Nerd's Eye View blog

Reducing Retirement Income Volatility With The Modified RMD Safe Withdrawal Method

February 25, 2026 07:02 am 0 Comments CATEGORY: Retirement Planning

One of the most pressing questions for individuals nearing retirement is how much they will be able to withdraw from their portfolio each year without exhausting their retirement savings. But the problem is that almost all the variables involved in making that calculation, from market returns to life expectancy to the client's spending needs, are uncertain. This conundrum has spawned an entire field of research into Safe Withdrawal Rates (SWRs), seeking methods to thread the needle between over- and under-withdrawing the portfolio that are also flexible enough to adapt to clients' life circumstances – all while being simple enough to explain and apply in practice.

Several types of withdrawal strategies have arisen out of this research, each with its own benefits and drawbacks. Some 'fixed' SWR strategies, like the "4% Rule" developed by Bill Bengen, are relatively simple to apply – but because they're premised on having the client's portfolio survive the worst-case market return scenario, the vast majority of the time they'll result in the client having significant unspent (and unenjoyed) portfolio assets at the end of their lives. Other 'dynamic' withdrawal strategies, like the Guyton-Klinger guardrail method, can more precisely match portfolio withdrawals to market conditions (and often allow for higher total withdrawals), but the withdrawals under these strategies can vary significantly from year to year, leading to uncertainty and anxiety for some clients who use them.

One strategy that can serve as a happy medium between fixed and dynamic withdrawals borrows from the IRS's method of calculating Required Minimum Distributions (RMDs) from retirement accounts. Under the RMD method, the client's total portfolio value as of the end of the previous year is divided by a factor based on the client's remaining life expectancy (provided by IRS tables for RMD calculations). As a result, each year the client withdraws only a certain percentage of their portfolio, preventing over-withdrawals – but because the withdrawal percentage increases each year incrementally, there's a lower likelihood of leaving significant funds behind. And because the IRS publishes RMD tables for all ages (since, for example, a child who inherits an IRA may be subject to RMDs), the RMD method can be applied regardless of when the client decides to retire.

Furthermore, the RMD approach can be modified to reduce the volatility of annual withdrawals (e.g., if market movements cause a temporary drop or spike in the portfolio's value at year-end). Under this modified approach, the annual withdrawal is calculated based not just on the previous year-end portfolio balance, but on the average of the past three years. This helps smooth out year-to-year variations in annual withdrawals and can help keep clients from focusing too much on market conditions that could affect their 'paycheck' the next year.

The key point is that because the IRS has already done the work of calculating withdrawal tables meant to gradually deplete a portfolio throughout retirement, the RMD method presents a relatively easy-to-understand strategy that doesn't require special software or decision trees to implement. And with a few simple modifications – e.g., using the three-year average portfolio value to reduce withdrawal volatility and carving out specific amounts to set aside for legacy and other goals – advisors can help their clients customize the RMD method to meet their own needs and ultimately reduce the uncertainty around drawing down their portfolio in retirement!Read More...

Fixing Advisory Firm Marketing Funnels So The Phone Actually Rings With Prospects: #FASuccess Ep 478 With Kendra Wright

February 24, 2026 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 478th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Kendra Wright. Kendra is the owner of Rebel Media Agency, a marketing firm based in Austin, Texas, that helps RIAs establish and execute clear marketing strategies.

What's unique about Kendra, though, is how her experience working with a range of financial advisory firms has allowed her to identify four ways that advisor marketing funnels break and the solutions that can help firms establish more effective marketing practices.

In this episode, we talk in-depth about how Kendra finds that many advisors lack what she calls "ideal client clarity" and attempt to market themselves to a broad audience (making it harder for potential clients to understand whether the advisor can solve their particular pain points), why Kendra thinks that getting "ideal client clarity" doesn't necessarily require an advisor to adopt a single hyper-specific niche, but rather the ability to identify one (or more) profiles of the clients they most enjoy working with and who can afford to pay for the advisor's services, and how Kendra completed this exercise with her own firm, zeroing in on working with particular types of RIAs instead of a broader pool of potential advisor clients.

