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How To Evaluate The Pension Versus Lump Sum Decision, And Strategies For Maximization

July 22, 2015 07:01 am 51 Comments CATEGORY: Retirement Planning

While the use of pensions as an employee benefit is on the decline, many of today’s workers nearing retirement have participated in a pension plan for the past several decades, and have already accumulated a significant pension benefit. And as those individuals begin to retire, they are faced with the classic decision of whether to keep the lifetime pension payments, or choose a lump sum instead.

While there are several factors that go into the pension-vs-lump-sum decision, ultimately the trade-off can be boiled down to calculating the internal rate of return (IRR) of the promised pension cash flows, which reveals the “hurdle rate” of return that a lump sum portfolio would have to earn to generate to reproduce those same payments over the same time horizon. Of course, the longer the retiree is expected to live, the greater the number of anticipated pension payments, and the greater the portfolio hurdle rate will be.

Ultimately, though, because life expectancy will vary by the individual, and in practice the size of a lump sum relative to a pension payments will also vary from one plan to the next (and also over time, as the GATT rate used to discount the pension payments fluctuates from month to month and year to year), the decision of whether to keep a pension or convert it into a lump sum will vary from one person to the next. In some cases, choosing a lump sum will clearly be best (e.g., when life expectancy is short or the hurdle rate is especially low), while in others there will be no way for a portfolio to generate similar cash flows without a significant amount of risk – at least, as long as the pension plan itself remains secure and isn’t facing a potential default or being forced to rely on PBGC backing!

Consumers Now Prefer Their Financial Planner To Have CFP Certification Over A CPA License

July 20, 2015 07:01 am 24 Comments CATEGORY: Planning Profession

The CFP Board’s Public Awareness campaign has been underway for over 4 years now, investing a cumulative total of over $40M of “dues” from CFP certificants with an 80% increase in CFP registration fees that began in 2011, plus almost $10M of additional funds from the CFP Board’s own reserves. And after almost $50M, what does the CFP Board have to show for it?

As it turns out, a lot. The latest Ipsos brand tracking study for the CFP Board shows it is making very significant progress in building awareness with mass affluent investors who might seek out a financial advisor. In just four years, intent to seek out a CFP certificant is up from 30% to 52%, and overall trust in CFP certificants is up from 23% to 49%. Even more significant, top-of-mind awareness for CFP certification has leapt from 13% to 29%, passing the CPA license (only 12%), and dwarfing other designations like CFA, CLU, ChFC, and PFS (all scoring under 5%).

In fact, for the first time ever, the Ipsos study shows that consumers seeking financial advice are most likely to insist their financial planner have CFP certification, more than any other designation, certification, or license. The CFP marks even outrank the CPA license (as well as all other designations) when it comes to what a ‘professional financial planner’ is expected to hold.

These significant results mean the CFP Board remains committed to the public awareness campaign in the coming years – so CFP dues will not be going down anytime soon. But arguably, the real news is that the CFP Board’s efforts in public awareness are continuing to set the roots for financial planning to finally be recognized as a bona fide profession of its own, with the CFP marks at its core. Perhaps someday, the profession will eventually reach the point where consumers don’t even have to ask!

Weekend Reading for Financial Planners (July 18-19)

July 17, 2015 02:01 pm 19 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a discussion of the newly implemented reductions in the CFP Experience requirement, which quietly took effect earlier this month without any public comment period for CFP certificants, or public comments from FPA or NAPFA. Also in the news this week was the revelation that Vanguard's Personal Advisor Services platform added on another $4B of AUM in just the past quarter as its growth accelerates (potentially threatening both the robo-advisor platforms, and possibly even threatening established independent advisors in the coming years, too). There's also discussion of a new push from PIABA to get the SEC to create its own one-stop-shop database of public disclosure information about brokers and investment advisers for the public to access, as complaints continue that FINRA's BrokerCheck is not getting the job done.

From there, we have a few investment articles this week, including a discussion from Barron's about the challenges of navigating bond investing with the looming potential for rising interest rates, a discussion of ETF liquidity and whether advisors may be overestimating how liquid their ETF investments really are, and a discussion of the recent move by Dimensional Fund Advisors (DFA) to begin offering ETFs through John Hancock (but with fewer solutions and higher costs than its existing advisor-distributed mutual fund lineup).

There are also a couple of practice management articles, from a look at how 2015 is shaping up to be the "year of the mega-deal" for RIA mergers and acquisitions, to a broader look at how the RIA channel continues to be the only segment of the advisory industry that is growing as insurance, broker-dealer, and wirehouse channels all continue to lose market share, and the last is an interesting discussion of what it really means to be an "independent" advisor and whether many advisors may think they're more "independent" than they really are.

We wrap up with three interesting articles: the first is a look at a new book called "Endorphinomics" by advisory industry business consultant Steve Moeller, who looks at the surprisingly common phenomenon of advisors who are "successful yet miserable" in trying to find the right work/life balance with a thriving advisory firm; the second raises the question of when/whether financial planning will ever get a seat at the "big kids' table" in Washington DC and have a role in contributing the unique knowledge and experience of financial planning to public policy discussions; and the last is a look at how the rise of robo-advisors and a new slew of technology solutions have reignited the "fee vs commission" debates as fee-only technology-based platforms show that it really may be possible to serve the middle market without commissions after all.

Enjoy the reading!

How The 691(c) IRD Deduction Can Eliminate The Need For Deathbed Roth Conversions To Avoid (Federal) Estate Taxes

July 15, 2015 07:01 am 10 Comments CATEGORY: Estate Planning

For those in poor health who face potential estate taxes and have a large IRA, a popular tax strategy is the so-called “deathbed Roth conversion” where the IRA owner converts to a Roth before death as a means to pay the income taxes up front and reduce the size of his/her estate. For large estates (and large IRAs), the tax savings can be significant.

However, the caveat of the deathbed Roth conversion strategy is that in most cases it is unnecessary, thanks to the availability of the so-called “IRD” (Income in Respect of a Decedent) tax, which provides IRA beneficiaries an income tax deduction for any estate taxes paid by the original IRA owner. In fact, the whole purpose of the IRD deduction is to eliminate any need for deathbed conversions (or liquidations) of pre-tax assets, by aligning the tax deductions to ensure that the beneficiaries will be no worse off (nor any better).

On the other hand, it’s notable that while the IRD deduction does shelter against Federal estate taxes, deathbed Roth conversions can still be relevant to protect against state estate taxes. Though in either case, the greatest driver of the outcome is not actually the IRD deduction or minimizing state estate taxes at all, but trying to shift the timing of when the IRA is recognized for tax purposes, so that the income taxes are paid at whichever rate is lower – either the IRA owner now, or the rate the beneficiaries would pay by simply inheriting the pre-tax IRA and stretching it out in the future!

MailBag: Roth IRA Prohibited Transactions, And Adopting Social Media As An Advisor In A Broker-Dealer

July 14, 2015 07:01 am 7 Comments 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 occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis, of course!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at the problem with trying to swap a highly appreciating private company investment from your personal assets into your Roth IRA (and the "prohibited transaction" rules that prevent it), and also the challenges for advisors in a broker-dealer who are trying to get their compliance department to loosen the reins and allow them to adopt social media.