All Nerd's Eye View Blog Articles On Investment Planning

Investing For Nonimmigrant Visa Holders: Understanding Visa Types, Investment Challenges, And Tax Implications

May 17, 2023 07:02 am 0 Comments CATEGORY: Investments

Amid a tight job market and low unemployment rates, a significant amount of the U.S. ‘talent gap’ is filled by foreign-born workers on employment visas like the H-1B. These visas allow foreign workers to live and work in the country temporarily while they are employed – although in practice, this can mean that individuals can spend years or decades (or even their entire career) working in the U.S. on a ‘temporary’ visa.

Like native-born workers, foreign workers need to think about saving for retirement, planning for their children’s college, managing healthcare costs, and all manner of other financial goals. However, the system in the U.S. that incentivizes saving for these goals for American citizens – namely with tax-advantaged accounts such as 401(k) plans, IRAs, 529 college savings plans, and Health Savings Accounts (HSAs) – can impose hurdles on foreign nationals who rely on them for their own savings needs.

For example, the tax benefits of certain accounts can sometimes work in the other direction if a non-U.S.-born worker contributing to them eventually moves back to their home country. Roth IRAs, for instance, are taxed once upon contribution and can grow tax-free thereafter in the U.S., which can allow for a large accumulation of tax-free savings over time; however, because some countries don’t recognize the tax-free nature of Roth accounts, withdrawing from the IRA in another country later could cause it to be taxed a second time, eliminating the primary benefit of Roth savings.

Additionally, foreign workers often also face hurdles in opening and accessing some accounts. For example, some brokerage firms won’t even allow foreign nationals to open new accounts, and others may require the individual to close the account and move their assets out if they ever move away from the U.S. and in some cases, entire account types may be unavailable due to the worker’s foreign status, such as 529 plans, which require beneficiaries to have a U.S. Social Security Number (making them effectively off-limits to individuals with noncitizen dependents) and necessitate a different approach to college savings than is common for U.S. citizens.

Ultimately, navigating saving and investing for foreign-born workers requires a careful balance of understanding the considerations and potential pitfalls of different savings strategies, knowing the person’s goals and plans (including potential relocation overseas), and – perhaps most importantly, given the uncertainty that can come with staying in the U.S. on a work visa – maintaining enough flexibility to preserve their assets should those plans change. Advisors who can stay on top of changes to immigration and tax law and help with navigating these challenges can serve a valuable role for foreign national clients – a potential client base that is only poised to grow in an increasingly global workforce!

Factor Investing And Its (Behavioral) Persistence: Facts and Fiction About The Zoo Of Factors

March 8, 2023 07:07 am 0 Comments CATEGORY: Investments

In the early days of investing, stocks were often evaluated in a vacuum: Investors assessed the plusses and minuses of each company’s stock based on its own merits, with little consideration of the relationship between one stock’s performance and that of the market as a whole. Then, in the 1960s, with the advent of the Capital Asset Pricing Model (CAPM), investors began to look at stocks (and by extension, pooled investments like mutual funds as well as entire portfolios) through the lens of a stock’s risk compared to the entire market (and concurrently, the expected return that investors demanded to compensate for that risk). A stock’s ‘beta’ – generally speaking, its riskiness compared to the overall market – was considered a key driver of its future performance.

In the early 1990s, however, the release of a landmark study by Eugene Fama and Kenneth French introduced the concept of “factors” beyond beta that could influence a stock’s performance. Though Fama and French’s study focused on 2 factors (size and value), investment research in the subsequent 30 years has identified hundreds of additional factors that investors can use to adjust their return opportunities and expectations in constructing diversified portfolios.

Although the rise of factor-based investing has created many possibilities for advisors to add value by optimizing the risk and return profiles of their clients’ portfolios, the explosion in the number of potential factors creates its own new challenge for investors, from determining how to evaluate the factors themselves to deciding which ones are really useful in making investment decisions. As it turns out, when filtering the “zoo of factors” down to only those that have had explanatory power to predict above-market returns (as well as that meet a series of tests for persistence, pervasiveness, robustness, investability, and the logic of how they operate), there are really only a handful of factors that are truly worthy of investment (including size, value, momentum, quality, profitability, and quality for equity; as well as term and credit quality for fixed income), which make it much more manageable for investors to implement a factor-investing strategy.

