Kitces.com - Advancing Knowledge in Financial Planning

The Problem With Joint Ownership Of Non-Qualified Deferred Annuities

May 18, 2016 07:01 am 19 Comments CATEGORY: Annuities

The opportunity to obtain tax-deferred growth in a non-qualified deferred annuity is a key feature of the contracts, particularly for those who face high tax brackets and have already maxed out other available tax shelters. An added benefit is that non-qualified annuities aren’t even subject to RMD obligations during the lifetime of the annuity owner.

However, a significant complication of annuities is that upon the death of an annuity owner, the beneficiary must begin post-death Required Minimum Distributions from the contract. And notably, the post-death RMD obligation occurs at the death of the first owner with a jointly owned contract, which means that a surviving joint owner can even be forced to liquidate their own asset and trigger a taxable event!

Fortunately, the tax law does allow for “spousal continuation” of an annuity payable to a surviving spouse. But that rule triggers based on whether the spouse is named as the beneficiary, not the joint owner. In fact, once a surviving spouse is properly named as a beneficiary, there’s often no reason at all for the annuity to be jointly owned anymore!

And between non-spouses, the situation can be even more problematic, as the death of one annuity owner can force the surviving owner to begin taking “stretch annuity” payments over his/her life expectancy, even if it was the survivor’s money in the first place and he/she doesn’t want it!

Which means in the end, most situations where an annuity is jointly owned, it probably shouldn’t be, as most of the benefits of joint ownership can be accomplished by other means when using an annuity anyway (unless specifically pursuing contractual living or death benefit guarantees that are designed to apply for both spouses jointly). And in situations where it's not actually necessary to jointly own the contract anyway, by not owning the contract jointly, the risk of unintentionally forcing the contract to be liquidated at an undesirable time is greatly reduced!

Gratitude Marketing And Generating Client Referrals Through The Reciprocity Rule

May 16, 2016 07:01 am 1 Comment CATEGORY: Marketing

Despite our general interest in self-preservation, a growing volume of research is finding that human beings are hard-wired to help each other. Not only can helping others trigger a release of endorphins and create a “helper’s high”, but we have a tendency to want to help those who have helped us – a form of social reciprocity that can be very rewarding in the long run to those who help others.

In a new book entitled “Gratitude Marketing”, financial advisor and coach Michael Sciortino explores how advisors can leverage the principles of helping others, expressing gratitude, and the reciprocity rule, to market themselves and their businesses. Not from the perspective of doing good for selfish reasons, but simply because doing good – in a consistent, systematic way – happens to be remarkably good for business, too.

So whether it’s sending clients cards on their birthday, taking them (and their friends) out for birthday lunches, throwing clients (and their co-workers) a retirement party, or having client appreciation events and making charitable donations as a token of appreciation for those who refer, there are numerous ways to express to clients your appreciation for their business and referrals in a way that can support more of those behaviors in the future. Though notably, in the end expressing gratitude isn’t necessarily about the latest, greatest idea, but simply the consistent expression of thanks… which is why Sciortino notes that for some advisors, the best tactic is also simply to regularly write thank-you notes to express your gratitude to those who have helped you to grow your business!

Weekend Reading for Financial Planners (May 14-15)

May 13, 2016 02:44 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a somewhat controversial new industry study, finding that brokers who used their home office's packaged portfolio solutions had better investment results than the advisors who tried to do it themselves, with the latter showing both less due diligence in their investment selection and a greater likelihood to get in and out of the market at the wrong times (either making bad calls themselves, or acquiescing more quickly to nervous clients who insisted on making changes instead of staying the course). And while the study was specific to broker-dealers, it has interesting implications for RIAs that have (or have not) adopted standardized firm-wide model portfolios as well.

From there, we have a number of practice management articles this week, including a look at how doing client surveys can open up additional advisory firm revenue (both by finding new business opportunities, and simply better engaging clients to provide referrals), the importance of doing client appreciation events that really engage clients rather than just passively thank them, the reasons an advisory firm should consider using centralized password management tools, and how to approach a conference to ensure you really get the most out of your time to attend.

There are also several technical planning articles, including: a list of key issues that advisors should watch for when reviewing estate planning documents; the situations where a fund's Net Asset Value (NAV) actually does not accurately reflect its true underlying value (which happens more often than advisors might realize!); how new Form 5498 reporting requirements on IRAs will lead to new scrutiny of hard-to-value alternative assets; and a look at the importance of customizing life expectancy assumptions for clients (rather than just assuming everyone will live to age 100).

