome for smaller firms).
The growing costs of purchasing AdvisorTech tools 'a la carte' has led to several 'All-in-One' offerings that combine features such as portfolio management, performance reporting, and trading and rebalancing. Ideally, such multi-feature platforms create at least some economies of scale (versus buying solutions one at a time), but are themselves still expensive for most firms to purchase on top of the more limited technology their broker-dealers or RIA custodians provide.
Several years ago, then-newcomer RIA custodian Altruist made waves by offering a competitive portfolio management and performance reporting solution for just $1/month to advisors (or $12/year/account, when competitors often charged closer to $40/year/account). And after becoming self-clearing earlier this year – and expanding the profitability of its underlying RIA custody services – Altruist has now announced that its 'All-In-One' investment platform will provide portfolio management software (which includes trading, performance reporting, and fee billing capabilities, as well as a client portal) entirely for free to advisors who custody entirely with the firm (advisors who work with other custodians will receive their first 100 accounts for free and be subject to the previous $1-per-account-per-month fee for the rest of their accounts). Because as Altruist founder Jason Wenk recently noted in a Financial Advisor Success podcast, RIA custodians are profitable enough in their core business that they should be able to help their advisors save on underlying software costs.
Altogether, Altruist's latest move sweetens its product offering as it competes with market leaders Charles Schwab (fresh off of integrating advisors who were previously on the TD Ameritrade platform) and Fidelity, as well as with smaller custodians, to attract advisors large and small with potentially significant technology cost savings (compared to what they have to spend to purchase portfolio management separately on top of other custodians). Further, this move (particularly if it draws more assets onto the Altruist platform) could spur these RIA custodian competitors to offer additional software features to their custody clients, which could ultimately help RIAs profitability when it comes to managing their (ever-growing?) tech stacks! (Though, perhaps, is not as positive for competing portfolio management platforms whose own pricing may be undercut in an RIA custodian software showdown!)
(Ali Hibbs | Wealth Management)
While RIA Mergers and Acquisitions (M&A) activity had been brisk for many years, with heightened demand from acquirers (often larger firms, sometimes infused with Private Equity [PE] capital) driving up valuations, the pace of deals started to slow late last year as rising interest rates and other factors served as headwinds to continued deal flow. And while 2023 is on track to be the first year in almost a decade in which RIA M&A is down, there are signs that deal activity could be picking back up.
According to data from M&A consulting firm DeVoe & Company, while year-to-date activity is down about 7% from last year, the first 11 weeks of the 3rd quarter saw a slight (2%) increase in deal flow compared to the prior-year quarter and 7% more deals compared to the 2nd quarter of 2023. While elevated interest rates have increased financing costs for external buyers, higher rates (along with firm growth) have also made internal successions more expensive and firm owners appear to be increasingly pessimistic that next-generation advisors will be able to complete a purchase (which could present more opportunities for larger RIAs and private equity firms to step in as buyers). In a survey of RIAs with between $100 million and $5 billion in assets under management, only 18% of advisors said they were confident that next-gen buyers could afford to buy their firm, down from 29% in 2022 and 38% in 2021, while 45% said they were certain they cannot afford to do so.
Ultimately, the key point is that while financing RIA M&A deals has become more expensive amid higher interest rates, the number of interested sellers (as aging firm owners seek to retire) could help spur continued activity in the years ahead, particularly if greater financing costs (and perhaps a lack of planning conversations between firm owners and potential successors?) lead to fewer internal successions.
(Jennifer Lea Reed | Financial Advisor)
When it comes to expenses that could dramatically increase in retirement, health care costs might be the first thing that comes to mind given that older individuals tend to require more (often expensive) health care services than those who are working age. However, a recent study suggests that housing expenses are actually a greater contributor to spending volatility in retirement.
According to the study by T. Rowe Price, using data from the Health and Retirement Study conducted by the University of Michigan, home-related expenses accounted for 25.1% of the variance of spending in retirement, while healthcare expenses accounted for 5.3%. Overall, about a quarter of retired households experienced a 25%-50% spending increase at some point during their retirements, while more than a fifth of households faced spending increases between 50% and 100%.
