Weekend Reading For Financial Planners (August 10-11)

Americans With Advisors Feel More Ready To Retire: Survey

(Leo Almazora | InvestmentNews)

For financial advisors, it's easy to understand the significant value they provide to clients, from the "quantitative" elements of planning (e.g., tax, investment, and retirement planning) to the "qualitative" benefits clients can experience as well (e.g., greater confidence and peace of mind around their finances). Notably, a recent survey of consumers who work with a financial advisor indicates that advisory clients are recognizing these benefits as well, demonstrating both greater preparedness for retirement and other goals as well as more confidence in their future.

According to Northwestern Mutual's 2024 Planning & Progress Study, which surveyed 4,500 U.S. adults, 75% of respondents with an advisor said they would be financially prepared to retire, compared to 45% of those without an advisor. Notably, there is a "self-selection bias" of who works with financial advisors in the first place – because of typical advisor minimums, the average client of an advisor tends to be more affluent than the average American in the first place. Nonetheless, the survey found that the differences in retirement confidence weren't solely about differences in wealth itself; part of this confidence came from knowing about how much they will need to save to retire, as 62% of those surveyed who work with an advisor said this was the case, while only 34% of other respondents indicated the same.

Other areas where those working with advisors saw a confidence boost included taking steps to address the possibility of outliving their life savings (83% versus 53% for those without an advisor), having a specific plan to pay off debt (79% versus 49%), and have a plan to address health care costs in retirement (69% versus 38%). Further, looking specifically at respondents with at least $1 million in investible assets (including those who worked with advisors, and those with such affluence who did not), those with advisors are more likely to believe they will be financially prepared for retirement compared to those without advisors (92% versus 77%) and expect to retire a year sooner (at age 61 versus 62). Millionaires working with advisors also are more likely to report having a long-term financial plan that factors in up and down economic cycles (89% versus 75%) and are more likely to have a will (81% versus 50%).

Ultimately, the key point is that advisors appear to be making a significant difference in their clients' lives, not just in amassing greater wealth, but also in giving them greater confidence that they will be able to handle any financial circumstances they face. Which suggests that advisors have an opportunity to frame the value they provide in terms of the real-world outcomes for clients (and not 'just' in hard dollars)?

IAA Demands Longer Implementation Period For SEC Customer ID Rule

(Sam Bojarski | Citywire RIA)

Under the Bank Secrecy Act (BSA), banks and other major financial institutions are required to fulfill certain "Know Your Customer" (KYC) requirements to prevent criminals, terrorists, and other unsavory actors from using the financial system to pursue their illicit ends. Notably, though, despite managing billions of dollars in assets (and potentially being an attractive medium for illicit actors to park or invest their money), investment advisers currently are not on the list of financial institutions under the BSA.

That could be changing, though, as the Treasury Department earlier this year proposed a new rule that would add certain investment advisers (SEC-registered RIAs and those reporting to the SEC as exempt reporting advisers) to the list of "financial institutions" under the BSA and would require them to implement risk-based Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) programs. Further, in May the SEC and the Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that would apply customer identification obligations to the same group of advisers as in the Treasury proposal. Under the proposed SEC-FinCEN rule, affected advisers would be required to verify the identity of each of their clients "to the extent reasonable and practicable" (e.g., by obtaining the client's name, birth date, address, and government-issued identification number), maintaining records of the information used to verify the person's identity, and consulting government terrorist watch lists to verify that the client is not listed on them.

The SEC/FinCEN proposal received a number of comments from advisors and trade groups, including the Investment Adviser Association (IAA), which in its comment letter called the rule "overly prescriptive" in certain areas and expressed concern about the burdens the rule could place on smaller advisers (with the SEC and Treasury estimating that their proposal would cost an RIA with 100 clients $10,630 to implement, with an ongoing external cost of $2,300 per year to run their customer verification programs). The IAA highlighted the 6-month implementation period between finalization of the rule and its enforcement as a potentially challenging hurdle for advisers balancing other new regulatory requirements, calling instead for an implementation period of at least 24 months for RIAs with 100 or fewer employees and 18 months for larger firms. Further, the IAA asked that the proposal be modified to exclude lower-risk clients (e.g., retirement plans) and accounts that don't involve management of client assets (e.g., non-discretionary financial planning).

