Nerd's Eye View blog

Weekend Reading for Financial Planners (Jan 5-6)

January 4, 2013 09:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interview with Michael Branham, the incoming president of the Board of Directors for the Financial Planning Association (and the youngest person to ever take on the role), as he discusses the outlook for the FPA in particular and the financial planning profession in the coming year. As the first Weekend Reading of 2013, we continue with a number of additional articles taking a final retrospective look at 2012 and a fresh look at 2013, including a look back at the major financial regulatory events of 2012, a prospective look (and wish list) by fiduciary guru Ron Rhoades on potential regulatory activity for advisors in 2013, a look from Bob Clark at how FINRA took some big hits in 2012 but may not be out for the count yet, and a projection by Bob Veres of a dystopian future for advisors if FINRA gains control (can you sense a theme regarding the looming regulatory battles regarding the fiduciary standard, the oversight of investment advisers, and a general dislike of FINRA?!).

We also look at a few other idea and trends articles for the coming year, including an intriguing idea of how financial planning could be brought to the masses to be funded by a tiny tax applied against the rest of the industry, and a look from yours truly in the Journal of Financial Planning about how the "new normal" environment is impacting the growth of financial planning firms. From there, we look at a few investment-related articles, including a discussion by Bob Veres about best practices for firms that use investment committees, a brief article explaining the best ways to determine if your (client's) annuity carrier is safe, and an interesting article from GMO about the challenges of investing for clients in "the age of financial repression." We wrap up with three somewhat more "offbeat" articles: the first looks at the ongoing rise of "gamification" to induce consumers to change their behaviors (for better and for worse); an important reminder not to assume you know what your customers really want (or to get stuck in an echo-chamber by only asking your best clients if they're still happy); and a striking discussion of recent research that shows how we consistently underestimate how different our future personality and tastes will be in 10+ years from what they are today, which has profound implications for how we attempt to establish financial planning goals for clients. Enjoy the reading!

MailBag: 0.9% Medicare Tax Withholding From Nonqualified Deferred Compensation And Separating Twitter Accounts For Personal And Business Use

January 3, 2013 01:04 pm 1 Comment 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 two recent inquiries: 1) what is the treatment of nonqualified deferred compensation for the purposes of the new 0.9% Medicare earned income tax starting in 2013; and 2) should you have separate Twitter accounts for your advisory firm and yourself personally, or just do everything personal and business from one account?

Financial Planning Implications the American Taxpayer Relief Act of 2012 (ATRA)

January 1, 2013 05:50 pm 58 Comments CATEGORY: Taxes

The last-minute fiscal cliff compromise - H.R. 8, which will also be known as the American Taxpayer Relief Act of 2012 (or "ATRA") - extends the majority of tax cuts that were scheduled to expire at the end of 2012, in addition to retroactively reinstating some rules that had expired in 2011. However, the legislation also introduces a number of changes as well - including a new top tax bracket of 39.6%, and an increase in the top long-term capital gains and qualified dividend rate to 20%. And some old rules that had lapsed and were scheduled to come back have in fact returned, such as the Pease limitation (phaseout of itemized deductions) and the Personal Exemption Phaseout (PEP). In addition, a new rule will allow 401(k) participants to complete intra-plan Roth conversions.

For planning purposes, though, the good news is that not only was the fiscal cliff largely "averted" with last minute legislation, but the changes under ATRA are permanent. On the other hand, making some rules permanent - such as not only the current gift and estate tax exemption, but also the portability of a deceased spouse's unused exemption - will change income and estate tax planning going forward.

In this article, we take a first look at the details of the H.R. 8 fiscal cliff legislation and some of its financial planning implications.

