Nerd's Eye View blog

Can A Charitable Remainder UniTrust (CRUT) Truly Replace The Benefits Of The “Stretch” IRA?

July 28, 2021 07:08 am 9 Comments CATEGORY: Taxes

The Setting Every Community Up for Retirement Enhancement (SECURE Act) was passed into law on December 20, 2019, dramatically changing the post-death distribution rules for most non-spouse Designated Beneficiaries. Whereas in the past, such beneficiaries were generally able to ‘Stretch’ distributions from their inherited retirement accounts over their life expectancy, the SECURE Act generally imposes a new 10-Year Rule on such beneficiaries (Non-Eligible Designated Beneficiaries). And since (as compared to the ‘Stretch,’ the 10-Year Rule generally reduces tax deferral and increases the size of the average distribution (in the years such distributions take place), raising the chances that a beneficiary will be bumped into a higher tax bracket, practitioners have been exploring ways to mitigate this change.

One way that some practitioners have suggested to mitigate the impact of the ‘death’ of the ‘Stretch’ is to name would-be Non-Eligible Designated Beneficiaries as the income beneficiaries of a CRUT, and then naming that CRUT as the beneficiary of the individual’s retirement account (instead of naming the Non-Eligible Designated Beneficiaries directly on the beneficiary form). Notably, CRUTs have the potential to offer certain individuals similar benefits as would have been provided by the ‘Stretch’, such as tax deferral, and the ability to distribute assets annually individual’s (or group of individuals) life expectancy. And similar to the ‘Stretch’, income beneficiaries of a CRUT pay taxes on the distributions they receive (from the trust) on their personal returns.

To establish a valid CRUT, a trust must comply with certain rules and restrictions. CRUTs, for instance, are required to provide no less than 10% of the actuarily projected future value of the trust be left to a qualified charity. Such trusts must also distribute a fixed percentage between 5% and 50% of their assets annually to the CRUT’s income beneficiaries. Distributions retain the tax characteristics of income (e.g., ordinary income, long-term capital gain, etc.) received by the CRUT, and are distributed on a Worst-In, First-Out (least-tax-efficient income first) basis.

But while, on the surface, CRUTs can appear to approximate many of the qualities of the ‘Stretch', they are rarely the optimal choice for those retirement account owners who are primarily interested in transferring as much wealth as possible to heirs. Such trusts are generally not even possible to establish with lifetime distributions for beneficiaries in their early 20s, or younger. Older beneficiaries, meanwhile, often can’t (or don’t) live long enough to diminish the projected ‘loss’ of (at least) 10% of the CRUT assets to charity to a point where it is outweighed by the gain of extended tax deferral (compared to the 10-Year Rule).

While each scenario should be evaluated separately, in general, if a retirement account owner is looking to use a CRUT as a wealth maximization vehicle, the ideal fact pattern would include:

A young, healthy beneficiary (but not so young that the CRUT can’t actually be established),
who projects to be in a high tax bracket, and
expects to have significant long-term returns with at least a reasonable amount of turnover, and/or interest or dividends.

Even where the pieces ‘line up,’ though, it can often take three or more decades for the CRUT beneficiary to reach the breakeven point and ‘catch up’ to a beneficiary who inherited assets via the 10-Year Rule. Thus, there is almost always a substantial mortality risk associated with the use of a CRUT. CRUTs also limit the optionality of a beneficiary, as well as increasing organizational and operational expenses.

But while CRUTs have probably been over-hyped for purely their wealth transfer ability, for retirement account owners looking to satisfy both legacy (to heirs) and charitable goals, they can be a powerful tool. In many situations, the result of such planning will be a modest reduction in the wealth passed to heirs, in exchange for a much larger increase in the amount that goes to charity.

Ultimately, if just the right circumstances present themselves, or if a retirement account owner is sufficiently charitably inclined, naming a CRUT as the beneficiary of a retirement account is a planning strategy worth exploring. But for retirement account owners solely looking to maximize the transfer of wealth to heirs, the bottom line is that a CRUT is generally not a great (or is at least a “risky”) option.