We also talk about how Kendra finds that advisors can improve their marketing funnels by engaging in what she calls "channel focus", identifying the marketing channels (for example, YouTube or in-person seminars) where their ideal clients are most likely to engage with the advisor's content (and why having multiple ideal client types might require focusing on separate channels for each), why Kendra thinks that "channel focus" is also a function of identifying a medium that reflects an advisor's strengths when it comes to content creation (for instance, advisors who are strong writers might choose to create a blog or long LinkedIn posts, while those who prefer verbal communication might start a podcast), and how Kendra finds that focusing on creating content tailored for a particular marketing channel can help advisors differentiate themselves from those who cast a wider net across channels (but not stand out in any particular one).

And be certain to listen to the end, where Kendra shares why she thinks the best advisor content talks about painful, urgent problems their ideal client is likely to face (rather than more general "helpful" content that could otherwise be found through a Google search or AI prompt), why Kendra thinks it's important for advisory firms to have effective calls to action in their marketing and on their websites that make it easy for prospective clients to take the next step (and to make it clear that the firm is currently accepting new clients in the first place), and how Kendra has ultimately found success not by growing her marketing agency as large as possible but rather by gaining flexibility (and greater satisfaction) by focusing on a smaller number of (profitable) clients she enjoys working with.

So, whether you're interested in learning about the different ways marketing funnels can "break", how to create "ideal client clarity" to get your marketing off on the right foot, or how to better move consumers from content to client, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Kendra Wright.

How Prospects Choose A Financial Advisor: 3 Key Methods To Communicate Your Value

February 23, 2026 07:01 am 0 Comments CATEGORY: Marketing, Research

Prospective clients face a complex and high-stakes decision when selecting a financial advisory firm. They're not only seeking credentials to trust, but also an individual they can genuinely trust to solve their specific financial challenges. However, the landscape of financial advice can be dense, and these decisions are high-stakes for prospects – a traditional advisor/client relationship involves nearly all of their life savings and can span years. For the prospect, this poses the challenge of how to determine who to trust, given their lack of understanding of the broader landscape of financial advice. For advisory firms, this poses a challenge of how to stand out to the (right) prospects and communicate their value effectively.

In this article, Sydney Squires, Senior Financial Planning Nerd, discusses how financial advisors can mold their existing marketing and value propositions to fit a prospect's emotional and practical decision-making process. Most decision-making processes are two-part: first, the divergent phase (gathering a wide array of qualified options), then the convergent phase (of narrowing down the list). This process often cycles multiple times as prospects refine their understanding of what they need and who can best provide it.

For prospects, the initial divergent phase involves looking for indicators of general trustworthiness and expertise. This typically includes checking an advisor's professional designations or seeking peer validation of the firm, such as asking for referrals or looking for online reviews. Referrals remain the most influential factor in how prospects find advisors… yet Wealthtender's research shows that 96% of prospects will conduct further online research before reaching out, typically visiting the advisor's website and evaluating credentials, pricing transparency, and communication style.

This highlights the importance of 'supporting tactics' such as SEO, social media, and newsletters – tactics that help reinforce the positive perception initiated by referrals. Even strong referrals can falter if a firm's website is outdated, difficult to navigate, or overly generic. Design, clarity, and messaging matter; poorly executed online experiences can erode trust, while effective ones help convert curiosity into inquiry. The challenge for advisors is to strike a balance between providing general signals of trust and competence to ensure visibility… while also providing specific evidence and information to withstand the convergent phases.

