Nerd's Eye View blog

IRS Opens Temporary Window For Retroactive Portability Of Estate Tax Exemption In Rev Proc 2014-18

February 12, 2014 07:01 am 3 Comments CATEGORY: Estate Planning

The potential for portability of a deceased spouse's unused exemption amount (DSUEA) to a surviving spouse was a significant change that emerged from the fiscal cliff legislation in 2010. However, early adoption of portability was limited, due both to a lack of awareness of the rule by many of those who needed it, and the fact that the portability rules were just "temporary" and faced future sunset in the fiscal cliff of 2012 until subsequently made permanent under the Taxpayer Relief Act of 2012... and by that time, it was already too late for many who might have wished to claim portability.

To provide relief for this unfortunate situation, the IRS has issued Revenue Procedure 2014-18, which will allow any decedent who passed away in 2011, 2012, or 2013 to have an extension to file an estate tax return and claim DSUEA portability for the surviving spouse. However, the relief provision reopening portability for anyone who died in the past 3 years is temporary; the Form 706 estate tax return must be filed by the end of 2014 to claim this "retroactive" portability, or the window will once again be closed for good.

For many surviving spouses, this opportunity for retroactive portability is an appealing relief provision to get a "free" second chance to claim portability and carry over a decedent's unused estate tax exemption amount; the only requirement is that a Form 706 estate tax return now be filed. In situations where the surviving spouse has also since passed away, the potential for retroactive portability could actually result in an immediate and significant estate tax refund. And notably, for same-sex spouses - who couldn't file for portability in 2011, 2012, or most of 2013 because the marriage wasn't recognized in the first place - the new relief provisions of Rev. Proc. 2014-18 offers the opportunity to go back and claim portability for a same-sex surviving spouse who never had the opportunity in the first place!

The Five Stages Of Growth In A Financial Planning Firm

February 10, 2014 07:01 am 7 Comments CATEGORY: Practice Management

As the world of financial advice continues to grow and evolve, advisory firms are increasingly going through a series of consistent stages in the growth of their firm. There's a start-up phase with rapid growth, followed by a capacity "wall" where the individual advisor just can't handle any more clients. The capacity wall is cleared by converting from a solo advisory firm into a multi-advisor ensemble, with years of potential continued growth as the firm reinvests into its infrastructure. Eventually, though, the ensemble practice hits another wall, as the sheer size of the firm is so large that even the collective efforts of all the advisors and partners is not enough to sustain its growth rate, leading to the fifth and final phase: the establishment of a brand and truly scaled marketing.

What's significant about this progression is not just the fact that the growth pattern happens so consistently, with a series of faster and slower growth phases, but that the walls occur at consistent points as well, and require an able-to-be-anticipated series of steps to navigate them and reach the next stage. In practice, these stage nuances may be masked by the tailwind of market returns (or the headwind of a bull market), which provide an additional level of volatility to an advisory firm. Nonetheless, by focusing on the underlying organic growth rate of new clients and asset flows, the pattern remains clear.

Ultimately, advisory firms that recognize the stages of growth will be best positioned to navigate the inevitable walls that come. But the real challenge of this landscape is to recognize that the firms in the last stage of growth may actually be the best positioned of all, potentially putting a "growth squeeze" on the wider base of smaller advisory firms still struggling to reach the next stage. For those firms that are smaller and wish to stay that way, it will still be possible to enjoy a profitable lifestyle practice. But those in the middle stages may need to navigate carefully, or risk being unable to get past the final growth wall. And in the long run, the largest firms with a visible brand and scaled marketing may actually grow so large and effectively, that it begins to change the growth landscape itself in the future!

Weekend Reading for Financial Planners (Feb 8-9)

February 7, 2014 01:55 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the CFP Board's announcement this week of its newest "fun, edgy and creative" commercial for the ongoing $10M/year public awareness campaign. As incoming CFP Board chair Ray Ferrara recently took the leadership mantle, there's also an interview with Ferrara about the CFP Board's strategic initiatives, including an ongoing focus on growing the ranks of CFP certificants (to 81,000 by 2017), and a restatement that the CFP Board believes its compensation disclosure definitions are clear and do not need to be adjusted (despite the ongoing disparity between its own fee-only definition and that of NAPFA). And wrapping up the news this week was the SEC's announcement of its 2014-2018 strategic plan, which includes an intention to "continue to analyze" a potential fiduciary rule... and the potential that if the SEC is "just" in the analysis stage, that there may be no rule coming at all in the near future.

