Nerd's Eye View blog

#FA Success Ep 192: Breaking Away From A Wirehouse To Build A True Fiduciary Multi-Family Office, with Paul Pagnato

September 1, 2020 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 192nd episode of Financial Advisor Success Podcast!

My guest on today's podcast is Paul Pagnato. Paul is the co-chairman and chief visionary officer of Cresset Capital, a multi-family office with nearly $9.5 billion of assets under management for just over 600 ultra-high-net-worth clients. What's unique about Paul, though, is the journey he's had as an advisory firm owner, from a nearly 20-year career at Merrill Lynch to breaking away to work with HighTower Advisors as a partner, deciding to go out entirely on his own as an independent RIA to build his own vision, and then deciding to merge his multibillion-dollar advisory firm into Cresset and give up control in order to further expand the reach of that vision.

In this episode, we talk in-depth about Paul's entrepreneurial journey through the industry. How the stresses of the financial crisis on the brokerage industry created a unique conflict that led him to leave the wirehouse world after 20 years there, the challenging learning curve than an advisory firm faces when first breaking away, the unique stresses that emerge in the client relationship when the Broker Protocol and wirehouse employment agreements require that clients not be informed about the plan to leave until surprising them with it after the fact, and why it's so important to have a strong support structure in place with experienced vendors when making the decision to break away as a large team.

We also talk about the unique multi-family office that Paul built once he was finally able to go fully independent. The $90,000 a year flat fee structure the firm uses to serve its ultra-affluent clientele, why and how Paul's firm weaves together tax services, legal support, and even concierge travel assistance into their high-net-worth offering, the unique approach of quarterly experiments that Paul's firm conducts on an ongoing basis to come up with new ways to serve clients more efficiently, and how Paul has been able to scale efficiently with a philosophy of always trying to outsource as much as he can.

And be certain to listen to the end, where Paul shares the journey of deciding to merge his multibillion-dollar multi-family office into an even larger one. The investment banker he used to explore the options, why he ultimately decided to sell instead of raising capital from a private equity firm, and how he got comfortable with the decision to no longer have full control with the decision to merge.

Announcing New Kitces Research Study On Advisor Well-Being

August 31, 2020 07:06 am 0 Comments CATEGORY: Nerd's Eye View

It’s an old saying that “money can’t buy happiness”, but recent research has shown that, in reality, the relationship between money and happiness is more nuanced. Greater income levels are associated with greater levels of emotional well-being (at least up to a certain point); money is associated with higher levels of happiness, at least when it’s spent in certain ways (e.g., on experiences shared with other people or outright on others, rather than spent on ‘stuff’); we are increasingly recognizing the real-world trade-offs between earning more money versus having more time with our friends and family; and in the context of advisory firms, the trade-offs between income and work are of even greater focus as many advisors can outright control how many clients they wish to take on and what ‘Enough’ really means in the context of an advisory business.

Yet, in practice, remarkably little research exists to understand what maximizes the well-being of financial advisors. Instead, industry research overwhelmingly focuses only on what produces ‘More’ – more revenue, bigger businesses, more profitable businesses, with greater and greater productivity – as though the only path to success is through growth, and completely ignoring the growing base of financial advisors who are deliberately building ‘lifestyle’ practices and stopping their growth once they reach the point of having 'Enough'.

To better understand these trends, we’re excited to announce the launch of our latest Kitces Research Study on Advisor Well-Being, which explores what factors really are – or are not – associated with greater well-being as a financial advisor. Are independent advisors really happier than employee advisors? Are smaller advisory firms really more stressed than larger firms? Does the platform an advisor is associated with impact their own individual well-being? Does advisor well-being actually rise as an advisory firm grows, or is there a point of diminishing (or even negative) well-being returns on growth?

So if you have a few minutes, please take our latest Kitces Advisor Research study on Advisor Well-Being. It is the shortest yet of our Research studies (for those of you who have been kind enough to go through some of our prior longer surveys!), and we’ll be sharing the results at the end of the year, in the hopes of helping the entire advisor community plan out what should be on their New Year’s business resolution lists to make 2021 their best year yet.

