Nerd's Eye View blog

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!

#FASuccess Ep 049: Getting Paid For (Hourly) Financial Planning By Packaging Financial Advice with Anna Sergunina

December 5, 2017 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 49th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Anna Sergunina. Anna is the owner of MainStreet Financial Planning, an hourly-based financial planning firm founded under the Garrett Planning Network that has grown to more than $600,000 of revenue, all from simply getting paid to provide hourly financial planning advice (with no income from insurance products or managing investment portfolios at all).

What's fascinating about Anna's business, though, is the way that she's figured out how to communicate the value of hourly financial planning – by creating very specific financial advice packages for various types of prospective client profiles – and then using her website to both explain the value of financial planning packages to prospects, and to screen out those who aren't really likely to take the process seriously.

In this episode, we talk in depth about Anna's 5-meeting process for financial planning, why she charges $100 as an upfront deposit just to have an Initial Inquiry approach meeting with prospects, the way she focuses first on the client's spending to help them understand what they can save and what kinds of goals might be possible, and then proceeds to an interactive financial planning session using MoneyGuidePro, all of which leads up to a final meeting where she ultimately presents financial planning recommendations and then helps clients to implement them.

We also talk about how Anna sets the level for her financial planning fees, the sources of new business that has her firm on track to add more than 100 new financial planning clients this year, the way she re-engages existing clients for ongoing financial planning updates to generate a level of recurring revenue, and why and how she built extensive workflows in her Wealthbox CRM to manage the financial planning logistics with her ever-growing 6-person team.

And be certain to listen to the end, where Anna shares her own path into the industry, how she actually bought out MainStreet Financial Planning from its original founder, the way she's decided to structure her week with some days dedicated to working in the business and others solely for working on the business, and why she thinks it's so crucial that even fiduciary financial planners learn how to sell. Because you can't get paid for your knowledge and expertise until you can sell someone on its value and why they should pay you.

So whether you have been trying to figure out how to better communicate your financial planning services, have been contemplating providing hourly services and wanting to know how to do it successfully, or are interested in more effectively using CRM to manage workflows, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (December 2017)

December 4, 2017 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the December 2017 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the big news that Lincoln Financial has decided to build its AdviceNext advisor workstation on Fidelity’s Wealthscape, as Fidelity’s investment into eMoney Advisor is starting to pay off by becoming the most holistic-wealth-management-oriented custody and clearing platform… a notable threat to both technology competitors like Envestnet, and custody-and-clearing competitors like Pershing. And with DoL fiduciary pushing more and more broker-dealers towards financial planning, Fidelity suddenly seems incredibly well positioned to gain market share in the shifting landscape!

From there, the latest highlights also include a number of major announcements of new capital for advisor FinTech startups, as well as new partnerships and big feature rollouts this month, including:

AdvicePay raises $500k of seed capital to provide custody-compliant payment processing for one-time and retainer financial planning fees
Gainfully raises $2.5M of seed capital for a content sharing platform for advisors to distribute client-friendly compliance-pre-approved content… paid for by asset managers and other product manufacturers!
Morgan Stanley partners with LifeYield to offer household-level asset location tax alpha tools
Morningstar launches its new Office Cloud, providing a deep integration of Morningstar research capabilities on top of a performance reporting portal for clients

Read the analysis about these announcements, and a discussion of more trends in advisor technology, in this month's column, including a look at the evolving landscape of account aggregation as Fidelity launches Fidelity Access (allowing a direct API feed of client financial data without the need for screen scraping) and UBS begins to waive account fees for clients who agree to account-aggregate held-away accounts, MoneyGuidePro launches client-directed data-gathering and Discovery Lab tools (and a study that shows 2/3rds of clients would prefer to enter data and evaluate goals in the comfort of their own home), and a look at how even as advisor FinTech increasingly matches the capabilities of “robo-advisors” when it comes to onboarding, the robo-advisors continue to innovate, with robust new capabilities in financial planning software (Wealthfront), and new facilitate to more easily facilitate tax-savvy charitable giving (at least, until/unless the rules change with a new requirement for FIFO accounting!).

