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When Roth Conversions Go ‘On Sale’: Discounted Roth Conversions During A Bear Market Decline

June 22, 2022 07:03 am 9 Comments CATEGORY: Retirement Planning

Bear markets can be stressful for both financial advisors and their clients – particularly for those clients who are near retirement or have recently retired and are therefore especially susceptible to sequence-of-return risk, as a market downturn in the first decade of retirement can negatively impact a retiree’s sustainable spending rates. At the same time, though, market downturns can create favorable tax planning opportunities, including the ability to maximize ‘discounted’ Roth conversions.

While individuals at any income level can complete Roth conversions (unlike making Roth IRA contributions, which have income limits), it does not necessarily mean that doing so will always be the most tax-efficient decision. Because whether traditional or Roth accounts are better depends on that individual’s tax rate today as compared to their expected future tax rate. Typically, this means that it will be advantageous to make traditional contributions (and reduce taxable income) when a person’s marginal tax rate is higher today than it will be when the funds are withdrawn in the future, and Roth contributions (or conversions) when the future tax rate is expected to be higher than it is today.

For investors who do consider making a Roth conversion, a declining market can effectively put the conversion ‘on sale’ at a (hopefully) temporarily depressed value. This is because, as the total value of the account drops, the dollar amount to be converted to a Roth account will represent a larger percentage of the pre-tax account, resulting in a larger portion of the future growth of the account being shifted into a Roth without moving into a higher tax bracket as a more sizable portion of the account is converted.

Notably, the benefits of Roth conversions during a market downturn can also depend in large part on how an individual sources the funds to pay the taxes on the conversion. And when it comes to paying the taxes due, cash is usually king, since using available cash set aside in a savings account – instead of taking funds that could have otherwise been converted to pay those taxes – will allow a larger balance of the tax-free Roth account to enjoy a market rebound. As while the individual might not have wanted to invest the money in the savings account, by using it to pay the taxes due on the Roth conversion, the savings is effectively paying for the future tax-free growth in the Roth account!

In addition, because Roth conversions can be made throughout the year in any amount, certain strategies can help maximize the value of the conversions, minimize potential client regret, and avoid running afoul of the tax rules that govern conversions. For example, conversion-cost averaging (dividing a selected annual conversion amount into regular, smaller conversions throughout the year) and Roth barbelling (converting once at the beginning of the year and again at the end of the year when the client’s tax picture is clearer) can allow for adjustments of the amount converted if a client’s income changes unexpectedly, among other benefits.

Ultimately, the key point is that a market downturn presents an opportunity to convert a higher percentage of a pre-tax account to a Roth account for the same amount of taxable income, for those who otherwise should be doing a Roth conversion given their current tax rate. Because while a down market can be challenging for both advisors and their clients, the opportunity for Roth conversions ‘on sale’ during these periods (when appropriate!) offers advisors the chance to generate tax alpha for their clients!

#FA Success Ep 286: Pursuing Intrapreneurship As A Path To Growth Within A Larger Firm, With Matt Cosgriff

June 21, 2022 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Matt Cosgriff Podcast Featured Image FAS

Welcome back to the 286th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Matt Cosgriff. Matt is the Director of Wealth Management for BerganKDV, an independent RIA that operates as a division of a regional accounting firm based in Bloomington, Minnesota, and oversees more than $2 billion in assets for 1,000 client households.

What's unique about Matt, though, was his path to launch and build a specialized division within the firm as an “intrapreneurship” opportunity to serve next-generation clients, and then how he leveraged that to create a career path for himself toward leadership of the entire $2B RIA.

In this episode, we talk in-depth about how, despite his young age and lack of CFP marks at the time, Matt was able to get the opportunity to operate not as an entrepreneur starting his own firm but as an intrapreneur inside of BerganKDV to develop and operate a separate brand that catered to next-generation clients, how even though Matt was given some autonomy to launch his division, he struggled with having to ‘side hustle’ within the firm by also supporting a new retirement plan practice and working with traditional smaller wealth management and retirement clients to justify his intrapreneur salary, and how Matt ultimately shifted his career focus toward a leadership path after he realized he enjoyed working more on developing and growing and scaling the business itself than his client-facing responsibilities.

We also talk about how Matt leveraged his intrapreneurship experience and his ‘side hustle’ of working with internal clients to become the Director of Wealth Management for his firm at just 29 years old, how, during his first year as a director, Matt dealt with a lack of trust and confidence from some staff and clients due to his young age while he was trying to create change (which did eventually lead to a few of their departures), and how going through the Schwab Executive Leadership program helped Matt refocus and create space to be more strategic and drive growth for the firm.

And be certain to listen to the end, where Matt shares how he learned in hindsight the importance of being clear about what is realistic and managing expectations upfront to give room to celebrate wins later, why Matt believes that connecting with other professionals in the financial industry, being persistent, and staying curious are the keys to creating a path to a great career, and how Matt has managed to avoid getting stuck on the ups and downs along the way and keep his focus on enjoying his journey.

