Weekend Reading for Financial Planners (Nov 2-3)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Weekend reading for November 2nd-3rd:

IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - The latest inflation adjustments are out for the coming year's tax system. Key changes include: top 39.6% tax bracket threshold rises to $406,750 for individuals and $457,600 for married couples; standard deduction rises to $6,200 for individuals and $12,400 for married couples; phaseout threshold for itemized deductions and personal exemptions increases to $254,200 of AGI for individuals and $305,050 for married couples; AMT exemption increases to $52,800 for individuals and $82,100 for married couples; no change to the child tax credit (refundable up to $3,000), the kiddie tax limits (threshold still $1,000), or Flex Spending Accounts (still $2,500), nor to the IRA contribution limit (still $5,500 for 2014) or the annual gift tax exclusion (remains $14,000); and the Federal estate tax exemption rises from $5.25M to $5.34M. Adjustments for employer retirement plans (e.g., 401(k) contribution limits) will be announced separately. For further details on the dozens of other inflation adjustments under the tax system, see Revenue Procedure 2013-35.

Treasury Relaxes ‘Use or Lose’ Rule for Flexible Spending Accounts - This week, the Treasury Department announced that it was relaxing the rules on the "Use Or Lose" rule for flexible spending accounts that has been around for decades, and instead will allow health benefit plans to carry over up to $500 from their FSA from year to year. The purpose of the change is to encourage more people to use FSA, with a current contribution limit of $2,500/year, without needing to worry as much about whether unused/unneeded dollars will be lost at the end of the year (and/or without incentivizing people to do unnecessary end-of-year health care spending just to avoid losing the money in the account). Notably, it will still be up to the employer to decide whether or not to offer the carryover option, and some employers may be tempted not to, since the rules allow most employers to hold onto any money left by employees in their FSA accounts (though the comments to the Treasury's proposals did not indicate many employers were focusing on this as a key factor). If plans are amended quickly, the carryover change can be applied for the current 2013 plan/tax year, though even plans that do not amend for the new provisions must still allow individuals a grace period to incur qualified 2013 FSA expenses for up to 2.5 months past the end of the year (though employers will only be able to offer a carryover or a grace period in the future, not both). However, it's important to bear in mind that if an employee is terminated, unused amounts in an FSA are still forfeited; in addition, if an employee has more than $500 left over in their FSA in multiple years, the carryover limit is still only a single $500 amount for the following year. For further details, see IRS Notice 2013-71 and the associated Fact Sheet from the Treasury Department.

Your Insurance Is Canceled Because Of Obamacare? Now what? - This CNBC article provides some good guidance on what to do if your (or your client's) health insurance has been cancelled as a result of the Affordable Care Act - which is estimated to be as many of 50%-70% of those who currently own individual health insurance. The issue is that while the Affordable Care Act allows people to be "grandfathered" and keep their existing coverage, this only applies to coverage that hasn't been changed since the law was enacted back in 2010; for most, there have been some changes to their policies, and consequently their coverage is being cancelled (as insurers are no longer permitted to offer it) and they must instead replace it with a newer policy that meets the minimum essential benefits requirements of the Affordable Care Act. Perhaps the first key step with clients, though, is simply to help them understand that with the new health insurance exchanges, they can get coverage, guaranteed, without any underwriting or limitations for pre-existing conditions, so "losing" their coverage doesn't mean it's gone, but simply that it must be replaced. Of course, with the new higher minimum coverage levels, many may find that their new replacement policies will be more expensive, especially those who were young and healthy; on the other hand, it's also important to remember that many will be eligible for premium assistance tax credits, will means their actual out-of-pocket cost will be much lower than the initially-stated premium. The starting point for those who don't have grandfathered coverage they can keep, though, is to check out the health insurance exchange websites (which should be easier as the technology "glitches" are resolved) to see what new coverage would cost (after the tax credit assistance).

The Unknown Workaround To Healthcare.gov - From the Forbes blog of doctor-and-financial-planner Carolyn McClanahan, this article provides a great reminder for advisors and their clients who are struggling with the "glitches" and problems of the Healthcare.gov website (while it's still difficult to apply, you can at least see the available plans and their costs without registering now) - for higher income individuals, you can always just use a health insurance agent to get information and buy coverage! This alternative may be far more appealing for advisors than the current suggestions from the White House, including submitting the 11-page paper application, continuing to try to apply through Healthcare.gov itself, applying by telephone (limited success because the phone operators also rely on the problematic Healthcare.gov website!), or seeking out a local navigator to take a (paper) application. For clients whose income is below 400% of the Federal poverty level - and who would be eligible for premium assistance tax credits - they'll have to apply through the exchanges (online, by paper, by telephone, or with a Navigator's assistance); for everyone else, though, new policies can be obtained directly from a local health insurance agent (not a navigator, but an actual agent or broker), and the agents can sell the same policies at the same cost as what's available on the exchanges (and may have some off-exchange policies available as well). Of course, McClanahan notes that it's important to make sure you're working with a legitimate agent who's actually licensed and reputable (with all the health insurance confusion these days, beware the imposters and frauds out there!), and make sure you're getting the full range of quotes (as some agents are incentivized more for some companies than others), but you can always get assistance from an agent and double-check the premiums on Healthcare.gov in case you're concerned.

