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Weekend Reading for Financial Planners (Aug 2-3)

August 1, 2014 02:31 pm 8 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with reports emerging that Scottrade Advisor Services appears to be strategically shifting away from its position as one of the more startup-friendly custodians, imposing a new asset minimum of $7M, or a potential $12,000 custodial fee for advisors who don't meet the minimum; dozens of advisors who don't meet the minimum are now shifting away to the leading startup-friendly alternatives, SSG and TradePMR instead. In a related story, the latest data on RIAs suggests that notwithstanding industry consolidation and the push towards larger advisory firms, there is still a lot of growth with new RIAs being formed every year (though a significant number of other firms appear to be closing their doors at the same time, leading to a smaller level of net growth in RIAs).

From there, we have several articles on practice management and advisor technology this week, including: how advisory firms need to shift away from revenue-sharing-based compensation to build enduring businesses; a look at some less expensive rebalancing software tools for advisors including RedBlack, Trade Warrior, and TRX; the re-emergence of consumer-targeted BloombergBlack as an advisor-targeted account aggregation and analysis/reporting platform called CircleBlack; and a look at the ongoing aggravation many advisors still face with account aggregation tools, and a new entrant (Quovo) that's attempting to solve the issues.

We also have a few more technical financial planning articles, from an analysis via Morningstar that finds tactically-based target-date funds are outperforming purely strategic TDFs, to a discussion of the various options for long-term care insurance (and alternatives to "traditional" coverage), and a look at how the line-of-credit borrowing limits are determined for clients who want to obtain a standby reverse mortgage to support their retirement income needs.

We wrap up with three interesting articles: the first gives a credit list of important lessons from the research in social psychology, some of which have significant implications for us as financial planners and how we build a business; the second is a fascinating look at how the pricing of your services dramatically impacts the long-term growth of the business, when you take into account the potential of reinvesting profits back into the business to get new clients in the future and how it compounds over time; and the last reports on a recent research study finding that financial knowledge/acumen is a poor predictor of making good financial decisions, and that the better predictor is whether the individual tends to focus more on the past, present, or future... and notably, the best results are not from those who focus on the future, but those who focus on the past!

Enjoy the reading!

How To Evaluate Your Current And Future Marginal Tax Rate

July 30, 2014 07:01 am 4 Comments CATEGORY: Taxes

Proper tax planning for clients relies on understanding what the tax consequences will be for various tax strategies - in other words, what tax rate, at the margin, will apply to the next dollar of income or deductions. Whether it's taking advantage of charitable deductions, calculating the true after-tax cost of tax-deductible interest, of evaluating the consequences of a Roth conversion, it's crucial to know how the client's tax liability would be impacted, on top of the existing "base" income that already exists, if the planning strategy is implemented.

However, for tax strategies that shift the timing of income - most notably, decisions like to whether to a traditional or Roth retirement account (or whether to convert from traditional to Roth) - it's important to evaluate not only the current marginal tax rate, but also the one that will apply in the future. After all, if the reality is that a Roth conversion accelerates income from future (tax rates) to the present day (tax rates), it's crucial to know whether today's tax rates are actually likely to be lower - or higher - than they would have been down the road!

While the conceptual process for determining a marginal tax rate is fairly straightforward - the tax rate that will apply at the margin after accounting for the underlying base income - the situation is much more complex in light of the various factors that impact marginal tax rates beyond just the client's tax bracket itself. The situation is further complicated by how inflation will change tax brackets in the future, and compounding growth can change the income and wealth picture as well. Nonetheless, it remains crucial to make reasonable estimates of how a client's tax situation will change over time, or it's impossible to make good tax planning decisions!

CFP Board’s Flawed Fee-Only Compensation Definition Creates Another Three Bucket Mess

July 28, 2014 07:01 am 17 Comments CATEGORY: Planning Profession

After almost a year of often-public discussions, the CFP Board recently delivered its decision to financial planner Rick Kahler that, because he owns a (commission-based) real estate brokerage firm to which his financial planning clients are sometimes referred, he will no longer be permitted to label himself as "fee-only" and must describe his compensation as "commission and fee" instead, in light of the commission-based related party. In response, Kahler has declared that he will likely drop his CFP certification (after being the first in South Dakota to earn the CFP certification over 30 years ago), and may even file a lawsuit with the CFP Board over the issue, after failing to find any other remedy to the situation in more than 10 months of talks with CFP Board staffers.

In point of fact, though, the CFP Board's "related party" rules were arguably designed to catch situations precisely like Kahler's - the whole point of the rule is that a planning firm cannot make itself "fee-only" by simply splitting off its commission-based work into a separate business still owned by the CFP certificant. To allow such behavior would render compensation disclosure meaningless, as all advisors could be both "fee-only" AND "commission-only" by just hanging two shingles! As a result, it appears that this time the CFP Board may have really gotten its ruling right in this case.

However, the reality that the CFP Board could not come to an amicable resolution with Kahler about how to unwind the situation highlights what is still the CFP Board's fundamentally flawed interpretation of its own compensation disclosure rules. Kahler offered to cease providing referrals to the real estate firm, or even to outright bar any of his financial planning clients from doing business with the real estate firm, yet the CFP Board still insists that the mere fact that he owns the private-held firm "taints" his fee-only status, and that even if Kahler can prove that 100% of his clients pay only 100% fees from this day forward, forever, Kahler is still required to "disclose" client commissions that wouldn't actually exist or face potential sanction.

