As Congress and the White House continue to search for revenue to close the gap on the US fiscal deficit, numerous estate planning strategies - especially for high net worth clients - are coming under attack. Recent legislative or budget proposals have threatened the use of both Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs), both popular strategies to "freeze" the value of hopefully-rapidly-appreciating assets for transfer to the next generation. In addition, the new rules on portability - currently temporary, but likely to become permanent at some point in the future - threaten the even more popular and common estate planning strategy, the bypass trust. While the exact timing for when these new rules become permanent law, the reality is that change appears to be coming. As a result, some clients may wish to accelerate the implementation of strategies before the laws change... while others may prefer a wait-and-see approach before deciding what estate planning strategies to implement at all!Read More...
Splitting After-Tax 401(k) Distributions For Roth Conversion
As more and more baby boomers retire, an increasingly popular strategy is to split pre- and after-tax funds in a 401(k) at retirement, with the goal of rolling over the pre-tax funds into an IRA, and converting the after-tax funds into a Roth IRA, taking advantage of the non-taxable nature of the after-tax contributions.
Yet the effectiveness of the strategy is ambiguous at best; recent guidance from IRS Notice 2009-68 would suggest that the approach shouldn't be allowed at all, and although some esoteric and technical workarounds have been suggested, none have truly been tested or subjected to IRS scrutiny. As a result, while many 401(k) plans are willing to issue separate checks to accommodate those who wish to try the strategy, and the odds of getting caught are low, caution is still merited about whether the client will really end out with the desired tax treatment.Read More...
A Unique Way Planners With Niches Grow Business That Others Can't
As the steady drumbeat continues to beat about the value of planners creating niche practices, most discussion of niches focuses on having a more clearly defined value proposition for clients and being able to make yourself more relevant for a target client market. Yet a recent article points out another important benefit that emerges when lots of planners all begin to establish niche practices - the opportunity for cross-referrals between planners with different, non-overlapping niches! In a world where most planners are generalists who all do everything for everyone, there is little need to ever cross-refer; but when most planners specialize in niches, cross-referrals can become increasingly common. And if planners will well-defined niches are more effective in converting prospects into clients, then the reality is that a collaborative group of niche planners may generate more clients in total than all of them could achieve by each acting as an individual generalist, as the whole really can act more effectively than the sum of its parts!Read More...
Weekend Reading for Financial Planners (June 30-July 1)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an article about the FPA, its declining membership, and prospective organizational changes as the CEO retires in 2014. From there, we look at a number of practice management articles, including an overview of the emerging niche of firms that provide quality lead generation for financial advisors, how to sustain a study group, the importance of e-delivery of documents not only for your firm but for your clients, a new software package to help with investment advisory fee billing, and two marketing articles - both emphasizing the value of being unique and different and having a niche to grow the business effectively. From there, we look at an interesting interview with Jeremy Grantham about investing opportunities, a striking article that suggests the giant pile of cash corporations are sitting on may be a bad sign and not a good sign, an article from the Journal of Financial Planning about a new way to manage tail risk for client portfolios, and coverage of an emerging new product called a "stand-alone living benefit" designed to provide all the lifetime income guarantees contained in today's variable annuities but wrapped around a client's own investment account instead. We wrap up with a slightly more light-hearted list of investing tips and maxims that would probably be a good reminder for almost any planner and his/her clients. Enjoy the reading!
What’s The Point Of A Standard Of Care If It Can’t Be Enforced?
In the ongoing effort to differentiate, many financial planners are engaging in a "race to the top" to assert themselves as delivering the best quality advice subject to the highest standards. At the same time, the financial planning membership organizations are similarly competing to attract more quality members by implying their existing members are of the highest quality due to the organization's high Standard of Care.
Yet the reality is that most of the major financial planning organizations now have an almost identical standard of care... and as a result, the real differentiation is not what the standard of care is, but whether the members really adhere to it, even though most associations have no feasible way to monitor the activity of their members. Which raises the question - what's the point of even claiming a standard of care as a differentiator, if the organizations can't enforce those standards to deliver on the promise anyway?Read More...
Variable Annuity Guarantees May Be Too Risky Or Too Expensive, But They Can’t Be Both!
