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Weekend Reading For Financial Planners (May 28-29) 2022


Executive Summary

Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with the news that an advisory firm owner has filed a lawsuit against his former employer (RIA giant Creative Planning), alleging that the firm coordinated with several of the largest RIA custodians to limit his access to their custodial platforms for his new firm, and that their lucrative retail client referral programs are similarly being coordinated amongst a subset of (primarily large) firms that are willing to put their clients into products that generate the custodians more revenue. While the allegations have yet to be adjudicated (and the defendants vigorously deny the claims), the situation highlights both the often complicated and messy divorces that occur when an advisor leaves to start their own firm, and casts a new light on questions of how RIA custodians actually decide when to allow an advisor breaking away from an RIA to start their own on the platform, and the terms under which firms get access to the custodians’ client referral programs.

Also in industry news this week:

  • Debate is expected to begin soon on a bill that would extend the solvency of the Social Security trust fund by subjecting wages over $400,000 to the payroll tax
  • A recent study shows that while most advisor social media posts are educational or branding-related, the posts that actually generate the most engagement are those in which the advisor takes a personal stance or shares more of their personal lifestyle

From there, we have several articles on the current state of financial markets:

  • The four different types of bear markets and how recessions often drive the length and depth of stock market downturns
  • Why implementing an investment plan can often introduce absolute and relative risks that can draw clients’ attention away from their long-term goals
  • Why putting the current market drawdown into historical perspective can help clients understand that downturns are normal and to be expected

We also have a number of articles on the competition for advisor talent:

  • How Fidelity’s hiring spree reflects a turn toward human-provided advice and could make the hiring environment more challenging for RIAs looking to hire their own talent
  • Ally Invest is the latest brokerage firm to begin offering human-provided advice, bringing in advisors and attracting clients with moderate levels of assets
  • Why advisory firm executives attending the recent DeVoe Elevate conference appeared to be more concerned with simply attracting and retaining talent than striking new deals

We wrap up with three final articles, all about recent changes to the workplace:

  • How companies can generate innovative ideas while working in a virtual environment
  • How firms have changed the design of their conference rooms during the pandemic to create more comfortable and functional spaces
  • How company team retreats have changed during the pandemic and why both in-person and virtual options are viable

Enjoy the ‘light’ reading!

Adam Van Deusen Headshot

Author: Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for non-profits in the Northern Virginia area. He has an MA from Johns Hopkins University and a BA from the University of Virginia.

Read more of Adam’s articles here.

(Tobias Salinger | Financial Planning)

When an employee leaves a company to start their own business, the relationship with their previous company can often be fraught. This is especially true in the financial advisory business, as a departing advisor might try to attract clients they brought to or worked with at their previous firm (and/or potentially some of the former firm’s employees). And while non-compete clauses and other agreements can cover these issues to some extent, there can still be bad blood between the departing employee and their former firm for an extended period.

This appears to be the case for Stephen Greco, the former director of wealth management at RIA giant Creative Planning. Greco left Creative in 2017 and started his own RIA, Spotlight Asset Group, but also said he filed a whistleblower complaint with the Securities and Exchange Commission that included data that allegedly showed as much as 50% of all TD Ameritrade retail client referrals were going to Creative Planning (amounting to 78% of Creative’s net new assets from 2014 to 2016) and that Creative intentionally recommended transactions which boosted fees clients paid to TD (impliedly in order to receive the bulk of TD’s referrals). Notably, though, the SEC has not issued any enforcement action against Creative Planning with regard to allegations Greco says he raised, and Creative in 2020 filed a suit against Greco accusing him of breaching a contract signed upon his departure from Creative, including by attempting to recruit away its employees and making disparaging and false remarks about the company’s growth to reporters. That suit is pending in a Kansas state court.

And now, Greco has filed a lawsuit alleging, among other claims, that Creative and three major RIA custodians – TD, Charles Schwab, and Fidelity – have colluded in their programs that refer clients from their parent company’s retail brokerage divisions to RIAs. The suit alleges that in exchange for incoming clients, preferential prices, and some free products and services from the custodians, participating RIAs make revenue-sharing agreements subject to “performance metrics” ensuring the firms maintain a certain level of business with the custodians. Some industry observers have suggested that because of the business minimums required to participate in these programs, large RIAs are able to grow significantly while shutting out smaller firms.

