Nerd's Eye View blog

Strategies For Existing Variable Annuities With GLWB Or GMIB Riders

April 10, 2013 11:03 am 17 Comments CATEGORY: Annuities

While some advisors recommend annuities more often than others, virtually any advisor may have to deal with situations where clients have existing annuities. And because of the significant "living" and death benefit riders offered over the past decade, the reality is that the decision about what to do with an existing variable annuity is not as clear cut as it was in the past; in fact, failing to do proper due diligence before recommending a client cancel a variable annuity can land an advisor in more hot water than just selling one in the first place!

Unfortunately, the due diligence process is complicated by the fact that almost no two variable annuity riders work the same, with a broad range of GLWB and GMIB riders from one company to the next, each with their own unique features and benefits. As a result, there's more pressure than ever on advisors to read through the details of each and every contract, to try to make a good assessment of the situation and what the client should do next. On the plus side, though, a growing number of third-party providers are available to assist - including a notable new offering aptly titled "Annuity Review" - giving advisors the opportunity to gain outside expertise to help go through the details of contracts with which they may not be familiar.

News Highlight – New SEC Social Media Policy Makes Twitter The New Center Of Financial News?

April 9, 2013 12:28 pm 0 Comments CATEGORY: Industry News

Last week, the SEC announced a change to its rules for social media, permitting companies to use social media channels like Facebook and Twitter to announce important and timely news, rather than "just" the company's website or via a news release. The companies just have to tell investors which social media outlets will be used in the future, so that investors have fair notice of where to tune in to get the latest information.

What's notable about the change is not just that social media will become a permitted channel, but that given the speed of social media, it may have just become the necessary go-to channel. In fact, last week may mark the turning point for when Twitter went from being "just" a social media platform, to being an essential primary source of key news and information!

Where Should Financial Planning End And A Government Safety Net Begin?

April 8, 2013 11:04 am 6 Comments CATEGORY: General Planning

Earlier this year, former LA Times journalist Helaine Olen - who was responsible for their popular Money Makeover series for many years - published a controversial new book entitled "Pound Foolish: Exposing The Dark Side Of The Personal Finance Industry." In the book, Olen tears apart most of the personal finance industry - tracing it from the roots of Sylvia Porter to Jane Bryant Quinn to today's world from Suze Orman and David Bach to Jim Cramer, the MoneyShow, and Robert Kiyosaki's "Rich Dad" series, and showing along the way how the conflicts of interest rife in the industry serve to undermine much of the value personal finance is purported to give.

Although Olen also shines a harsh light on many segments of the financial advisor space as well, the most notable part of the book is not merely that so much of the financial services world is conflicted and acts in its own interests at the expense of consumers, but that the underlying implication that the problems of most Americans are a result of their poor spending habits and failure to get financially educated may be placing too much blame on consumers and too much of an expectation on even the best that personal finance has to offer. Instead, Olen suggests that many of these issues must be viewed in a broader social light, where the struggle of bringing financial planning to the masses may be less about the problems of our industry business models and more about the fact that what financial planning has to offer simply isn't enough to rectify the real world challenges the average American faces.

The kinds of government safety net and paternalistic solutions implied by such concerns are likely unappealing to many planners, but Olen's book is nonetheless a worthwhile read for some fresh perspective on the intersection between what personal finance and financial planning have to offer, and the limits on what they can achieve without perhaps some social and economic reform and government oversight and assistance.

Weekend Reading for Financial Planners (Apr 6-7)

April 5, 2013 05:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with an announcement of the CFP Board's new "Financial Planning Competency Handbook" which is intended to become the "Merck manual of financial planning," an announcement from the SEC that companies will now be allowed to release and disseminate key news and information through social media rather than (or in addition to) traditional media channels, and a surprising recent study that found advisory firms run by Gen X and Gen Y practitioners may already be generating more profits than the practices of baby boomers due in large part to their better use of technology.

