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Weekend Reading for Financial Planners (Dec 15-16)

December 14, 2018 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that asset manager Blackrock is partnering with Microsoft to create a new digital financial planning and retirement platform for consumers, aiming to leverage both Microsoft's tech prowess and workplace reach to insert Blackrock-created digital advice tools directly into the employer marketplace... for which the software's recommended solutions will include new Blackrock retirement income products, as Blackrock increasingly focuses on technology, not just as an effective tool to manage portfolios, but literally a distribution channel for its investment products.

Also in the news this week was a surprising "double-header" of fee-only news, as both Ron Carson and Ric Edelman have converted their practices to be entirely fee-only going forward, with Edelman's firm shedding the last sliver of its commission-based trails (which were down below 1% of revenue anyway) and Carson forming his own limited-purpose broker-dealer to house and sell off his prior commission-based trails to (in order to drop his own FINRA licenses for good).

From there, we have a slew of investment-related articles this week, including: a look at the significance (or not) of the recent inversion of the yield curve; how the U.S. is now reaching the crossover where, for the first time in 75 years, it is now a net exporter of oil, as the country approaches energy independence (albeit still in a globally-interdependent energy marketplace); a deep-dive look at securities lending and its rise as a tool to reduce the cost of ETFs; Betterment's decision to launch a new "two-way sweep" that shifts client cash into short-term bond funds with higher yield (including automatically transferring and investing "excess" client cash held in outside bank accounts, potentially attracting over $2B in new AUM in the coming year); the shift of ultra-high-net-worth investors towards "direct investing" into businesses in lieu of public market (or even hedge fund or private equity) investing, and what may be underappreciated risks in doing so; and a fascinating study from Riskalyze that finds a substantial relationship between the risk tolerance of clients... and other individuals who live in the same state, providing yet another reminder and affirmation that investing is often a herd behavior.

We wrap up with three interesting articles, all around the theme of looking out to the opportunities and challenges of 2019: the first is a look at the major challenges likely to loom in 2019, from the SEC's anticipated re-proposal of Regulation Best Interest and the rising risk of a bear market to the industry's ongoing transition away from an AUM-centric model and the growing availability of "fee-only" insurance and annuity products; the second explores similar industry trends in the UK, which remarkably mirrors the US in everything from the need for succession planning, to the rise of next generation advisors, the emergence of the "second generation" (i.e., non-founder) CEO of advisory firms, and the growing pressure on advisory firm founders to develop business skills to manage their growing advisory business enterprises; and the last is a fascinating discussion around Vanguard's stated intent to come into the financial advice business and drive away high-cost low-value financial advisors just as they did to high-cost low-value mutual fund managers... even as the firm builds its advisory business on top of its own (admittedly low-cost and popular) mutual fund and ETF business, raising the question of whether Vanguard really represents the future of financial advice or the last remnant of its proprietary-product-centric past?

Enjoy the "light" reading!

Pros and Cons of Completing a Rollover Before Year-End

December 13, 2018 02:27 pm 3 Comments CATEGORY: Taxes

For many individuals, their 401(k) makes up the bulk of their retirement savings, yet with an average of just over 10 job changes through one’s career, it’s not uncommon for people to have multiple (potentially expensive and restrictive) employer-sponsored retirement plans. Which means that transferring money out of various retirement plans into an IRA can be tremendously beneficial on many fronts, including lower costs and complexity, as well as increased investment options.

As we approach the end of the year, a common question on clients’ minds is whether or not they should consider rolling over money from their retirement plan into an IRA, and in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope and guest hosted this week by Jeff Levine, we discuss the benefits such a move, some of the potential pitfalls you might encounter along the way, and a few rules to keep in mind when making a rollover near the end of the year.

In order to understand the available options, it’s important to first understand the reasons for not rolling money between retirement accounts in the first place. For instance, clients who completed a Roth conversion earlier in the year that included after-tax dollars but still have pre-tax dollars in the traditional IRA would see their year-end balances impacted, making their prior conversion a lot less tax-efficient. Meanwhile, if a client wants to preserve and utilize a “still working” exception in order to delay RMDs from their employer-sponsored plans, then that option will be lost when rolling money into an IRA.

