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#FASuccess Ep 051: What Robo-Advisors Can Teach Human Advisors About Evidence-Based Behavioral Finance with Dan Egan

December 19, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 51st episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Dan Egan. Dan is the Director of Behavioral Finance and Investments at Betterment, the so-called "robo-advisor" that now manages more than $12 billion of assets under management for over 300,000 clients.

What's fascinating about Dan, though, is not simply that he was an early employee and Director at Betterment as the company as grown, but specifically his role as the Director of Behavioral Finance at a robo-advisor. In a time when the primary criticism that financial advisors levy at robo-advisors is their supposed inability to help clients with their behavioral issues when it comes to investing.

In this episode, we talk in depth about the nature of the "robo-advisor" movement, why the reality is that Betterment and its ilk aren't really in competition with financial advisors because they serve a different kind of consumer with different needs, how Betterment over the years has built an increasingly more robust goals-based financial planning process for its clients, and the challenges and opportunities that come with trying to deliver financial planning and investment advice at scale - in a world where Betterment serves more than 300,000 clients, while the typical advisory firm has no more than about 100 clients per advisor.

We also talk about what Betterment is doing specifically from the behavioral finance perspective, how Betterment is actually testing behavioral finance interventions to help their clients using a robust scientific process, the kinds of evidence-based insights they're gleaning about how we can help clients better – including how the conventional wisdom of strategies like "proactively communicating with clients during times of market volatility" can actually backfire – and the ways that companies like Betterment may actually be better positioned to help clients with certain behavioral issues, because unlike most financial advisors Betterment doesn't have to rely on third-party technology firms and instead can build its technology tools to nudge clients in the exact direction they need.

And be certain to listen to the end, as Dan discusses some of the insights he's gleaned about where and how human advisors will continue to be superior to technology in some areas, even as technology makes other aspects of what advisory firms do less and less valuable and more automated for everyone.

So whether you have been contemplating offering your own robo-advisor solution, are interested in how you can better incorporate insights from behavioral finance into your practice, or are curious about the areas in which human advisors will continue to be superior to technology, I hope you enjoy this episode of the Financial Advisor Success podcast!

Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017

December 18, 2017 07:01 am 188 Comments CATEGORY: Taxes

Major tax reform typically only occurs once every decade or few. But after a tumultuous series of negotiations in both the House and Senate, a final reconciled version of the Tax Cuts and Jobs Act of 2017 appears to be heading shortly to President Trump for signature.

The legislation will result in substantive tax reform for corporations, with the elimination of the AMT and consolidation down to a single 21% tax rate, all of which are permanent. However, when it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to a(nother) infamous sunset provision after the year 2025.

Nonetheless, the new tax laws have a lot to like for individual households, almost all of whom will see a reduction of taxes in the coming years (though not after the 2025 sunset). While 7 tax brackets remain, most are decreased by a few percentage points (to a top rate of 37%), along with the repeal of the Pease limitation. The AMT remains, but its exemption is widened. Most common deductions remain, though they are more limited, and an expanded standard deduction means fewer will likely claim itemized deductions at all in the future. There is a new crackdown on the Kiddie Tax (subjected to trust tax rates instead of parents' tax rates), but a much wider range of families will benefit from a great expanded Child Tax Credit (with drastically higher income phaseouts). And a doubling of the estate tax exemption amount – to $11.2M for individuals, and $22.4M for couples with portability, will make estate tax planning irrelevant in 2018 and beyond for all but the wealthiest of ultra-HNW clients.

Of particular interest for financial advisors are a number of key provisions. The controversial rule that would have eliminated individual lot identification, and required all investors to use FIFO accounting, is out and not included in the final legislation. However, also out is the ability to deduct any miscellaneous itemized deductions subject to the 2% of AGI floor – which means all investment advisory fees will no longer be deductible starting in 2018. In addition, several popular Roth strategies will be curtailed by the repeal of recharacterizations of Roth conversions (although the backdoor Roth rules remain). And while the deduction for pass-through businesses remains in place in the final legislation, and may be appealing for “smaller” advisors whose total income is under the $157,500 for individuals (and $315,000 for married couples) threshold. Although for larger advisory firms, the service business treatment is so unappealing, that large RIAs may soon all convert to C corporations (or at least, become LLCs and partnerships taxed as corporations under the “Check The Box” rules).