Thanks again for your willingness to contribute to this important advisor research!

Weekend Reading for Financial Planners (August 29-30)

August 28, 2020 02:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big industry news that the SEC has updated the Accredited Investor rules, declining to increase the income and net worth thresholds but expanding the definition of who constitutes a "sophisticated" investor to include financial advisors themselves... allowing anyone with a Series 7, 65, or 82 license to be able to participate in private market investments themselves (though still not necessarily on behalf of their clients, unless their clients still qualify under the more 'traditional' measures).

Also in the news this week is an announcement that insurance companies expanding into the world of fee-based annuities for the no-commission RIA channel are now starting to develop life and disability insurance products for RIAs, as insurance distribution continues to be reinvented, and a study finding that advisors unwittingly tend to engage the men more than the women of their heterosexual couples, resulting in a gender bias that is associated with women not only being more likely to terminate their advisor after a bad experience but being less likely to complain or give the advisor a chance to correct the issue before being fired from the relationship.

From there, we have several interesting investment articles, including a new Morningstar analysis finding that actively managed funds did not actually outperform their passive peers during the recent market volatility (though notably, they didn't underperform either), a look at how market valuation measures aren't very predictive in the short term but that measures like Shiller CAPE are very predictive in the long run (which has significant implications for what return assumptions advisors are using in their retirement planning projections), and a review of SPACs that are suddenly becoming the hot new alternative to IPOs.

We also have a few articles around selling an advisory firm, including what it takes for advisory firms to get a double-digit multiple of earnings for their seller valuation, a look at recent M&A trends for advisory firms that are rebounding quickly after a brief pandemic slowdown, and some guidance on what it takes to sell your advisory firm on the open market (for sellers who have never been through the process before and only get one chance to get it right!).

We wrap up with three interesting articles, all around the theme of building a practice that fits your personal goals (rather than simply one that is solely focused on growth): the first explores the rise of the 'lifestyle' practice as an alternative to the 'traditional' work-hard-play-hard approach (of intensive hours of growing the firm and vacations to recover and then returning to the grind of building again); the second examines one 37-year-old advisor's decision to turn his practice into a lifestyle firm focused on profits and personal time efficiency over growth; and the last explores the 'curse of the overachiever' and how to think about the balancing point and finding the sweet spot between wanting to succeed as a high achiever and when you've got 'enough' to focus your energy elsewhere, instead!

Enjoy the 'light' reading!

Kitces & Carl Ep 41: How Advisors Can Help Clients Who Are Stuck In Too Much Cash On The Sidelines

August 27, 2020 07:04 am 2 Comments CATEGORY: Kitces & Carl Podcast

A recent Fidelity report showed that a significant portion of investors over 65 moved at least some of their money out of stocks between February and May in response to the turmoil created by the pandemic. The fear and anxiety over the sudden and severe economic uncertainty pushed many investors to dramatically reduce their risk. And unfortunately, once investors take risk off the table, and the market sharply rebounds… there’s no “good” time to get back in. Which in turn has left some advisors asking how they can work with clients who are still stuck sitting on a pile of cash and are now resistant to the idea of re-investing into equities now that they’ve gone up (or in some cases, are unwilling to reinvest into anything at all!?)?

In our 41st episode of Kitces and Carl, Michael Kitces and client communication expert Carl Richards discuss various ways advisors can approach the conversation when a client is resistant to the very idea of taking back on any risk, especially from a market that feels like it’s ‘gotten away’ from them, how to determine if any sudden changes are only in response to recent temporary circumstances (or are more permanent in nature), and why advisors have to be so clear about the services they provide and who they best provide them for.

