With two market "crashes" in the past decade, prospective baby boomer retirees have grown increasingly afraid of the risk that the next market crash could topple their retirement if it comes at the wrong time. This fear has been exacerbated by the recent stream of research on safe withdrawal rates, that highlights how an unfavorable sequence of returns in the early years of retirement can derail a retirement plan. Yet the reality is that failure is dictated not simply by the magnitude of the market decline, but the speed at which it recovers. As a result, while clients are increasingly obsessed about the risk of a sharp decline in the markets (or a so-called "black swan event"), the true danger is actually an extended period of "merely mediocre" results that are uncommon but not rare, not a black swan market crash!
On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008. Although it was widely known as the "bailout" bill - it was the legislation that authorized the Treasury Secretary to use $700 billion under the Troubled Asset Relief Program (TARP) - the legislation also contained a number of measures to help bring in additional revenue to the Federal government.
Amongst those provisions was the establishment of a new requirement for financial intermediaries to track and report cost basis on securities transactions to the IRS on an updated Form 1099-B, to better ensure that taxpayers properly their gains and losses on investments and pay taxes as appropriate, and the new rules took effect for stocks that were purchased in 2011. Over the long run, the new rules will make it easier for clients to track the cost basis for most of their investments, simplifying reporting and preparing returns during tax season.
However, in the near term, the introduction of cost basis reporting brings new complexities and challenges to manage. To help support taxpayers through this process, the IRS has revamped Schedule D, and introduced the new Form 8949 - which may have to be done three times for many individuals! - for reporting capital gains and losses for the 2011 tax year.
The long-term impact of inflation is a fundamental risk for retirees; a 60-year-old retired couple loses 50% of their purchasing power by age 85 at a mere 3% inflation rate. To plan for this, retirement projections typically assume an annual inflation adjustment, as does the research on safe withdrawal rates and sustainable retirement income. Yet many planners are quick to point out that no clients called the office on January 1st, 2012 to request their monthly distributions be adjusted from $3,000/month to $3,090/month to reflect the 3.0% increase in CPI in 2012. In fact, most clients rarely request to adjust their ongoing portfolio distributions more than once every several years. Does that mean retired clients don't really experience ongoing annual inflation? Or is the reality that they just handle it some other way?Read More...
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an interesting discussion by Morningstar about the challenges of evaluating tactical investment managers, an article by Bob Veres with tips on resources when starting a practice and outsourcing solutions, and an article by Joel Bruckenstein about a new integrated cloud solution for advisory firms. We also highlight some compliance-related articles for RIAs tying to the slew of new rules and regulations impacting investment advisors this year thanks to Dodd-Frank, a summary of the Rydex|SGI AdvisorBenchmarking study, and some tips to deal with the tax treatment of client investments in gold. We wrap up with Mauldin's weekly investment article - this week continuing his discussion of the decisions facing the US and how much impact the president and elections do or don't have on the outcome, an intriguing look from Oaktree Capital chairman Howard Marks at the challenging realities of assessing performance records, and a piece by Moshe Milevsky about "Gompertz' Law" and the mathematics of mortality assumptions. Enjoy the reading!
Once upon a time, the purpose of a client vault was to use it like a vault. It would store important client documents to be accessible if/when needed. It was designed to be the digital equivalent of a safety deposit box in your local bank's vault. But at some point over the past several years, we began to shift, and the client vault became not only the place we store the files we access rarely, but the ones we access regularly. Advisors increasingly made it the centerpiece of their efforts to securely share files and collaborate with clients. Yet in reality, this is quite impractical. Just as you don't regularly go to your local bank vault to constantly move things in-and-out of your safety deposit box, so too do we need to stop using our digital data vault like a collaborate file sharing tool. Just as going regularly to your bank every time you need to check on something would be a huge hassle and a negative experience, so too is using the data vault as a collaboration tool a negative client experience. It's time for a better alternative.
In an ideal world, everyone in your office would selflessly collaborate together in pursuit of the common goal to serve clients and ensure the success of the firm. In reality, though, your staff and co-workers probably run the gamut, from people who are really focused on the team and the good of the firm, to those focused just on themselves, to those who don't seem particularly motivated to do much of anything at all. The latter, in particular, can be the most frustrating when mixed in with an otherwise proactive and motivated team. But new research suggests that surprisingly, if you want to upgrade the demotivated team members and make your office "tribe" more collaborative, the key first step is actually to try to make those individuals more interested in just selfishly helping themselves!Read More...
