Nerd's Eye View blog

Planning For Changes In Client Marginal Tax Rates After TCJA’s Sunset

July 10, 2024 07:02 am 0 Comments CATEGORY: Taxes

The Tax Cuts and Jobs Act (TCJA), passed in 2017, was one of the most extensive pieces of tax legislation to be passed in the last 30 years, touching many aspects of individual, corporate, and estate tax. However, most of TCJA's provisions are set to 'sunset' at the end of 2025 – an event that would have at least as much impact as TCJA's initial passage.

From an advisor's perspective, TCJA's impending expiration raises the importance of planning for clients who will potentially be impacted, which, given the law's broad scope, could be nearly every client. And yet, the timing of the sunset provision at the end of 2025 means that the actual fate of TCJA will largely hinge on the uncertain outcome of the 2024 U.S. elections. In reality, any law that extends or replaces TCJA would likely not pass until well into 2025, creating a very limited window (potentially only days long) in which to implement any planning strategies. And so even though there's uncertainty today about whether or not TCJA will sunset as scheduled, it's still not too early to start making plans for either contingency so they can be triggered quickly once there is more certainty.

For many clients, one of the biggest questions is whether they'll have a higher or lower marginal income tax rate after TCJA expires than they do today, and whether it is therefore reasonable to accelerate income – i.e., to recognize it before the end of 2025, such as by converting pre-tax retirement funds to Roth – or to defer income to be recognized in 2026 or beyond. And although TCJA's reputation as a broad tax cut might give the impression that everyone's tax rates would increase after its expiration, comparing the current Federal tax brackets with their estimated post-TCJA equivalents shows that a fair number of households will actually see their tax rates decrease.

Beyond the tax brackets themselves, however, households will also see significant changes to how their taxable income is calculated post-TCJA. First, the combination of a lower standard deduction and the elimination of the $10,000 cap on deductible state and local tax payments means that many more people will be taking itemized deductions instead of using the standard deduction. Second, the reinstatement of personal exemptions means that households will be able to take an estimated $5,010 exemption per taxpayer or dependent, meaning that larger households could see a large reduction in their taxable income. With the caveat that the expiration of TCJA will also bring back the Personal Exemption Phaseout (PEP) and "Pease limitation" on itemized deductions above a specific income threshold, both of which effectively create a surtax on income within the threshold range, increasing the household's marginal tax rate above their nominal tax rate based on the tax brackets alone.

For owners of pass-through businesses like partnerships, S corporations, and sole proprietorships, the biggest concern around TCJA's sunset is the elimination of the Section 199A deduction on Qualified Business Income (QBI), which allowed for a deduction equal to 20% of the lesser of the taxpayer's QBI or their taxable income. For most pass-through business owners, the end of the QBI deduction will result in much higher marginal tax rates in 2026 or later, with one exception: Owners of Specified Service Trades or Businesses (SSTBs) like lawyers, consultants, and financial advisors, whose QBI deduction phases out above certain income thresholds, will have a much higher marginal tax rate on any income earned within the threshold range – meaning that while it might make sense for most business owners to accelerate income in 2024 and 2025 while the QBI deduction is still in effect, SSTB owners within the phaseout threshold range would be better off doing the opposite and deferring income until after TCJA expires.

The key point is that different households will experience the end of TCJA in a wide variety of ways, with income level, filing status, number of dependents, and QBI all factoring heavily into the impact that the TCJA sunset will have. And although TCJA's ultimate fate may still be undecided, for at least some clients the potential benefit of taking action today (e.g., to recognize income at a lower marginal tax rate today versus after TCJA expires) may be worth taking the risk that TCJA is ultimately extended – since in that case the client would have simply recognized income at the same marginal rate that they would have later on, merely 'costing' them the value of a few years of tax deferral. So by understanding how each client stands to be affected, advisors can narrow their focus on the planning strategies that will have the biggest benefit for their clients.Read More...

#FASuccess Ep 393: Taking The Risk Of A Multi-Million-Dollar Succession Loan To Make The Business What You Want It To Be, With Alex Lewis

July 9, 2024 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 393rd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Alex Lewis. Alex is the owner of Blackbridge Financial, a hybrid advisory firm based in Irmo, South Carolina, that oversees approximately $330 million in assets under management for 415 client households.

