Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the release of the IRS’s long-awaited SECURE Act regulations, which clear up many questions advisors had about how the law’s provisions will apply to IRA beneficiaries after the original owner’s death in numerous scenarios (such as what to do when the original IRA owner was taking RMDs before their death, what options spouses of deceased IRA owners have for distributing the IRA’s assets, and which distribution rules apply to “See-Through” discretionary trusts).
Also in industry news this week:
- The IRS has reversed course on its plan to require users of its Online Account feature to submit to facial recognition to verify their identities after blowback from numerous sources (though the agency has yet to announce what will replace the facial recognition process and is still processing facial recognition through its website even after the announcement)
- A new report from McKinsey shows that the fastest-growing category of investors are “hybrids” (i.e., those who have self-directed brokerage accounts in addition to a traditional financial advisor), underscoring the opportunity for advisors who can provide financial planning for clients beyond their (increasingly self-managed) investment portfolio
From there, we have several articles on education planning:
- How ‘merit aid’ is lowering the cost of college for many families… and increasing the importance of getting strong grades in high school
- How to navigate the rules for determining whether a college student is eligible for in-state tuition benefits
- How to ‘superfund’ a 529 plan, and when it might (or might not) be a useful strategy for financial planning clients
We also have a number of articles on practice management:
- How advisory firm owners can use the “Entrepreneurial Operating System” to systematize organizational meetings, identify and solve issues, and stay focused on the firm’s long-term goals to overcome the challenges that come with being an “accidental business owner”
- Why businesses are increasingly considering offering more frequent pay raise schedules in the face of a hot labor market
- How realizing the potential of the remote work environment to give employees more flexibility and control over their lives (and make them happier and healthier in the long run) may depend on replacing constant “pings” and meetings with more asynchronous forms of communication like task boards that give employees information when they need it (but don’t interrupt them when they don’t)
We wrap up with three final articles, all about the benefits of learning to become a (better) writer:
- How strong writing skills can help advisors refine their ideas, and better communicate with prospects and clients
- Strategies for overcoming writer’s block, and how advisors can leverage their clients’ questions to generate content
- How writing can turn ideas from raw building blocks into a well-reasoned and coherent discussion with clients and prospects
Enjoy the ‘light’ reading!
(Melanie Waddell | ThinkAdvisor)
The SECURE Act, passed in the waning days of 2019, introduced sweeping changes to many of the rules surrounding retirement accounts like 401(k)s and IRAs. Most notably, the law replaced the old “Stretch” IRA rules (in which a beneficiary of an IRA whose original owner had passed away could stretch distributions from the trust over their entire lifetime) with the “10-year rule”, where (for most non-spouse IRA beneficiaries, dubbed “Non-Eligible Designated Beneficiaries”) the beneficiary must withdraw the entire contents of the IRA by the end of the 10th year after the original owner’s death.
However, the text of the legislation left open several important questions about how the new rules would be applied across different types of beneficiaries. Would an IRA beneficiary need to take RMDs if the IRA’s original owner had already begun taking RMDs? Would spouses of deceased IRA owners, who are generally allowed to delay RMDs from the inherited IRA until age 72, be able to opt for the 10-year rule instead of waiting for their own RMDs to kick in? Will all discretionary “See-Through” trusts, originally set up to qualify for the stretch rules under the previous law, now be subject to the 10-year rule (and be at risk for the ‘compressed’ distribution schedule triggering compressed trust tax brackets)?
On February 23, the IRS issued 275 pages of long-awaited proposed regulations answering the questions above, along with many others left open by the original legislation. Among the proposed regulations’ many provisions are:
- Non-Eligible Designated Beneficiaries of IRAs whose original owner had begun RMDs before passing away would now be required to take yearly RMDs and fully empty the account within 10 years (while if the original owner hadn’t yet started RMDs, the beneficiary would only need to satisfy the 10-year rule, without any year-by-year RMDs along the way)
- Spouses of deceased IRA owners would be able to choose between delaying RMDs until their own RMD age, or fully emptying the account within 10 years (which could come in handy if the spouse has large IRA accounts of their own and would pay a lower tax rate by distributing the inherited IRA before waiting for their own RMDs to kick in)
- Discretionary See-Through Trusts will be treated as subject to either the old stretch rules or the new 10-year rule, depending on the makeup of the trust’s beneficiaries – but certain beneficiaries can be disregarded when making this distinction, making it possible for some trusts to be able to use the stretch rules that would have otherwise been ‘stuck’ with the 10-year rule
There is now a 90-day comment period for the proposed regulations, followed by a public hearing, and then the release of final regulations (likely before the end of the year). For advisors, the proposed regulations provide many potential opportunities to review clients’ beneficiary designations and trust setups and discuss the potential impact on those clients’ tax situations (and that of their heirs).