Top 12 Nerd’s Eye View Blog Posts Of 2012

December 31, 2012 01:02 pm 2 Comments CATEGORY: Nerd's Eye View

As 2012 comes to a close, I'm thankful to all of you, my readers, who have visited Nerd's Eye View more and more over the year, and shared this blog with your colleagues. The growth has helped to renew my energy and enthusiasm to continue writing regularly here in the coming year, as well as reinvest into the site; in the coming weeks, you'll see a significant re-design rolling out. And yes, due to popular demand, it will include a larger default font size!

With life and work as busy as it is, though, I know that most people don't have the time to keep up with everything that's written here, and it's an unfortunate "curse" of blogging that articles, once written, often vanish to the archives, never to be seen again outside of an occasional Google search or two. Accordingly, I've compiled for you this list of the 12 most popular articles that ran this year on Nerd's Eye View. So whether you're new to the blog, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful or of interest to you!

Thanks for a great 2012, and looking forward to an even better 2013!
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Weekend Reading for Financial Planners (Dec 29-30)

December 28, 2012 07:05 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition focuses on practice management and personal/professional development issues! We start off with an interesting discussion from Abby Salameh on RIABiz, suggesting that while early on the hybrid B-D/RIA model was just a waypoint for advisors transitioning from their broker-dealer roots to an RIA future, in reality the hybrid model may not be just a layover on the journey but the actual destination. From there, we look at a few articles focused on how to grow your business and service clients, including a discussion of how to "Wow" Gen Y clients (although many of the tips are relevant to all firms regardless of their clients' generational demographics!), the ways some firms are offering concierge services to clients, and some tips on how to ask more proactively for referrals (if, in fact, you wish to pursue referrals that way). There are also a number of articles focused on some of the internal issues of financial planning businesses, including a remarkably candid discussion by Ross Levin of Accredited Investors about transitioning ownership and control of a firm he founded to the next generation of owners, a look at how to structure compensation for partners of advisory firms (hint: it probably shouldn't be equal for everyone), how to better develop your own home-grown star employees to avoid the cost and challenge of trying to hire "star" talent, and how to go about raising your client fees if you need to (and the fact that for most firms, the fear of how clients will respond is far worse than how they actually respond!). After reviewing two quick articles - one is a guide about how to hide LinkedIn endorsements in a quick single step (if your compliance requires you to do so), and the other is a list of providers that offer ready-to-use content for advisors on their websites/blogs/newsletters - we wrap up with two very interesting pieces: the first looks at how the small gifts we receive as advisors (e.g., from vendors) may impact our behavior and bias our recommendations far more than we realize; and the second about how setting goals may actually not be a good business strategy, and that instead it's best to focus on tasks and key activity areas. Enjoy the reading!

What’s The Real Value Of Deferring Capital Gains? Less Than Most People Think…

December 26, 2012 01:02 pm 11 Comments CATEGORY: Taxes

With the looming specter of not only the fiscal cliff with rising capital gains tax rates, but also the onset of the new 3.8% Medicare tax on net investment income in 2013, many investors have been looking to harvest capital gains before the end of the year.

The strategy is somewhat controversial, inasmuch as most taxpayers (and their accountants) have long since trained themselves to avoid ever paying taxes sooner than they absolutely have to, maximizing the value of tax deferral according to the basic principles of the time value of money. Nonetheless, the math of the situation with rising tax rates is quite straightforward, and in such environments it can require significant appreciation in a short period of time to make deferral worthwhile.

But perhaps at a more basic level, the debates about whether or not to harvest capital gains have revealed an even more problematic point of confusion: we may be grossly overvaluing the actual benefit of deferring capital gains in the first place, and the unwillingness to harvest capital gains may be part of a broader tendency to allow the tax tail to wag the dog far more than it should.

Fixing The Financial Planning Conference Exhibit Hall

December 24, 2012 01:04 pm 2 Comments CATEGORY: Conferences

It is a sad reality that at most financial planning conferences, most attendees go out of their way to avoid being in the exhibit hall, due to a combination of exhibitors that don't feel relevant, poor salesmen, and especially the few bad apples that really make the experience uncomfortable. Yet the reality is that financial planners actually should want to be in the exhibit hall - not only for the opportunity to find new vendors, service providers, and products for their businesses, but more importantly to do the requisite due diligence to ensure they are up to date on the latest products and services they can make available to their clients. In point of fact, doing such due diligence is arguably a key aspect of fulfilling one's due diligence obligation as a fiduciary CFP certificant!

