Nerd's Eye View blog

MailBag: The Impact Of The Phaseout Of Itemized Deductions (Pease Limitation) On AMT Exposure

February 14, 2013 12:04 pm 0 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 the interplay between the phaseout of itemized deductions for high income individuals (the so-called "Pease limitation") and potential exposure to the AMT.
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Is Variable Annuity Tax Deferral Worth Paying For Again?

February 13, 2013 12:02 pm 7 Comments CATEGORY: Annuities

Through the 1980s and 90s when tax rates were higher, variable annuities were a popular tool for tax deferral. However, since the late 1990s, the primary focus of the annuity industry has been on risk management instead, offering a series of living and death benefit features that have provided significant guarantees, but at a significant cost. When combined with tax rates that declined significantly with President Bush’s tax legislation in 2001 and 2003, the benefit of tax deferral associated with non-qualified annuities was simply no longer worth the cost.

In a significant shift, though, an emerging new generation of low cost variable annuities, combined with a significantly more progressive tax system since the American Taxpayer Relief Act of 2012, may usher in a new era for the use of variable annuities, especially when the contracts can be used strategically as an asset location vehicle to shelter high-return but tax-inefficient investments. Consequently, while not long ago it was projected to take a decade or two for the benefits of tax deferral to offset the cost, it now can take as little as a year or two for higher income clients! The end result: it may once again be time to seriously consider the cost of variable annuities as an expense worth paying to harness the value of tax deferral.

Is Financial Planning Becoming Commoditized?

February 11, 2013 12:02 pm 5 Comments CATEGORY: Practice Management

As we enter the digital age, technology has been a driving force in putting pressure on many industries, taking any goods or services that could possibly be commoditized and driving their profit margins down to a sliver. In recent years, many have wondered whether financial planning may soon be impacted in a similar manner, especially given how software like TurboTax decimated the profitability of tax preparation services. After all, the commoditization has arguably already begun for some parts of the financial services industry, as costs have plummeted for trade execution and index investing and many software packages offer the ability to perform relatively sophisticated financial planning projections entirely for free.

Yet the reality is that financial planning itself may remain remarkably resistant to commoditization for the foreseeable future, for the simple reason that financial planning is incredibly customized and unique to the needs and complex circumstances of the client, and outcomes can still vary greatly depending on the expertise and the skillset of the planner (unlike tax preparation, where ultimately the outcomes are exactly the same because all clients and their preparers both have to follow the same IRS guidelines). In fact, arguably the greatest challenge in financial planning is not that services are so nearly identical from one planning firm to the next that the only competitive factor is price (as occurs in commoditized markets), but instead that the planning experience is still so different amongst firms that consumers struggle to determine which planner would be the best fit in the first place!

Nonetheless, the caveat is that for advisors who have linked the profitability and success of their businesses to a commoditized service, such as charging a fee just to gather data and do financial planning software projections, or charge an assets-under-management fee just to provide strategic passive asset allocation using index funds, the pressure is on to step up and deliver a greater value. Ironically, in the end that means not only is financial planning not being commoditized in a manner that makes financial planners irrelevant, but the reality may be that it's about to get even more competitive with more financial planners than ever, as an increasing number of advisors realize the components of what they provide have become commoditized and that they must step up to provide a deeper, higher quality of financial planning advice and services for their businesses to survive and thrive!

Weekend Reading for Financial Planners (Feb 9-10)

February 8, 2013 06:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issues starts off with the big regulatory news of the week - that FINRA may be backing away from its efforts to regulate investment advisers - along with two articles about being a good financial planning professional: the first indirectly suggests that perhaps life insurance needs to be recognized as its own profession (with its own professional designation, the CLU); and the other notes that fiduciaries might be trying to hard to get clients by using fiduciary as a tool for instilling fear, uncertainty, and doubt, instead of trying to get clients by acting like a fiduciary in a way that demonstrates leadership and helps clients with their decision-making process.

