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Effective financial planning for clients often has tax-related consequences, which in turn requires a good understanding of not only the tax laws themselves, but also the client's tax rates. Unfortunately, though, significant confusion abounds regarding what tax rates should be used when analyzing various problems. Is it the client's tax bracket? Or a marginal tax rate? Or an effective tax rate? When should each be used? The key is that in the end, marginal tax rates should be used to compare strategies, and effective tax rates should be used to compare people.

Accordingly, if you want to know who commits a larger portion of their total income to their tax obligations, use an effective tax rate. But if you want to know whether to do that Roth conversion/IRA withdrawal/annuity investment/sale for a capital gain or loss/etc., the marginal tax rate is what should be used. In point of fact, this actually means that the marginal tax rate is really the only rate that should be used for financial planning scenarios!

The caveat, however, is that in practice determining a client's marginal tax rate requires more than just looking at his/her tax bracket... so be certainly to calculate the marginal tax rate correctly, too!

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Historically, the various software and technology solutions serving financial planners has been very fragmented. Independent firms were often stuck with small, homegrown solutions for financial planning, client relationship management (CRM), and portfolio reporting software, and/or working with providers that simply didn't have enough resources for growth and development; advisors with larger firms often had access to the best software, but since it was a proprietary solution of the parent firm, the advisor effectively faced a world where key client and business data might held captive. As the world transitions into the digital age, though, this landscape is rapidly changing, due both to the accessibility brought about by having near-universal access to "the cloud" from any computer or device and any location, and the emergence of Application Programming Interfaces (APIs) that allow disparate software packages to integrate in a way that has never before been possible.

These changes in turn are driving several new emerging trends. The first is that now independent software companies are often larger and better developed than proprietary solutions, which both invites in new firms to innovate and also makes it easier than ever for advisors to change firms knowing that they will have more portable client and business data and access to similar (or even better) software after making a change. In addition, the growing integrations through software APIs are rapidly bringing advisors towards the infamous "holy grail" of a unified central solution for CRM, portfolio management and reporting, and financial planning software, which is further driven by a growing number of "integrators" - firms that help adapt software packages through their APIs to develop customized advisory-firm-specific holy grail solutions.

As of now, these trends are still underway and will be playing out for many more years. Nonetheless, the direction is clear, and remarkably positive for both startup firms - who have more opportunity for growth and success than ever - and also advisors, who may enjoy software in the future that is simultaneously cheaper, more efficient, more innovative, more integrated, and just downright superior to anything we've ever had in the past!

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Enjoy the current installment of "weekend reading for financial planners" - this week's issues starts off with the big regulatory news that Mary Jo White has been nominated to replace interim SEC chairwoman Elisse Walter; White is an industry "outsider" with a background as a U.S. attorney who has prosecuted terrorists and organized crime bosses, raising the question of whether there's about to be a shift in the aggressiveness of the SEC towards Wall Street and in favor of the fiduciary movement. After looking at a second article on the trend towards fiduciary as well, we have a series of more technical articles, including one that suggests potential estate tax reforms may change how ILITs are designed, another that provides a useful checklist of reminders for advisors and their clients when someone passes away, and an interesting look at how education regarding stock options can help employees overcome the mental shortcuts they take that often misjudge the value of their option compensation.

We also have a series of retirement-planning-related articles this week, including: research about how clients can start with significantly higher safe withdrawal rates if they're willing to give up inflationary adjustments in later years (which often happens anyway as clients age); a new research study suggesting that the base safe withdrawal rate may need to be reduced below 4% given today's dangerous combination of high market valuation and low yields; and how it may be worth delaying immediate annuities given today's low return environment until clients are well into their 70s or even their 80s. There's also a striking article looking at how annuities may change in the coming decade, going back to their industry roots from centuries ago where annuities didn't guarantee a lifetime of cash payments, but of lifetime services like food, clothing, and shelter. There are also two behavioral-finance-oriented articles: the first looks at how to manage not the behavioral biases of our clients but our own biases; and the second shows how keeping too much liquidity for clients is a problem not just because it's a return drag but also because clients may actually be happier if their long-term investments are illiquid to reduce temptation to spend!

We wrap up with a nice reminder that working as a professional can lead to a lot of sitting - which can be very unhealthy over extended periods of time. The proposed solution: try "walking meetings" where you actually conduct the meeting while taking a walk, instead of just sitting. The author notes that it's not only a healthier way to meet, but can even lead to more productive meetings as well! Enjoy the reading!