With that in mind, what are some good reasons to complete a rollover into the end of the year? First and foremost is convenience and ease. Because consolidating retirement accounts can reduce the complexity of keeping track of multiple accounts. This is particularly pertinent for individuals over 70 ½ who are subject to RMDs, since it doesn’t matter which IRA their RMDs are taken from as long as the total (and correct amount) is distributed, whereas RMDs must be taken from each employer-sponsored retirement plan account.

Meanwhile, clients who are interested in a making a qualified charitable distribution (where individuals can reduce their taxable income by using their RMD to contribute money to a charity), that QCD can only come from an IRA. Which, in turn, is based on the year-end balance in that IRA, meaning that there has to be money in the IRA in the first place! In a similar vein, clients who might want to purchase a qualified longevity annuity contract may not have that as an option in their employer-sponsored retirement accounts. Instead, a QLAC is more commonly purchased inside an IRA, but again, is subject to certain limitations that can be addressed by completing a year-end rollover.

Additionally, for clients over 70 ½ with a spouse that is at least 10 years their junior, rolling money into an IRA or other retirement account where that spouse is the sole beneficiary before year-end will lower the RMD from that IRA in the following year. And finally, rolling money from a 401(k) into a Roth IRA can be an effective means of reducing RMDs in the future, and is especially attractive at this time due to the lower tax rates (temporarily?) in effect following the passage of the Tax Cuts and Jobs Act.

Although there are some rules to keep in mind when taking advantage of these year-end planning opportunities at the end of the year, they aren’t terribly complex. Specifically, any money that leaves one account must be out before December 31st, but beyond the common timeframes for rollovers, it’s okay if the money doesn’t transfer into the receiving account until after January 1st. One thing that’s important to keep in mind for clients subject to RMDs, however, is that the custodian likely will not track that last minute change, and it will be up to the advisor to make sure to account for any year-end balance increases for the following year’s RMD.

Ultimately, the key point is to avoid completing any sort of rollover if it is not tax-efficient, but there are some good reasons to move money between tax-favored retirement accounts, particularly towards the end of the year, as well as opportunities for advisors to add value for their clients by helping them manage their tax exposure, particularly for those clients fortunate enough to not rely on distributions from their retirement account for income in retirement!

Unwinding An “Irrevocable” Life Insurance Trust (ILIT) That’s No Longer Needed

December 12, 2018 07:05 am 6 Comments CATEGORY: Estate Planning

Irrevocable Life Insurance Trust Structure

The Irrevocable Life Insurance Trust (ILIT) has long been a staple of estate planning – a means of avoiding the death benefit of a life insurance policy from being subject to estate taxes by having it owned not by the insured or family themselves, but an independent third-party trust holding the life insurance for the family’s (beneficiary’s) benefit instead. Which was necessary in a world where, as recently as 10-20 years ago, even basic term insurance for a 30-something-year-old breadwinner to protect the children in the event of an untimely death could cause an estate tax liability.

But the drastic increase in the estate tax exemption, especially with last year’s doubling to $11.2M (or $22.4M for a married couple with portability) under the Tax Cuts and Jobs Act of 2017, has not only removed more than 99% of households from Federal estate tax exposure, but has rendered a large number of existing ILITs unnecessary for families who once had an “estate tax problem” in the past (when exemptions were lower) but won’t be in any foreseeable future.

And the good news is that despite the “irrevocable” label in its name, in many cases it is possible to either “rescue” life insurance out of an ILIT that’s no longer needed, or to unwind the ILIT altogether. In some cases, it may be as straightforward as the grantor simply substituting the life insurance policy out of the ILIT in exchange for cash of equivalent value (or alternatively buying the policy back). In other scenarios, if the life insurance itself is no longer needed, it may be easiest to simply let it lapse, rendering the ILIT irrelevant because it would no longer have any assets left to oversee. And if the life insurance policy has cash value, it can simply be surrendered or sold in a life settlement transaction, with the cash potentially distributed to beneficiaries (at least if the trustee has discretion to do so). Alternatively, if the beneficiaries themselves want to keep the policy, it may be feasible to distribute the policy in-kind under the trustee’s discretion, or to terminate the trust outright (either under the terms of the trust, as a consent termination of the grantor and beneficiaries, or court-directed termination at the direction of the beneficiaries).