As a starting point, it’s important to note that just because someone has the financial capacity to take on risk and get back into the markets, doesn’t mean that they should, or that they even need to. Because, for some, their goal all along might have been to get to a point where they don’t have to take on risk, and after working hard for decades, they can get off the “more” treadmill. After all, investing is just one of several levers that are available to help clients reach their goals… it’s just that advisors (understandably) are focused on that one lever in particular, not only given the industry’s long history of providing the investing public with access to the capital markets, but that, especially with the more recent move towards the AUM model, it’s hard for advisors to pay the bills if there’s no “A” to “M” (which means we must be cautious of our own inherent bias towards keeping clients invested!)!

Yet, for clients who do have a reason (and need) to invest to meet their goals, and yet remain extremely risk-averse, there are essentially two approaches. The first is to use a more prescriptive approach, leveraging data and logic to demonstrate the long-term value that investing presents. While that more heavy-handed approach might work for a subset of clients, more often though, the better tack is to engage clients in a co-creative process that begin with a statement of values, which help define goals, and ultimately end out in an action plan in support of those fundamental values. As a result, advisors can help clients circle back around to (or even reevaluate) their values and goals, and walk them through possible trade-offs they might have to make.

Other approaches include having a conversation around why money is important in the first place (because sometimes there’s enough cash on hand to satisfy a fundamental why, and actually defining that can help calm their nerves about letting the rest work for them), and discussing whether or not changes to their savings and investing goals are permanent (as temporary, mid-course adjustments can be managed by incrementally moving back towards the original plan).

Sometimes, though, it turns out that a client just simply does not want to assume any risk whatsoever, which ultimately means that advisors need to get comfortable with the limitations of the advice model (and least if their AUM model means they can’t work with clients who want to stay in cash!), and understand that there are some clients who may need help with planning but don’t want/need the AUM-based services that many advisors provide (and make their livings from).

At the end of the day, there isn’t a one-size-fits-all approach for every investor, but in general, the best approach for risk-averse clients is to go upstream to find the root cause of any sudden changes, review values and goals to make sure everyone is on the same page, and then have a discussion around potential trade-offs that need to be made to implement any changes. By coming to the conversation with a positive mindset, and an objective of reaching a better understanding of a client’s goals (and why they feel that being in cash is helping them achieve those goals… or not?), advisors can serve their needs to the best of their ability… even if that may lead to the ultimate realization that the client isn’t a good fit?

Helping Client Couples Practice Gratitude To Reduce Money Disputes

August 26, 2020 07:03 am 3 Comments CATEGORY: Client Trust & Communication

Over the past several months, life has become increasingly challenging for many, as we have collectively had to weather the pandemic, market instability, high unemployment rates, and social unrest across the country. Inevitably, people everywhere are experiencing high levels of stress and anxiety, and financial advisors are faced with clients who are stressed and worried about their financial plan and may need help to cope through difficult situations. One simple and accessible strategy to help clients deal with stress is by practicing gratitude, and financial advisors can leverage gratitude practices as a tool to help clients work through difficult feelings and circumstances around their financial goals.

Financial planning conversations generally focus on future goals and events and are considered ‘private’ topics of discussion that often only focus on the client themselves. Gratitude, on the other hand, focuses on the present, by consciously acknowledging the cause(s) of some positive outcome that has resulted in current feelings of appreciation, and involves how external social factors have contributed to those feelings. Research has tied the importance of gratitude to general life satisfaction and how it embodies positive psychology models such as the “PERMA” framework, which identifies the key requirements for well-being: Positive emotions, Engagement, Relationships, Meaning, and Accomplishments.

Accordingly, by guiding clients to acknowledge gratitude in their financial planning conversations, financial advisors can help their clients feel better about current planning choices, and find satisfactory solutions to difficult problems. And by encouraging clients to recognize and practice gratitude in the present moment, financial advisors help those clients sustain patience for future rewards! Because when one feels gratitude for and thus can be comfortable with having enough to begin with, the desire to acquire or accomplish more is generally lessened.