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

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

Weekend Reading for Financial Planners (December 2-3)

December 1, 2017 02:56 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 news that UBS has exited the Broker Protocol, just three weeks after Morgan Stanley... but not before spiking the ball at Merrill Lynch and recruiting away several big Merrill teams as they left, which may just accelerate Merrill Lynch's departure from the Protocol as the entire agreement unravels (to the detriment of both brokers and their clients).

Also in the news this week is the final and official announcement of the 18-month delay of the Department of Labor's fiduciary rule... which may kick off a new spate of lawsuits by fiduciary advocates aimed at halting the delay (to compel the rule to take effect at the beginning of 2018 after all), and a surprise withdrawal of support from the White House of the SEC's Administrative Law Judges, raising the possibility that the Supreme Court make take Ray Lucia's case and strike down the SEC's ability to appoint its own ALJs.

From there, we have several articles about life insurance, including a look at how life insurance companies are trying to develop new extension riders to avoid the otherwise taxable event of policyowners who reach age 100 (though it's not clear that they can do so under the tax code), the issues with "guaranteed" whole life and why many common whole life strategies are not actually fully guaranteed (even though old-fashioned traditional whole life was/is), and a primer on the concept of "Private Placement Life Insurance" (PPLI) as a strategy to use the tax-deferral wrapper of life insurance to minimize the tax drag on high-income alternative investments for high-net-worth investors.

We also have a few practice management articles, including: a look at the rise of "predatory buyers" of advisory firms, who often leverage the limited closed market of their broker-dealer or RIA custodian to persuade advisory firm owners to sell on less-than-ideal (valuation or tax) terms; a reminder that growing a billion dollar (of AUM) advisory firm will require founders to transition from "just" being advisors into actually being "leaders" of their advisory firms (which in practice is a very uncomfortable transition for many!); and a look at how automation tools can be used to better engage clients and prospects... because even though the advisor knows it may have been automated, as long as the client receives value, they likely won't care about how it was achieved!

We wrap up with three interesting articles, all around the theme of our rapidly changing world: the first is a fascinating in-depth look at the blockchain, the underlying technology that powers Bitcoin (and other cryptocurrencies), and why even if Bitcoin turns out to be a bubble or a fad, the blockchain technology itself is likely here to stay and could revolutionize a wide range of industries; the second explores the "dying art of disagreement", and the idea that democracies are founded on our ability to have productive discourse with those we disagree with (which has become increasingly challenging with the polarization of today's modern world); and the last raises the interesting question of whether the fiduciary debate has already be co-opted to the point that being a fiduciary is no longer a meaningful differentiator, and whether it's time for leading advisors to take up a new battle to push the envelope around concepts like "integrity" or "stewardship" instead.

Enjoy the "light" reading!

Offering Financial Planning As An Employee Benefit For Your Advisory Firm Employees

November 30, 2017 01:32 pm 5 Comments CATEGORY: Practice Management

As financial planning firms, we offer a valuable service to consumers who are willing and able to pay for our services. Which is what makes the business of financial advice so valuable, and why the average income of a CFP professional is nearly double the median household income in the US. The unfortunate caveat, though, is that financial planning services still are not affordable to a large segment of consumers. Including, alas, the employees of most advisory firms, which means the very people who work there and are expected to advocate for the value of their firm's services and the benefits of financial planning have never actually experienced it themselves!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the issues to consider for advisory firms that want to remedy this gap offering financial planning as an employee benefit to the employees of their own firm... including considerations such whether to provide such services internally or externally, whether to let employees choose their own advisor, the tax consequences to consider, and why providing financial planning to employees can actually provide an Return On Investment as employees gain better perspective on how to improve the firm's client experience (by actually experiencing financial planning themselves!).

The first question you have to evaluate when considering how to offer financial planning as an employee benefit is whether you’re going to provide the financial planning services internally or externally. Offering financial planning “internally” means the firm's advisors actually do the financial planning for its employees. Firms may put one associate advisor in charge of all internal planning, or perhaps provide several advisors that employees can go to (since it may be awkward to get financial planning from your direct supervisor). Which raises a real issue with trying to do financial planning internally for employees: there are many conflicts of interest that can arise. For instance, what if an employee's financial plan includes a desire to leave the firm and go into another field? Or what if employees want to talk through the considerations of saving up enough money to buy out the founder in a firm (but don't want to announce their intentions to their co-workers yet)? These issues may be awkward to discuss internally.