From there, we have a few more practice management articles, including a discussion of how to break out of the "PR slump" if you're using blogging and social media but not getting the results you want, a look at how to rethink employee compensation to recognize that while it's important not to underpay employees it often doesn't help to overpay them either, and a review of the "Hidden Levers" software program that allows advisors to stress test current and prospective client portfolios through a variety of macroeconomic scenarios.

In addition, there are a couple of research and technical articles this week, including a study that finds whether clients think short-term or long-term in moments of financial stress may actually be related to their socioeconomic status as children, a look at whether projecting retirement accumulations in the amount of future income it can buy may be more effective than just showing a future account balance (it helps only modestly, but it helps), and a discussion of the recent new rules allowing intra-plan Roth 401(k) conversions and when they do (and don't) make sense.

We wrap up with three very interesting articles: the first is looks at how we seem mired in complexity, and what it takes to truly simplify the products or services we provide clients (even though simplicity is actually much harder to deliver than complexity!); the second is an intriguing interview with Michael Mauboussin on his book "The Success Equation" with some innovative thoughts about the interrelationship between luck and skill; and the last is an amusing - or perhaps not - April Fool's send-up by fiduciary expert Ron Rhoades about a hypothetical SEC temporary rule that would apply a uniform and very-watered-down fiduciary standard for RIAs and brokers, which is sad not just for the fiduciary outcome it portrays but the fact that several journalists and professors thought the announcement was actually true! Enjoy the reading!

Harvesting Losses Or Harvesting Gains – Planning Around Four Long-Term Capital Gains Tax Rates

April 3, 2013 11:04 am 15 Comments CATEGORY: Taxes

Traditional tax planning for portfolios has been relatively straightforward - given that the same maximum capital gains tax rate applied regardless of whether someone had $100,000 or $1,000,000 of income, the dominant strategy was simply to defer capital gains as long as possible, and harvest capital losses to further maximize the benefit.

In today's world, however, the introduction of both a new top 20% long-term capital gains tax rate, and a 3.8% Medicare surtax on portfolio income, makes the picture far more complicated. Instead of just having two long-term capital gains tax brackets that reach a cap at $72,500 of income (for married couples), there are now four capital gains tax brackets, that extend as high as $450,000 before the top rate is reached!

The end result of this graduated four-tax-rate structure is that now it's no longer best to just defer capital gains indefinitely, which - just like accumulating a huge IRA - could eventually drive the client's tax rates higher as income is ultimately recognized in the future! Instead, tax planning for portfolios becomes more proactive, where some years it's still best to harvest capital losses, but in other years it's better to harvest the gains, instead!

Nerd's Eye View Reader Survey – Your Input Is Requested!

April 2, 2013 11:06 am 2 Comments CATEGORY: Nerd's Eye View

As subscribers of my newsletter The Kitces Report know, I like to survey my readers once a year to get their input on what they find least/most useful about the content and how it's delivered to them. As this blog has exploded in traffic and readership over the past year, I've decided it's now time to institute the same process here.

Accordingly, I'm hoping you'll take just a couple minutes to answer the relatively brief reader survey below, and share with me your thoughts about this blog, the content, and some services that I am considering adding to it... if the survey says I should, of course!

The survey is only 10 questions, and should take no more than a minute or two. Thanks in advance for your time, feedback, and ongoing readership!

Strategies For CFP Board To Improve The Quality Of CFP Continuing Education (CE) Credit

April 1, 2013 11:03 am 18 Comments CATEGORY: Planning Profession

It's no secret that the current state of CFP Continuing Education (CE) credit is a pretty sorry affair. Financial planners attend sessions just hoping for 1-2 takeaways that they haven't heard a dozen times before - an embarrassingly low bar for "satisfaction" - and conferences struggle to draw attendees. It often seems that planners choose a myriad of free vendor-provided CE options not because the content is good - often, it's still little more than a veiled sales pitch for the company's products or services - but because the paid CE alternatives from conferences aren't much better; if you go into your CE experience assuming you won't hear anything new anyway, there's little reason not to take the free option. And this situation is not new; while the CFP Board has become more aggressive about cracking down on the worst of the CE-as-product-pitch options, there's been little done to elevate the average CE experience.