Gratitude can also be a useful tool for clients to recognize how connecting with others can be valuable when it comes to their financial planning goals. For instance, simply having the advisor to talk to about their financial plan offers tremendous relief for many clients, not just for the technical planning guidance, but also for the social support that the advisor often provides to the client. Or encouraging a client who may seem unhappy or lonely to identify (and invest in) ways to build social connections can help the client achieve more life satisfaction. Simply having conversations that explore sources of gratitude can be very therapeutic for the client… and does not require the financial advisor to have any therapy training!

During client meetings, financial advisors can include gratitude practices in their discussions with clients by simply asking them to identify the gratitude they may have for their current life situation in general, or the gratitude they may have for other people. This can be done by using simple exploratory questions, such as, “What are three things you currently think you (or your partner) do(es) well financially?” or, “Describe three financial things you feel content about right now?” Gratitude practices can also be incorporated into client events, which can include group activities or discussions about how clients experience gratitude.

Ultimately, helping clients acknowledge gratitude can be a very effective way for advisors to ease their clients’ minds about troubling situations around their financial plan. And, while gratitude practices won’t solve all problems, they do provide clients a simple yet powerful strategy to cultivate more awareness of the important things in life that provide comfort, happiness, and satisfaction, but that are often taken for granted and easy to forget… and in the process, can reduce money disputes and help clients feel satisfaction that they really have ‘enough’.

#FASuccess Ep 191: Carving Your Own Career Path To Create A Role That Fits Your Unique Strengths, with Tiffany Charles

August 25, 2020 07:14 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 191st episode of Financial Advisor Success Podcast!

My guest on today's podcast is Tiffany Charles. Tiffany is the chief growth officer for Destiny Capital, a hybrid advisory firm based near Denver, Colorado that oversees $260 million in assets under management for nearly 200 households. What's unique about Tiffany, though, is the way she's crafted a unique role for herself as the chief growth officer for an independent advisory firm with a focus not simply on personally prospecting for new business, but building more scalable marketing systems to power the growth of the entire firm.

In this episode, we talk in-depth about how Tiffany forged her own career path through the industry. Starting out first as an executive assistant and then taking on roles in compliance and marketing before climbing the ladder from an associate advisor to a lead, the challenges in building a book of clients by the traditional industry approach that may not be authentic to one's natural style of marketing, the way Tiffany restructured her own personal focus to move away from business outcomes and towards measuring her activity instead, and how Tiffany ultimately created her own unique chief growth officer role with the focus on the firm's revenue, client experience, brand identity, and culture.

We also talk about how Tiffany took on her chief growth officer role with her firm as a tie-in to a next-generation succession plan for the firm. Why it was so appealing to join a firm that was already in the midst of transitioning to the next generation of leadership, how she negotiated her role to become a new partner with the firm, and the way she co-created a new vision with the firm and her new partner to pursue a new niche of working with entrepreneurs.

And be certain to listen to the end, where Tiffany shares the challenges in transitioning an advisory firm from a lifestyle focus to a path of growth. Why even if you have an aspirational vision of someday leading an advisory firm, often the key experiences that shape you come from those early entry-level roles that are still so valuable in the early stages of our own careers, and the power of finding a mentor and investing into a coach to help get perspective on how to navigate the key steps of your career along the way.

Kitces Research On Advantages Of Niching In Time Use, Planning Approach, Pricing, and Productivity

August 24, 2020 07:09 am 3 Comments CATEGORY: Practice Management

In the early days of the financial advice industry, the nature of client relationships was primarily transactional, and any “financial planning” that happened was done purely from the perspective of determining a client’s needs so that the advisor could get paid for implementing a product with them to meet that need. That transactional relationship meant that advisors could work with anyone them meet – or at least anyone who had an interest and the financial wherewithal to buy their products – and since there wasn’t any value to meet with the client again until there was another opportunity to implement another product, an advisor would need potentially several hundred clients to be able to call back upon over time in order to make a living. However, as the advice industry has increasingly moved towards a recurring-revenue model (where advisors provide ongoing advice and generate ongoing fees), the number of clients that any advisor needs to serve has decreased dramatically, and the biggest limiter to an advisor’s practice is the number of ongoing clients they can support with a limited amount of time in the week, month, and year. Which means that it’s become increasingly important for advisors to focus on the operational efficiency of their financial planning practice.