Furthermore, focusing on just the most salient factors can allow investors to avoid some of the criticisms of factor investing raised over the years, including that factors are overly risky compared to the market, that factor investing is prone to failing at inopportune times, and that factors have become irrelevant (or perhaps too well-known and ‘overcrowded’ to produce excess return) for investors going forward. In reality, the body of evidence that supports factor-based investing has only grown larger with time – as long as one focuses on just the factors that have actually proven to be effective.

The key point is that while investment risk is impossible to eliminate, factor-based investment strategies have been shown by a wide body of data to create excess returns without adding to a portfolio’s overall risk. While factor investing isn’t a panacea and can itself be prone to long periods of underperformance, the evidence has shown that it can reward investors who are willing to stick with it. Ultimately, factor investing can be almost as much about behavioral factors as economic ones: The fact that so many investors aren’t willing to endure the risk of underperformance creates potential rewards for the ones who are!

Is Private Debt Worth Considering As An (Alternative) Asset Class In Client Portfolios?

January 18, 2023 07:07 am 0 Comments CATEGORY: Investments

Many investors are familiar with private equity as an alternative asset class, which is popular with certain high-net-worth and institutional investors as a vehicle for diversification and a source of potentially higher risk-adjusted returns than what is available on the public market. However, less well-known is the related but distinct asset class of private debt, which, like private equity, focuses on opportunities outside of what is traded on the public market but deploys its capital in the form of credit rather than taking equity stakes in companies. And in the midst of a rough market for publicly traded debt, high-net-worth individuals (and their advisors) who might be seeking alternatives for the fixed-income portions of their portfolio may be curious about what private debt might have to offer.

While public market and private equity asset classes are much more thoroughly researched, research on private debt providing reliable data on returns, volatility, fees, and other characteristics has been relatively scarce. However, a recent paper by Pascal Böni and Sophie Manigart in the Financial Analysts Journal sheds new light on how private debt has performed over time and provides insight into what factors advisors and their clients should focus on when considering private debt for their portfolios.

One of the paper’s key takeaways is that although private debt as an asset class has delivered higher risk-adjusted returns compared to traditional fixed-income investments, there is a wide range of outcomes between individual private debt funds, with a relatively small cluster of top-performing funds delivering much of the asset class’s overall outperformance. And while the maxim “past performance does not indicate future results” holds true for traditional asset classes, the reverse has proven at least somewhat true for private debt: Among private debt funds and the General Partner who manages them, prior performance was a significant indicator of future performance, with funds having a good performance history being the most likely to outperform in the future. Funds with GPs who had no history of prior private debt fund management had some of the worst performance, suggesting that not only do past returns but also the skills and experience of General Partners have much to do with which private debt funds are likely to have the best returns.

For advisors, examining the management and culture of a private debt fund can be an important way to provide value to clients through a thorough due diligence process. This can include assessing the experience and performance history of the fund’s GP and how the fund has achieved its returns (e.g., by making concentrated bets or through a more diversified approach). And while the choice of a fund may be the most significant decision regarding private debt, advisors can add value in other ways as well, such as by incorporating private debt into a client’s existing asset allocation strategy, optimizing the asset location of a private debt fund, and analyzing the fund’s fee structure.

Ultimately, what’s most important is that clients have a solid understanding of the risks involved with investing in private debt versus remaining in the public markets. Namely, the illiquidity of private funds (which can keep clients’ funds locked up for 10 years or more) makes them most appropriate for clients with a long-term investing horizon and with other liquid funds for short-term and unexpected needs. Advisors who can help their clients navigate these important considerations, and keep the client’s focus on the long term, can be an invaluable aid in ensuring those clients can realize the potential advantages that private debt can make possible!

The Four Types Of Direct Indexing And Technology Solutions For Advisors

February 16, 2022 07:01 am 8 Comments CATEGORY: Investments

First introduced in the 1970s, index funds have grown in popularity over time thanks to their ability to provide broad-based diversification at (typically) very low costs, making their benefits available to investors of any level of wealth. And while mutual funds and Exchange-Traded Funds (ETFs) have been the dominant way for investors to get index exposure, thanks to improved technological capabilities and reduced trading costs, direct indexing – buying the individual component stocks within an index – has emerged as an alternative tool with a range of potential use cases.

