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Analyzing Biden’s New “American Families Plan” Tax Proposal

September 15, 2021 01:50 pm 18 Comments CATEGORY: Taxes

After months of anticipation with a ‘two-track’ process of infrastructure and separate tax legislation, Democrats on the House Ways and Means Committee released their tax proposals on September 13… and the measures are very different from what many expected! The legislation touches on a wide range of tax issues, from increasing the top ordinary income tax bracket to cracking down on popular retirement account strategies and bringing the estate and gift tax exemptions back to pre-2017 levels. Notably, though, the proposals do not include some rumored measures, such as equalizing the top ordinary income and capital gains rates or eliminating the step-up in basis. While the legislation will now be debated in Congress and finalized in the weeks to come, these proposals will create a range of planning opportunities for advisors to consider both in the future… and to take action before the legislation is signed and certain planning windows are closed!

As originally proposed by the Biden administration in its American Families Plan, the bill includes a host of new tax increases on households earning more than $400,000. In addition to restoring the 39.6% top marginal rate (which was reduced to 37% by the 2017 Tax Cut & Jobs Act), the legislation also increases the top capital gains rate to (only) 25%, although it lowers the amount of income needed to get into the top tax bracket (for both ordinary income and capital gains) to only $400,000 (for individuals, or $450,000 for married couples). As a result, the taxpayers who will be most impacted by the new rates are those in the $400,000–$500,000 income range, who will see themselves move from the current 35% bracket to the new 39.6% bracket – as higher earners who were already in the 37% bracket will see ‘only’ a 2.6% increase to 39.6%. Other changes targeting higher earners include a limitation on the Section 199A deduction for Qualified Business Income (QBI), an expansion of the Net Investment Income Tax (NIIT) impacting S Corporation owners, and a 3% surtax for ultra-high earners with over $5 million of income (making the true top tax rate 42.6%).

Another main focus of the bill is reforming retirement plan rules to close perceived “loopholes” commonly used by wealthy individuals. Perhaps most relevant for financial planners and their clients is the bill’s aim to eliminate the ‘backdoor’ Roth strategy, prohibiting Roth conversions of after-tax funds in retirement accounts altogether, as well as prohibiting all Roth conversions for those in the top income tax bracket (but only after a 10-year window, subtly encouraging high-income taxpayers to convert to Roth accounts – and pay taxes – sooner rather than later). Also notable are two new rules for high-income taxpayers with more than $10 million of aggregated retirement account assets: a prohibition on making new IRA contributions, and a new Required Minimum Distribution of 50% of the combined balances above $10 million (and 100% of combined balances above $20M), forcing dollars out of large retirement accounts. However, these forced-distribution rules only kick in for taxpayers in the top tax brackets, meaning those who are able to reduce or shift their income will still be able to contribute and accumulate retirement savings above and beyond the $10 million cap.

The proposed bill also contains significant reforms to estate law, most notably a 50% reduction in the estate and gift tax exemption – while simultaneously increasing the special valuation reduction for real property used in family farms and businesses from $750,000 to $11.7 million. The bill also cracks down on Intentionally Defective Grantor Trusts (IDGTs) by including those trusts’ assets in their grantors’ estates. In addition, any sale between an individual and their own grantor trust will be treated as the equivalent of a third-party sale, and any transfers out of a grantor trust will be considered a taxable gift. Family Limited Partnership discounts would be similarly curtailed as nonbusiness assets – including stocks, bonds, options, Real Estate Investment Trusts (REITs) or mutual funds, and trademarks – would no longer be eligible for valuation discounts (though any remaining bona fide business assets would still be eligible for a minority and marketability discounts as appropriate).

Ultimately, while some of the proposed changes may require large pivots to be made by advisors and clients, it’s worth remembering that this bill is not yet in its final form – there may still be weeks of negotiation before it is passed. That said, advisors should be prepared to act quickly, as many of the major proposals in the legislation are set to go into effect on January 1, 2022, and some will take effect as soon as the legislation is enacted… which may leave just weeks or even days to act if Congress proceeds!

#FA Success Ep 246: Finding The Right (Valuation) Formula To Give Everyone Buy-In For An Employee-Owned Advisory Firm, With Jessica Hovis Smith

September 14, 2021 07:04 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 246th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Jessica Hovis Smith. Jessica is the President of Longview Financial Advisors, an RIA with offices in Gadsden and Huntsville, Alabama that manages $194M for 199 clients.