(Drew Harwell | Washington Post)
Last year, the IRS began introducing an enhanced identity validation process for users of its Online Account feature, which allows taxpayers to make tax payments and view transcripts, correspondence, and other tax information. The new process would have required users (even those with an existing IRS account) to create new login credentials and upload a “selfie”, along with a picture of a photo ID, to continue to access their accounts. For the new verification process – including the facial recognition technology – the IRS contracted with the third-party vendor ID.me.
But as the new login process was rolled out, it accumulated criticism from users, privacy advocates, government watchdogs, and eventually members of Congress for numerous concerns with the technology and how it was deployed. First, many users complained that the new photo-based verification process – which proved difficult even for technology-savvy users to manage – would present an obstacle for elderly or lower-income taxpayers without the hardware or tech skills to complete the process. Second, privacy advocates raised concerns about providing a private third-party vendor access to millions of taxpayers’ private information, including facial scans and photo ID records. And finally, many observers decried the use of facial recognition technology itself, which has been shown to have significant racial bias by less-accurately identifying people with darker skin.
In early February, the blowback reached a high enough pitch that the IRS decided to reverse course and announce that they would transition away from using ID.me. The announcement states that the IRS will “quickly develop and bring online an additional authentication process that does not involve facial recognition”. But the announcement does not detail what will replace ID.me, what will happen for those who have already created an account using ID.me, or what will become of the “selfie” and photo ID files that users have uploaded to the site. And the link to create a new ID.me account is still active on the IRS’s website, meaning people could still be uploading pictures to create their accounts despite the fact that the IRS has already announced its intention to discontinue facial recognition to verify users’ identity. Meaning, for anyone who has not yet created an account with ID.me, it is probably best to wait until the IRS announces whichever verification process will come next.
(Andrew Welsch | Barron’s)
Traditionally, there have often been thought to be two types of investors: those who hired a financial advisor to provide recommendations and/or hands-on management of the investor’s portfolio, and “DIY-ers” who preferred to manage their own portfolios instead. Some clients of advisors had “held-away” assets which they preferred to manage on their own, but advisors tended to view these cases as the exception rather than the rule (and they were often a sticking point between clients and advisors, representing both a hurdle in implementing a “unified” investment strategy, as well as a missed opportunity for billable assets for the advisor to manage).
A recent report by McKinsey, however, shows that – whether advisors like it or not – the landscape of how investors choose to manage their money is rapidly changing. The report shows that 33% of “affluent” investors (defined as having between $250k and $1M in investable assets) have a financial advisor as well as at least one self-directed investment account – a nine percentage point change from just three years before. But the data also shows that the total percentage of affluent investors with a “traditional” advisor (with or without a self-directed account) also increased by 13 percentage points over the same time, suggesting the increase in “hybrid” investors using self-directed investment platforms occurred within an overall shift toward traditional financial advisors.
The report underscores the opportunity that exists for advisors who can accommodate providing (and charging for) financial advice clients both with and without a need for investment management. Technological advances have made it significantly easier for investors to manage their own portfolios (e.g., the elimination of trading fees on stocks and ETFs across most brokerage platforms, and the rise of robo-advisors that have removed much of the need for hands-on trading and rebalancing), so many potential clients do not see the need to hand over all (or any) of their assets to an advisor to manage for them; yet at the same time, there is a continued and growing demand for human advice to help affluent clients manage their own complex financial lives. The growing likelihood that new clients will arrive with investments that they prefer to manage on their own benefits advisors, who, rather than taking an “all-or-nothing” approach to their clients’ assets, can provide investment management as an optional add-on (or even offer “advice-only” financial planning for clients who truly would rather do their own hands-on investment management).
(Ron Lieber | The New York Times)
The rising cost of college during the past two decades has made education planning a challenge for parents and their financial advisors. At the same time, colleges have become more competitive with each other to secure the highest achieving students for their incoming classes and improve their rankings.
And while need-based financial aid and scholarships for outstanding achievements have traditionally helped cover the cost of tuition, another type of assistance – merit aid – has become an increasingly important part of the college planning process. Unlike traditional financial aid (which is based on a family’s financial need) and scholarships (which are often limited to the top students), merit aid offers a way for colleges to offer a discount on their tuition to high-achieving (but not necessarily elite top-scholarship-earning) students. For example, some parents and students who might shy away from a college that charges $60,000 for tuition but might be more willing to give that school a chance if it offers the student $20,000 per year in merit aid.