Historically, direct indexing was developed as a means to unlock the tax losses of individual stocks in an index – even if the index itself was up – and was primarily used only by the most affluent investors (who had the highest tax rates and benefitted the most from the available loss harvesting). However, direct indexing can be used not only to harvest tax losses but also to harvest capital gains (particularly for those taxpayers in the 10% and 12% tax brackets). In addition, direct indexing can provide tax benefits to investors who are charitably inclined by allowing them to donate the underlying shares within an index that have the largest gains, thereby helping them to maximize their tax savings.

For those whose primary goal is to benefit from a more personalized indexing strategy that still gains broad market exposure while specifically adjusting for personal preferences, using a personalized index can ensure the investor’s capital will support the exact industries or companies they wish to support (while also saving on the management fees otherwise charged by more packaged ESG/SRI mutual funds and ETFs).

The direct indexing framework also is relevant for advisors whose default strategy is to own “the market” (i.e., broad-based index funds), but who also want to overlay various rules that subsequently modify or tilt the allocations based on their own (or their clients’) investment preferences or outlook, such as over- (or under-)weighting certain sectors, factors, or segments of the market.

Finally, direct indexing can be used to help a client with a large, highly appreciated or concentrated investment position, or one whose human capital is tied up in one company or industry. For these clients, an advisor can build around the holdings committed to an existing company or industry by diversifying the remaining assets into an index, better positioning the client away from exposure to a potential downturn in their company’s (or its industry’s) performance.

The distinctions between the four types of direct indexing are important, as the various uses of direct indexing necessitate very different capabilities from the platforms themselves. Which in turn means that more than multiple different indexing providers can each have the potential for breakout success, by building the best-in-class solution for a particular direct indexing approach… while recognizing that what it takes to be most successful in one direct indexing category may be very different from what it takes in others.

Ultimately, the key point is that the value of direct indexing is no longer limited to tax benefits for high-net-worth clients. The developing uses for direct indexing – personalized indexes, rules-based advisor investment strategies, and customized completion portfolios – can benefit a wider range of clients. And while it remains to be seen whether direct indexing will start to displace mutual funds and ETFs in advisor-managed portfolios, its expanded uses, increased outside funding into direct indexing providers, and growing platform capabilities, suggest that direct indexing’s value to advisors is likely to expand in the future!

Series I Savings Bonds: End-Of-Year Strategies To Take Advantage Of The Current High Interest Rate

December 8, 2021 07:06 am 18 Comments CATEGORY: Investments

Fixed income investments are an important component in a portfolio because of their ability to cushion against equity market losses. However, when it comes to abundant returns, fixed income holdings have not had much luck during the low-interest-rate environment of the past few years. Accordingly, those seeking higher returns from their bond holdings have had to venture into less secure instruments, such as high-yield “junk” bonds and other alternative-fixed income holdings. Making matters worse, the recent spike in inflation means that many fixed income investments are earning a negative real yield. However, this is not bad news for all fixed income instruments, as this increase in inflation has made the rarely used Federal Series I Savings Bond (or, more simply, the “I Bond”) significantly more attractive for investors.

I Bonds are offered via the Treasury Department and are backed by the U.S. government. They can be purchased through the TreasuryDirect website, and such purchases are limited to $10,000 annually per person. What makes I Bonds unique is their interest structure, which consists of a combined “Fixed Rate” and “Inflation Rate” that, together, make a “Composite Rate” – the actual rate of interest that an I Bond will earn over a six-month period.

While the current Fixed Rate for newly purchased I Bonds is 0%, the Inflation Rate for I bonds purchased before May 1, 2022 is an annualized 7.12%, meaning the Composite Rate is also an annualized 7.12% (the highest rate of I Bonds since May 2000!) for the first six months that the I Bond is held (after which a new Composite Rate will be determined by any change to the Inflation rate). While I Bonds have a 30-year maturity, they can be redeemed after being held for at least 12 months. Investors who redeem I Bonds between 12 months and 5 years after issue will forfeit the last 3 months of interest, but I Bonds held for more than 5 years can be redeemed at their current value.

