Kitces.com - Advancing Knowledge in Financial Planning

Using Qualified Opportunity (Zone) Funds To Minimize Capital Gains

October 10, 2018 07:09 am 6 Comments CATEGORY: Taxes

Featured_Splitting Basis and Gains Using Qualified Opportunity Funds

Real estate investors have long enjoyed a number of unique tax benefits, from the tax deductibility of depreciation, to the ability to defer capital gains with a like-kind 1031 exchange. And beyond these core tax benefits of real estate investing itself, Congress has, from time to time over the years, provided additional tax incentives for particular types of real estate development opportunities, as a way to further guide where real estate developers may direct their capital. The latest version, created under the recent Tax Cuts and Jobs Act (TCJA) of 2017, is the so-called Qualified Opportunity Fund (QOF), which offers some especially unique tax benefits for those who are willing to invest in certain low-income areas designated as "Qualified Opportunity Zones".

Specifically, investing into a QOF offers the ability to defer tax on capital gains from the sale of existing property that are reinvested within 180 days into a QOF (including not only a rollover of real estate proceeds akin to a 1031 exchange, but even allowing the rollover of capital gains from intangible assets like stocks), subsequent basis increases on deferred capital gains reinvested into a QOF after five years (and again after seven years), and the complete elimination of capital gains tax on growth attributable to gain reinvested in a QOF (if the QOF is held for at least 10 years).

The caveat, however, is that, in order to receive the full array of QOF benefits, the latest date (according to the current tax code) that gains on the sale of assets can be invested into a QOF is December 31, 2019. Past that date, investors will begin to at least partially lose out on basis increases and, thanks to what’s widely assumed to be poor drafting, potentially lose out on other future tax benefits as well. Furthermore, the deferral of the gains on the funds used in the initial investment isn’t perpetual. Gains timely reinvested into a QOF will become taxable (except for any basis increases received after years 5 and 7) at the end of 2026 (or when the QOF is sold, if sooner).

Meanwhile, despite the attractive tax benefits, advisors should exercise caution and perform their normal investment due diligence before jumping in with both feet. Bad investments with good tax attributes are, at the end of the day, still bad investments. Questions such as “What are the management team's qualifications?”, “What are the expenses to investors of the fund?” and “What sort of assets (which, by their very nature, are illiquid) will the fund be targeting?” are all essential to answer. Not to mention the actual merits and growth or income opportunity of the particular real estate investment itself.

Nonetheless, investors who have sold appreciated assets within the past 180 days, or plan to do so in the near future, should evaluate the merits of investing into a QOF. However, the reality is that many investors’ tax planning needs will be better served by using existing strategies, including 1031 exchanges, charitable trusts, and simply holding on to existing assets – all of which may provide tax benefits, including indefinite tax deferral, and the opportunity for a future step-up in basis at death that a QOF does not provide.

#FASuccess Ep 093: Building A High-Income Lifestyle Practice Efficiently By Running It Like A Real Business with Sunit Bhalla

October 9, 2018 07:07 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 93rd episode of the Financial Advisor Success podcast!

This week's guest is Sunit Bhalla. Sunit is the founder of OakTree Financial Planning, a highly efficient solo advisory firm based in Colorado that oversees more than $40 million in assets under management.

What's unique about Sunit though is the way he's been able to build to nearly $300,000 in revenue with a whopping 85% profit margin as a career changer who works with just 17 affluent clients in a hyper-targeted niche of engineers, as a former engineer himself. In this episode we talk in-depth about how Sunit has built his hyper-efficient solo practice with the relentless focus on staying focused: The technology tools he uses to stay efficient in delivering services to clients, his simple fee structure to keep even his billing process simple and efficient, and why he offers all of his prospective clients one and only one comprehensive financial planning and investment management service that they can either take or leave.

We also talk about Sunit's unique financial planning process with clients, the key questions he asks at the beginning of each client relationship to really understand their needs, the six meaning process he uses that starts with a discussion about goals and exploring possibilities, even before gathering all the client's data. And how he ultimately delivers the financial planning results to his sophisticated engineer clients, not by producing and printing out detailed financial projections for them, but using his planning software interactively to model their various what-if scenarios live on the spot.