Further, the lawsuit alleges that the custodians removed Greco’s new firm from their platforms in retaliation for his whistleblower complaint to the SEC and a complaint with the Department of Justice about the custodians’ allegedly unfair business practices. TD terminated its custodial relationship with Spotlight in 2019 after the firm hired two former TD employees, and Schwab cut ties with Spotlight that year as well (Spotlight had also hired a former Schwab advisor). Spotlight’s other custodian, Fidelity, dropped Spotlight in 2021. The defendants in the case, which include Creative, the three custodians, as well as Creative CEO Peter Mallouk and its private equity backer General Atlantic Service Company, have all strongly denied Greco’s claims.

While these claims are ultimately still just allegations and have not been adjudicated (in employment disputes, there are always two sides to the story), they nonetheless raise serious issues for firms and their advisors who want to break away. Because of the importance of the RIA-custodian relationship (and the ongoing consolidation among custodians), the ability of a former large-firm employer to influence custodians to drop their former employee’s new firm (or custodians dropping RIAs that hire their former employees) could chill the growth of new RIAs (who need a quality custodial relationship to service their clients’ needs). Similarly, because RIA custodial referral programs have been such a driver of growth for RIAs that participate, the allegations raise serious questions about how exactly the platforms determine which advisory firms are eligible, and whether in any cases there are ’quid pro pro’ arrangements that advisory firms may get preferential treatment if they use more of the custodian’s proprietary products or other ‘revenue centers’ for the advisor’s clients. Which means regardless of how this particular matter of Greco vs. Creative Planning is resolved, the questions of how RIA custodians determine eligibility for their referral programs, and how they make the determination of when a new breakaway RIA can launch on the platform of their prior firm (or not), may linger far longer.

(Melanie Waddell | ThinkAdvisor)

The future ability of Social Security to pay out full benefits to recipients has been a topic of concern for current and future retirees for years. With the 2021 Social Security Trustees Report estimating that the Social Security trust fund will be depleted by 2033 (at which point Social Security would ‘only’ be able to pay 76% of scheduled benefits), efforts have begun in Congress to remedy the situation.

Amid this background, the House Ways and Means Social Security Subcommittee will soon debate a bill dubbed “Social Security 2100: A Sacred Trust” to address this issue, according to the bill’s sponsor, Rep. John Larson. To increase revenue for the program, the proposed legislation would seek to shore up Social Security by applying the payroll tax to annual wages above $400,000 (currently the payroll tax is capped at the first $147,000 of wages). Among other measures, the bill also proposes changing the way the annual Cost-Of-Living Adjustment (COLA) is calculated from the current Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the CPI for Americans 62 years of age and older (CPI-E) to better reflect the expenses faced by Social Security recipients. It also expands benefits for a range of beneficiaries, including disabled workers, spouses, and young adults, though these would sunset after five years. The bill would keep the Social Security trust fund solvent through 2038.

Some critics of the bill argue that the latest version of the bill comes up significantly short in shoring up Social Security when compared to a similar bill proposed in 2019. In addition to taxing earnings above $400,000, the previous bill would have gradually raised the payroll tax rate from 12.4% to 14.8%, which would have kept Social Security solvent beyond the year 2100. In addition, if the proposed benefit expansion in the current bill were to be extended beyond the initial five-year window, the trust fund’s depletion date could arrive sooner than 2038.

So while this latest bill works its way through Congress, the key point is that there remain several years for legislators to act before the trust fund runs out and benefit reductions potentially become necessary. In the meantime, advisors can work with their clients to ensure their Social Security statements are correct (so that they receive the benefits to which they are entitled) and provide an analysis of how potential benefit reductions could impact their financial situation (as some clients might be surprised to learn that potential benefit reductions might not have a large impact as they think!).