Ultimately, the new tax rules are actually complex enough that it will likely take months or even years for all of the new tax strategies to emerge, from when it will (or won’t) make sense to convert to a pass-through business, to navigating the new tax brackets, and the emergence of strategies like “charitable lumping” to navigate a higher standard deduction. In the near term, though, most are simply focused on taking advantage of end-of-year tax planning… especially taking advantage of deductions in the next two weeks that may not be available after 2017 once the Tax Cuts and Jobs Act is signed into law.

On the “plus” side, though, at least ongoing tax complexity means there will continue to be value for tax planning advice?

Weekend Reading for Financial Planners (December 16-17)

December 15, 2017 02:57 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the buzz that last-minute changes to the pass-through provisions of the proposed Republican tax plan could have a major impact on broker-dealers and RIAs, given that the version as written would have a substantial bias for independent broker-dealers over employee brokers (as the former would be eligible for favorable pass-through treatment while the latter would not), and would present significant challenges for large RIAs (that may struggle to raise capital given their less preferential tax rates than other industries). With a final tax plan due "imminently" soon, we'll see what the final outcome will be.

Also in the news this week was a fascinating consumer study, which finds that the rise of "robo-advisors" and digital advice tools isn't causing consumers to move away from human financial advisors, and instead is leading self-directed investors to adopt a combination of human and digital solutions – the first indication that the rise of digital tools could actually be a boon for human financial advisors (particularly those positioned to add value on top of what increasingly sophisticated digital tools can already provide to consumers directly).

From there, we have several articles about (digital and content) marketing for financial advisors, including guidance on how to effectively design a real lead-generation process on your financial advisor website, the typical content marketing mistakes that most financial advisory firms make when they get started with digital marketing, how advisors need to focus more on the "triggers" that make prospects actually seek out a financial advisor in order to drive more new business, and some ideas about how advisors can change their marketing in a world where client referrals appear to be on the decline.

We also have a few practice management articles this week, from a look at the recent Investment News Advisor Compensation benchmarking study that shows financial advisor compensation is up significantly (good news for advisors) but that growth is declining (an ominous sign for many firms), to a discussion of the recently emerging trend of large RIAs forming their own subsidiary broker-dealers (to manage old legacy B/D business, or even to facilitate the offering of alternative investments to new clients), and a discussion of whether the introduction of private equity firms to the RIA space could ultimately threaten their growth trends by introducing new conflicts of interest (in a world where RIAs thus far have thrived in part from their sheer lack of conflicts relative to other advisor business models).

We wrap up with three interesting articles, all around the theme of managing your personal productivity and creating a structured schedule: the first explores how the classic 8-hour workday may be an anachronism of the modern world, as while it was a humane change to long factory hours, in the modern world of knowledge-based work, a structure of 1-hour-on-and-15-minute-break appears to be far more conducive to productivity; the second looks at how structuring your day can help to facilitate better personal productivity when working from home; and the last discusses how the "ideal structure" for your day varies dramatically depending on whether you're a "maker" (a creative type, who needs long blocks of uninterrupted time) or a "manager" (who needs a highly structured schedule of short meetings to put out all the necessary fires and manage a team in the right direction)... and the conflicts that can arise when makers and managers don't respect the fact that the other has a very different ideal schedule.

Enjoy the "light" reading!