So how can the bad exhibit hall experience be fixed? The starting point is attracting a broader range of exhibitors than "just" insurance and investment companies, broker-dealers, and custodians, but also including software and technology companies, consultants, and more. From there, lay out the exhibit hall itself less like a random scattering of exhibitors and more like an efficient supermarket with aisles dedicated to certain types of companies, and wrap it up with an Ignite-style session built to allow a little bit of time for a lot of exhibitors to show what they have to offer so participants can choose who to follow up with for further information!

Weekend Reading for Financial Planners (Dec 22-23)

December 21, 2012 07:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a look at the new Department of Labor 408(b)(2) fee disclosure rules for qualified plans, now that they've been in force for 6 months, and finds the industry impact has not been as significant as many had anticipated. There are a few investment articles this week as well, including a look at how age-based 529 plans are on the rise, how to use the capture ratio to evaluate investments, and the appropriateness (or not) of investing in gold, and also a series of retirement articles, including a look at what chained CPI is and how it may impact retirees if adopted as part of the fiscal cliff negotiations, a review of the FPA's 2012 study on how advisors are implementing retirement income strategies, and the final installment of Wade Pfau's review of the Aria RetireOne "Stand-Alone Living Benefit" (SALB) offering. After looking at a Journal of Financial Planning article on life insurance proceeds and beneficiary designations after a divorce, we wrap up with four interesting articles: one looking at some of the academic research about the ways that investors hurt themselves, a second about how too much data and information can lead to worse decisions; a third looking at the different ways we can try to build trust (as educator, as therapist, etc.) and how some are less effective than others; and the last suggesting that there's really no such thing as a true "Generalist" who knows a lot about many different topics, and that instead the real key are people who know how to translate their complex specialized knowledge to outside domains and situations. Enjoy the reading!

MailBag: Hostess Pension Shortfall And The PBGC, And The Cost Basis And Tax Treatment Of MLPs

December 20, 2012 12:06 pm 0 Comments CATEGORY: MailBag

In this week's mailbag, we look at two recent inquiries: 1) was there anything illegal in what Hostess did in stopping its pension plan contributions and leaving a huge shortfall, and how shaky is the PBGC; and 2) how do you calculate cost basis for a Master Limited Partnership (MLP) as distributions are received, and what is the tax treatment of gains when the MLP is later sold?

IRS Issues Guidance For New 3.8% Medicare Tax On Net Investment Income

December 19, 2012 12:01 pm 16 Comments CATEGORY: Taxes

In early December, the IRS and Treasury issued a series of Proposed Regulations for the two new Medicare taxes scheduled to begin on January 1, 2013 - the 3.8% Medicare tax on unearned income (generally, a 3.8% surtax on net investment income), and the 0.9% Medicare tax on earned income (i.e., wages and self-employment income), applied to "high income" individuals above certain thresholds. Although the new rules are still proposed and may ultimately be amended or changed, the Treasury and IRS nonetheless indicated that they can be relied upon by taxpayers. However, given the limited time to cultivate these regulations - including addressing potential loopholes - the rules did indicate that taxpayers should not try to read between the lines to find loopholes in the proposed regulations, and that the IRS will closely review transactions that manipulate net investment income to eliminate Medicare tax exposure.

While there were no huge surprises in the guidance, it does provide important clarification on a wide range of issues that planners and their clients must contend with heading into 2013, including how the Medicare tax rules interact with other parts of the tax code, and serves as a reminder to complete any last minute capital gains harvesting that high-income clients may wish to engage in before 2013 begins (including a special opportunity for Charitable Remainder Trusts!)!