In the end, while these proposed rules would add additional compliance (and paperwork) obligations for RIAs, advisers offering comprehensive planning services (as well as their investment custodians) are likely already conducting a certain level due diligence on their clients, as understanding their background and circumstances is an important part of preparing a financial plan. Which could be a 'defense mechanism' for these firms against criminals, as these actors might instead try to park their money with more investment-centric advisers and fund managers that spend less time getting to know their clients?

SEC Investigating Multiple Wirehouse Cash Sweep Programs

(Andrew Foerch | Citywire RIA)

In recent years, the decline of revenue streams like ticket charges and mutual fund fees has led wirehouses, broker-dealers, and RIA custodians to look for other sources of revenue. One of these has been earning more net interest income during the past couple years, often continuing to offer sub-3% (or even sub-1%) rates on client cash held in platform or related-bank sweep programs while lending rates advanced alongside broader interest rates, which appears to have drawn the attention of both regulators and customers.

Morgan Stanley disclosed in a quarterly regulatory filing this week that since April it has been cooperating with requests for information from the SEC regarding its "advisory account cash balances swept to affiliate bank deposit programs". Further, the wirehouse noted that it has been named in 2 lawsuits seeking class action status regarding its retail client cash sweep programs. Fellow wirehouse Wells Fargo has received similar scrutiny, being hit with lawsuits seeking class action status in recent weeks in addition to an ongoing SEC investigation since last year regarding its cash sweep program for advisory clients. Notably, both Morgan Stanley and Wells Fargo last month announced that they will raise rates on investor cash sweep accounts as well.

While much of the scrutiny has been focused on wirehouses, Charles Schwab (the largest RIA custodian) announced in July that over the next few years it will resume using third parties to manage client cash sweep accounts (presumably at a higher rate that it currently offers, which would pinch its net interest income), suggesting that other RIA custodians could feel competitive pressures (or perhaps to preempt regulatory or legal action?) to increase the rate paid on cash sweep programs. And while the increase in cash sweep rates would appear to be good news for advisory clients, as advisors can bring better yields to the table for their clients (or at least don't have to jump through as many trading hoops to minimize client cash held in sweep accounts), these moves could shake up not only the cash management business, but also, in the long run, how wirehouses, broker-dealers, and RIA custodians are compensated (in the case of RIA custodians, perhaps instituting fees for RIAs on their platforms to boost revenue?).

The Pros And Cons Of Maxing Out A 401(k)

(Amy Arnott | Morningstar)

Workplace retirement plans represent the bulk of many Americans' retirement savings, due in part to their convenience (e.g., contributions are directly withheld from paychecks), tax benefits (e.g., avoiding ongoing taxes on capital gains and dividends), and, perhaps most beneficial, the opportunity to receive matching contributions from an employer. And while a common recommendation is for individuals contribute at least up to this match (which represents an 'instant' 100% return on their contribution, though participants will want to be aware of any vesting schedules on matching contributions), a trickier question is whether they should contribute beyond this point (perhaps up to the annual limit of $23,000 [$30,500 for those age 50 and older] for 2024).

At the simplest level, increasing retirement account contributions past any match can help turbo-charge an individual's retirement savings, whether they are early in their career (and can benefit from decades of compounding) or are closer to retirement (in which case they might need to 'catch up' if they require additional savings to meet their retirement lifestyle goals). In addition, plans that offer the choice between traditional and Roth contributions can give employees flexibility to choose the option that maximizes the tax benefits based on their current and expected future income. For instance, an individual might choose to make Roth contributions in low-income years (when they might be in the 10% or 12% tax brackets) and traditional contributions when they are in a higher bracket than they expect to be in during retirement. Further, those who make traditional contributions might be able to gain additional tax efficiency by engaging in (partial) Roth conversions during future low-income years and/or (if they are charitably minded) giving through Qualified Charitable Distributions once they reach age 70 1/2.