#FA Success Ep 239: Creating Advisor Value By Helping Clients With Complexity Regardless Of Assets, With Ryan Frailich

July 27, 2021 07:08 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 239th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Ryan Frailich. Ryan is the founder of Deliberate Finances, an RIA located in New Orleans, Louisiana that serves young professionals using a monthly subscription fee model.

What's unique about Ryan, though, is that he’s intentionally built his advisory business in such a way that allows him to help people in their 20s, 30s, and 40s navigate the inevitable financial complexities in their lives… regardless of whether or not they have liquid assets that need managing.

In this episode, we talk in depth about Ryan’s experience that, while the industry typically assumes clients with limited assets have little financial complexity, in practice, it’s often the journey of getting to the point of actually having assets to manage that is the more complex part of the journey, why Ryan finds that the tendency of financial advisors to not specialize (unlike other professionals, such as doctors, who use different titles to differentiate amongst specialties), makes it challenging for consumers to find someone who can help with their particular pain points, and how Ryan has structured his subscription model with a varying price range specifically to align to the specialized and complex needs of his younger clientele as their own careers evolve and their income grows.

We also talk about Ryan’s commitment to remaining a solo advisor and how that makes focusing on making sure he is serving only his ‘ideal’ client all the more important to the success of his business, the third-party services that Ryan refers clients out to for their estate planning, insurance, and even investment needs (which ultimately allows Ryan to maximize the time he spends in the planning areas where he adds the most value), and why Ryan has implemented surge meetings in order to achieve the sort of work/life balance that is important to him and his family.

And be certain to listen to the end, where Ryan shares why he provides a Client Engagement Standard in his onboarding process as a way to set clear expectations around both his and his clients’ relationship responsibilities (especially given his lifestyle practice), the expertise that Ryan has developed around student loan planning as a way to differentiate himself even further, and why Ryan’s background as a teacher coming into the financial planning business has allowed him to eschew the industry’s ‘traditional’ definitions of success and create his own business goals to maximize his financial and family wellbeing.

So whether you’re interested in learning how Ryan’s structured his business to serve clients who aren’t good fits for the traditional AUM model, how he helps his clients with student loan planning, or why he’s committed to remaining a solo advisor, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Ryan Frailich.

Scaling Financial Advice: What Actually Drives Efficiency And Advisor Productivity

July 26, 2021 07:08 am 0 Comments CATEGORY: Practice Management

Improvements in worker productivity over time are one of the biggest drivers for increasing an entire country’s standard of living. In the context of an individual business, productivity becomes the driver for growing revenue faster than the associated costs to support that revenue – otherwise known as “scaling” the business. For most businesses, investments in technology are one of the factors – if not the single greatest factor – that brings productivity improvements.

Except, perhaps, when it comes to the business of financial advice. As despite an incredible boom in advisor technology over the past decade, advisor productivity – whether measured by the average number of clients served by each professional in the firm, or the average revenue generated by each professional – has remained entirely flat for nearly 10 years. Instead, technology improvements have shown up in the back-office efficiency of advisory firms – where productivity ratios have improved significantly.

Yet in practice, the stagnation of advisor productivity – or at least, the apparent inability of technology improvements to have measurable increases in advisor productivity – isn’t entirely surprising, once it’s recognized that clients ultimately hire a (human) financial advisor precisely to gain expertise and support beyond what technology alone can provide. (Or else the client would simply solve their challenges themselves using the internet!)

Fortunately, though, this doesn’t mean that advisor productivity cannot be improved. Instead, recent Kitces Research into “How Financial Advisors Actually Do Financial Planning” finds that enhancements in advisor productivity are driven by three (non-technology) factors: client variability, advisor expertise, and (professional) staff support.

When it comes to client variability, the challenging reality is that because most financial advisors build their businesses in the early years by taking nearly anyone who will just agree to be a client (and compensate the advisor for their advice), the typical advisory firm ends out with an extremely wide range of clientele. Yet in practice, when advisors get more focused into a particular niche or specialization, enabling them to develop more ‘repeatable expertise’ simply by targeting a more consistent group of clients who have more consistent needs to be serviced in the first place, the average advisor ends out spending 13% less time doing middle- and back-office support work, can service 14% more clients, and is able to attract more affluent clients (who pay higher fees), such that the top 10% niche/specialized advisors earn nearly 67% more than the top 10% non-niche advisors (earning $660,000 versus $395,000, respectively).

