Kitces.com - Advancing Knowledge in Financial Planning

Spousal Rollover And Stretch Rules For Inherited Traditional And Roth IRAs

October 25, 2017 07:01 am 15 Comments CATEGORY: Taxes

The key benefit of specialized retirement accounts are their tax preferences – from the upfront tax deduction and tax-deferred growth of an IRA or 401(k), to the opportunity for tax-free growth from a Roth. Such tax benefits are intended to encourage and incentivize workers to save for retirement, and to make retirement at least a little more affordable. The caveat, though, is that if all the assets are not actually used for retirement, the retirement account – whether an employer retirement plan or an IRA, Roth or traditional – must be unwound, as eventually the Federal government does want to collect its share! Accordingly, IRC Sections 401(a)(9) and 408(a)(6) prescribe a series of somewhat-complex rules to determine exactly how fast a tax-preferenced retirement account must be liquidated after the death of the original owner, allowing the beneficiary in most cases to stretch out the tax impact over time (dubbed the “stretch IRA” strategy).

However, the reality for many couples – particularly single-earner households – is that the retirement account assets may be in only one spouse’s name, even though the savings were intended to support the couple jointly in retirement. And so in recognition of this dynamic, the tax code provides unique preferential treatment for a spouse who is the beneficiary of a retirement account, allowing not only more favorable stretch IRA (and stretch 401(k)) provisions, but also the opportunity for a spousal beneficiary to “roll over” the inherited retirement account and treat it as his/her own.

Yet while the additional flexibility of the spousal stretch IRA and the spousal rollover option are both more favorable than the standard rules for non-spousal beneficiaries of inherited retirement accounts, the special choices that spouses face have unique trade-offs. On the one hand, leaving an inherited IRA as such for a spousal beneficiary obligates him/her to take post-death Required Minimum Distributions (RMDs) – potentially sooner rather than later – but avoids the impact of an early withdrawal penalty. A spousal rollover allows for the use of more favorable RMD tables, and may defer the onset of RMDs until even later, while also providing more favorable treatment for subsequent beneficiaries… but re-introduces the 10% early withdrawal penalty, which may be problematic for younger spousal beneficiaries (under age 59 ½).

Ultimately, the good news is that spousal beneficiaries have the option to make either choice, and even have flexibility about the timing – allowing a decision to maintain an inherited stretch IRA for the spouse initially, and completing a spousal rollover later (after he/she turns age 59 ½). Nonetheless, it’s important to carefully consider the choices and trade-offs… especially since a spousal rollover, once completed, is irrevocable and cannot be undone after the fact!

#FASuccess Ep 043: Navigating The Internal Succession Planning Turning Point As An Advisory Firm Founder with Marty Kurtz

October 24, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the forty-third episode of the Financial Advisor Success podcast!

My guest on today's podcast is Marty Kurtz. Marty is the founder of The Planning Center, an independent RIA based in Moline, Illinois, that - as the name implies, quite deliberately – provides comprehensive financial planning for clients, along with investment management for more than $700 million of client portfolios.

What's unique about Marty's business, though, is that he's already in the midst of executing a succession plan that will ultimately wind down his ownership and management of his 26-employee and now multi-partner firm. In other words, while a lot of advisors talk about succession planning, Marty is actually living the process.

In this episode, we talk in depth about succession planning, and the real-world challenges that crop up in trying to facilitate an internal succession plan, from the difficulty in finding an "appropriate" valuation for the firm, the dynamics that emerge between founders and the next generation of advisors that want to take over the business, and why founders need to recognize the trade-offs that often exist between maximizing the dollar value of the business by selling to a third-party, and maximizing the longevity and sustainability of the business itself by selling internally.

From there, we also talk about how The Planning Center is shifting away from the AUM model to a unique retainer model that charges clients 1% of their income plus half a percent of their liquid net worth, how Marty jump-started the growth of the firm in the early years with a strategic partnership with a local accountant (and how they structured - and had to later change - the revenue-sharing solicitor agreement), and the unique household cash flow planning technique that he uses as the First Step of the financial planning process with every client.

And be certain to listen to the end, as Marty provides his advice to those who are looking to become successors in a firm about the conversations they need have – and drive, if necessary – with their founders to ensure the succession plan really happens. And Marty talks about the new business he's helping to create – called Turning Point – that helps experienced advisors who founded firms and are looking to sell to figure out what they really want and need, deep down, to make the succession plan a success.

