Nerd's Eye View blog

President’s Budget Proposes Elimination Of Backdoor Roth, Stretch IRA, and Step-Up In Basis At Death!

February 10, 2016 12:45 pm 18 Comments CATEGORY: Taxes

Every February, the President formulates a budget request for the Federal government, which Congress then considers in coming up with its own budget resolution. And while many provisions of the President’s budget pertain to actual recommendations on appropriations for various government agencies, the proposals often include a wide range of potential tax law changes, recorded in the Treasury Greenbook.

Given that this is an election year and already within less than 12 months of the end of President Obama’s term, there is little likelihood that any of the President’s substantive tax changes will actually come to pass, from a version of the so-called “Buffet Rule” (a “Fair Share Tax” for a minimum 30% tax on ultra-high income individuals), an increase in the maximum capital gains rate to 24.2% (which would total 28% including the 3.8% Medicare surtax on net investment income), or a rewind of the estate tax exemption back to the $3.5M threshold from 2009.

However, the President’s budget proposals do provide an indication of what’s “on the radar screen” inside Washington, including a wide range of potential “crackdowns” and “loophole closers” that could appear in legislation (as was the case with the crackdown on Social Security file-and-suspend and restricted-application claiming strategies last year).

And in this context, it’s notable that the President’s budget proposal does include a wide range of potential crackdowns on individuals, from a new cap on the maximum gain to be deferred in a 1031 like-kind exchange of real estate, to the addition of lifetime Required Minimum Distributions for Roth IRAs after age 70 ½, the elimination of stretch IRAs and step-up in basis at death, shutting down the “backdoor Roth contribution” strategy, and more!

CFP Board Begins The Process Of Updating Its Fiduciary Standards of Professional Conduct

February 8, 2016 07:01 am 6 Comments CATEGORY: Regulation & Compliance

The CFP Board’s Standards of Professional Conduct are the rules by which CFP certificants are held accountable – and a violation of those rules can result in a private censure, a public Letter of Admonition, or even an outright suspension or revocation of the CFP marks. And after 8 years of the current Standards being in place, the CFP Board recently announced that it has formed a new 12-person committee – the “Commission on Standards” – tasked with evaluating whether it is time to update the standards… and if so, how they should be changed.

And arguably, the CFP Board’s standards do have room for improvement. While the last revision in 2008 took the positive step of introducing a fiduciary standard for CFP certificants, it notably applies only when a CFP certificant is actually “doing” financial planning, not merely for being a CFP certificant who works in the financial services industry – creating problematic scenarios where a consumer hires someone with the CFP marks only to find out later that person wasn’t required to act in his/her fiduciary capacity as a professional. Similarly, the CFP Board ‘requires’ a fiduciary duty for CFP professionals providing financial planning, but doesn’t specifically require those advisors to manage or avoid their conflicts of interest, and instead simply requires that such conflicts be disclosed… despite the available research that finds disclosure is a poor remedy to manage conflicts of interest, and can even cause advisors to behave worse. And of course, there’s the CFP Board’s compensation disclosure rules, which have dragged the CFP Board into both a lawsuit, and criticism that its current definitions render its definition of “commission and fees” as meaningless for consumers.

Fortunately, the CFP Board’s decision to revisit the Standards of Professional Conduct – as it does from time to time – gives the organization opportunity to correct these issues. The process this time around includes both numerous public forums with CFP certificants – being held in six major cities in the coming weeks – and will be followed by a public comment period for all CFP stakeholders to weigh in on any proposed rule changes.

So with 2016 shaping up to be the year of major regulatory change for financial advisors – with not just the Department of Labor fiduciary rule, but also the CFP Board’s prospective updates to its Standards – what changes are you hoping to see the CFP Board enact?

Weekend Reading for Financial Planners (Feb 6-7)

February 5, 2016 02:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a new industry white paper finding the ongoing shift of advisor compensation from commissions to fees has reached a crossover point, where fees now top commissions as the primary advisor revenue source (as trend that may only accelerate as the Department of Labor's fiduciary proposal rolls out later this year).

From there, we have a number of practice management articles this week, including: a look at the history of the Rule 206(4)-1 limitation against testimonials and what to watch out for; tips on communication not with potential new clients but existing ones; a look at what advisors serving ultra-high-net-worth clients are providing as "value-added" services; a review of how some value-added services and "perks" are being adopted by a wider range of advisory firms (not just those serving the super-rich); and a look at how mutual fund fees continue to be squeezed, and whether an advisor's AUM fee may be next (though the short answer is "no", probably not, because it's still so hard to comparison-shop advisors!).