We wrap up with three interesting articles: the first is a look at how the rise of tech startups is impacting the legal profession, which is witnessing a flurry of startup activity similar to #FinTech, but where the companies seem to have been quicker to recognize that the future is not the "robo-lawyer" but tech solutions that help to make lawyers more efficient and better at what they do; the second is a look at how the rise of platforms and (digital) networks may be spurring a fourth industrial revolution; and the last is an interview with industry luminary and thought leader Dick Wagner, who suggests that financial planning may be the most important profession that will emerge in the 21st century.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes highlights of new advisor technology that debuted at the spring #Finovate conference (including a Client Insights tool from IBM and the new Advisor Now platform from Envestnet), what advisors should bear in mind about technology backups given the recent major Salesforce CRM outage, and a look at the future of advisor technology from a recent tech panel at the SSG annual conference.

Enjoy the "light" reading!

How DoL Fiduciary Will Disrupt The Blackrock And Schwab Robo-Advisors

May 12, 2016 11:53 am 17 Comments CATEGORY: Technology & Advisor FinTech

Periscope Office Hours Cover Image May 10 How DoL Fiduciary Will Disrupt Blackrock and Schwab 1

As the Department of Labor's fiduciary rule proposal was being discussed last year, robo-advisors were hailed as a potential solution to bring low-cost fiduciary advice to consumers. Labor Secretary Perez explicitly touted companies like Wealthfront as being a key part of the fiduciary future. However, it turns out that the final fiduciary rule has created a significant problem for several robo-advisors like Schwab and Blackrock's FutureAdvisor, that use the platform to distribute their own proprietary products.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at what the final DoL fiduciary rule really said about robo-advisors, how robo-advice must be delivered to satisfy the Level Fee Fiduciary requirements, and why the use of proprietary products by companies like Schwab and Blackrock - especially when combined with having investment discretion - may present a serious fiduciary problem when the rules take effect next April.

Which means ultimately, some robo-advisors may need to substantially change their business practices and how they operate in the coming months, to ensure they fit within the DoL's fiduciary rules. The most likely outcome may be for the companies to simply raise their fees, and eliminate their proprietary-product-based profitability, to ensure they're operating as Level Fee Fiduciaries. But doing so will throw a significant wrench in the growth of robo-advisors that were being cultivated specifically as a distribution channel for ETFs. On the plus side, though, it means the DoL's fiduciary rule may be more effective at limiting proprietary products than was initially believed!

Grandparent 529 Plans And Gifting Appreciated Assets While Qualifying For FAFSA Financial Aid

May 11, 2016 07:01 am 23 Comments CATEGORY: General Planning

While affording both college and retirement is difficult for many families, some retirees find themselves in the fortunate position of having enough to cover their retirement years and still have something left over to help other family members pay for college.

Yet the challenge is that if not done carefully, using a grandparent-owned 529 plan or gifting assets from a grandparent to grandchild for college can adversely impact the grandchild’s own ability to qualify for financial aid, implicitly diminishing the value of the gift.

For instance, a grandparent-owned 529 plan is not treated as an asset of the grandchild for financial aid purposes, but distributions from a grandparent-owned 529 plan may show up on the grandchild’s FAFSA financial aid form (even if it’s a qualified tax-free distribution!). Similarly, gifts of appreciated assets from a grandparent to a grandchild may be eligible for 0% capital gains tax rates, if able to avoid the kiddie tax, but may still adversely impact the student’s income on the FAFSA. And for grandparents trying to diminish their own estates, often the best tactic is simply to make tuition payments directly to the college institution, which can be done above and beyond the annual gift tax exclusion limits.

Ultimately, the reality is that grandparents actually have numerous opportunities for preferential income and/or estate tax treatment by helping fund college for grandchildren (or other family members). But the financial aid rules – especially when considering the new “prior-prior year” (PPY) rules for which year’s income is reported on the FAFSA – means that coordinating the timing of the various strategies is crucial to avoid adverse financial aid outcomes!

How Webinar Marketing Beats Traditional Seminars For Financial Advisor Prospecting

May 9, 2016 07:01 am 34 Comments CATEGORY: Marketing

Seminar marketing has long been a staple of financial advisor marketing strategies, and while it's more challenging in today's environment given the declining efficiency of direct mail (used to get prospects to show up in the first place), many advisors still use educational seminars as a way to introduce themselves to potential clients. Yet as our world becomes increasingly digital, and we substitute e-mail for snail mail, some financial advisors are experimenting with webinars as the next strategy beyond seminars.

In today's guest post, financial advisor Jeff Rose shares his experience in making the transition from seminar marketing to doing webinars instead - and how the outcome was not only better results in terms of new clients and revenue, but an investment that took less time and effort and had just 1/5th the upfront cost... and was ultimately more scalable as well.

In addition to sharing the success story itself, Jeff also shares his tips and best practices for financial advisors who want to adopt webinar marketing strategies for themselves, from the software and hardware tools he uses to the way he set up the registration process, and how he follows up with them afterward to ask for their business. So whether you've been thinking about switching away from seminar marketing, are looking for a new marketing strategy like webinars, or are already doing webinars and want a few tips for improvement, hopefully, today's guest post will be helpful food for thought!