(Ryan Neal | InvestmentNews)

Social media has become a part of daily life for advisors and consumers alike. And given the opportunity to use social media posts to reach potential clients, more and more advisors have turned to this medium to demonstrate their expertise and engage with prospects. But while a growing number of advisors have recognized the potential value of social media, a recent study suggests that most might not know which platforms and types of posts are most likely to actually generate consumer engagement.

Exploring this question, digital marketing firm Hearsay this week released its 2022 Financial Services Social Selling Content Study, which analyzed 14 million published social media posts from across the financial services industry, including 3.6 million from wealth management firms. The study found that, while financial education (29%), corporate branding (22%), and news (21%) made up the bulk of posts at wealth management firms, these were not the types of posts that generated the most engagement. Instead, posts about a firm’s or advisor’s personal stance on issues (which only made up 1% of posts) generated the most engagement, while lifestyle posts (15% of total posts) were the second most engaging category. The study also found that LinkedIn remains the most popular social media platform for financial advisors, with text posts on the platform driving the most engagement with followers.

In addition to using social media to post unique perspectives or insights (which generated the most engagement), the study found that advisors can also improve their engagement by ensuring that their social media profiles are complete and include a photograph, a personal summary, and contact information (because consumers often want to know who an advisor is in addition to what they think!).

Ultimately, the key point is that social media is an avenue for advisors to connect with potential clients, offering advisors an opportunity to augment and amplify how they present themselves to the public. And while some advisors might be nervous about posting bold stances on social media (given that they might turn off some potential clients) or more personal (i.e., “lifestyle”) details about themselves, the Hearsay study suggests that advisors who are willing to do so are likely to drive more engagement from consumers by showing up as their own authentic and unique selves!

(Charlie Bilello | Compound Advisors)

The stock market has performed poorly in 2022, with broad indices seeing double-digit declines and many individual stocks experiencing drops well beyond 50%. Confirming the weak performance, the S&P 500 on May 20 officially entered a bear market on an intraday basis, falling 20.9% from its high on January 4. And so, with the market entering bear territory, investors (and their advisors) are wondering whether further losses might be ahead.

Unfortunately for those who want definitive answers, the fact that a bear market has begun does not necessarily indicate where the market will head next. For example, there have been several short and shallow bear markets (most recently in 2018 and 2020) in which the bear market lasted 5 months or less from peak to trough, with a maximum decline of 36% (in 1987). Other bear markets (e.g., 2000-2002 and 2007-2009) have included drawdowns lasting more than a year with over 50% losses. Still other bear markets see slow, but protracted declines (e.g., the 28% decline between 1980 and 1982). And of course, the worst bear market remains the 1929-1932 decline during the Great Depression, which saw the S&P 500 fall 86% over the course of 33 months.

And while no indicator can provide a definitive answer on whether the current bear market will end soon or stretch into the future, a shorter and shallower bear market is more likely if the economy avoids going into recession: the 10 bear markets since 1929 that did not coincide with a recession averaged 12 months in duration and a 29% decline, while those that accompanied recessions saw an average decline of 42% over 16 months.

In the end, one of the ‘costs’ of investing is the lack of certainty over where markets are headed in the future. And while the current bear market likely has many advisory clients on edge, advisors can not only use historical data to demonstrate how similar markets have performed in the past, but can also help clients create new narratives to navigate the stressful market conditions.

(David Hultstrom | Financial Architects)

Many prospective clients approach financial advisors because they want to know whether they have enough money to reach their financial goals. And thanks to financial planning software and simulation tools, advisors can give clients an idea of the likelihood that a given course of action will allow them to achieve their goals. But while achieving these financial goals is important to clients, they often also want the ride to be smooth along the way.

And so, while an advisor can create a plan that has a strong chance of success (reducing the risk that a client will not be able to achieve their financial goals), the volatility of markets introduces other risks. This includes ‘absolute risk’, the risk that a client’s portfolio will fluctuate with the gyrations of the market, as well as ‘tracking risk’, the risk that a client’s portfolio will underperform the portfolios of their peers. The problem for advisors is that the actions required to increase the chances a client reaches their goals often increase the amount of absolute and tracking risk for a client.