And be certain to listen to the end, where Sunit talks about how he went about building his unique lifestyle practice the way that he did, the way he very deliberately manages his lifestyle practice as a business, and why he isn't concerned at all that his advisory firm may not necessarily have any salable value at the end.

So whether you're interested in learning about building a lifestyle practice, how to make sure you're only working with your ideal clients, or about maintaining a healthy work-life balance, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Student Loan Planning Software Solutions: Comparing The 8 Leading Tools For Financial Advisors

October 8, 2018 07:03 am 2 Comments CATEGORY: Technology & Advisor FinTech

As a wave of next-generation clients starts to seek out help managing their finances, one of the most common challenges that they face is a high level of student loan debt. Unfortunately, advisors are generally ill-equipped to provide student loan analysis and planning, because, unlike traditional debt, student loans - and federal loans in particular - are subject to a dizzying array of repayment options (each of which can result in significantly different outcomes for borrowers) and forgiveness programs, which in and of themselves, are stunningly difficult to navigate. And, in a world where interest rates are rising quickly, the “easy” solution of refinancing older loans at a lower rate isn’t providing the same bang for the buck it once did, not to mention the fact that refinancing won’t make any sense for borrowers that recently took out loans while rates were at historic lows. Which means that a strong working knowledge of the various options for repaying federal student loans will increasingly be an important tool for advisors in coming years.

Fortunately, there is a growing number of tools to help advisors analyze their clients’ student loans, and in this guest post from Ryan Frailich, founder of Deliberate Finances, (a fee-only financial planning practice that specializes in working with couples in their 30's, as well as educators and nonprofit workers) provides comprehensive reviews and ratings for 8 student loan planning tools, including offerings from CSLA, RightCapital, the VIN Foundation, Loan Buddy, and Pay For ED (among others), and shares his thoughts on everything from features and flexibility, to their ease of use and usefulness of output.

Because the fact is that, often, those clients who come in with the highest level of debt, including doctors and lawyers who are just starting out, also happen to be ideal long-term clients, and having the knowledge and ability to potentially help them save a significant amount of money over the life of their loans is a great way to build long-term loyalty. And even for advisors who work primarily with Baby Boomers, the ability to help their children navigate the student loan landscape can assist in introducing you to your next generation of clients.

While not all the solutions that Ryan examines are targeted specifically at advisors and there’s still plenty of room for improvement with all of them, the good news is that FinTech developers are recognizing the importance of putting tools in advisors’ hands that will help clients with student debt navigate what is often the first (and most challenging!) aspect of their young financial lives. So, whether you have clients with questions about how best to manage and repay their student loans, are looking for ways to gain and develop expertise in this important area, or are simply interested in staying up-to-date on this rapidly evolving area of financial planning and FinTech, then we hope you find this amazingly comprehensive guest post from Ryan to be helpful!

Weekend Reading for Financial Planners (Oct 6-7)

October 5, 2018 02:54 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a beautiful write-up of the winners of the Invest In Others foundation awards, which recognizes financial advisors who have not only been successful in their advisory firms but also in giving back to their communities in various charitable and non-profit endeavors... an inspiration to any/all advisors that the helping profession of financial planning can extend beyond just the work we do directly with clients (and in fact, many financial advisors' community giving efforts extend far beyond the financial services industry altogether).

From there, we have several articles around spending and savings advice, from a study that shows the popular "spend money on experiences, not goods" happiness research may only apply for those with above-average socioeconomic status (and that for the rest, there really is happiness to be derived from spending on good, solid, useful material goods), to another study that finds our tendencies with money towards being either a "tightwad" or a "spendthrift" may be evident as early as age 5 (when, in theory, new/healthier habits can still be learned), a discussion of how some of the most successful wealth creators ostensibly begin the process as a means to provide for their families (during life and as an inheritance after death) but then never stop to re-assess their motives once their wealth compounds beyond a "prudent" inheritance, and an interesting look at some of the most "undervalued" financial advice (which is less about spending tips like being frugal and cutting back on lattes, and more about getting off the hedonic treadmill and simply learning better gratitude for what we already have).

