Nerd's Eye View blog

End Of Year Roth Conversions And Capital Gains Harvesting – Paying Taxes To Save Taxes

December 11, 2013 07:01 am 13 Comments CATEGORY: Taxes

As the end of the year approaches, so too does the time for end-of-year tax planning, a time typically filled with strategies that minimize income, maximize deductions, and generally try to ensure that the least amount of taxes possible are paid and that any taxes due are pushed as far out into the future as possible.

In the past, a minimize-and-defer-income approach has been rather effective. But in today's tax environment, with more tax brackets, higher top rates, and a myriad of additional phaseouts and surtaxes that can drive marginal tax rates even higher for both ordinary income and long-term capital gains, the reality is that just pushing income indefinitely into the future is not necessarily the best strategy anymore. Instead, deferring too much income into the future may simply mean that when it's finally time to liquidate - whether it's selling highly appreciated investment positions for retirement income, or beginning withdrawals (or facing RMDs) from large IRAs - income at the time can rise so high that tax rates skyrocket!

As a result, it turns out that in today's environment, it may be far more effective to consider strategies like Roth conversions or capital gains harvesting that aim to accelerate income into the current year, rather than defer it into the future. This form of "tax bracket arbitrage" - creating wealth by reporting income when tax rates will be lower, even if it's now - can actually result in greater lifetime wealth, even though it triggers a tax liability sooner rather than later! In other words, it turns out that sometimes the best way to save on taxes is to pay them as soon as possible, even if it means creating income before the end of the year in order to do so!

The Biggest Trap Financial Planners Face When Marketing Themselves

December 9, 2013 07:01 am 19 Comments CATEGORY: Practice Management

With the growth of financial planning and the CFP certification over the past decade, just doing comprehensive financial planning is not the differentiator it once was. As technology commoditized first investment transactions, and now increasingly the basic elements of diversified portfolio construction, advisors are forced in the direction of providing more holistic financial advice to add value to the relationship. While this is ultimately a plus for consumers, it also mean that providing financial planning services to consumers is a much more crowded, competitive space than it was just a few years ago.

In response to a more challenging environment, many advisors have doubled down on their efforts to be generalists, seeking to cast a wider and wider marketing net in the hopes of attracting more prospects to become clients. Yet unfortunately, it's not clear whether such efforts really result in more clients, or simply more marketing work for the same - or even inferior - results. After all, it only takes a few advisors becoming specialists to attract away key potential new clients, to the point where while each specialist may only be able to grow within his/her niche, the generalists can't grow at all. And the end result is that the advisor sees even more prospective clients, but gets fewer actual clients.

Accordingly, the real key to turning around the trap of the wider marketing net is to recognize that for a business that is already undifferentiated and struggling to grow, casting an ever-wider net will not result in more clients and business. Instead, the key to differentiation is to turn around 180 degrees, and become more focused and specialized, to truly become the best-in-class for a particular type of clientele that can be served effectively and profitably. While that might result in fewer prospects, real differentiation ultimately results in more actual clients, allowing advisors to grow their businesses smarter, instead of just working harder.

Weekend Reading For Financial Planners (Dec 7-8)

December 6, 2013 12:23 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big 2013 annual advisor tech survey, with some interesting results showing that advisors are starting to really shift to the cloud (and show a preference for cloud-based solutions). There's also an interesting bit of news about Fidelity announcing that it going forward it will charge more to purchase Vanguard and DFA mutual funds (and a few other low-cost providers) compared to the other 99%+ of the marketplace.

From there, we have a number of technical planning articles, including a discussion of how clients who use the Social Security "file and suspend" strategy can actually undo it years later, a look at some of the rules for 529 plans that are relaxed when a beneficiary designation change occurs, a harsh look at whether nontraded REITs are really all they're cracked up to be, and some recent research from the Journal of Financial Planning about how to achieve higher withdrawal rates using a standby line of credit via a reverse mortgage.

We also have several practice management articles, including a bit of a point-counterpoint discussion about the how easily advisors can get started with blogging, but a note that just because advisors can blog doesn't mean they should unless their practice is really focused and specialized enough to create content that has unique value from all the other "tripe" being pushed out (spammed out) to consumers. There's also a discussion of how some advisors have struggled with the execution of website re-design projects (though most seem happy with the final outcome, even if the process of getting there was a challenge!).

