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2019 Highlights – The Top 20 Nerd’s Eye View Blog Posts You Might Have Missed

December 30, 2019 07:04 am 1 Comment CATEGORY: Nerd's Eye View

As we enter the 2019 holiday season and the year (and decade!) comes to a close, I am once again so thankful to all of you, the ever-growing number of readers who continue to regularly visit this Nerd’s Eye View blog (and share the content with your friends and colleagues, which we greatly appreciate!). As we entered the decade of the 2010s, this blog was still in a nascent stage on the Kitces.com website, with just 1,225 people coming to read the entire month of December 2009; today, far more people than that read our blog posts in just the first two hours after each article is published and emailed out to everyone! And I have even more exciting ideas about how we can do more and be even better for the advisor community in 2020… stay tuned for more announcements in the coming weeks!

We recognize that although this blog is a weekly habit for thousands of advisors, not everyone reads every blog post that is released from Nerd’s Eye View throughout the year. As many of you noted in response to our recent Reader Survey, most choose which articles to read based on headlines and topics that are of interest. Yet in practice, this means that an article once missed is often never seen again, ‘overwritten’ (or at least bumped out of your Inbox!) by the next day’s, week’s, and month’s worth of content that comes along.

Accordingly, just as I did last year and in 2017, 2016, 2015, and 2014, I've compiled for you this Highlights List of our top 20 articles in 2019 that you might have missed, including some of our most popular episodes of the Financial Advisor Success podcast. So whether you're new to the blog and #FASuccess podcast and haven't searched through the Archives, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you'll take a moment to share podcast episodes and articles of interest with your friends and colleagues as well!

In the meantime, I hope you're having a safe and happy holiday season. Thanks again for another successful year in 2019, and I hope you enjoy all the new features and resources we'll be rolling out in 2020, too!

Weekend Reading for Financial Planners (Dec 28-29)

December 27, 2019 02:54 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a deeper-dive look at the SECURE Act (now that it is officially signed into law), as advisors get up to speed on the real-world planning implications and conversations that must happen with clients in the coming year. Also in the news this week is a major across-the-board fee cut from DFA, which ultimately amounts to 'just' 1-8 basis points of fee cuts and an asset-weighted cut of just 8% of their fees, but still sends a signal that even DFA is feeling the growing pressure of fee cuts (though in the end, such cuts may hurt DFA's competitors even more?).

From there, we have several articles on cash flow and spending behaviors, from an "investment pyramid" of the areas to focus on first (i.e., set goals before trying to focus, have good savings habits before worrying about asset allocation, etc.), the second looks at how complex strategies can help create wealth but it's crucial to fix the 'simple' behaviors first (most notably, spending less than we make and having ongoing savings!), and the last examines the research around whether the shift to cashless "e-money" through smartphones will lead us to lose control of our spending (hint: perhaps not, as seeing the money subtracted from our e-wallet immediately may still yield the digital equivalent of the pain of paying [with cash]).

We also have a few articles on marketing, from why email is not dead but buying email lists is (and how to build your own email list instead), what "marketing brand archetypes" are and how they can help you refine your marketing messaging, why paying for "reach" to get your marketing message out more widely isn't necessarily a good idea (it's about reaching the right people, not just more people), and how you can get through a marketing (or writing) mental block by trying to picture one specific person you're aiming to help (and then craft your messaging to be relevant and on-target for that specific person... and likely everyone else similar to them who may also need your help!).

We wrap up with three interesting articles, all around the theme of New Year's resolutions and habit change: the first explores the research about why it is that New Year's resolutions (and habit change in general) so often fails; the second delves even further into the problem with trying to make "SMART" concrete new Year's goals (instead of trying to appeal to our own 'superordinate goals' of what we aspire towards); and the last provides some even more concrete tips about how to actually get more done in the coming year as 2019 comes to a close.

Enjoy the 'light' reading!

Parsing The Difference Between Rollovers And Transfers To Avoid Retirement Account Penalties And Confusion

December 25, 2019 06:50 am 11 Comments CATEGORY: Retirement Planning

When distributions are taken from tax-deferred retirement accounts, ordinary income taxes are due. However, sometimes funds may simply need to be moved from one retirement account to another – perhaps because an employee is retiring or switching jobs and chooses to move their 401(k) from their old employer to another 401(k), or to an IRA account, or because a client wishes to work with a new financial advisor and chooses to move all of their accounts over to the new advisor’s firm. Whatever the reason, there are specific rules for different types of money movement that financial advisors should understand to make sure their clients’ accounts are protected from unnecessary taxable distributions.