The $10,000 annual limit on I Bond purchases restricts their benefit for those with larger portfolios, but there are several ways investors could increase the amount purchased at the current (very favorable) Composite Rate. For example, because the annual limit is a calendar-year limit, individuals could purchase $10,000 worth of I Bonds before January 1, 2022, and then an additional $10,000 between January 1 and April 30, 2022. Which means a couple could purchase a combined $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held. In addition, I Bonds can also be purchased for children or by trusts and estates, which could further increase the amount purchased. Finally, paper I Bonds can be purchased using a tax refund up to a $5,000-per-return limit, which is in addition to the $10,000 annual limit on I Bonds purchased through the TreasuryDirect website.

Ultimately, the key point is that there is a limited amount of time for investors to purchase I Bonds at their very favorable Composite Rate of 7.12%, especially if they want to maximize the amount purchased for the 2021 and 2022 calendar years. In the current environment of low-interest rates and high inflation, I Bonds represent a potential opportunity for investors to increase the yield for a portion of their fixed income portfolio!

Gaining Better Understanding of Client Personality, Attitudes, and Values Using Psychometric Assessments

September 22, 2021 07:01 am 5 Comments CATEGORY: Investments

Financial advisors have used various personality assessments with their clients for decades as a way to identify risk tolerance and to make the right asset allocation decisions. With the growing focus on financial psychology in recent years, though, many advisors have sought to better understand their clients’ behaviors and biases around money, with the ultimate goal of helping them make better financial decisions. In response, there has been a proliferation of behavioral assessments that purport to offer valuable insights into a subject’s psychological characteristics. However, without industry regulations for how these tests are developed, financial advisors need to recognize how to select the right assessments to use with their clients. Yet, how do we know whether an assessment actually gives an accurate psychological profile of our clients? Having at least a baseline understanding of psychometrics – the science of measuring unseen, personal characteristics – can provide a way to determine not only how useful an assessment can actually be for advisors to better understand the client, but also how to select suitable tools based on their psychometric properties.

The usefulness of a test can be judged according to three key elements: design, reliability, and validity. A test with a good design will clearly identify its purpose and the population it was designed for, and will also be engineered to eliminate error and bias from the results. A reliable assessment will provide consistent results each time it is administered, and a valid assessment will measure specifically what it claims to measure. A good test will also have had statistical analyses conducted that confirm the reliability and validity of its design, with published results so its users (e.g., advisors and their firms) can review the developers’ efforts to construct accurate assessments.

One of the core functions of psychometric assessments in the context of financial planning is to measure a client’s psychological risk tolerance in order to predict their behavior in various market conditions. Knowing which clients might be inclined to make poor decisions in up and/or down markets can help advisors focus attention where it is needed most during those often intense and stressful periods. Psychometric tests also aim to examine a client’s enduring traits, which remain relatively stable over time and can therefore be used to predict the client’s behavior in conditions different from those in which they took the assessment—an important attribute in an industry where market conditions and client behavior can both be highly unpredictable.

Beyond serving as traditional risk tolerance surveys, psychometric assessments can also help advisors to understand a client’s communication style, personality, and saving and spending behaviors more objectively and at a deeper level than their own subjective judgment (which can be fraught with biases and sometimes even knowledge gaps of the client’s personal circumstances). As the topic of financial psychology becomes more prominent in our field (as evidenced by the CFP Board’s inclusion of “Psychology of Financial Planning” in its list of Principal Knowledge Topics), it becomes increasingly important for advisors to better understand their clients’ behavioral and emotional traits to improve communication, behavior, and, ultimately, the financial planning recommendations given to their clients.

Ultimately, the key point is that when chosen carefully and used correctly, well-designed psychometric assessments can give advisors valuable information about their clients that cannot be obtained by a simple form, survey, or interview. With insight into their clients’ inherent psychological traits – which are often hidden beneath layers of personality – advisors can better position themselves to deliver financial plans that will more effectively ‘stick’ with their clients!

Storing Cryptocurrency Securely: The Safest Options For New And Experienced Investors

August 11, 2021 07:04 am 36 Comments CATEGORY: Investments

Since the first block of bitcoin was mined in January 2009, cryptocurrency has transformed from an obscure, experimental corner of the market to an increasingly popular investment option trying to become mainstream. Famous for its dramatic highs and infamous for its subsequent lows, cryptocurrency has fascinated many as a fast-moving corner of the market... capturing both media and more and more consumer attention, to the point that many advisors who may have once dismissed cryptocurrency as a legitimate investment option are being asked to reconsider it by a growing number of clients ready to take on at last a little risk. In fact, a recent FPA Trends In Investing survey found that one in four advisors have indicated that they have considered adding cryptocurrency to client portfolios—a massive increase from what was historically fewer than 2% of advisors interested. However, in order for advisors to have confidence in cryptocurrency as a sound client portfolio option, it is important to know how to do more than trade cryptocurrency; advisors must also understand how to securely store it.