For example, some clients might need to have a large percentage of their portfolio in stocks for it to grow sufficiently to meet their goals. In this case, a client portfolio with 80% in stocks and 20% in bonds is likely to experience more volatility than one with 60% in stocks and 40% in bonds. And while this allocation makes it more likely that the client will reach their financial goals, it introduces more absolute risk, as their portfolio is likely to see sharper declines during market downturns. This could require the advisor to remind the client during a downturn that taking the absolute risk was necessary to improve the odds that they would achieve their financial goal.

In other cases, suggesting a diversified portfolio to reduce volatility could lead to tracking risk. For example, a client with an equity portfolio consisting of 50% U.S. stocks and 50% international stocks will see their performance trail the portfolios of others with a 100% equity allocation to U.S. stocks when U.S. stocks are performing better. Despite diversification being an important part of the plan to achieve their financial goals, it could be frustrating to the client that their portfolio performance will sometimes lag behind that of their peers.

The key point is that while advisors can construct portfolios to help clients reduce the risk that they will fail to reach their financial goals, doing so often comes at the price of introducing the risk that they will face increased market fluctuations (such as the current downturn) and/or weaker relative performance compared to others. This suggests that the advisor’s role is not just technical (constructing a financial plan and asset allocation based on the client’s financial goals), but also helping clients work through the psychological risks that come with implementing their financial plan!

(Nick Maggiulli | Of Dollars And Data)

Almost every investor has lived through at least one bear market. Whether it was the short-but-sharp pandemic-related bear market of 2020 or the lengthy, deep bear market associated with the 2007-2009 Great Recession, investors have experienced a range of market downturns. However, notwithstanding this experience, a new market decline can make some investors panic and worry that this downturn will be much worse than those they have previously experienced.

One way to put the current market downturn into perspective is to compare it to the frequency and magnitude of previous declines. For example, the U.S. stock market typically declines by at least 10% every other year, 30% every 4-5 years, and more than 50% once a generation. In addition, an investor can consider the run-up to the most recent decline; with the S&P 500 having returned 31% in 2019, 18% in 2020, and 29% in 2021, the recent decline has only eaten away at a portion of those gains. While this might be cold comfort in the midst of a drawdown, it shows that regular, and often significant, downturns are to be expected (and are typically built into the assumptions advisors make when constructing financial plans!)

And so, given the frequency and range of market declines, advisors can play an important role in helping their clients choose and stick with an asset allocation that will help them reach their financial goals while also matching their risk tolerance and risk capacity. In addition, a market downturn can be a good time to assess whether a client’s stated risk tolerance during good times aligns with their behavior when markets turn south!

(Lisa Shidler | RIABiz)

The introduction of robo-advisors, with their sleek platforms and relatively lower costs compared to human advisors, brought predictions from some industry observers that human advisors would suffer as consumers turned to the robos. Several asset management giants would eventually join the robo movement, acquiring smaller firms or creating solutions of their own. But robo-advisors never achieved a dominant market share (due in part to high client acquisition costs and small account sizes) and today, it’s become clear that robo solutions actually work best and gain the most traction when paired with a human financial advisor.

Given the lack of momentum from pure robo solutions, several of the largest asset managers have scaled up their human advisor services. And now, Fidelity is in the process of making a major move in this competition, with plans to hire 28,000 new employees, with 16,000 hired in 2021 (when their total headcount at the end of 2020 was ‘only’ 49,000), and another 12,000 hires planned for this year, in an apparent attempt to compete specifically on knowledgeable human service (as almost 80% of the 2021 hires were in client-facing roles) rather than on technology or products. For which the firm intends to use a “dynamic working” environment that will blend in-person and remote work.

In the end, Fidelity’s hiring binge (along with growth in human advisor services at Vanguard and Schwab) could not only reduce the size of the talent pool for independent advisory firms looking to hire, but could also attract clients that might have otherwise turned to an independent advisor for human service. And so, this trend increases the importance for advisors of gaining expertise and offering more specialized services to a niche clientele in order to offer a more specialized level of service that the more generalist asset management giants with their ‘call center’ CFP professionals will have a hard time matching!