What's unique about Alex, though, is how, at age 29, he took on a multi-million-dollar loan to purchase the firm from its founder as his successor, and, in the 4 years since, has made changes to everything from the staff to the technology to the service structure to make the business what he wanted it to be… and in the process, nearly doubled the firm's AUM.

In this episode, we talk in-depth about how Alex gained the trust of his firm's founder and its clients by gradually increasing his client-facing responsibilities over a span of 4 years in advance of a potential succession, how Alex and the firm's founder negotiated a valuation and transaction terms with a seller-financed note with protective covenants that met the needs of both parties, and how Alex got comfortable with a purchase whose first monthly loan payment was higher than his entire annual salary the year before the purchase and resulted in a net income of just $11 in the 1st year after the deal (but ultimately grew enough that he was able to refinance his succession loan to make the former owner whole and reduce the monthly payment).

We also talk about how Alex's firm now segments clients into 5 service tiers based on their assets under management and revenue (and the actual differences in services the firm provides to clients at each level), how Alex tracks his clients' individual preferences to create what he calls "Wow Factors", such having their favorite soda on the table when they arrive for a meeting, which strengthens the relationship between clients and the advisory team, and how Alex, shortly after taking over the firm, made the decision to hire 2 new advisors and support them through getting their CFP marks to be able to continue to offer high-touch services for his rapidly growing client base and ensure they stay under 150 clients per advisor.

And be certain to listen to the end, where Alex discusses how he first entered the financial planning industry, transitioning from the world of public accounting to seek better work-life balance but taking a more-than-50% pay cut to get his foot in the door, how Alex managed to not lose a single client after being forced to call all 400 clients to let them know he had to raise their fees after a service provider dramatically increased its own pricing to Alex's firm… only to cancel the fee increase after the service provider reversed course (and how that action in turn built even more trust with his clients), and how Alex dug into a series of business books to identify best practices to systematize his own firm's operations, from Gino Wickman's "Traction" to Matthew Jarvis' "Delivering Massive Value", as he continues to evolve the business he bought from its prior owner into the one that he wants it to be for himself.

So, whether you're interested in learning about navigating an internal succession plan, handling the financial realities of taking on debt to purchase the firm, or creating a plan to grow the firm and its staff after taking over, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Alex Lewis.

The Return Of IAR Ethics CE Day And The State Of The (Nerd’s Eye View) Blog

July 8, 2024 07:02 am 0 Comments CATEGORY: Nerd's Eye View

After several turbulent years in both markets and workforces, 2024 appears to be the 'most normal' year of late, with strong market performance, cooling (or at least no longer rising!?) interest rates, and relatively little new tax legislation (yet).

Yet the need for advisor education – and the regulatory requirements to get it (in the form of Continuing Education obligations) – never ends, with the latest focus for most financial advisors being on the ongoing expansion of NASAA's 2020 Model Rule that implemented the first Investment Advisor Representative (IAR) requirements to get 12 hours of Continuing Education (CE), including 6 hours of Products & Practices and 6 hours of Ethics & Personal Responsibility, in order to maintain their IAR registration. This new model rule is enacted on a state-by-state basis and has currently been picked up by 18 states… though, because it applies not only to IARs physically located within those states but to anyone who is required to register as an IAR in one of those states, in reality, the new IAR CE obligation is quite far-reaching (especially with California and Florida IAR CE requirements taking effect this year!).

Given the continuing growth of advicers who fall under these new IAR CE Requirements, the Kitces platform is not only continuing to offer IAR CE (along with all of its other CE types) through its Nerd's Eye View blog articles, but, starting this year, has also expanded IAR CE eligibility to our webinars as well. And to meet the growing demand for the required "Ethics & Professional Responsibility" content in particular, we're also excited to announce the return of our IAR Ethics CE on August 29, 2024! Attending IAR Ethics CE Day allows advicers to fulfill all 6 hours of their required IAR Ethics & Personal Responsibility CE obligations in just 1 day, preventing an end-of-year CE crunch and providing high-quality education from top experts in the field of ethics and compliance (while also satisfying their CFP Ethics and IWI Ethics requirements, too!).