From there, we look at a series of articles this week about blogging and more generally about using content to attract prospective clients and grow your business as a financial advisor. The first article highlights an advisor interviewed at the recent TD Ameritrade conference who's bringing in $2M per month of AUM purely from blogging in targeted niches; the second looks at how blogging is evolving, noting that while short blog posts are often popular it may be the longer blog posts that really demonstrate your expertise to clients; the third providing a fantastic list of topic ideas for advisors (you'll never have writer's/blogger's block again!), and the last providing some useful tips about how to distribute your blog content so it's read more widely and grows an audience.

Beyond the blogging articles, there's a great piece about how to set good investment defaults with clients so that they will more often make good decisions (or at least need to go further out of their way to make bad ones), an interesting look at how Gen Y advisors may be leaning increasingly towards wirehouses out of a desire for a more structured career environment, a strange-but-true article highlighting research that finds clients may be more inclined to engage in risky financial decisions if they are touched on the shoulder by a woman, and a NY Times discussion of how economics research is beginning to focus on not just the objective economic data but also the subjective data on happiness, raising the question of whether in the future we'll look at Gross Domestic Happiness alongside the country's Gross Domestic Product?

We wrap up with a lighter article from the Harvard Business Review, which serves as a reminder that one of the greatest technology tools to enhance business efficiency and productivity, not to mention client service, was actually invented almost 140 years ago: it's called a telephone, and it's time we picked it up a little more often to just talk to clients (or staff), and perhaps rely a little less on all the email back-and-forth Enjoy the reading!

News Highlight – FINRA Backing Away From Push To Oversee Investment Advisers?

February 7, 2013 03:39 pm 4 Comments CATEGORY: Industry News

In a surprising interview article just released today by Reuters reporter Suzanne Barlyn, FINRA Chairman and CEO Rick Ketchum goes on record stating that he sees "no sign [FINRA] can convince lawmakers in Washington to support a change in the way [investment] advisers are regulated anytime soon."

Ketchum attributes this primarily to the leadership changes in the House Financial Services Committee after the 2012 election, as Representative Jeb Hensarling has taken over for Representative Spencer Bachus (it was Bachus who had put forth the 2012 legislation that was widely viewed as paving the way for FINRA to regulate investment advisers). The matter was further complicated by the lack of clear support from the SEC.

The bottom line - Ketchum believes that continuing to push FINRA as overseer of investment advisers will make no progress in the foreseeable future, so it's backing off.Read More...

Safe Withdrawal Rates In Today’s Low Yield Environment – Walking On The Edge Of A Cliff?

February 6, 2013 12:05 pm 17 Comments CATEGORY: Retirement Planning

Safe withdrawal rates have been under a great deal of criticism in recent years, as both investors and planners ratchet downwards their expectations of market returns in the face of a low return environment. Of course, the reality is that safe withdrawal rates are actually based upon low-return environments in the first place, and do not rely upon long-term historical average returns. Nonetheless, a growing body of research suggests that expectations of the safe withdrawal rate should be adjusted based on the current market conditions that apply at the time of retirement.

Accordingly, today's low-yield environment, where the real return on TIPS is actually negative in the coming years, arguably represents one of those times where safe withdrawal rates should be applied with caution. And in fact, a recent draft study by Finke, Pfau, and Blanchett affirms this concern, finding that the probability of failure for today's retirees could be much higher than commonly recognized, given today's real returns on TIPS.

Ultimately, though, just because starting conditions are suboptimal does not guarantee that safe withdrawal rates will fail for today's retirees. By analogy, just because you're walking along the edge of a cliff does not mean you're certain to fall off of it; nonetheless, being closer to the edge of the cliff is certainly more dangerous than being safely inland, and similarly starting a retirement in today's market conditions clearly merits more caution and monitoring!

How All Financial Planning – Even Fiduciary – Is About Sales, Sales, Sales

February 4, 2013 12:01 pm 17 Comments CATEGORY: Practice Management

As financial planning continues to shift further and further away from selling products and towards the delivery of quality advice, many have suggested that financial planning may soon reach the point where it departs entirely from its "sales" roots - a vision widely supported by both consumers and new financial planners entering the profession, who all view sales with a highly negative stigma.