Because while cryptocurrencies like Bitcoin solve many unique technological challenges that have made entirely digital currencies infeasible before, cryptocurrency is not held in traditional brokerage accounts like stocks, bonds, mutual funds, and ETFs, which presents unique challenges for securely storing cryptocurrency. In addition, unlike funds that are transferred via ACH and can be retrieved in the event that they were accidentally transferred between the wrong accounts, there is no central authority that can 'undo' an accidental cryptocurrency transaction. Instead, cryptocurrency is traded using public and private keys, which allow cryptocurrencies to be received and spent, respectively. While public ‘receiving’ keys can be used, generated, and distributed on a case-by-case basis without any personal risk, private ‘sending’ keys need to be securely guarded. If someone is trading in large amounts of cryptocurrencies, then the risk is even higher, and the keys will need to be safely stored in what is referred to as a (digital crypto) ‘wallet’. Yet at the same time, a key challenge with cryptocurrency storage is that the sophistication of the storage strategy used needs to also match the technical sophistication of the investor, as there’s a genuine risk of losing funds (or more specifically, permanently losing access to one's own cryptocurrency holdings) in the event that someone doesn’t quite know what they are doing.

So what is a safe option, then, for cryptocurrency storage? There are a wide range of storage options. In theory, one of the most secure methods possible is what’s known as a ‘paper wallet’- which refers to a wallet generated fully offline and stored in a physical format. However, the challenges of actually generating a paper wallet fully offline, and some technical aspects of how Bitcoin transactions actually work, make paper wallets a poor choice for most users. At the same time, despite the ease of use available from some wallets that can be installed on a computer, storing keys on a computer that has ever been connected to the internet is also a bad idea since an internet-connected computer can be compromised (and if that computer is the gateway to thieves permanently stealing one's sizable cryptocurrency holding, it is best to assume that any such computer has already been compromised!?).

Thankfully, there are two general cryptocurrency solutions advisors can give to their clients (or use) themselves. For the less tech-savvy advisor, using a reputable exchange or storage provider is emerging as a lower-risk solution—particularly as more mature firms are developing in this space. Such storage violates an ‘old’ cryptocurrency adage of “not your keys, not your coins,” since it is true that the service provider does have the owner's keys for (and therefore ultimate control of) the cryptocurrency funds, but for someone who otherwise would have limited ability to secure their funds, this may still be a better alternative, particularly if features such as 48-hour waiting periods are added before transactions can be made. However, for the slightly more tech-savvy user, hardware wallets are likely the ideal balance between security and the technical sophistication needed to implement a strategy. Hardware wallets are single-purpose computing devices that are designed solely to store cryptocurrency keys. The single-purpose nature of hardware wallets means that they can be used without fear of being compromised, even if a user is interacting with the wallet through a compromised computer. While there are some basic standards that users would want to ensure a hardware wallet meets, quality hardware wallets use a combination of security features that help ensure that someone’s coins are safe and retrievable even in the event that their hardware wallet is lost or stolen.

At the end of the day, cryptocurrency is likely here to stay, and consequently will only receive more attention in the future. As a result, if someone is going to own cryptocurrency, appropriate security measures need to be taken to address the unique nature of how these assets are owned and held. Importantly, though, as the amount invested grows, so too does the need to safeguard those investments. This is especially true for those who are looking to invest not only for themselves, but also for others. But the good news is that ultimately, with a little bit of research, advisors can find a secure storage option that opens up an entirely new side of investing for their clients (and even themselves if they are so inclined)!

Optimizing 529A ABLE Plan Contributions and Distributions To Benefit Individuals With Disabilities

October 30, 2019 07:06 am 12 Comments CATEGORY: Investments

Planning for individuals with disabilities poses unique challenges when coordinating across the potentially high cost of special care needs, Federal and state assistance programs such as Supplemental Security Income (SSI) and Medicaid, and savings strategies designed to work together with those assistance programs (which themselves can have complex requirements to qualify). For example, in 2014, Congress passed the “Achieving a Better Life Experience” (ABLE) Act that created the tax-favored 529A account, providing tax-free growth opportunities for individuals with disabilities… at least, those with a disability (or blindness) that was diagnosed before the age of 26.