Instead, the CFP Board insists that the only solution is for Kahler to divest himself of his non-majority stake in a family firm he has owned for over 40 years, for what would surely be a significant personal financial loss to Kahler in trying to sell an illiquid closely-held business. But should the CFP Board really be allowed to dictate to fee-only CFP certificants what are and are not "permissible" investments to own for personal investment purposes apart from their financial planning clients? Ultimately, Kahler's dilemma about how to come back into compliance with the fee-only rules - and his inability to do so without divesting himself of a family business that he is willing to legitimately run separate from his financial planning clients - emphasizes the continued absurdity of how the CFP Board is interpreting its own three bucket doctrine for determining compensation to disclose.

Weekend Reading for Financial Planners (Jul 26-27)

July 25, 2014 02:11 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with the news that another planner is threatening to sue the CFP Board over its compensation disclosure rules, after being told that the relationship between his "fee-only" advisory firm and commission-based family real estate firm meant that his advisory firm must describe itself as "commission and fee" instead. Also in the news this week was the latest study from the CFP Board that the public awareness campaign continues to have a material impact on consumer awareness of the CFP marks, and a decision from the SEC on new rules for money market funds that may introduce a floating-NAV to institutional funds and the potential for "gating" on redemptions and potential 2% exit fees on retail money market funds during times of financial distress.

From there, we have a few articles on technical planning issues this week, including a look at how sometimes Social Security beneficiaries should actually claim early to take advantage of dependents' benefits, an overview of the current landscape for annuities of all types (including which have been more popular lately, and which are declining), and some fresh analysis comparing systematic withdrawal strategies in retirement to partial annuitization approaches.

We also have several practice management articles, from a discussion of whether we need to start teaching personal finance in high schools not just for financial literacy but to encourage young people to aspire to become financial advisors when they go off to college, to a look at the recent failed effort by Savant Capital Management to launch an e-platform for their advisory firm and what they learned from the experience, to the highlights of the latest RIA industry study from Financial Advisor magazine.

We wrap up with three interesting articles: the first raises the interesting idea that perhaps we should focus less on "time management" and more on energy management like athletes, recognizing that one highly energized hour can be far more productive than several tired ones; the second article looks at some of the ongoing discussions about changing the accredited investor rules and the challenging reality that income- and wealth-based tests may simply not be the best measure of determining whether someone is "savvy" enough to select complex investments; and the last provides a valuable reminder that there are a lot of great questions we ask our clients about how they vision their retirement and their future that we might consider asking inwardly of ourselves sometime as well...

Enjoy the reading!

How IRA Withdrawals In The Crossover Zone Can Trigger The 3.8% Medicare Surtax

July 23, 2014 07:01 am 4 Comments CATEGORY: Taxes

As the 2013 tax preparation season wound to a close in April of this year, many investors discovered for the first time a costly new line item on their tax return: "Other Taxes" on Line 60 of their Form 1040, where they reported the new 3.8% "Medicare surtax" on net investment income that just took effect in the past year. While "only" a 3.8% rate, the new tax is significant for many types of investment income eligible for a preferential rate; after all, adding 3.8% to a 15% long-term capital gains rate is actually a 25.3% relative increase in tax burden!

Fortunately, the new 3.8% surtax on net investment income applies only to investment income, and not distribution from (or conversions of) retirement accounts like 401(k)s, 403(b)s, and IRAs. However, the reality is that because the tax only applies to investment income above certain income thresholds, it's possible for "non"-investment income like retirement distributions to cause the surtax on other investment income by pushing it over the line. The end result: even types of income not directly subject to the tax end out indirectly causing the 3.8% surtax after all!

Given this dynamic, investors whose investment income is in the "crossover zone" and straddles the income threshold - such that only a portion of their investment income is subject to the surtax - have a unique planning opportunity to shift income into other years where they do not face the crossover zone. In fact, there are even situations where it can pay to shift retirement distributions or conversions into a year where overall income is higher if it avoids the crossover zone (and of course, shifting income into years when income is lower is often also favorable). At a minimum, though, recognizing the crossover means acknowledging that the marginal tax rate may be higher than just the tax bracket alone, leading to additional tax planning opportunities but requiring more careful analysis as well!

FPA RPI Studies How Advisors Communicate, Segment Clients, And Conduct Review Meetings

July 21, 2014 07:01 am 2 Comments CATEGORY: Practice Management

This month, the FPA’s “Research and Practice Institute” (RPI) released its study on “Trends in Client Communication”, a part of its ongoing follow-up to last year’s “Future of Practice Management Study” that identified client communication as a key driver of advisory firms (and a self-identified challenge area for many advisors).

Not surprisingly, then, the results of the RPI study show a wide range of practices in how advisors handle their client communication, segment their clients, and conduct their client review meetings. Nonetheless, the results do provide an interesting glimpse into common practices today; for instance, 71% of advisors report that they segment their clients to at least some degree, 85% conduct client meetings in their offices (rather than the client’s home/business), and 88% have a website for providing at least basic information to clients.

Notwithstanding these consistencies, though, the conclusions of the study suggest there is still significant room for advisors to continue to standardize the way they conduct review meetings and deliver communication to clients as well. For instance, while 80% of advisors say they use a CRM only 41% actually enter client notes into their CRM, only 1-in-3 advisors even occasionally set a formal agenda for client meetings, and only about a quarter of advisors have defined standards of service for their clients and have a means of tracking effectiveness!

While the study is ultimately more descriptive than prescriptive, it will be interesting to see how these statistics trend in the coming years!