So whether you're curious to hear the successsor's perspective on executing a succession plan, or are looking for ideas of new and innovative non-AUM advisory firm business models, or simply want to learn how one advisor built success with a focused strategic alliance with an accounting firm, I hope you enjoy this episode of the Financial Advisor Success podcast!

The 13 Best Conferences For Financial Advisors To Choose From In 2018

October 23, 2017 07:01 am 8 Comments CATEGORY: Conferences

Michael Gerber’s famous business book “The E-Myth” points out that most small business entrepreneurs struggle because they spend all of their time working in their business, and too little time working on the business itself. Any small business owner who has a unique and valuable personal skillset – from a pie-maker to a doctor to a financial advisor – is particularly prone to this challenge, as almost by definition what gets them paid is the work they do in the business. And accordingly, to the extent they take time off to go to a conference once or twice a year, they tend to go to events that help them improve their skills in the business (i.e., continuing education), particularly since most regulated professions have CE requirements anyway.

To break the cycle for financial advisors, I’m declaring 2018 as “the year of the practice management (or career development) conference” instead. Because the reality is that there is an ever-growing number of choices on how to fulfill your annual CE requirements online, from conferences that are live-streamed or recorded for subsequent purchase, to an abundance of webinars on demand, and even the Members Section of this blog (and CFP professionals only need to complete CE requirements every other year anyway!). But the opportunities for good practice management content that actually helps you work on the business more effectively, or career development content that helps you grow to the next level, are few and far between. And when it comes to working on the business, it’s especially important to actually physically leave the business and go to a conference, as you have to get beyond your own four office walls to get a fresh perspective on your business or career.

Unfortunately, though, going to a conference is a major investment – with conference registration fees that can run $1,000 or more, plus the cost of airfare and hotel accommodations – which means it’s especially important to pick the right conference to get value. In fact, given that in recent years I’ve been speaking annually at nearly 70 conferences myself, and have presented at virtually every major conference in our industry, from the various membership association events to custodian and broker-dealer and even media publication conferences, I’m often asked for recommendations of what I think are the “best” conferences for financial advisors based on what I’ve seen.

Accordingly, in 2012 I started to craft my own annual list of “best-in-class” top conferences for financial advisors, based on my own travels and experience, and divvied up into categories that would make it easier for advisors to select what matches their own needs at their current business or career stage.

And now, I’m excited to present my newest list of “Top Financial Advisor Conferences” for 2018, all with a focus on practice management and career development. Of course, given that we’re all at different stages of our businesses, some events are much better suited to certain types of advisors, and accordingly I’ve tried to delineate which are the best depending on your size of business, industry channel, and/or career stage.

So I hope you find this year’s 2018 financial conferences list to be helpful as a guide in planning your own conference budget and schedule for next year. And I hope you make the investment – because the truth is that you just need one major takeaway to materially change the trajectory of your business or career in the coming years! Also, be certain to take advantage of the special discount codes that several conferences have offered to all of you as Nerd’s Eye View readers (especially since a few early-2018 events have their Early Bird deadlines closing soon)!

Weekend Reading for Financial Planners (October 21-22)

October 20, 2017 02:57 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a slew of major RIA custodian and broker-dealer news stories, including the decision by TD Ameritrade to eliminate 84% of its no-commission ETF lineup (including all of its Vanguard ETFs) with just 30 days' notice to advisors to re-design their portfolios, the news that retail online brokerage giant E-Trade is looking to enter the RIA custody business by acquiring Trust Company of America (for a whopping $275M!), the launch of U.S. Bancorp's new "FundKeeper" platform that could substantially disrupt mutual fund distribution and aid most small-to-mid-sized broker-dealers that don't self-clear, and a backlash against FINRA for granting block transfer approval in the LPL/NPH deal after not allowing it for any other recent broker-dealer acquisitions (though the change in precedent could just further accelerate broker-dealer consolidation from here!).

From there, we have a few more technical articles, all around the theme of handling concentrated stock positions, from a discussion of a "Stock Protection Fund" strategy to partially hedge concentrated stock positions for executives (without liquidating the stock and incurring tax consequences), to how an "M&A Reseller" strategy can help small business owners gain installment-sale tax deferral on the sale of a business while minimizing the credit risk of taking on an installment note directly from the buyer, and a look at the rise of Securities-Based Lending (SBL) and how it can help provide short-term liquidity at a reasonable cost for those with concentrated stock positions.

We also have several practice management articles this week, including: How to change the ways you ask questions in a prospective client approach meeting to better connect emotionally with clients; a 5-meeting structure for approaching prospects and turning them into clients (and getting them comfortable after they've onboarded); and how to re-frame a client or prospect event around a "life transition" event that can help get a far better turnout than "just" talking about your latest investment views or a particular financial planning strategy.

