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…
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
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)
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
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) 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
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!)!
Why Every Financial Planner With A Blog Needs A Google+ Page, Now
As consumers increasingly turn to the internet for information about potential products, the ability of a company and its products to turn up at the top of search engine results is increasingly crucial for success and growth - leading to an explosion of consultants that will help companies with their "Search Engine Optimization" (SEO) to ensure that their products and services come up first. A similar process occurs when consumers search for information about services and people to work with, although the process is more complicated due to the fact that many experts may appear prominently on lots of sites, not all of which are necessarily tied to their business.
To better understand not just where influential content is, but the influential people who create it, Google has begun to develop a new system for its search engines to track authors and determine who's influential, called "AuthorRank", which is intended to supplement the "PageRank" algorithms it uses to identify and rank influential websites and content. The upshot of this change is that for the first time ever, financial planners and other service professionals will be able to start establishing their own online "webutation" as they tie content they have produced to their personal profile and business, regardless of where it is published. The caveat, though, is that Google accomplishes "Google Authorship" tracking by having authors tie their content and websites to a specific Google+ profile - which means any financial planners that produce a blog or other content who hadn't already established a Google+ profile need to go create one, now!
Weekend Reading for Financial Planners (Dec 15-16)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition is a technology extravaganza! We start off with a writeup of Financial Planning magazine's 2012 Tech Survey, and Bill Winterberg's picks for 2012's "Best Tech for Advisors" from Morningstar Advisor. From there, we look to a number of recent technology developments, including whether advisors should jump on board with Windows 8, how advisors can get their own privately branded "app" for mobile devices, a new online site for advisors to search for new jobs and contact prospective firms privately and anonymous, how investment custodians are evolving to meet rising technology demands from RIAs, and a discussion of why more advisors should look to conduct online meetings with clients. We also have a look at the rising trend of email fraud (where thieves pretend to be clients to convince the advisor to transfer money), and an interview with David Drucker and Joel Bruckenstein regarding their upcoming new book about technology tools for advisors. We wrap up with two interesting articles: one that looks at the only 5 things you need on your website to communicate with clients (and a suggestion that you should trim the fat off your website to focus on those items), and the other providing a neat list of statistics for financial advisors about use and adoption of social media by both advisors and their clients. Enjoy the reading!
MailBag: Solo 401(k) Contributions For S Corps And End-Of-Year Rebalancing To Harvest Capital Gains
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) when do employee "salary deferral" contributions have to be made for a solo 401(k) where the business is an S corporation; and 2) is it a good idea to split end-of-year rebalancing trades to trigger the gains this year but the losses next year (even if it means you're out of the markets for a few days).
The Emerging Next Generation Of Investment-Only Variable Annuities (IOVA) – An Asset Location Tool?
For the past 40 years, variable annuities have been on a rollercoaster, where the popularity of various features and benefits rise and fall as the contracts shift and adapt to the then-current environment. In the early years, variable annuities were popular for tax-deferred investing as top tax rates of the time were 70%, and remained popular in subsequent years as the burgeoning bull market made equity investing more appealing overall, even as tax rates declined. As the 2000s approached, variable annuity companies innovated, creating a wave of so-called "living benefit" riders that included GMIBs and GMWBs, to make variable annuities appealing to the coming onslaught of baby boomer retirees. Unfortunately, though, with the financial crisis, living benefit riders became far less appealing - old contracts forced annuity companies to raise reserves, and new contracts experienced a significant cost increase as annuity companies struggled to hedge and manage risk in a more volatile post-crisis environment.
As a result, annuity companies are now entering a new wave of innovation - where variable annuities are bolstered by more innovate active management and alternative investment strategies, and the annuity itself is used as a tax shelter for these rather tax-inefficient investments, at a drastically lower cost than the annuities of recent years. Whether this new line of investment-only variable annuity (IOVA) contracts will catch on remains to be seen, but the potential is for variable annuities to become a major part of portfolio design in the future - where the variable annuity becomes an asset location tool and clients can voluntarily choose how much of their most tax-inefficient investments will be sheltered by tax deferral.
