Nerd's Eye View blog

Weekend Reading for Financial Planners (Dec 5-6)

December 4, 2015 02:33 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest 2015 Financial Advisor Tech Survey from Financial Planning magazine, highlighting the latest in advisor technology trends, from the most popular CRM and financial planning software, to which advisor channels (and age demographics) are adopting new technology the fastest. Also in the news this week is another discussion of the Vanguard whistleblower suit, suggesting that Vanguard really is facing the possibility of being forced to increase its internal pricing by as much as a factor of 4X (and potentially pay billions of dollars of "evaded" taxes as well).

From there, we have a few technical financial planning articles, including: Social Security planning tips from Larry Kotlikoff in the aftermath of the recent Bipartisan Budget Act crackdown on File-and-Suspend and Restricted Application; a summary of the upcoming rules changes next year on money market funds, including which types may face a 2% redemption fee and have a floating (not-fixed-at-$1) NAV; a discussion of looming Medicare changes, from rising healthcare inflation impacting premiums, to new income threshold for the Medicare surtaxes in 2018 and changes to Medigap supplemental policies in 2020; and a look at "swap powers" and their relevance in income and estate tax planning (especially to get a step-up in basis on certain appreciated assets) for various types of irrevocable grantor trusts.

We also have a couple of practice management articles this week, from a review of the latest technology enhancements at broker-dealers like Cambridge, Commonwealth, and LPL, to a look at how advisory firms are adopting virtual part-time paraplanners and interns, and a discussion of the "pricing trap" that many advisory firms are facing as growth rates slow and firms (wrongly?) try to cut prices to compete instead of getting more focused on really crafting a unique value proposition for a clear target clientele (because in the future, it's really going to matter!).

We wrap up with three interesting articles: the first is a look at the recent FINRA initiative to reshape the Series 7 exam and/or to introduce a new "general knowledge" exam, which in turn has kicked off questions about whether the Series exams are even still relevant in today's financial advisor (and not-stockbrokering-centric) world; the second is a discussion of Facebook founder Mark Zuckerberg's announcement to donate 99% of his Facebook stock (about $45B) for philanthropic purposes, but to not use a private foundation and instead contribute to a for-profit LLC instead (possibly a newly emerging philanthropic trend?); and the last is a touching discussion about the "real" value of the home, as told by the Wall Street Journal's Jason Zweig when he had to move his 87-year-old mother out of the family home that they had owned for more than 50 years.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, featuring his own take on Financial Planning magazine's 2015 Advisor Technology Survey results, from what is still poor adoption of advisor CRM (the most common advisor CRM is "none"!?), but rising technology spending budgets as advisors look to step up in the future!

Enjoy the reading!

Using Systematic Partial Roth IRA Conversions And Recharacterizations To Fill The Lower Tax Bracket Buckets

December 2, 2015 07:01 am 34 Comments CATEGORY: Retirement Planning

From the moment the Roth IRA was created in the late 1990s, it has been a popular vehicle to generate future tax-free growth and income, whether by contributing to the account on an ongoing basis, or even doing a Roth conversion of an existing IRA or other pre-tax retirement account.

Yet the caveat is that the decision to contribute or convert to a Roth IRA incurs an immediate tax liability. And in the extreme, a large Roth conversion can generate so much taxable income that it actually drives up the IRA owner’s tax bracket to the point that the transaction becomes wealth destructive!

Fortunately, though, the decision to do a Roth conversion doesn’t have to be “all or none” – and in fact, not only is a “partial” Roth conversion permitted, but in practice it’s often the optimal strategy, allowing retirement account owners to convert just enough to fill the lower tax brackets, without causing “too much” income that would trigger the top tax brackets.

In fact, the Roth recharacterization rules make it feasible to precisely fill the bottom tax brackets, but not a dollar more, by converting more than enough to fill the lower tax brackets each year, and then doing a partial recharacterization to back into the optimal partial Roth conversion amount after the year is over!

How Tax Treatment Changes The Valuation Of An Advisory Firm Acquisition

December 1, 2015 07:01 am 2 Comments CATEGORY: Practice Management

As the pace of advisory firm acquisitions slowly but steadily increases, more and more attention is being paid to the "going rate" valuations of advisory firms, with some recent mega-deals valued at upwards of 2.0X recurring AUM fee revenue.

Yet the caveat is that not all advisory firm acquisitions are treated the same for tax purposes. Earn-out arrangements result in the purchase price being taxed as ordinary income to the seller, while others deals that purchase the underlying business assets may be treated as a capital transaction eligible for long-term capital gains treatment. As a result, a deal that is reported at 2X revenue could actually be worth another 15% more (or quite a bit less) depending on the tax treatment.