Another Reason For Putting Your Advisory Firm Fees And Minimums On Your Website

December 14, 2017 01:42 pm 17 Comments CATEGORY: Client Trust & Communication

The conventional wisdom amongst financial advisors is that the best place to talk about advisory fees and minimums is face-to-face with prospective clients, who are told "Come in for an introductory meeting and 'we'll talk' about the cost to work together." Doing so allows the financial advisor the opportunity to explain the nature of what he/she does, and the value of their services, to provide better context regarding their costs. And, if necessary, allows the advisor to make an on-the-spot decision about whether to grant a prospective client an exception when it comes to their fees or minimums. Except as it turns out, that also may be the biggest drawback to waiting until the first prospect meeting to discuss advisory fees and minimums, and can actually put us in situations where we make 'business' decisions we ultimately regret!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at why it is important to put your advisory firm fees and minimums on your website up front, including why it makes you more referable, helps screen out non-qualified prospects, and can protect us from ourselves when it comes to making fee and minimum concessions just to get (bad-fit) clients!

The first issue with not publishing your advisory fees and minimums, though, is simply what it communicates to the client. After all, the RIA that doesn't publish their fee schedule online is effectively saying: “We believe in fiduciary transparency. That’s why we won’t tell up front what we charge.” And the reality is that, when it comes to RIAs in particular, our fees are already publicly available through the SEC's Investment Adviser Public Disclosure website anyway! Which makes advisory firms seems as though they have something they're trying to hide by making already-required-to-be-public fee schedules and minimums difficult for prospects to find. And to make matters even worse, not putting your fees and minimums on your website makes it hard for other people to refer to you, as there’s nothing more embarrassing for a referrer than sending someone to you, only to have you reject them. As a result, referrers are tempted not to refer, because it's safe to not refer to you than it is to refer and risk creating an awkward social situation if their referral doesn't meet your minimums or can't afford your fees!

Another important consideration is how listing your fees and minimums allows your website to screen out non-qualified prospects. And this is valuable for advisors, because one of the most wasteful things you can do, from a business development perspective, is to spend a lot of time meeting with prospects who aren’t actually qualified to do business with you. When prospective clients can see what you cost and what your minimums are, if it's not a good fit for them, they'll just move on. Perhaps every now and then you’ll miss out on a prospect you might have converted and convinced you were valuable enough and worth paying for if you met in person. But you’ll also save a lot of wasted meetings with people who were, realistically, never going to do business with you.

Perhaps most important, though, is the simple fact that as a helping profession, most financial planners want to help people. Which means it can be especially hard to tell someone "no" to their face in a meeting, leading to the temptation to discount fees, reduce minimums, or make other on-the-spot concessions. And even for otherwise qualified clients, it's difficult in the moment to stand firm on your advisory fees if a prospective client questions them the first time they hear about the fee. But when advisory fees and minimums are disclosed on your website, prospects know the details up front - and if it's not a good fit, they likely won't contact you in the first place. Which reduces the risk that you put yourself in the awkward position where you make bad business concessions to a prospect simply because it felt too awkward to reject them (even if it would have been a good business decision to do so!).

Because in the end, actually putting fees on your website is not that hard. Just write “Our fee schedule is <blank>. The minimum to work with us is <ZZZ> of assets.” If you are concerned about the possibility that you might take a client with only $300,000 who was in their 40s, then go ahead and just write something like “Our minimums are $500,000 of investable assets. However, our services are also available to active accumulators under the age of 45 with only a $300,000 minimum.” In other words, if you have rules about how you decide which clients to take, or not, simply disclose it, and let prospective clients choose!

The bottom line, though, is simply to recognize that putting your advisory fees and minimums on your website is good business. Both because it helps to fulfill your brand promise of being a real fiduciary. And because it makes it easier to refer to you. But most of all, because it helps to screen out non-qualified prospects, so you don’t meet with them when you shouldn’t. Which at best wastes your time. And it worst puts you in a position where you can’t help yourself and allow your fees and minimums to be haggled down. Which is not good for your business in the long run!

How The Proposed Pass-Through Rules Distort Income And Valuations Of Large Service Businesses

December 13, 2017 07:01 am 24 Comments CATEGORY: Taxes

(Note: For an updated discussion of the final 2017 GOP Tax Plan, see Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017.)