We wrap up with three interesting articles: the first is an interview with financial planner, blogger, and speaker Tim Maurer about the wide range of activities he's involved with and his secret for how he's achieved such good relationships with the media (hint: give it away); the second is a look at some of our behavioral biases in making decisions as advisors, and how we can better navigate our own decision-making challenges; and the last is an interesting look at how, despite all the negativity about the state of the US these days, we've actually made astonishing improvements over and above the days-gone-by when we already said times were great (which means we should be even happier now, right!?). Enjoy the reading!

HECM Reverse Mortgages – Current Borrowing Limits May Not Last Much Longer

December 4, 2013 07:01 am 5 Comments CATEGORY: Debt & Liabilities

The reverse mortgage marketplace has been through a rollercoaster in the past decade, as the number of loans grew by more than 100% from the mid-200s to the peak in 2009, only to fall by almost 50% in the years since then. While everything from the declining availability of home equity to more restrictive reverse mortgage rules have been blamed for the decline, it seems that in reality the primary factor has simply been the fact that reverse mortgages are more popular when "traditional" mortgage options are unavailable (e.g., in the depths of the financial crisis), and become less appealing as credit conditions improve.

Accordingly, this suggests that reverse mortgages may soon become even less popular as new rules just taking effect further reduce their availability, compounded further by a financial assessment that will begin to apply in early 2014, and the coincidental lapse of the FHA's "temporarily increased" maximum property value from $625,500 down to only $417,000 at the end of the year after 2014. The end result - reverse mortgages are facing their own "tightening credit conditions" during a time when traditional lending options have become more and more relaxed - which may mean clients and their planners are less interested than ever in considering a reverse mortgage, even while reverse mortgage strategies like the standby line-of-credit or refinancing a forward mortgage into a reverse remain as valid as ever.

For those who are interested in a prospective reverse mortgage, though, the time may be now to act, as the tighter limits taking effect in 2014 means that clients may never again be able to borrow as much on a reverse mortgage as they can through the end of December. Even for those below the FHA property limits and who won't otherwise be affected by the changes taking effect next year, the simple fact that reverse mortgage borrowing limits decline by approximately 20% for every 100 basis point increase in interest rates means that there may be no better time than right now to get a reverse mortgage line of credit in place. In the long run, though, it remains unclear whether the reverse mortgage industry will be able to weather the storm it faces as reverse mortgages become relatively less appealing compared to available alternatives, or whether reverse mortgages will simply remain used in limited situations as a loan of last resort (to the extent still possible), or simply for older clients who advanced age still allows for more useful higher borrowing limits.

Tips For Dealing With Entitlement Issues With Your Gen Y Financial Planning Team

December 3, 2013 07:01 am 0 Comments CATEGORY: Practice Management

Hiring young "Generation Y" financial planners has its challenges, as today's generation of new financial planners have some fundamentally different views regarding work/life balance and work expectations that will shape how they navigate their careers. While this may simply mean that Gen Y planners make different decisions when faced with some of their life/career trade-offs, an associated challenge is that Gen Y is often viewed as having an "entitlement" attitude - that they want the benefits, without the trade-offs.

In this guest post, Gen Y planner and NAPFA Genesis founder Dave Grant shares some of his experiences with the difficulties of dealing with Gen Y entitlement issues, reflecting on some of his recent challenges with his own entitlement demons that crop up from time to time. From the perspective of someone dealing with the issue themselves, Dave then shares some of his insights about how firm owners can try to handle and address Gen Y entitlement issues, from the perspective of someone who would be on the receiving end of the message!

Of course, ultimately generational stereotypes are just that - a stereotype that does not necessarily represent every unique individual of the generation - so it is not a 'guarantee' that the problem will present itself just because you're hiring or working with young planners. Nonetheless, if you're an advisory firm owner struggling with some younger planners in your firm - or perhaps you are a Gen Y planner dealing with these issues yourself - today's guest post should be helpful for you in trying to think through ways to tackle the issue!

How Do You Measure Success And Quality In A Financial Planning Firm?

