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Kitces & Carl Ep 20: Is A Fiduciary Requirement Necessary When Acting In Clients’ Best Interests Is Good Business Anyway?

November 7, 2019 07:05 am 2 Comments CATEGORY: Kitces & Carl Podcast

Over the past several years, the big focus in the financial advice industry has been around the various iterations of a fiduciary standard. From the DoL fiduciary rule, to the SEC’s Regulation Best Interest, to efforts by individual states to pass legislation, there has been plenty of debate over the best (and most practical) way to ensure that all financial advisors do what’s in the best interest of their clients. However, lost in all the sturm und drang over these regulatory and legislative undertakings is the question: Do we even really need a fiduciary rule in the first place?

After all, compliance with existing regulations is expensive and time consuming enough as it is, and a higher fiduciary standard may only amplify that. And even if you try to legislate morality within the professions, won’t there be those who figure out a way to break the rules, anyway? Not to mention that acting in a client’s best interest is arguably just “good business” anyway?

In our 20th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss why a fiduciary rule is necessary even though acting in your client’s best interests is already “good business” in the long run, how real financial advisors are at a competitive disadvantage against those who really are just out to make the next buck as quickly as possible, and how advisors have a duty to spread the word about what it means to be a fiduciary.

As a starting point, it’s important to recognize that serving clients well isn’t just about being able to look at yourself in the mirror… it is also, in a very real sense, in your own best interest as a business owner… at least if you want your clients (and the friends and family that they might refer to you) to keep paying for your services for several decades to come. In other words, an advisor can either build a sustainable business based on trust, or a business that’s dependent on finding the next person to fool in the short term with a quick sale before moving on to the next.

However, the reality is that all real financial advisors have had the experience of meeting with a prospective client who has been on the receiving end of an unscrupulous “advisor” who has already extracted as much as they legally could from that client and moved on. And the unfortunate fact is that it’s often more profitable (and maybe even easier) to scare someone into buying a high-commission “can’t-lose” product than it is to convince them to pay an ongoing fee for an admittedly intangible service.

And that’s really the crux of why a blanket fiduciary rule is necessary. Even in today’s environment where consumers are better educated and it’s much easier for someone to ‘do their due diligence’, the bar is still so low that, not only can anyone call themselves an “advisor”, but they can still extract nearly 10% of the wealth of every person they meet by selling a low-quality high-cost product, with little worry about any legal recourse… since the bar to prove their sale was “unsuitable” is so low and easily cleared.

Ultimately, the key point is to understand that, while real financial advisors remain at a competitive disadvantage to salespeople who can legally take a large chunk of someone’s net worth by selling them flawed and expensive products as quickly as possible and moving on to the next, there is at least an ongoing effort by regulatory bodies and state legislative bodies to make it more difficult for that sort of maleficence to occur in the first place. But it’s not just up to the regulators to change the industry (and the public’s perception of it). Responsibility for affecting change also falls on the shoulders of real financial advisors, who (as part of their sacred duty to help the clients manage, grow, and protect their life’s savings) have to help foster awareness both within and outside of the industry around what it means to truly be an advisor.

Splitting An IRA With Ongoing 72(t) Distributions In Divorce

November 6, 2019 07:04 am 1 Comment CATEGORY: Retirement Planning

Although the aggregate divorce rate amongst Americans has fallen in recent decades, there has also been a concurrent (and dramatic) increase in the number of divorces for couples over age 50. The rise of the so-called “grey divorce” has created a number of uncommon and complex issues that financial advisors are helping their clients navigate, such as splitting what can oftentimes be substantial assets, including retirement accounts. Splitting an IRA, for instance, is generally pretty straightforward, but the matter becomes far more complicated for accounts that have ongoing 72(t) distributions.

As a starting point, it’s important to understand what a 72(t) distribution is in the first place. Although IRA accounts are intended to provide retirement funds for the owner, there can be emergent situations in one’s life for which an individual might not have the necessary cash on hand. Understanding that, Congress provided for a handful of exceptions that allow an individual to access the funds in their IRA accounts prior to age 59 ½ without triggering the dreaded 10% early withdrawal penalty. One of these exceptions includes the option to elect taking "substantially equal periodic payments" from the IRA, also known as 72(t) payments.

Although there are a few IRS-approved methods to calculate the exact amount of those substantially equal periodic payments, the key component is that the individual must continue to take those distributions “without modification” for the longer of five years, or until age 59 ½. Modifications can include (among other things) changing the amount of the periodic withdrawals (other than as allowed via the RMD method), taking an additional distribution on top of the 72(t) payments, changing the balance on the IRA account via roll-ins or rollovers out of assets, or making a non-taxable transfer of a portion of the account balance. And it’s that “non-taxable transfer” rule that can cause so much confusion for divorcing couples who need to split an IRA that is subject to 72(t) distributions.

Under normal circumstances, splitting an IRA that is not subject to a 72(t) distribution schedule between a divorcing couple is simply a matter of the custodian transferring the funds specified by the divorce decree from the current owner to a (new) IRA account in the name of the ex-spouse. However, since dividing an IRA pursuant to a divorce decree is, in fact, a non-taxable transfer, it seems possible that the IRS would deem that transfer to be a “modification” for IRAs subject to 72(t) payments, thus triggering the 10% penalty… plus interest!