A key aspect of proposed tax reforms, ever since President Trump was on the campaign trail, was the possibility of reducing the tax rate on pass-through business entities like S corporations, LLCs, and partnerships. To some, the tax break was intended as an incentive for small business growth. For others, it was viewed as a necessity when proposed corporate tax reform and lower tax rates for C corporations would effectively put pass-through entities at a disadvantage without a similar break. Either way, there has been substantial momentum on the proposal, which was codified in both the House and Senate versions of the Tax Cuts and Jobs Act.

However, a key caveat of creating favorable treatment for pass-through businesses is to not unwittingly convert personal labor income – i.e., wages or self-employment income – into pass-through income eligible for favorable rates. Which at the least can distort the relative incentives of being an employee (paid as wages) versus self-employed (paid through a pass-through business entity). And at worst could incentivize employees to literally quit their jobs and try to get rehired as independent consultants – and paid through shell pass-through businesses – just to obtain favorable rates.

As a result, both the House and Senate proposals under the Tax Cuts and Jobs Act would limit the availability of the pass-through for so-called “service businesses”, either by eliminating the favorable rates for those who are “active participants” in a pass-through service business (in the House version), or simply eliminating the preferential treatment altogether for pass-through service businesses (in the Senate version).

Yet in practice, the actual mechanisms that both the House and Senate have created impose substantial economic burdens on large service businesses. Founder/employees of large service businesses (e.g., with $10M+ of employment income) can actually face marginal tax rates of 100%, 200%, or more on their wages as a leader of the firm, because their employment in their firm converts all their non-wage business income into less-favored ordinary income (under the House proposal). Large service businesses that want to scale may struggle to attract capital if their profits are literally “less valuable” on an after-tax basis to outside investors when all service business income is taxed less favorably (under the Senate proposal). And service businesses that also have non-service business lines will find their non-service income (otherwise eligible for favorable rates) becoming "tainted" by being wrapped under a service business.

Which means ultimately, if the goal is to reasonably separate “labor income” from “capital income” without distorting large service businesses, it’s necessary to adapt the rules further. One option is to simply codify a requirement that in service businesses, “reasonable compensation” must be paid (and taxed as wages), with only the excess eligible for favorable pass-through treatment (perhaps with a safe harbor to stipulate that any excess above a certain level of income is automatically eligible for pass-through treatment). Or alternatively, Congress could actually designate a “qualifying large service business” (e.g., with at least $10M of revenue and 30+ employees) that is automatically deemed to qualify its business income as favorable pass-through income (as such businesses typically already have governance mechanisms in place to ensure owner-employees are paid properly as owners for their labor, and separately for their pass-through business profits).

Without some solution, though, service businesses face substantial disadvantages in attracting capital, and/or outright disincentives for founders to continue to work – potentially with marginal tax rates in excess of 100%! Or alternatively, the current proposals may simply drive large service businesses to all recharacterize themselves as C corporations, in a world where the corporate tax rate would be dramatically lower (and even if the firm was deemed a Personal Service Corporation, would be taxed more favorably than a pass-through service business if top corporate tax rates are only 20%). Which would then disadvantage any service businesses that couldn’t effectively reorganize as a C corporation.

The bottom line, though, is simply to recognize that while it’s an important matter of tax policy to tax labor income as labor income, and business income as business income… the reality is that in large service businesses, the profits of the business are substantially attributable to investments in capital (albeit human capital), and not just the fruits of an owner-employee’s personal labor. Good tax policy must recognize that difference.

#FASuccess Ep 050: The Value Of Hiring A Financial Advisor Coach To Maintain Your Business Focus with Tracy Beckes

December 12, 2017 07:01 am 4 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 50th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Tracy Beckes. Tracy runs an eponymous financial advisor coaching firm, and in fact was one of the very first coaches to specialize in working with financial advisors nearly 20 years ago.

What's fascinating about Tracy, though, is not merely her history as a coach for financial advisors, but the way that she's been able to systematize her coaching strategies into concrete tools and templates that she uses with her coaching clients to help them navigate the common challenges of trying to run what she calls an "Effortless, Outrageous" practice.