Of course, the caveat is that the trustee must still honor the terms of the trust, and if the trust is more restrictive in preventing various “unwinding” or policy rescue options, the parties are still bound by the terms of the trust (unless, perhaps, the ILIT can be decanted to a new trust under state law). Nonetheless, the fact remains that while the “irrevocable” nature of an ILIT means the terms of the trust itself cannot be changed, that doesn’t mean the grantor, beneficiaries, and trustee can’t work within the terms of the trust and state law to eliminate an ILIT that is no longer necessary in today’s estate tax environment!

#FASuccess Ep 102: Transitioning From Wirehouse To Independence: Is The Grass Really Greener? With Michael Henley

December 11, 2018 07:17 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 102nd episode of Financial Advisor Success Podcast!

This week's guest is Michael Henley. Michael is the founder and CEO of Brandywine Oak Private Wealth, an independent advisory firm in the Brandywine Valley of Southeastern Pennsylvania that manages more than $500 million of client assets.

What's unique about Michael, though, is that he's a 34-year-old millennial, who only just recently founded his independent advisory firm a few months ago as a breakaway from Merrill Lynch, where he had spent the first decade of his career. And until recently, was so loyal to the firm that he even had his wedding cake shaped like a bull.

In this episode, we talk in-depth about what it's like to build an advisory firm in the wirehouse environment, how the culture of wirehouses and the value of the wirehouse brand itself has begun to change in recent years. The way that wirehouses have increasingly deemphasized the role of commissions but have adopted forms of integrated grids that require minimum production levels in certain product categories just to maintain current grid payouts. And the way that once dominant wirehouse technology is now struggling to keep pace with the growth of independent technology firms instead. We also talk about the breakaway transition itself, how Michael and his team really did have to resign late on a Friday afternoon, and then spend the weekend frantically calling clients to come with them. The reason he's chosen to build his client portal around eMoney Advisor and eschew a standard portfolio performance reporting tool like Black Diamond altogether. Why Michael chose to leverage Dynasty Financial as a back-office provider to support the firm, and the unique decision that the firm made to sell of a small slice of its future revenues to create the necessary startup capital to fund the transition and buy out the deferred compensation plans they would lose by leaving Mother Merrill.

And be certain to listen to the end, where Michael compares the ways that the grass is and isn't greener in the independent channel versus the wirehouse, why most advisors may underestimate the burdens it takes to really be a business owner as an independent, as Michael discovered the hard way when he was forced to rename his brand-new firm just a month after launching. And why he would still build his career again in a wirehouse if he was starting over, even though he's happy so far with the transition he's made to independence at this juncture of his career.

So whether you're interested in learning about steps Michael took to affect his breakaway transiton, some lessons he's learned along the way, or the pros and cons of being independent, then we hope you enjoy this episode of the "Financial Advisor Success" podcast with Michael Henley.

Understanding FPA National’s “OneFPA Network” Plan To Dissolve And Consolidate Its Own Chapters

December 10, 2018 07:05 am 0 Comments CATEGORY: Planning Profession

It’s no secret that the Financial Planning Association has struggled for many years with stagnant membership amidst an increasingly difficult and competitive landscape for membership associations given both the rise of social media (and more online platforms for people to connect outside of traditional networking and professional associations) and intra-industry competition from other membership and trade organizations and even media companies competing for advisors’ attention.