Fortunately, though, over the years, the IRS has issued several Private Letter Rulings (PLRs) addressing this very conundrum. These PLRs have been rather accommodating to both ex-spouses. Transferor ex-spouses have been given the option to decrease future 72(t) distributions proportionally to the amount that was transferred out of the account. Meanwhile, transferee ex-spouses have not been required to continue to take 72(t) distributions, though they have been allowed to choose to do so if desired!

Ultimately, the key point is that, while divorce is a stressful event that often creates unforeseen financial hurdles for advisors and their clients to navigate the best they can (and sometimes without any formal guidance from the IRS on unclear taxation rules), there has at least been consistency (albeit on a case-by-case basis) in the rulings around the treatment of transferring the balance of an IRA that’s subject to 72(t) payments in a divorce.

#FASuccess Ep 149: Managing Capacity And Ensuring Continuity For Clients By Selling Without Retiring, with Susan John

November 5, 2019 07:23 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 149th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Susan John. Susan is a financial advisor and the managing director of financial planning for F.L.Putnam, an independent RIA with offices across New England that manages more than $2 billion of assets under management.

What's unique about Susan, though, is that she only just recently joined F.L.Putnam having spent nearly 25 years building her own independent financial planning firm from scratch up to $350 million in assets under management before deciding to tuck into F.L.Putnam as part of her succession but not retirement plan.

In this episode, we talk in depth about the financial planning process that Susan has developed over more than three decades of experience, which now is done on an interactive basis using eMoney Advisor, where clients don't even ever receive a big printout but just a summary of recommendations, pros and cons, and the firm's rationale for the recommendations it's making; why Susan chooses to charge a full upfront fee of $3,500 to $15,000 to do these financial planning snapshots for every client before even considering whether to take them as an ongoing AUM client; and how, on an ongoing basis, Susan starts every year with an annual cash plan that evaluates exactly how each retired client's retirement paychecks will be generated from their portfolio for the coming year, given both their cash flow needs and the current portfolio and tax situation.

We also talk about how Susan grew her advisory firm to $350 million by proactively asking for referrals and running intimate client events, including entire weekend ski getaways to deepen those client relationships. How Susan expanded ownership of the firm over the years with buying opportunities to several of the firm's employee advisors, and why, for the sake of her firm's fiduciary duty to clients, she ultimately decided to sell externally and tuck into a larger advisory business rather than continuing to transition succession equity to her existing advisor partners internally.

And be certain to listen to the end, where Susan shares why she has become increasingly active in the financial planning profession with leadership roles in both NAPFA and the CFP Board, how she structures her week to try to balance her obligations within the firm and beyond, and why Susan views it as imperative for both newer and established financial advisors to join and get actively involved with one of the industry's membership associations.

The Latest In Financial Advisor #FinTech (November 2019)

November 4, 2019 07:06 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the November 2019 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 news that Schwab will allow fractional share trading in its retail accounts, in what is widely viewed as another jab at Robinhood in the competition for young new investors (who literally might not have enough saved to buy even a single share of Amazon at nearly $1,800/share)… but what may ultimately be laying the groundwork for Schwab to launch its own Direct Indexing 2.0 solution and compete more directly with mutual fund and ETF providers (and the robo-advisor Wealthfront that pioneered the approach for the mass market but never managed to scale it as Schwab may with its national brand reach).

From there, the latest highlights also include a number of other interesting advisor technology announcements, including:

Riskalyze expands further beyond risk tolerance assessment towards becoming an Envestnet competitor by launching Connected Trading to implement third-party models in its Model Marketplace
Broadridge acquires Fi360 in a strong statement that it anticipates the future of financial advice, even in broker-dealers, will be fiduciary
Galileo raises a massive $77M Series A to expand its white-labeled savings, checking, and debit/credit card services (including for advisors)
Cetera launches a new fee-for-service 401(k) offering powered by AdvicePay to allow 401(k) advisors to get paid directly when providing individual financial planning advice to plan participants

Read the analysis about these announcements in this month's column and a discussion of more trends in advisor technology, including the launch of yet another ‘digital’ RIA custodian (Velox Clearing), more tools from Fidelity and Pershing to choose or customize model portfolios, Timeline's integration with Black Diamond and ByAllAccounts to facilitate real-time updated sustainable withdrawal rate projections for retirees, and Whealthcare's announcement of a fundraising initiative to expand its tools for serving aging clients just as regulators increasingly focus on how advisors can better help prevent elder financial abuse.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well.

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 (Nov 2-3)

November 1, 2019 03:46 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a fascinating look at a new CFP disclosure form from Northwestern Mutual, in advance of the CFP Board's new fiduciary disclosure rules, that not only provides a template for what the future of (more thorough) CFP fiduciary disclosure may look like, but also raises questions anew of whether CFP professionals will find it difficult to comply with their fiduciary obligations themselves when working for firms that are primarily in the business of manufacturing and distributing products. Also in the news this week is the official launch of the OneFPA Network "Beta Test", as more than 80% of FPA's 86 chapters declined to even apply but the organization is still moving forward with its test of new staffing, accounting, and technology systems by accepting 11 of the 16 chapters that did request to be involved.