In this episode, we talk in depth about some of Tracy's coaching tools, from the value of creating Engagement Standards with clients that set the terms of both what the advisor commits to doing for the client and what the client is expected to do to be a productive part of the advisor-client relationship, to why it's so important to create a "cadence of accountability" within an advisory firm with a regular series of daily, weekly, and quarterly scheduled meetings, to the benefits of creating a one-page strategic business plan that sets forth the business' Core Values, its Purpose, its Big Stretch Goal, and a series of 3-year, 12-month, and 90-day objectives, all built to help the firm create better focus in what it does... and how establishing a clear target market or niche can actually bring tremendous efficiency to an advisory firm and an advisor's time in the business.

We also talk about what financial advisor coaching itself actually is, how it differs from training or consulting, why successful financial advisors so often seek out coaches – even when they're already fairly successful in their businesses – and why the real secret to advisory firm growth is all about systematizing, developing people, and honoring the power of the 80/20 rule... which a financial advisor coach can help you to focus on.

And be certain to listen to the end, where we talk about how the real secret to having more productive team meetings is all about your ability to actually structure meetings to make key decisions or solve problems... and how advisors can better craft a meeting agenda process that helps to target the most important issues at every meeting.

So whether you have been considering hiring a financial advisor coach to maintain business focus, contemplating how you can better set and manage expectations for your relationships with clients, or interested in how you can have more productive team meetings, I hope you enjoy this episode of the Financial Advisor Success podcast!

3 Real #FinTech Disruptions In The Financial Advisory Industry

December 11, 2017 07:01 am 9 Comments CATEGORY: Technology & Advisor FinTech

While the accelerating pace of technological change has many industries buzzing about the risk of disruption – including the world of financial advice – in practice, many forecasted disruptions never come to pass. Sometimes, it’s because the new “innovation” isn’t really all that much better than the status quo – at least, not better-enough to convince people to make a change. In other cases, it’s simply because it’s a new solution that consumers aren’t yet accustomed to paying for.

In fact, often some of the most disruptive business models are the ones that succeed through the use of cross-subsidies – giving away “for free” something that consumers were previously paying for, because there’s an opportunity to make money in other ways instead. Or viewed another way – not every part of every business model must be compensated, as long as there’s at least one component that is valuable to someone who’s willing to pay enough to make it economically viable.

In the context of financial advisors in particular, the rise of technology and the opportunities of cross-subsidy models introduce the potential for numerous disruptions in the coming years. From an RIA custodian that gives away the actual custody services, trading, and execution for free (and gets paid for its technology platform instead), to model management software that makes it feasible to buy index ETFs (or factor-weighted smart beta, or portfolios with SRI tilts) without the need for a mutual fund or ETF itself, and even the possibility that in the future some financial advisors might stop charging for investment management altogether and instead charge fee-for-service financial planning and “give away” the investment management services for free!

Ultimately, the challenge of disruptive cross-subsidy models is that they still require finding someone who is willing to pay for a key component of value, potentially at a cost that is far higher (or at least far different) than what he/she was accustomed to previously. Nonetheless, from Google Maps disrupting Garmin, to Chance the Rapper and other musicians increasingly giving away their music for free (and getting paid for live performances and merchandising instead), the reality is that significant disruption can occur by finding the one most valuable component of a solution… and giving everything else away for “free” to support that core value.

Is it time for the industry supporting financial advisors – and the financial advisor business model itself – to experience such a disruption?

Weekend Reading for Financial Planners (December 9-10)

December 8, 2017 02:57 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the "leaked" announcement that Merrill Lynch isn't "currently" making plans to leave the Broker Protocol, while avoiding making any official statement that would foreclose on their ability to leave next year, even as rumblings begin that Wells Fargo might be thinking about whether to leave the Protocol instead, and use its FiNet platform as a way to retain its more independent-minded brokers without allowing them to be recruited away.

