Nerd's Eye View blog

Getting Stretch IRA Treatment When Using An A-B Trust As An IRA Beneficiary

June 1, 2016 07:01 am 26 Comments CATEGORY: Estate Planning

The A-B trust strategy has long been a staple in the world of estate planning to help minimize estate taxes. And even with the increase in the Federal estate tax exemption and the creation of portability of the estate tax exemption, A-B trust planning is still relevant for very high-net-worth clients, and those who may face a lower state estate tax exemption.

However, a significant complication of A-B trust planning occurs when the only (or primary) asset available to fund the trust is a retirement account such as an IRA, given the common desire to obtain “stretch IRA” treatment to minimize taxable distributions from an inherited IRA.

Fortunately, though, the “see-through” trust rules do allow at least some types of A-B trusts to still obtain stretch IRA treatment, particularly in the case of bypass trusts or (properly drafted) QTIP marital trusts, even when created as a testamentary. On the other hand, naming marital trusts or even revocable living trusts outright can result in a total loss of stretch treatment for an inherited IRA.

In addition, it’s notable that even where the see-through trust rules do allow for the stretch of an inherited IRA, the income tax treatment will often be less favorable than naming beneficiaries outright (due to the compressed trust tax brackets). As a result, anytime an A-B trust is being considered as the beneficiary of an IRA or other retirement account, it’s crucial to weigh the non-tax (and potential estate tax) benefits against the likely income tax disadvantages!

Summer Reading List of “Best Books” For Financial Advisors – 2016 Edition

May 30, 2016 07:01 am 8 Comments CATEGORY: Personal/Career Development

It's Memorial Day once again, which means the busy spring conference season is coming to an end, and it's time for the annual summer slowdown for most advisory firms - as clients begin to go on summer vacations and it's harder to schedule them for meetings, advisors have some time to relax with family themselves... and catch up on the reading list.

As an avid reader myself, I'm always eager to hear suggestions of great books to read, whether it's something new that's just come out, or an "old classic" that I should go back and read (again or for the first time!). So in the spirit of sharing, a few years ago I launched my list of the "Top Books for Financial Advisors to Read", and it was so well received that in 2013 I also started sharing my annual "Summer Reading List" for financial advisors of the best books I'd read in the preceding year. It quickly became a perennial favorite on Nerd's Eye View, and so I've updated it every year, with a new list of books in 2014 and yet another fresh round of suggestions again in 2015.

And so continuing the trend, I'm now excited to share my latest 2016 Summer Reading list for financial advisors, with suggestions on books about everything from how to improve your personal and business focus, several books on advisor marketing and practice management, and a few more to challenge your thinking about the business world of the future (as more and more becomes either "free", or accessible at ever-lower costs thanks to a growing number of mega platform businesses... which may someday make their way into financial services as well!). As you might guess from the common theme of the books, I'm spending a lot of time thinking about the future of the financial advisory and where the best opportunities may be going forward from here!

So as we head into the summer season, I hope that you find this suggested list of the latest books to read to be helpful… and please do share your own suggestions in the comments at the end of the article about the best books you've read over the past year as well!

Weekend Reading for Financial Planners (May 28-29)

May 27, 2016 02:44 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that robo-advisor SigFig has raised $40M of new venture capital, from established asset manager Eaton Vance, in its bid to become a leading robo-advisor-for-advisors solution as the company continues to pivot away from its challenged B2C roots.

From there, we have a number of practice management articles this week, from a brief review of the new retirement income software solution "Income Solver", to a look at what the DoL's "Best Interests" requirement really means (now that it appears the rule is here to stay), tips and best practices for doing client meetings virtually via webinar or video conferencing software, and why it's so crucial for financial planning to be done consistently across an advisory firm.

There are also several technical planning articles, including: a look at how the long-term care marketplace is evolving as long-term care insurance (and Medicare and Medicaid) continue to struggle; how the problems of the student loan crisis may actually be understating, by failing to recognize how often low-income students in particular are enticed into colleges they can't afford, fail to graduate due to the financial burden, and then end out with student loans and no diploma; a discussion of common estate planning strategies and assumptions that are changing in today's environment; and a look at how the rise of indexing may make investments more efficient on a relative valuation basis while still leaving them exposed to potentially extreme absolute valuation distortions.

