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!

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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.

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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!

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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!

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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!

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Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with the news that Republican Spencer Bachus has signed on as a co-sponsor to Democrat Maxine Waters' proposed legislation to establish SEC user fees that would help fund increased investor adviser oversight; while there still isn't likely to be anything passed into law in the immediate future, the announcement suggests that there may be some traction building for the user fee approach to close the examination gap as the SEC remains underfunded. Also in the news this week was an announcement that the SEC is considering whether to update the definitions for Accredited Investors (which still haven't been updated, or even adjusted for inflation, in more than 30 years since they were first established in 1982!), and a new round of fighting between the American College and the CFP Board as the American College announced updates to its ChFC curriculum to 'compete' with the CFP certification and the CFP Board responded by noting that the ChFC still doesn't require a comprehensive exam (amongst other differences).

From there, we have a firm retirement planning articles this week, including some recent research suggesting how a focus on combining partial annuitization with portfolios may be a better way to frame annuities than the typical all-or-none discussion, a look at how cash balance plans are exploding forth in popularity and are already approach $1 trillion in retirement assets (compared to about $4 trillion in 401(k) plans), and a powerful discussion of how retirement is a joy for many but also a time where the depression and suicide rate for men doubles and advisors may be one of the few in a position to intervene and encourage a client to get help.

We also have several practice management articles this week, including a look at the FA Insight "People and Pay" study that finds team-based firms are growing more rapidly than firms that run in silos, a discussion from Angie Herbers about how the real challenge for existing advisory firms to grow is not about "making rain" and generating new prospects but about improving the closing ratios the prospective clients firms are already getting via referrals, and the last reporting on a recent industry survey that finds - despite all the discussion of the coming wave of retiring advisors - that there are still twice as many buyers as sellers in the next 1-5 years, suggesting that it's actually still very much a seller's market for the few firm owners that are willing to sell at all.

We wrap up with three interesting articles: the first looks at the challenges of businesses that have "co-founders" who struggle to keep their business and personal interests aligned as the business grows (while written in the context of co-founded startup tech firms, the challenge seems equally relevant for advisory firm partnerships as well!); the second examines some of the latest research on motivation, which finds that not only is internal motivation better than "external" factors like incentivizing with money and fame, but that offering too much in external incentives can actually damage the outcomes of otherwise-internally-motivated people (so think through your compensation structures carefully!); and the last is a discussion of the so-called "End of History Illusion" and recent research that finds we're actually terrible at predicting our personality, values, and preferences more than a decade into the future... which raises interesting questions about how to effectively save for retirement in the long run when you really may not have any idea what you'll want to do in retirement until you're almost there!

Enjoy the reading!

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Similar to retirement accounts like IRAs and 401(k)s, Congress provides deferred annuities a tax preference, in the form of tax-deferred growth, to encourage their use. This tax treatment does not have any outright cost; instead, it’s simply a benefit that is otherwise granted to the owner of an annuity. Yet because of the similarities in tax treatment between retirement accounts and annuities – and the fact that for much of their history, deferred annuities really were used primarily or solely for their tax deferral treatment – there is a long-standing rule of thumb for how to coordinate between the two: “never purchase an annuity inside of an IRA, because you don’t need tax deferral in an already tax-deferred account!”

Yet the reality is that for more than a decade, this rule has actually been rendered moot by significant changes that have occurred in the annuity landscape. While once upon a time there were few reasons to purchase a deferred annuity besides the preferential tax-deferral treatment, since the early 2000s annuities has been increasingly popular for their guaranteed living benefit riders, along with enhanced death benefit, unique investment features (in the case of certain equity-indexed annuities), or outright superior fixed income yields (with some fixed annuities). As a result, by 2012 the majority of annuities were actually being purchased with funds sourced from a retirement account, because that’s where the available money was held to be invested for such features and guarantees!

While in some limited cases, deferred variable annuities actually are making a resurgence for pure tax deferral purposes – in which case, there’s once again little reason to purchase them with retirement assets – most annuities continue to be purchased for their guarantees and investment characteristics, not their tax preferences. Given these changes, it is perhaps time to abolish the “annuities should never go into an IRA” rule and recognize that it has become more a myth and remnant of old than proper advice in today’s environment.

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As my long-time subscribers know, I like to survey readers of this blog once a year to get their input on what they find least/most useful about the content and how it's delivered to them. Your feedback is used to shape everything from the design and structure of the blog, to new types of content and features, and more. I've tested many ideas and potential initiatives via these surveys over the years; it's shaped everything from the default font size of the blog content, to the recent launch of our webinars offering, to a decision to totally scrap some ideas that have come up along the way but were clearly not supported in the survey results.

