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Proactive Section 199A Deduction Strategies For Small Business Owners

May 9, 2018 07:01 am 0 Comments CATEGORY: Taxes

The Tax Cuts and Jobs Act brought the biggest changes to both individual and corporate taxes that we've seen in the past 30 years. Included in those changes was IRC Section 199A, which is a new section of the tax code that introduces a 20% deduction on qualified business income (QBI) for the owners of various pass-through business entities (which include S corporations, limited liability companies, partnerships, and sole proprietorships). Fortunately, the QBI deduction will provide big tax breaks for many business-owning clients, but unfortunately, the new deduction is highly complicated, and it may take some time before the IRS can even provide more meaningful guidance on how it will be applied. However, the reality is that the planning opportunities created by IRC Section 199A are tremendous, and practitioners are already eagerly exploring how they can help clients reduce their tax burden through creative strategies around the QBI deduction.

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance shares some of his own QBI deduction strategies and considerations after the TCJA. Broadly speaking, most strategies QBI deduction strategies can be broken into the three buckets, including income reduction strategies to stay below the income threshold where the specified service business or wage-and-property tests kick in, "income alchemy" strategies for transforming income from a specified service business into non-specified service business income, and other business strategies – such as hiring more W-2 employees – which are focused on favorably characterizing business income.

Notably, within each bucket are a wide range of tactics. Business owners who could benefit from income reduction strategies can consider ideas such as planning around retirement contributions, transferring portions of ownership to various non-grantor trusts, and revisiting filing separately as a married couple. Business owners who could benefit from "income alchemy" strategies can consider spinning-off certain assets and leasing them back, creating employee leasing companies, and even avoiding marketing language that makes strong claims about a business owner's skill. And business owners who could benefit from favorably characterizing business income may want to reduce or eliminate guaranteed payments to partners, change profit-eligible-only S corporations to partnerships, or switch from a salaried employee to an independent contractor.

Ultimately, the key point is to acknowledge that IRC Section 199A creates a tremendous number of planning opportunities after the TCJA. New strategies with QBI deduction implications will certainly continue to be developed with time and further guidance from the IRS, but even in the present, financial planners already have enough reason to reach out to business-owning clients and help them reduce their tax liabilities!

#FASuccess Ep 071: Appointing A Chief Planning Officer To Ensure Firm-Wide Consistency In Financial Planning Advice with Peggy Ruhlin

May 8, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 71st episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Peggy Ruhlin. Peggy is a partner and the CEO of Budros, Ruhlin, and Roe, a wealth management firm in Columbus, Ohio that oversees nearly $2.5 billion of assets under management for nearly 700 affluent clients.

What's unique about Peggy and her firm, though, is the way that they have focused on systematizing the financial planning recommendations they make within the firm, to ensure that every client in the firm truly receives consistent advice and a consistent planning experience across the firm's five planning teams.

In this episode, we discuss in depth the firm's approach to making their financial planning more consistent, including regular "collaborative studies" meetings one Monday a month, peer-to-peer presentations on a quarterly basis to review unique planning cases, a bi-weekly financial planning committee meeting to discuss what the firm's standard recommendations will be on various planning issues, creating a "Wealth Management Resource" library to catalog them, and appointing a "Chief Planning Officer" to be responsible for it all, just as the firm has a Chief Investment Officer to do the same in standardizing the firm's investment process!

We also talk about the evolution of how Budros, Ruhlin, and Roe has done business with clients over the past 30 years that Peggy has been there, from starting out as a financial-planning-only firm back in the 1980s (when it was not very common to do so!), the combination of net worth and income fees they used in their early years, why the firm ultimately shifted to add in investment management services and adopt the AUM model, and how they currently offer clients a choice between investment management only for a percentage of assets under management, or a comprehensive wealth management relationship for a percentage of their total net worth under advisement.