From there, we have several articles about advisor technology, including the results of the latest annual Advisor Technology survey from Financial Planning magazine (which unfortunately is no longer headed by advisor tech guru Joel Bruckenstein and doesn't provide nearly as much useful information as it once did), a review of the MaxMyInterest platform that is using "robo" tools to automate maximizing cash yields for RIA clients (and self-directed investors), an overview of the tech strategies and roadmaps of the leading RIA custodians, a discussion of the ongoing rise of model portfolios (and the technology to execute them), and a good reminder of how challenging it is for financial advisors to switch financial planning software platforms.

We also have a few more technical tax-planning articles this week, from a great in-depth overview of year-end tax planning strategies, a reminder of why estate tax planning is still relevant for high net worth clients (even if the estate tax exemptions are increased or potentially repealed), and a list of "tax alpha" strategies that advisors can engage in to improve a client's after-tax portfolio returns.

We wrap up with three interesting articles, all around the theme of the changing future of financial planning: the first looks at how the rise of digital personal finance tools is making it easier and easier for researchers to test new forms of "digital nudges" to help people improve their financial behaviors; the second explores the ongoing rise of financial planning academic, as the number of degree-based financial planning programs now exceeds adult certificate programs and more and more financial planning practitioners are becoming part-time professors; and the last provides a good reminder that, even as the RIA community worries about whether the SEC's uniform fiduciary standard could lead to FINRA becoming a regulator of RIAs, that the SEC hasn't done a particularly good job of regulating RIAs either... including the fact that if the Investment Advisers Act of 1940 was enforced as written, the majority of "advisors" at broker-dealers would already be fiduciary RIAs, and the entire DoL fiduciary rule would have been a moot point in the first place!

Enjoy the "light" reading!

Advisor #FinTech As A Distribution Channel For Insurance And Investment Products

December 7, 2017 12:32 pm 2 Comments CATEGORY: Technology & Advisor FinTech

The competition for getting a financial advisor's attention has never been fiercer... which in recent years has led to an explosion of increasingly aggressive wholesaler efforts to try to get in front of advisors, especially in the RIA channel. The volume of inquiries has risen so much, most advisors don't even have the time to politely say "no" to all the requests, and instead are increasingly adopting a "don't call us, we'll call you if we want information" approach, or simply going directly to the websites of product manufacturers for the information they need. Which means asset managers, insurance companies, and other financial services product manufacturers need to find new and innovative ways to reach advisors in the first place, to get their investment, insurance, and annuity products to market.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at an emerging trend of investment and insurance product distributioin: the idea of technology itself as a product distribution channel to reach advisors... and the opportunities, innovations, and conflicts of interest that arise from such arrangements!

The most apparent starting point for this shift of technology as a distribution channel was the rise of the robo-advisors. Robo-advisors first started gaining real momentum in 2014, and it was around this time that asset managers – particularly fund managers – began asking, "Do we need to launch our own robo advisors, or risk being excluded from the trend?" But the reality was that there was nothing unique about robo-advisors that required the use of ETFs. Effectively robo-advisor technology was simply a way to gather assets and execute a managed account, which means the technology was basically just another distribution channel for the asset manager - companies that could get their products into the managed account wrapper were the winners. And so, after Schwab picked up over $2B in assets in just their first 3 months of Schwab Intelligent Portfolios - comprised nearly 70% of Schwab's own proprietary products - BlackRock decided to acquire FutureAdvisor to distribute their iShares ETFs, Invesco bought Jemstep to distribute PowerShares ETFs, and WisdomTree invested heavily into AdvisorEngine to distribute WisdomTree ETFs, as asset managers began seeking robo-platforms that they could put their funds on and offer the technology to advisors – turning the robo-advisor into a distribution channel (and owning your own robo-advisor as a vertically integrated distribution strategy).