Similarly, because of the complexities involved in giving advice to clients (who almost by definition tend to have more complex issues and needs… or else they wouldn’t be seeking out and willing to pay a professional financial advisor for support), advisors who invest in their own expertise are able to complete the financial planning process with clients in significantly less time. Specifically, CFP professionals complete the financial planning process in nearly 22% less time on average than non-CFP advisors. And for experienced advisors – who tend to attract even more complex clients – the differences expand further, with experienced non-CFP advisors averaging 52 hours in the first year to complete the financial planning process, compared to only 29 hours for CFP professionals (a 44% improvement in time efficiency!).

And because of the time-intensiveness of client meetings themselves – where advisors typically spend at least as much time preparing for and following up after the client meeting as the time in the meeting itself – one of the greatest improvements in advisor efficiency comes from leveraging professional support staff (i.e., paraplanners and associate advisors) to aid in the planning process. In fact, the cumulative difference in how the top 25% of advisors spend their time compared to the bottom 25% advisors amounts to as little as 1 hour per day in additional client meetings by leveraging paraplanners to aid in the meeting preparation… which results in a 64% increase in the average number of clients serviced, and a whopping 80% increase in advisor take-home pay!

Ultimately, technology may still provide incremental improvements in advisor efficiency along the way as well, especially as more technology tools arrive specifically to aid in the efficiency of the most time-consuming areas of the advisor’s day like meeting preparation and follow-up time. Nonetheless, the research shows that in the end, the greatest differences in advisor productivity are not actually driven by their technology adoption, but instead by the variability of their clientele, the expertise of the advisor themselves, and how the firm leverages professional (not ‘just’ administrative) staff support to focus the advisor’s time where it has the most impact: in meetings with clients!

Weekend Reading for Financial Planners (July 24-25)

July 23, 2021 03:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with industry buzz that a new Senate bill would remove the "Specified Service Trade Or Business" (SSTB) limitations on the Qualified Business Income deduction, effectively opening the door for financial advisors to claim the 20%-of-income deduction... with the caveat that those financial advisors under $329,800 of income (as married couples, or $164,900 for individuals) could already claim the QBI deduction, while the new rules would begin to phase out the QBI deduction for everyone above $400,000 of income. Which means high-income advisors who couldn't claim the QBI deduction still won't be able to under the new rules anyway (if they're even passed by Congress, which remains to be seen).

Also in the industry news this week are a number of other interesting headlines:

A Capgemini World Wealth Report highlights that high-net-worth investors are increasingly becoming adopters of robo-advisors... and also increasingly want to hire human advisors for their more complex advice needs beyond what an automated investment platform can provide
Vanguard is ramping up its own push into financial advice, as the 0.30% AUM-fee Personal Advisor Services platform surpasses $200B of AUM (albeit mostly from Vanguard users who weren't likely to hire a higher-cost independent advisor anyway?)

From there, we have several articles on the current regulatory environment:

The SEC issues a new Risk Alert on hybrid advisors whose brokerage platforms may be 'double-dipping' on wrap accounts by also earning fees on underlying products
Massachusetts charges Schwab with failing to oversee an independent advisor who was billing clients even after his licenses were terminated... raising questions of what role RIA custodians should play in compliance oversight?
The CFP Board's new Managing Director of Enforcement responds to criticism about whether CFP Board is really ready to take enforcement seriously and says CFP Board is stepping up

We've also included a number of articles on advisor marketing, including:

Consumers are reporting that they don't place much trust in media financial personalities, raising questions about media PR as an advisor marketing strategy
Advisors often don't claim enough credit for their own improvements to clients, and should 'market' their new offerings
Tips on which social media platforms really drive new leads to advisors (hint: it depends on the type of clientele you're trying to attract!)