Notably, the cause of spending volatility differed across income groups. For instance, while non-discretionary expenses (e.g., housing and healthcare) accounted for 47% of spending variation for retirees with less than $50,000 of annual income (and 47% for those with between $100,000 and $149,000 in income), this effect was flipped for those with at least $150,000 of income, for whom non-discretionary expenses only explained 5% of changes in spending. Which suggests that higher-income retirees have significantly more control over their total spending in retirement (e.g., by choosing whether or not to take an expensive trip) compared to lower-income retirees (as a major housing or medical expense could eat up a significant portion of their income).
In sum, this study provides additional backing to previous findings that healthcare costs in retirement are more stable than might be assumed and indicates that housing costs are a bigger driver of spending shocks, particularly for relatively lower-income retirees. Which suggests that individuals (and their advisors) could consider planning for and/or making major renovations (e.g., making the house suitable for aging in place) and repairs before retirement to avoid having to make unexpected portfolio withdrawals during retirement (which, if they occur during a market downturn, could exacerbate sequence of returns risk) to cover these costs!
(Jack Pitcher | The Wall Street Journal)
Over the past few decades, investors have enjoyed seemingly ever-decreasing fund fees, thanks to both the introduction of Exchange-Traded Funds (ETFs), which often come with lower fees than do mutual funds, as well as a shift toward index funds (i.e., buying a fund that tracks an index such as the S&P 500), which tend to have lower fees than their actively managed counterparts.
But while index funds typically come with lower expense ratios than actively managed funds, there is also variability in fees among funds that track the same index, including among funds from the same provider. For instance, State Street's popular SPDR S&P 500 ETF Trust (ticker symbol SPY) comes with a 0.09% expense ratio (meaning that an investor would pay about 90 cents in fees each year for every $1,000 invested. But the asset manager also offers the SPDR Portfolio S&P 500 ETF (ticker symbol SPLG) that also tracks the S&P 500 but has a 0.02% expense ratio. Which means that while an individual investing $100,000 in SPY would pay $90 per year in fund fees, the same investment in SPLG would only cost $20. Similarly, Invesco's QQQ ETF that tracks the Nasdaq-100 Index comes with a 0.2% expense ratio, while its newly launched QQQM fund charges a 0.15% fee. In both of these cases, the larger, more popular (and slightly more expensive) funds offer professional traders (who trade in larger quantities than individual investors) needed liquidity when transacting large quantities of shares, suggesting that the less-expensive alternatives could be attractive to investors (and their advisors) buying smaller positions.
In the end, while the difference between a 0.02% and a 0.09% expense ratio between index ETFs pales in comparison to the cost differential between these index ETFs and an actively managed fund with an expense ratio of 1% or more, the presence of lower-cost options does offer advisors the chance to trim fund costs further for their clients while investing in the same desired indexes (though the costs of moving between funds, including the potential for realizing capital gains in taxable accounts, could play into this calculation as well)!
(Elisabeth Kashner | FactSet)
ETF investors have become accustomed to ever-declining expense ratios as issuers compete to attract assets. Nonetheless, recent data suggest that this trend could be slowing as many index ETFs hit their lower bounds for fees and investors show increased interest in certain actively managed funds.
According to data from FactSet, ETF expenses fell 0.001% during the first half of 2023, one-fifth of what would have been expected based on the drops during the previous 5 years, when asset-weighted ETF expense ratios (which take into account how much money is invested in what funds) fell by more than 0.01% per year on average. Kashner cites three factors for this slowdown in fee compression: slower inflows into ETFs (particularly into equity ETFs), price insensitivity among investors, and certain ETFs raising their expense ratios.
The relative price insensitivity reflects in part a move among investors toward more expensive, actively-managed ETF strategies. For instance, JPMorgan's Equity Premium Income ETF (which uses covered calls to generate income and has a 0.35% expense ratio) has seen $10 billion of inflows in the first half of 2023 as investors have sought investment income amid turbulent market performance over the previous year. Further, while investors choosing broad-based index ETFs tend to favor those with the lowest expense ratios (which makes some sense given that multiple funds can track the same index), those selecting actively managed funds or those focused on a certain market sector have shown a willingness to pay a premium for more-expensive options within these segments.
In addition to some investors putting money into more expensive ETFs, some ETF issuers have bucked the trend of ever-lower fees and have raised the expense ratios on certain funds. In fact, the first half of 2023 saw more ETFs with fee increases than decreases for the first time since 2017. These managers might be gambling that investors will be willing to take (or might not notice) a fee increase of a few hundredths of a percent to avoid the hassle (and the cost, in the case of ETF holdings with unrealized capital gains) of moving to a lower-cost alternative.