So whether you're interested in learning about how Matt’s initial experience as a founder taught him to start small, build interest, then scale, how he uses Entrepreneurial Operating Systems (EOS) to break beyond the day-to-day grind and keep everyone focused on long-term growth, or why persistence is key in building connections (and finding prospects!), then we hope you enjoy this episode of the Financial Advisor Success podcast, with Matt Cosgriff.

Summer Reading List Of “Best Books” For Financial Advisors – 2022 Edition

June 20, 2022 07:07 am 12 Comments CATEGORY: Personal/Career Development

The first half of 2022 has not played out as most expected; the good news is that for most parts of the country, businesses and offices are re-opening (at least those that decided to return to in-person at all!), and by whatever means we’ve figured out how to ingrain the pandemic into our normal daily lives. The bad news is that the reinvigoration of activity seems to have spawned inflation, economic worries, and a challenging simultaneous decline in stocks and bonds. Which means the arrival of summer should bring some welcome relief – a traditional time for most to find some rest and relaxation (if only because clients also travel more during the summer, and are harder to pin down for meetings anyway!). And for many, this includes finding some time to read and catch up on a few good books!

For those who love to read, though (and especially for those who have limited time and will only get to read just one or two books over the summer), the question quickly becomes “what’s a good book worth reading this summer?”

As a voracious reader myself, I'm always eager to hear suggestions from others of great books to read, whether it's something new that's just come out, or an "old classic" that I should go back and read (again or for the first time!). And so, in the spirit of sharing, a few years ago I launched my list of "Recommended (Book) Reading for Financial Advisors", and it was so well received that in 2013 I also started sharing my annual "Summer Reading List" for financial advisors of the best books I'd read in the preceding year. It quickly became a perennial favorite on Nerd's Eye View, and so I've updated it every year, with new lists of books in 2014, 2015, 2016, 2017, 2018, 2019, 2020, and a fresh round last year in 2021.

And now, I'm now excited to share my latest Summer Reading list of top books for financial advisors in 2022, from a deep dive into how exactly to ‘deliver massive value’ to ongoing clients after the initial financial planning process, to what it takes to market an advisory firm successfully in a crowded landscape, how to build better rapport with prospects and clients by asking (more) effective questions, why sometimes the best path to a better business is not by growing and adding team members but knowing when to strategically subtract instead, several books on how to more effectively scale your advisory firm if/as it does grow (and how to ‘grow’ your business when the goal is not necessarily to be bigger, but to be better!), and a fantastic book on how to stop living in the “gap” between our current reality and the future ideal that always seems to be a little out of reach and instead learn to celebrate the “gain” by recognizing how far we’ve come in recent years.

So as the summer season gets underway, and summer vacations return, I hope that you find this suggested summer reading list of books for financial planners to be helpful… and please do share your own suggestions in the comments at the end of the article about the best books you've read over the past year as well!

Weekend Reading For Financial Planners (June 18-19)

June 17, 2022 02:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that Charles Schwab has agreed to pay $187 million to settle allegations that it misled users of its Schwab Intelligent Portfolios robo-advisor platform by falsely claiming that the cash allocations in its model portfolios (which were significantly higher than its competitors) were determined through a ‘disciplined portfolio construction methodology’ when regulators ultimately determined they were pre-set to generate a desired amount of revenue for Schwab. In other words, even as Schwab advertised that it was not charging a platform fee for the service, Schwab’s large cash allocations in the portfolios were still set to incur a cost for its clients, serving as a ‘hidden’ fee for an otherwise ‘free’ service, which the regulators treated as a violation of the antifraud (no-misleading-advertising) provisions of the Investment Advisers Act. Which in turn raises questions of whether regulators will eventually apply a similar scrutiny to the similar pricing model offered to RIAs using custodial platforms as well?

Also in industry news this week:

Why it is important for advisory firms to review their compliance and disclosure practices in the wake of a new Department of Labor regulation regarding rollovers of workplace retirement plans and IRAs
How the term ‘ESG’ has lost much of its meaning and how advisors can serve clients who want to take a values-based investment approach

From there, we have several articles on this year’s market volatility:

The tools advisors are using to help clients stay the course during the current market downturn
While the 60/40 portfolio has come under fire amid the poor performance of stocks and bonds this year, the classic asset allocation could now be more attractive given improved stock and bond valuations
Why the day the market seems to be at its worst is often one of the best times to buy

We also have a number of articles on bear markets:

Five things advisors can keep in mind during bear markets to provide clients with a long-term perspective
Why a trend following strategy can be an effective risk management tool for a portion of some client portfolios
Why reading books and prioritizing sleep can help advisors and their clients lower their stress levels during bear markets

We wrap up with three final articles, all about putting money in perspective:

While it seems like the worst of times when it comes to the economy and world affairs, the historical record shows how much things have improved over time
How those with better numeracy skills tend to have higher incomes and greater happiness
Why building wealth is not an end in itself and how money can be used to facilitate health and happiness

Enjoy the ‘light’ reading!