There are two categories of money movement between retirement accounts: Indirect and Direct transactions. For an Indirect Rollover, the account owner withdraws funds to be moved from the originating account and takes actual custody of the funds. The full amount of funds withdrawn must be deposited into the target account within 60 days. One caveat for Indirect Rollovers from employer-sponsored retirement plans is that there is generally a mandatory 20% withholding for Federal income taxes that the plan sponsor makes directly to the IRS, with the balance of the funds sent to the account owner. This means that, in order to avoid the tax withholding itself to be considered a taxable distribution from the account, the employee must ‘make up’ for the withheld amount by depositing funds from another source into the target account within the 60-day Indirect Rollover window. This withholding does not apply to IRA accounts, including IRA-based employer plans such as SIMPLE IRAs and SEP IRAs. Taxpayers are also limited to one Indirect Rollover between IRA or Roth IRA accounts every 365 days; any additional attempted Indirect Rollovers would be considered an account contribution and can potentially result in a 6% excess contribution penalty annually until corrected.

In addition to Indirect Rollovers, there are two types of Direct methods to move funds between accounts: Direct Rollovers and Direct Transfers. Direct Rollovers move funds between two retirement accounts, but unlike an Indirect Rollover, the funds are never in the account holder’s custody, nor is there any mandatory tax withholding. For Direct Rollovers, funds are moved from the trustee of one account directly to the trustee of the second account (where each account is a different type of accounts, e.g., 401(k) to IRA or vice versa). Direct Rollovers also have no time limit in which the transaction must take place, and there is no limit to how many Direct Rollovers can be done in a given year. While Direct Rollovers are not taxable events, they are reportable events and as such, are reported on Form 1099-R.

Similar to Direct Rollovers, Direct Transfers are made directly between the trustees of each account and don’t involve the account holder ever having custody of the funds being transferred. What distinguishes a Direct Transfer from a Direct Rollover, though, is that the accounts in a Transfer must be ‘like’ accounts (e.g., IRA to IRA, 401(k) to 401(k), etc.). Like Rollovers (including both Direct and Indirect), Like Rollovers, Transfers are not taxable events, but unlike rollovers, they are not reportable events and thus do not require submission of any forms to the IRS. Transfers are also different from Rollovers as they can accommodate funds designated as RMDs.

Ultimately, the key point is that each of the various ways funds can move between retirement accounts has its own distinct set of rules and requirements. Direct Rollovers are generally preferable over Indirect Rollovers, as they are subject to neither the 60-day time limit nor the 20% mandatory withholding, but do require to be reported to the IRS. On the other hand, Transfers do not need to be reported to the IRS and are used when an individual simply needs to change custodians or consolidate accounts involving the same kind of account.

#FASuccess Ep 156: Establishing Next Generation Career Tracks And Business Development Training For Long-Term Sustainability, with DeLynn Zell

December 24, 2019 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 156th episode of Financial Advisor Success Podcast!

My guest on today's podcast is DeLynn Zell. DeLynn is the Co-Founder and CEO of Bridgeworth Financial, a hybrid RIA based in Birmingham, Alabama that oversees nearly $1.6 billion of assets under management for almost 2,000 clients.

What's unique about DeLynn and her firm, though, is the way they decided from the start to build an advisory firm that would be sustained past the founders, and have taken steps over the years to establish the necessary career tracks, and equity and compensation structures to attract and retain next-generation talent for the firm in order to be sustainable for the long run.

In this episode, we talk in-depth about the four-tier career track that Bridgeworth has created. From a planning coordinator who focuses on the technical work for a base salary, to associate advisors who are involved with client meetings but also have the responsibility to start networking to establish themselves in the community; lead advisors who have the primary responsibility of relationship management and some incentives for business development; and partners who have not only a heavier responsibility for business development but also a greater financial participation to incentivize their ongoing efforts to keep growing the firm and its equity value.

We also talk about how Bridgeworth structures its compensation for partners. The unique way the firm allocates partner salary based on credits for both their business development and revenue or other leadership responsibilities to compensate their ongoing work in the business as separate from their equity ownership of the profits, which in turn is based on what they originally brought to the business when it was formed, how and why Bridgeworth is reinvesting into the business development training for its next-generation advisors so they too can become eligible to become a partner in the future, and the way the firm is developing advisor teams that each have their own specializations to support their individual business development activities under one common firm-wide umbrella.

And be certain to listen to the end, where DeLynn talks about how, even with the long-term success in the business, it was still incredibly difficult in the early years. Why she thinks in the long run, the advisory business is an especially good fit for women; how the gender split of CFP professionals may shift in the future; and why the most important thing when selecting an advisory firm to build your career is not the firm's compensation or particular role, but instead, its culture and whether it's a place you want to be in the long run, and then to let the role and your opportunity evolve as it may over time in a firm and culture you trust.

SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges

December 23, 2019 07:35 am 129 Comments CATEGORY: Retirement Planning

Sweeping legislative tax or retirement reforms typically happen only once every decade or so, but the final weeks of 2019 brought the second major piece of Congressional action in the past 24 months, as the SECURE Act (along with a series of year-end tax extenders), which was passed in the House this past summer, finally made its way through the Senate and was signed into law by the President. The legislation will have substantive repercussions as financial advisors help clients plan for their retirements for years to come.

In the context of financial advisors and the clients they serve, the first, and probably most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. On the one hand, without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of “see-through” trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they’re no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).