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In the ongoing difficult borrowing environment, some potential homebuyers have found the best way to finance a purchase is not from a major commercial bank, but from the "family bank" instead through an intra-family loan. And as long as IRS guidelines are followed, the transaction can be remarkably appealing, with more flexible lending terms, IRS-required Applicable Federal Rates that are still lower than commercial mortgage rates, the potential to still deduct mortgage interest payments for the borrower, avoidance of origination and many other mortgage transaction fees, and the simple benefit that all the interest and principal payments ultimately stay in the family. A major downside, however, is that to ensure the IRS truly respects the transaction - and to receive some of the tax benefits as well - formalities of the loan should be honored, including drafting a promissory note, recording the mortgage against the residence in the proper jurisdiction, and completing actual payments of interest and/or principal. Fortunately, a new solution has emerged - a company called National Family Mortgage, that completes all of the required documentation, records the mortgage, helps to service the loan, and even issues the requisite IRS reporting forms, all for a fraction of the cost of a traditional mortgage loan origination fee. While this won't likely mark a great boom in intra-family mortgage lending, it nonetheless makes the strategy far easier for advisors to implement efficiently for clients! Continue reading "An Efficient Solution To ... »

As financial planning shifts increasingly to a pure fiduciary focus, many advisors have begun to differentiate themselves by explaining to prospective clients their fiduciary obligations, ostensibly in an effort to demonstrate that they are trustworthy. Unfortunately, though, the reality is that saying "You can trust me" is actually a terrible way to establish trust, especially when it's done using complex jargon that most consumers don't even understand! Even worse, in many cases an advisor talking about fiduciary status is less about demonstrating the trustworthiness of the advisor, and more about bashing the competition for not being worthy of trust - despite the fact that may make the advisor appear petty or desperate with little value to offer, and may actually prime clients towards distrust of any advisors! So what should financial planners do instead? Focus on conveying credibility more holistically, which includes a focus not only on motives and intent, but also the advisor's integrity, capabilities to deliver value to the client, and track record for positive financial planning results. And establish your trust and credibility not just by your words, but by your actions and behaviors. Or stated more simply: stop trying to establish client trust by saying you're a fiduciary; instead, build real trust with your clients by actually being one and behaving accordingly!

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Enjoy the current installment of "weekend reading for financial planners" - this week's "Practice Management" edition starts off with a nice Journal of Financial Planning Focus article by marketing consultant Stephen Wershing about how to refine your referral process to improve growth, a great list of tools for digital age marketing from technology consultant Bill Winterberg, and a good reminder that digital age marketing strategies should focus not just on building social media followers but ultimately converting them into clients. From there, we look at an interesting article about the rise of "wealth databases" that advisors can engage to find affluent prospective clients, a profile of some firms that are aiming to serve younger clients not just with different services but an entirely different office atmosphere, and a review from Bill Winterberg about the Fox Financial Planning Network and the resources it provides to help firms with workflow efficiency.

We also look at a few articles highlighting some of the difficult challenges that advisors face, including two warnings from both Mark Tibergien and Angie Herbers that the advisor marketplace is becoming more challenging and competitive and that advisors and the vendors who serve them must step up to compete, a discussion from Pinnacle Advisor Solutions highlighting the emerging number of outsourcing providers that are trying to help advisors get past the growth wall, and a look at how some advisors are joining close-knit study groups where they "open the kimono" and share everything in an intimate group setting to get feedback about how to improve their businesses and professional lives.

We wrap up with two interesting articles: the first suggests that while financial planning is slowly moving beyond just focusing on the numbers to look at client personal issues, we're still a long way from truly integrating behavioral finance and a more holistic look at well-being; and another that shows how storytelling may be a more effective way to activate our brains, which is relevant for everything from marketing your services to prospects to helping persuade clients to change their behaviors and implement your recommendations. Enjoy the reading!

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As a part of the resolution to the fiscal cliff, the American Taxpayer Relief Act of 2012 (ATRA) extended and made permanent a number of important tax code provisions that impact estate planning, including the now-$5.25 million estate tax exemption (after inflation indexing), and the portability of a deceased spouse's unused exclusion amount (DSUEA) to carry over some or all of that $5.25 million to a surviving spouse. The end result of these changes: married couples can shelter as much as $10.5M of net worth from the estate tax system simply by doing nothing more than leaving everything to a surviving spouse with a simple Will and filing an estate tax return.