From there, we have several articles on spending and debt, including a look at the common myths of what does (and doesn't) actually increase or decrease one's credit score, the rise of new online installment notes that are replacing payday lending as the new triple-digit-interest-rate high-risk lending program, and how the "old rules of wealth" to save early and often for retirement are falling by the wayside with a Millennial generation that is still struggling to balance the desire to buy a home, start a family, build a career, and save for retirement... on top of carrying a potential mountainload of student loan debt that in some cases may literally take until retirement to repay!

We also have a few articles on financial advisor marketing, including new research on where financial advisors are spending their marketing dollars that work (hint: increasingly on not just social media, but digital advertisements funneling interested prospects to increasingly targeted advisor websites and landing pages), what it really means to pursue a relationship with a "Center Of Influence" (and how to identify such COIs beyond the typical lawyers and accountants), why you should not use a quick auto-responder with every new LinkedIn connection you make, and how Opt-In Text Messages are becoming a new financial advisor marketing channel.

We wrap up with three interesting articles, all around the theme of the growing awareness of the advisory industries' issues with not only gender discrimination but also sexual harassment and sexual assault in the aftermath of the Ken Fisher incident: the first shares the stories of women in finance who have been sexually harassed or assaulted at a financial advisor conference; the second shares stories of women in finance who have faced gender discrimination challenges or similar sexual harassment or assault in the workplace; and the last looks at how advisory industry conferences are beginning to implement more stringent harassment and assault reporting tools, with actual enforcement mechanisms in place, to finally try to change behavior at industry events and hold accountable those engaging in inappropriate behavior.

Enjoy the 'light' reading!

Optimizing 529A ABLE Plan Contributions and Distributions To Benefit Individuals With Disabilities

October 30, 2019 07:06 am 12 Comments CATEGORY: Investments

Planning for individuals with disabilities poses unique challenges when coordinating across the potentially high cost of special care needs, Federal and state assistance programs such as Supplemental Security Income (SSI) and Medicaid, and savings strategies designed to work together with those assistance programs (which themselves can have complex requirements to qualify). For example, in 2014, Congress passed the “Achieving a Better Life Experience” (ABLE) Act that created the tax-favored 529A account, providing tax-free growth opportunities for individuals with disabilities… at least, those with a disability (or blindness) that was diagnosed before the age of 26.

529A accounts allow for annual contributions, from all sources, of up to $15,000/year (the annual gift tax exclusion limit) plus earnings of the ABLE beneficiary, up to the annual poverty limit for a one-person household. They also allow for tax-deferred earnings on contributions inside the 529A plan, and tax-free withdrawals for qualified disability-related expenses. While contributions cannot be deducted from income on Federal tax returns, many states do allow contributions to be deducted on state tax returns. The caveat, however, is that most states also allow state-run Medicaid programs to recover expenses from 529A plans once the beneficiary has died (although five states, so far, have prohibited this, with more possibly to follow), which is important because this recovery-of-Medicaid-assistance provision has been a main reason that many individuals have opted against opening 529A accounts since they were created 5 years ago.

But despite their seemingly complex rules and restrictions – and the potential overhang of state Medicaid recovery at death – 529A accounts can still be used to effectively grow assets in a tax-efficient manner, while serving as a ‘spending account’ for a disabled beneficiary. In fact, advisors can help disabled clients to maximize the value of 529A accounts in light of state Medicaid recovery, particularly since the balance of growth and Medicaid recovery opportunities becomes especially pertinent when the beneficiary is expected to live for at least five more years.

Accordingly, the first step in maximizing the use of a 529A plan, “Contribute, But Don’t Distribute”, is to grow the account balance as aggressively and as quickly as possible in the early years in order to maximize tax-free earnings. However, the balance should be kept below $100,000 if the beneficiary is receiving any SSI benefits (though if the individual does not receive such benefits, the account can be allowed to grow to the maximum account balance as specified by the state, which is often greater than the $100,000 SSI limit).

The second step to maximize a 529A plan, “Earn and Burn”, is to systematically withdraw funds any time the account balance reaches the target threshold (to keep the account balance from exceeding the targeted limit) and to use those earnings to pay for qualified disability expenses.

Finally, the last step, “When In Doubt, Empty It Out”, applies to beneficiaries who live in states allowing for Medicaid recovery from the remaining account balance after their death. In this stage, the account holder proactively spends down and uses the 529A account, in full, if/when the beneficiary’s health takes a turn for the worse or their life expectancy otherwise becomes more limited in time horizon (to ensure there’s nothing left in the 529A account shortly before the beneficiary is expected to die).

Ultimately, the key point is that, despite the complex rules around maintaining a 529A account and the risk of state Medicaid recovery taking away the account’s remaining contributions and growth, the expenses for which a 529A account can be used are broadly defined and thus offer flexible strategies for using 529A plans for the benefit of qualifying individuals who are disabled or blind, ensuring those dollars are fully spent for the disabled beneficiary themselves.