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Proposed Regulations Refine Definitions For Specified Service Businesses Eligible For QBI Deduction

August 22, 2018 02:23 pm 4 Comments CATEGORY: Taxes

Featured Specified Trade Service or Business SSTB

While much of the Tax Cuts and Jobs Act of 2017 was focused on individual and corporate tax reform and simplification, one of the biggest new planning opportunities that emerged was the creation of a new 20% tax deduction for “Qualified Business Income” (QBI) of a pass-through entity, intended to provide a tax boon to small businesses that would leave more profits with the business to help it grow and hire.

The caveat, however, is that the QBI deduction was only intended to provide tax benefits for profitable businesses that hire employees, not to provide tax benefits for high-income professions who generate their profits directly from their own personal labors. As a result, the new IRC Section 199A created a so-called “Specified Service Business” classification that, at higher income levels, would not be eligible for the QBI deduction.

The challenge, however, is that the exact definition of what constitutes a “Specified Service Trade or Business” (SSTB) has not always clear, given the wide range of professional services that exist in the marketplace. In addition, as soon as the rules themselves were released, creative tax planners began to strategize about how to arrange (or re-arrange) revenue and profits to maximize the amount of income eligible for the QBI deduction and minimize exposure to the Specified Service Business rules.

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance, and our Director of Advisor Education for Kitces.com, examines the latest IRS Proposed Regulations for Section 199A, which provides both important clarity to how the “Specified Service Business” test will apply in various industries, including rather broadly for professions like health, law, and accounting, but only narrowly to high-profile celebrities who may have their endorsements and paid appearances treated as specified service income but not the income from their other businesses that may still materially benefit from their high-profile reputation.

Of greater significance for many small business owners, though, are new rules that will force businesses with even just modest specified service income to treat the entire entity as an SSTB, limit the ability of specified service businesses to “carve off” their non-SSTB income into a separate entity, and in many cases aggregate together multiple commonly owned SSTB and non-SSTB business for tax purposes.

Ultimately, the new rules are only impactful for the subset of small business owners who engage in specified service business activities and have enough taxable income to exceed the thresholds where the phaseout of the QBI deduction begins (which is $157,500 for individuals and $315,000 for married couples). Nonetheless, for that subset of high-income business owners, effective planning to avoid having SSTBs “taint” non-SSTB income, or to split off non-SSTB income to the extent possible, will be more challenging than before.

#FASuccess Ep 086: Mastering Marketing As A Solo Advisor By Simply Sharing Your Authentic Self with Eric Roberge

August 21, 2018 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 86th episode of the Financial Advisor Success podcast!

This week's guest is Eric Roberge. Eric is the founder of Beyond Your Hammock, an independent RAA based in the Boston area that specializes in financial planning services for high-income young professionals in their 30s and 40s.

What's unique about Eric though is the way that he's quickly propelled his advisory firm to $300,000 of revenue from scratch in just five years, with a marketing approach of talking about what he does personally in his own financial lifestyle and attracting prospective clients to him who want to live the same way.

In this episode, we talk in-depth about Eric's marketing process, from why he's decided to abandon the standard approach of trying to make neutral statements in the media and always saying it depends, and instead, showing the financial decisions he actually makes. To how he's published articles to share publicly about those financial decisions, including how much he spent on his recent marriage and why he's chosen to rent instead of buy a home living in Boston. How Eric deals with the criticism that often comes back when you make such strong statements in public. And why Eric finds that this kind of marketing is the ultimate differentiator, because anyone can write technical articles, but only you can write about your beliefs to attract prospective clients who share those beliefs.

We also talk about Eric's advisory firm itself. From the financial planning process he uses and the way he uses eMoney Advisor to gather data before meeting with clients, to the way that he's implemented a monthly retainer model with his clients, or as Eric puts it, an annual retainer payable monthly. Why Eric decided to add in a separate AUM service as well and what Eric went through to survive the early years of getting his practice to the point of generating $300,000 of revenue, including spending nearly six months waiting tables on the side to make ends meet while he was getting his advisory firm off the ground. And be certain to listen to the end where Eric talks about how he ultimately figured out the exact type of ideal client he wanted to serve as a way to build his own confidence in communicating his passion for financial planning to clients.

So whether you are interested in learning about how Eric grew Beyond Your Hammock to $300,000 in revenues in the first five years, about his unique approach to marketing to his target audience, or about his pricing model that allows him to charge effectively for a blended service model, then I hope you enjoy this episode of the Financial Advisor Success Podcast!

The Appeal Of Working At Independent Advisory Firms In The Eyes Of A Millennial

August 20, 2018 07:03 am 1 Comment CATEGORY: Human Capital

In a recent study, Cerulli Associates points out that nearly 28% of financial advisors say that they plan on retiring in the next 10 years… but have yet to settle on a succession plan. In the aggregate, the financial services industry understands the need to develop the next generation of talent, but accomplishing that goal remains a challenge, both due to struggles for firms to retain top talent… and because it’s proven remarkably difficult to attract Millennials to the profession in the first place.