Yet the reality is that at its purest level, "selling" is really just about persuasion and influencing the decisions of others, and financial planners really are in the business of persuasion, convincing clients to: 1) pay the planner for services; 2) to engage in the financial planning process; and 3) to implement the advisor's recommendations. As a result, if you - as the planner - don't know how to "sell" your clients on the value of you, the financial planning you offer, and motivate them to act on your recommendations, then you simply can't succeed as a financial planner, regardless of whether the sale of an insurance or investment product is ever involved (though especially if clients really do need to implement such products!).

Accordingly, the reality is that perhaps it's time to ditch the sales stigma in the financial planning profession, and take a fresh look at how the noblest implementation of sales, persuasion, and influence is at the very core of what it takes to be a successful practitioner. To do this, however, also requires dropping the embarrassing history of how "sales" has been done in financial services in the past, and instead look to the latest tools and research available, so that we can develop proper training for how to "sell" effectively in the 21st century.

Weekend Reading for Financial Planners (Feb 2-3)

February 1, 2013 07:30 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issues starts off with a fascinating article that studied brain images of investors working with CFPs or non-CFPs in volatile markets, and found that those following a CFP-credentialed advisor were more likely to stick with the advice and less likely to second guess than with a non-credentialed advisor. A second article looks further at some recent brain research and what it's beginning to tell us about not just how clients behave in general, but about how they interact with advisors and why they often don't implement an advisor's recommendations.

From there, we look at a few articles on the regulatory front, including one that suggests the SEC's recent crackdown on advisors misrepresenting AUM may be partially the regulator's own fault for having such a poor and ambiguous definition of what constitutes AUM in today's complex marketplace, a second looking at how fiduciary rulemaking is very likely to proceed this year from the DOL even if the SEC's own rulemaking progress has slowed, and a third striking piece by Don Trone suggesting that the real roadblock to moving forward on the fiduciary issue is that fiduciary advocates are spending too much time talking about principles the industry already agrees with and not enough time focusing on developing the fiduciary best practices and safe harbors that are really necessary for wider fiduciary adoption.

We also have a few technical articles this week, including guidance from Joe Tomlinson about how to craft better asset class return expectations for financial plans, a fascinating look from John Hussman at how the "great rotation" from bonds to stocks is a myth, a look at how "career asset management" is a new frontier for financial planners to deliver value to clients, and a deep look at the new "play or pay" tax rules for employers offering health insurance (or not) that will kick in starting next year.

We wrap up with three articles looking more broadly at the industry - the first suggests that financial advisor conferences are broken and need to be fixed (with a few suggestions about how to do so), and the last two provide a striking look at the research that's come out in recent years trying to quantify whether or how much value financial advisors really bring to the table for their clients - research that shows promising signs for the value of a financial planner, but research that is unfortunately confounded by the fact that apparently researchers often can't tell who's an advisor and who's a salesperson any more than consumers can! Enjoy the reading!

MailBag: Is A Qualified Charitable Distribution (QCD) From An IRA Better Than Donating Appreciated Securities?

January 31, 2013 12:10 pm 17 Comments CATEGORY: MailBag

In this week's MailBag, we look at a recent inquiry regarding whether it's still a good deal to donate appreciated securities to a charity, now that the rules are back allowing Qualified Charitable Distributions (QCDs) directly from an IRA to a charity.

Understanding Marginal Tax Rate Vs Effective Tax Rate And When To Use Each

January 30, 2013 01:03 pm 15 Comments CATEGORY: Taxes

Effective financial planning for clients often has tax-related consequences, which in turn requires a good understanding of not only the tax laws themselves, but also the client's tax rates. Unfortunately, though, significant confusion abounds regarding what tax rates should be used when analyzing various problems. Is it the client's tax bracket? Or a marginal tax rate? Or an effective tax rate? When should each be used? The key is that in the end, marginal tax rates should be used to compare strategies, and effective tax rates should be used to compare people.

Accordingly, if you want to know who commits a larger portion of their total income to their tax obligations, use an effective tax rate. But if you want to know whether to do that Roth conversion/IRA withdrawal/annuity investment/sale for a capital gain or loss/etc., the marginal tax rate is what should be used. In point of fact, this actually means that the marginal tax rate is really the only rate that should be used for financial planning scenarios!

The caveat, however, is that in practice determining a client's marginal tax rate requires more than just looking at his/her tax bracket... so be certainly to calculate the marginal tax rate correctly, too!