We wrap up with three interesting articles: the first is a look at how social networking is actually on the decline, as companies increasingly adopt social media for business purposes and drown out the less-and-less-common "personal status update"; the second is a fascinating new study discussed in the Harvard Business Review that suggests the "skills gap" in the U.S. may not be due to a lack of availability worker training and STEM programs, but simply that businesses don't (or can't) pay enough in wages to incentivize workers to go get those skills; and the last is an examination of the growing juggernaut that is Vanguard, now taking in nearly $1B of AUM per day and showing no sign of stopping, due not only to its incredible economies of scale and strong brand, but also its unique structure of being owned by its shareholders and the favorable investor-centric incentives that has created for the company's management and leadership.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week looks at Personal Capital's announcement that it raised another $75 million of venture capital (albeit from an established financial services firm) to expand its tech-augmented-humans advisory service, SigFig's announcement that it also raised venture capital this week ($40M, from another established financial services firm) as it pivots its B2C robo-advisor to become a B2B solution for advisors instead, and a look at a recent FINRA fine on an advisor which was triggered in part because he backdated and altered client notes in his CRM to obscure questionable recommendations.

Enjoy the "light" reading!

Finding Your Virtual Assistant As A Financial Advisor

May 26, 2016 08:28 am 37 Comments CATEGORY: Practice Management

As the internet makes the world more and more interconnected, it is increasingly feasible to work with clients anywhere in the country (or even the world). And the phenomenon of working-at-a-distance isn't unique to the advisor-client relationship. It's also relevant for advisors who are looking to hire and expand their own team, too - freed by the constraints of geography.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the rise of virtual assistants, and how financial advisors can find their own virtual assistant. A growing number of platforms have made it easier than ever to find a virtual assistant... although ironically, the best may still come from the advisor's own personal network!

In addition, we also look at the typical cost for a virtual assistant - which can range from $15/hour to $30/hour for support on straightforward administrative and operational tasks, to $50/hour or $100/hour or more for specialized support on tasks like preparing a financial plan. Though notably, as long as the hourly rate is less than what the advisor bills for their own time, even "expensive" virtual staff support can be a great deal for the advisor.

For many, though, the appeal of a virtual assistant is not just trying to get a "good deal" on an hourly rate, but simply the flexibility of being able to hire someone for just the hours that are actually needed, while at the same time potentially getting a specialist for the task who will be more competent and require less training than hiring a full-time staff member anyway. Just be certain to buy them a separate license for all your software, so you can turn off their access if you ever terminate the staffing relationship!

Why The Empty Nest Transition Is Crucial For Retirement Success

May 25, 2016 07:01 am 22 Comments CATEGORY: General Planning

Despite decades of encouragement to save a percentage of annual income, the national savings rate has been in decline for decades, and a disturbing number of today’s 50-somethings are seeing their children off to college, only to turn to their own financial situation and realize there's a significant shortfall in retirement preparedness.

Yet given the reality that it’s very expensive to raise children – including the ballooning cost of college – arguably this transition into the empty nest phase provides a unique opportunity for households to play “catch-up” for retirement… simply by taking the money that was once being spent on the kids, and saving it instead!

In other words, perhaps the idea of saving a steady percentage of income throughout our working years was never a reasonable approach to begin with, and that a strategy more sensitive to the spending realities of the child-rearing versus empty-nest phases of accumulation is both more realistic, and what many households will end out doing anyway.

Which means the real key to retirement success may not be about saving early and often for the long term at all, and that instead a significant post-child-rearing-phase "catch up" sprint is the normal path to retirement success. In turn, this suggests that the most crucial phase of retirement saving is not figuring out how to save during the early working years, and instead is about ensuring that the transition into the empty nest phase is used as an opportunity to catch up on retirement savings – after all, just 15 years of saving 30% of income once the kids are out of the house is still enough for an astonishing number of households to stay on track for retirement!

CFP Board Raises Revenue With New Voluntary Donation “Dues” For Its Quasi-Membership Association

May 23, 2016 07:01 am 31 Comments CATEGORY: Planning Profession

Last fall, the CFP Board formally announced its new Center for Financial Planning, a designated subsection of the CFP Board itself intended to help advance the financial planning profession. It’s stated vision was to become “the premier resource in the financial planning profession for educators, researchers, practitioners, financial services firms, and the public”, with a particular focus on cultivating the next generation of financial planners, enhancing gender and racial diversity amongst CFP certificants, and becoming an academic home for the financial planning body of knowledge.