We wrap up with three interesting articles, all around the theme of challenging our perceptions: the first is a fascinating look at how Betterment is putting behavioral testing into practice to determine what really helps clients to stay the course (and finds that just communicating to all clients that they should "stay the course" with a blast email during market turmoil is actually not a very effective strategy after all!); the second looks at the research into how (and why) we actually change our minds, and finds that the biggest key to helping someone change their mind is to give them an "out" so it's not embarrassing for them to change their views; and the last is a simple but powerful way of looking at advice, recognizing that the best advice is not just good advice, but effective advice that people can implement given all of our behavioral biases!

Enjoy the "light" reading!

TD Ameritrade Sells Out NextGen Advisor-Client Platform By Replacing 84% Of Its NTF ETF Lineup

October 19, 2017 01:06 pm 42 Comments CATEGORY: Industry News

Periscope Office Hours Cover Image Oct 18 2017 TD Ameritrade Sells Out NextGen Advisor Client Platform Replacing 84 Of Its NTF ETF Lineup

The growth of ETFs in recent years has been nothing short of extraordinary, with more than $3 trillion of ETF assets in the US, and ETF adoption amongst advisors rising rapidly from just 40% a decade ago, to 88% of advisors today. Yet, unfortunately, one of the main appeals of ETFs - that they trade "like stocks" - has also inhibited their growth, as the ticket charges of trading commissions can add up quickly for younger investors that are still in the accumulation phase and making modest ongoing contributions to a diversified multi-ETF portfolio. Fortunately, in recent years, RIA custodians have helped to fill this void by offering so-called "no-commission" or "no-transaction-fee" (NTF) platforms, where a set list of ETFs can be traded without incurring transaction costs... which has been especially helpful for advisors creating ETF portfolios for young savers. Yet this week, TD Ameritrade upended its no-commission ETF Market Center for financial advisors by announcing the removal of 84% of their current NTF exchange-traded funds, including several iShares Core ETFs and the entire lineup of popular Vanguard ETFs!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the TD Ameritrade’s big announcement, the good news of their newly expanded ETF Market Center lineup, and the bad news of how TD Ameritrade's decision to remove 84% of the existing no-commission ETFs upends financial advisors on the platform – and has been particularly damaging to those advisors who were most loyal to ETF Market Center while serving next generation clients!

In recent years, TD Ameritrade's ETF Market Center platform was used primarily by financial advisors who wanted to construct simple low-cost passive portfolios for their younger clientele, whose more moderate account balances and ongoing contributions were especially well suited to the no-commission ETF lineup... especially given the availability of low-cost iShares Core and Vanguard ETFs. Yet some financial advisors prefer to express a wider range of investment views, from more targeted allocations (which can be tax loss harvested), to applying factor tilts... and accordingly, TD Ameritrade has expended the selection of Market Center ETFs up to 296 (including the new ultra-low-cost State Street “SPDR Portfolio” series).

Yet unfortunately, the removal of all Vanguard ETFs and the most popular iShares Core ETFs has put advisors in the lurch, leaving them barely 30 days to make changes for their clients before ticket charges will apply. Which means, what was a convenient solution for financial advisors has just become a big headache, as they must now scramble to investigate and map out replacement funds, contact clients, and update portfolios over the next 30 days.

Fortunately, the reality is that all those Vanguard and iShares Core ETFs are still going to be available through TD Ameritrade. They’re not being removed from the custodial platform; they're simply being removed from the commission-free ETF Market Center platform, and as a result advisors can continue to hold onto those ETFs for existing clients. But after November 20^th, any subsequent purchases for new contributions (or sales of existing ETFs) will cost $6.95 per trade. Which for small ongoing contributions, is still cost-prohibitive, and will likely force advisors to at least switch to the new ETF lineup for new contributions, and potentially make switches for the existing ETFs as well.

Except making such a transition introduces a lot of operational complexity for advisors. Because now advisors will be forced to decide whether to switch all existing funds from the old lineup to the new lineup. Which is challenging because, even without ticket charges, there are still bid/ask spread concerns to consider… especially given that some of the new ETFs still have very low volume. In addition, long-term accumulator clients now have substantial capital gains issues, after 7 years of a raging bull market! And keeping existing funds in current ETFs and allocating new funds to new ETFs is logistically very difficult to manage without rebalancing software - and at best requires programming "proxies" into current rebalancing tools just to ensure accidentally-taxable sales aren't triggered in the future.