In recent years, a growing number of financial advisors have begun to focus into niches and specializations as a way to differentiate themselves in an increasingly crowded advice marketplace. But those who have focused on a particular target clientele have also begun to note that it’s possible to run a more efficient (and more profitable) business by serving a client base that shares similar characteristics, as it means that an advisor can develop a deep and repeatable expertise to increase their capacity to serve more clients (and reduce the time it takes to provide financial planning to each).

Yet, in practice, actually committing to serve ‘just’ one certain type of client and ‘niche down’ is a major decision. As while it might seem ‘logical’, the idea of actively excluding prospective clients outside of their niche is downright daunting, to say the least, and up to this point, there’s been little hard evidence to support the time and efficiency value of having a niche. Until now.

By analyzing data from both the 2019 Kitces Research Study on Advisor Marketing and the 2020 Financial Planning Process Kitces Research Study, our analysis shows that there is indeed material efficiency value in focusing on a niche clientele to serve.

Specifically, our research analysis finds that top advisors with a niche (versus top advisors without a niche):

Spend 150+ more hours every year on high-value, client-facing activities (or 28% more time with clients and prospects, while spending 13% less time doing middle-office and back-office tasks)
Are able to deliver a more focused and customized financial planning process (as not every possible area of financial planning is applicable to every particular niche)
Serve an average of 14% more clients (since advisors with niches can more easily scale their practices)
Have clients with an average of both 25% more investable assets and higher net worth
Are able to set their AUM fees 9% higher, and generate 20% higher standalone planning fees
Earn an average of $660,000 (versus $395,000 for non-niche advisors at the same income percentile)

Ultimately, the key point is that there are indeed clear and measurable advantages (in both the short- and long-term) when opting to serve a niche clientele. Not only do advisors enjoy greater efficiencies withing their practices (by spending more time on the most value-added activities and less time on the least productive business tasks and stages of the financial planning process, and by offering a more concentrated, specialized planning approach), they charge more for their advice, serve more – and more affluent– clients (or, conversely, have the option to reduce their number of total clients by focusing in on their most profitable clientele), and end out seeing substantially better bottom-line results. And any business decision that allows a professional to serve their clients better, and to see better business results is, at the end of the day, a positive for advisors and their clients!

Weekend Reading for Financial Planners (August 22-23)

August 21, 2020 02:58 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big industry news that Schwab is launching a free MoneyGuide-like financial planning software solution for all of their (retail) clients to use, emphasizing both Schwab's own increasing focus on financial planning as part of its retail advice to consumers, and undermining financial advisors who view their own value proposition as 'just' delivering the comprehensive financial planning software output as a financial plan that more and more consumers will be able to get for free from Schwab directly.

Also in the news this week are several interesting industry studies, including one that finds despite the hype around model marketplaces from asset managers looking for adoption and technology companies offering them in the hopes of getting a piece of the pie, actual advisor adoption is barely around 10% as advisors fear making a third-party money manager too much of their own value proposition with clients, and a look at how the tech snafus of many advisor platforms are leading a majority of advisors under age 40 to look for new platforms that are more tech savvy.

From there, we have several interesting articles about advisory fee models, including the latest research from Bob Veres showing that, while the AUM model remains dominant with more than 70% of firms being "AUM-dominant", only a minority of those are AUM-only and instead blended fee models of AUM and hourly or subscription/retainer fees are becoming increasingly common, a look at one advisor who decided to stop offering hourly financial planning options for clients (out of frustration that they didn't always follow through on the advice properly on their own), and a discussion of what happened when one advisor decided to raise his minimum fee to $10,000 per client (and the conversations he had with a subset of clients who didn't want to stick around for the fee increase).