In the end, prospective clients are looking for two things: someone they can trust and someone who can solve their problem. And prospects generally look for that information in multiple steps. Financial advisors who recognize the nuances of the prospect decision-making process – and who intentionally align their marketing, online presence, and messaging to meet those needs – are better positioned to attract and convert right-fit clients. By layering in both general trust signals and information about the specific value they provide, advisors can effectively differentiate themselves in a crowded, often confusing marketplace, creating clarity and confidence for the people they are best suited to serve!

Weekend Reading For Financial Planners (February 21–22)

February 20, 2026 02:00 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 research from Morningstar finds that the vast majority of actively managed funds underperformed their passively managed peers in 2025, with even fewer active funds outperforming over 5-, 10- and 20-year periods. Nevertheless, the research did identify a few market segments (including certain bonds and real estate) where actively managed funds (particularly those with relatively lower costs) tend to fare relatively better, suggesting that there could be room for advisors to add value by identifying funds in these areas that might be supportive of their clients' portfolio needs and investment goals (though, as always, past performance isn't indicative of future results!).

Also in industry news this week:

A review of financial advisor salaries finds that lead advisors (and those living in certain states in the Northeast) tend to see the highest pay
A survey finds that financial advisors are seeing more success converting defined contribution retirement plan participants into wealth management clients, suggesting that advising on plans not only could be a profitable business line itself but also serve as a valuable marketing tactic

From there, we have several articles on retirement planning:

Why the 'guaranteed' returns of delaying Social Security benefits (and the unknown returns of a broadly invested portfolio) could make waiting to claim benefits a valuable way to mitigate against longevity risk
How certain client preferences (such as being able to spend more earlier in retirement when they are relatively healthier) could shift their optimal Social Security claiming age earlier than what a purely math-based calculation might prescribe
Why it rarely pays for both spouses to delay Social Security benefits (with an 'optimal' strategy often being for the higher-earning spouse to delay benefits as long as possible and the lower-earning spouse to claim as soon as they can)

We also have a number of articles on estate planning:

The many complications involved when transferring real estate to heirs and how financial advisors can support clients by getting this conversation started early (to help avoid potential tax issues and family conflicts)
While more states are allowing for "transfer on death deeds" that allow real estate to be transferred to heirs without going through the probate process, care must be taken when applying for this structure to avoid legal headaches down the line
Four tax-aware strategies for clients looking to give a primary or vacation home to their children or to charity

We wrap up with three final articles, all about college planning:

Why 529 plans can be particularly attractive for college saving, not only for their tax benefits but also for their superior treatment compared to certain other account types (including Roth IRAs) when it comes to income counted in financial aid calculations
Eight tips for appealing financial aid awards, including the ability to make colleges compete directly against one another (particularly if they're peer institutions)
How algorithmic pricing has become embedded in the college aid landscape and how students and their families can benefit by reading between the lines on the aid offers they receive

Enjoy the 'light' reading!

The (Unexpected) Ways AI Is Changing Content Marketing For Financial Advisors: Kitces & Carl 184

February 19, 2026 07:03 am 0 Comments CATEGORY: Kitces & Carl Podcast

The advent of artificial intelligence (AI) initially seemed like a breakthrough for advisors who liked doing content marketing yet struggled to find the time and focus to do so. However, the very technology that enhanced creation and distribution for advisors did the same for everyone. In an environment oversaturated with low-effort AI-generated content, financial advisors are finding that content marketing no longer delivers the impact it once did. What was once an effective way to connect with prospects and demonstrate expertise is increasingly becoming a source of noise – undermined by the very technology that was supposed to enhance it.

The widespread availability of AI tools has made it easier than ever to produce blog posts, newsletters, and social media content. But as the barriers to creation fall, the flood of undifferentiated, mediocre content has overwhelmed audiences, eroding trust, reducing engagement, and forcing advisors to rethink how they communicate value. As a result, many advisors now report declining engagement and fewer client conversions.

In this 184th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how financial advisors' content marketing can continue to stand out amongst a saturated world. When everyone has access to the same tools, the signal-to-noise ratio plummets. Unless content is either outrageously bold or hyper-relevant to a clearly defined audience, it gets deleted, ignored, or filtered out.