As a result, most advisory firms I’ve seen that offer financial planning as an employee benefit offer it externally. The most straightforward approach is simply to engage in a reciprocal agreement with another similar-sized advisory firm – where each provides services to the other firm's employees. In this scenario, you will likely have a cost to actually pay the other advisory firm for their services as well, but if the firms are similar in size, presumably each firm will have roughly the same costs (and income) paid to each other. The caveat even with this approach, though, is that the firm may not actually have the expertise to help your employees, nor will you necessarily have the expertise to help theirs. Are you really prepared to develop for them a 3-year roadmap to repaying debt, navigating debt consolidation services, and repairing their credit scores, if that’s what your employee's planning needs are?

Which leads to a third option for financial planning as an employee benefit: just give employees a budget for financial planning, and let them go and find their own advisor. And the benefit of this approach is that employees can seek out their own advisors through organizations like the Garrett Planning Network or XY Planning Network, which include financial advisors whose expertise is in the areas that typically-younger "rank-and-file" employees actually need, while also having pricing that is less expensive than larger independent RIAs (and therefore more affordable to the advisory firm offering the employee benefit).

Beyond the enhancements in employee well-being that can come from having access to financial planning services (e.g., reduced stress, less absenteeism, better utilization of employee benefits, and lower employee turnover), one of the biggest indirect benefits of using an external firm is that employees can actually experience what it's like to seek out and be a financial planning client. Going through the process of finding an advisor, being onboarded, and then working with that advisor on an ongoing basis, gives employees perspective not only on the value of financial planning, but may also generate ideas about how to provide services better for the firm’s own clients. Of course, in order to avoid unintended negative feelings, it is important that employees understand the tax consequences of receiving financial planning as an employee benefit. Because financial planning is not a tax-qualified employee benefit perk, any money actually paid to an external firm (or possibly the market value of the services received internally), must be reported as W-2 income and becomes taxable to the employee.

The bottom line, though, is simply to recognize that financial planning services can be an excellent benefit to provide to employees, and particularly when employees get to seek out an external advisor and gain valuable insight into how your own firm can better service clients!

New IRMAA Surcharges On Medicare Part B and Part D Taking Effect In 2018

November 29, 2017 07:01 am 13 Comments CATEGORY: Retirement Planning

Since 2007, the Medicare Modernization Act of 2003 has required high-income Medicare enrollees to pay an “Income-Related Monthly Adjustment Amount” (IRMAA) surcharge on their Medicare Part B premiums, which lifts the Medicare Part B premium from covering “just” 25% of costs up to as high as 80% of results, increasing Medicare Part B premiums by as much as 219% in 2017. And since 2011, a similar IRMAA surcharge has applied to Part D premiums, applying a flat dollar surcharge of as much as $914/year in 2017.

Beginning in 2018, though, the IRMAA surcharges on Medicare premiums will apply even more quickly, as changes under the Medicare Access and CHIP Reauthorization Act of 2015 will reduce the top Modified-AGI threshold from $214,000/year down to “just” $160,000 (for individuals, or $320,000 for married couples). And individuals with MAGI as low as $133,500 (or married couples at MAGI of $267,000/year) will be forced into a higher IRMAA tier, resulting in a nearly $1,000/year increase in IRMAA surcharges.

Which means going forward, it will be even more important to engage in proactive income tax planning for affluent retirees, to manage their exposure to IRMAA, especially in a low-inflation environment where being impacted by IRMAA also renders the household ineligible for the so-called “Hold Harmless” rules that limit annual inflation increases to Medicare Part B premiums. Especially since even “one-time” income events, like a sizable Roth conversion, or liquidating substantial capital gains, can be IRMAA triggers (at least for that one year the income event occurs).

On the other hand, it’s important to recognize that IRMAA surcharges still only amount to a roughly 1% to 2% cost increase, relative to the income the household must have to be subject to IRMAA in the first place. Which means that while managing taxable income (or really, MAGI) is important, it’s equally crucial not to let the tax tail (or the IRMAA tail) entirely wag the dog.