Nonetheless, there are several cases where an individual might reconsider maxing out their 401(k) contributions. For instance, they might find that their workplace plan has high costs and/or poor-quality investment options. While an individual could roll money out of the plan once they leave the company, those who plan to stay with their employer for many years could find that these costs could counterbalance the tax benefits of saving in this account (perhaps instead choosing to save in an IRA, though they come with lower annual contribution limits [$7,000 in 2024, or $8,000 for those age 50 or older]). In addition, because accessing funds in a 401(k) before reaching age 59 1/2 can be costly (whether by paying a 10% penalty on early distributions or the direct and indirect costs of taking out a 401(k) loan), those with pre-retirement spending goals (e.g., a home purchase or paying for a child's education) might prefer the flexibility of keeping funds outside of a retirement account (perhaps in a savings account or, if education expenses are on the horizon, a 529 plan). Finally, while workplace retirement plans come with tax benefits, some individuals might receive greater benefits from contributing to other types of tax-preferenced accounts (e.g., "triple-tax-preferenced" Health Savings Accounts).

Ultimately, the key point is that the decision of whether to 'max out' 401(k) contributions is likely to depend on a given individual's circumstances (which could change from year to year!). Which means that financial advisors can play a valuable (and ongoing!) role in deciding on how much to contribute to their workplace retirement account based on their cash flow needs today and into the future as well as the relative benefits of contributing to a 401(k) versus other tax-preferenced (or even taxable brokerage or savings) accounts!

Calculating The Tax Benefit Of Investing In 401(k)s Vs Taxable Accounts

(Nick Maggiulli | Of Dollars And Data)

One of the benefits of investing in a 401(k) or other workplace retirement account is that contributions grow tax-free (i.e., without having to pay taxes on capital gains or dividends on an annual basis), avoiding the "tax drag" that comes from investing in a taxable brokerage account (though taxes are due when funds are distributed from traditional 401(k) plans). Nevertheless, given the potential downsides of keeping money in a 401(k) (e.g., reduced liquidity compared to a taxable account), advisors and their clients might consider how much the tax benefits of 401(k)s are actually worth.

Maggiulli considers a scenario where an individual makes a $10,000 annual investment into either a Roth 401(k) or a taxable brokerage account over 30 years, receiving 7% annual growth (5% price growth and a 2% dividend), with the individual paying a 15% tax rate on capital gains (with the entire investment sold at the end of the period) and dividends (he chose to make Roth contributions so that both accounts were invested with after-tax funds) in the taxable account. He finds that the Roth 401(k) ends up with $114,000 (14%) more than the taxable account at the end of the period (after all taxes have been paid). While this might seem like a significant benefit to investing in the Roth 401(k), on an annual basis it provides a 0.73% annualized benefit, which, while not insignificant, could be largely negated if the 401(k) comes with high fees and/or limited investment options (in addition to the reduced flexibility of saving in a 401(k) compared to a taxable account).

In sum, while the tax benefit of investing in a 401(k) is real, it might not be as much as some clients expect and can be weighed against the costs of making these contributions. At the same time, certain clients might experience greater tax benefits if their circumstances differ from the assumptions used here (e.g., if they make traditional 401(k) contributions and have a significantly lower marginal tax rate in retirement than they do today) and these accounts come with behavioral benefits (e.g., automatic paycheck withdrawals could reduce the temptation to spend, rather than invest, these funds), suggesting that advisors can add value to their clients by analyzing the potential tax benefits and costs for each client's unique situation!

