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New Rollover Rules For Unwanted 2020 RMDs Under IRS Notice 2020-51… Welcome Relief And A Troubling Precedent

June 25, 2020 07:08 am 28 Comments CATEGORY: Retirement Planning

In response to the coronavirus global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. A more-than-$2-trillion-emergency fiscal stimulus package, the CARES Act was enacted to ease the effects of the economic damage caused by the COVID-19 pandemic by providing a wide range of relief efforts to help individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands. Among the many provisions provided by the CARES Act was the suspension of Required Minimum Distributions (RMDs) during 2020. But since the CARES Act wasn’t passed until March 27, 2020, many individuals had already taken what they thought, at the time, were their 2020 RMDs!

Not surprisingly, many of those retirement account owners and beneficiaries wanted to ‘undo’ those distributions that were no longer RMDs and put them back into a retirement account. For some retirement account owners, that was possible by making a 60-day rollover. But for retirement account owners whose 60-day rollover window had already closed (including the extended window for distributions made on or after February 1, 2020 by IRS Notice 2020-23), or where such rollovers would have been a violation of the once-per-year rollover rule, or where distributions were made to non-spouse beneficiaries, there appeared to be no way to ‘unring’ the RMD ‘bell’.

Cue IRS Notice 2020-51…

On June 23^rd, the IRS released “Guidance on Waiver of 2020 Required Minimum Distributions” (Notice 2020-51), which ultimately solved all the problems noted above, allowing anyone who took a distribution (that, but for the CARES Act, would have been a RMD) to rollover that amount until August 31, 2020 .

While the IRS released Notice 2020-23 in April 2020, which extended the 6o-day rollover rule for distributions taken on or after February 1, 2020 to the later of 60 days after receipt of the distribution or July 15, 2020, individuals who took distributions prior to February 1 were excluded from the opportunity and were still unable to rollover their unwanted distributions. Notice 2020-51 provides even further 60-day rollover relief, by extending the 60-day-rollover window for all unwanted 2020 RMD distributions to the later August 31, 2020 date or 60 days after receipt of the distribution).

Notice 2020-51 provides further relief by excluding rollovers of amounts, that if not for the CARES Act would have been 2020 RMDs, from being counted as a rollover for purposes of the once-per-year rollover rule. Finally, while beneficiaries are explicitly prohibited from completing 60-day rollovers under the law, Notice 2020-51 essentially allows beneficiaries to temporarily ignore this portion of the Internal Revenue Code and rollover their 2020 inherited ‘RMDs’ until as late as 8/31/2020.

Ultimately, the new guidance just released by the IRS provides a fair and favorable outcome for people who took their RMDs earlier this year, as those individuals should not be penalized for being proactive and complying with the RMD rules early during the year. However, this is an unprecedented and potentially troubling move by the IRS, given that they do not actually have the legal authority to make this change (it is technically the job of Congress to create and amend laws). The IRS’s action can arguably be interpreted as circumventing well-defined statutes prescribed by the Tax Code, Tax Court decisions, and its own long-standing guidance via Private Letter Rulings (PLRs). While it’s unlikely that anyone will take issue with the IRS’ attempt to be fair and equitable, there’s little question that they seriously stretched their legal authority when issuing this Notice, which may set a troubling precedent moving forward.

The 15 (Fiduciary) Duties To Clients That CFP® Professionals Must Comply With

June 24, 2020 07:01 am 3 Comments CATEGORY: Ethics

CFP® professionals – like any professional – are expected to give advice in the best interests of their clients. Both as a hallmark of professionalism, and simply because it’s good business to do so. Yet in practice, it’s not enough to just say that CFP® professionals are fiduciaries; professional adherence requires setting forth clear Standards of Conduct about how, exactly, CFP® professionals are expected to deliver their services in a fiduciary manner, so CFP Board can determine when a CFP® professional is not meeting their obligations and may need to be disciplined… or, at worst, have their CFP® marks suspended or revoked.

To provide clear guidance, CFP Board’s new Code of Ethics and Standards of Conduct (“Code and Standards”) delineate a series of 15 Duties To Clients that CFP® professionals must adhere to, from the Fiduciary Duty to Clients itself, to an obligation for providing key information and relevant disclosures of Material Conflicts of Interest, confidentiality obligations, the duty to uphold core professional principles including Integrity, Competence, and Diligence, as well as entirely new Duties regarding the selection of external professionals (to which the CFP® professional may refer clients) and even the selection of technology itself.

In addition, CFP Board’s new Code and Standards also establish new guidance in previously controversial areas, particularly with respect to how CFP® professionals disclose their compensation, and the use of compensation disclosures as a marketing term (e.g., the “Fee-Only” label)… not to induce CFP® professionals towards any mode of compensation in particular, but simply to ensure that whatever compensation methodology the CFP® professional chooses, that they are accurate in how they describe their prospective compensation to their Clients.