From a financial perspective, the Center for Financial Planning was originally announced as being funded primarily from the CFP Board’s own operating budget, by outside sponsors (including a lead sponsorship from TD Ameritrade), and through the opportunity for CFP certificants to voluntarily donate. However, the CFP Board has recently begun "testing" a new CFP renewal process, defaulting every CFP certificant into a $25/year donation that amounts to a 14% increase in certification fees and “voluntary” organizational dues, or nearly $2M/year of new revenue for fund the CFP Board’s ever-expanding initiatives!

Although the Center for Financial Planning’s new initiatives themselves are laudable, the massive push by the CFP Board and its new internal entity for new revenue seems to put it on an ever-accelerating collision course with the Financial Planning Association, as their overlapping initiatives grow ever more redundant, and both organizations increasingly ask CFP certificants to foot the (redundant) bill.

Yet ironically, even as the CFP Board converges on the functions of a membership association and a certifying body, the reality is that the entire origin of the CFP Board was a spin-off from an educational institution (the College for Financial Planning) in the 1980s, in large part due to the fundamental conflict of interest that exists when the certifying organization also serves as an educator of its certificants and competes with the CE sponsors it oversees. Which means either the CFP Board has managed to entirely forget the roots from whence it came… or perhaps that it is continuing to groom the Center for Financial Planning as a spin-off membership association precisely because the leadership believe it is a way to work around the CFP Board's troubled past?

Weekend Reading for Financial Planners (May 21-22)

May 20, 2016 10:05 am 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement that UBS is partnering with "robo-advisor" SigFig, which is notable both because it signifies yet another B2C robo-advisor that is pivoting to serve advisors instead, and more significantly because the hunger for better "robo" tools for advisors has now gone all the way to one of the top wirehouses (which may only further accelerate the trend).

From there, we have a number of practice management articles this week, from a look at how advisors can add "student loan planning" as a service to work with younger clients, to tips on how to get a better attendance at your client and prospect marketing events, what advisors should consider if they want to keep working in the financial planning industry but don't want to serve clients anymore, and how even tiny shifts in your advisory business can lead you far off track over time (which is why it's so important to periodically evaluate whether your business is where you want it to be, and if not to reset the path).

There are also several technical planning articles, including: tips on how to broach the long-term care insurance conversation with clients; a cautionary tale on the questionable "PIRAC" strategy to supercharge Roth contributions; how more flexible withdrawal rate strategies make it easier to take advantage of favorable return sequences in retirement (if and when they happen); and a discussion of the rules around the taxation of Social Security and planning strategies to consider.

We wrap up with three interesting articles: the first is a look at the recent research on "grit", which has been celebrated as the new predictive factor that determines success, but in reality may only be relevant in a very narrow set of circumstances; the second is a discussion of how the best techniques to help consumers change their behavior aren't about better disclosures, or education, or giving nudges, but about recognizing that the optimal tactic itself will vary depending on how engaged the consumer is with the decision-making process to begin with; and the last is a fascinating look at how the abundance of information (thanks to the internet and the accessibility of smartphones) is actually bringing an end to the "Information Age" and leading to the rise of the "Experience Age" where the greatest creation of value comes from having the experience to not only gather information but apply it... which means seniors who retire may be stepping out of the workforce at the exact moment that they could actually be contributing the most value of all.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week provides coverage directly from the Envestnet Advisor Summit, including the new "Open ENV" open architecture platform, the announcement that Tamarac is adding integrations to Salesforce CRM, and how Envestnet is starting to capitalize on its Yodlee acquisition with new features for advisors.

Enjoy the "light" reading!

Should Advisors Ditch Their Broker-Dealers In Light Of DoL Fiduciary?