December 2, 2013 07:01 am 10 Comments CATEGORY: Practice Management

Over the past decade, it has become increasingly popular for publications to cite the assets-under-management (AUM) of an advisory firm when quoting from someone at the firm. Ostensibly, an advisory firm's AUM is meant to connote its success and relevance; the larger the AUM of the firm, the more the apparent success of the person being quoted, and the more we should all pay attention to what he/she is saying. Or so the media seems to imply.

Of course, the reality is that AUM says little about the actual quality of a firm's financial planning services or the success of its clients; in fact, it doesn't even indicate whether the firm does financial planning in the first place! Accordingly, some has suggested that better alternatives might be to look at the years of experience of the planner instead, to adjust for and acknowledge the fact that advisors can have excellent knowledge and insight even if their personal goal was not to grow a huge pile of AUM (or for that matter, in the event they decided not to even run an AUM business model in the first place!).

Yet at the same time, this raises the question: what should we be using to evaluate and measure the success and quality of a financial planning firm? After all, if we can't even measure it, how can we possibly manage it and work towards improving it? Would a better alternative be to look at client satisfaction surveys? What about the percentage of recommendations that are implemented? Or the time horizon it takes for them to be implemented? How do you measure the quality and success of your financial planning services for your clients?

Weekend Reading for Financial Planners (Nov 30-Dec 1)

November 29, 2013 02:03 pm 5 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with some interesting regulatory articles, including the big announcement late last week of an SEC panel encouraging the regulator to move forward with RIA user fees to fund better oversight and to adopt a uniform fiduciary standard for investment advisers and brokers, along with a discussion of whether the SEC's fiduciary rulemaking may ultimately result in two kinds of fiduciaries, and an interesting look at how recent regulatory recent in the UK that took effect at the beginning of the year has already resulted in a 20% drop in the number of advisors (but mostly concentrated in large institutions that may have been the most commission-centric in the first place).

From there, we have a long array of technical financial planning articles this week, including: a recent court case supporting the use of Medicaid-compliant annuities when trying to qualify one member of a couple for Medicaid; an overview of the recent research on more dynamic retirement income/withdrawal strategies; research looking at what the optimal timing for annuitization might be (hint: annuitizing a significant portion later is about as efficient as annuitizing at the start of retirement, especially when balanced amongst competing longevity/liquidity/bequest goals); a fresh look the so-called "annuity puzzle" (if annuities as so economically optimal, why don't more people buy them?); and a Journal of Financial Planning study suggesting that making asset location decisions should be done based on a client's "after-tax" asset allocation (which yields some different results than the 'traditional' approach!).

There are also a pair of practice management/industry articles this week: the first looks at how financial planning programs are struggling to mint quality new financial planners fast enough to meet the demand; and the second looks at how potential changes to Facebook business pages may be a dealbreaker for financial advisors trying to use the social media platform for business.

We wrap up with two interesting articles: the first looks at how the primary reason why prospective clients resist financial planning may have less to do with the trustworthiness and competence of the planner and more to do with the simple fact that people are hard-wired to behave consistently with their prior actions (even if that means sticking with a failing strategy); and the second looks at how smartphone-enabled savings tools may have the potential to help bridge the country's retirement crisis by making it as easy to save as it is to spend. Enjoy the reading!

Why The Pease Limitation Phasing Out Itemized Deductions Should Not Discourage Charitable Giving

November 27, 2013 07:01 am 9 Comments CATEGORY: Taxes

The Pease limitation, which restricts the amount of itemized deductions a taxpayer can claim, has been around for more than two decades; after briefly being phased out and repealed at the end of last decade, it has returned in full force for 2013 as a result of the American Taxpayer Relief Act of 2012. The reinstatement of the Pease limitation applies with the same rules that existed previously - phasing out itemized deductions by 3% of every dollar over the threshold - though the new rules did increase to the threshold to a new, higher amount.

Given how the Pease limitation is calculated though - as a percentage of income above the threshold, and not directly based on deductions - the reality is that the Pease limitation should actually more properly be viewed as a surtax on income, not a limitation on deductions. Although the amount of deductions does matter in certain limited circumstances - particularly with ultra-high-income taxpayers living in states with no state income taxes - for most, the Pease limitation simply lifts the top 3 tax brackets by about 1% - 1.2% without directly impacting the benefits of tax deductions at all!