In addition to IAR Ethics CE Day, the ongoing growth of our Kitces Education team has allowed us to offer more frequent live CE webinars (now running the 1st and 3rd Tuesday of every month at 3:00 PM EST), and next month, we'll be rolling out our newest Kitces Course, a master class taught by our own Jeff Levine and Michael Kitces on "Optimizing Tax-Efficient Roth Conversion Strategies And Implementation", which will let advisors practice the skill of determining the 'right' amount to Roth convert, identify which clients should do Roth conversions and when, and also explore ways to explain the strategic components of Roth conversions to clients (who may otherwise resist the upfront tax liability, notwithstanding the long-term tax benefit!). Additionally, the upcoming Kitces Value Summit, coming December 12, 2024, will tackle how real advisors provide and communicate their ongoing value to their clients.

Along with the expanded CE offerings, we've also been reinvesting heavily into making the Kitces platform easier to use. Our major focus this year has been on supporting the growing number of multi-advisor firms buying Group and Enterprise subscriptions… and then needing to manage all of their Kitces Group members! Going forward, our new Group and Enterprise dashboards will make it far easier for firms administering their Kitces membership to add and remove individual advisors and to enroll their advisors into IAR CE (as more states add the requirement) with just a few clicks of a button! (And yes, in the coming year, we will be looking at a broader overhaul and re-design of the entire Kitces Members Section for all advicers to make it easier to navigate – we've heard your feedback!😊)

Of course, CE is not the only part of the advisory landscape that's changed. Our newly released Kitces Research on Advisor Marketing shows that fewer advisors are reporting client referrals as a methodology to attract new prospects (and the growthiest firms are relying on referrals the least!), but that there is no one dominant marketing tactic taking its place. Instead, the firms that are the most successful at marketing don't appear to be engaging in materially different tactics than the rest; they simply have more clarity of the ideal client they're pursuing, and how to communicate with them, such that they're executing the same marketing tactics but getting much better results (which, in turn, leads them to invest time and dollars into their marketing efforts and further compound their growth lead!).

In the meantime, if you (or anyone else you know) wants to join our Team of Nerds, stay tuned for more openings in 2024, including the Managing Editor role (available now!), an Operations Coordinator (coming soon!), and other roles. We'll be listing these roles as they become available on our Kitces Career Opportunities page, or you can sign up for our separate Career Opportunities mailing list (via that Opportunities page) to be notified when new positions open up! And for those who don't want to join the team full-time but would simply like to 'Nerd Out' with us or a bit and share what they do or know with their fellow advicers, remember to check out our "How To Contribute" page to see how you can engage with the Kitces platform as a guest writer, presenter, or podcast guest!

Ultimately, though, the focus remains the same as it always has been – on our mission to "Make Financial Advicers Better, And More Successful" – through our 4 strategic pillars of creating Navigational resources, insightful Education, original Research, and skills Development for financial advicers across the spectrum of experience and firm sizes (and yes… or organizational strategy does spell N-E-R-D😊). We look forward to continuing the journey with you through the rest of 2024!

Weekend Reading For Financial Planners (July 6-7)

July 5, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that a recent U.S. Supreme Court decision shifting authority to interpret laws passed by Congress from Federal agencies to the judicial system could have significant impacts on regulation of the financial advice industry, including the potential for additional legal challenges to regulations from the Securities and Exchange Commission (SEC), the Department of Labor (DoL), and other agencies, with new groups already joining a lawsuit against the DoL's new Retirement Security Rule following the decision.

Also in industry news this week:

A separate Supreme Court decision struck down the SEC's use of in-house judges to adjudicate cases involving civil penalties (unless both parties in the matter agree to it), likely setting up more settlement offers from the regulator to avoid a drawn-out legal process in the Federal court system
At a time when it has seen an increased staff headcount and budget, FINRA, the self-regulatory agency for broker-dealers, has issued a smaller total dollar amount in fines as well as fewer press releases regarding enforcement actions during the past several years, raising questions about the extent of its enforcement of Regulation Best Interest and other regulatory measures

From there, we have several articles on retirement:

Why some clients have a hard time spending down their assets in retirement while others are more spendthrift
5 ways that can help financial advisors give hesitant clients 'permission' to spend more in retirement
An updated study suggests that for retirees, investment assets generate about half of the amount of additional spending as wealth held in the form of 'guaranteed' income (e.g., Social Security benefits, a defined-benefit pension, or a private annuity), offering a potential opportunity for advisors to help nervous clients boost their spending