Over the past year, this evolution of technology as a distribution channel has gone one step further, with the rise of the so-called “Model Marketplace”, where advisors can select third-party investment models, and then have trades automatically executed in the advisor's own portfolio management or rebalancing software tools. The distinction from the early robo-advisors like Wealthfront, Betterment, FutureAdvisor, and Schwab Intelligent Portfolios was that advisors remain responsible for (and in control of) placing trades, although that trading is made very easy by the technology. However, the caveat for such portfolios was that in order to use them for free, advisors typically must use pre-fabricated models in the marketplace... which are often made by the asset managers, and include their own proprietary funds. In point of fact, the technology is so becoming a distribution channel, that now asset managers are starting to subsidize the cost of advisor technology, just to have a chance to get their funds into the hands of the advisors that use the technology! And notably, this trend isn’t unique to “just” rebalancing software and model marketplaces, as financial planning software such as MoneyGuidePro and Advizr have begun to partner with product companies to easily recommend appropriate insurance or investment products where the client can open the account or apply electronically on the spot from within the planning software itself!

And despite the rapid push towards new technology channels, I suspect we’re still in the early phases of this transition to the idea that Advisor FinTech itself can be a distribution channel. From the technology company’s perspective, the good news of this emerging channel is that it provides a new source of revenue for companies, especially since advisors have already shown far more willingness to have technology costs borne by the expense ratios of insurance and investment products, rather than by paying for the software directly from their own Profit and Loss statement.

However, with this new distribution channel will come new innovation, opportunities, and conflicts of interest – as technology companies struggle with everything from overcoming the same growth problems that robo-advisors faced in the first place (as it's very hard to grow user adoption, and existing incumbents with existing brands can easily leapfrog new entrants), to technology companies navigating the mid-point between the conflicts of getting paid for product distribution and trying to satisfy independent fiduciary advisors (as the recent debacle of TD Ameritrade’s ETF Market Center illustrated).

The bottom line, though, is simply to recognize that a major shift is currently underway. As advisors increasingly adopt the technology, the technology itself is becoming a distribution channel for products that asset managers, insurance companies, and annuity companies, who seem very willing to pay for access in a competitive marketplace. Which means more new tools and innovation for advisors. But also tools with a whole new range of conflicts of interest that we’ve never had to deal with before!

Strategies To Minimize Or Delay Required Minimum Distribution (RMD) Obligations

December 6, 2017 07:01 am 42 Comments CATEGORY: Taxes

The benefit of contributing to pre-tax retirement accounts like IRAs and 401(k) plans is the opportunity to receive an upfront tax deduction, and enjoy the growth that remains tax-deferred as long as the investments remain in the retirement account. For those accumulating towards retirement, this provides additional tax-deferred compounding growth that can help bridge the gap towards retirement itself. With the expectation that once someone reaches retirement, they will begin to take distributions – and Uncle Sam will finally get his share of the tax-deferred account.

To ensure this final outcome, the Internal Revenue Code requires that retirement account owners begin liquidating their accounts upon reaching age 70 ½. Of course, for those who actually need to use their retirement account to fund their retirement lifestyle anyway, distributions will likely be occurring already. However, for those who don’t need the funds, the Required Minimum Distribution (RMD) obligation ensures that at least some money is distributed – and taxed – every year.

For those who don’t actually need to use their retirement accounts – yet, or at all – the mandatory withdrawals of the RMD obligation presents a substantial tax challenge, as the forced distributions not only trigger taxes on the RMD amount itself, but also risks driving the retiree up into a higher tax bracket when stacked on top of all of his/her other retirement income as well.

Fortunately, though, the reality is that there are numerous strategies that can be leveraged to manage and minimize required minimum distributions – both for those who have already reached the RMD phase, and also those still accumulating towards it, who want to plan ahead to minimize the bite of RMDs in the future.

Ultimately, it’s impossible to completely and indefinitely avoid the requirement to distribute retirement accounts – if only because, even to the extent the account isn’t liquidated during life, the beneficiaries will be subject to additional RMD obligations after the death of the original account owner. Nonetheless, the potential exists to at least partially manage and minimize RMDs, and mitigate some of their tax bite!