We also have a couple of technical articles this week, from a look at the latest research on retiree spending patterns which finds that affluent clients tend to under-spend in retirement (creating a "consumption gap" between what they could spend and what they actually do), a look at the coming Actuarial Guideline 49 rules next month that will curtail the return assumptions used in sales illustrations of equity-indexed Universal Life (and whether the policies may still be over-projected), and a review of the Qualified Charitable Distribution (QCD) rules from IRAs now that they've been made permanent by last December's "Tax Extenders" legislation.

We wrap up with three interesting articles: the first is a look at why, despite all the ongoing warnings of disruption, big companies continue to get disrupted by start-ups that build on top those big companies' existing technology or service stack; the second is a look at the concept of "Deep Work" and how Bill Gates had incredible productivity by being able to apply an intense focus for extended periods of time; and the last explores how the biggest factor that drives our success is our personal engagement with what we're looking on (and how to refine it if you're not feeling fully engaged yourself).

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 includes a playlist of all the video highlights from his live coverage of the TD Ameritrade LINC National Conference!

Enjoy the "light" reading!

Finding Your Financial Planner Niche – Is Getting A CDFA To Serve Divorcees A Good Choice?

February 4, 2016 09:11 am 11 Comments CATEGORY: Marketing

As more and more financial advisors offer comprehensive financial planning services, the pressure is on for advisors to differentiate by choosing a niche specialization. In fact, a recent TD Ameritrade survey found that more than half of all RIAs are planning to target a new niche in 2016!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the decision of how to choose a niche, and whether getting the CDFA designation to serve divorcees is a good niche to pursue. Or is the reality that there are already so many advisors serving the divorcee niche, that it's necessary to pursue something else?

The good news is that for the time being, the shift of advisors towards niches is new enough that few niches are truly saturated, even if pursuing a "popular" specialized niche designation like the CDFA. In fact, soon there will likely be even more post-CFP educational programs for advisors to gain the education and credibility they need to pursue new niches.

In the long run, though, the growth of advisor niches in the next 10-20 years is likely parallel the growth of the AUM model over the past 10-20 years - which means just as the early AUM advisors of the 1990s built many of the biggest "mega" RIAs today, the advisors who begin down the path of niche specialization today are not only ahead of the pack, but may well form the basis for the new "mega" advisory firms in the decades to come!

Could A Tontine Be Superior To Today’s Lifetime Annuity Income Products?

February 3, 2016 07:01 am 36 Comments CATEGORY: Annuities

Despite the fact that one research paper recently found Americans are more afraid of outliving their money during retirement than death itself, and economics research has long since shown that leveraging mortality credits through annuitization is an “efficient” way to buy retirement income that can’t be outlived, the adoption of guaranteed lifetime income vehicles like a single premium immediate annuity purchased at retirement remains extremely low.

In a recent new book entitled “King William’s Tontine: Why The Retirement Annuity Of The Future Should Resemble Its Past”, retirement researcher Moshe Milevsky makes the case that perhaps the primary blocking point of immediate annuitization really is its cost, and that guaranteeing mortality credits takes an unnecessary toll on available retirement income payouts (not to mention creating systemic risk for insurance companies if there’s a medical breakthrough!).

As an alternative, Milevsky advocates for an alternative retirement income vehicle, called a tontine. Similar to an annuity, a tontine provides payments that include both a return on capital and mortality credits stacked on top. The difference, however, is that with a tontine the mortality credits are not paid until some of the tontine participants actually pass away – which eliminates the guarantee of exactly when mortality credits will be paid, but also drastically reduces the reserve requirements for companies that offer a tontine (improving pricing for consumers).

Ultimately, it remains to be seen whether consumers would be willing to adopt a payment structure that involves getting more money for outliving your tontine peers. Yet Milevsky’s look through history reveals that tontine agreements have actually been very popular in the past, and nearly 100 years ago the use of tontines by Americans for retirement was similar to the adoption of IRAs today. Which means it really may not be much of a stretch to suggest that they should be brought back as a new form of retirement lifetime income vehicle for the 21^st century as well!

Intrapreneurship And Launching A Next Gen Offering In An Existing Financial Advisory Firm

February 2, 2016 07:01 am 11 Comments CATEGORY: Practice Management

In recent years, there has been a growing awareness of the importance for financial advisors to expand the breadth of clients they serve to include "next gen" clients like Gen X and Millennials. So far, however, most existing advisory firms have remained primarily focused on retiring baby boomers, and done little if anything to serve a younger clientele. Instead, the shift to working with Gen X and Gen Y clients appears so far to be primarily the domain of "younger" financial advisors - often Gen X or Gen Y themselves - taking the entrepreneurial leap of launching their own advisory firms to serve their peers.