We also have a number of articles on practice management:

The 3 types of firms looking to acquire RIAs and why the attractiveness of a deal goes well beyond a firm's valuation
How advisory firm owners can tell the difference between solicitations from M&A brokers solely focused on the financial bottom line of a potential sale and advisors who understand the full implications of a sale, including the importance of a solid cultural fit, for the selling firm owner
The considerations for firm owners considering selling a minority stake in their firm, including the importance of understanding what the investor brings to the table, in terms of the capital and industry knowledge they offer as well as their expectations for a financial return

We wrap up with 3 final articles, all about vacations:

How to set up proper boundaries at work before going on vacation to ensure needed work gets done without having to answer emails or phone calls while away
How to stop 'overplanning' vacations, from setting up loose guideposts for each day rather than strict itineraries to avoiding the rabbit hole of travel review websites
Why vacations that aren't particularly relaxing can still offer value, including the opportunity to have a 'fresh start' on work practices after returning to the office

Enjoy the 'light' reading!

Why Quality Factor ETFs Have Seen Large Inflows Over The Last Year – And How Advisors Can Use Them In Client Portfolios

July 3, 2024 07:01 am 0 Comments CATEGORY: Investments

Over the past few decades, technological advances and plummeting transaction costs have facilitated the emergence of a dizzying variety of ways to gain exposure to very specific areas of the market. As a result, advicers have more options than ever to add value for their clients by tailoring investment portfolios that are specific to their unique needs, goals, and risk tolerance. One approach that has become increasingly popular is the use of factor-based ETFs, which are designed around certain shared characteristics of assets that go beyond the more traditional attributes (e.g., size, industry, location) of early mutual funds. While there are literally hundreds of identifiable factors, the most well-known are Quality, Value, Momentum, Small Size, and Minimum Volatility.

In this guest post, Robert Hum, a Managing Director and U.S. Head of Factor ETFs at Blackrock, discusses why Quality factor ETFs have seen large inflows over the last year, the characteristics that define Quality, and how advicers can implement Quality ETFs in their clients' portfolios.

As we head towards the second half of 2024, investors continue to grapple with many of the same issues that have influenced the overall market action for the past several quarters. While inflationary pressures have continued to trend lower and the jobs market seems to have tightened somewhat, the Federal Reserve remains in a wait-and-see mode in regard to any potential rate cuts, international tensions remain elevated, and the level of concentration in a handful of (arguably overvalued) stocks persists.

As a result, this macroeconomic and market uncertainty has ostensibly driven a preference for overweighting higher-quality companies in investment portfolios. Specifically, 'high-quality' companies share several similar fundamental characteristics. For instance, research has shown that companies whose revenue is driven by their core business functions (versus temporary accounting transactions) tend to have more sustainable earnings and higher future stock returns. Leverage also comes into play, as firms with lower debt-to-equity ratios are less risky, particularly in high-interest-rate climates. Moreover, companies that are more profitable (as measured by their return on equity) tend to outperform their less-profitable peers, even after accounting for the higher price multiples they often carry… and that relative outperformance has tended to increase with longer holding periods!

With those factors (no pun intended!) in mind, there are 3 primary ways that advicers can use Quality ETFs in portfolios. First is from a tactical perspective, where quality strategies that focus on companies with lower debt-to-equity ratios have lower total interest expenses and may be better positioned to weather the current higher-for-longer rate regime. Second, advicers can use Quality ETFs strategically. Quality ETFs tend to have a lower 'tracking error' in comparison to other factor-based products and, therefore, can be used as a large-cap blended fund. Finally, Quality ETFs can be an effective diversifier, particularly in portfolios that are tilted toward the Value factor.

Although Quality ETFs have already shown solid relative performance year-to-date, the longer-term case for Quality may still be compelling, given persistently high interest rates and the ongoing macroeconomic headwinds. Advicers can add value for clients who may be concerned about a possible economic slowdown by maintaining their overall portfolio mix consistent with a strategic focus on an area that tends to show relative strength during downturns. Ultimately, by offering clients strategies to respond to changes in the economic cycle, advicers can help clients stay disciplined and focused on their long-term goals!