Health-Care Help From An Unlikely Source - On Marketwatch, this article looks at how financial advisors are increasingly making themselves a resource for guidance on health insurance, especially Medicare for retirees, as the number of retirees covered by employer health insurance has declined from more than 60% in the 1980s to only about 25% today, and the trend is expected to continue (or even accelerate) as retirees are now assured of health insurance after retirement (on health insurance exchanges up to age 65, and via Medicare thereafter). Accordingly, advisors can help clients navigate the "Medicare maze" of Part A (hospital inpatient care), Part B (outpatient care, including doctors visits and diagnostic testing), and Part D (prescription drug plans), to understand what's covered, what's not, and what kinds of premiums (for Parts B and D, with higher means-tested premiums once AGI exceeds $85k for individuals or $170k for married couples) and out-of-pocket costs may be on the table. In addition, retirees must decide whether to opt out of the 'traditional' Medicare Parts A and B to go with a Part C (Medicare Advantage) plan (which may have lower premiums but also more restrictive HMO-style benefits), or buy a Medigap supplemental plan for the gaps in Part A and B coverage. Retirees unhappy with Medicare Advantage can switch from it back to the traditional Medicare system during the annual open enrollment period, but they may have trouble getting a Medigap supplemental policy now (as those who apply outside of their initial Medicare window at age 65 must be medically underwritten and may be declined for coverage). Advisors who don't want to establish and retain this kind of expertise themselves can also look to external experts to help, like Dr. Katy Votava of Goodcare.

Retired abroad? Get ready for FATCA - This article looks at the Foreign Account Tax Compliance Act (also known at FATCA), which takes effect in 2014 and will require foreign financial institution to report information regarding "U.S. Persons" (including U.S. citizens, green card holders, and some others) back to the IRS for tax purposes; institutions that do not comply will be required to do 30% withholding on foreign investments, though the real point is simply to encourage foreign financial institutions to comply, so that the IRS can properly enforce the tax law on those subject to U.S. income taxes. In addition to the rise of FATCA next year, those with foreign assets must already comply with the recent Foreign Bank and Account Reporting (FBAR) requirements, which requires those with foreign interests greater than $10,000 of value to report those values to the IRS annually (so that they can be tracked and the IRS can determine if individuals are hiding foreign assets). The end result of all these rules are simply to ensure that U.S. citizens - who have an obligations to pay taxes on all their income worldwide - continue to pay their tax obligations, as it is estimated that there are about 7 million U.S. persons living outside the country and only about 500,000 of them file tax returns. However, the increased reporting requirements have both cost and impact on those living or retiring abroad (including kids who are U.S. citizens, even if they have never set foot on U.S. soil!), and are viewed as burdensome enough that some foreign institutions have simply decided to stop doing business with U.S. persons rather than deal with their own institutional IRS reporting requirements. Notably, some individuals have been renouncing their U.S. citizenship to permanently avoid these reporting requirements (and the underlying U.S. taxes themselves), but the author cautions that renouncing citizenship is a very permanent, one-way decision, so be very cautious before taking the leap (and recognize that the U.S. may even apply some "exit" taxes and have reporting requirements for a period of time thereafter anyway). In the meantime, those living and retiring abroad should focus on being compliant, keep a big chunk of savings locally in the foreign country (but make sure it's with a bank that's ready/willing to comply with the new reporting requirements!), and keep a credit card linked back to U.S. accounts just in case (though this introduces some currency risk).

