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Should The CFP Board Really Risk Losing The Camarda Case, Or Is It Time To Settle?

December 22, 2014 07:01 am 7 Comments CATEGORY: Planning Profession

As the case of Camarda vs CFP Board winds closer towards a potential trial date, estimated legal costs for the organization continue to mount, and what started out as a dispute regarding a disciplinary action for one certificant may end out being a multi-million dollar expense for the CFP Board by the end.

Yet what’s really at stake for the CFP Board is not just the expense of pursuing a lawsuit – and potentially paying additional damages if found guilty, and more damages if others who have been disciplined by the DEC return to challenge their outcome, too – but the risk of a legal stigma against it for being found guilty in a court of law of breaching its contract with CFP certificants by failing to promulgate clear rules and enforce them consistently. Such a stigma that could haunt the organization for the foreseeable future as it attempts to establish the CFP marks as the minimum standard for a financial planning professional in the eyes of regulators, legislators, and the public.

Of course, if the CFP Board had an unequivocally clear case for defending itself and its actions, it would be only natural for the organization to protect its interests by pursuing the case to its bitter end. Yet with a litany of embarrassments for the organization in trying to enforce its compensation disclosure rules over the past 2 years – culminating most recently in the resignation of its own Managing Director of Professional Standards (a concerning vote of no-confidence from its own key employee?) – the CFP Board may be at more risk of losing than it is willing to publicly admit.

Unfortunately, the Camarda case has progressed so far that at this point, even settling will still be a very potentially expensive proposition for the CFP Board, and with so much in sunk costs it may seem like proceeding to trial is the inevitable conclusion. Yet with the benefits of winning so outweighed by the adverse consequences of a loss, and the CFP Board’s compensation disclosure challenges over the past year raising the concern that the CFP Board might not prevail in its defense, the question arises: should the CFP Board really be taking the risk, or will its Board of Directors intervene to protect the organization’s long-term interests?

You can view the CFP Board's official response to this post at the end of this article.

Weekend Reading for Financial Planners (Dec 20-21)

December 19, 2014 03:31 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with two news stories about the CFP Board, the first that disciplinary chief Michael Shaw (who had responsibility around both the compensation disclosure rules, and the ongoing Camarda lawsuit) has left the organization without an immediate replacement named, and the second that the results are in from the CFP Board's first computer-based exam, which scored results reasonably in-line with prior exams (suggesting it was not actually easier in the shorter computer format), but appears to have boosted the number of exam-takers back to a 2-year high.

Also in the news this week is the approval of a Congressional study to analyze the potential link between financial stress and military suicide (which could eventually lead to the Department of Defense expanding programs to provide financial planning for soldiers in a few years), the latest projections from Cerulli that RIAs will continue to pick up significant market share from wirehouses in the coming few years, and a Fidelity benchmarking study that finds advisors continue to struggle with marketing and business development.

From there, we have a few practice management articles this week, from a warning that advisors should be taking steps now (while times are good) to defend their businesses against the next market downturn, to a look at "compensation theory" and why slowing growth at many advisory firms may be a result of (mis-matched) compensation incentives, the things to consider when a large advisor team at a broker-dealer is considering whether to break away, and some things to watch out for if you're looking to sell your advisory firm in exchange for shares of stock in the acquiring firm (especially if it is promising an uncertain liquidity event in the distant and unknown future).

We wrap up with three interesting articles: the first is a review of the Strategic Coach program from an advisor who went through it and more-than-doubled his (already significant) income in just 3 years; the second looks at the emerging concept of "policy-based financial planning" where the goal is less about helping clients make decisions in difficult times and more about establishing policies up front that make it easy to implement the "right" decisions automatically if/when the difficult times come; and the last raises the question of whether the CFP Board has been launching "too many" initiatives lately, that may be positive for what they are doing and meant to accomplish, but shouldn't come at the cost of the CFP Board losing focus on its core purpose of supporting the CFP marks, including ensuring that there is a clear and fair enforcement process backing them.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, covering his selections for the Best Financial Advisor Technology of 2014 in the categories of Back-Office Technology, Client-Facing Technology, and Innovation of the Year! Enjoy the reading!

Tax Extenders Reinstated Temporarily, But ABLE Act Of 2014 Will Permanently Change 529 Plan Landscape For Special Needs Beneficiaries

December 17, 2014 07:01 am 25 Comments CATEGORY: Taxes

Late last night, the Senate passed H.R. 5771, known as the Tax Increase Prevention Act of 2014 or more simply as the “Tax Extenders” legislation. Having already passed the House of Representatives two weeks ago, the legislation will soon go before President Obama and should be signed into law within the next few days.

In its final form, the legislation “patches” the tax extenders for one year, retroactively reinstating a wide range of provisions that technically lapsed at the end of 2013, to now be available for the current 2014 tax year. This includes the popular rule allowed those over age 70 ½ to make a qualified charitable distribution (QCD) from an IRA, satisfying the current year’s required minimum distributions while simultaneously completing a charitable bequest and excluding the IRA distribution from income entirely for tax purposes, with just enough time left to complete a QCD before year end. However, as a temporary extension, we will find ourselves in the same boat - lapsed tax extenders, waiting for a retroactive reinstatement - again in 2015!