#FASuccess Ep 392: Crafting Your Specialization When There Is No Standard Playbook To Learn It, With Kristopher Heck

July 2, 2024 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 392nd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Kristopher Heck. Kristopher is a Founding Partner of Tanager Wealth Management, an RIA based in London, England, that oversees approximately $1.1 billion in assets under management (AUM) for 630 client households.

What's unique about Kristopher, though, is how his firm has scaled to more than a billion dollars of AUM while specializing in working with clients whose personal and financial lives touch both the United States and the United Kingdom, a niche for which there is no set 'playbook' to learn the tax, estate, and other planning expertise needed to serve these clients, which makes the expertise they've crafted for themselves over the past decade to be instantly differentiated in the marketplace!

In this episode, we talk in-depth about how Kristopher chose his unique cross-border specialization, in part due to his own experience as a US expatriate navigating the financial issues that come with living and working in the UK, why Kristopher's firm emphasizes the ability to teach other team members about technical planning topics (since team members have to learn most of the specialized knowledge on the job) as a key criterion when hiring and evaluating new staff members to join Tanager Wealth, and how Kristopher's firm uses an internal blog, videos, and regular lunch-and-learns to further transmit their specialized knowledge across all advisors in the firm.

We also talk about how Kristopher's firm has attracted clients within its cross-border US-UK specialization, including by establishing relationships early on with accountants and estate attorneys who were also just starting their practices and working with similar expatriate clients (creating a healthy system of cross-referrals as each of those professionals' own practices have grown over the years), how Kristopher's cross-border specialization has evolved into several sub-niches, including expats who work specifically in the technology, financial, and legal sectors, and how Kristopher's firm's specialized expertise gives them an edge even and including against much larger firms in the broader market for financial advice.

And be certain to listen to the end, where Kristopher shares how his firm's separate advisory and planning teams not only help build and maintain his firm's knowledge base, but also provide separate career tracks for employees who want to be client-facing and those who want to dig deeper into the technical aspects of financial planning, how starting his firm with 2 other partners gave Kristopher the added confidence needed to overcome feelings of impostor syndrome when working with clients in his chosen-but-still-developing specialization, and why Kristopher believes RIAs are, in reality, HR and technology platforms that simply monetize with financial expertise (which emphasizes the importance of having the 'right' people and tech to successfully scale a firm).

So, whether you're interested in learning about how to develop a successful client niche when there is no 'playbook' to learn it, how to organize a firm to ensure institutional knowledge stays within the business, or how to nurture relationships to generate referrals from centers of influence, even when just starting out, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Kristopher Heck.

The Latest In Financial #AdvisorTech (July 2024)

July 1, 2024 07:02 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the July 2024 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition kicks off with the news that AI meeting support solution Jump has raised $4.6 million in venture capital, as meeting support has increasingly shown itself as a leading use case for AI as it applies to financial advisors given the sheer amount of time advisors spend on meeting preparation and follow-up tasks between multiple systems and the ability of AI tools like Jump to quickly scan through meeting notes and transcripts and produce meeting summaries, draft follow-up emails, and assign tasks.

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

Digital prospecting solution AIdentified has raised $12.5 million in Series B funding as it looks to further develop and scale its solution for finding qualified prospects for referrals among an advisors' network in order to drive more organic growth – though it remains to be seen how many advisors are ready to engage in a more proactive prospecting approach to the extent that it makes sense to adopt a new technology solution for doing so.
AI-driven investment research solution Brightwave has raised $6 million in seed funding for its digital "investment analyst" – although in a tech landscape where solutions tend to cater either towards 'active' advisors who seek out investment opportunities on their own or 'passive' advisors who focus more on educating clients to keep them in the markets, it isn't clear where on the divide Brightwave lies (or whether advisors will want to pay for a solution that seeks to do both, given that most advisors fall in either one camp or the other)
The state of Missouri has joined Washington state in scrutinizing advisors' use of third-party technology like Pontera to access and trade in clients' held-away accounts – which on the one hand, is striking in that those tools seem to be widely popular among clients and advisors alike due to their ability to give advisors secure access to client accounts, making it confusing that regulators would choose to scrutinize them; but on the other hand may be understandable given how quickly the technology to trade held-away assets has emerged, leaving regulators to find any way they can to pump the brakes on further development until they can come up with an acceptable regulatory framework