(Ryan Neal | InvestmentNews)

Amid substantial fee compression for brokerage services, many asset managers have sought ways to transition brokerage clients to higher-fee services, such as robo- or human-provided advice. From Vanguard’s Personal Advisor Services to Schwab Intelligent Portfolios Premium, firms are competing to not only bring in new investors but also maximize the revenue generated by these customers.

And now, Ally Invest, the online brokerage division of digital banking firm Ally Financial, is offering clients human-provided financial planning advice. Investors with a minimum of $100,000 are eligible, and the annual advisory fees will range from 0.75% to 0.85% based on the portfolio balance. And while both the asset minimums and fees are higher than similar services offered by Vanguard and Schwab, Ally is offering more personalized service by giving clients a dedicated advisor rather than having them interface with a team or call center. In addition, Ally’s clients can also receive advice on held-away assets that are aggregated on Ally’s platform.

While Ally is starting out with 15 advisors, growth in the platform’s popularity would likely lead to increases in its advisor headcount (and the competition for talent with RIAs). In addition, the lower minimums offered by Ally and similar firms could attract younger investors with account balances below many RIAs’ minimums, gaining loyalty with these clients with the hope that their portfolios will grow into even more valuable clients down the line.

The key point is that RIAs face increasingly stiff competition for attracting talent, from established asset managers and upstarts like Ally. This increases the importance for firms of optimizing the hiring process and creating training and career advancement opportunities (as well as offering competitive compensation) to stand out as an employer of choice!

(Rocco Aloe | RIABiz)

RIA mergers and acquisitions have been on a torrid pace the past couple years, with both the volume and valuation of new M&A deals setting a record in 2021 and the median firm valued at 9x EBITDA (and some deals going as high as 13x EBITDA), a 12% increase from the previous year. But for this pace to continue, RIAs will have to continue to demonstrate the ability to generate revenue, and one of the key drivers of revenue − attracting and retaining top talent − appears to be top of mind for many RIA leaders.

The recently held DeVoe Elevate conference, which usually focuses on the inner workings of dealmaking, saw a shift this year, with the talent crisis taking center stage. In fact, DeVoe & Company CEO David DeVoe said in his opening speech that perhaps employees should come first, ahead of clients. In turn, speakers primarily discussed the factors that keep employees at a firm (both those that are hired in the first place, and acquired in a deal), including recognition, wellbeing, career paths, and continuing education, as well as creating incentives that promote growth, retention, and teamwork. Further, firms can keep employees engaged by ensuring they understand how their work impacts the importance of the firm. In addition, maintaining company culture through the pandemic was a concern of attendees, with 26% of attendees saying that the pandemic has affected the culture of their business.

The “Great Resignation” has hit many industries, and the RIA space is not likely to be an exception, especially given growing competition from larger asset managers. And so, because talent is one of the main drivers of RIA revenue (and valuation), focusing on how to attract and retain employees is one of the keys to growth, whether or not a firm is preparing for a sale!

(Claire Cain Miller | The New York Times)

When many companies made the switch to remote work at the start of the pandemic, many features of office life were lost. From brainstorms in conference rooms to conversations around the proverbial water cooler, many social aspects of work life shifted online. The key question, though, is whether the move to virtual work reduced the idea generation and innovation that could come from chance encounters between employees in the office.

It turns out that there is little data demonstrating that in-office interactions are a significant spark of innovation-generating interactions. While some innovation-generating occupations, such as those that involve physical objects, require in-office work, other fields have found ways to foster new ideas in the virtual workspace. For example, while video chats (on platforms like Slack or Microsoft Teams) have become ubiquitous parts of virtual office life, teams that leave the video function on while going about their normal work could find it easier to float ideas by their teammates. And for those who might feel nervous about shouting out an idea, shared documents (through tools like Google Docs or Evernote) can offer a place to write down new ideas or build on those of others. And for companies who have retained their office space, inviting employees in for occasional brainstorming days can allow for in-person collaboration while still allowing for the flexibility of remote work during the rest of the week.