529A accounts allow for annual contributions, from all sources, of up to $15,000/year (the annual gift tax exclusion limit) plus earnings of the ABLE beneficiary, up to the annual poverty limit for a one-person household. They also allow for tax-deferred earnings on contributions inside the 529A plan, and tax-free withdrawals for qualified disability-related expenses. While contributions cannot be deducted from income on Federal tax returns, many states do allow contributions to be deducted on state tax returns. The caveat, however, is that most states also allow state-run Medicaid programs to recover expenses from 529A plans once the beneficiary has died (although five states, so far, have prohibited this, with more possibly to follow), which is important because this recovery-of-Medicaid-assistance provision has been a main reason that many individuals have opted against opening 529A accounts since they were created 5 years ago.

But despite their seemingly complex rules and restrictions – and the potential overhang of state Medicaid recovery at death – 529A accounts can still be used to effectively grow assets in a tax-efficient manner, while serving as a ‘spending account’ for a disabled beneficiary. In fact, advisors can help disabled clients to maximize the value of 529A accounts in light of state Medicaid recovery, particularly since the balance of growth and Medicaid recovery opportunities becomes especially pertinent when the beneficiary is expected to live for at least five more years.

Accordingly, the first step in maximizing the use of a 529A plan, “Contribute, But Don’t Distribute”, is to grow the account balance as aggressively and as quickly as possible in the early years in order to maximize tax-free earnings. However, the balance should be kept below $100,000 if the beneficiary is receiving any SSI benefits (though if the individual does not receive such benefits, the account can be allowed to grow to the maximum account balance as specified by the state, which is often greater than the $100,000 SSI limit).

The second step to maximize a 529A plan, “Earn and Burn”, is to systematically withdraw funds any time the account balance reaches the target threshold (to keep the account balance from exceeding the targeted limit) and to use those earnings to pay for qualified disability expenses.

Finally, the last step, “When In Doubt, Empty It Out”, applies to beneficiaries who live in states allowing for Medicaid recovery from the remaining account balance after their death. In this stage, the account holder proactively spends down and uses the 529A account, in full, if/when the beneficiary’s health takes a turn for the worse or their life expectancy otherwise becomes more limited in time horizon (to ensure there’s nothing left in the 529A account shortly before the beneficiary is expected to die).

Ultimately, the key point is that, despite the complex rules around maintaining a 529A account and the risk of state Medicaid recovery taking away the account’s remaining contributions and growth, the expenses for which a 529A account can be used are broadly defined and thus offer flexible strategies for using 529A plans for the benefit of qualifying individuals who are disabled or blind, ensuring those dollars are fully spent for the disabled beneficiary themselves.

Choosing The Right 529A Plan For A Special Needs Beneficiary

July 10, 2019 07:02 am 2 Comments CATEGORY: Investments

Leveraging the success (and the systems and infrastructure) of tax-preferenced 529 college savings plans, in 2014 Congress passed the “Achieving a Better Life Experience” (ABLE) Act, which created a new “529A” version of the accounts, designed specifically to allow families to accumulate assets on a tax-preferenced basis for special needs beneficiaries. Which for some families may be a more cost-effective (and tax-favored) alternative to a special needs trust, and for others may at least supplement a special needs trust for a portion of the assets the family sets aside.

The caveat, however, is that similar to 529 college savings plans, the new ABLE accounts are established on a state-by-state basis, with everything from the costs to the state tax deductions varying from one state to the next. And because 529A plans are more likely to be used transactionally on an ongoing basis for their special needs beneficiaries… they’ll less likely to grow to a significant size. Which has resulted in some states deciding not to even offer the accounts. Making the process of selecting a 529A plan far more of a state-by-state evaluation effort than even traditional 529 college savings plans.

In this guest post, Andrew Komarow and Craig Breitsprecher of Tenpath Financial Group, an advisory firm with a specialization in working with families that have special needs beneficiaries, explores the current landscape of 529A plans, the key criteria to compare one ABLE account to the next, and what advisors should be mindful of in helping clients to select a plan. Including the fact that very few 529A plans are even designed to work with financial advisors directly in the first place, with only one broker-sold plan and no fee-based options. But with at least some potential workarounds for RIAs through their own custodial platforms.