We wrap up with three final articles, all around the theme of productivity and focus:

How to distinguish between being "busy" and really improving your "productivity" (which isn't about efficiently doing more, but finding the focus to do the fewer things that really matter)
Tips to get yourself 'unstuck' if you feel like you're spinning your wheels and can't move forward
How being more willing to change your mind may seem scary (no one wants to be seen as a "flip-flopper") but research shows it is actually associated with greater wellbeing!

Enjoy the 'light' reading!

Developing A “Good Enough” Mindset To Increase Financial Contentment

July 21, 2021 07:06 am 0 Comments CATEGORY: Client Trust & Communication

In his book The Paradox of Choice: Why Less is More, author Barry Schwartz identifies two personality types: Satisficers, who tend to be content with having just enough, and Maximizers, who continually strive to attain and achieve more, no matter how far they get. Given their different outlooks, Maximizers and Satisficers have strikingly different approaches to goal-setting and the expectations they set for themselves. Whereas Maximizers rarely (if ever) reach their goals because they are constantly striving to push for more, Satisficers can reach goals much more easily, as their sense of what they consider to be ‘good enough’ is much more attainable.

Interestingly, because of their constant drive to obtain and achieve more, Maximizers generally tend to be wealthier than Satisficers. Accordingly, financial advisors may commonly find themselves working with clients who are Maximizers, or who at least display Maximizer tendencies, with high expectations of achieving and attaining more from the financial planning relationship, whether it be through higher portfolio returns, optimized tax strategies, or even lower advisory fees. Yet, to maximize in all places, with all choices, and all at once is simply not possible. Which, for Maximizers, can be very upsetting. And naturally, they may consider their financial advisor (at least partly) to blame – as while they hired the advisor to help them maximize, they are still not maximizing! While the advisor understands that full maximization is not possible, it is hard to get the Maximizer client on the same page.

Luckily though, there are methods the advisor can use to maintain an amicable relationship with their client, and even help them minimize the regret they may associate with not being able to completely maximize their goals. For instance, encouraging the client to slow down and prioritize their goals can be an effective step to help them see that focusing on only one (or on a very few) goals at a time can lead to a greater chance of success in achieving that goal. Another key to working with Maximizers is to help them identify realistic comparison groups (or even using a past point in time to compare themselves to) so that they are not setting unrealistic expectations for themselves when seeking social proof through making comparisons to others. Finally, advisors can help Maximizers by managing their expectations, and even adjusting them as necessary.

Ultimately, while working with Maximizers may be a stressful experience for many financial advisors, these relationships don’t always have to be difficult. By implementing certain strategies, advisors can help their Maximizer clients have a more realistic view of their goals (and their drive to reach those goals), so that they can narrow their focus on what they value most, which, in the end, can help them minimize any regrets over unmet objectives and maximize their satisfaction from successfully achieving what matters most to them!

#FA Success Ep 238: Breaking Away To Independence For Freedom To Serve Clients The Way You Want, With Margaret Dechant

July 20, 2021 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 238th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Margaret Dechant. Margaret is the CEO of 6 Meridian, a hybrid-RIA located in Wichita, Kansas, that has $3 billion in assets under advisement, serving 700 clients.

What's unique about Margaret, though, is that, in 2016, she and her partners broke away from a very lucrative practice at Morgan Stanley to go fully independent, and rather than use one of the popular breakaway broker support platforms, decided to launch their own firm entirely from scratch in order to build the business exactly the way they wanted.

In this episode, we talk in depth about what it was that Margaret and her partners wanted to be able to offer their clients and their team members that they weren’t able to accomplish within a wirehouse, the circumstances leading up to Margaret and her partners deciding to break away, including the realization that, despite investing heavily into their own brand and acting as a stand-alone unit within Morgan Stanley, all the work they were doing within the wirehouse wasn’t truly their own (and instead was considered Morgan Stanley's “work product”), and the decision-making process that Margaret went through when figuring out what the business they wanted to build actually would look like (rather than simply trying to find the best recruiting offer from any number of competitors).