Notably, though, the Tax Increase Prevention Act legislation also included the Achieving A Better Life Experience Act of 2014 (also known as the ABLE Act of 2014), which will create a new Section 529-ABLE account to be used not for educational purposes but to allow for tax-free growth for a special needs beneficiary (without disqualifying the beneficiary from most Federal or state aid programs). And while the tax extenders section of the legislation is temporary – adding just one year to the life of the tax extenders – the new ABLE Act provisions as permanent, and will change the landscape of using special needs trusts and planning for special needs beneficiaries for many years to come.

How Technology Is Turning The Typical Advisor AUM Fee Schedule Upside Down

December 15, 2014 07:01 am 7 Comments CATEGORY: Practice Management

The “traditional” AUM fee schedule for an advisory firm has graduated breakpoint as asset levels rise, a tacit acknowledgement that it doesn’t really take twice the work to service a client with twice the assets, and that investment management (and/or with broader financial planning and wealth management services) is fundamentally an expensive service that gets cheaper with “volume” discounts as clients invest more.

By contrast, today’s “robo-advisor” platforms simply charge a flat low AUM fee. While robo-advisors provide only a limited scope of services for that price point – not directly competing against a comprehensive advisor – the nature of charging a low price for a commoditized service implies that advisors can only charge more by explicitly offering additional value-add services (e.g., financial planning and wealth management) for an additional fee, that rises with the client complexity and depth of client service.

While the reality is that none of today’s “robo-advisor” platforms are actually profitable, and their business model is heavily subsidized by venture capital while they try to achieve scale, the difference in fee structures highlights a fundamental difference that will likely remain relevant for years to come: is investment management and supporting financial planning and wealth management services an “expensive” service that gets (relatively) cheaper to provide at larger asset levels, or actually a “cheap” service where higher net worth client can buy value-added services for an additional cost?

Weekend Reading for Financial Planners (Dec 13-14)

December 12, 2014 02:31 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with some industry regulatory news, including the potential that Congress may soon approve NARAB (creating the National Association of Registered Agents and Brokers) to better facilitate multi-state insurance licensing, and that the SEC is considering whether to require large RIAs to have a business continuity and succession plan in place (following on a similar proposal by NASAA earlier this year for state RIAs to be subject to such a rule as well).

Also in the news this week are a number of articles related to year-end planning, both for advisors and clients, including a discussion of the rules for determining when a charitable gift is made and "delivered" for end-of-year charitable donations, an overview of why almost 10% of ETFs are actually making long-term capital gains distributions this year despite their typical tax-efficiency, some tips for advisors giving gifts to clients about mistakes to avoid, and some guidance about how to execute good employee performance and compensation reviews.

From there, we have a few investment-related articles this week, including: a discussion of how nontraded REITs really work, their potential conflicts of interest, and why advisors should perhaps be wary of them; a look at a new AQR "alternatives" fund that actually seeks to capture the return premium by investing in risk factors without taking on the underlying risks of the investments; and a look at the explosive growth of "securities-based lending" for higher net worth individuals - often as an alternative to more traditional mortgage lending - and the problems that it may create the next time there's a market downturn.

We wrap up with three interesting articles: the first looks at how as service professionals we tend to underestimate the value of the component parts of what we do, leading us to package together a "value beast" that may be so complex to explain and difficult to deliver that it would have been better to just provide clients the component parts instead; the second provides a reminder that when there's an elephant in the room - like recent market volatility - it's always better to acknowledge the elephant and talk about the issue than to ignore it and wait/hope it goes away; and the last provides an interesting look at how even 5-year periods of returns can drastically differ from what financial theory expects for stocks, bonds, and commodities, yet over the long haul (e.g., multi-decade time periods) financial theory still holds up far better than we typically give it credit for.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including coverage of the 2014 Advisor Tech Survey, Fidelity's collaboration with LearnVest, and a new "Direct Indexing" solution from Wealthfront! Enjoy the reading!

Understanding The New Once-Per-Year 60-Day Rollover Rules For IRAs And The Exclusion For Trustee-To-Trustee Transfers

December 10, 2014 07:01 am 38 Comments CATEGORY: Retirement Planning

The rule allowing IRA distributions to be rolled over within 60 days to avoid taxation has been around as long as IRAs themselves have existed, whether used simply to facilitate the transfer of an account, to fix a distribution mistake, or for those who want to use their IRA as a form of “temporary loan” to be repaid in a timely manner. However, to prevent abuse, Congress did enact a rule that limits 60-day rollovers to only being done once every 12 months, which the IRS has historically applied on an IRA-by-IRA basis.

In the recent case of Bobrow v. Commissioner, though, the Tax Court expanded the interpretation of the once-per-year rollover rule, changing it from applying one account at a time to instead being applied on an aggregated basis across all IRAs, effectively killing a popular form of sequential-rollovers-as-extended-personal-loan strategy.

The IRS has declared that it will begin to enforce the new aggregation-based IRA rollover rules in 2015, with a special transition rule that will still allow old 2014 rollovers to cause a 1-year waiting period for just the accounts that were involved and not all IRAs. Nonetheless, going forward advisors and their clients will need to be more cautious than ever not to run afoul of the rules when engaging in multiple 60-day rollovers over time… or better yet, simply ensure that IRA funds are only moved as a trustee-to-trustee transfer to avoid the rules altogether!