Kitces.com - Advancing Knowledge in Financial Planning

Capital Gains Strategies For Highly Appreciated Investments After A Big Bull Market Run

March 28, 2018 07:01 am 3 Comments CATEGORY: Taxes

Executives and small business owners often struggle to figure out how to diversify a concentrated investment in company stock, due to the adverse tax ramifications of liquidating a highly appreciated investment. Which leads to strategies including variable prepaid forward contractors, exchange funds or stock protection funds to facilitate diversification, or leveraging available tax laws like Net Unrealized Appreciation to mitigate the tax consequences.

But after nearly 9 years of a bull market since the bottom in March 2009, “most” long-term investors now have substantial capital gains. Not because they held a concentrated stock investment that grew, but simply because even a diversified portfolio of mutual funds and/or ETFs may be up 100%, 200%, or even 300% since the bottom. And ironically, the more tax-efficient and “tax-managed” the fund or advisor has been all along, the less turnover there’s been, and the more likely it is to have very substantial embedded capital gains now!

And unfortunately, such large embedded capital gains create real tax complications for engaging in even routine investment adjustments like periodic rebalancing, and especially in situations where the advisor might want to switch strategies (or the investor might want to switch advisors), but “cannot” do so because of the adverse tax consequences.

On the plus side, the reality is that the tax benefits of deferring capital gains are often smaller than most investors realize, as they confuse “tax avoidance” (not recognizing the capital gains) with what really is just tax deferral (the capital gains will ultimately have to be paid if the investor is ever going to use the money).

In addition, relatively straightforward tax strategies can further help investors to get comfortable with unwinding investments with large capital gains, from establishing a “capital gains budget” for the amount of capital gains to be triggered each year (perhaps targeted to stay under the threshold for the next capital gains tax bracket), setting targets for staged sales at progressively higher (or lower) prices to help investors pre-commit to making a change, or simply engaging in a “donate-and-replace” strategy that leverages the tax preferences of contributing appreciated securities for a tax deduction (and eliminating the capital gains altogether) and then replacing the investment (as a new higher cost basis) with the cash that would have been donated in the first place!

#FASuccess Ep 065: Building A True One-Stop Shop Advisory Firm To Drive Organic Growth with Peter Mallouk

March 27, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 65th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Peter Mallouk. Peter is the President of Creative Planning, one of the largest independent RIAs in the country with nearly $35 billion in assets under management for more than 20,000 clients, spanning 12 states and 21 office locations.

What's unique about Peter, though, is that he's been able to grow the firm from under $100 million to nearly $35 billion in AUM in just 15 years, and without relying on mergers and acquisitions... instead building an organic growth machine through a combination of strategic partnerships, and trying to build a "one-stop shop" with enough size and scale to deliver the kind of comprehensive value that really makes clients refer.

In this episode, we talk in depth about how Peter's firm includes not only financial planning and investment management services but also divisions for tax preparation, estate planning, and trust services (stemming from his own early days as an estate planning attorney before becoming an advisor), why he felt it was necessary to expand and deepen the services of his firm to provide real value to his clients, and why even at $35 billion in AUM Peter still views his firm as a small "boutique" in the marketplace, even as the size of the firm is allowing them to attract more and more affluent ultra-high-net-worth clientele.

We also talk about the broader trends in the advisory industry, how the consumer marketplace is splitting into pursuing either the highest value or the lowest cost (and why that's a threat to most advisors in between), why both wirehouses and the retail divisions of RIA custodians are simultaneously moving away from selling products and into financial advice, and the competitive threats that advisory firm owners must navigate in the coming years.

And be certain to listen to the end, where Peter shares why he still personally spends a whopping 70% of his time every week sitting in front of prospects and clients, and his philosophy of minimizing layers of management in order to keep the firm efficient, even as they approach 500 employees.

So whether you are interested in learning how to achieve organic growth through strategic partnerships and delivering high-value services that make you referrable to clients, how the advisory industry is splitting into pursuing either highest value or lowest cost, or are interested in how Creative Planning has minimized layers of management even while growing to $35 billion in AUM, I hope you enjoy this episode of the Financial Advisor Success podcast!