Nonetheless, the new 2018 IRMAA rules will just make Medicare-related tax planning more popular than ever. Although notably, for new retirees, the best IRMAA planning strategy is simply recognizing the opportunity to file Form SSA-44 to receive an exception to the IRMAA surcharge, as the act of retirement itself is a valid “life-changing event” that can allow new Medicare enrollees to avoid IRMAA premium surcharges on Part B and Part D in their initial Medicare years!

#FASuccess Ep 048: Creating Tangible Advisor Marketing Messages For Intangible Financial Planning Services With Gail Graham

November 28, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 48th episode of the Financial Advisor Success Podcast!

My guest today is Gail Graham. Gail runs an eponymous marketing consulting firm called Graham Strategy, that works with both advisory firms and B2B vendors serving financial advisors, on how to more effectively craft relevant marketing messages to reach their target clientele.

What's fascinating about Gail, though, is that she's had a similar marketing role in a wide range of advisory industry businesses, from the private wealth division of PNC bank, to Fidelity's private client group, and later as Chief Marketing Officer for the mega-RIA United Capital. And through the journey, Gail has gained some incredible insights about what it really takes to effectively market an intangible like financial planning services.

In this episode, we talk in depth about how to more effectively communicate financial planning and its value, from the importance of using plain language that people understand (instead of saying "I'm a fiduciary" simply say "Here's how it works – I'm personally liable if I give bad advice"), to the benefits of converting your value proposition into a physical proposal sheet and bringing a Sample Financial Plan to every prospect meeting (because it literally makes the advice value proposition more physically tangible), to the benefits of including "proof points" that actually validate your value proposition with prospective clients (such as "we've helped 300 families do this in the past 8 years").

We also talk about why getting better at financial advisor marketing is all about getting clear for yourself on who your ideal client really is, why it's absolutely essential to focus in order to find the right marketing messages that really resonate, and Gail's process to finding and refining your own value proposition.

And be certain to listen to the end, where Gail shares her perspective on the benefits and challenges of the RIA custody model, and why she's decided to collaborate as a marketing strategist with Apex Clearing to try and help disrupt the status quo, for the betterment of advisors and their clients.

So whether you have been contemplating to how to make your own marketing of intangible financial advisory services more tangible, have been reconsidering who your ideal client truly is, or are simply interested in hearing some new perspectives on marketing topics, I hope you enjoy this episode of the Financial Advisor Success podcast!

How Mindset Trumps Best Practices For Financial Advisor Success

November 27, 2017 07:01 am 0 Comments CATEGORY: Practice Management

Financial advisors looking to improve their businesses have a wide range of “Best Practices” research to tap for new ideas, from industry benchmarking studies to specialized white papers. And of course, this Nerd’s Eye View blog. For those seeking methods to run their advisory business more efficiently and profitably, there are a lot of relatively simple tactics to try.

In fact, as highlighted in this guest post from Stephanie Bogan and Matthew Jarvis, arguably the greatest challenge in improving a financial advisor’s business is not actually figuring out the Best Practices methods at all… and instead is almost entirely about changing the mindset of the advisory firm owner. Because most business improvements to an advisory firm are fairly straightforward – from standardizing service offerings, to eliminating fee schedule exceptions. The blocking point is in our heads. Literally.

Because as Bogan and Jarvis discuss, the real reason that most advisors struggle to take their businesses to the next level is the limiting beliefs that we impose on ourselves as financial advisors and business owners. The idea that certain aspects of the business “must” be done a certain way, or the business will fail. When in reality, it’s simply that we don’t want to go through the awkwardness of change and the discomfort of feeling threatened and worried that a client might push back… even though at worst, making changes will probably just threaten to cause a few clients to leave (and usually it’s those clients who weren’t even the best fit in the first place!).

In other words, the key to financial advisor success isn’t really about implementing the right methods – the business tactics and best practices – but more about having the right mindset that makes it easier to implement those methods in the first place. Because once as advisors we have clarity and focus in the business, a confidence in our own worth and the value we provide, a focus on leveraging our time and relationships, and an abundance mentality that the money and business success will come by doing the right things… it becomes remarkably easy to make the changes necessary for that success to actually happen!