Kitces & Carl Ep 88: Showing Your Value To Prospects When Everything Is Already Going Well

June 16, 2022 07:06 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces Carl Ep Showing Your Value Featured Image

When financial advisors seek new clients, their outreach efforts can often lead to prospective clients approaching them because of a specific issue on their mind that they would like the advisor to address. In these instances, the advisor may start the discussion simply with the intention of better understanding the client’s problem. But sometimes, when the advisor meets a potential prospect (perhaps at a party or other social engagement) who doesn’t appear to have any immediately discernable ‘problems’, the conversation to convince the prospect that the advisor has value to offer, especially when markets are up and everything else appears to be going well, can be more complex.

In our 88^th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can connect with prospects who believe their financial lives are going well. As while it is easier for an advisor to attract prospects who are already aware that they need assistance (e.g., offering investment management to a prospect whose portfolio has underperformed the market), it can be much more difficult to attract prospects who don’t recognize that there are any problems to solve in the first place.

As a starting point, it is important to recognize that a successful connection between a prospect and advisor requires two things: 1) the prospect must recognize they have an issue that needs to be solved; and 2) they must believe the advisor has a solution to their problem. As while most financial advisors have a wide range of services to offer, people rarely have a ‘comprehensive financial planning’ problem. Therefore, an advisor can help prospects identify gaps and areas of weakness, and then show that they have a solution to the specific issue, whether it is portfolio management, retirement planning for a specific career, handling life transitions, or another area.

This situation also demonstrates the value for advisors of serving a particular niche, solving problems for a specific group of people. By being clear about the services they can offer for a specific type of client, advisors can better attract prospects who have issues that match the advisor’s specialty and save time by engaging with fewer prospects who would not be a good fit.

Ultimately, the key point is that an advisor has to offer relevance to prospects in order to convert them into clients. Which means that helping prospects recognize that they have a problem in the first place, by using language that relates to them so they can self-identify with the stated problems, is an important step to connecting with prospects. And identifying specific problems, recognized and understood by both the advisor and the prospect, allows the advisor to build the relationship by explaining how they will help their new client solve their problems!

Complying With PTE 2020-02 Under DoL’s New IRA Rollover Requirements

June 15, 2022 07:04 am 5 Comments CATEGORY: Regulation & Compliance

As of February 1, 2022, financial advisors who give advice to clients about whether to roll over 401(k) plan assets into an IRA are subject to a new set of regulations from the U.S. Department of Labor (DOL). Specifically, advisors who would receive increased compensation as a result of recommending a rollover (such as a commission or advisory fee) must qualify for an exemption from DOL’s prohibited transaction rules by complying with the new standards outlined by DOL.

In this guest post, Jaqueline Hummel, compliance consultant and Managing Director of Foreside, outlines the basics of DOL’s Prohibited Transaction Exemption 2020-02 (PTE 2020-02), details the six key conditions required of financial advisors by PTE 2020-02, and provides tips for advisory firms to comply with the new rules.

At a basic level, PTE 2020-02 expands the definition of a “prohibited transaction” under ERISA to include any recommendation for rolling over 401(k) assets into an IRA (or from one IRA to another) when doing so would increase the compensation for the advisor. To qualify for an exemption to this rule, advisors must comply with six key conditions:

Acknowledge that they are fiduciaries under ERISA;
Disclose, in writing, to the client the scope of the relationship and any material conflicts of interest;
Comply with DOL’s Impartial Conduct Standards requiring advisors to provide prudent investment advice, charge only reasonable compensation, and avoid misleading statements;
Provide written disclosures to clients of why the recommendation to roll over assets is in their best interests;
Conduct an annual review of the firm’s compliance with PTE 2020-02 (and document the results in a written report to a “Senior Executive Officer” of the financial institution); and
Adopt and implement policies and procedures to comply with the DOL’s Impartial Conduct Standards, mitigate conflicts of interest, and document the reasons for recommending rollovers of retirement assets

While many advisors may already be following some of these conditions (for example, RIAs who have fiduciary status by virtue of the SEC’s fiduciary rule may already acknowledge that status in writing and provide disclosures of material conflicts of interest in Form ADV), DOL has its own specific requirements, including model language to use in disclosure documents, that are required to comply with the prohibited transaction exemption. Nevertheless, RIAs may be able to easily adapt their existing disclosure documents, such as Forms ADV and CRS, to satisfy the first two requirements.

Even though it may seem daunting when viewed in its entirety, compliance with PTE 2020-02 can be more manageable by breaking it down into its individual components and determining where the advisor’s existing processes and tools can be used or adapted. Connecting with other advisors or hiring an expert to walk through the steps of developing policies and procedures can also relieve some of the burden on RIAs to build up their own compliance standards from scratch.

Ultimately, with the deadline to meet DOL’s documentation and disclosure requirements approaching on June 30, 2022, the most important thing is for advisors to be proactive about putting their firm’s standards in place (which might need to be adjusted as DOL releases more guidance in the future). Read More...