We also have a few articles around client communication, including a look at how the pandemic may have changed the style of communication but the demand for client communication is only increasing, how adopting more digital tools (if only 'forced' by the pandemic) is ending out reducing paperwork errors and increasing client trust, and an exploration of what it means to go 'full curbside' service in an advisory firm the way more and more retail businesses have had to transition

We wrap up with three interesting articles, all around the theme of productivity and the digital world: the first looks at how team meetings may actually be more productive virtually than in-person by adopting digital collaboration tools (e.g., Google Docs); the second explores how it's often 'easy' to quickly delegate by email but leads to such poor delegation habits that a "no delegating by email" rule may actually improve the business; and the last explores how technology has made it easier and easier to maintain an ever-longer to-do list but just results in more frustration when we can't get to everything on the digital to-do list, and why it's better to keep a shorter and simpler to-do list by paper (if only to force yourself not to try to task with more than can really be done and focus instead on the few things that really matter most!).

Enjoy the 'light' reading!

Complications To Undoing Unwanted 2020 RMDs From The “Same-Property Rule” And Other Factors

August 20, 2020 07:12 am 5 Comments CATEGORY: Retirement Planning

As an initial response to the economic devastation created by the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March, a $2+ trillion emergency fiscal stimulus package. In addition to several notable provisions, such as direct government payments to taxpayers and the elimination of the 10% early withdrawal penalty on distributions from retirement accounts, the CARES Act also suspended required minimum distributions (RMDs) for 2020 for IRAs, 401(ks), and other defined contribution retirement plans.

Unfortunately, the CARES Act didn’t address those who had already taken their RMD(s) – or at least what they thought were RMDs at the time – earlier in the year, but in April 2020, the IRS issued Notice 2020-23, which started to address this issue. More specifically, the Notice extended the rollover window deadline for distributions taken on or after February 1, 2020 to the later of July 15, 2020, or (the regular) 60 days after the distribution was received.

On June 23rd, 2020, the IRS further expanded its relief for early-year would-have-been-RMDs, when it issued Notice 2020-51. Notice 2020-51 provided unprecedented relief for many taxpayers, by not only (further) extending the rollover window for distributions that would have been 2020 RMDs (but for the CARES Act) to the later of August 31, 2020, or (the regular) 60 days after the distribution was received, but also by allowing taxpayers to ignore the prohibitions on completing multiple IRA rollovers in a 365-day period (the once-per-year rollover rule) or a rollover of a distribution from an inherited retirement account, that normally apply. The cutoff date for this unprecedented relief, however, is rapidly approaching, advisors have been fielding a flurry of questions from clients regarding the rollback guidance.

As a starting point, many clients are wondering if they have any options available if they miss the deadline. Unfortunately, distributions received more than 60 days ago, or for which a rollover would violate the one-per-year rollover rule, or that were made from an inherited IRA (401(k), or other defined contribution plan) generally won’t be able to be rolled back after the August 31, 2020 deadline. The sole exception to the hard deadline of August 31,2020 is for IRA, 401(k), and other defined contribution retirement plan owners (not beneficiaries) who can treat an early 2020 distribution as a Coronavirus-Related Distribution. More specifically, such distributions, as defined by Section 2202 CARES Act, can be returned up to three years after the date of distribution.

Meanwhile, some clients have asked what their options are if they took more than the required minimum distribution and would now like to roll those back. Unfortunately, unless such individuals are still within the 60-day window, or they can treat their distribution as a Coronavirus-Related Distribution, the portion of their distribution in excess of what would have been their 2020 RMD will not be eligible for return.

Another very common question has been around what happens when a client took an in-kind distribution earlier this year to satisfy their required minimum distribution. In many instances, the value of the distributed asset may have appreciated substantially since they were distributed. If the distribution was made from an IRA, retirees must return the same property that was taken out (as if the distribution was never made in the first place), regardless of how much the value of the property increased (or decreased) in the past few months. For those who may have already (incorrectly) returned cash to try and complete a rollover of the in-kind distribution, two steps are required to ‘fix’ the ‘problem’ without any penalties. First, the same property must be rolled back by the August 31, 2020 deadline. Second, the cash, along with any gain/loss attributable must be distributed as an excess contribution, by October 15, 2021.