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including:

A new technology solution, RIA Growth Catalyst, has launched as a tool for firms to identify potential Mergers & Acquisition partners by using current and historical public Form ADV data to gauge which firms actually have a solid track record of organic growth and productivity metrics
A new survey shows that around 21% of advisors use direct indexing in their practice, which on the one hand, indicates that a large majority of advisors and clients aren't yet sold on the tax efficiency and other benefits of direct indexing (at least enough to make up for the added complexity it introduces), but on the other hand reflects how at least some advisors see direct indexing as a way to more effectively serve high-net-worth clients and values-based investors, leaving the question about whether it will eventually see more widespread adoption than those specific use cases

And be certain to read to the end, where we have provided an update to our popular "Financial AdvisorTech Solutions Map" (and also added the changes to our AdvisorTech Directory) as well!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading For Financial Planners (June 29-30)

June 28, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that a recent study found that at a time when the number of SEC-registered broker-dealers and their registered representatives is declining, the number of SEC-registered RIAs, their assets under management, and the number of clients they serve all grew in 2023, reflecting the attractiveness of the RIA model to both advisors and clients alike and the ability for firms across the size spectrum to profitably serve clients.

Also in industry news this week:

How the SEC could target dually registered firms for enforcement of their duties to care for and manage conflicts of interest under Regulation Best Interest and the Investment Advisers Act to send a message to the industry and to clarify its expectations for these "dual-hatted" firms and their advisors
Why a shift in IRS priorities away from specifically focusing on taxpayers with more than $10 million in income for audits could result in more clients with incomes above $400,000 being audited in the coming years

From there, we have several articles on investment planning:

5 ways advisors can 'fix' the portfolios of new clients, from unwinding unintentionally concentrated positions to maximizing asset location
While concentrated investment strategies offer the promise of higher returns, the specter of unpredictable risks and, in the case of concentrated funds, misaligned incentives between fund managers and investors, can make them risky propositions
How a "total wealth approach" for portfolio management that takes a client's human capital and other non-investment assets could mitigate the downside risks to their wealth

We also have a number of articles on client meeting note-taking:

Strategies for advisors to take more effective notes in client meetings, from adopting structured frameworks to leveraging software tools
Client meeting note-taking software has emerged as one of the first AI use cases for advisors, though its use comes with compliance and security considerations
A review of available AI-enabled client meeting note-taking software, broken down by price, accuracy, security, integrations with other AdvisorTech tools, and more

We wrap up with 3 final articles, all about productivity:

How the "weighted shortest processing time" strategy can help advisors prioritize their to-do lists and why one of the best ways to boost productivity could be to shorten the list to only include what truly needs to be done
Amidst a work culture that often prioritizes time spent at the computer, why stepping away from the desk for unstructured thinking could boost workers' creativity and productivity
Why the concept of "entrenchment" suggests that achieving a "flow state" can sometimes lead to reduced productivity and wellbeing

Enjoy the 'light' reading!

Kitces & Carl Ep 141: Creating The Space To Have More Meaningful Money Conversations With Clients

June 27, 2024 07:03 am 0 Comments CATEGORY: Kitces & Carl Podcast

The practice of asking questions has always been an integral part of the financial planning process. In the early days of the advicer industry, those questions almost exclusively dealt with facts around a client's or prospect's financial situation to determine (ultimately) what products the adviser should recommend. However, given the industry's ongoing transition away from being primarily transaction-focused and towards being relationship-based, advicers have had to learn how to develop meaningful connections. One of the best ways to accomplish this is by having deeper conversations that go well beyond basic data gathering. Which, naturally, gives rise to the question: How can advicers foster an environment where these conversations can develop, and what are some ways that they can help their clients go deeper?

In our 141st episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards explore some key concepts around facilitating meaningful conversations, ways advicers can help clients take time to focus on more foundational topics (so they can have a clearer picture around where they want to go), and some conversational strategies to give clients the 'permission' to open up.