From there, we have a number of practice management articles this week, including: how to keep your data private from prying eyes when working on your laptop in public; a new tool to help you do a "Do It Yourself" valuation of your practice (with far more accuracy than traditional industry rules of thumb); an interesting discussion of how advisors create value for clients, focused around the three core areas of Planning, Implementation, and Monitoring; and some ideas about how to create a better client experience (a la "the Disney experience"). There are also two technical articles this week, the first discussing a recent IRS announcement that it will grant a reprieve for those who missed the opportunity for filing a portability election since it was first established at the end of 2010, and the second reviewing a recent Tax Court case that illustrates the hazards of using IRA dollars to invest in a personal business.

We wrap up with three interesting articles: the first looks at a big change coming to the credit card system to combat rising credit card fraud - by October 2015, the entire US system will be switching from the current swipe-and-sign approach to the structure used in most of the rest of the world, where credit cards have security chips and purchases are authorized by an individual PIN in addition to the swipe action; the second article provides a fascinating deep dive into how exactly to best deliver an apology in a business like financial planning where mistakes are inevitable and will happen (but how you handle it determines how big or small the problem will ultimately be!); and the last is an interesting article from practice management consultant Angie Herbers who notes that while advisory firms are often founded by visionary owners, it takes an "integrator" to really make the business grow and come to life... though ultimately once the integrator takes over, replacing the founding visionary with the next generation can actually be the hardest step of all for the long-term viability of the firm. And be sure to check out the latest advisor tech news with Bill Winterberg's "Bits & Bytes" video segment at the end!

Enjoy the "light" reading!

Wealthfront Tax Loss Harvesting White Paper – A Case Study In How Not To Calculate Tax Alpha

February 5, 2014 07:01 am 25 Comments CATEGORY: Taxes

The benefits of reducing current tax liabilities through tax loss harvesting are widely acknowledged - so much, that the IRS developed the 30-day "wash sale" rules to prevent taxpayers from abusing the strategy. Yet less widely understood is that there's one crucial caveat to tax loss harvesting - that taking advantage of the loss also reduces the cost basis of the investment, potentially exposing the taxpayer to a gain in the future that can wipe out some, most, or all of the tax benefit, and in the extreme with today's four capital gains tax brackets actually drive up future tax rates and leave the investor worse off than having done nothing at all.

Notwithstanding these issues, many investors and advisors continue to overstate the benefits of tax loss harvesting, and now "robo-advisor" Wealthfront is doing so as well, with its "Tax-Loss Harvesting White Paper" that purports Wealthfront can increase an investor's wealth by an extra 1%/year, annualized, indefinitely, through its daily tax loss harvesting strategy. Unfortunately, though, the reality is that in a review of its strategy, Wealthfront - like so many others - is confusing tax savings with tax deferral, and in the process may be drastically overstating its benefits by a factor of 10:1, and for its typical investor the true annual benefit may be a mere 1/25th of what their "white paper" claims purport.

Again, this is not to say that tax-loss harvesting is useless, and in reality while many advisors have been automating tax-loss harvesting just like the robo-advisors for almost a decade, Wealthfront's particular tools to implement loss harvesting are unique, especially in how it is able to quasi-pool investor assets to drive the transaction costs down to nothing for its clients (facilitating tax loss harvesting at very small thresholds on a nearly continuous basis!). Nonetheless, the flaws of the Wealthfront tax-loss harvesting white paper also provide a clear example of the problems with trying to come up with a generalized algorithm for an individual's specific and unique tax circumstances, and overall provides an unfortunate case study in how not to calculate tax alpha and try to apply its benefits for a wide range of clientele.

The New MyRA Roth IRA Proposal: A Financial Planner’s Guide To Everything We Know So Far

February 3, 2014 07:01 am 22 Comments CATEGORY: Retirement Planning

On January 28th of 2014, President Obama delivered his State of the Union address, which laid out many of his administration's policy goals for the coming year, including a number of initiatives he intends to implement by executive order. Amongst the list was the creation of a new "MyRA" retirement account, a type of "safe, easy-to-use starting savings account" for Americans, intended to help improve the country's retirement savings shortfall.

As further details have emerged, though, it turns out that the MyRA may be little more than a standard Roth IRA, funded via payroll direct deposits, and invested into a government bond fund, albeit with $25 initial and $5/paycheck ongoing contribution levels that are smaller than what financial institutions typically allow. As a result, many critics of the new MyRAs have emerged, from those who think the accounts will create more confusion by adding to the patchwork of retirement account choices while creating little new value (and worse, defaulting young people into fixed income investments without a chance at the long-term growth of equities), to those who complain that since the accounts are still purely voluntary to contribute to and those contributions remain liquid and accessible (as is standard for all Roth IRAs) that participation will be limited and those in need will just tap the accounts to spend later anyway.