May 19, 2016 08:03 am 2 Comments CATEGORY: Practice Management

For much of the past year, the broker-dealer community has lamented that the proposed DoL fiduciary rule would be a significant impediment to their business model, causing additional compliance burdens and greater costs for their brokers and ultimately consumers. Yet with the final DoL fiduciary rule issued, the question now arises about what brokers who work at a broker-dealer should actually do, given the rules that are scheduled to take effect next April of 2017.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how the DoL fiduciary rule will likely splinter the broker-dealer community into three types of broker-dealers: the level-fee fiduciary broker-dealer, the full-BIC broker-dealer, and the non-qualified-only broker-dealer, each of which will have different compliance obligations, different products and services available, and different limitations on the oversight and scope of advice their brokers can provide.

Notably, the decision of what type of broker-dealer the organization will be in the future is ultimately up to the broker-dealer itself, and advisors will simply have to decide whether they're happy to continue under that broker-dealer structure, or seek out another type instead. Or possibly leave the broker-dealer environment altogether and become an RIA instead.

Which means for an advisor currently at a broker-dealer, there's really no reason to make a change... yet. But it's imperative that advisors at broker-dealers begin to consider what kind of business they want to operate in the future, and whether it's really necessary to continue offering commission-based products and deal with the additional compliance burdens, or choose to focus as a level-fee fiduciary instead. And then when the broker-dealer makes the announcement of what it will be, likely sometime over the next six months, the path of whether to stay or go should become much clearer...

The Problem With Joint Ownership Of Non-Qualified Deferred Annuities

May 18, 2016 07:01 am 19 Comments CATEGORY: Annuities

The opportunity to obtain tax-deferred growth in a non-qualified deferred annuity is a key feature of the contracts, particularly for those who face high tax brackets and have already maxed out other available tax shelters. An added benefit is that non-qualified annuities aren’t even subject to RMD obligations during the lifetime of the annuity owner.

However, a significant complication of annuities is that upon the death of an annuity owner, the beneficiary must begin post-death Required Minimum Distributions from the contract. And notably, the post-death RMD obligation occurs at the death of the first owner with a jointly owned contract, which means that a surviving joint owner can even be forced to liquidate their own asset and trigger a taxable event!

Fortunately, the tax law does allow for “spousal continuation” of an annuity payable to a surviving spouse. But that rule triggers based on whether the spouse is named as the beneficiary, not the joint owner. In fact, once a surviving spouse is properly named as a beneficiary, there’s often no reason at all for the annuity to be jointly owned anymore!

And between non-spouses, the situation can be even more problematic, as the death of one annuity owner can force the surviving owner to begin taking “stretch annuity” payments over his/her life expectancy, even if it was the survivor’s money in the first place and he/she doesn’t want it!

Which means in the end, most situations where an annuity is jointly owned, it probably shouldn’t be, as most of the benefits of joint ownership can be accomplished by other means when using an annuity anyway (unless specifically pursuing contractual living or death benefit guarantees that are designed to apply for both spouses jointly). And in situations where it's not actually necessary to jointly own the contract anyway, by not owning the contract jointly, the risk of unintentionally forcing the contract to be liquidated at an undesirable time is greatly reduced!

Gratitude Marketing And Generating Client Referrals Through The Reciprocity Rule

May 16, 2016 07:01 am 1 Comment CATEGORY: Marketing

Despite our general interest in self-preservation, a growing volume of research is finding that human beings are hard-wired to help each other. Not only can helping others trigger a release of endorphins and create a “helper’s high”, but we have a tendency to want to help those who have helped us – a form of social reciprocity that can be very rewarding in the long run to those who help others.

In a new book entitled “Gratitude Marketing”, financial advisor and coach Michael Sciortino explores how advisors can leverage the principles of helping others, expressing gratitude, and the reciprocity rule, to market themselves and their businesses. Not from the perspective of doing good for selfish reasons, but simply because doing good – in a consistent, systematic way – happens to be remarkably good for business, too.

So whether it’s sending clients cards on their birthday, taking them (and their friends) out for birthday lunches, throwing clients (and their co-workers) a retirement party, or having client appreciation events and making charitable donations as a token of appreciation for those who refer, there are numerous ways to express to clients your appreciation for their business and referrals in a way that can support more of those behaviors in the future. Though notably, in the end expressing gratitude isn’t necessarily about the latest, greatest idea, but simply the consistent expression of thanks… which is why Sciortino notes that for some advisors, the best tactic is also simply to regularly write thank-you notes to express your gratitude to those who have helped you to grow your business!