The True (Hidden) Costs Of Migrating Data To New Financial Planning Software

March 26, 2018 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

As we live in the "Golden Age" of advisor fintech, the number of great products to help financial advisors increase the value they deliver to clients continues to expand. Yet, an unfortunate reality of switching from one technology solution to another is that such changes can often come with substantial switching costs, both in terms of the financial costs that might be incurred during the process, and also the costs of the time and effort that must be invested by staff and advisors in order to get data transferred to the new tool and the entire team up to speed on using it. And when it comes to financial planning software, these costs can be even higher, as planning software generally doesn't have an export functionality needed for migrating data from one program to another, and the required training of advisory staff is higher relative to some other types of technology (e.g., CRM and performance reporting software), since advisors increasingly need to be able to confidently use planning software "live" in the client meeting in order to not undermine their credibility with clients.

In this guest post, financial planner Matt Cosgriff shares his perspective on BerganKDV Wealth Management's recent transition from MoneyGuidePro to eMoney, including their lessons learned, how to build an internal transition team, tools for "gamifying" the process, and how the transition can actually serve as a great training opportunity for both advisors and administrative staff. As Matt notes, a successful transition is crucial not only for preserving your existing work for clients, but also understanding how much variation exists between the results of your old software and your new software and why, so that you can effectively use your new software going forward and communicate any different outcomes to clients.

So if you’re contemplating a transition from one financial planning software program to another, or perhaps are just interested in how you can incentivize staff to make progress on a large goal by "gamifying" the process, I hope that you find today’s guest post and the insights from BerganKDV's transition from MoneyGuidePro to eMoney helpful!

Weekend Reading for Financial Planners (March 24-25)

March 23, 2018 02:59 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 Investment Adviser Association, in collaboration with Charles Schwab, has begun an effort with lawmakers to both reverse the recent changes that eliminated the tax deductibility of investment advisory fees and expand the scope of the new "pass-through" business deduction (intended to support businesses that grow jobs and and hire people) to allow at least larger advisory firms that really do hire people and create jobs to be eligible for the deduction as well.

From there, we have several marketing-related articles this week, including: how most financial advisor websites are like a "bad date" that mostly talks about themselves instead of trying to connect with the other person; how Googling around to check out other advisory firms in your area can help to show you how you can better differentiate (or how undifferentiated you may actually be); the steps to follow to create a successful lead-nurturing campaign with prospective clients; key tips for starting your own Public Relations (PR) initiative in your advisory firm with (local) media; and a discussion of a unique COI referral opportunity that most advisors miss out on (working with investment bankers that facilitate the sale of small-to-mid-sized businesses).

We also have a few articles on advisor technology trends, from a look at how performance reporting software may eventually be replaced by "PFM" tools that advisors can give to their clients (which both better engage them, and are less expensive), the rise of the next wave of "robo" firms now targeting disruption in the small-to-mid-sized 401(k) plan marketplace, and a glimpse of the new "Advisor Innovation (AI) Labs" effort from Lori Hardwick and Mike Zebrowski that is aiming to create a new form of advisor desktop that would sit on top of existing broker-dealer or custodial platforms to let independent advisors be more independent (at least, if those firms will cooperate and "let" AI Labs do so with "their" data!).

We wrap up with three interesting articles, all around the theme of raising financially successful children: the first examines the results of a recently published study that took a 40 year(!) view of children in 1968 and again in 2008 to see which children traits were most predictive of the greatest financial success (and found that the "rule-breakers" were often the most financially successful in the end, despite their challenges as children); the second reviews another recent research survey, which found that while those with above-average talent often do at least make above-average income, the greatest levels of success are more commonly driven by luck than talent (or at least talent alone); and the last explores how to raise children to be more grateful, in recognition of both the long-term emotional and other benefits of having an "attitude of gratitude", and the challenges of doing so in a world where parenting styles that aimed to bolster the self-esteem of children may have unwittingly made them more entitled (and less inclined towards gratitude) in the process.

Enjoy the "light" reading!

When A Client’s Failing Retirement Plan Sometimes Isn’t Really

March 22, 2018 01:25 pm 0 Comments CATEGORY: Practice Management

As financial advisors, we never want to see a client run out of money, especially "on our watch" as the advisor. Which makes it especially challenging to deal with clients who appear to be spending "too much" and may be on an unsustainable spending trajectory... especially if you've done a comprehensive financial plan for them, and know that their current spending pattern is unsustainable. Even if it's sometimes difficult medicine to give them - telling them that their spending and lifestyle need to change - it's an essential value of good financial planning to deliver the sometimes-difficult message when it's necessary to do so. Except, in some cases, it turns out that the problem isn't actually that the client has a spending problem at all... instead, the real problem is simply that the client didn't yet trust us enough to tell us about all their assets in the first place.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore situations where clients who have a "spending problem" actually don't have a spending problem... they have a trust problem that leads them to be unwilling to share information about all of their assets with the advisor. A situation that may occur more and more frequently in the future, as the advisory industry continues to converge on the AUM model... and clients feel increasingly pressured to consolidate all their assets with their current advisor once the advisor "finds out" there are other assets he/she doesn't already manage!

