Weekend Reading For Financial Planners (August 22–23)

Author: Adam Van Deusen, CFP®

Team Kitces

Adam Van Deusen, CFP®, is a Financial Planning Nerd at Kitces.com, where he hosts the Financial Advisor Technician podcast, writes articles for the Nerd’s Eye View blog (including the popular Weekend Reading for Financial Advisors), and regularly speaks at industry events on a range of technical and practice management topics. He previously worked at a financial planning firm in the Washington, D.C. area and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

Firing Of Forbes Editor Highlights Simmering Questions About Advisor Rankings

(Brooke Southall | RIABiz)

Given the large number of financial advisors in the country, a key challenge for an individual advisor is to show how they stand out from other sources of financial advice. One way to do so is simply by trying to effectively differentiate themselves in how they describe what they do and who they serve best on their website. Others do so by employing social proof, such as through testimonials by current clients (with the SEC's Marketing Rule outlining the requirements for using them compliantly). Another way for advisors to communicate their value and skill to prospective clients is to be recognized on one or more 'top advisor' lists, which are promoted by various publications. However, a recent incident involving individuals at Forbes – one of the higher-profile publishers of such lists – and the firm hired to produce the rankings that Forbes was publishing, brings to the foreground how money plays a role in their creation.

Last week, The New York Times reported that Forbes' chief content officer was fired last month after the company discovered that he had received $6 million from the founder of SHOOK Research, which was working with Forbes to produce rankings of financial advisors. While the Forbes editor reportedly considered the payment a gift for advice he had provided the founder over the years (which was discovered after founder RJ Shook sold his company to a PE firm, and the PE firm then raised questions about the $6M payment that occurred post-sale), it does highlight the major financial implications of such lists, and the tangled web of economics that can underlie why so many publications are now trying to create various "Top Advisors" ranking lists.

'Best advisor' lists such as those published by Forbes typically don't require advisors to make a payment to be considered (or to increase their chances of making the final list), but those who are selected are offered the opportunity by the lists' publishers to purchase advertising, licensing packages, trophies, and republishing rights to get the word out about their selection (the exact amount of revenue 'best of' list creators generate is unclear, but their ubiquity suggests that it's a profitable endeavor). In some cases, advisors cannot even mention that they were recognized by the publication and its associated top-advisor "research" without paying a licensing fee… such that while the lists do not charge outright to participate, they effectively hold the ranking recognition "hostage" until payments are made. In other cases, publications pursue the rankings because when advisors come to the "recognition event", they either must pay a substantial fee (e.g., to buy/sponsor a "table"), or the publication/event organizer sells heavily to third-party sponsors who want to be in the room with a group of "top advisors" (who typically have significant assets under management that could be invested into sponsors' products).

In the case of offerings like the Forbes list, where payment is required to publicize the recognition and use the Forbes brand, the long-standing concern is that publishers might have an incentive to include more advisors from firms that have the financial wherewithal to make these related purchases (perhaps leading them to include more advisors from well-funded wirehouses than from smaller independent firms?). And raises further questions about how the underlying research of such rankings is funded, in situations where Shook did the "independent" research but could only monetize the research by having Forbes publicize it under their (appealing-to-pay-for) brand name recognition. As ultimately, few further details have emerged as to why Shook paid $6M to the Forbes publisher who was involved… beyond the implication that clearly doing "top-advisor research" that was published through the Forbes brand over the years was clearly very financially lucrative for all involved.

Ultimately, the key point is that "best advisor" lists can be highly subjective (given the immense challenge that would be involved in determining how well a particular advisor serves their clients) and can unwittingly (or potentially intentionally) be created in ways that unduly recognize advisors more likely to pay or generate revenue for the publisher's business interests (rather than purely trying to truly identify the "best" advisors). Nevertheless, given the challenge of standing out in a crowded marketplace, being selected for one of these lists (and potentially paying to communicate this selection to prospective clients) could remain attractive for advisors, especially when AI Engine Optimization (AEO) appears to weigh more heavily third-party recognition of an advisory firm (though advisors might consider comparing the cost effectiveness of this tactic compared to other marketing tools?).