Other notable retirement planning changes under the SECURE Act include lifting the restriction on making contributions to a traditional IRA after age 70 ½ (as long as there is earned income to contribute in the first place), and an age increase for the onset of RMDs from age 70 ½ to age 72. However, as was the case with the IRS’s recent proposal to update the RMD life-expectancy tables, since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires. In addition, the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70 ½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).

Beyond the changing or elimination of various age-based thresholds for retirement accounts, the SECURE Act also includes an allowance for a penalty-free distribution up to $5,000 for a qualified birth or adoption, the creation of a Fiduciary Safe Harbor for selecting a “Lifetime Income Provider” (i.e., annuity company) for ERISA fiduciaries (thus assuaging at least some liability concerns around using lifetime income annuities in qualified plans), a substantial increase in the tax credit available to small businesses when establishing a retirement plan (as well as a brand new tax credit for small businesses that adopt an “auto-enroll” provision in their retirement plans), an increase in the allowable auto-enrollment “default” 401(k) plan contribution, improved access to employer plans for long-term part-time workers, and a significant reduction in the barriers to creating and maintaining Multiple Employer Retirement plans (which in theory will help to create economies of scale for lower plan costs when a group of small employers band together to provide a retirement plan)… as well as several other miscellaneous, smaller retirement provision changes.

Other notable non-retirement provisions attached to the SECURE Act include a repeal of the TCJA-introduced Kiddie Tax changes (reverting away from a requirement to use trust tax brackets and back to using the parents’ top marginal tax bracket), adjustments to the medical expense deduction threshold (back to 7.5%-of-AGI again for 2019 and 2020!), expanded provisions for 529 college savings plans to be used for Apprenticeships and (up-to-$10,000 of) student loan repayments, and a series of Tax Extenders for the mortgage insurance premium deduction and the higher education tuition and fees deduction.

Ultimately, the key point is that, although not nearly as sweeping as the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 makes numerous updates to the rules around retirement plans in an effort to increase access to employer-sponsored retirement plans, and (hopefully) takes a positive step towards addressing the so-called retirement crisis. But as with other legislation in recent years, what legislation may give with one hand, it takes with the other, and in practice, many financial advisors may spend more time dealing with what is lost under the SECURE Act – in particular, the stretch IRA – than what is gained. At the very least, though, financial advisors will be busy in months ahead as they re-evaluate plans for clients impacted by the new and updated provisions introduced by the SECURE Act.

Weekend Reading for Financial Planners (Dec 21-22)

December 20, 2019 02:53 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that after months of delays, the SECURE Act is finally being passed as an extension of a year-end Congressional spending bill, opening up the potential for Multi-Employer Plan (MEP) 401(k) offerings and more annuities in defined contribution plans... and notably for most advisors, severely curtailing the use of the popular "stretch IRA" strategy to generally no more than 10 years (instead of the full life expectancy of a much-younger beneficiary).

Also in the news this week is the release of the results of the CFP Board's independent task force on enforcement that found "significant failures" in its enforcement processes that must be reformed in the future, and the news that the SEC is looking to expand the Accredited Investor rules beyond the current income and asset test (including, notably, a broad-based permission that would allow all financial advisors themselves with a Series 7 or Series 65 to participate as an Accredited Investor).

From there, we have several technology-related articles, including a look at how the growth of advisor technology for the past decade is reaching the point where now the primary challenge is that advisors have 'too many' choices (and not enough time to wade through options, evaluate how they'll integrate, and do due diligence on vendors), a review of the recent InVest West FinTech conference that is taking an increasing focus on not just UX (user experience) and CX (client experience) but also AX (advisor experience), and a review by Bob Veres of a new wave of "financial planning software" companies that are not producing comprehensive planning software but instead increasingly more specialized 'niche' solutions around everything from tax return reviews and tax planning to Social Security timing, Medicare, and other elder care planning issues.

We also have a few articles on marketing, from tips on how to diligently follow up with a prospect after an initial meeting (without being too pushy), to a reminder that in the end clients don't want to hear your story (as the advisor) but want to tell their story (as we all like talking about ourselves!), and some suggestions on how to handle that moment in a prospect conversation where they say "I'm sorry, I already have an advisor".

We wrap up with three interesting articles, all around the theme of gift-giving ('tis the holiday season!): the first looks at how from an economic perspective, gift-giving is remarkably inefficient (as people try to 'guess' what non-financial gift will provide the appropriate amount of satisfaction and relationship-building with the recipient, with one study estimating $13B per year of 'economic waste'); the second looks at the rise of experiential gifts, which may be compelling to the recipient but are exponentially harder to organize and 'give' in the first place; and the last explores recent research finding that when it comes to family and close friends, a sloppily-wrapped gift is actually better than a neatly-wrapped one (as it lowers the expectations of what's inside and is more likely to have an upside surprise when opened!), but for more distant acquaintances it's still important to neatly wrap the gift (as an expression of your commitment to the burgeoning relationship)!

Enjoy the 'light' reading!