We also have a number of practice management articles this week, including: the "wobble" theory of growing an advisory firm (that advisory firms grow in stages, and the key to success is not navigating each phase, but the transition moments when the firm begins to "wobble" and has to evolve to the next stage); how despite the "uncertainty" about smaller advisory firms in today's environment, a look at the established professions of law and accounting suggests that small firms will survive and thrive far longer than commonly believed; a study on the benefits of outsourcing back-office tasks to more easily scale an advisory firm; and the rise of "virtual" advisory firms that leverage technology (especially screen-sharing and video conferencing tools) to build a location-independent advisory firm.

We wrap up with three interesting articles, all around the theme of leveraging the benefits of compounding (not just in a portfolio, but in your personal/business life as well): the first explores how long-term compounding takes a strong base, but once the foundation is laid, it's mostly a function of compounding (as evidenced by the fact that $80.7B of Warren Buffett's $81B net worth came after he was 50 years old!); the second raises the simple question of considering what, exactly, you're doing (even in a tiny way) to contribute to the compounding growth of an asset every day; and the last provides a powerful reminder that while we tend to celebrate the business leaders who are "consistently heroic" in taking big bold leaps to move their firms forward, for most the key to success is being "heroically consistent" instead, making small efforts every day and week and simply allowing time to compounding them in your favor!

Enjoy the "light" reading!

Transitioning Part-Time Into Financial Planning As A Career Changer

October 4, 2018 02:30 pm 0 Comments CATEGORY: Personal/Career Development

Notwithstanding all the the talk in recent years about the challenges facing the financial planning industry, from including rising competition to “robo” fee compression, the financial advisor career path remains quite appealing. Not only can advisors make meaningful, life-changing impacts on their clients’ lives, but with experienced advisors making 2-3X or more than the median household income in the US, it’s also a potentially lucrative career choice as well. And, with a possible shortage of new talent to replace the wave of ageing advisors who are expected to start retiring in droves in the next decade or so, it’s little wonder why the profession holds so much appeal, particularly for those who are mid-career and looking for a more rewarding opportunity. The caveat, however, is that it still takes a lot of time to succeed and grow your income as a financial advisor, which presents a major roadblock for those who want to career-change into the industry and just don’t have a lot of “income flexibility” to take a pay cut in order to get their proverbial foot in the door. Which leads many to wonder if it’s possible to transition into a career as a financial advisor on a part-time basis.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the challenges facing the part-time transition for career changers, discuss why many consider simply opening their own RIA given the lack of part-time job opportunities, and offer some practical ideas for transitioning into the industry as a career-changer without going the (not-actually-recommended) part-time route.

Notably, the challenge of finding good part-time work to grow and develop as a financial advisor is a relatively recent phenomenon. Historically, there wasn’t much need for new “advisors” to have much professional knowledge or experience because, in reality, they weren’t providing actual advice, but were rather being paid to sell insurance or investment products (which simply requires some product and sales training). For career changers, it was often quite feasible to make the transition into such a sales role on a part-time basis, soliciting their existing friends and family and former co-workers for product sales for a few hours a week. However, for those who want to provide comprehensive advice, and get paid for it on an ongoing basis, the reality is that it’s really hard to gain the requisite experience in anything but a full-time setting.

Which is why there just aren’t many part-time job opportunities with real financial planning firms in the first place. As an alternative, some career-changers explore the option of simply launching their own RIA, which on the surface makes sense, because the raw startup costs to create your own advisory firm are very low, and it’s very possible to be up and running in a few months’ time on a shoestring budget. Unfortunately, the problem remains that giving people advice about how to handle their life savings is a sacred duty, so just because you can hang your shingle and open your own financial planning practice doesn’t mean that it’s the responsible thing to do! Not to mention the fact that it’s really hard to gain credibility as a professional, to be paid for your advice services, if you’re part-time anyway.