In the end, the 15 Duties Owed To Clients by CFP® professionals are not meant to impose substantial new obligations on CFP® professionals – and in reality, are commonly followed and generally recognized as best practices anyway. Still, though, by enumerating the 15 Duties as part of the Code and Standards itself, CFP Board both provides additional guidance to CFP® professionals on what they are expected to do as a matter of not just “best” but standard practices… and also establishes the grounds by which CFP® professionals may be disciplined for failing to meet the minimum standard of their professional duties!

#FASuccess Ep 182: How Private Wealth Management In A Multi-Family Office Differs From Traditional Financial Planning, with Richard Joyner

June 23, 2020 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 182nd episode of Financial Advisor Success Podcast!

My guest on today's podcast is Richard Joyner. Richard is a wealth manager and the president of Tolleson Wealth Management, a multi-family office based in Dallas, Texas, that oversees nearly $6.5 billion of assets under management for just 180 affluent families. What's unique about Richard, though, is the way he's developed Tolleson to serve ultra-high-net-worth clientele with a breadth of private wealth management services that truly goes beyond the traditional financial planning approach.

In this podcast, we talk in-depth about what Tolleson actually does for clients who have an average family net worth of tens of millions of dollars, from a deeper level of client financial management and support, including bill-paying services and family spending reports, to advanced tax and estate planning services that delve into techniques that can produce seven-figure estate tax savings, private banking services to help clients obtain loans and receive corporate trustee services, and why arguably the biggest value Tolleson provides to their clients is supporting their family learning and helping affluent parents conduct family meetings to develop their children and grandchildren to become responsible stewards of the wealth legacy they will someday inherit.

We also talk about the business of multi-family office private wealth management itself, the composition of 180 staff members that Tolleson employs to support its 180 client families, the combination of flat fees and AUM fees that Tolleson charges its ultra-high-net-worth clients, how the firm justifies what can amount to $150,000 a year or more in advisory fees, and why despite having a heavy component of AUM fees for clients with tens of millions of dollars, that Tolleson has chosen to outsource most of its investment management and serve as a manager of managers instead.

And be certain to listen to the end, where Richard shares the policies that he's had to put in place to train and develop next-generation talent in the firm to be able to manage such ultra-high-net-worth clients, the combination of structured learning through designations like CPWA and internal mentoring the firm uses to balance technical and interpersonal skills development, and how Richard managed to balance his own workload and commitments to serve as the president of a multi-family office with 180 employees and still maintain a client-facing role for himself as well.

Optimizing Operational Experience To Influence Growth

June 22, 2020 07:06 am 1 Comment CATEGORY: Practice Management

Growing and improving a financial advisory business is a continuous and iterative process, and in general, firm owners tend to first look for new and better ways to attract and retain clients when taking the next developmental step. However, in order to really capitalize on those efforts, advisors should first ensure that they are also consistently optimizing the operational aspects of their businesses as well.

In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – explains how Operational Experience (OX) is a crucial element in all business processes as it is the mechanism that ensures consistent delivery of service. It consists of the back office activities that outline business processes and, for each step of every process, identifies every action that needs to be followed, who is responsible, how long it should take, and any technology requirements. In order to define a firm’s OX, two categories of key processes must be considered: those that involve client processes, and those that involve employee processes. Whereas client processes involve marketing, sales, and the actual client experience, employee processes involve the steps needed to recruit, onboard, and train employees.

The effectiveness of key processes can be measured by various performance indicators, such as those that examine metrics that are most impactful to revenue and profits. These can include factors such as client referral rate, close-ratio, and gross profit margin. As such, process frameworks should be developed in alignment with the overall business goals, ultimately to enhance financial performance, using three key steps: focusing, aligning, and optimizing.

Identifying focus is the first stage of developing an OX framework, and it should be targeted on the reason for making improvements to the process (e.g., to expand the number and rate of client referrals). Next, the framework should be fleshed out with areas that need improvement so that they better align with the focus (e.g., annual meeting reviews are not being conducted consistently by different advisors across the firm, and some clients have expressed that they are upset by the unequal treatment). The final stage is the optimization stage, in which repairs are made to the broken processes identified in the alignment stage (e.g., a three-phase process for conducting annual client meetings is developed to systematize the client meeting experience, which all advisors will be required to follow).

Ultimately, the key point is that having a strong operational experience is the basis on which to build efficient client experience, marketing, and employee processes that will facilitate the successful growth of a firm. Because by establishing a sound, functional operational experience, a firm will be able to develop processes that will facilitate efficient marketing efforts and exceptional client service provided by a team of employees who excel at and enjoy their jobs.