The Hierarchy Of Tax-Preferenced Savings Vehicles For High-Income Earners

(Nerd's Eye View)

The Federal government has long incentivized saving for retirement and other financial goals by offering some combination of three types of tax preferences: tax deductibility (on contributions), tax deferral (on growth), and tax-free distributions. As long as the requirements are met, various types of accounts – traditional to Roth IRAs, and annuities to 529 plans to Health Savings Accounts - enjoy at least one tax preference, often two, and sometimes all three. For most households, these tax-preferenced accounts simply help to encourage (and tax-subsidize) savings towards various goals, and cash-flow-constrained households allocate based on whichever goal has the greatest priority. Yet for a subset of more affluent households, where there's 'enough' to cover the essential goals, suddenly a wider range of choices emerges: how best to maximize the value of various tax-preferenced accounts where it's feasible to contribute to several different types at the same time?

Fortunately, the fact that not all accounts have the exact same type of tax treatment means there is effectively a hierarchy of the most preferential accounts to save into first (up to the dollar/contribution limits), after which the next dollars go to the slightly less favorable accounts, and so on down the line, from  triple-tax-preferenced accounts such as the Health Savings Account (tax-deductible on contribution, tax-deferred on investment growth, and tax-free at distribution for qualified medical expenses expenses), to double tax-preferenced accounts such as traditional and Roth-style IRAs, to single tax-preferenced accounts such as a non-qualified deferred annuity (which is tax-deferred only). Which in turn must be balanced against even 'traditional' investment strategies of simply buying and holding in a taxable account... which itself effectively defers taxes, thanks to the fact that long-term capital gains are only taxed upon liquidation.

Notably, many of the tax preferences do come with trade-offs (such as penalties for early distribution, and rules about how the funds can be spent), but for high-income earners, those limitations simply mean it will be necessary to coordinate amongst the various tax-preferenced savings accounts at the time of liquidation (and aren't a reason to not use them in the first place), though there is also still the foundational tier of savings to provide an emergency fund (and perhaps funds to promote job mobility and business startup expenses as well, which may be particularly appealing for higher income individuals).

In the end, by considering the hierarchy of tax-preferenced accounts – ranging from triple-tax-preferenced accounts to accounts with no tax preferences – advisors can help high-income earners (and other clients) better limit their tax liabilities and maximize their growth by adhering to this hierarchy. And given that a client's circumstances (e.g., income level and types of savings needs) are likely to evolve over time, this is not just a one-time activity, but rather a valuable way for advisors to demonstrate the ongoing value they provide!

The Upsides For Clients Of Sharing Wealth Sooner Rather Than Later

(John Manganaro | ThinkAdvisor)

Many financial planning clients have a goal to leave a financial legacy to the next generation(s), leaving their remaining wealth to children, grandchildren, or others. And while financial advisors have a variety ways to help clients maximize the bequests they leave to their heirs (e.g., by assigning their assets based on the tax statuses of the assets and their beneficiaries rather than dividing them evenly), another consideration is whether clients might gain greater satisfaction from gifting (some of) their assets while they are still alive (particularly if they have more than enough to cover their retirement spending needs).

One reason clients might consider gifting during their lifetimes is that these funds often can have a greater impact for recipients when they are younger. For instance, a $50,000 gift from a parent to their child to support a down payment on a first home could have a greater financial impact for the child than if the same gift (even accounting for investment gains) were made at the parent's death 30 years later when their child might have accumulated significant assets of their own. On a more qualitative level, gifting while alive not only can allow the giver to experience the recipient's reaction to receiving it, but also perhaps get to enjoy it with them (whether it's Thanksgiving dinner in a new home or a paid-for vacation for their extended family). Another potential benefit of lifetime gifting is to allow the giver to see how the recipient uses the gift, which could serve as a preview for how they would use a (perhaps larger) bequest later on and provide the giver an opportunity to consider creating incentive trusts or other vehicles to manage how the funds are distributed.

Ultimately, the key point is that lifetime gifting can often have a greater impact on the beneficiaries of this generosity than does receiving an inheritance (and can provide ongoing benefits to the individual making the gift during their lifetime as well!). Which suggests that starting a conversation about lifetime gifting could allow advisors to help their clients get the most benefit from their planned giving and to consider how it might fit into their financial plan.