Learning that a client has been "hiding" assets can come as a shock for many advisors. It's the situation where you thought you were being a good holistic financial planner, and giving them guidance about unsustainable spending, and then abruptly find out the client is terminating the relationship and consolidating all of their assets with another advisor. Which leads to three surprising and related realizations: (1) they actually had another advisor we didn’t know about, (2) they actually had other assets we didn’t know about, and (3) they weren’t actually overspending in the first place. We only thought they were overspending because they didn’t want to tell us about all of their assets for fear of being solicited about them!

And the reality is, as more and more of the advisory industry shifts to the AUM model and packages together financial planning and investment management, this problem is going to get a lot worse. When we look at the financial advisory market as a whole, about one-third of the 115 million US households are at least mass affluent, only about one-half of those have more than $100k that could be managed by a financial advisor (i.e., outside of a retirement plan), and only about one-third of those are actually delegators who are looking to hire an advisor. Which means, when you do the math, there may only be about 7 to 8 million households to divvy up among 300,000 financial advisors, resulting in about 21 clients per advisor (of which only 5 are millionaires!). Ironically, this means that if all clients did consolidate all of their assets with one advisor, many advisors would go out of business (or at least be compelled to pursue other advisor business models that can serve other types of non-AUM clientele!)!

Fortunately, in practice clients tend to split assets across multiple advisors (which keeps more advisors employed and engaged!), but clients don't necessarily tell us, because they don't want to be solicited to consolidate assets... which can result in a dysfunctional financial planning relationship in the process! For me, this led to the realization of the importance of being even more focused on leading with financial planning first, and to be less aggressive about insisting we "have to" be holistic and do "everything" for clients all at once. Because if clients can't trust you to do the financial planning work first and build that relationship over time, then they may never have enough trust to consolidate their assets regardless. But if you can lead with financial planning and build that trust, then you can end up eventually winning all of their business in the long run anyway. Without clients feeling so pressured that they keep some of their assets a secret in a way that further undermines the planning relationship you're trying to build.

The bottom line, though, is just to acknowledge that if you have a client who has a “spending problem” and is heavily overspending and just keeps ignoring your advice, it is possible they really have a spending problem, but it is also possible that they have a different problem – one where they don't actually trust you and feel as comfortable with you as you may have thought, leading them to hide assets from you so that you don't solicit them to consolidate. And as the industry continues to converge on the AUM model for providing both financial planning and investment management services, we'll likely continue to see more and more clients with "spending problems" that might not actually be!

How Healthcare Sharing Programs Compare To Traditional Health Insurance

March 21, 2018 07:01 am 18 Comments CATEGORY: Insurance

With health insurance premiums continuing to rise every year – in some areas, compounding at double-digit rates – more and more consumers are questioning whether it’s even worthwhile to have health insurance at all. Especially now that the Tax Cuts and Jobs Act of 2017 has repealed the Individual Mandate (effective in 2019) that would have applied a tax penalty for those who decline to enroll in health insurance through an individual exchange.

At the same time, though, rising health insurance premiums have also increased the popularity of alternatives to traditional health insurance, including so-called healthcare sharing programs. Typically organized under ministries or other religious organizations, healthcare sharing programs operate outside of traditional health insurance, and in some cases may be more restrictive with their benefits… but are also operating at a cost that is substantially less than traditional health insurance.

In this guest post, Jake Thorkildsen provides an in-depth explanation of what healthcare sharing programs are, a review of the most popular healthcare sharing programs and ministries, why healthcare sharing programs are not for everyone, and the kinds of situations where they might at least be considered.

So whether you’re simply curious to better understand an increasingly popular alternative to traditional health insurance – now covering more than 1,000,000 people – or are actually trying to evaluate and compare programs for a particular client situation, I hope this comparison and review of the various healthcare sharing programs is helpful!