SEC Probing AI-Washing, Employee Tech Training During RIA Exams: Document

(Sam Bojarski | Citywire RIA)

One of the major themes in the financial advisory space during the past few years has been how advances in Artificial Intelligence (AI) technology will be incorporated into firms' and advisors' day-to-day business practices. Amidst interest and adoption in this technology (and its implications for marketing accuracy, data security, and client privacy), regulators have taken notice as well.

According to a document obtained by Citywire, the SEC has "requested a list of all mediums an RIA might use to promote AI, such as websites, social media channels, presentations, newsletters, videos, and annual reports," suggesting an interest in evaluating potential "AI-washing" practices where a firm in marketing materials might exaggerate how it is incorporating AI in its business. The document also indicated that the SEC wants to see written guidance "evidencing employee compliance training" on AI and a list of "all board, management, or staff committees with specific AI related responsibilities" as well as whether these committees keep written minutes, demonstrating an interest in understanding who at a firm has AI-related responsibilities and whether they understand how to execute on them in a compliant manner.

In sum, while advisor adoption of AI technology is still emerging, so too is the SEC's interest in ensuring consumers aren't harmed by firms' use of it. And while there are many open questions about advisors' responsibilities under relevant regulations, this document suggests that taking a proactive approach to ensure the firm makes factual claims about its AI use and that team members using AI understand the data security and privacy implications of doing so would appear to be prudent actions?

CFP Board Publishes Guide To Fulfilling Fiduciary Responsibilities When It Comes To Rollover Recommendations

(CFP Board)

When an individual leaves their current employer for a new job or to retire, they face the question of what to do with the 401(k) or other retirement plan at their previous employer (with potential options including leaving the money in the previous employer's plan, rolling it over into a new employer's plan, rolling into an IRA, or making a withdrawal from the plan). For those who already work with one (or who are considering doing so), discussing this decision with a financial advisor is often their first course of action.

While financial advisors are well-placed to offer advice on this decision (e.g., considering the investment, tax, and creditor considerations of the different options available), conflicts of interest can occur as well. For instance, if a client decides to roll the 401(k) into an IRA managed by their advisor (who charges on an assets under management basis), the advisor stands to earn additional fee revenue, whereas if the client rolls it over into the 401(k) at their new employer (and the advisor doesn't manage these assets) the advisor will not generate this extra revenue.

Given the potential conflicts of interest involved, CFP Board this week published a guide to applying the fiduciary duty of CFP professionals to rollover conversations (notably, firm advisors might also have fiduciary obligations related to rollovers from their regulator [e.g., PTET 2020-02] as well). The CFP guide notes that CFP professionals' duty of loyalty and a duty of care to their clients apply directly in the rollover conversation. For example, an advisor can follow the former by identifying conflicts of interest in rollover recommendations, fully disclose them to clients, obtain informed consent from clients, and manage these conflicts through a duty of care process. Such a process includes fully understanding the client's situation and the options available to them (e.g., comparing investment options and fees in the 401(k) plans available to them), then applying this information to present a recommendation (and alternative options) that incorporates costs and other factors (while also documenting the advisor's decision-making process and the course of action chosen by the client).

In the end, rollover conversations present financial advisors with the opportunity not only to offer advice on what can be a financially impactful topic for clients but also demonstrate that they are able to put their clients' interests ahead of their own by conducting a thorough analysis of the available options when developing recommendations and communicate any conflicts they might have. Which could ultimately pay off in greater client trust and loyalty (even if it might mean sacrificing some revenue in the short run?).

Roth Employer Contributions Come With A 1099-R Surprise

(Denise Appleby | Morningstar)

While employees have long had the option to make contributions to their 401(k) or similar workplace retirement plan on either a traditional or Roth basis, employer contributions to these accounts were only made as traditional, pre-tax contributions. However, "SECURE Act 2.0", passed in late 2022 offered employees the opportunity to receive Roth-style employer contributions if their employer permits them.