What remains are two angles: outrageousness (provoking anger or 'spirited discussions') or relevance (deep, authentic, and personalized content). The latter is more sustainable than the former. But through that relevance, advisors must be ruthlessly specific about who their work is for and what it does. Broad content aimed at 'everyone' no longer cuts through the noise, but high-quality, consistent, and uniquely human content still stands out! Whether through long-form writing, clear idea distillation, or curated content, advisors can reassert their value through thoughtfulness and craftsmanship. AI can still be a powerful ally, but only when used strategically – as a tool for ideation, editing, and refinement – not as a substitute for the advisor's authentic voice.

As the marketing landscape shifts, substance, not volume, becomes the marker of distinction. Ultimately, the path forward requires advisors to either be radically unique or hyper-relevant – ideally both. AI isn't the enemy of content marketing, but a reminder that the human element is now more important than ever. By doubling down on quality, clarity, and audience fit, advisors can continue to use content to build trust, demonstrate expertise, and drive meaningful engagement. The firms that thrive will be those that resist the temptation to automate everything and instead focus on doing the deep work of creating content that truly matters.

9 Discovery Meeting Questions To Find Out What Clients Really Want From You And Align Relationship Expectations

February 18, 2026 07:01 am 0 Comments CATEGORY: Client Trust & Communication

There is a lot of information to gather early on in a relationship between a financial advisor and their new client, from investment statements to risk tolerance data. Given that both parties might be focused initially on creating an initial financial plan and solving any 'pain points' that are on the client's mind, it can be easy to miss out on discussing each side's expectations for the broader relationship (e.g., when it's appropriate for the client to contact the advisor with a question). However, avoiding this conversation can create misaligned assumptions between the advisor and their client, potentially leading to frustration for one or both parties over time.

In this guest post, Meghaan Lurtz, a leading expert on the psychology of financial planning and Professor of Practice at Kansas State University, discusses the potential benefits of taking time early on in the advisor-client relationship to discuss and set clear expectations as well as nine questions advisors can use to get the conversation started and ensure they and their clients are on the same page.

To start, an advisor might ask a new client about their understanding of the advisor's planning process and what to expect regarding formal meetings and other touchpoints. An advisor might also ask about the client's expectations for the relationship, allowing the advisor to highlight areas where client expectations are in line with the advisor's service model and any client expectations that might be unrealistic (e.g., if the client expects the advisor to prepare their tax return but that service isn't offered).

A central issue in the advisor-client relationship is ensuring each party sets expectations for when communication is appropriate, as some clients may be unsure when they're 'allowed' to reach out to their advisor. By starting this conversation, advisors can note when they want clients to reach out (e.g., when they're planning to make a major purchase). This topic can also lead to a discussion of the best modes of communication for each side (e.g., phone versus email) to avoid assumptions that one particular mode is preferred by both the advisor and their client.

This conversation can also be used to set big-picture expectations for the relationship. For example, the advisor might ask their new client what a successful relationship would look like to them (which might include both a number [e.g., a particular retirement savings goal] and a feeling [e.g., a sense of financial freedom]), giving the advisor more information about what the client is seeking from their partnership. Similarly, an advisor might ask what the client wants to be true about their work together over the next year, giving the advisor clarity on shorter-term goals and creating a natural check-in point to see whether each side's expectations are being met. Also, to set expectations before conflict arises, an advisor can ask a client early on about how they would want to handle a potential disagreement with the advisor or between members of a client couple.

Ultimately, the key point is that the client onboarding process is not just about understanding a new client's financial situation and loading this information into the advisor's computer systems, but also represents a valuable opportunity for both the advisor and the client to communicate and discuss their mutual expectations for their work together. Which could result in greater trust and satisfaction for both sides over the course of what will hopefully be a long-term relationship!