Warning to RIAs: Don’t Let Your Privacy Policy Stay Private - From ThinkAdvisor, this article gives a good reminder of the requirement to provide a Privacy Policy to clients as an RIA. The good news is that as of a few years ago, several "model" privacy notice forms were developed for advisory firms that can be used as a starting template, or even the entire notice from start to finish, to meet the requirement. There's even a "Privacy Notice Online Form Builder" tool to cull together the correct notice details. However, using the model privacy notice and meeting the safe harbor requirements does have a series of very specific compliance rules that must be followed, as detailed in the SEC's Small Firm Compliance Guide; as a result, while the privacy notice requirement is now fairly straightforward to honor to avoid any hot water, the rules do have to be followed properly to avoid any problems, and while privacy notices may appear trivial relative to bigger compliance infractions like fraud or fiduciary blunders, it's also an easily identifiable deficiency (and one that could imply a broader lax compliance program requiring further scrutiny). Ultimately, though, some RIAs may still wish to customize and adapt their own firm, either to add more of a marketing twist to their privacy notice, to incorporate other issues not covered in the model notice, or simply because the model notice is too general for the peculiarities and specifics of a particular RIA practice.

SEC To Take 'Swipe' At RIAs That Have Never Been Examined - According to Andrew Bowden, director of the SEC's Office of Compliance Inspections and Examinations, the SEC is going to specifically target for inspection those RIAs that are regulated by the SEC but have never before been examined, especially those based in the U.S. that have been registered for more than 3 years. The effort is part of an acknowledgement by the SEC that out of the nearly 11,000 advisers it oversees, about 40% have never been examined, though about half of them have been around for fewer than 3 years and/or are not domiciled in the U.S. Compliance and regulatory consultants are expressing some skepticism that the SEC can really visit as many firms as they're targeting, and suggest that the goal is more aspirational than a real hard target; nonetheless, whether the SEC successfully examines all or just some of these unexamined RIAs in question, the fact remains that the probability of a never-before-examined RIA getting a knock on the door from an SEC examiner will be higher in 2014, especially those in business for more than 3 years.

Time to Quit: 4 Reasons to Leave Your Advisory Firm Job - From the ThinkAdvisor blog of practice management consultant Angie Herbers, this article provides some advice to employees of advisory firms about when they should think about leaving their advisory firm job, noting that while most employee/employer problems can be worked out, sometimes the employee just isn't a good fit. While Herbers advises that quitting should be the last resort, not the first, sometimes it becomes necessary, particularly in these situations: 1) Lack of training (if you want to be a lead advisor, and your firm doesn't have any kind of process to train you to be one, or at least a plan to start such a training opportunity soon, it might be time to look for a firm that does); 2) Situation doesn't fit your long-term goals (if your goal is ownership but the firm doesn't have a clear succession plan, find a firm that does, as there are plenty of older advisors looking for a successor); 3) Persistent owner behavior problems (some firm owners are micro-managers or clock-watchers or even verbally abusive, but they can fix their behavior after it's pointed out to them; if they can't, though, it may be time to leave); 4) Work/home life imbalance (you need to find the balance that's right for you, as if the imbalance is making you unhappy, it's likely to soon reflect in your work quality anyway, so see if there's a way to fix the problem, and if there's not, it may be time to move on). The bottom line is that while quitting should not be done rashly or quickly - trying to work out problems before just walking away from them - sometimes problems like these are too big to avoid, and may mean it's time to leave.

Advisers Still Leaving Wirehouses But There's No Exodus - While wirehouses continue a slow attrition of advisors, the departure pace is closer to a trickle than an exodus; over the past 3 years, the headcount at the big four wirehouses (Bank of America Merrill Lynch, Morgan Stanley, Wells Fargo, and UBS) declined by less than 2% (over the past year, slight declines at Morgan and Merrill, holding even at Wells Fargo, and slight growth at UBS), and as of September 30th there are still 54,445 advisors in total at the major firms, overseeing a whopping $6 trillion in wealth. At the same time, profitability is improving at the wirehouses, not because of proprietary products, but because an increasing number of wirehouse advisors have been shifting to the same assets-under-management model used in RIAs; for instance, Morgan Stanley earned more than 60% of its total revenue from AUM fees this year, up from 50% just a few years ago. Nonetheless, challenges remain for wirehouses, as Cerulli predicts their market share will continue to decline in the coming years; while the number of breakaways have been relatively few, an increasing number of hybrid models (like Dynasty Financial Partners and HighTower Advisors) are available to facilitate the transition, though given that many advisors don't want the burdens of responsibility associated with total independence, and many find value in the large-firm brand, it's not clear how many advisors will leave the wirehouses in the end. In the meantime, the wirehouses are suffering even more than the rest of the industry with aging demographics (wirehouse advisors are the industry's older, averaging 53, and the wirehouses have had limited success replacing them with younger talent), but predictions are that the number of intra-wirehouse changes may slow if the recent FINRA proposals are passed that would require brokers to disclose the compensation/incentive packages they receive for switching firms.