The issue is further complicated by the fact that the treatment most favorable to the seller - taxation at long-term capital gains rates - is least favorable to the buyer, who will be compelled to spread the cost of the purchase for tax purposes over 15 years as "goodwill amortization" even though the cash flows for the purchase occur immediately. As a result, the tax treatment of the deal can be a significant factor in setting the price itself, as buyers may pay more for a deal with more favorable tax treatment for themselves, and sellers may accept less if they can receive more favorable tax treatment on their end.

In this guest post, advisor Daniel Zajac shares his perspective on how the valuation of an advisory firm can swing by 15% or more, based on both the tax treatment to buyers and sellers and the expected growth rate of the practice. Whether you're considering the sale of your own practice, or are a prospective buyer of one (either as a way to start out as a financial advisor, or to make your existing advisory firm bigger), hopefully this information will help you gain a better understanding of the tax issues to consider that may influence the valuation of the firm involved!

NSR Invest Platform Aims To Open Peer-To-Peer Investing Marketplace To Advisors

November 30, 2015 07:01 am 11 Comments CATEGORY: Investments

In today’s low-interest-rate environment, the pressure is on for advisors to add value when it comes to fixed income allocations. Yet unfortunately, some of the most appealing segments of the fixed income markets to generate higher yields – such as peer-to-peer (P2P) investing – have little or no means to fit into the typical financial advisor investment platform.

But that may soon change, as peer-to-peer analytics and management solution NSR Invest prepares to launch the first integration of P2P investment platform Lending Club to ‘traditional’ advisor portfolio analytics solution Orion Advisor Services. The ultimate goal – to make it feasible for financial advisors to manage client investments in P2P loans, including allocating capital into individual loans (in a diversified manner), managing cash flows in and out of P2P investment accounts, and facilitating consolidated performance reporting of P2P investing and the client’s other portfolio investments. All done in a manner that advisors can even bill for their services.

Of course, the caveat is that peer-to-peer investing still has significant risks to accompany the higher yields it offers, from a material risk of default (which can only be partially diversified away) to significant illiquidity if clients unexpectedly need to sell their allocations. Nonetheless, the relatively new sub-asset-class within the fixed income environment remains appealing for yield-starved clients, and NSR Invest’s technology may finally make it feasible for, at least, independent RIAs to begin to allocate client dollars to P2P investment opportunities!

Weekend Reading for Financial Planners (Nov 28-29)

November 27, 2015 02:00 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that now Fidelity is throwing its hat into the "robo" ring, with a new automated investment advice solution called "Fidelity Go" that, like Schwab's own effort, will function as a distribution channel for Fidelity's own proprietary mutual funds for a portion of the investment assets. Also in the news this week was a settlement between Vanguard and the state of Texas driven by a whistleblower allegation that the company may be setting its costs at a below-market rate as a tax avoidance scheme (and raising the question of whether further tax-related lawsuits may eventually force Vanguard to raise its fees).

From there, we have a few technical financial planning articles this week, from a look at the ongoing rise of Deferred Income Annuities (also known as Longevity Annuities) and why advisors should consider them, to a discussion of why factor investing strategies (e.g., a value-tilt or a small-cap tilt) continue to persist despite the fact they are "known" and theoretically should be arbitraged away, a look at the "investment portfolio of the future" as advisors increasingly shift to "core" investing with index funds and "satellite" positions with an ever-widening range of alternative investments, and discussion of a recent EBRI study that found while retirement spending declines by more than 20% for nearly 1/3rd of retirees in the first 6 years of retirement, a material number of retirees increase their spending early in retirement (and not just those who are affluent).

We also have a couple of practice management articles this week, including: the latest Cerulli data, which finds that despite prior predictions, the number of financial advisors actually increases last year (albeit by just 1.1%) as large firms increasingly hire junior advisors to deepen their teams and formulate succession plans; a look at the importance of really asking your clients what they truly value, recognizing that what we think clients appreciate may not really be what they value most; and the last looking at how financial planning may change in the coming decade as technology increasingly impacts the way advisors do business and serve clients.

We wrap up with three interesting articles: the first looks at how the coming Department of Labor fiduciary standard could actually become a disruptive threat to RIAs (even as it benefits consumers), as RIAs simultaneously lose their differentiating fiduciary factor and face an onslaught of new competition from sales-oriented fiduciary advisors who may prove more capable at gathering clients and assets; the second is a cautionary note from former SEC Investment Management Division director Norm Champ about the problems that may arise if the SEC proceeds with its anticipated proposal to outsource RIA exams to a third-party examiner; and the last raises the interesting question of whether the entire retirement paradigm of "work now for financial freedom later" is the wrong approach, and whether a series of periods of work followed by periods of "mini-retirement" may ultimately be the more fulfilling "retirement" approach of the future.

Enjoy the reading!