Finding Real Uses For AI Tools Not Just To Gain Efficiency But Create More (Customized) Value For Clients: #FASuccess Ep 477 With Christopher Haigh

February 17, 2026 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome everyone! Welcome to the 477th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Christopher Haigh. Christopher is the CEO of Iconoclastic Capital, an RIA based in Rochester, New York, that oversees approximately $60 million in assets under management for 120 client households.

What's unique about Christopher, though, is how he is using Artificial Intelligence (AI) tools not only to gain greater efficiency (for example by taking notes during client meetings and scanning data from client documents), but also to create high-quality deliverables that convert prospects and wow clients.

In this episode, we talk in-depth about how Christopher was an early adopter of AI-powered note taking software (starting with a generalist tool before transitioning to one designed for financial advisors and now using one integrated with his custodial platform), how Christopher leverages the AI capabilities of his financial planning, investment analysis, and tax planning software to save time on data entry that allows him to provide better planning analyses for clients, and how Christopher uses more generalist AI tools to generate and refine dynamic presentations that give prospects and clients a richer understanding of his firm and its value proposition than more static formats.

We also talk about how Christopher started his RIA after leaving a successful practice in the insurance channel in order to provide fee-only comprehensive planning to his clients (and to have the freedom to create his own unique brand), how Christopher offered his team equity stakes early on (to allow them to participate in the growth of his firm and as a reflection of the challenges of offering industry-competitive salaries as a startup), and how Christopher now generates 150 client leads each year in part by using his website to demonstrate the firm's unique brand (even though it might turn some prospective clients away)

And be certain to listen to the end, where Christopher shares how he balances his desire to leverage new AI capabilities to iterate on his firm's deliverables with the need to offer consistency for his team and clients, why Christopher thinks individuals who received sales training and experience in the insurance channel can make excellent candidates for positions at RIAs (even if they need to build their financial planning skills), and why Christopher wants to grow his firm into an enterprise that can remain independent long after he leaves the business.

So, whether you're interested in learning about practical applications of AI tools that can allow for more engaging client interactions, building a niche around a brand identity, or taking a startup approach to creating a new advisory business, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Christopher Haigh.

The 7 Dimensions Of Risk For Growing Advisory Firms

February 16, 2026 07:01 am 0 Comments CATEGORY: Practice Management, Research

Starting an advisory firm is a bold risk, but even after it is established, growth introduces new and evolving risks that can undermine long-term sustainability if left unexamined. Advisors are trained to assess and manage risk in client portfolios, yet many give far less attention to the risks embedded in their own businesses. As with clients, the goal is not to eliminate all risk, but to align a firm's risk exposure with its goals and capacity – removing unmanaged or misaligned risks while embracing those that offer strategic upside. For firm owners, this requires clarity not only on where the risks lie, but on when to act, when to monitor, and how to prepare for inevitable disruptions.

In this article, Senior Financial Planning Nerd Sydney Squires discusses how advisory firm risk manifests across seven different dimensions, and how advisors can evaluate and integrate risk into their advisory firm in a thoughtful, strategic way as their firms grow.

First, profit margin functions as a firm's shock absorber and growth engine. A healthy margin (ideally around 40%) enables hiring, experimentation, and resilience in down markets, particularly for AUM-based firms that are exposed to market volatility. However, excessive profit retained at the firm level can become a retention risk if compensation growth lags. Introducing variable pay structures can both boost advisor well-being and more closely align team incentives with firm performance.

From there, advisors can consider the various risks and rewards of different service models. For example, recurring revenue provides predictability and stability – and at the same time, many advisory firms integrate AUM into their fee model, which scales well in bull markets, but compresses quickly in downturns. Blended models that combine AUM and planning fees offer more durability, especially when paired with stress-tested revenue scenarios.