In the case of the FPA, though, the situation is further complicated by the fact that the FPA is not just a single entity, but a national “parent” organization that has 86 separate chapters – each its own legal entity with its own Articles of Incorporation, Bylaws, and Board of Directors – that each sign an “affiliation agreement” to represent the FPA at the local level. And while in the early days of the FPA and its predecessor organizations, a distributed chapter system was necessary – where there were no resources for a national organization, nor the kind of centralized communication and business management technology to execute a national organization – in today’s environment, it simply means 86 different entities repetitively filing Form 990s, 86 different entities implementing their own technology, and 86 different entities each rowing in their own similar-but-not-always-same direction under the national affiliate umbrella.

To address this challenge, last month the FPA issued a proposed initiative to re-form the FPA as not a series of 86 independent chapters (plus 2 state councils!), but a single national entity under one umbrella that can better centralize technology, operations, accounting, and other largely redundant functions of the individual chapters, while reconstituting “The New Chapters” (or TNCs for short) that will no longer be discrete entities but will still have ultimate responsibility for implementing their own local budgets to run their own local programs.

And in return for becoming part of the new “OneFPA Network,” chapters will have the opportunity to send representatives to a new “OneFPA Council” – a form of Participatory Governance system that will allow both a pathway for chapters to provide feedback to the National Board, and also to populate and be represented on key National committees regarding everything from Strategic Partnerships and Resource Coordination of chapters, to the Nominating Committee of the National Board and a new OneFPA Leadership Institute for the development of future volunteer leaders.

Ultimately, the new OneFPA Network is scheduled to roll out at the end of 2019, but the FPA leadership has already launched a “Listening Tour” series of meetings with FPA chapter boards to gather feedback as the final details of the structure are sorted out in the coming months. Though in the end, the real question is not simply how the OneFPA Network will work, but whether it will work, and be the transformational change the FPA really needs to reinvigorate its growth? (Stay tuned for my own thoughts on the likely efficacy of FPA's OneFPA Network proposal next week!)

Weekend Reading for Financial Planners (Dec 8-9)

December 7, 2018 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the latest edition of Financial Planning magazine's annual Advisor Technology survey, showing the most widely adopted advisor software tools in various categories... and highlighting that, with the proliferation of advisor technology, the problem now is not the threat of robo-advisors but simply the burden of choosing which of the ever-growing number of solutions human advisors want to use to deliver their own tech-enabled services!

Also in the news this week was the stunning news that wirehouse Wells Fargo will be rolling out a pilot program for "independent" RIA offices (albeit still operating under the Wells Fargo brand) in an effort to stem the tide of brokers breaking away to the RIA channel, and the news that the SEC is going to take a hard look at its own custody rule in 2019 and whether it's time to update the requirements for the modern technology-driven world (where custody is far more complex than just having physical possession of a client's printed stock certificate!).

From there, we have several articles on industry trends, including a look at the initial success of recent Financial Planning Re-Entry Initiative from the CFP Board's Center for Financial Planning to increase the number of women in financial services, an updated discussion from Bob Veres on the recent OneFPA Network proposal (and the FPA National Board's response to his earlier criticisms), and the news that the FPA NexGen community is transitioning itself away from being an independent community for younger advisors and instead will adopt the vision and mission of FPA National and serve as its community for any advisors who are new to the profession (whether entering as young students or more experienced career-changers instead).

We also have several practice management articles this week, including a reminder of the importance of focusing not just on reducing employee turnover but "regrettable" turnover, the impact of culture and how it is naturally set from the top by a firm's founder/leader (but can be consciously changed/improved), and tips for advisors who want to negotiate a better deal for themselves when changing broker-dealers (and understanding what can potentially be negotiated in the first place).

We wrap up with three interesting articles, all around the theme of finding our own purpose and success in life: the first looks at how, despite the popularity of the saying "do what you love and the money will follow," a better approach is probably the Japanese concept of "ikigai" which considers both whether what you're doing is something you love, something you're good at, something the world needs, and something you can actually get paid for (and that it takes the intersection of all 4 to really succeed financially at what you love); the second takes a fascinating look at how luck may play a far greater role in success than we realize (but talent does matter, and you can choose to put yourself in positions where good luck can happen to you); and the last explores how the key to getting what you desire (and aspire to) is being willing to change when necessary in order to achieve it.

Enjoy the "light" reading!