In this guest post, financial planner Matt Cosgriff shares his perspective as a Gen Y advisor trying to establish a new service offering for younger clients, not by launching a new firm as an entrepreneur but by building it within an existing advisory firm as an "intrapreneur" instead. And as Matt notes, there is a big difference in the challenges of intrapreneurship and entrepreneurship. For instance, intrapreneurship requires justifying to the leadership why the new initiative is worth allocating limited resources of the organization in the first place, not to mention setting and managing expectations for growing the platform, but also has unique opportunities for success that come from building within an existing firm (including the opportunity for referrals from existing clients and established centers of influence, and being a realm of experimentation for the firm to vet new technology).

So if you're a "larger" established advisory firm thinking about a "Next Gen" offering for younger clientele, or perhaps are a younger advisor in a firm trying to figure out how to take up the mantle of intrapreneurship and convince the firm's owners to start serving Gen X and Gen Y clients, I hope that you find today's guest post and this example of intrapreneurship in an advisory firm to be helpful and inspirational about how to move forward in your own firm, too!

MaxMyInterest And MaxForAdvisors – A New Advisor #FinTech Tool To Maximize Cash Yields And FDIC Coverage

February 1, 2016 07:01 am 8 Comments CATEGORY: Technology & Advisor FinTech

In today’s low interest rate environment, “managing cash allocations to maximize yield” is virtually an oxymoron, as there’s little yield to be obtained with any level of proactive management. However, what’s unique about this upcoming rising interest rate cycle is that as rates rise and do become more appealing, for the first time ever internet and mobile banking are widespread. Which means it’s easier than ever before to open accounts online and move cash around to maximize yield. So easy in fact, that you could simply program a computer algorithm to monitor for higher yielding opportunities, and transfer your cash from one bank account to another.

And that’s exactly what a new FinTech startup has done. Called “MaxMyInterest”, the platform is designed to monitor the available yields from five major online banks, and automatically shift available cash dollars in a manner to always earn the maximal available yield. In addition, the platform can also be programmed to maximize yield up to available FDIC coverage limits (and then shifting the excess dollars over to other banks), effectively automating the asset protection strategy of spreading cash across banks to maximize FDIC protection!

And after an initial launch directly to consumers, MaxMyInterest is now developing a private white label platform for advisors. Dubbed “MaxForAdvisors”, the tool will allow advisors to offer this form of bank account cash management program directly to clients, both to maximize their yields and their FDIC-based asset protection, for a mere cost of 8bps/year (which for many clients will be more than recovered by the process of automatically shopping and shifting to higher yields), while also providing advisors a "Max Advisor Dashboard" to keep track of client cash positions. So in a world where advisors are actively seeking ways to differentiate from robo-advisors, will MaxForAdvisors become a technology solution advisors can use to enhance their own perceived value-add?

Weekend Reading for Financial Planners (Jan 30-31)

January 29, 2016 02:29 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the breaking news that the Department of Labor's latest fiduciary proposal has in fact been filed with the Office of Management and Budget (OMB), which means with an expedited review that the final rule could be issued by April. In the meantime, anti-fiduciaries continue to maintain their pledge to fight the rule, but a number of large broker-dealers have announced that they're now re-positioning to prepare for what is increasingly viewed as an inevitable fiduciary outcome.

From there, we have a number of practice management articles this week, including: a look at what you should be aware of if you have an employment contract with your advisory firm (from non-compete to non-solicitation rules and more); an announcement that digital and content marketing platform Vestorly has raised a whopping $4.1M in venture capital to scale up their solution for advisors; tips from Angie Herbers on how advisors need to re-envision their role in a growing firm (transitioning from lead advisor to lead coach for the firm's other advisors); a review of the research on how to help clients in times of "crisis" (including panicked clients about a market crisis); and another article about best practices in talking to clients who are angry and emotional about markets, and recognizing that they may actually be feeling a form of grief over losses in their portfolio and how they expect those losses to impact their personal lives.

We also have a couple of technical articles this week, from a new way to consider the challenge of how long a retirement portfolio will last (considering both how long the funds may last and how likely it is for the client to live long enough to even see the portfolio possibly fail), to issues that must be considered when evaluating Medicare plans (and in particular, pros and cons of choosing a Medicare Advantage plan over 'traditional' Part B coverage with Part D and Medigap supplemental policies), and a new study looking in depth at the track record of popular "market strategists" who give annual forecasts of market returns... who have not only historically been wrong, but have actually been more wrong than the predictions that could have been achieved by just flipping a coin every year!