We also talk about why Margaret and her team ultimately opted to go fully independent, divvying up the tasks amongst themselves to launch their new firm from scratch (rather than leveraging the services of a turnkey service platform provider), the tax alpha reasoning that Margaret and her partners decided to actually launch their own family of ETFs for their clients last year, and how Margaret’s focus on reducing the number of centers of influence they sought referrals from and, instead, nurturing deeper relationships with just a few of them who had already provided referrals to 6 Meridian has helped the firm bring in increasingly larger and more complex clients.

And be certain to listen to the end, where Margaret shares some of the lessons she’s learned from being in the business for over 30 years, including the benefit of focusing her own mental energy on only the things that she can control, Margaret’s efforts towards recruiting and developing younger advisors in order to build 6 Meridian into a multigenerational firm, and the additional service offerings that Margaret is exploring as a way to provide even more value to her clients in the future.

So whether you’re interested in the thinking behind Margaret and her team’s decision to break away from the wirehouse model, why they decided not to leverage a turnkey platform when launching 6 Meridian, or the services she wanted to roll out to her clients when creating their own family of ETFs, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Margaret Dechant.

3 Types Of Focused Marketing Approaches To Accelerate Growth Of Your Firm

July 19, 2021 07:06 am 5 Comments CATEGORY: Marketing

In the early days of financial planning, advisors often relied on marketing strategies that were based on a phone book, telephone, and their own ingenuity. As the internet developed, though, advisors became able to reach wider audiences, which has only compounded with the rise of social media. At the same time, advisors identified an emphasis on personalized money management as becoming more prevalent than the use of one-size-fits-all sales techniques. These shifts of focus and opportunity have provided advisors with liberating flexibility around the services they can offer and the clients they can serve; however, they can also be intimidating: how can advisors establish a niche and grow their client base with the right marketing strategy, when there are seemingly infinite ways to market effectively?

Given the dizzying array of marketing options to attract clients, it may help advisors to understand the three primary types of marketing strategies before they select the best approach for them and their firm. The Transaction approach has a culture focused on sales and is comprised of direct marketing campaigns such as workshops, direct mail, and ads to generate leads. Advisors who choose this approach rely on a numbers game of maximizing outreach to prospects, focusing on raising awareness of the firm, and capitalizing on call-to-action conversion. Alternatively, advisors may opt for a Relationship approach, which has a focus on service, and relies on clients, centers of influence, or community connections for referrals. Lastly, advisors may lean into an Expertise approach, which focuses on education. With this approach, advisors leverage their thought leadership by creating publications and offering workshops, for example, in order to establish themselves as experts in a particular niche.

Fortunately, advisors can identify an appropriate marketing approach relatively easily by assessing their firm’s style. Large firms that are willing to pour money into their marketing campaigns, looking for quick results, and have sales-driven cultures would likely find the most success in a Transaction approach to marketing. On the other hand, firms that focus on close-knit communities and who seek to provide a high-level client service experience for a large client base might benefit from a Relationship approach. Finally, smaller firms with energy (in lieu of financial resources), an education-based mindset, and that seek a specific type of client would be likely to find an Expertise approach most suitable. While each of these approaches can be helpful and has its own set of merits, it’s important to remember that there is no foolproof marketing method for advisors. It’s all about the approach that is most sustainable and that works best with the firm’s unique style!

Once advisors have determined which marketing approach best fits their firm, they can move into action to design a suitable marketing strategy. A firm looking to foster a Relationship approach to their marketing may decide to review their client experience, create marketing materials for their centers of influence, or host an annual holiday open house, whereas a firm choosing an Expertise approach may develop weekly blogs or a podcast. Advisors might also choose to incorporate a blend of different approaches, adopting a primary marketing approach serving as their top priority strategy, with auxiliary activities involving a secondary approach. Other advisors who have realized they want to transition to a different approach can begin to gradually shift their marketing investments of time, money, and energy towards the new approach, while letting original marketing resources gradually trickle over.

Ultimately, no matter what approach advisors end out using, being thoughtful, intentional, and dedicated can help them ensure they stay on the right track to effectively market their firms. Investing the time and energy to find the right marketing approach can make all the difference in ensuring not only that advisors are providing the best service and experience to their clients, but also that the right clients are being attracted to the firm!