This distinction of whether the Pease limitation is driven primarily by income or by deductions is important, as it affects the relative value of various income and deduction strategies. In fact, while the common conclusion from the media and some political pundits has been that the Pease limitation is a disincentive to tax deduction strategies like charitable giving, the reality is actually that there are only a few limited circumstances where the benefits of charitable giving may be diminished indirectly by the Pease limitation, and in the end the overwhelming majority of individuals who face the Pease limitation will actually still enjoy the full tax benefits of their charitable giving strategies!

Re-Evaluating The CFP Board’s “3 Buckets” Approach For Determining Fee-Only Compensation

November 25, 2013 07:01 am 9 Comments CATEGORY: Planning Profession

In recent months, the CFP Board has been buffeted by criticism of its current compensation disclosure rules - built upon a series of definitions that the CFP Board insists have not been changed since the Practice Standards were approved after a public comment process more than 5 years ago, yet appear to be impacting so many advisors that it's difficult to understand how the current way the CFP Board is interpreting its rules is anything but a change from how things once were.

The key point of dispute appears to revolve around the CFP Board's use of its so-called "3 buckets" approach to determining the types of compensation an advisor receives, which looks at what clients pay to the advisor, to related parties, and how the advisor themselves generate income from their employment and ownership interests. In the process, the definition of what constitutes "compensation" has stretched so far that advisors can now be disciplined for failing to disclose types of compensation that don't actually exist because no client has ever actually paid it to anyone, ever!

Accordingly, it's time for the CFP Board to "clarify" its 3 buckets approach to recognize that the fundamental starting point for all types of compensation disclosure should always be what clients actually pay in the first place. The fact that no client has ever actually paid a commission to anyone, ever, should always be a valid defense for an advisor to claim that they are fee-only (and the same should apply to commission-only advisors whose clients have never paid fees, and who are equally in "violation" of the CFP Board's current rules). By fixing its confused and problematic rule, the CFP Board can start to move past its recent compensation disclosure debacles and move the definitions in line with a clear and logical rule that consumers can actually understand, and eliminate the absurd requirement for advisors to disclose (and potentially be punished for failing to disclose) client compensation that doesn't actually exist!

Weekend Reading for Financial Planners (Nov 23-24) – Practice Management Edition!

November 22, 2013 03:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" practice management edition! This week's reading kicks off with an interesting interview with "robo-advisor" Betterment CEO Jon Stein, who seems to be shifting in acknowledging that perhaps his platform will be more likely to co-exist with advisors than compete directly with them (though that doesn't slow Stein from a lofty goal for a whopping $100B of AUM in 5-7 years!).

From there, we have a long array of practice management articles this week, including: an overview of the results of the 2013 FA Insight People and Pay industry benchmarking study; a discussion by practice management consultant Angie Herbers of the most common fatal succession planning mistake (focusing too much on valuation) and how to manage it; an interesting survey of new advisors that highlights what a subset of "quick starters" are doing to succeed (growing their businesses to more than $50M of AUM in under 5 years); how female advisors, while still forming a small minority of total advisors, are actually winning on some key advisor metrics for success; how "big data" solutions are coming soon to help advisors better manage their practices and serve their clients, with an initial glimpse at two new offerings; and a review of the latest Redtail Document Imaging software solution for advisors.

There are also some articles specifically about marketing and business development, including: an overview of 3 services that help advisors to better market and grow; how some advisors are having extraordinary new business success by attracting clients through Yelp, albeit while operating in a "grey" area of compliance; and some guidance from Bill Winterberg on how advisors can get started with video on their websites.

We wrap up with three interesting articles: the first is a good discussion from Mark Tibergien about what it really means when firm owners say they want staff and especially future partners to "act more like an owner"; the second is a look at the latest trends in website development for financial advisors and some examples of the advisory world's best advisor websites; and the last is a discussion of how advisors need to look beyond classic business metrics to really measure "success" or risk evolving their businesses in ways they didn't intend. Enjoy the reading!