Weekend Reading for Financial Planners (June 20-21)

June 19, 2020 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that Washington is now seriously considering a potential $1T+ infrastructure bill, as President Trump indicates a trillion dollar proposal will be coming soon and Democrats are drafting their own $1.5T version, in the collective hopes that a second round of stimulus spending will help to support the economy as it continues to struggle from the impact of the coronavirus pandemic (not to mention accomplishing some long-overdue infrastructure projects for the country!).

Also in the news this week is a fresh look at what is really changing (or not) in the pandemic and whether current predictions (e.g., the death of cities, the end of colleges) are really likely or simply over-projections of trends that were already in place (while ignoring what may actually be more 'real' long-term changes occurring quietly in plain view), and an interesting exploration of how the divorce rate appears to be spiking in the aftermath of the pandemic (with real implications for advisory firms that may lose clients in divorces, or that could refine their value proposition by crafting a divorce expertise!).

From there, we have a number of articles around the challenges and opportunities in networking in a virtual world, from strategies to focus on quality over quantity (i.e., using the pandemic environment to eschew wide-net networking events and simply focus on more targeted quality networking opportunities instead), running your own virtual study/mastermind group to create networking opportunities, and how to effectively do outreach on LinkedIn to engage with connections and deepen the relationship.

We also have a few marketing-related articles, from the importance of looking at local media as a PR opportunity (rather than trying to get onto national media like CNBC that is more crowded and harder to sustain impact anyway), why email newsletters are still an effective marketing approach (even as it feels like we're suffering from more email overload than ever), and tips on how to market for advisors who 'hate' marketing (hint: don't put on the marketing mask and do what others tell you you 'should' do to market, and instead simply be your authentic self and try to make personal connections to the people you want to connect with).

We wrap up with three interesting articles, all around the theme of life lessons and finding what makes us happy: the first is a fascinating look at how books and articles from our past can take on new relevance and provide additional wisdom when we read them again a decade later; the second provides some insights about the conflicts between what we think will make us happy and what actually leads to happiness and life satisfaction; and the last explores the rise of the "Passion Economy" and the rise of platforms that support unique opportunities in the modern era to monetize our passions (including the ability to be a successful solo advisor who helps a focused clientele we want to serve profitably!?).

Enjoy the 'light' reading!

Kitces & Carl Ep 36: Protecting Your Own Self-Confidence As A Financial Advisor

June 18, 2020 07:01 am 0 Comments CATEGORY: Kitces & Carl Podcast

When markets turn volatile and clients get stressed, at best, financial advisors face their own stress in trying to help clients stay the course; at worst, they absorb the ‘blame’ from clients who are unhappy with economic and market outcomes beyond the advisor’s control. And when clients turn negative, it is easy for mental exhaustion to set in and for confidence levels to take a hit. Yet when self-confidence suffers, so too can our motivation and productivity. Accordingly, taking measures to protect our self-confidence not only helps to preserve our ability to function optimally at work, but also helps to maintain our mental and emotional well-being by ensuring we focus our time on activities that bring us energy and positive engagement.

In our 36th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss how advisor self-confidence can impact productivity, offering some ideas for financial advisors to protect their personal confidence and keep a positive mindset. As for financial advisors, in particular, healthy confidence levels can help them to avoid ‘imposter syndrome’ (which can distort an advisor’s sense of personal value), grow through the business challenges they’re facing, and support their clients with the ‘rational overconfidence’ they sometimes need to display as effective leaders.

Confidence also plays a crucial role when the advisor needs to establish appropriate pricing levels for their services and value, where a lack of confidence can result in advisors discounting their own value because they fail to realize that clients are willing to pay the price the advisor is actually worth. On the other hand, advisors who are able to preserve a high level of confidence tend to price themselves and their services more fairly and will naturally find themselves facing more business opportunities. Confidence also helps advisors deal with difficult situations, such as losing clients or key employees, with more positivity and the ability to see the circumstance as an opportunity versus a setback, which can ultimately be the key that potentially distinguishes between business growth and stagnation.

Being able to recognize one’s ‘unique abilities’ (like those identified by Dan Sullivan’s Unique Ability Discovery Process program) or key strengths (such as those identified by Gallup’s StrengthsFinder assessment) – activities that a person enjoys and excels at, and that are energizing – are key to maintaining one’s confidence and improving productivity at work. And once these ‘unique abilities’ are identified, finding the time to intentionally do those things as much as possible can help to stabilize energy levels and foster a positive mindset, which in turn tends to help maintain higher confidence levels. Equally important for protecting one’s confidence are recognizing the factors that erode energy levels and identifying how to take counteractive steps against the effects of those factors. For example, spending time outside in fresh air, going for a walk, and getting more sleep are some activities that can help prevent energy levels from dropping and, in turn, keep confidence levels from deteriorating.

Ultimately, the key point is that by taking steps to identify activities that not only drain energy levels but also increase them, financial advisors can protect their energy levels from falling, which is an important step in preserving confidence levels and a positive mindset – key elements of fruitful client relationships, successful career advancement, and overall business growth!