While employee Roth 401(k) contributions are subject to normal tax withholdings, the IRS treats employer Roth contributions as in-plan Roth rollovers (for SEP and SIMPLE IRAs, the IRS treats employer Roth contribution as if it were first contributed to a traditional IRA and then immediately converted to a Roth IRA). Which means that individuals receiving employer Roth contributions will receive a (perhaps unexpected) Form 1099-R and be responsible for paying taxes on the taxable amount (typically the total amount of the employer Roth contribution).

Given this backdrop, individuals electing to receive employer Roth contributions (and their advisors) will want to recognize the additional income (and taxes owed) that will be reflected on their tax return for the year (which could be particularly important for those managing income to qualify for certain credits or deductions). Also, because the 1099-R is filed for the year the employer contribution is actually added to the employee's account, which might not be the year it relates to (e.g., a contribution made in January for work performed in December), understanding exactly when the employer contribution is made will also be important for managing income in the current and subsequent year.

In sum, the availability of employer Roth contributions to workplace retirement accounts presents several opportunities for financial advisors to support their clients, from deciding whether to choose pretax or Roth contributions in the first place (for both their contributions and those of their employer, if given the option) to managing the tax implications of the route chosen (which could extend beyond the taxes due on any employer Roth contributions!).

Ensuring Clients Can Claim The Full Value Of Their Charitable Donations By Obtaining A CWA

(Laura Saunders | The Wall Street Journal)

While individuals who donate to charities typically do so primarily for altruistic purposes, the ability to obtain tax benefits for this giving can be attractive as well (and perhaps allow them to give more than they might have otherwise!). However, given the potential for abuse of these tax benefits (e.g., by making donations for which the 'donor' receives significant compensation from the recipient), the IRS has stringent rules around reporting these donations.

In order to deduct a gift of cash or property worth $250 or more, donors are required to receive a "Contemporaneous Written Acknowledgement" (CWA) from the charity that gives the value of cash or a description of the property donated and states whether the donor received goods or services in return (token gifts [e.g., mugs or stickers] with a value of up to $13.90 [for 2026] don't need to be subtracted from the donation amount). Notably, the CWA requirement not only applies to donations intended to be included as itemized deductions, but also Qualified Charitable Distributions (QCDs) and donations that qualify for the new deduction for non-itemizers created by the "One Big Beautiful Bill Act".

The need to obtain a CWA came to the forefront in a recent court case in Utah where two individuals donated land worth $665,000 to a town to be preserved as open space, obtained an appraisal for the land (often required for donations of noncash items worth more than $5,000), IRS Form 8283 (which is required for such donations), a letter from the town calling the property a "donation" and a "gift", and a report from the local city council noting that there would be "no expenditure" to the town for the donation, but were denied the ability to deduct the gift by a judge because they didn't have a statement from the town specifying that it provided no compensation in return for the donation.

In the end, while much of the planning focus when making charitable donations is doing so in a tax-efficient way (e.g., by donating appreciated shares or stock and/or 'bunching' contributions into a particular year), this recent case demonstrates the importance of not overlooking the documentary and other requirements to be able to obtain potential tax benefits in the first place!

Considering IRMAA Obligations When Planning A Home Sale

(Sydney Lake | Fortune)

For some individuals, retirement sometimes means leaving both an employer and (given that they might not need to live near their office or might not require as much space) a house where they lived for many years. Amidst the rise in home prices experienced in many parts of the country over the past several years (and the possibility that they've lived in the house for multiple decades), some of those deciding to sell their primary home could realize capital gains in excess of the exclusion limit ($500,000 for those married filing jointly and $250,000 for others).