Nonetheless, the reality is that the new MyRA is unique in its ultra-low direct deposit contribution limits, and while its fixed-income investment option isn't ideal in the long-term, the MyRA is "forced" into a private Roth IRA rollover that can be reinvested in a more diversified manner anyway once the account balance reaches $15,000. As a result, even if the program just gains limited traction, there may be a significant boost of $15,000 MyRA "rollover planning" in just a few years. And given that the MyRA can be implemented by executive order without Congressional approval - as President Obama has stated he intends to do - the reality is that the MyRA really does appear to be coming soon, with a pilot program rolling out by the end of the year!

Weekend Reading for Financial Planners (Feb 1-2)

January 31, 2014 03:37 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a summary of the key details of President Obama's newly proposed "MyRA" accounts, a new form of "starter IRA" account for those who may only be able to save small dollar amounts. In addition, there's also some coverage of the latest AALTCI survey on long-term care insurance showing that premiums are up by 12% for females in 2014 but actually down almost 10% for males as gender-based LTC insurance pricing has taken effect. And an interesting survey of advisors in the UK after the first year of their RDR reforms - which banned commissions for advisors - finding that in fact the transition to a commission-free world has gone more smoothly than many first feared.

From there, we have a few practice management articles, including a look at how advisory firms are onboarding and training new advisors, new research on what generates referrals finding that the greatest predictor of whether clients refer may simply be that some are more "hard-wired" to do so that others, and the last a summary of advisor tech guru Bill Winterberg's keynote session at this week's TD Ameritrade conference on how advisors need to focus more on their digital presence and the first impression it may be making on prospective clients.

We also have a number of more technically-oriented articles this week. There's one that looks at how the world of estate planning is changing now that no more than 3,000 - 4,000 Americans each year are actually passing away subject to Federal estate taxes, a second that provides an interesting rebuttal to the recent criticisms about the Shiller CAPE ratio and suggesting it may still be more valid than many give it credit for, and the last is the latest for investment guru James Montier of GMO that seeks to critically debunk several recent new investment trends, from "smart beta" to "risk parity" strategies to investing in real assets.

We wrap up with three interesting articles: the first is an insightful article about blogging itself by advisor and blogger Josh Brown, who makes the important point that advisors shouldn't worry about being the first to cover breaking news and that instead trying to be last - giving the ultimate and final word on an issue - may actually be the better (and less pressured) way to go; the second is a predictive look from industry commentator Bob Veres at the advisory profession in 20 years, noting that the changes we witness may be far more dramatic than what anyone has been predicting so far (remember, 20 years ago the "internet" was little more than dialing up to America Online or CompuServe!); and the last explores whether the financial planning profession - and the regulators who oversee it - still has too much "marketing myopia" with a nearsighted focus on products and not enough on recognizing that advice itself is our primary value proposition. Enjoy the reading!

Can We Really Measure Risk Tolerance Or Does It Swing Too Wildly With Market Volatility?

January 29, 2014 07:01 am 27 Comments CATEGORY: General Planning

It is a staple of financial advising to measure a client's risk tolerance; whether out of a mere regulatory requirement to do so, or out of a best practices desire to better understand a client's comfort level with the investments (and other financial planning advice) being recommended, so process to measure risk tolerance is essential in today's world.

Yet many financial advisors severely question the value of doing so; as the saying goes, "Clients are risk tolerant in bull markets, and intolerant of risk in bear markets, so is there really that much value to going through the exercise at all?" And a recent academic presentation at the FPA Experience conference added fuel to the fire, showing a remarkably high correlation between the monthly average risk tolerance scores of a well respected measurement tool, and the monthly level of the S&P 500.

Yet a deeper look reveals that while even the best risk tolerance measuring process is not totally immune to the vicissitudes of the market, a client's true risk tolerance appears to be remarkably stable and doesn't change much at all in the midst of volatile markets. Instead, what appears to be unstable is not the client's tolerance for risk, but their perceptions of risk in the first place; in other words, clients may be loading up on stocks in bull markets not because they're more tolerant of risk, but because they don't think there is any risk in the first place. In turn, this suggests that ultimately, it may be time for financial planners to more widely adopt quality tools to measure risk tolerance, but simultaneously recognize that managing client (mis-)perceptions of risk is the real challenge that we face.

News Highlight: Judge Rules Against CFP Board On All Recent Motions And Accepts Amended Camarda Complaint

January 28, 2014 07:01 am 27 Comments CATEGORY: Industry News

On Sunday, January 26th, a decision was issued in the latest round of legal motions between the CFP Board and the plaintiffs Jeffrey and Kimberly Camarda regarding their looming public disciplinary action from the CFP Board for what it claims were violations of the compensation disclosure rules.