And despite a number of articles and industry studies about what firms should be doing to attract and develop next generation talent, remarkably little has been written from the Millennial viewpoint of what it takes to make the financial planning profession and industry firms more attractive in the first place – about what they’re looking for in a career, why they desire a sense of purpose and not just a job, and what the financial advisory industry looks like through their eyes.

In this guest post, Millennial consultant Janki Patel from The Ensemble Practice (a consulting firm serving the financial advisory industry) discusses why independent financial advisory firms are a great fit for Millennials, the challenges many Millennials face when trying to understand (and differentiate between) the varying service models within the industry, why advisory firms are having such a hard time attracting next-generation talent, and the specific steps advisory firms can take in order to bridge that gap.

Because the real challenge is not just the difficulty in attracting next generation Millennial talent, but that the financial services industry is competing with a myriad of other industries who are also trying to hire the same Millennial talent. And relative to other industries, the financial planning profession is still small, the industry is outrageously complex, and financial services in the aggregate doesn’t exactly have the best reputation (compounded by the perception that being a “financial advisor” is still largely a sales job). Simply put, even though there’s a lot of good in the financial planning profession, it just isn’t easy for young people to figure out who’s wearing the “white hats” when all they see are (very) negative headlines and job postings that are misleading at best!

Meanwhile, Millennials have been unfairly labeled as a spoiled and entitled generation that’s only interested in taking selfies and communicating with emojis. Instead, Millennials can actually be quite driven and passionate, and desperately want their careers to matter… in a manner that is an especially good fit to financial planning. They care less about perks and benefits, and more about a company’s mission, having a well-defined career path, and being challenged and mentored… which means there are opportunities for financial planning firms to attract Millennials not by what they pay, but by what they do, and why they do it for clients.

Because the reality is that good financial planning advice can make deep and meaningful impacts on people’s lives, and that resonates with Millennials. Which means that by focusing on doing a better job of honing their mission statement, communicating how they make the world a better place, and creating well-defined career paths, advisory firms can better position themselves to attract and retain the next generation of talent.

Weekend Reading for Financial Planners (August 18-19)

August 17, 2018 02:56 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the interesting news that a growing number of states are trying to limit the use of the terms "certified" or "registered" to only those who are actually certified or registered by a state agency or certifying body... raising the concern that "Certified" Financial Planning professionals might someday be prevented from using the term, and leading the FPA and CFP Board to join a multi-organization coalition called the "Professional Certification Coalition" fighting to differentiate bona fide certification credentials from the rest of the specious designations (in financial services and other industries) that state legislators are really trying to crack down on.

Also in the news this week is a brief look at the recent "FINRA Industry Snapshot" (a first-ever report from FINRA on the state of the brokerage industry, which finds that the number of broker-dealer firms and registered representatives has been declining steadily for 10 years... but revenue and profits continue to grow and hit record highs!), and a discussion of some of the public comment letters that came out earlier this month against the SEC's Regulation Best Interest and new Form CRS proposals (including a stringent objection from a group of 17 state attorneys general that could form the basis of a legal challenge against the rule if the SEC decides to move forward).

From there, we have several advisor technology articles this week, from a look at how "robo" tools aren't replacing advisory firms, but instead are allowing smaller advisory firms to run more efficiently than ever with the use of technology to automate away expensive back-office staff and administrative tasks, to tips on how to conduct third-party vendor due diligence for cybersecurity purposes, and why both advisors and their clients should be talking more about using Password Managers.

We also have a few retirement articles, including: the role that uncertainty (especially sequence of return risk, but also simply the changing nature of our lives over time) has in determining whether portfolios are depleted in retirement or not (which goes far beyond just investing for a sufficient long-term return); perspective on how economists that study lifecycle finance view traditional financial planning topics and strategies differently; and why a goals-based retirement planning approach is very problematic because, in the real world, most people don't actually know what their goals are, and even if they think they do, the goals often change by the time the client gets closer to achieving it!

We wrap up with three interesting articles, all around the importance of habits (both breaking bad habits and improving good ones): the first looks at a number of recent books that highlight the latest research in how we form habits, change habits, and improve our willpower and self control; the second is a fascinating study at how we can improve our own self-confidence in our ability to control our behavior and break our bad habits (by adopting seemingly mindless rituals); and the last is a fascinating look at how even the most brilliant creatives still struggle, often for years, with a vision of what they want to achieve and knowing that their current work isn't up to their own tastes, but that the key is maintaining the habit of continuing to do the work anyway with a focus on self-improvement, and it's the repeated habit of practice combined with the vision of what your work can be that ultimately makes it great and successful!

Enjoy the "light" reading!