What's unique about Jessica, though, is that she oversaw a succession plan that sought to transition ownership of two merged lifestyle practices into a single employee-owned, multigenerational firm, navigating multiple transitions along the way to eventually arrive at a valuation that both internal buyers, and the founders who were selling, felt was fair.

In this episode, we talk in depth about how Jessica's firm structured their purchase to ensure that new owners both understood the company culture and had a better chance of remaining with the firm throughout their careers, how Jessica and her firm were able to find local banks to finance smaller buy-ins from employees for shorter durations, versus industry banks that were only interested in larger, one-time transactions, and why the actual process used to arrive at Jessica's firm valuation turned out to be a bigger contributing factor to getting everyone's buy-in rather than the final valuation number itself.

We also talk about why Jessica's firm makes a clear distinction between the firm's financial planning and wealth management services, with each department having their own separate teams even though most clients receive both services, how Jessica incorporates philanthropic planning into her practice (and why she decided she wanted to work with clients with a "giver's heart" in the first place), and the realization Jessica had that, although the firm operates, markets, and hires to serve a philanthropic niche, it’s still OK that not every client who walks through the door absolutely must fit her ideal client avatar perfectly.

And be certain to listen to the end, where Jessica shares her own journey through Longview, starting off as an unpaid intern while in an undergraduate financial planning program, and then progressing from being an associate planner, to eventually becoming the Director of Financial Planning, before assuming the role of President, the challenges Jessica surmounted as she took over as the leader of the firm, transitioning from a boots-on-the-ground implementor to a visionary and ultimate decision-maker, and how Jessica has communicated with her own clients that, while she will continue to serve them, another planner on her team will assume the day-to-day activities for their accounts as Jessica takes on more of her leadership duties to guide the firm into the future.

So whether you’re interested in learning about how Jessica and Longview transitioned to an employee-owned firm, how the sellers and buyers arrived at a valuation they could both agree on, or how Jessica integrates philanthropic planning in her practice, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Jessica Hovis Smith.

Announcing The New Kitces Social Security Optimization Course And The State Of The (Nerd’s Eye View) Blog

September 13, 2021 07:02 am 0 Comments CATEGORY: Nerd's Eye View

For most of its history, the business of being a financial advisor wasn’t actually about getting paid for advice. Instead, giving financial advice was part of a consultative approach to selling financial services products, which involved identifying a gap, and then getting paid a commission to implement whatever product would fill that gap. But as technology and the rise of the internet are making financial services products increasingly accessible to consumers directly, the business of financial advice is shifting from being paid for implementing financial services products, to being paid for financial advice itself. In essence, financial advisors are becoming financial advicers.

As part of our mission to “Make Financial Advicers Better, and More Successful”, Kitces.com is focused on providing education that helps Financial Advicers be able to command greater fees for greater expertise, which in 2020 led us to launch our first Kitces Course on “How To Find Planning Opportunities When Reviewing A [Client’s] Tax Return”, with a particular focus on not just providing the information, but offering in-depth case studies and providing opportunities for advicers to actually practice applying the knowledge with real-world client scenarios. And now, with more than 1,000 advisors who completed our first Course, today we’re excited to formally open registration for our second, on “Maximizing Social Security for Couples” and how to optimize Social Security claiming decisions and coordinate them with the client’s portfolio and other retirement assets… with a similar focus on not just learning the technical rules, but having opportunities to practice applying the knowledge with real case study scenarios.

In addition, we’re also gearing up for the launch of our next Kitces Summit – this time on “Demonstrating Your [Financial Planning] Value To Clients”. Similar to our first Kitces Summit on Digital Marketing, our upcoming Kitces Summit will not have any consultants or vendors pitching you on services; instead, we continue our “Show, Don’t Tell” approach by inviting fellow financial advicers sharing what they do, that really works in their practices with their clients, when it comes to both showing the value they will provide to prospects, delivering value in their initial planning process with new clients, and showing ongoing value with ongoing clients after the first year. Stay tuned for our next Kitces Summit to open for full registration in the coming weeks.