And be certain to listen to the end, where Peggy shares her own career path, from starting out as a CPA who decided to earn her CFP marks to make a shift from historically-focused accounting and tax compliance to forward-looking financial planning, why she's been an active volunteer over the years with organizations from the IAFP to the Foundation for Financial Planning and now the CFP Board's Board of Directors, and why she says that volunteering in professional organizations in her early years was more instrumental than anything else she did to advance her own career!

So whether you are interested in learning how a Chief Planning Officer can help ensure firm-wide consistency in financial planning, why a firm which set out to be financial planning only added in investment management services as well, or how volunteering in professional organizations can advance your career, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (May 2018)

May 7, 2018 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the May 2018 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the big news that private equity firm Hellman & Friedman is purchasing Financial Engines for a whopping $3 billion in cash, and intends to pair what many call the “original robo-advisor” together with (also-Hellman-owned) Edelman Financial, in an effort to expand Financial Engines’ services to 401(k) plan participants to include human comprehensive financial planners. Which is notable both that major investors now see the upside of “robo” platforms as expanding them back into human advisors, and also because if it works it could dramatically alter the landscape for 401(k) rollovers by making those assets “advised” by a comprehensive financial planner before they ever become a rollover opportunity in the first place!

From there, the latest highlights also include a number of interesting advisor technology announcements, including:

Personal Capital pairs up with Alight to distribute its PFM solution into the large firm employee channel as a means of getting financial advice prospects.
Goldman Sachs buys the Clarity Money PFM solution as a way to cross-sell its Marcus bank products to nearly 1 million Clarity users.
“Free” robo-advisor WiseBanyan raises $6.6M of venture capital to cross-sell more a-la-carte “premium” services to its existing 32,000 clients.
Australian Salesforce CRM overlay PractiFI partners with Black Diamond to bring its “business management” advisor CRM solution to the U.S.
Chalice Wealth Partners launches a new “technology network” that aims to charge advisors $249/month to integrate their technology (overlaid onto Chalice’s B/D-RIA platform).

Read the analysis about these announcements, and a discussion of more trends in advisor technology, in this month's column, including United Capital’s shift into providing a standalone FinLife Partners option (dubbed FinLife CX) for firms that want to continue using their existing CRM software, the launch of a “RoboWholesaler” that aims not to fully replace human wholesalers but make it easier for financial advisors to control the process by identifying the funds they’re interested in and then contacting the wholesalers they want to talk to, the rollout of a straight-thru insurance application process by Cetera that is integrated directly into MoneyGuidePro financial planning software, a look at whether the new ScratchWorks competition could be a new model for Advisor FinTech startups aiming to raise capital, and the opening of the application period for the third annual XYPN FinTech Competition for advisor fintech startups specifically aiming to support financial advisors serving next generation (i.e., Gen X and Gen Y) clientele.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map”, including a number of new companies and categories!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (May 5-6)

May 4, 2018 02:53 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the 5th Circuit Court of Appeals declined the motion by AARP (and several state attorney generals) to intervene in an effort to defend the DoL fiduciary rule... which means unless the Department of Justice suddenly (and at this point, unexpectedly) petitions the Supreme Court to hear the matter, it appears the DoL fiduciary rule will officially be vacated and gone and dead for good next week on May 7th (even as debate about the SEC's advice rule is just starting to gain momentum).

Also in the news this week was the announcement of a blockbuster private equity deal that will merge together Financial Engines and mega-RIA Edelman Financial (bringing human financial advisors to the 401(k) channel in a manner that could make it more challenging for independent advisors to access 401(k) rollovers in the future), and an interesting study that finds the average financial advisor is significantly more stressed than most U.S. workers, mostly about compliance and regulation and the difficulty in growing an advisory firm in today's environment... even as the majority of advisors still report they are overall very satisfied with their careers.

From there, we have several articles on marketing, including a look at how much less advisory firms spend on marketing compared to most industries (and where/how they should deploy the money if they do decide to start spending), a reverse-engineered analysis of how mega-RIA Fisher Investments spends its online marketing dollars for advertising and more traffic to its websites, and why the best way to connect with prospects is still about telling your own personal story and why it is that you chose to become a financial advisor in the first place.