Fiduciary Standard: Findings From Academic Literature - From the IMCA Monitor, this article by Dr. Michael Finke of Texas Tech provides an overview of the academic literature on the fiduciary standard and the current advisory landscape, and was part of IMCA's open comment letter to the SEC earlier this year on the proposals for a uniform fiduciary standard. Key aspects of the findings include: moderate wealth clients are most commonly served by advisors compensated via either commissions or hourly charges, and financial planning services are more frequently provided amongst dual-registered investment advisors than investment advisors who receive compensation only from assets under management; a suitability standard gives broker-dealers greater latitude when making product recommendations to retail investors but also results in wide-ranging incentives especially when consumers are unable to recognize self-serving recommendations; mutual fund performance comparisons show that broker-recommended funds significantly underperform direct-channel funds more commonly recommended by investment advisors; simplified price disclosure can substantially improve the efficiency of the financial advice marketplace; conflicts of interest disclosure appears to be ineffective and possibly counterproductive; a stricter fiduciary standard of care in some states has not limited the supply of broker-dealer agents in those states, nor does it affect their ability to recommend products or cater to lower-wealth clients; there is no evidence that retail investors recognize differences in standards of care, which contributes to vulnerability involving self-serving recommendations; a fiduciary standard of care in medicine gives professionals an incentive to invest in knowledge and to recommend products that meet a minimum standard. Overall, this article provides a very high quality in-depth discussion of the literature on many aspects of the fiduciary standard throughout history, and is good reading for anyone who wants to really deepen their substantive knowledge on the subject.

A Departing NestWise Advisor Tells What He Learned From The Whole Experience - This article from RIABiz shares the story of Andrew Ghezzi, an advisor who was part of the NestWise platform (the LPL subsidiary aimed at bringing financial planning to the younger and middle class with a combination of monthly retainer fees and a growing base of AUM). Ghezzi shares some of the positive and negative surprises of trying to build a practice on the NestWise platform. Perhaps most notable was that while many clients were attracted to the firm online, often it was the ones in New England (Ghezzi was based in Boston) who chose him, attributing the geographic proximity as a key factor, even though it would not be feasible for him to travel all over New England for face-to-face meetings for the small $250 upfront planning fee that was part of the NestWise fee structure; while some clients did come online, the fact remained that face-to-face was often winning the clients. Nonetheless, Ghezzi remains upbeat on the model overall, and suggests that the idea of advisory proximity may have just been a crude substitute for the lack of trust inherent in any B2C online model (especially since NestWise was one of the first to break the mold in this regard); in fact, Ghezzi notes that the month leading up to when NestWise was shuttered had actually been his busiest month yet in his still-relatively-new practice. Overall, the key takeaways from what was working include: the middle class is clearly hungry for advice (not just investments, but health care, long-term care, college planning, and even simple budgeting); a "concierge" team in the home office that could provide some tools and resources to clients on a centralized (and more scaled) basis, such that advisors were only engaged when consumers wanted a deeper level of service; technology to make the process of managing clients efficient (including an online scheduling app); and financial plans that were short and to-the-point, built around data that clients filled out 100% online in advance (though some clients struggled with this), which both maximized value for clients and allowed more time for advisors to grow their practice.

John Grable on Managing Stress and Linking Research with Practice - From the Journal of Financial Planning, this article is an interview with financial planning professor John Grable, who has done a great deal of work and research on financial planning and financial planners, and is trying to promote evidence-based research in financial planning to validate what approaches and models are most effective. The interview covers a lot of ground, but key areas include: helping clients change behavior is not strictly cognitive, but also has physical and emotional reactions, such that the higher a client's stress level, the less likely they are to implement recommendations, which in turn leads to conclusions like ditching conference tables for couches when meeting clients (promotes lower stress) to recognizing that stressed planners can transfer their stress to clients (so taking better care of yourself can help your clients better implement your strategies!); the importance of good communication skills (especially if financial planning wants to break free of its currently narrow demographic and socioeconomic focus) for which Grable is co-authoring a book; the emergence of financial therapy as a field of study (the intersection of marriage and family therapy and money issues); the importance of risk tolerance and measuring it (just because clients say they're comfortable with a strategy and goal doesn't mean they really are) and the biases we can introduce to the process (even the gender of the person asking the risk tolerance questions can influence the outcome!); ultimately, Grable reiterates the importance of building the link between academic researchers and practitioners... while many "pure" academics just want to pursue knowledge and research for its own sake, Grable advocates for more "applied" research that can really be used by practitioners.

In the meantime, if you're interested in more news and information regarding advisor technology I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, including his "FPPad Bits And Bytes" weekly advisor technology update!

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!