Accordingly, I'm hoping you'll take just a couple minutes to answer the relatively brief reader survey below, and share with me your thoughts about this blog, the content, and some services and business ideas that I am considering adding to it... if the survey says I should, of course!

The survey is only a dozen questions, should take no more than a few minutes, and will remain open until the end of the month (July 31st). Thanks in advance for your time, feedback, and ongoing readership!

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As the financial services industry slowly but steadily becomes more tech-savvy and technology-enabled, including the adoption of online models for the delivery and implementtion financial advice, the line of where human financial advice ends and "robo" automation begins is becoming increasingly blurry. Or simply put, what's the difference between a "robo-advisor" providing online financial advice, and any number of human advisors who do the same thing using online meeting and collaboration tools like Skype, GoToMeeting, and web-based financial planning software?

Given that both humans and robo-advisors can deliver advice in an online medium, ultimately the key distinction is not actually about being online at all, but about how the industry itself is crafted and delivered: in the end, does the advice the client gets come from a human, or a (human-designed) computer algorithm? The difference matters not only in terms of the advice itself, but also the underlying cost structure; as the robo-advisors themselves advertised in their early days, a key reason for their ability to deliver low-cost solutions to consumers was their elimination of "expensive" human financial advisors.

In the end, it remains to be seen whether or what forms of financial advice consumers will prefer to receive from an algorithm versus another human being (especially given some of the potential cost differences between the two), though what's becoming clear from the attempts of both in the online world is that building trust online to get clients in the first place is difficult in a low-trust industry like financial services; simply put, online financial advice is not an "if you build it, they will come" kind of business. Nonetheless, some of the lines about where each can excel are now being drawn, as robo-advisors increasingly focus on narrow, specific problems that can be addressed with technology and an algorithm alone - commoditizing those solutions in the process - while human advisors are increasingly driven to financial planning as the "anti-commoditizer" by providing a more comprehensive financial advice solutions that delve into the complex realities that consumers face when viewing their holistic financial picture.

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Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the results of the latest RIA Benchmarking Study from Schwab, finding that business continues to be very good in the world of RIAs, with more than 1/3rd of firms doubling in the past 5 years and profits at all-time highs (since the survey began in 2006). In fact, ironically business for RIAs seems to be so good, that in a separate story Schwab is reported to be expanding their own offering, raising both the pricing (despite the emerging low-cost "robo-advisor" trend) on their internal Schwab Private Client offering up to 0.90% and the depth of advice provided to Schwab clientele, in a move that makes Schwab Private Client look increasingly similar to (and a potential competitor to?) the independent RIAs that custody with Schwab as well.

From there, we have a few technical articles this week, including a summary of what's changed (and what still hasn't) in planning for same-sex couples in the year since the Windsor decision from the Supreme Court, a coming change to the reverse mortgage rules for couples that will protect some consumers but take away planning choices from others, and an interesting look from Nobel Prize winner Robert Merton at the current state of retirement planning in the US and how our shift from defined benefit to defined contribution plans may have dangerously shifted how we think of what's "safe" and "risky" in the world of retirement income in the first place.

We also have several practice management articles, from tips about how to find your first clients if you're just starting your firm as a new advisor, to some "lessons from the trenches" of an advisor who just went through his first year as a solo practitioner, to some recent research about how advisors (and investors) anticipate communication to change in the coming years (think: big rise in video conferencing), and a look at how advisors who are approaching or hitting "the wall" of client capacity can step back and figure out how many clients they really have capacity to handle in the first place.

We wrap up with three interesting articles: the first looks at how we can make better investment decisions by deliberating reading information from and surrounding ourselves with people who disagree with us (forcing more deliberate thought about whether our investment views are really valid or not); the second, in celebration of last week's Independence Day, looks at the story of Haym Solomon, the broker who perhaps exemplified the best of what Wall Street can achieve by becoming the financier that ensured the United States had the funds necessary to field an army and win the Revolutionary War; and the last discusses an interesting new study looking at what does and doesn't lead to greater happiness in retirement, suggesting that the amount of wealth and income really needed for happiness may be far less than most people expect (which means retirement might not be so far off for most baby boomers after all!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a new "Technology Spot Audit" service for advisors who need some help figuring out where they stand with their own software solutions! Enjoy the reading!

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