The variable annuity industry has a long history of criticism, generally stemming from the relatively high cost of their guarantees relative to less expensive investment alternatives. To burnish their value, in the past 15 years variable annuities have stepped up the guarantees that they provide, delivering a far wider range of income and death benefit features. However, in the face of wild market fluctuations – especially the 2008 financial crisis – many critics now also point out that the new guarantees of variable annuities pose new risks about whether the company will even be able to make good on its guarantees when the time comes. Yet the reality is that suggesting that variable annuities are risky and that the companies might not be able to pay on their guarantees would suggest that they’re not charging enough – implying that actually, variable annuities are too cheap, not too expensive! Alternatively, if the reality is that the current world of variable annuity guarantees really are too expensive, then there should be no risk at all, as the companies would have more than enough excess profits to handle the risks. So which is it at the end of the day? Are annuities really too expensive, or are they actually too cheap? Read More...
Treasury Releases Proposed Regulations For Portability Of Estate Tax Exemption
Since the beginning of 2011, clients who pass away and leave their assets to their spouse have been able to bequeath not only their property, but also their unused estate tax exemption. As a result, bypass trusts are no longer necessary to preserve the estate tax exemption of the first spouse to die. Unfortunately, though, the portability of the estate tax exemption is only temporary, and is scheduled to expire at the end of the year.
Recently, though, the Treasury put forth Proposed and Temporary Regulations, intended to clear up some areas of confusion around portability, and invite public comments to further press towards Final Regulations.
While the regulations bring some welcome clarification - and a few positive changes for planners as well - the fact that the Treasury went through the trouble of working on regulations also suggests that they, too, expect portability to ultimately become permanent. While most planners aren't counting on the change yet, the new regulations do provide a good opportunity to better understand the details of portability and how it may play out in the future.Read More...
Social Media Is Just Another Medium For Being Social
As the visibility of social media continues to grow, many advisors have become skeptical about whether it represents a new trend for growing a business that's here to stay, or simply a fad that will soon be gone. Yet the reality is that when done best, social media isn't really a new strategy for growing a business at all, it's simply a new medium to facilitate the same strategy advisors have always engaged in: to become someone that people know and trust, to whom they would be comfortable to refer, and cultivating a network of prospective referrers. The difference is that with social media, the potential exists to reach both a larger and more focused network of potential target clientele, allowing the growth strategy to be implemented even more effectively. Read More...
Weekend Reading for Financial Planners (June 23-24)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an editorial from Bob Veres about whether the Financial Services Institute is going to find itself on the wrong side of history, defending the status quo broker-dealer model against the underlying trend towards fiduciary advice. From there, we look at a recent announcement of FPA's new PlannerSearch tool for consumers, a new CRM package for smaller advisory firms, a nice article about how to select the right CRM package for your firm, and some tips about how to run a seminar marketing strategy effectively to grow your practice. We also look at an interesting article about important conversations to have with your clients, that includes a lot of stuff financial planners already know but a few good tips as well, and a nice article by Roy Diliberto pointing out that the best way to get extraordinary results from your firm is to make your employees extraordinary by giving them the opportunity to succeed and making sure you, the business owner, aren't being part of the problem. This week's reading also includes three investment articles: one that suggests the fate of municipal bonds may be more tightly linked with equity returns than we realize; the second providing a nice primer on the European crisis and how we got to where we are; and the last suggesting that Europe's moment of truth may be arriving, and that they will not be able to substantively kick the can further down the road. We wrap up with a nice article from Robert Shiller - a prospective commencement speech for finance graduates that provides a nice reminder of both the challenges that finance must tackle in the coming years, and the underlying social purpose for why the finance sector exists in the first place. Enjoy the reading!
The Impact of Fees And Investment Costs on Safe Withdrawal Rates
While the safe withdrawal rate research provides useful guidance to understand how much clients can safely spend as a baseline, it is based on historical index returns - even though in reality, clients cannot even invest directly in an index without incurring some investment costs, and many pay for the cost of a financial advisor in addition. As a result, many planners recommend that clients adjust their spending downwards to account for the costs and fees.
Yet the reality of the research is that while investment expenses do have a real cost, it has far less of a spending impact than most assume; a 1% expense ratio might reduce a 4% withdrawal rate not to 3%, but instead to 3.6%. This surprising result occurs because of the self-mitigating impact of investment expenses that are recalculated based on the client's account; when accounts are declining, the fees decline as well, while inflation-adjusted spending rises.
The end result is that while financial planners should not ignore the impact of expenses on sustainable spending, it's important not to overstate the impact, either, or clients may unnecessarily constrain their spending when they could be safely enjoying more of their money!Read More...