While those with home sale gains in excess of the exclusion might recognize the income tax implications of the sale, another potential factor to consider for certain individuals is the impact of the sale on their Income-Related Monthly Adjustment Amount (IRMAA) Medicare surcharges. Because the IRMAA for a given year is determined by Modified Adjusted Gross Income (MAGI) received two years prior, home sellers as young as 63 could see their future IRMAA owed increase. For instance, a married, 65-year-old couple who otherwise would have had MAGI of $200,000 in 2024 (which would lead to no IRMAA surcharge) but who realize a $300,000 taxable gain on the sale of their home would see their MAGI increased to $500,000, requiring them to pay more than $12,000 in combined IRMAA surcharges in 2026.

Altogether, while a one-year increase to IRMAA surcharges might not be the deciding factor for individuals nearing or in retirement on whether to sell their home, the non-trivial cost it could add (depending on the client's circumstances) highlights the value financial advisors could offer through income planning (e.g., by reducing other sources of income [e.g., capital gains from investment sales] during the year of the home sale) to minimize this expense (which often represents a major annoyance for clients!).

The Most-Read Email I Sent Clients This Year: A Beneficiary Check-In

(Paul Fenner | Rethinking65)

Filling out account beneficiary forms is seen by some individuals as a necessary task when opening a new account but also something that, once completed, doesn't need to be reconsidered unless a major life event occurs. However, given the power of beneficiary designations (which can override wishes expressed in estate documents, such as a will) and the potential to forget to update them, reviewing them regularly can help avoid undesired outcomes when an individual eventually passes away.

Given the importance of maintaining accurate beneficiary designations, Fenner sends an annual email to each of his clients (which gets a greater response than any other emails he sends throughout the year) outlining their current beneficiary designations for accounts Fenner is aware of. Sometimes the beneficiaries are listed as intended, but clients often realize their current beneficiaries are no longer a fit (whether or not they just experienced a major life event that affects their beneficiaries).

Common circumstances for this include having a deceased parent listed as a primary beneficiary, having no contingent beneficiaries listed, having different beneficiaries listed on their 401(k) at a previous employer and their current 401(k), having a Health Savings Account (HSA) with no beneficiary listed (which can be painful because HSA assets that are left to a decedent's estate are subject to taxation as ordinary income in the year of death), and having an ex-spouse listed as the primary beneficiary on a retirement account from a previous employer. Beyond the named beneficiary or beneficiaries themselves, clients might also check whether they selected their intended option between a 'per capita' or 'per stirpes' election when multiple beneficiaries are involved (which could make a big difference if a named beneficiary has died, as their child(ren) would divide their share if 'per stirpes' was selected but would receive nothing if 'per capital' was checked).

Ultimately, the key point is that beneficiary designations aren't 'set it and forget it' decisions, and financial advisors can play a valuable role for their clients (and potentially build greater client loyalty in the process) by collecting beneficiary data and reminding them to review it regularly (perhaps annually?).

The Timeless Gift Of Ethical Wills

(Megan Moghtaderi | Wealth Management)

Depending on their circumstances, an individual's estate plan might consist of several documents, from a will to a power of attorney and more. Beyond these legally binding documents that govern the disposition of their financial and tangible assets after their passing, amongst other functions, an individual might also want to pass down less tangible 'assets' to their loved ones.

An ethical will can serve this purpose, allowing an individual to describe their values, relationships, and best advice for future generations. For instance, while the decedent might leave a particular piece of jewelry to a grandchild through their legally binding will, the ethical will can describe its backstory, imbuing it with priceless non-monetary value. In this way, an ethical will can serve as a complement to the rest of an individual's estate plan, providing context for decisions made. Notably, while an ethical will isn't a legally binding document (and therefore can take many forms, from a written letter to a video recording), given that it might discuss assets that also appear elsewhere in their estate plan it can be worthwhile to have an individual's estate attorney review it to ensure it's not offering messages (e.g., the intended recipient of a particular item) that conflict with the instructions outlined in their other estate planning documents.