Yet that doesn't mean the situation is hopeless, as many steps can be taken to improve the quality of CFP continuing education; in fact, the CFP Board, as the keeper of the CFP marks and the continuing education for them, wields a great deal of power to change the system for the better. For instance, the CFP Board could create a ratings clearinghouse so conference organizers can more easily see who's a good speaker and who's not, allowing events to better screen their speakers before putting them on the podium. In addition, the CFP Board could also provide a better database for finding CFP CE providers in the first place, so the majority of events don't have to rely upon random Google searches and scanning the agendas of other conferences! But perhaps the best path to getting better CE credit is simply to lift the number of required CE credits, creating more of a potential CE market that could attract quality providers in the first place!

Weekend Reading for Financial Planners (Mar 30-31)

March 29, 2013 05:02 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with an interesting discussion noting that the trend from regulators now appears to be allowing for and even encouraging the use of social media in financial services (albeit while still expecting firms to maintain proper procedures to oversee the activity), and a harsh look at whether our real problem in the financial services industry is not just the general lack of trust but the fact that the entire financial sector has bloated to the size that it has... and that even though the bloat stems largely from Wall Street, it's those very firms that have such an integral role in rewriting the new rules for the future.

From there, we have a few industry and practice management articles, including a discussion of how marketing is shifting from just trying to convert a percentage of prospects into meetings and clients and instead towards engaging all prospects on an ongoing basis until they become clients, a look at Wealthfront and the rise of online investment providers, and a discussion of how you can break out of the rut of boring review meetings (which long-standing clients often resist) by structuring your reviews to have themes around broad financial planning topic areas that can be systematically revisited over time (yet provide more variety than just reviewing investments or asking if anything has changed).

In addition, there are a couple of technical articles this week, including a warning that health insurance premiums may be set to rise significantly with the new coverage laws taking effect in 2014 (especially for individuals getting coverage directly and some small businesses), a discussion of the unique planning challenges for families with special needs dependents (and the potential for advisors to create niche practices to serve them), a look at the so-called "dividend illusion" and that investors may be misunderstanding how dividends work if they think it's a strategy to only spend income and not principal, and the latest Mauldin article dissecting the ongoing debacle in Cyprus.

We wrap up with three somewhat more offbeat articles: the first is looks at how color - the your clothing to the markers you use to illustrate key points - may influence your clients; the second is an excerpt of the latest Heath brothers book "Decisive" about how we can make better decisions; and the last is a somewhat controversial discussion from J.D. Roth, founder of the popular Get Rich Slowly blog, who observes that financial literacy alone just isn't enough, primarily because most financial problems aren't just about needing more information, but also about (fixing) our (dysfunctional) behaviors. Enjoy the reading!

MailBag: How To Get Started On Twitter As A Busy Financial Planner

March 28, 2013 11:03 am 8 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at a question about how to get started using Twitter (and other social media) as a busy financial planner. What are the tools for efficiency, and what are the tips and tricks to get started easily?

The Taxation Of Social Security Benefits As A Marginal Tax Rate Increase?

March 27, 2013 11:07 am 45 Comments CATEGORY: Taxes

Social Security benefits first became partially taxable in 1983, and the rule was expanded in 1993 to its current form. As the rules stand now, rising income can subject 50% or even 85% of Social Security benefits to taxation, until a maximum of 85% of all Social Security benefits are included in income for tax purposes.

The reason the taxability of Social Security matters is not just that it raises a client's tax burden in the aggregate, but that it can boost a client's marginal tax rate far above the tax bracket alone; those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!

Fortunately, this rate eventually reaches a cap - when the maximum amount of Social Security benefits are being taxed - and the client's tax rate returns to normal. Nonetheless, while clients are going through the income levels where Social Security phases in - which can begin with as little as $25,000 of income for individuals - tax rates rise high enough that more proactive tax planning, from Roth conversions to the use of annuities and asset location strategies, becomes crucial to manage a client's overall tax exposure!