Ultimately, the key point is that while ETF expense ratios have tended to fall over time, a move toward actively managed funds and increased fees on some funds could lead to higher expenses for certain investors going forward. Which offers an opportunity for advisors to add value not only by creating an asset allocation that meets a client's needs (rather than chasing the latest hot sector or strategy), but also one that is implemented in a low-cost manner!
(Alicia McElhaney | Institutional Investor)
Actively managed mutual funds and ETFs face a tall task when it comes to competing with their passively managed counterparts. Because these funds tend to have higher expense ratios (given the need for more active management of their holdings), they not only have to beat their benchmarks, but this excess performance also has to overcome the higher fees. Nonetheless, actively managed funds remain popular among many investors, who seek to invest with managers assessed to be skilled or to take advantage of investment strategies that can only be accomplished through active management. And while these investors are willing to pay a premium for this active management, they might not necessarily have unlimited tolerance for higher fees.
With this in mind, researchers from the Norwegian School of Economics sought to explore how sensitive investors in actively managed mutual funds are to differences in fees within this subset of the investment universe. The researchers found that actively managed fund investors are in fact sensitive to fees, finding that a 1 standard deviation increase in a fund's fee results in a decrease in net flows of about 0.23%. Further, they found that investors differ in their fee sensitivity based on the fund type and its performance. For example, investors in value funds are more fee-sensitive than those in growth funds and that investors are less sensitive to fees when they are invested in high-performing strategies (likely because given that the excess performance likely makes up for the higher fee).
Altogether, these findings indicate that while investors in actively managed funds are willing to pay a premium for this active management, their patience for higher fees is not unlimited. Which suggests that advisors using actively managed funds could add value for their clients not only by tracking whether these funds outperform their benchmarks on a fee-adjusted basis, but also whether there might be lower-cost options available with a similar strategy and performance!
(Crystal Butler | Advisor Perspectives)
While in-person seminars have been a staple of financial advice (and product sales) marketing for decades, the use of webinars has become an increasingly popular marketing tool. According to Kitces Research on advisor marketing, 22% of advisors surveyed have used webinars as in their marketing, with 56% of these advisors gaining a client as a result of them. Further, clients gained through webinars brought in an average of $7,750 of annual revenue (near the top end of marketing tactics surveyed). Nonetheless, given the time and monetary costs involved in planning and executing a webinar (as the aggregate average client acquisition cost for webinars was $7,585), applying best practices for webinars can increase the chances that it will be a cost-effective strategy.
Hosting an effective webinar starts with selecting an appropriate topic that will allow the advisor to demonstrate their expertise and connect deeply with the types of clients they want to serve. For instance, an advisor could compile a list of potential topics based on recurring themes from client meetings. Other options include webinars offering context into recent financial headlines (e.g., changes to tax laws relevant to the advisor's ideal target client) or on seasonal topics (e.g., Medicare enrollment or end-of-year tax planning).
While webinars are often used as a marketing tactic to win new clients, they are events that require marketing in their own right. For instance, an advisor might send a 'save the date' to their email list and current clients (to invite their friends and family) a month in advance and then ramp up the visibility as the date of the event approaches, perhaps through social media campaigns, leveraging the advisor's professional network, or taking out paid ads on online platforms.
Hosting a successful webinar can help an advisor elevate their brand and attract prospective clients, but doing so requires preparation to ensure it goes off without a hitch. This includes preparing a structured outline, professional slides, and practicing the presentation in advance (to check whether it is engaging, hits key points, and fits in the allotted time block), conducting a tech check in advance (to prevent the event from being delayed or interrupted), and making sure the webinar is recorded (so that it can be viewed by those who signed up for the event but could not make it and so it can be repurposed for social media marketing or educational purposes). And following the webinar, advisors can consider guiding attendees toward a follow-up action, such as scheduling a consultation, that helps bring them along the path toward becoming a client.
In sum, webinars can be effective tools for advisors to demonstrate their expertise and connect (virtually) face-to-face with their ideal target client. And with thoughtful preparation, professional delivery, and subsequent follow-up, advisors can convert participants from interested attendees to engaged prospects!