The ramifications of these changes will significantly impact estate planning for years to come, as the higher exemption drastically reduces how many people will be subject to the estate tax in the future, and portability in particular renders the use of bypass trusts largely irrelevant. In fact, bypass trusts actually become an adverse strategy for many, given both the direct cash costs of trust drafting and administration, and the indirect income tax consequences like compressed trust income tax brackets and the loss of any step-up in basis at death.

While bypass trusts will still remain relevant in some situations, from their usefulness to shelter future growth from taxation for very high net worth couples and to preserve the GST exemption (which is not portable), to their utility for state estate tax planning. In addition, use of trusts in general will remain relevant for many non-tax reasons, especially asset, divorce, and spendthrift protection. Nonetheless, the bottom line is that with the new rules, esecpially portability of the estate tax exemption, it may be time to bypass the bypass trust for the overwhelming majority of Americans!

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For most people, financial planning is difficult and complex - which is why they seek out professionals for assistance. Yet while the outcomes of working with a financial planner are positive, the actual experience of going through the financial planning process is not always pleasant. As one focus group researcher put it, "The financial planning experience is a blend of a dental exam, math class, and marriage therapy." And the challenge for growing a financial planning practice continues to become more difficult, given an increasing number of financial planning practitioners competing for business, with less and less differentiation from one firm and advisor to the next.

By contrast, the Build-A-Bear workshop provides an entirely different experience. Notwithstanding the fact that it sells teddy bears - a product long since commoditized - Build-A-Bear differentiates itself not by the product itself, but by the experience that customers engage in to get the teddy bear, as children visiting Build-A-Bear literally build the bear from scratch. The end result - the entire process turns from a few minutes at a cash register or website into a multi-hour interactive experience, the children have a much deeper buy-in to what they get (as their tagline notes, Build-A-Bear is not where teddy bears are bought, but "Where Best Friends Are Made"), and customers spend twice as much or more to get the same commoditized product at the end!

Which raises the question - what if the client financial planning experience was more like a Build-A-Bear experience, where your clients happily pay twice as much for your services and want to spend hours going through the process and the experience of it!?

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Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with several articles looking at fiduciary and ethical challenges for financial services, from a discussion from the Institute for the Fiduciary Standard about how progress on fiduciary rulemaking has been lagging for several years (and what has to happen in the coming years to get it back on track again), to how hard it is for even an experienced financial planner to find a financial planner to recommend (and how a true license for financial planners could help resolve the issue), to a disturbing trend amongst ETF providers to create marketing materials showing questionable historical performance that may be legal with disclosures but is of questionable ethics. From there, we look at a few business and technology related articles, including a new platform that will allow advisors to create their own ETFs, a discussion of inStream financial planning software that may revolutionize how we use planning software in our practices, a nice discussion of Facebook and where/how it is useful for advisors, and a brief article about how the Social Security administration has expanded its online capabilities (which you can use with your clients to get useful client-specific benefits information). We also look at two more technical articles, one from Wade Pfau discussing the decision for those who want to partially annuitize about whether it's better to do so sooner or later, and an interesting exploration by Martin Shenkman of how estate planning is going to change in 2013 and beyond due to the fiscal cliff legislation. 

We wrap up with three interesting articles: the first from Scott MacKillop about how the research that questions the value of active management as being too much "book smarts" and not enough "street smarts" to rely upon in the real world; the second providing a good overview of the recent discussions regarding the Trillion-Dollar Platinum Coin solution to address the debt ceiling; and the last taking a fresh look at the importance of financial planners finding a niche not just as a way to build business but because in the end having a niche is all about finding the intersection between what we love to do, what we're good at, and what people will pay for. Notably, we emphasize for clients the importance of trying to find the right balance to ensure that what they're doing is meaningful both personally and financially; maybe it's time we take the advice ourselves? Enjoy the reading!

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Amongst the various "extenders" included in the American Taxpayer Relief Act of 2012 (ATRA) was the reinstatement of rules allowing an individual to make a "Qualified Charitable Distribution" (QCD) from an IRA to a charity with favorable tax consequences, assuming the individual has reached the minimum 70 1/2 age, stays within the $100,000 dollar limit, and meets other requirements regarding the distribution and the receiving charity. Unfortunately, though, bringing back QCDs retroactively for 2012 was of limited use when the law wasn't even passed until the first week of 2013 and the 2012 tax year was already closed!