In the end, because an individual's legacy is not just about the financial and tangible assets they leave behind, but also extends to the relationships and impact they built over time, an ethical will can help ensure that heirs have a more complete picture of what their loved one is leaving behind!

The Value Of Naming A Trusted Contact (And How They Differ From POAs)

(William Anderson | Wealth Management)

In order to prepare for the possibility that they might one day no longer be able to make appropriate financial decisions for themselves, many individuals will prepare a Power Of Attorney (POA) to identify an individual who will have the ability to make financial and other decisions for them under certain conditions (e.g., when they are incapacitated). However, as individuals age (and perhaps experience mild cognitive decline) they might still be able to make their own financial decisions but could be more susceptible to financial fraud.

With this in mind, naming a trusted contact can be a valuable middle ground between 'going it alone' on financial issues and having another individual be able to control one's finances under a POA. Unlike a POA, a trusted contact has no access to an individual's money or accounts, but rather represents a safety contact authorized to speak with an individual's financial advisor (or financial institution) in case of suspected fraud or other suspicious activity (e.g., unusual requests for cash withdrawals) that could be stopped before any further damage is done. With this in mind, the best trusted contacts are both dependable (able to be honest and show sound judgment about their family member's or friend's condition) and reachable (as some actions that might need to be taken are time sensitive). While someone might choose their POA to also serve as a trusted contact, this isn't a requirement (and providing an advisor with multiple trusted individuals could allow for beneficial checks and balances).

In sum, while addressing the challenges that can come with aging might be a sensitive subject (though younger individuals might want to name a trusted contact as well for periods where they might not be reachable by their advisor), naming a trusted contact can give clients greater confidence in their financial security while still retaining control over their finances.

Help Me, I've Got Money

(Meghaan Lurtz | (Less) Lonely Money)

Many individuals face a tradeoff between time and money, whether in terms of spending additional time to earn money (e.g., taking a higher-paying job with longer hours) or by using money to 'buy' time (e.g., by hiring a house cleaner). While there could be time to emphasize each during different seasons of life, a body of research strongly suggests that 'buying' time can be an effective way to increase wellbeing.

A problem, though, which is particularly pronounced for women (who often take on many of the care and home management tasks that are frequently outsourced), is that even if they can afford to do so financially, 'buying' time can sometimes come with psychological barriers. For instance, a mom might consider hiring a nanny to watch her kids in order to free up a few post-work hours for meaningful personal activities but could be concerned about blowback she might face for 'letting others raise your kids'. Financial implications can be considered as well (even for those who are in a strong financial position at the moment); for example an adult child might feel pressure to provide part- or full-time care for an aging parent even though it could mean taking time away from their career (leading to delayed promotion opportunities and less lifetime income).

With this in mind, financial advisors could support clients not only by discussing opportunities for 'buying' time, but also by uncovering the motivations and/or hesitancies that might be underlying this discussion. Questions that could be used to do so include asking where does time feel most constrained, what they would do with five additional hours a week, or if there is anything they feel they "should" be doing themselves that they resent doing. Other questions could be particularly useful for client couples (along with ensuring that both partners have a chance to answer) include asking about how caregiving responsibilities are divided in the household and whether each partner is concerned about making a career decision because of caregiving or household demands. Which not only might unearth unspoken burdens that could be worked through and potentially ameliorated in the short run by 'buying' time, but also identify anticipated financial shifts (e.g., an anticipated period away from work to provide care for a loved one) that can be planned for in advance.

Ultimately, the key point is that decisions regarding trading money for time (or vice versa) aren't made in isolation, with relationship dynamics and societal pressure often weighing on them. Which suggests a valuable role for financial advisors in creating space for these issues to come out into the open and to show how time-saving opportunities, if chosen, can be incorporated into their financial plan.

Lifestyle Creep Is The Goal, Not The Enemy

(Elizabeth George | Use Your Wealth)

Personal finance commentators often warn about the perils of 'lifestyle creep', which occurs when an individual's lifestyle expenses rise alongside (or even in excess of) increases in their income, not only limiting their ability to save but also increasing their lifestyle costs that must be met in retirement (which could mean working longer or eventually taking a painful haircut to expenses).