And so, advisory firms that have transitioned to a virtual or hybrid office can take steps to promote interactions among their employees and maintain firm culture. For example, while team members will not always be physically together, it is important that everyone in the firm understands the firm’s core values and its direction. In addition, leaders can consider how to promote social interaction among employees, from in-person or virtual firm-wide retreats, or encouraging employees to schedule ‘coffee chats’ to get to know one another and to hear about what they are working on (and perhaps generate new ideas!). The key, though, is to recognize that innovation can happen in a virtual office, but it’s up to the firm to create the conditions to make it happen!

(Jane Margolies | The New York Times)

For many individuals, one of the benefits of working from home during the pandemic has been the ability to avoid long meetings in the office conference room. Often staid and stuffy, many conference rooms were more likely to induce a nap than innovation.

But with many companies moving to a full-time hybrid or virtual remote format, some are considering how to redesign meeting spaces to make them attractive to employees when they do come into the office. For example, some companies have elected to change the size and shape of their conference rooms. Rectangular rooms with long, formal rectangular tables appear to be out, with square tables (which better allow people to see and hear each other and avoid creating a ‘hierarchy’ with someone sitting at the head of the table) and more modular rooms (that can better adjust for differently sized groups) becoming more popular.

In addition, because smaller meetings have become more popular as fewer workers have come to the office, some companies have opted to create cozier settings, such as having a few plush chairs surrounding a coffee table. And some firms have even moved their conference spaces outside, creating natural settings that can both spark creativity and provide employees with fresh air (the importance of which has only increased during the pandemic). Also, as videoconferencing has become more common (as employees working remotely might want to call into a meeting taking place in the office), the latest conference rooms are outfitted with camera, speaker, and monitor systems that allow all participants to be seen and heard.

And given the importance of office design for financial advisors, many firms might consider how their work and meeting spaces might be redesigned to reflect changes to how employees work together and how the firm meets with clients. From building a “thinking room” to designing a space that signals an advisor’s personality and competence, there are many options to create an environment that is not only employee-friendly, but also is able to attract more clients!

(Jim VandeHei | Axios)

Working virtually has brought many benefits to workers and companies alike. From shorter (or non-existent) commutes to schedule flexibility, the virtual working environment comes with several advantages. But while videoconferencing has replaced in-person meetings and instant messaging has replaced ‘watercooler’ talk at many firms, these daily activities can be insufficient for firms to have ‘big picture’ discussions about where the company is going.

Before the pandemic, many firms engaged in occasional company-wide retreats to bring managers and employees together in one place to not only discuss the company’s direction, but also to brainstorm ideas for new services and to create a place for employees across teams and offices to socialize and build firm-wide camaraderie. And while the pandemic temporarily shut down in-person retreats, many companies are now considering how to adapt these events going forward.

Some firms are choosing to return to in-person retreats. Given that many employees at a company might have been hired during the pandemic, some might have never met each other in person, and so an in-person retreat, with its formal sessions as well as informal meals and social events, can create connections among employees across offices. In addition, with a recent study showing that in-person brainstorms generate more creative ideas than those that take place on video, an in-person retreat could be more effective at coming up with new service offerings or ways to improve the workplace.

Nevertheless, virtual retreats can be effective as well. Given that employees are now better set up for online communication (whereas setting up a video-based retreat might have been more challenging early in the pandemic), a virtual retreat can be held with little technical difficulty. In addition, because retreats that are held overnight can create burdens for those with care responsibilities, moving virtually can create a more inclusive atmosphere. In the end, the important thing is to set an expectation that employees can put aside their day-to-day work and fully immerse themselves in the retreat.

Ultimately, the key point is that retreats can be a useful tool for building firm cohesion and for generating new ideas, whether they are held in person or virtually. And at a time when employees are often spread out in the remote work environment, retreats might be more important than ever!


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, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.

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