And with potential legislation under consideration in Washington that might further increase contribution limits, expand age limits, and overall make 529A plans more appealing, ABLE accounts may increasingly need to become part of the financial advisor’s "quiver" of tools to use with clients. At a minimum, though, it’s important to be aware of the options that exist today, and what it takes to ensure that clients who do have a special needs beneficiary pick the plan that’s best for them.

How To Choose The Best TAMP To Work With And Factors To Consider

February 21, 2019 01:55 pm 1 Comment CATEGORY: Investments

As the trend towards financial planning as the primary value proposition for financial advisors continues to gain momentum, one of the biggest challenges that emerges is freeing up the time to provide that financial planning advice to an ever-growing number of clients. As all growing advisory firms eventually get to a point where there just isn’t simply enough time in the day to devote to nurturing client relationships (and developing new ones) and do all the other stuff necessary to make the business actually happen! Accordingly, one of the most cost- and time-efficient ways to increase the time an advisor can spend better servicing clients is by outsourcing the process of implementing (and managing) investment planning recommendations to a TAMP, or turnkey asset management platform. Yet for those advisors who do decide to outsource their investment management, the question then becomes, with the dizzying array of TAMPs on the marketplace, how do you determine which one is best (or at least, best suited to the individual advisor’s needs)?

Accordingly, in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope, we examine six areas of due diligence questions to consider when choosing a TAMP, how to understand the real costs of TAMPs, and the various ways advisors can position the cost of paying for a TAMP’s services (alongside the advisor’s own advisory fee).

Of course, as an outsourced investment management platform, one of the first (and most important) questions to ask any TAMP provider is about how they approach investments in the first place. Because all investment management firms have some sort of philosophical preference…. and without getting into the merits of one strategy over another, the reality is that whatever approach a TAMP uses is going to become your approach if you use that TAMP. Which means, ultimately, you as the advisor are going to be the one responsible for not only selling that investment philosophy (and process) to your clients, but also defending that approach when the inevitable bear market or stint of underperformance occurs. So be certain the TAMP’s philosophy is one you’re ready and willing to defend… and that the TAMP has a process to execute that philosophy, and a performance track record to validate they can deliver!

From a more nuts-and-bolts perspective, other key points to consider when evaluating a TAMP include: make sure that the TAMP is approved on your platform (if you’re under a broker-dealer), or that the TAMP can work with your custodian (if you’re with an RIA); what sort of additional technology do the various TAMPs offer (because there is a wide variety amongst providers, with some offering their own proprietary solutions, others not offering any, while still other TAMPs bolt on other third-party platforms); and what amount of additional staff support does the TAMP offer (or not), including administrative services, investment research, and marketing support.

And don’t forget that you need to determine how much the TAMP actually costs. As with anything, you get what you pay for, and at least in the TAMP marketplace, the pricing usually coincides with the level of service and support that’s provided. But, some TAMPs do price higher than others, and you need to factor in the expense ratios of the investment products they use as well, which get stacked on top of the TAMP’s base fee and can materially impact the all-in cost to your client!

Finally, bear in mind that if you plan to use a TAMP, you have to figure out how you’re going to pay for the TAMP. Some advisors simply treat the TAMPs fees as an additional cost to the client over and above their own management fee (just as the client would have paid a mutual fund manager’s expense ratio above-and-beyond the advisor’s own fee), while other advisors treat the TAMP’s fee as a business expense (because they would have otherwise had to hire and pay staff to see to those duties) and pay it from their own advisory fee, while other advisors “share” the fee with their clients, tacking on only a portion of what they’re paying the TAMP and absorbing the rest of the fee themselves (in lieu of the other staff they would have had to hire anyway).

Ultimately, the key point is that it’s important to spend time taking a deep look at each TAMP provider to make sure that you’re both a good fit for each other, both from a pure philosophical investment viewpoint, and with respect to the technology and other support services the TAMP does or does not offer (which you may or may not need!), and make sure that their offerings address the needs of your clients and how you want to run your business. No one TAMP is the best solution for every advisor, and it’s worth your time to do the due diligence to find the right one for your current and future needs in serving your clients.