Additional growth has also provided us with more resources to reinvest into the Kitces platform itself. As a result, today we’re excited to launch a new Members Section homepage to make it easier to navigate to our various White Papers, live events, courses, and CE quizzes, and will soon be rolling out the ability to Suggest Topics for the Nerd’s Eye View to cover (“What would you like us to nerd out on… for you!?”), and to be able to Save Favorite articles to come back to later.

In turn, to manage our ongoing growth, we’re also excited to announce several new members of the Kitces team, including a new Director of Advisor Education, as we continue to expand our Courses and Summits, two new “Financial Planning Nerds” joining our Editorial team producing our free blog and resources for advicers, and a new Membership Manager as the Kitces Members Section crosses 10,000 Advicers.

Notably, though, while the Kitces team expands its expertise, ultimately our goal is to share expertise that’s valuable to the Advicer community, regardless of source. As a result, we’re also expanding the opportunities for all of you, our readers, to share your own expertise through Kitces.com (and get paid for it!), with new ways to submit yourself for consideration as a potential Guest Post Author or Guest Webinar Speaker (in addition to our ongoing opportunities to appear on the financial Advisor Success podcast).

Thank you so much for the continued opportunity to support all of you, the Financial Advicer community. We’re happy to report that the ‘State of the Blog’ is better than ever, but, as always, we remain eager to hear from you on what else we can do to be even more relevant and useful in the content and resources we’re providing to help you be better, and more successful!

Weekend Reading for Financial Planners (Sept 11-12)

September 10, 2021 02:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a look at the latest SEC initiative on the 'gamification' of investing (e.g., Robinhood) to the use of behavioral nudges (e.g., certain robo-advisors), with a new warning that it will be delving deeper into the "digital engagement practices" of broker-dealers and investment advisers that use technology to entice investors to roll over assets and/or trade on their digital platforms... with a particular eye on when a technology-driven investment 'nudge' may turn into investment advice (with the higher fiduciary duty that would attach to such advice).

Also in the industry news this week are a number of other interesting industry headlines:

A recent survey shows that more than 9-in-10 CFP certificants are strongly satisfied with their choice of career, and that the majority of advisors have seen more prospects and had more communication with existing clients since the pandemic
FINRA's new Rule 4111 is taking effect, which will make it more onerous for broker-dealers to take on brokers with multiple dings on their on their regulatory record (in the hopes of curtailing the number of brokers that get re-hired after engaging in 'problematic' behavior)

From there, we have several articles on spending and saving, including:

How to think about the allocation of financial duties within couples (and ways for couples to structure their spending accounts for marital harmony)
Challenges in home affordability are being driven in part by the reduction in builders constructing "starter" homes, as the number of new homes costing <$200,000 has dropped from 60% in 2002 to <2% today
Tips on simple "money-saving" phone calls (from cable providers to property tax assessors), and potential services that can make those calls for you

We've also included a number of marketing-related articles:

The desire of advisory firm marketers to begin using testimonials is creating friction with compliance departments that are still figuring out how exactly to implement the new rules in their own practices
13 marketing KPIs that advisory firms should track to monitor the health of their advisory firm's growth path
The problems with marketing "service" as an advisory firm differentiator

We wrap up with three final articles, all around the theme of maximizing business efficiency and productivity:

Why it's problematic to simply look at "hours worked" because it rewards the high-hours inefficient worker over the more efficient employee who gets the work done in less time
The difference between efficiency (doing the same, with less) and productivity (doing more, with the same), and why efficiency drives profits but productivity drives growth
How companies historically showed their size by their employee counts and why a growing focus on productivity means "revenue per employee" may be a better metric for success

Enjoy the 'light' reading!

Kitces & Carl Ep 68: Managing Advisor Turnover And The Transferability Of Trust

September 9, 2021 07:08 am 0 Comments CATEGORY: Kitces & Carl Podcast

In July 2021, Schwab released its latest RIA benchmark study, which, among a plethora of other things, asked advisory firms what their top strategic initiatives were. Unsurprisingly, the top result was to “acquire new clients through client referrals”, but coming in at second (and moving up from the fifth spot the previous year) was to “recruit staff”. Given the steady growth in the number of clients that advisory firms serve (regardless of firm size) over the past several years, it’s also not surprising that firms are focused on hiring additional staff to absorb the growth. But in an industry that, for much of its history, has seen a tremendous amount of turnover, many financial advisors are concerned that the advisors they hire may not stick around nearly as long as their clients, the vast majority of which stay with the firm they hire for life. Which raises the question: How can financial advisory firms structure their hiring practices to manage the risk of advisor turnover?