Additionally, client types can pose different types of risk. Firms that depend heavily on a few large clients or underprice certain client segments create fragility in their revenue base. Much like concentrated portfolios, these risks require proactive diversification – either by gradually adjusting fees, 'graduating' misaligned clients, or growing segments with similar profiles. And in the realm of client acquisition, many solo or small firm advisors rely heavily on their own time and energy for marketing, creating a bottleneck as the firm scales. As the firm grows, this advisor-centric approach becomes unsustainable. Shifting to scalable marketing channels, outsourcing, or delegating to team members reduces dependency on the lead advisor and lowers long-term acquisition costs.

Finally, advisors may consider the risks inherent in their team structure and capacity. If a firm waits too long to hire, it risks burnout and turnover – yet hiring prematurely also introduces cashflow stress. At the same time, as the firm grows, it is easy for processes to increasingly exist in 'just' one advisor's head. This, in turn, creates a severe risk of turnover or leave of absence! Without process documentation and cross-training, firms are vulnerable to knowledge loss and inconsistent service. Establishing regular process reviews and redundancies improves team resilience and allows firms to scale more confidently.

Ultimately, the key point is that none of these types of risk is inherently bad. Rather, the challenge is for advisory firm owners to embrace 'their' risk that best aligns with their goals. Strategic use of guardrails, backup plans, and market stress testing can help firm owners make more confident and strategic decisions over time. Further, reducing low-reward risks while doubling down on growth-aligned ones allows advisory firms to scale more sustainably. Advisors who understand and intentionally shape their firm's risk profile are better equipped not just to survive, but to grow something uniquely molded to their long-term vision!

Weekend Reading For Financial Planners (February 14–15)

February 13, 2026 02:00 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's latest RIA compensation report finds that while base salaries remain the largest component of advisor compensation, firms that offer incentive pay have seen more revenue and client growth in recent years than those that don't (notably, these firms also are more likely to have strategic plans and a defined client value proposition, which could play a role in these results as well). Beyond compensation, the survey also found that top-performing firms were more likely to offer an established employee value proposition (including features such as a compelling work setting, emphasis on teamwork, recognition, and connections, and a defined mission statement, culture, and values), suggesting that attracting and retaining high-quality talent (and the follow-on effects for client growth) could mean looking beyond headline salary figures to the broader monetary and non-monetary compensation firms can provide their employees as well.

Also in industry news this week:

A recent SEC settlement shines a light on potential regulatory violations stemming from RIAs' use of "hedge clauses" in their advisory agreements
A survey looking at advisory firm career development finds that internal training and compensation for certifications and continuing education are the most commonly available features of such programs, with a number of advisors seeking less-common offerings, including external coaching

From there, we have several articles on tax planning:

Four red flags that might appear in a prospect's or client's tax return and how advisors can use them to identify future tax-savings opportunities
How financial advisors can help high-income clients duck the "SALT torpedo" that can result in a significantly higher marginal tax rate
The pros and cons of three timing strategies for taking Required Minimum Distributions (RMDs) and how advisors can play a valuable role in ensuring they are taken in a timely and accurate manner

We also have a number of articles on retirement planning:

A recent study finds that annual healthcare costs could be expected to increase at an average annual rate of 5.8%, well above the overall inflation rate
How the growing costs of the Medicare program could lead to significantly higher IRMAA surcharges in the years ahead (increasing the value of income management in retirement)
While lump-sum figures of total healthcare spending in retirement might be scary, in reality these costs often represent a more manageable burden on an annual basis (though still a major line item on many retirees' budgets)

We wrap up with three final articles, all about time management:

Why "time fragmentation" can prevent advisors from focusing on strategic initiatives that could boost long-term growth and how time blocking could be an effective solution
How "hurry sickness" can lead to negative physical and mental effects for busy professionals, and how a task organization system that moves items off an individual's plate can prevent this phenomenon from occurring
Why procrastination isn't necessarily a matter of (a lack of) mental will, but rather a reflection of ambivalence between two choices that each have their own upsides

Enjoy the 'light' reading!