How PEP And Pease Don’t Actually Penalize Deductions, They’re Just 1% Surtaxes On Income

November 25, 2015 07:01 am 3 Comments CATEGORY: Taxes

Back in 1991, Congress first enabled the "Pease limitation" phasing out itemized deductions, and the "Personal Exemption Phaseout" (PEP), which were designed to limit the tax benefits of those deductions for higher-income taxpayers. While the PEP and Pease limitations were themselves phased out in the mid-2000s, the American Taxpayer Relief Act of 2012 re-enacted them beginning in 2013, making them a current tax planning issue.

Yet the irony is that while they are referred to as "phaseouts of itemized deductions" and a "personal exemption phaseout" the reality is that the Pease limitation and PEP are applied primarily based on the extent by which someone’s income is over specified thresholds. As a result, while they're labeled as penalties to deductions and exemptions, the Pease limitation and PEP actually function more like surtaxes on income, amounting to a 1% marginal tax rate increase for the Pease limitation, and another 1% rate increase per family member for the PEP.

The reason why this distinction matters is that ultimately, as surtaxes on income, the PEP and especially the Pease limitation are not actually disincentives against deduction-producing strategies; for instance, with almost all taxpayers, the tax savings of charitable giving is actually identical with or without the Pease limitation! In the end, this means that advisors and their clients should be cautious about trying to avoid deductions when faced with PEP and the Pease limitation; instead, simply recognize their 1% surtax effects, and focus planning on income given the higher marginal tax rates that result!

Celebrating My 5 Year Blogiversary, And A Look At How I Get Paid For “Free” Blogging

November 23, 2015 07:01 am 26 Comments CATEGORY: Nerd's Eye View

With nearly 1,000 cumulative articles, this past month the Nerd’s Eye View blog celebrated the 5-year anniversary (or “blogiversary”?) of its re-birth in the fall of 2010. And over that time span, this blog has gone from a sleepy little side project that had a dozen or two readers for every article, to one that generated a whopping 120,000 unique visitors last month, and has become the center of my business and professional world.

From many of you who are regular readers of the blog, and enjoy the entirely free (and advertising-free) content, I’m often asked how I can ‘afford’ to give away so much of my time and content without charging anything (or selling third-party ads). The key is simply this: no matter how much free information is out there on the internet, there will always be a subset of people who need some help implementing the ideas and strategies they read.

In fact, given the size of this site, it means that ultimately even if only 1% of you (or even 0.1% of you!) have a need to do business with one of the various companies I own, or want me to speak at your event or consult with you, and the other 99.9% of you simply use this information for free to improve your own lives (or your practice, or your work with clients), we all win. And that simple strategy has more-than-quadrupled my personal income in the past 5 years, even as I give away more and more for free!

Accordingly, I am happy to report that even as the Nerd’s Eye View blog grows to new highs, I remain committed to giving you as much helpful information as I can entirely for free - and remain free from any third-party advertising as well. In fact, you’ll notice that we’ve re-launched with an updated visual look and interface to the site to make it even easier to read and navigate, and with a re-design on the back end of the site will be rolling out more new features and services in the coming months as well. All I ask is that you continue to visit the site regularly, read the content, share it with your friends and colleagues, and if you have a need for some further assistance, please don’t hesitate to reach out if one of my businesses can help.

Weekend Reading for Financial Planners (Nov 21-22)

November 20, 2015 02:30 pm 13 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the launch of the CFP Board's new Center for Financial Planning, which will pursue the laudable goals of attracting more young financial planners to the profession, improving advisor diversity, and lanuching a new academic journal for financial planning research, but in the process is increasingly putting the CFP Board into conflict with the FPA with overlapping membership initiatives. At the same time, the CFP Board also announced this week that for the first time in a long time, the average age of CFP certificants has begun to decline, and dipped below age 50 this year, as the organization's ongoing efforts to attract young new talent is beginning to show signs of progress.

From there, we have a few technical financial planning articles this week, including: the final announcement that Medicare Part B premiums will rise "only" 16% next year for those not eligible for Hold Harmless (albeit with a $3/year surcharge to last the next decade or so); a look from retirement researcher Wade Pfau at how Social Security compares to investment alternatives (particularly if you want to spend down your portfolio while delaying Social Security benefits); an announcement from the Department of Labor to expand state-run IRAs and employer retirement plans (including the potential for automatic enrollment with payroll deduction); the news that next February the NYSE will stop allowing Stop orders and Good-Til-Canceled orders (in acknowledgement that investors are improperly using them as risk management tools when they're not); and a look at the new Actuarial Guideline 49 that rolled out this fall to limit the "over"projections of indexed universal life policies (and whether the AG49 rules still don't go far enough to limit overly optimistic policy illustrations).