Weekend Reading for Financial Planners (July 17-18)

July 16, 2021 02:55 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big industry news that Vanguard has completed its first-ever external acquisition... of JustInvest, a direct indexing platform, specifically to offer it to financial advisors using Vanguard, as even Vanguard is now placing a bet that direct indexing is going to be a major part of the advisor's investment management services in the future (whether to maximize tax-loss-harvesting benefits, or simply to craft more 'customized' indices for clients based on the advisor's investment philosophy, or the clients' own ESG- or other purpose-based investment preferences).

Also in the industry news this week are a number of other interesting headlines:

A new Executive Order from the White House raises the possibility of a crackdown on advisory industry non-compete and non-solicit agreements in the coming years
Carson Group's $17B of AUM is valued at more than $1B of enterprise value as Bain Capital takes a stake in the rapidly growing RIA channel

From there, we have several more interesting articles on advisory firm acquisitions and valuations:

Advisory firm M&A slows slightly in Q2 over Q1, but is still up more than 50% over 2020 as firms rebound and rising valuations tempt more advisors to sell
Concerns are growing that advisory firm valuations may be rising too much and too quickly... even as others simply suggest that firms have been undervalued all along and the industry is just now recognizing how valuable ongoing fiduciary relationships really are
How advisory firm consolidation is leading some to suggest that the small independent advisor may be doomed... even as the reality is that today's consolidators were small firms that took market share from the mega-firms of 20 years ago!

We've also included a number of articles on focusing an advisory firm's marketing and growth, including:

How sometimes "less is more" when it comes to having a clear focus on an ideal clientele (that helps the firm stand out for those prospects with a premium offering)
Why advisory firms that focus into a niche don't have to say "no" to non-niche clients, but may want to in order to accelerate their own growth
Why newer advisors are beginning to focus on niches from the start as an alternative to the traditional "natural market" approach

We wrap up with three final articles, all around the theme of managing our own focus:

How having discipline in our habits ultimately grants more freedom to make exceptions to those habits when we need to
Why the scarcest resource to manage is not our money, nor our time, but our attention
How creating more flexibility for ourselves to have more options is ultimately what drives our own happiness

Enjoy the 'light' reading!

Kitces & Carl Ep 64: Why AUM Keeps Growing Despite Opportunities For Flat-Fee Clients

July 15, 2021 07:07 am 3 Comments CATEGORY: Kitces & Carl Podcast

In the early days of the financial advice industry, an advisor’s most valuable service for clients was simply providing access to financial products (as stocks, bonds, insurance, etc. couldn’t be purchased directly by consumers). However, the advent of online brokerages not only drove down the cost to purchase investment products, but made investing (as the slogan went) “so easy, a baby could do it”. As a result, advisors turned their focus towards building customized portfolios for clients, and rather than earning commissions on the products they sold, began charging recurring fees for managing those portfolios on an ongoing basis.

More recently, however, ongoing technological progress has automated portfolio management to the extent that it’s now “so easy, a robot can do it”, and once again, advisors have evolved to make their main value offering the advice that they provide across their clients’ entire financial lives. Yet, despite the introduction of alternative fee structures (including hourly and subscription models) based on the delivery of advice rather than management of assets (as well as the growing consumer demand for flat fees), growth of the AUM model remains robust.

In our 64th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how disconnects can sometimes arise between what potential clients may expect and how advisory businesses are structured to deliver advice, why the demand for quality advice continues to combat industry-wide fee compression, and why it’s been (up to this point, at least) such a struggle for alternative fee structures to gain better traction.

Over the past several years, as more options for automated investment management have become available, consumers have increasingly sought out ‘compartmentalized’ planning engagements (i.e., advice on ‘just’ one or two, rather than on all seven, aspects of the planning process), but often run into difficulty when trying to find an advisor that has the capacity to accommodate their requests, particularly when it comes to higher-net worth clients. As while there are advisors who are able to accommodate limited planning engagements, their numbers are limited. Moreover, clients who are further along the complexity spectrum may expect the sort of service found at larger firms, which simply aren’t structured in such a way to provide compartmentalized service.