George argues, however, that focusing too much on lifestyle inflation could mean missing out on spending that can make life richer (and to start flexing the spending 'muscle' to avoid being hesitant to spend money later on in life). For instance, because she values expressing herself through her appearance and also buying few, high-quality goods that will last many years, she is willing to buy relatively high-cost clothing items (while minimizing some of her fixed costs to afford these purchases, as well as quarterly vacations, monthly massages, and weekly restaurant trips that she enjoyed). She also finds that spending money to improve one's quality of life can also feel empowering and promote self-esteem during the sometimes-tricky period of mid-life.

Altogether, while some individuals might get enjoyment from looking at their bank balance, money is typically better enjoyed when it is spent. At the same time, there is naturally a balance to be had between spending for today and saving for tomorrow (which makes financial advisors particularly well-placed to help thrifty clients imagine how they might want to put their money to work) and to ensure spendthrift clients recognize the tradeoffs they make for their spending today (ultimately helping all clients find the right balance given their particular preferences!).

Why (Prudent) Spending Rates Matter More Than Savings Rates

(Nerd's Eye View)

The media provides no shortage of articles giving recommendations of how much households should save to afford retirement, from rules of thumb like "save 10% to 15% of your annual income" to more detailed research studies providing "precise" savings guidelines based on age, income level, and targeted retirement income replacement rates. The caveat to all of these tools, though, is that they presume the household has flexible discretionary dollars available to save in the first place.

Yet in reality, most households struggle to save because there is no money left at the end of the month to save in the first place. Because technically their problem isn't a savings rate that's too low; it's a spending rate that's too high, in one or more categories, that is causing all of the available household income to be consumed before the end of the month is even reached!

And sadly, there is remarkably little guidance available to households about what a prudent spending rate should be in the first place. In some of the largest categories, which tend to be financed with debt – e.g., homes and automobiles – lender guidelines place some restriction on the maximum amount of spending in each of those key categories. With the caveat that lenders don't lend based on what is prudent for the borrower, but what will result in a permissible level of defaults and losses for the lender. Or stated more simply, borrowing guidelines are based on what the lender believes will extract the maximal amount of interest with an acceptable level of defaults… despite the fact that many of those borrowers will be in over their heads and struggling just to make their repayments!

A somewhat better data set for households to evaluate the prudence of their spending comes from comparing an individual's spending to the Consumer Expenditure Survey from the Bureau of Labor Statistics, which details what households spend in various categories, segmented by income level (as fixed expenses not surprisingly consume far more of a lower-income household's budget than those with higher income levels).

Of course, comparing one's spending by category to average spending rates (by income level) still doesn't necessarily reveal what is prudent and what a household should spend, especially when recognizing that the national savings rate is already a dismally low 3.2% (which means comparing to CES data in the end simply compares to a national set of households that already are spending "too much" and not saving enough!).

Nonetheless, focusing on spending rates at least puts the focus back on what households can control – what they spend, and what they earn – rather than focusing on or criticizing a savings rate that ultimately is more a result of other decisions than a decision unto itself. And also helps to recognize that, for most middle-income households where spending is challenging, it is actually far better to focus on 'big ticket' housing and transportation costs than trying to trim vacations, clothing, lattes and avocado toast from the budget.

The bottom line, though, is simply to recognize that the real key to saving isn't actually the "saving" itself, but setting reasonable and prudent spending guidelines (ideally derived from something beyond a simple rule of thumb or what a lender is willing to loan out). Which provides an opportunity for financial advisors to offer value for their clients by helping them identify the types of spending they value the most and showing how their spending levels impact their ability to save and ultimately achieve both their short- and long-term financial goals.

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or send an email to [email protected] to suggest any articles you think would be a good fit for a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "WealthTech Today" blog.