Accordingly, for career-changers who are looking for a practical (and responsible) path to a career as a financial advisor, the best thing to do on a part-time basis is start your education to become a CFP certificant. Because, by taking and passing the CFP exam, you’ll be in a much better position to get a better paying full-time job at a real financial planning firm. The next best thing to do is to take the Series 65, because while most states offer a waiver for the Series 65 exam for CFP certificants, the reality is that you’ll still need to meet the experience requirement before you can earn your marks. Also, start building your professional network by joining your local FPA chapter or NAPFA study group, because at some point, you’ll be looking for a full-time opportunity, and it’s a good idea to get in front of the folks who might someday hire you. Finally, simply recognize the fact that you are changing careers and that it’s just not realistic to think that you can do that without taking a step down in salary in order to (literally) pay your dues. So make yourself your first financial planning client, and figure out how to build up the savings necessary to take one step back in the short-term, so you can take two big steps forward in your new financial advisor career in the long run.

The bottom line, though, is simply that there are some very real challenges when transitioning into a career as a financial advisor on a part-time basis. However, those who are willing to do hard work of studying for (and passing!) the CFP exam, getting the Series 65 license, and building a professional network will have the best options. But rather than trying to be a financial advisor on a part-time basis, do those things on a part-time basis instead… which also allows you to stay in your current job a little longer in order to save up enough so that, when the time is right, you can make the transition to a full-time role as a financial advisor in a way that makes sense financially and professionally!

How Birth Year Shapes A Generational Experience In Stock Market Investing

October 3, 2018 07:03 am 1 Comment CATEGORY: Investments

Social Image The Generational Experience Of Wealth Creation

One of the fundamental principles of long-term investing is the recognition that, while markets may go up and down and be volatile in the short-term, eventually the volatility tends to average out into favorable long-term growth rates. Accordingly, the conventional wisdom in the face of market volatility is simply to keep invested and stay the course. Of course, those who are approaching or transitioning into retirement need to be cognizant not to draw down the portfolio too much waiting for those returns to average out – a phenomenon known as sequence of return risk – but as long as investors stay a little flexible on their retirement goals, and spend reasonably conservatively, that sequence of return risk can generally be managed.

However, the fact that investors will for the most part simply have to accept whatever returns the market gives – and in whatever sequence it provides them – means that different generations of investors may have substantively different experiences with long-term investing simply based on whatever happens to occur during their particular investment sequence and the "investment cards" they're dealt.

In turn, this effect is further amplified by the fact that early investment experiences often shape a lifetime of investment behavior – from Baby Boomers that experienced favorable market returns coinciding with the rise of the 401(k) and have stuck with markets during their difficult years, to late Gen X’ers and Millennials who have had to wait as much as a decade or more simply to see the markets recover to where they started when they first begin investing (hearkening back to the experience of a Lost Generation of investors after the Great Depression who never returned to stocks after the scarring experience of the crash of 1929 and its slow recovery during the Great Depression). And in fact, a growing volume of data on investor behavior is suggesting that younger investors are indeed far more skeptical of stock markets and long-term investing… a challenge that may not necessarily reverse itself even as the market improves (just as the bull market of the 1950s and 60s didn’t necessarily win back Depression-era investors).

The fact that the generational timing of young adulthood – and the market returns that coincide with it – may have such a long-term behavioral influence notably also extends to financial advisors themselves, as Baby Boomer advisors in their early 60s today saw a raging bull market for the first 20 years of building their careers, while younger Gen X and older Millennial advisors have had to wait 10-15 years just to see the markets recover to where they invested their first clients! Which raises the question of whether advisor attitudes about the value of providing investment management, and the active vs. passive debate, may also be heavily shaped by the advisor’s generational experience and the timing of when they happened to launch their advisor career?

Ultimately, though, the key point is simply to recognize that mere birth year may actually be responsible for a far more outsized portion of our lifetime investment behavior and experience than is commonly acknowledged. As even if a long-term portfolio can mathematically recover from almost any sequence of returns, it doesn’t mean that certain generations of investors – and advisors – will behaviorally do so themselves, based on whatever early-years' experience the market happens to give them during their formative years?