Box Spreads Explained: A (Lower-Interest) Borrowing Alternative To Margin Loans And SBLOCs

February 11, 2026 07:03 am 0 Comments CATEGORY: General Planning

Debt is an important tool in the financial toolbox, and can be very helpful when used in the right way. People often view 'good' debt in terms of loans that are subsidized and/or tax-deductible in some way, such as mortgages and Federal student loans. But some forms of debt can be useful for other planning purposes, such as when an individual needs a bridge loan to put a down payment on a new house while waiting for their old house to be sold, or if they have a large expense coming up like a home renovation or a new vehicle purchase and they want to avoid liquidating investment assets (and incurring capital gains taxes) to pay for it.

There are various types of loans available for these shorter-term borrowing needs, including Home Equity Lines of Credit (HELOCs) backed by the equity in one's home, and margin loans or Securities-Backed Lines of Credit (SBLOCs) secured by the value of the borrower's portfolio assets. While these loans offer some financial flexibility and have lower interest rates than other kinds of personal debt, like credit cards, they still tend to carry higher interest rates than the 'best' types of loans (e.g., mortgages and student loans). Moreover, interest paid on HELOCs, margin loans, and SBLOCs generally isn't tax-deductible, unless they're used for a small subset of purposes (e.g., a HELOC used for home renovations or a margin loan used to buy income-generating investment property).

In recent years, however, a new form of 'synthetic' lending has emerged as a potential alternative to margin loans or SBLOCs for short- and medium-term borrowing: The "box spread". At a high level, the box spread is an options strategy involving four different options contracts (selling a call, buying a put, buying a call, and selling a put), all with the same expiration date. The options contracts are structured so that, regardless of market movements, the 'borrower' is guaranteed to receive a net premium payment at the start of the period and to repay a fixed amount on the options' expiration date. Which makes the box spread effectively a zero-coupon loan where the 'principal', plus interest, is paid back at the end of the loan term. And owing to the fundamental math behind options pricing, the effective 'interest' rate paid on box spread loans tends to be only slightly higher than the interest on Treasury bills, which is far lower than the borrower would likely pay on a margin loan or SBLOC!

The tax treatment of box spread loans creates yet another advantage. Since a box spread effectively creates a net loss on a combination of options contracts, the 'interest' paid is tax-deductible as a capital loss. And because most box spreads qualify as 'non-equity options' under IRC Sec. 1256, a portion of the loan interest is usually deductible in each year that the box spread is in effect – even though the interest isn't actually paid until the options expire and the 'loan' is paid back. All of which means that in comparison to margin loans and SBLOCs, box spread loans have both a lower interest rate, and that interest is tax deductible (although box spread interest is only deductible against capital gains income, which is less of a benefit than being able to deduct against ordinary income – but it's still better than not being able to deduct the interest at all!).

Although options strategies are often risky, the offsetting 'legs' of a box spread mean that there's no inherent market risk from using a box spread – and because the Options Clearing Corporation (OCC) guarantees options contracts, there's very little risk that a counterparty will be unable to pay their portion of the options contract either. The main risk is that the amount to be repaid generally counts against the borrower's margin requirements in their brokerage account. Which means the borrower can borrow up to a certain percentage of the assets in their taxable account (typically 50%), and a severe market drop could trigger a margin call requiring the borrower to add more funds to their account and/or close out the box spread early.

The key point is that while box spreads won't necessarily replace advantageous debt like mortgages and student loans, their combination of low interest rates and tax deductibility can make them a viable alternative to HELOCs, margin loans, and SBLOCs in the shorter-term borrowing sphere. And with new providers starting to pop up that can handle the operational side of box spread borrowing and make it so that advisors don't need to manually construct box spread trades for their clients, they could become much more common in the years ahead as an option to meet clients' borrowing needs.Read More...