Since much of an advicer's work centers around finding (and communicating) concrete answers to help solve problems and issues (like, "How big of an emergency fund do I need?" or "When can I retire?"), it's not too surprising that many view the process of facilitating meaningful money conversations from an analytical perspective (e.g., "Just tell me the best questions to ask and give me a flowchart to navigate the rest!"). However, finding the perfect questions and being skilled at asking them can also be cultivated through a sense of curiosity and a space where vulnerable conversations can happen. As while an advicer might want to implement the sort of life planning questions pioneered by George Kinder, the process may feel awkward in a more traditional "financial institution" setting and/or without a genuine interest in what the client has to say.

It's also important to recognize that clients typically don't seek out an advicer so they can explore their dreams, goals, and desires or to discuss their deep-seated feelings around money. Instead, meetings (especially initial meetings) happen because there's some 'presenting problem'. And that's where an advicer is in a position to create the space where meaningful conversations can happen by expressing empathy ("Mr. and Mrs. Client, I hear you. That is a real issue, and just to make sure we get to the best answer, can we back up a bit? Tell me why this is important for you?") and showing what a real financial planning relationship looks like.

The key point is that advicers who can develop their conversational skill set will not only do a better job of getting their clients to buy into their financial plans, implement the advice they're offered, and (ultimately) achieve their goals, but they'll also be better equipped to stand out in an increasingly crowded marketplace. And by greeting a client with genuine empathy, an advicer can create space in a conversation for the client where they can both explore deeper issues, arrive at impactful decisions, and engender a long relationship built on trust and meaningful human connection!

529-To-Roth IRA Rollovers: Taking Advantage Of The New Option To Move Education Savings To Retirement Savings

June 26, 2024 07:01 am 0 Comments CATEGORY: Taxes

Traditionally, the challenge in using a 529 plan to save for higher education expenses has been figuring out how much to save to cover the beneficiary's college costs without overshooting and saving more in the 529 plan than is actually needed. Because while 529 plans' combination of tax-deferred growth on invested funds and tax-free withdrawals for qualified education expenses (plus many state-level tax deductions or credits on 529 plan contributions) make it a powerful savings vehicle for college or graduate school expenses, the flip side is that any non-qualified distributions are subject to income tax plus a 10% penalty tax on the growth portion of the distribution. And so the conundrum of people with "too much" savings in their 529 plan – either because they overestimated how much they needed to save, or because they chose a different path entirely that didn't involve going to college – has been how to get funds out of the plan without sacrificing a large part of their value to taxes and penalties.

The Secure 2.0 Act passed in 2022 provided a new 'escape valve' for individuals who, for whatever reason, found themselves with more funds in their 529 plan than they could use on qualified higher education expenses. The new law created the ability for a 529 plan beneficiary to roll funds over tax-free from a 529 plan to a Roth IRA, subject to several key limitations: The 529 plan must have been maintained for at least 15 years, the amount of the rollover cannot exceed the IRA contribution limit for that year, the rollover must be made using funds that have been in the 529 plan for at least 5 years, and the maximum lifetime that a beneficiary can roll over in their lifetime is $35,000.

Because of the strict limitations on when and how the 529-to-Roth rollover can be done, it has limited usefulness as a planning tool beyond its intended purpose of giving individuals with overfunded 529 plans an opportunity to reallocate some of those funds tax-free towards their retirement savings. Similarly, the $35,000 lifetime rollover limit means that it can't be used by parents or grandparents to gift huge amounts of tax-free dollars to their heirs, since anything beyond that lifetime limit would still need to either be used on qualified educational expenses or be subject to taxes and penalties as a non-qualified distribution.

Even so, 529-to-Roth rollovers can still be worth incorporating into college and estate planning as a way to gift beneficiaries the "option" of putting up to $35,000 towards their retirement savings. In other words, families who want to give their kids a head start on their career and life path (but don't want to simply give no-strings-attached cash) can now consider 529 plans as a way to provide a boost not only to their education savings, but also to their retirement savings.

The key point is that while the new 529-to-Roth rollover rules may be limited in terms of how much wealth they can move into tax-free retirement funds, they can still provide real benefits – both in their intended purpose as an escape valve for people who can't or won't use all of the funds in their 529 plan for qualified education expense, and in the symbolic significance of contributing funds to a child or grandchild that can be used for education, retirement savings, or both!