7 Considerations For Providing A "Living Inheritance"

(Randy Fox | WealthManagement)

Parents naturally want to help their children thrive, which not only can involve money spent on their upbringing and education (e.g., helping to pay for college) but also leaving assets to them after the parents pass away. In between, though, parents might consider gifting their adult children money or other assets while still alive as a form of "living inheritance".

Taking a "living inheritance" approach can come with a range of tax benefits, particularly for those with potential estate tax exposure. For instance, gifts up to the annual exclusion amount ($18,000 in 2024, or $36,000 for a married couple, per recipient) do not require the givers to file a federal gift tax return or have it count toward their lifetime exemption amount (potentially reducing the size of the parents' eventual estate for estate tax purposes). At the same time, some parents might choose to accelerate gifting during the next year and a half before the current gift and estate tax exemption ($13.61 million per individual or a combined $27.22 million for a couple) is set to sunset at the end of 2025 (when it could be cut in about half, absent legislative intervention). These are in addition to potential qualitative benefits like providing financial relief for the recipient (e.g., to help pay for a large medical bill) and the opportunity to see them enjoy the money.

Nonetheless, there are potential downsides to giving a "living inheritance" as well. To start, parents will likely want to ensure (perhaps with the assistance of a financial advisor?) that any gifting allows them to achieve their other goals within a sustainable financial plan (even if it means giving up some tax benefits?). Also, many parents might be concerned that their gifts will reduce their children's incentive to earn up to their capabilities (though parents might see this as a plus if it allows a child to pursue a lower-paying but more-meaningful job). Finally, there might be considerations surrounding how a gift to one child will be seen by others (if they don't receive the same amount) to avoid family friction.

In the end, while a "living inheritance" can make sense for many families, assessing the best way to give (both in terms of financial costs and benefits as well as qualitative impacts of the giving) is an important step to make sure parents (and grandparents) get the most out of their generosity!

The Benefits Of Gifting Privately Held Business Interests

(Anthony Venette | WealthManagement)

Many business owners hope to leave a legacy through their firm, both in the form of the company continuing to operate after their deaths and the ability for their heirs to financially benefit from receiving ownership interests in the firm. Nonetheless, while some business owners wait to transfer shares in the business until their deaths, doing so during their lifetimes can potentially provide tax benefits to themselves and their heirs.

To start, given that businesses often appreciate in value over time, gifting shares of the company well before an owner's death can allow the owner to transfer more wealth to their heirs while using less of their lifetime gift/estate tax exemption ("locking in" the value of the shares today, when they are likely to be worth less than when the owner dies). Another valuation-related factor is that a business owner could take advantage of minority discounts when gifting shares, as the lack of control and marketability of these shares lead them to have lower valuation than a transfer of a majority stake. Finally, the potential expiration of the higher lifetime gift/estate tax exemption under the Tax Cuts and Jobs Act (TCJA) at the end of 2025 means that gifting now could allow a business owner interested in passing on shares of their company to take advantage of these higher limits before they are (potentially) cut in approximately half.

Altogether, while gifting shares of a business can potentially be a tax-savvy move, financial advisors can help business-owner clients not only determine the optimal way to do so for tax planning purposes, but also explore their broader goals for the business and their legacy, which could inform how (and whether) they gift shares now, throughout the remainder of their lives, and/or at their death.

The Deeper Meanings Of Money In Relationships

(Joy Lere | Finding Joy)

The topic of money can generate a range of emotions for an individual, depending in part on their past (i.e., "money memories") and how these are driving their present experiences with and feelings about money (i.e., "money scripts"). Notably, these messages and feelings can become even more complicated when an advisor is working with a couple and not just an individual given that each partner will have a different background as well as the dynamics involved when partners make decisions together.