We also have a few practice management articles, from a discussion of why it's a good idea for every advisor to take a week to track their time (and better understand how they're splitting their time between client service, growth, and administrative tasks) to understand what they might want to change to improve their personal productivity (and happiness), to an exploration of how to set the right "foundation" for providing a good experience to clients, and why it's better to not just be an expert for your clients but their counselor (or trusted "consigliere" instead).

We wrap up with three interesting articles, all around the theme of using credit cards instead of cash and the rise of travel rewards cards: the first is a review of the biggest and most popular standalone travel rewards cards (including American Express, Chase, and Citi); the second looks at how travel rewards cards have remained remarkably durable and popular over the span of more than 30 years now, but how their benefits are shifting away from increasingly devalued points and towards various "perks" instead, and how the rise of both credit and debit cards, online purchases, and systems like Apple Pay are making it increasingly easy to go "cashless" altogether... at least, as long as you don't need to tip your local service provider!

Enjoy the "light" reading, and Happy Star Wars Day!

Why The Financial Engines/Edelman Financial Deal Could End The 401(k) Rollover Bonanza

May 3, 2018 03:31 pm 0 Comments CATEGORY: Industry News

The blockbuster announcement in the RIA space this week was that private equity firm Hellman & Friedman is buying Financial Engines and taking it private for a whopping $3 billion dollars in cash, and in the process will be merging it with mega-RIA Edelman Financial – of which Hellman already owns a majority stake from a purchase back in 2015 – to make a new combined entity of both Financial Engines and Edelman Financial. Which is a mega deal not just because Financial Engines got bought for $3 billion dollars (and has an estimated $169 billion of assets under management in the managed 401(k) space) but also because Edelman Financial itself has $21 billion under management and is one of the largest independent RIAs in the country with almost 35,000 clients of their own for whom they do investment management and financial planning, with more than 100 (human) financial advisors.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the implications of this massive deal to pair together managed 401(k) accounts with human financial planners (at a size and scale that few others besides perhaps Fidelity have ever even attempted), and particularly how this may be the beginning of the end of advisors growing their businesses through 401(k) rollovers!

First and foremost, thouggh, it’s worth just recognizing that a brilliant deal it really is for Financial Engines to be merged with Edelman Financial. From the Financial Engines perspective, this is an opportunity to add a new higher “financial advice” service tier to its top 401(k) clients, in a world where they’re reportedly only charging between 0.2% to 0.6% for their managed account service, but Edelman’s fee schedule starts all the way up at 2%. Of course, what Edelman charges individual retail clients and what Edelman will charge for advice "distributed" through 401(k) channels as an enterprise-level advice solution will likely be different, but the point remains that the pricing power of human financial advisors providing personal financial planning advice is much stronger than "just" managed accounts with great technology. And from Edelman Financial's perspective, this deal also looks like a huge win to me. Because the magic question for years with Edelman Financial has been how will Edelman Financial grow without Ric Edelman (since Ric's books, radio show, and speaking generate so much growth)? The answer: Give Edelman Financial an opportunity to be distributed to the one million clients that Financial Engines already serves (or about 30X the size of Edelman’s client base!).

From the broader industry perspective, though, it's important to recognize the significance that the company that is arguably the original robo-advisor has been buying a series of human advisory firms – first the Mutual Fund Store in 2015, and now Edelman Financial – to deliver increasingly sophisticated human financial advice to their “robo” clients. In other words, even robo-advisor platforms are recognizing that technology is better as a means to augment human advisors than compete against them – a prediction I had made back in 2012.

In addition, the fact that Financial Engines is moving deeper into the (higher-priced) human advice business also suggests that the robo-advisor price point isn’t actually going to be the end point for financial advisors after all. Despite fears that all advisors were going to need to drop their fees to 25 basis points from the popular 1% AUM fees, it appears instead that robo advisors were actually pricing too low all along, and now are increasingly looking for ways to add more human services so that they can charge fees closer to the traditional 1% AUM fee that human advisors were charging. Or stated more simply, human advisors aren't capitulating to robo-advisor prices; instead, robo-advisors are capitulating towards human advisor prices (and blending in the human advisor value proposition).