In our 68th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss two reasons why advisory firms may be wary of hiring additional advisors, how advisory firms can transfer the trust that’s been built over time with their clients to other advisors, and the key mindset shift that advisors should make when thinking about hiring advisors into their firm.

As a starting point, it’s important to recognize that advisors often tend to overemphasize the need to ensure that clients have a continuous relationship with just one advisor. The reality is that clients, more often than not, care more about whether they are getting the best advice and service they can get rather than who is giving it to them. Which is good news for advisory firms and is the reason that they can not only scale and grow, but can also get lofty valuation multiples. Because if the “who” part of the equation isn’t as important as most advisors make it out to be, then it means that the trust between advisors and their clients is transferable. The key, however, is communicating that transfer the right way. Advisors who cling to client relationships by saying that they’ll “be there for anything serious that comes up” end up undermining the new advisor. On the other hand, by building up the newly hired advisor and framing the move as increasing the level of service that the client will receive, the hiring advisor takes the trust they’ve built with the client and hands it to the new advisor.

With that knowledge, advisors can then address the underlying reasons why they may be reluctant to hire additional advisors. The first is the fear that, after transferring trust to a new advisor, that advisor still decides to move on. The good news, however, is that the trust that was transferred can be transferred again, which in turn speaks to the fact that clients are clients of the firm, and not any one particular advisor… just as long as the firm is ensuring that their clients are being served well.

The other fear that hiring advisors often have is that their new hires will do so well that they decide to leave… and take clients with them. While that’s always a possibility, advisory firms can mitigate that risk by using a team structure at their practice and ensuring that clients interact with other advisors and employees at the firm, because the more touchpoints a client has, the more likely they’ll stay with the firm even if one member of the team happens to leave.

Ultimately, the key point is that financial advisors who are considering hiring additional advisors to help scale their firm (but may be uncomfortable with the notion that the advisors they hire may not be employees for life) can shift their mindset to viewing clients not as clients of the advisor who services them, but rather as clients of the firm itself. And it’s the transferability of the trust that’s been built with clients over time that makes it possible for firms to grow, for employees to turn over, and for clients to stay with an advisory firm for life.

Communicate Your Value As An Advisor By Explaining The “How” And Not Just The “What”

September 8, 2021 07:07 am 5 Comments CATEGORY: Client Trust & Communication

For many financial advisors, having the ability to effectively and efficiently provide solutions to new clients doesn’t always translate into prospects making the choice to engage in a planning agreement with the advisor. Sometimes, this can be caused by overlooking what many prospects truly value most, which is the path to the solution (i.e., how the advisor will implement a strategy) instead of the solution itself!

But making a simple change from focusing on what the solution is, to how it will be implemented, can have a profound effect on how prospects and clients perceive the advisor’s value. As while all financial advisors can provide a financial plan, the methods they use to implement the strategies, and that help clients realize the goals in their plan, are what really conveys the unique value that prospects seek from their advisor in the first place!

As while clients aren’t necessarily concerned about the fact that they will get a plan or have their assets managed by the advisor – they already know and expect that this is the case – what they do care about is the process the advisor will implement to deliver those services. This is where the advisor’s differentiating value is found for many prospects.

Accordingly, learning to talk about how services will be provided, with less emphasis on the specific services themselves, is important but can be a difficult shift for advisors to make. By creating a chart that clearly identifies not just the services the advisor offers (the advisor’s “whats”), but the processes they use to provide those services (the advisor’s “hows”) can be used as a reference tool for the advisor exclusively internally as they learn to focus on processes versus services. Alternatively, the chart can be created as a way to facilitate conversations with clients and prospects during meetings to explore not just their financial planning priorities but also the expectations they have of their advisor.

Ultimately, while financial advisors may find it difficult to articulate their value in ways that are most meaningful to prospects, identifying how to switch to focus on language that highlights the “how” of an advisor’s services instead of just which services are actually provided, can be a good opportunity to showcase value that will resonate with the prospect most.