(Lulu Cheng Meservey | Flack)
For financial advisors who also enjoy writing, creating an email newsletter can demonstrate their expertise and personality to prospective clients who sign up to receive it. Though given the time it can take to write content (time that could be used working with current clients or on other business development tactics), doing so in an efficient and effective way can increase the chances that this investment will pay off in the form of new clients.
The first step to creating an advisor newsletter is to consider the value proposition that will make someone want to subscribe. This can include what the newsletter will offer (e.g., topics that will be discussed), why the advisor is unique in offering this content (e.g., they could have advanced expertise in a certain topic area or a unique voice in communicating content), and deciding on the target audience (perhaps an individual that fits the advisor's ideal client persona).
Next, the advisor can consider the strategy for their newsletter, including how often they plan to publish (frequent enough that readers remain engaged, but not too frequent that the advisor burns out) and the length and format (i.e., one topic discussed in depth or multiple topics). Then, when it comes to producing the newsletter, careful consideration of the title (which can either preview what the reader will get in return for their time or pique their curiosity in the topic), structure (shorter paragraphs are often better for keeping a reader's attention), and including a call to action (e.g., downloading an e-book written by the advisor or scheduling an initial consultation) can all increase the effectiveness of each edition.
Ultimately, the key point is that advisor newsletters are a potentially valuable method to engage with prospective clients on a regular basis. But given the time it can take to produce them, ensuring they cover topics relevant to the prospects the advisor is trying to attract, demonstrate how the advisor can help solve these target clients' unique problems, and are written in an engaging manner can all increase the chances that writing a newsletter will be a cost-effective marketing tactic!
(Matt Nollman | Action! Magazine)
Podcasts have become prime sources of information and entertainment in the modern era and can make a car ride or dog walk more enjoyable. And while many podcast listeners (including financial advisors) have had the thought, "Hey, I could make my own podcast", following through and creating a lasting podcast can be challenging. Nevertheless, given the ability to 'speak' with individuals who might be interested in becoming clients down the line, hosting a podcast could be an effective advisor marketing tool.
Given that there are 5 million podcasts globally (and many advisor-led podcasts within that larger pool), figuring out how your podcast will stand out from the crowd can be a good first step. One way to do so is by being consistent; because while there are millions of podcasts, 44% of them have 3 or fewer episodes. Which means that creating a schedule that the advisor can stick to for the long term could increase the chances that they will outlast the competition. The next step is to decide on the intended audience for the podcast and the topics they would be most interested in (rather than the topics that appeal the most to the advisor); for instance, a podcast targeted to other advisors will likely look very different than one targeted at prospective clients (and within this latter group, the subjects and guests for a podcast aimed at retirees will be different than one targeted at busy professionals). Finally, given that podcast production requires a variety of steps (from choosing a topic, researching guests, recording the podcast, editing it (though this can be outsourced), and promoting it), creating a standardized process can increase the chances that it will be published on time.
In the end, while creating a podcast can help an advisor build their brand and demonstrate their expertise to their target clients, the significant amount of work that goes into creating episodes on a consistent basis raises the important of having a focused, organized approach. Because in a world where millions of podcasts have ended after a few episodes, advisors who are able to stay the course could find themselves with a growing audience and an increasing number of leads!
(Nick Maggiulli | Of Dollars And Data)
At the most basic level, individuals can earn income by working a certain number of hours for a set hourly wage (or perhaps earn a fixed annual salary). While these workers can dial up or down the amount of income they make based on the number of hours they work (or the number of jobs they take on), they are inherently limited by the number of hours available in a day (though pay raises could boost their income over time). But for those who want to "supercharge" their income, finding ways to leverage their labor can lead to significantly higher earnings, though these methods come with risk as well.
Entrepreneur Naval Ravikant has identified 4 types of leverage: labor, capital, content, and code. Leveraging labor involves hiring others to multiply the amount of work that can be completed (e.g., hiring an associate advisor or client service associate to help a financial advisory firm scale). On the plus side, leveraging labor can allow a business owner to earn more income by pocketing the difference between the additional revenue generated from hiring employees and the money paid to them for their labor. At the same time, employees require training and ongoing management, requiring an investment of time from the business owner that would need to be recouped.