To start, money can influence feelings of power and control in a relationship. For instance, if one spouse makes significantly more money than the other, the lower-earning spouse might feel like they have less power to make decisions in the relationship (or vice versa). In addition, while money is associated with feelings of security (or a lack thereof) for many individuals, this relationship can be even trickier when working with a couple who might have very different views on what it means to be financially secure (which could lead to conflict over spending and saving decisions). Money can also raise feelings of autonomy and dependence, which can manifest themselves when it comes to deciding how a couple will organize their finances (e.g., totally joint, completely separate, or somewhere in between). Further, money can be linked to feelings of significance and self-worth (e.g., one partner might see their self-worth drop if they lose their job and feel like they are not contributing financially to the household). Finally, money is closely linked to feelings of trust and a (lack of) communication, as "financial infidelity" (e.g., purposefully hiding accounts or spending from a partner) can create significant tension in a couple's relationship.

Ultimately, the key point is that serving client couples presents unique challenges for advisors, not only because they might have differing financial goals, but also because their underlying feelings about money could create ongoing conflict in the relationship. Which suggests that when clients are arguing about money, the answer might not be something that can be solved with financial planning software, but rather perhaps through dialogue, perhaps leveraging financial therapy techniques (and facilitated by a trained advisor or other professional).

How Couples Are Dividing Accounts, Expenses Today

(Dalvin Brown | The Wall Street Journal)

Many married couples decide to merge their finances as completely as possible, for example creating a joint checking account that receives each partner's income and pays for their expenses. However, other couples prefer to keep some or all of their finances separate; for example, a survey from Bankrate found that while 39% of U.S. adults who were married or living with a partner completely combine their finances, 38% have a mix of joint and separate accounts, and 24% keep their finances entirely separate.

For these latter 2 groups, a key question is how to divide expenses. At the simplest level, a couple might decide to split expenses 50/50, perhaps each contributing to a joint "expense account" used to pay bills while keeping the rest of their money separate (according to expense-splitting tool Splitwise, 97% of couples on the platform use a 50/50 split, the default setting). However, given that the partners are unlikely to make the same amount of money, some choose to contribute proportionately to the "expense account" based on their relative incomes (e.g., one partner paying 60% and the other 40%). In this way, each partner can have "personal" money that goes to their spending priorities while household finances are being met (couples who manage their finances jointly can choose to do this as well by giving each partner a set amount of money for "no-judgment" spending).

In the end, while some research suggests that couples who merge their finances tend to be happier in their relationships, the decision of whether to combine finances is both functional (i.e., whether to pay bills out of a joint account or separate accounts) and emotional (i.e., while some individuals might see having a joint account as a sign of trust, others might want to maintain a separate account to feel more independent). Which suggests that couples who are able to manage their finances in a way that breeds transparency and trust (perhaps with the facilitation of a financial advisor?), could be best positioned for many happy years (financial and otherwise) ahead!

Recognizing "Tightwad" And "Spendthrift" Tendencies In Couples

(Scott Rick | Next Big Idea Club)

Financial advisors can likely recall current or past clients who are, as Rick refers to them, "tightwads" (i.e., people who experience a lot of psychological distress when considering optional purchases) or "spendthrifts" (i.e., those who don't experience this psychological distress). For individuals, it's up to themselves to manage these tendencies (e.g., for spendthrifts, not spending beyond their means), but managing these attitudes can be particularly tricky for couples who might have divergent dispositions.

Notably, Rick and fellow researchers found that "tightwads" and "spendthrifts" are more likely to marry each other than they are to marry someone like themselves (possibly because they dislike the attribute in themselves and want to be with someone different). While partners with different spending attributes can serve as a helpful check on each other (i.e., a "tightwad" partner could help reign in the "spendthrift's" spending, while the "spendthrift" might encourage the "tightwad" to spend on things they truly enjoy), if this devolves into constant needling it could create conflict in the relationship. One potential way to avoid this path is for couples to aim for financial "translucency" rather than full financial "transparency", choosing to have a big-picture understanding of how the other is spending money rather than tracking every dollar the other spends (which could lead to nit-picking by one partner or the other).

Altogether, while the "tightwad/spendthrift" dynamic is almost certainly falls along a spectrum, partners who can recognize these tendencies in themselves and each other (perhaps aided by a financial advisor who has seen this pattern before?) can start to take steps to show more gratitude for what they bring to each other and work to ensure small disputes don't blow up into major conflicts!

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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.