Weekend Reading for Financial Planners (November 25-26)

November 24, 2017 01:01 pm 7 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 part of the Senate Republican tax plan generating buzz amongst advisors… that all investment sales may be required to use FIFO treatment in the future, eliminating the specific lot identification method, which would substantially curtail tax loss harvesting strategies.

Also in the recent news is the announcement that the military is overhauling its traditional 20-or-nothing pension system to a slightly scaled down version of the pension combined with government involuntary plus matching contributions to the Thrift Savings Plan (and a choice for enlisted military with less than 12 years of experience about whether they want to stay in the old system or switch to the new one). And there’s also a timely article on providing ideas for client holiday gifts, just in time for Black Friday sales!

From there, we have several articles about pricing and marketing advisory services, from a look at how to properly set and then communicate your fees, to an outsider’s perspective on how financial planners should be pricing their services (or rather, offering a menu of variously-priced services), and a good reminder about how it’s impossible to effectively market the value of your services until you get a clear understanding of your internal business strategy on how you plan to create (and differentiate) your value to your intended target market.

We also have a few practice management articles, including: how a growing number of advisory firms are shifting from lifestyle practices to enduring businesses (which provides more upside value potential to sell the business, but introduces substantial complexity along the way); a good primer on how a valuation expert looks at the real issues involved in trying to determine an advisory firm’s value; and a look at what today’s RIAs may be missing in how the DoL fiduciary rule will apply to them (including during the current “transition BICE” period until the full rule takes effect in July of 2019).

We wrap up with three interesting articles, all around the theme of how the advice industry, and the needs to be successful in the industry, are changing: the first looks at the challenges in attracting women into the financial planning profession, noting that the real challenge may not be the concern about whether there’s “too much math” or not, but that too many financial planning jobs are still overly sales-oriented, too inflexible, and too unwilling to given upwardly mobile Millennials the autonomy they crave; the second explores the emerging field of financial therapy, and how just as financial planners have been blurring the line between advice and product sales, so too is financial therapy blurring the line between advice and making (and treating) mental health diagnoses; and the last notes that as more advisors master the technical skills in financial planning, it’s the communication skills that are increasingly important, especially in a world where money remains such a taboo subject, which means perhaps it’s time to rename the “soft skills” to something more commensurate with the gravitas they are taking on in the path to being a successful financial planner!

Enjoy the "light" reading!

The Wealth-Limiting Risks Of Diversifying Too Soon – Redwoods, Bushes, and Pear Trees

November 22, 2017 07:01 am 30 Comments CATEGORY: Investments

Good diversification is a staple of financial planning advice, though the principle long pre-dates financial planners. From the aphorism “don’t put all your eggs in one basket”, to Talmudic texts from 3,000 years ago directing people to split their wealth evenly between cash, real estate, and business, the virtue of limiting exposure to risk from diversification is an “accepted truth”.

Except the reality is that, when you look to those who achieve the greatest wealth or have the greatest impact, virtually none of them ever diversify… or at least, not throughout most of their years. After all, if Bill Gates had “just” diversified into the S&P 500 after Microsoft IPO’ed, he’d have barely 1/40^th of the wealth he does today. In fact, most of those on the list of the richest billionaires are people in their 60s, 70s, or 80s, who have held a concentrated interest in their businesses for nearly their entire lives. Like the redwood tree, they waited a very, very long time before branching out… and as a result, were able to grow the tallest.

Of course, that doesn’t mean that diversification is always bad. Most “trees” are actually short bushes and shrubs, that grow just a few feet tall, but are still able to broaden their shoots and leaves enough to grow healthy. In the investing context, it’s the equivalent of a person who diligently saves and invests in a portfolio for decades, and retires with “comfortable wealth”.

Still, it’s important to recognize that diversification isn’t literally always the winning strategy, and for those who are young and have a long time horizon, arguably not even a necessary one. In fact, the weakest tree is the Bradford Pear – known for growing a V-shaped trunk, effectively diversifying itself from the start… in a manner that virtually ensures the tree will eventually either collapse under its own weight, or succumb to external forces.

For those who have decided they have “enough”, the satisficing strategy of the bush may be just fine. But for those who decidedly want to generate more wealth or have more impact, perhaps the redwood strategy is underrated after all? In fact, the highest-risk losing strategy may actually be the pear tree strategy of trying to have it both ways at once!