Ultimately, the key point is that time is running short to return unwanted RMDs from retirement account, and while it’s possible for a limited number of retirees to classify prior distributions as Coronavirus-related distributions, the majority of individuals must take action by August 31, 2020 if they are to rollover an early year distribution that would have been an RMD, if not for the CARES Act. And while it’s possible that further relief for such amounts may be included in future stimulus bills by Congress, retirement accounts have already been specifically addressed with historic guidance, making it less likely that we’ll see future RMD relief from either Congress or the IRS.

Maximizing Premium Assistance Tax Credits For Self-Employed Health Insurance Costs

August 19, 2020 07:02 am 7 Comments CATEGORY: Taxes

In 2014, the Affordable Care Act (also known as “Obamacare”) established state health insurance programs with the intent to make health insurance accessible to all individuals and families – including the self-employed – without needing to obtain coverage through a (larger) group employer. For those with lower income who may not be able to afford coverage from the state marketplaces, the Affordable Care Act also established the Premium Tax Credit (PTC; also known as the Premium Assistance Tax Credit, or PATC), a fully refundable Federal income tax credit meant to subsidize the cost of insurance premiums for individuals who purchase insurance through the Health Insurance Marketplaces. The PTC provides support by effectively capping health insurance premiums (for the second-lowest-cost Silver health plan available in their state) to a certain percentage of the individual’s household income, calculated on a sliding scale for those earning up to 400% of the Federal Poverty Level (which amounts to $104,800 for a family of 4). Though because of the unique control that self-employed individuals have over the income and expenses of their businesses, they have a unique opportunity to make business decisions that can also help maximize their ability to receive Premium Tax Credits.

In this guest post, Vinicius Hiratuka, founder of Elevated Retirement Financial Services, examines planning strategies that self-employed individuals can use to manage their reportable income levels in order to qualify for the Premium Tax Credit, and maximize the amount of the PTC they receive.

Maintaining income levels within the allowed threshold to qualify for the PTC in the first place - between 100% and 400% of the Federal Poverty Limit (FPL) - is crucial because as little as a single dollar of income over the 400% FPL will result in the complete loss of the PTC.

Maximizing the PTC (once meeting the FPL-qualifying threshold) is largely influenced by managing above-the-line tax deductions (that affect the calculation of an individual’s AGI used to determine the PTC in the first place). As such, self-employed individuals often have greater flexibility to employ tax-savings strategies through business expense and retirement contribution planning, such as accelerating business expenses (e.g., at the end of the year) to reduce income and contributing to Health Savings Accounts (HSAs) and/or tax-deferred retirement accounts, which can be used to increase above-the-line deductions, and thus reduce their income for purposes of calculating the PTC itself, thereby increasing the amount of the PTC benefit being received.

However, financial advisors should assess if and how their planning strategy will affect both their self-employed clients’ PTC benefit and also their Qualified Business Income (QBI) deduction. For example, while a Solo 401(k) contribution may decrease income (which both improves the PTC and reduces the Federal tax liability), the reduced income may also make the QBI deduction lower. As a result, making contributions to a Traditional IRA account instead of a Solo 401(k) could be even more beneficial, as the result would still reduce MAGI to increase the PTC, but would not reduce the QBI deduction for the self-employed individual (as IRA contributions are considered personal and, technically, not business-related contributions).

Ultimately, financial advisors can help clients by simply clarifying what health insurance options and potential Premium Tax Credit assistance is available to them. This can help the client understand how the PTC benefits their tax situation, and at the same time alleviate the fears that many clients who are considering self-employment have about the high cost of health insurance for self-employed business owners. Advisors can also add value for their clients by walking them through detailed tax projections that illustrate how the PTC (and other deductions and credits) play into their overall tax liability. Not only does this provide potential opportunities to strengthen the relationship with clients’ tax professionals, but at the end of the day, the collaborative efforts will ensure that the client has a more holistically prepared financial plan, and health insurance they can afford to keep!