Compounding the conundrum is the fact that it’s difficult for consumers to differentiate between advisors who actually offer advice and those who simply assume the title but may not be in the advice business. The supply of fiduciary advisors remains scarce, which (in turn) means that an advisor’s limited number of available spots can fill up quickly with clients who do want comprehensive planning (which is why so many of those advisors end out implementing wait lists). And with the high costs that advisors face to acquire clients in the first place, it just becomes impractical (at least at this point) to build a sustainable business that (primarily) serves clients on a limited basis.

Ultimately, the key point is that, while fee structures and advisory models continue to evolve to provide better and more varied services to clients who may not want (or need) comprehensive planning, the fact remains that it’s expensive to not only acquire clients, but to service them as well. Which, at the end of the day, is why a fiduciary standard is so important for the industry, as it would drive down the cost of advice in the aggregate and would make it more practical to profitable and effectively serve clients who would benefit the most from flat-fee engagements.

Planning For The Expiration Of The CARES Act Student Loan Payment And Interest Freeze

July 14, 2021 07:08 am 4 Comments CATEGORY: Debt & Liabilities

Beginning on March 20, 2020, most Federal student loan borrowers were given a break from having to make student loan payments, with interest rates set to 0% and no payments required. This policy began as an Executive Order, was then included in the CARES Act, and was repeatedly extended by both the Trump Administration and the Biden Administration. However, the payment and interest freeze is scheduled to sunset on September 30, 2021, and millions of borrowers will once again be required to make monthly student loan payments.

The resumption of student loan payments will be a significant change for many borrowers’ finances. It not only impacts cash flow but may also impact their preferred tax filing status, where they choose to keep their retirement savings, etc. In addition, many borrowers have had significant changes, both positive and negative, in their financial lives since the payment freeze began, so the best strategy to pursue after the repayment freeze ends may very well have changed. And with the resumption of payments for so many borrowers happening all at once, getting a plan in place and implemented well ahead of the September 30 end date is vital.

Borrowers on Income Driven Repayment (IDR) plans have many planning opportunities to consider. Both the timing of their income certification and their 2021 tax filing status could be set up strategically to minimize student loan payments. Especially since the popular strategy of Married Filing Separately to minimize payments may no longer be as appealing for families with young children, due to the American Rescue Plan’s changes to the Child Tax and Dependent Care Credits for 2021 (which are reduced or lost altogether for couples who file separately, and which have become fully refundable).

In addition, borrowers who may previously have been pursuing forgiveness strategies (e.g., deliberately minimizing payments to maximize their loan balance in anticipation of future Public Service Loan Forgiveness or IDR forgiveness) may now be able to pay their loans to $0, while others may have had a career change that makes them eligible for forgiveness programs they previously did not have access to. Borrowers should not assume that the student loan plans they had pre-pandemic still apply, and advisors can play a key role in helping them think about the moving pieces and how best to manage the tradeoffs involved.

Broad student loan cancellation of some amount has also gone from being a ‘pipe dream’ to having realistic odds of passing in the coming months. While this is far from certain, and many of the policy details are still unresolved, it is on the minds of many borrowers who don’t exactly want to accelerate debt repayment only to find out it would have been forgiven by waiting just a few months. For some borrowers, this may mean making at least a small bet on forgiveness, opting to pay some interest now in hopes of forgiveness, even if they have the cash to pay off their loans in one lump sum today. Other borrowers may decide to just wipe out their loans with the cash they’ve saved during the pandemic, simply to eliminate the debt (and its future interest and payment obligations).

Ultimately, though, the key point is simply that with tens of millions of student loan borrowers due to ‘suddenly’ begin repayments in October, a flood of service requests is likely to come soon to loan servicers. Which means those who are considering potential changes to their student loan strategies, from altering their tax filing status to accelerating (or not) their income recertification, need to be evaluating their plans now, including a consideration of how those plans might be adjusted if at least some level of student loan forgiveness does, in fact, come to pass!