To accommodate, Congress included two special lookback rules under ATRA - the first allows QCDs done in January of 2013 to be treated as a 2012 QCD, and the second allows December 2012 IRA distributions to be recharacterized as a QCD if a comparable amount of cash is donated to a charity after the IRA distribution but before the end of January, 2013. While these two rules are nice to have, though, the reality is that neither may be very useful, except for a few unique situations, such as those who already plan to max out their QCDs up to the $100,000 limit for 2013 and are looking to donate more. In addition, most clients will still benefit more by contributing appreciated securities to a charity, than by donating cash (with or without the QCD treatment). Nonetheless, the new rules do open up some useful planning scenarios for some client situations, and with only a few weeks available to take advantage of the rules, the time window is short to decide whether or not to take advantage of the two new special 2012 lookback rules for QCDs!

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As we close the books on 2012 and begin to look forward to 2013, a number of significant issues are looming that will shape financial planners, their practices, and the profession in the year to come. Perhaps the most apparent issue is the one that generated the most intensity in 2012, yet without a resolution: the ongoing debates regarding the implementation of a uniform fiduciary standard for financial advisors, and which regulator will be responsible for increasing the oversight of investment advisers. This issues will become hot topics again in 2013, as the SEC has committed to moving both issues towards a resolution, and the Department of Labor is also anticipated to (re-)release its own new fiduciary rules for 2013. This will be an intense year for financial advisor regulation.

Beyond what's on the regulatory horizon, though, two other significant issues loom for 2013. The first is a wave of change in the software and technology that advisors use, as tablets are rapidly becoming so mainstream that already the majority of advisors are using one... and soon the majority of all Americans will be, too. The bad news is that means a great deal of pressure is coming for advisors to improve their software, systems, and practices to accommodate the use of tablet computers. The good news is that this in turn may lead not only to dramatic improvements in the efficiency of the office and the experience for clients, but also that a wider base of tablet users attracts more software developers and providers to innovate and create even more new solutions and improvements. 

The final issue for 2013 - what will likely turn out to be both the biggest, yet is the one we are least anticipating and for which we are the least prepared - is the establishment later this year of health insurance exchanges and the need for clients to choose what health insurance they will purchase for 2014, or pay a penalty. The sheer numbers involved are daunting and almost overwhelming, as there are nearly 50 million uninsured Americans who must by the end of the year go through a process to purchase health insurance - and must do so from a series of state insurance exchanges that don't even exist yet! The issue will not be constrained to only the uninsured, either, as many employers are likely to cease offering coverage for employees and instead simply pay them a little more and let them obtain their own guaranteed coverage directly. In the long run, this dissociation of health insurance from employment is arguably a positive step for clients; nonetheless, in the nearer term, I suspect we will find that when the books are closed on 2013 a year from now, we'll be stunned by the volume of work that will have been done guiding clients through this health insurance transition period.

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Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interview with Michael Branham, the incoming president of the Board of Directors for the Financial Planning Association (and the youngest person to ever take on the role), as he discusses the outlook for the FPA in particular and the financial planning profession in the coming year. As the first Weekend Reading of 2013, we continue with a number of additional articles taking a final retrospective look at 2012 and a fresh look at 2013, including a look back at the major financial regulatory events of 2012, a prospective look (and wish list) by fiduciary guru Ron Rhoades on potential regulatory activity for advisors in 2013, a look from Bob Clark at how FINRA took some big hits in 2012 but may not be out for the count yet, and a projection by Bob Veres of a dystopian future for advisors if FINRA gains control (can you sense a theme regarding the looming regulatory battles regarding the fiduciary standard, the oversight of investment advisers, and a general dislike of FINRA?!).

We also look at a few other idea and trends articles for the coming year, including an intriguing idea of how financial planning could be brought to the masses to be funded by a tiny tax applied against the rest of the industry, and a look from yours truly in the Journal of Financial Planning about how the "new normal" environment is impacting the growth of financial planning firms. From there, we look at a few investment-related articles, including a discussion by Bob Veres about best practices for firms that use investment committees, a brief article explaining the best ways to determine if your (client's) annuity carrier is safe, and an interesting article from GMO about the challenges of investing for clients in "the age of financial repression." We wrap up with three somewhat more "offbeat" articles: the first looks at the ongoing rise of "gamification" to induce consumers to change their behaviors (for better and for worse); an important reminder not to assume you know what your customers really want (or to get stuck in an echo-chamber by only asking your best clients if they're still happy); and a striking discussion of recent research that shows how we consistently underestimate how different our future personality and tastes will be in 10+ years from what they are today, which has profound implications for how we attempt to establish financial planning goals for clients. Enjoy the reading!

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