Leveraging A Mini-Specialization To Gain Experience And Get More Client Referrals

August 16, 2018 01:05 pm 0 Comments CATEGORY: Personal/Career Development

Finding a good way to differentiate yourself amid a sea of people who call themselves financial advisors has never been easy task, but it’s become all the more difficult in recent years as the ranks of advisors who offer “comprehensive financial planning” continue to grow. The problem is only compounded for newer advisors trying to find a way, not to get new clients, but just to get noticed within their firms (and get opportunities for client face time) as they launch their own careers.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why niches and mini-specializations are a great way for advisors to differentiate themselves, the differences between the two, and cover specific and actionable ways to market yourself and grow your exposure in your mini-specialization of choice.

At the start of their careers, most advisors are generalists – having just completed the comprehensive CFP certification educational curriculum – and haven’t yet had the time, opportunity, and experience to develop a specific target niche audience. However, one way that newer advisors can start to differentiate their expertise is simply to dive deep into a particular subject area and make themselves more referable and top-of-mind by becoming the go-to expert for that topic in their firm or within their community – a form of “mini” specialization.

Because the reality is that early on, in particular, you don’t need to be an expert on everything to succeed. You just need to become really good at only one thing and be known for doing it well… and that can happen in a relatively short period of time!

Of course, just because you become an expert on something with a (mini-)specialization doesn’t mean that the masses will automatically beat a path to your door. You still have to get the word out, and that’s where a good inbound marketing strategy comes into play, from building a website that showcases your expertise, to starting a growing an email list and a social media presence to get the word out about your expertise, and creating “lead magnets” like ebooks (or even self-publishing a real book) to establish your “authority”, which you can then leverage further to teach and speak on the topic.

Ultimately, by going through the mini-specialization process, you’ll learn more about the things that matter most to your target clientele, and where they spend their time gathering such information, which makes the process of getting new clients even more efficient over time. But at the most basic level, developing a mini-specialization is the most straightforward path to being more than just another advisor who offers “comprehensive financial planning and investment management to affluent individuals and families”, and can be the key to making you the one that lead advisors choose to bring into their client meetings to gain more real-world experience!

Why The Best P&C Insurance Deductible Is Driven By The Pseudo-Deductible Threshold For Filing A Claim

August 15, 2018 07:05 am 0 Comments CATEGORY: Insurance

Selecting a Pseudo-Deductible that is “Just Right”

The concept behind property and casualty (P&C) insurance is straight forward. Consumers pay a premium for insurance coverage and, should they incur a loss greater than their deductible, they can file a claim for the balance. However, when we consider the fact that insurance companies operating in bonus-malus systems typically raise a customer’s premium after they submit a claim, the question of whether the insured should submit a claim versus paying for the loss out of pocket becomes substantially more complex.

This internal tension when deciding whether to file a claim or not leads to what is known as a “pseudo-deductible” – referring to the true dollar amount of a loss one would need to experience before deciding to actually make a claim (above and beyond just the stated deductible itself). In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – takes a closer look at this underexamined phenomena, including why the conventional wisdom to take as large of a deductible as one can afford may not be quite right (and why consumers should actually identify their ideal pseudo-deductible first).

The decision of how large of a pseudo-deductible to adopt is naturally influenced by many factors unique to an individual (e.g., our aversion to risk and uncertainty, as well as our ability to withstand loss in the first place). Though we cannot “solve” for an ideal pseudo-deductible in an algebraic sense, one method we can use to inform the question of how large of a pseudo-deductible may be ideal is Monte Carlo simulation based on real-world assumptions. Using national claims figures combined with peril-specific premium increases (as the premium increase for a loss which could indicate negligence or risky behavior is often higher than one that is completely out of an insured’s control, such as a natural disaster), the results of this analysis indicate that, in isolation, an ideal pseudo-deductible for homeowners insurance policy could be somewhere in the range of $500 to $1,500.

Of course, this amount is by no means fixed and is everchanging as both consumers and insurers adjust to the behavior of one another. But the key point is that by adopting some non-trivial pseudo-deductible above and beyond one’s deductible, it is possible to reduce both long-term average costs and outcome variability. Yet, if those adhering to conventional wisdom truly adopt deductibles “as high as they can afford”, this may not put them in a position to strategically forgo claims that may increase long-term costs. Instead, consumers may wish to first identify the maximum pseudo-deductible they can afford to adopt (or wish to adopt given their risk preferences) and then select a lower deductible which allows them to strategically forgo claims that may result in higher costs in the long run (but not a deductible that's too much lower, or consumers are paying a higher premium for a lower deductible threshold they won't use anyway given their higher pseudodeductible).

Financial advisors can lend a hand by helping clients understand these dynamics, as well as helping clients develop a better understanding of the actual odds that they will incur a loss (versus their preconceived notions of those odds). In fact, when participants in an experimental study were given information about the likelihood of a hypothetical loss reoccurring, they increased their pseudo-deductibles (but not their deductibles!) to levels which more effectively balanced the long-term costs and benefits of filing a claim – suggesting that this type of assistance can truly be beneficial to clients. Ultimately, though, the reality is simply that “the highest deductible you can afford” is not necessarily best; instead, your pseudo-deductible should be the highest you can afford (and are comfortable taking the risk), and the optimal deductible should be somewhat lower.