We wrap up with three interesting articles: the first is a look at how important it is for clients to figure out "how much is enough" to be able to retire, as the research on happiness finds that if we don't have a target for enough, we just inevitably keep seeking more, over-consume, and end out being even less happy; the second is another look at how to draw the line on "enough", and recognizing the significant of taking whatever we have in time and capital that is "over and above" what's necessary, and using it to plant the seeds of a better future (and find meaning and purpose); and the last is a discussion from industry legend Dick Wagner, who challenges advisors to consider what we even know of money itself, which in the past century has transformed from something that was just used by governments to facilitate foreign trade into what has arguably become one of the most powerful forces that impacts our lives, and at the same time is so intimate that it remains one of the greatest taboo subjects in society today.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the official launch of Betterment for Business (the robo-advisor's new 401(k) solution), the latest iPad app for advisors from Morningstar, and a round of venture capital raising by advisor digital and content marketing platform Vestorly.

Enjoy the "light" reading!

FPA Eliminates Its Standards Of Care And Code Of Ethics Requirements – Why It’s (Mostly) A Good Thing

January 28, 2016 12:01 pm 18 Comments CATEGORY: Planning Profession

Financial advisor standards of care has become the "hot topic" of 2016, driven by everything from recent controversies about the CFP Board's enforcement of its compensation definitions, to the looming Department of Labor fiduciary rule. Yet despite rising scrutiny over fiduciary standards of care, the FPA took the somewhat controversial action last week of dropping its requirement for financial planning professional members to adhere to its own FPA Standard of Care and Code of Ethics.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the FPA decision to eliminate its Standard of Care, and look at how it was actually a good decision of the organization - because the reality is that the FPA has no means to enforce a standard of care anyway, and claiming to have a standard of care without enforcing it just creates more problems than it solves by attracting low-quality "professionals" who wish to don the mantle of a professional association.

In fact, arguably the biggest problem with FPA's decision to drop its own Standard of Care was that it didn't go far enough. While the organization said members will still be required to follow the Standards of Care that apply from other credentialing bodies and regulators - from the CFP Board to the SEC and FINRA and state regulators - which means CFPs doing financial planning will be fiduciaries, as will financial planners working within an RIA, the reality is that the FPA still permits "financial planning professional members" to include non-CFP product salespeople who are not subject to a clients'-best-interests standard at all. Which means, ironically, that the FPA just lowered the required standard of care for its non-CFP members!

Ultimately, the FPA does continue to acknowledge that it sees the CFP marks as the best certification around which to build the financial planning profession... yet the question arises of how the FPA can say it embraces CFP certification as the basis for the financial planning profession, yet continue to invite "financial planning professionals" who are not CFP certificants and now, under FPA's revised rules, aren't even required to give financial planning advice in the best interests of their clients (as FINRA and state insurance regulators don't required them to) - which, notably, is a violation of the original Memorandum of Intent upon which the FPA was founded!

Understanding Longevity Insurance – How A Longevity Annuity Fits Into A Retirement Income Portfolio

January 27, 2016 07:01 am 50 Comments CATEGORY: Annuities

One of the hardest risks to manage in retirement is the uncertainty of longevity – how long the retiree will live, and therefore how long of a retirement time horizon needs to be planned for. Planning for too short of a retirement time horizon can lead to asset depletion if the retiree actually lives. Planning for too long leads the retiree to unnecessarily constrain retirement spending for a future that never occurs.

While one popular approach to managing the issue is simply to invest in a diversified portfolio, spend conservatively, and make adjustments in the future as necessary, an alternative is to actually buy “longevity insurance” in the form of a lifetime annuity. Historically, this could be done by purchasing a single premium immediate annuity at retirement, except in practice retirees rarely ever want to lock up so much of their capital - in fact, retirees annuitize so rarely that economists have dubbed it an "annuity puzzle".

A potential alternative, though, is to use a longevity annuity. This form of single premium deferred annuity still provides payments for life, but with payouts from the longevity annuity company not beginning until the distant future (e.g., at age 85). The upshot to this approach is that it significantly reduces how much capital must be committed to securing the longevity insurance guarantee, even as the deferred starting date can also delay required minimum distribution (RMD) obligations if purchased as a "qualified longevity annuity contract" (QLAC) inside of a retirement account.

And despite today’s low interest rates, a current longevity annuity quote reveals that it can already be an appealing competitor to the expected returns of a fixed income portfolio. In fact, if longevity insurance rates rise just a bit more, they may even become competitive with long-term equity returns, thanks to the benefit of mortality credits. Which means eventually, an allocation to a “longevity annuity bucket” may become a standard in retirement income planning… at least, as long as life expectancies don’t increase so much in the coming years that the longevity annuity rates just end out going down!