And if these investment decisions weren’t enough to cover in 30 short days, the real challenge for virtually every advisor will be the client communication burden imposed by the TD Ameritrade changes. By adopting completely different ETFs, advisors are going to need to have a lot of conversations over the next 30 days… not to mention needing to review (and potentially get signed and updated) Investment Policy Statements, update Fact Sheets and address hypothetical performance comparison issues going forward due to the fact that the new ETFs are largely built around different indices than the prior line-up, and review tax considerations on a client-by-client and account-by-account basis!

Perhaps most frustrating, though, is that there's no reasonable explanation for why TD Ameritrade is forcing these changes on its RIAs and next generation clients... except that apparently State Street and other ETF companies were willing to pay more to be in TD Ameritrade's ETF Market Center than the existing players (as Vanguard is notoriously not willing to share revenue with custodians). Which means, basically, that TD Ameritrade sold out financial advisors and their next generation clients on the ETF Market Center lineup! And it’s perhaps no coincidence that this change happened just a month after RIA champion Tom Bradley left TD Ameritrade... raising the question of whether there is a cultural shift away from Institutional business at TD Ameritrade, and grossly undermining TDA's position as a "champion of RIA fiduciaries" and next generation clients.

Ultimately, though, TD Ameritrade does still have some options to right their wrongs and restore trust with advisors and their next generation clients. First, TD Ameritrade could simply bring back the old funds and add them to the lineup of new funds (as the fundamental problem with the announced changes is not the additions, but the subtractions that were made). If TD won’t make such concessions for everyone, at least they can consider doing so as an “Institutional-only” option, or otherwise grandfather advisors who were already on the ETF Market Center platform. Or perhaps it's simply time to stop all of the faux “free ETFs” arrangements (which are only “free” on the front-end because RIA custodians make money on the back end from revenue-sharing shareholder servicing fees and sub-TA fees) and instead simply offer a low-cost fee-based wrap account for a few basis points that advisors can use for any ETF as a true open architecture platform. In other words, instead of selling out advisors to get 1-2 basis points on a SPDR Portfolio core fund, why doesn't TD Ameritrade just charge advisors 3 basis points and make all ETFs available with no trading costs?

The bottom line: Will TD Ameritrade Institutional do what it takes to make it right with its RIAs and next generation clients who were blind-sided by being sold out to the highest asset management bidder?

What Is The Optimal Shape Of Retirement Planning – Curve, Triangle, Or Rectangle?

October 18, 2017 07:01 am 7 Comments CATEGORY: Retirement Planning

As the retirement research has evolved over the decades, so too have the “optimal” retirement strategies, and the entire approach to the retirement planning process itself.

In the early years, optimal retirement planning was all about determining which portfolio on the efficient frontier was best suited to achieve retirement goals. Then advisors shifted to a more goals-centric approach, where clients pursued a Maslow-style hierarchy of goals, from the “basic” essential goals of retirement (e.g., food, clothing, and shelter), to the more discretionary wants and wishes. And in recent years, retirement planning has increasingly shifted towards a more holistic “household balance sheet” approach that aims to capture all of the household’s present and future assets and liabilities, to determine if the household is fully funded (or if not, what its funded ratio is).

And in a recent paper, researchers Patrick Collins and Francois Gadenne note that each of these retirement modeling approaches has their own “shape” – from the curve of the efficient frontier, to the triangle of the Maslow-style hierarchy of retirement needs, to the rectangle of the household balance sheet with its assets and liabilities. And each shape leads to its own unique views on what is “best” for retirement planning, and what is considered “safe” – from cash under the curve approach (the most conservative portfolio on the efficient frontier), to the lifetime annuity under the triangle approach (guaranteeing that essential expenses are covered for life), to a laddered portfolio of TIPS bonds with the rectangle approach (aiming to perfectly match assets to liabilities and immunize the household against future changes in interest rates or inflation).

Yet ultimately, while each of the different shapes of retirement planning may prescribe different recommendations, it’s still not entirely clear which is “best”. After all, the rectangle approach may be effective to determine the household’s funded ratio and explore what’s possible, but is a poor framework for making trade-off decisions about which goals to prioritize. And while the triangle approach is better for prioritizing goals, it doesn’t necessarily produce a clear portfolio allocation the way the efficient frontier curve does.

Which means in the end, the best approach for retirement planning may incorporate all three – the rectangle to explore the Possibilities, the triangle to Prioritize, and the curve to allocate the Portfolio itself!