In a blow to the CFP Board, the judge fully accepted an amended complaint from the Camardas, which is now seeking monetary damages in addition to "just" blocking the CFP Board's public disciplining of the Camardas. In addition, the judge denied all of the CFP Board's various motions to limit the scope of the case, including requests to quash subpoenas of various individuals for deposition. As a result, the breadth of discovery for the Camardas will be fairly wide, as they attempt to substantiate their claims that the CFP Board is in breach of contract, engaging in unfair competition, has violated due process, and may even be responsible for antitrust violations and having engaged in "false advertising" by misleading the public about its standards.

Of course, the fact that the judge has ruled that the full scope of the Camarda complaint will be considered and that the full breadth of their discovery requests will be honored does not actually mean that the CFP Board has been found guilty of anything at this point. Nonetheless, given the coming depositions that must now move forward, and the information requested by the Camardas on various other CFP Board disciplinary cases, a whole lot of additional detail about the inner workings of the CFP Board is about to come to light. To say the least, this case is no longer "just" about the definition of fee-only; it's now about the legitimacy of the organization's enforcement process and the standards for all CFP certificants, and raises the question of whether the CFP Board may have made a serious strategic mistake by trying to make Camarda vs CFP Board of Standards its defining case.

How To Be More Decisive In Your Own (Investment) Decision-Making Process

January 27, 2014 07:01 am 1 Comment CATEGORY: Personal/Career Development

Making decisions is a fundamental part of life; in fact, it's almost daunting to consider how many decisions we actually make just to navigate our day-to-day lives, not to mention the weightier decisions that have to be made from time to time. Yet despite the crucial nature of making good decisions, most people have little if any framework or process around how decisions are made, except perhaps for creating basic lists of "pros" and "cons" that in practice often do little more than confirm the decision we already intended to make.

In the book "Decisive" noted authors Chip and Dan Heath take a deep dive into the research around decision-making, including both the shortcuts our brains typically take to make decisions (so that we are not rendered paralyzed by the volume of decisions to be made on a day-to-day basis) to the best practices in how to actually craft and effective decision-making process and when necessary avoid the shortcuts that may be helpful for routine decisions but can be destructive when misapplied in more important situations.

From the ideas of multitracking potential solutions to adopting a devil's advocate (or at least a culture that encourages them), what results is an excellent and inspirational book about how to change your own approach to making decisions, along with some ideas about how you might apply the concepts in your business and with your clients. As the authors clearly illustrate, even for those of us who pride ourselves on the depth of our analytical skills, the reality is that good process trumps good analysis - and notably, good process may lead to better analysis as well!

Weekend Reading for Financial Planners (Jan 25-26)

January 24, 2014 12:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a discussion of an interesting new trend: financial "wellness" programs, which are employer workplace financial programs oriented primarily around education (and not necessarily advice), that are on the rise and may create new demand for young planners, potentially facilitating a new career track for the profession.

There are several industry and practice management articles this week, from a study by Spectrem Group affirming the trend that consumers - especially higher net worth - are increasingly seeking out independent advisors over full-service brokers, to a profile of Schwab's increasing push into financial planning as they delivered 101 thousand financial plans last year (albeit with varying levels of complexity, and often provided for free). There's also an article on social media tips wittily titled "Why Social Media Won't Work For You" (providing guidance on those mistakes to avoid), a nice basic guide from the Journal of Financial Planning on the importance of connecting your website to Google Analytics and what to look at/for, and a good article looking at how to fix your investment committee's decision-making process by "Investment Committee Doctor" Tom Brakke.

We also have a number of more technically-oriented articles this week, including: new research from the Journal of Financial Planning co-authored by Wade Pfau and yours-truly, finding that the optimal asset allocation in retirement may actually be to start more conservatively for clients and slowly increase equity exposure throughout retirement; a look at the trends in cash value life insurance, finding that use of the product actually has declined precipitously in the past 20 years, though the ones still using it today tend to be those who are older, wealthier, and most sophisticated; and a discussion of how to use bond ladders for retirement portfolios (with the caveat that at today's low rates, there's a significant trade-off to doing so).

We wrap up with three interesting articles: the first is a list of the 3 "big issues" that advisors need to examine more carefully when planning for clients (including our spending assumptions, our expectations about the stability of careers and income of our clients, and just how disruptive technology could be); the second takes a look at how the world of financial advice may be different in 2034, when there has been an entire generational turnover of financial advisors; and the last, which I highly recommend, by famed venture capitalist Marc Andreesen, on why Bitcoin is a much much bigger deal than most (advisors) realize, and its importance goes far beyond just being a speculative crypto-currency. Enjoy the reading, and be sure to check out Bill Winterberg's weekly advisor technology "Bits & Bytes" video at the end!