Leveraging capital involves using other peoples' money to increase one's income. For instance, a successful investor might make a decent income investing their own money, but potentially could make much more by investing the capital of other individuals and taking a percentage of this money as a fee (and further benefit by having these fees grow alongside their clients' balances). This kind of leverage requires a specific skill set (e.g. in investment management) and the ability to attract capital in the first place, but, as many advisors recognize, can result in a profitable business.
Producing content, whether in the form of books, music, or other media, can be an effective way to scale one's expertise or skills. With few barriers to entry in many areas (e.g., anyone can start a blog), individuals can start using this form of leverage more quickly than either labor or capital (which require hiring workers or attracting capital). However, given these low barriers to entry, competition is fierce and monetizing content can be challenging.
Finally, in today's digital age, computer code has become a key source of leverage. For instance, an individual could potentially sell millions of copies of a single software tool or app created using code. Though, given the potential for outsized financial benefits, this is also a highly competitive space.
Notably, an individual is not limited to using just one of these forms of leverage, but rather can combine multiple types to grow their income further. And financial advisors are well positioned to use all 4 types of leverage to increase their income, whether it is labor (e.g., hiring staff members), capital (e.g., managing client portfolios and receiving a fee), content (e.g., selling courses or books to consumers or other advisors), and/or code (e.g., by creating an advisor technology tool for their firm that could be sold to others)!
(Tadas Viskanta | Abnormal Returns)
The concept of 'Return On Investment', or ROI (i.e., money earned divided by capital invested), is commonly used in the financial world when evaluating potential uses of one's money. For instance, an investor might consider whether they could earn a higher ROI from investing their money in the stock market versus purchasing a rental property.
Nonetheless, for many investments, the capital required is not limited to the dollars invested. For instance, purchasing and maintaining an investment property can require an investor to not only contribute financial capital, but also their time in finding a property and ensuring it is rented out and maintained. With this in mind, an alternative way to evaluate investments might be to consider the "Return On Hassle" (ROH), a concept developed by Mitchell Baldridge that not only takes into account the financial capital required for an investment, but also the time and mental stress that comes with the investment as well. Applying this concept to the previous example, someone investing in a rental property might demand a higher expected return than an investment that requires the same amount of financial capital, but less time and stress.
There are a wide range of other potential examples of investments or activities where the ROH concept might come into play, from the decision of whether to rent or buy a home, using coupons at the grocery store, or trying to withhold the exact amount of income taxes owed each year. Though notably, the ROH for a given activity will differ from person to person given their preferences. For instance, an individual who enjoys personal finance might decide that the time spent managing their finances is a good investment, while someone who would rather prioritize this time for something else might choose to hire a financial advisor.
In the end, thinking about an investment or other decision in terms of "Return On Hassle" can provide a more robust picture of the costs one will face and suggest the return they might demand for these sacrifices. Which suggests that whether you are considering your next investment or whether to 'DIY' a task or hire a professional, the ROH framework could help you make the best decision based on your individual preferences!
(Frederik Gieschen | Neckar’s Alchemy Of Money)
When you hear the word 'focus' the first thing that comes to mind might be the ability to avoid distractions and dig into your day-to-day work, which is undoubtedly an important skill at a time where there are seemingly unlimited potential distractions in modern society (step away from that smartphone!). Nevertheless, while the ability to focus on the task at hand is a valuable tool, it is also important to make sure that one remains focused on the 'right' overarching goals.
Gieschen describes these 2 types of focus as "macro focus" and "micro focus". Macro focus refers to the ability to focus on what is important. Finding this macro focus is crucial because if an individual is working toward the 'wrong' overarching goal (e.g., pursuing a career they do not find satisfying), it will be hard to feel productive, no matter how many distractions they remove from their day-to-day life. Then, once an individual knows where they are headed, micro focus (i.e., the ability to stay on task) can be deployed to better follow through on the job at hand. For example, Warren Buffett identified investing as his macro focus and then structured his day for maximum focus by shutting out the outside world while he researched potential opportunities.
Ultimately, the key point is that while being able to avoid distractions while working is a valuable skill, it is also helpful to take a step back and confirm that the task at hand is contributing to a goal you want to pursue in the first place. Which can help ensure that you are not only productive in your daily work, but also feel fulfilled by pursuing a craft that you find meaningful!
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.