We also have a couple of practice management articles this week, from the importance of hiring an Operations Manager or Chief Operating Officer for your advisory firm if you're finding yourself at/past capacity (and especially if client service and/or business growth are starting to suffer!), to a discussion of the pros and cons of trying to hire a "permanent" financial planning associate who is not seeking a career track of personal advancement, and a look at how a typical advisor "Mastermind" or group operates (and how to take the steps of forming your own).

We wrap up with three interesting articles: the first explores the research of how we typically judge people (including ourselves) based on how hard the person works and how much time they put in, even though the reality is that the most creative and productive people usually limit how much time they put in (otherwise the brain just gets too tired!); the second is a look at the new Gino Wickman book "Rocket Fuel" which highlights how the most successful businesses are the ones that pair together a visionary and an "integrator" who is capable to putting the visionary's ideas into practice; and the last is a great reminder that just as fitness tracking devices like the Fitbit are successful because they take long-term health goals and break them down into daily bites, so too must advisors break their long-term goals down into daily bite-sized activities that can be tracked and measured to help reinforce success (and it's not a bad idea to try with clients, too!).

Enjoy the reading!

Is CFP Board Seeding A Future Competing Membership Association With Its New Center For Financial Planning?

November 19, 2015 07:01 am 25 Comments CATEGORY: Industry News

After giving a ‘sneak preview’ in early 2014, this week the CFP Board formally launched its new Center for Financial Planning, a “virtual entity” within the CFP Board that aims to support the future of the financial planning profession.

Armed with a multi-million-dollar founding sponsorship from TD Ameritade, the Center for Financial Planning will focus on attracting and developing the next generation of financial planning professionals, improve gender and racial/ethnic diversity amongst financial planners, and provide a home for financial planning academics, including the launch of a new Wiley-published academic journal for financial planning researchers to publish and get credit towards tenure.

Yet while these are laudable goals for the CFP Board to pursue, it is notable that the new Center for Financial Planning initiatives move the CFP Board into even further conflict with the FPA, which similarly has its own NexGen effort, its own diversity initiative, its own partnership with the Academy of Financial Services to provide a home to academics, and its own Journal.

In fact, the Center for Financial Planning’s vision to become “the premier resource in the financial planning profession for educators, researchers, practitioners, financial services firms and the public“, combined with the CFP Board’s effort to raise a whopping $10M of capital for the organization in the next five years – far in excess of what it needs to operate its current initiatives – raises the question of whether the CFP Board is seeding the Center of Financial Planning to become a competing membership association against the FPA, just as the FPA’s own market share of CFP certificants continues to sink to record lows.

Given the CFP Board’s long history of its own debacles, arguably in the long run it is better to have a strong and vibrant FPA operating as a membership association outside the CFP Board, and functioning as a check-and-balance to hold the CFP Board accountable. But with FPA facing its own woes as revenues continue to decline, and the potential Department of Labor fiduciary proposals risking a disruption to FPA’s own crucial sponsorship revenues, the CFP Board appears to be positioning itself for the possibility that the FPA may stumble… and perhaps is even trying to compete and hasten the FPA’s demise.

Investing In Peer-To-Peer Lending As An Alternative Fixed Income Asset Class

November 18, 2015 07:01 am 38 Comments CATEGORY: Investments

While much of the growth in P2P lending (over $5B in loan volume in 2014 alone!) has been driven by borrowers looking for appealing alternatives to traditional banks and financial institutions like credit card companies, the growth has only been possible because of the matching investor demand. After all, from the investor’s perspective, P2P loan investing is little more than an opportunity to lend money to other individuals and earn an interest rate yield, not unlike any other "bond" investment. Except in a world where Treasury Bonds and intermediate Corporate bonds or CDs may yield little more than 1% to 2%, the P2P loan has a starting yield of 5.3% for “high-quality” notes and an average rate of over 13%!

Of course, the significant caveat with Peer-to-Peer investing is that some loans will default, even over their relatively limited three to five year terms, and thus the final net returns will be substantively lower than the top-line interest rate suggests. After all, P2P loans are unsecured personal loans, often to people who have credit issues in the first place (and thus why they seek out loans with interest rates of 5.3% to almost 30%!).

Nonetheless, the rise of P2P platforms makes it feasible for investors to extensively diversify across hundreds of Peer-to-Peer lending notes by investing into fractional loan shares, managed by technology that facilitates the process of routing a borrower’s loan payments out to what might be dozens or hundreds of investors who each contributed incrementally to the loan.

In fact, the growth of the P2P marketplace, along with the introduction of institutions, is beginning to create the potential for advisors and their clients to access P2P loans, as a unique form of ‘alternative’ fixed income asset class with appealing yields. On the other hand, the growth of institutional buyers may also be pushing available investor yields down, making it harder for individual investors to compete... which is even more troubling given that P2P loans have enjoyed record net returns on the back of an economic expansion, but face the prospective risk that forward returns could be far lower if/when the next recession arrives!