All that being said, though, the biggest trend being portended by this Financial Engines and Edelman Financial deal is one that the industry has missed so far. And that trend is that the rise of human financial advice solutions directly in the 401(k) channel (as Financial Engines is ostensibly going to soon offer through Edelman Financial), which could be the beginning of the end of the 401(k) rollover bonanza. Because historically, defined contribution plans were self-directed... which meant that consumers both accumulated their wealth in a retirement plan, and didn't have an advisor help with that retirement plan, such that the act of retiring was the “money in motion” event that financial advisors have used for the better part of 30 years to grow their businesses. But with firms like Edelman providing human financial advice in the 401(k) channel, retirees will increasingly no longer need to find an advisor at retirement, as they'll just continue with the advisor they have had all along with their existing 401(k) plan. As a result, the entire market opportunity for independent financial advisors to grab 401(k) rollovers for unaffiliated consumers that don’t have an advisor, may begin to vanish.

Ultimately, this does not mean that firms will have no opportunities to win business away from RIAs serving clients in the 401(k) channel, but it will mean that firms will need a (more) compelling reason to do so (e.g., by serving clients through a well-defined niche or specialization). But the key point is to acknowledge that the announced acquisition of Financial Engines, and merging of Edelman Financial into Financial Engines, is an indication that we could be seeing the beginning of the end of the 401(k) rollover bonanza, as financial advice shifts into the 401(k) channel itself, rather than just for rollovers from 401(k) plans!

Prohibited Transaction Rules That Can Disqualify A Self-Directed IRA

May 2, 2018 07:01 am 11 Comments CATEGORY: Taxes

To fulfill their intended purpose in supporting saving for retirement, Congress grants the Individual Retirement Account (IRA) certain tax preferences, from tax-deductible contributions (in the case of traditional IRAs) to tax-free growth (for a Roth IRA). But to curtail potential tax abuse, the Internal Revenue Code also limits the range of permissible investments in an IRA, and explicitly bans life insurance contracts and collectibles (and under separate rules, S corporations cannot be owned in an IRA, either).

Furthermore, because an IRA is intended to be treated as a separate tax-preferenced retirement account from the other assets of the IRA owner, the Internal Revenue Code also contains a series of “prohibited transaction” rules intended to prevent the IRA owner from using the account to enrich themselves or their family members (without actually taking a taxable withdrawal). The prohibited transaction rules cause adverse tax consequences for the IRA if it engages in such prohibited transactions with any “disqualified person”, which includes the IRA owner themselves and his/her immediate family members (as well as certain related trusts and business entities).

Prohibited transactions themselves can include everything from buying or selling property between the IRA and a disqualified person, making the IRA assets available for a disqualified person’s use, or using IRA funds to compensate a disqualified person. Which is why it’s a prohibited transaction for an IRA owner to “fix up” a piece of IRA-owned real estate, or allow a family member to live in (for rent payments, or rent-free) property owned by the IRA, and even a financial advisor who earns a commission from selling an investment into a family member’s IRA can trigger a prohibited transaction (although level advisory fees are permitted). Similarly, an IRA owner must be caution not to pay any non-IRA investment management fees, or financial planning fees, using IRA assets (as the IRA should only pay its own advisory fees).

Fortunately, in the past the IRS has been fairly lax in pursuing and attempting to enforce against IRA prohibited transactions. But with the rise of self-directed IRAs buying real estate over the past decade, and more generally the popularity of using self-directed IRAs for “alternative” investments – which a recent GAO study estimates is now a $50B marketplace – there is a growing risk that the IRS will soon increase its enforcement on IRA prohibited transactions. Which means it’s crucial for IRA owners to take a careful look at how they’re using their IRA, especially for accounts that are not simply invested in “traditional” publicly traded securities… as even if a self-directed IRA provider affirms that it can hold a particular alternative investment, it’s still the legal responsibility of the IRA owner themselves to determine if it is permissible, and avoid triggering prohibited transactions!