Unfortunately, most schools do not reveal how much merit aid a given student might be eligible for until they are accepted, so it can be a bit of a guessing game for families as to which schools might offer them this assistance. And so, it can benefit families to cast a wide net in their college search to try to uncover colleges that might offer them a significant discount off the sticker price (of course this has to be weighed against the cost of college visits and applications!). And since merit aid is based in part on a student’s grades, it increases the importance of performance in high school, not just for acceptance into a college but also how much the student and their family will have to pay once they matriculate.
The key point is that because the merit aid system is opaque, advisors working with parents (or grandparents) of future college students can educate them on the potential benefits of this opportunity, and how it might fit in the family’s broader education funding plan. Because the reality is that increasingly, the “sticker price” of college is not actually the cost that even ‘typical’ students will actually be expected to pay.
(Mark Kantrowitz | Saving For College)
With college costs reaching into the tens or hundreds of thousands of dollars over the course of four years, students and their families often look for options to defray the cost. One of the most common ways to reduce the cost of college is to attend public schools, which often give in-state students a one-third to two-thirds discount on tuition compared to the out-of-state price. Because this benefit is so significant, it is important to know how to qualify as an in-state student and receive the preferential tuition price.
While the qualifications vary by state, they typically involve two factors: purpose (to verify that the student and/or their parents moved to the state for a reason other than just qualifying for in-state tuition rates) and duration (to ensure that the student and/or their parents have lived in the state for a certain period of time, typically one year). Further, it is important to note that qualification for in-state tuition is typically based on domicile (a permanent home) rather than just residence. For example, a student whose parents move to start a full-time job is more likely to qualify for tuition in that state than a student who temporarily moves into their family’s vacation home in the state. Another consideration is whether the student is deemed a dependent or independent, typically based on the student’s age, financial support they receive from their parents, and whether they can be claimed as a dependent on someone else’s tax return (other than a spouse). Independent students can meet the purpose and duration rules on their own, while the in-state (or not) status of dependent students will be based on their parents.
And so, given the potentially significant benefits of in-state tuition, families (and their advisors) should take care to ensure that, if they plan to qualify for in-state tuition at particular colleges their student might want to attend, they will meet the requirements, as a move immediately before (or during) a student’s college tenure could have significant financial implications!
(James Dahle | The White Coat Investor)
Many families use 529 plans as a way to save for future education costs due to its tax benefits, as funds in a 529 account grow tax-deferred, and that growth can subsequently be withdrawn tax-free if used for qualifying educational expenses. In addition, many states offer a tax deduction for 529 plan contributions, making these accounts even more attractive.
And while many families might not have the means to contribute more than the annual gift tax limits ($16,000 per individual, per recipient, in 2022), wealthier families have the option of ‘superfunding’ these accounts beyond this limit without using their gift tax exemption. The superfunding exception allows individuals to fund up to five years’ worth of 529 contributions to a given beneficiary in a single year, without triggering gift taxes when the contribution is made to the child’s 529 plan. For example, a parent could contribute $80,000 into a 529 for their child in 2022, and not have to use any of their gift tax exemption… as long as they do not make additional gifts to that child for five years. Given the additional years of potential compounding (with tax-free growth potential), superfunding a 529 could lead to a larger account balance by the time the student goes to college compared to making smaller annual contributions.
At the same time, there are limits on how much someone might want to contribute to a 529 account. For example, because of the limited tax-free uses of funds in a 529, a parent or other contributor might not want to ‘overfund’ an account beyond what the account’s beneficiary is likely to need for college or graduate school expenses (especially if the parent has other financial priorities of their own!). On the other hand, the parent can choose to fund more and plan to change the beneficiary to a sibling or another individual who will have education expenses. And some families might even consider contributing so much into 529 accounts that it funds not only college for their children, but has enough left over to benefit further generations down the line. These ‘Dynasty 529’ plans have the potential benefit of perpetual tax-free growth, but come with several potential pitfalls to navigate (e.g., gift tax and Generation-Skipping Transfer Tax implications, as well as the possibility that a future beneficiary will use the funds for something other than education and pay the associated taxes and penalties).
Ultimately, the key point is that ‘superfunding’ 529 plans can be a viable tax-saving strategy, but it is important for advisors and their clients to ensure that doing so fits within the clients’ broader financial plan!
(Ross Levin | Financial Advisor)
As an advisory firm (or any type of small business) grows in size, it can be a challenge for the people who run the business to keep it moving in the direction they want it to go. The firm adds employees – each with their own priorities, strengths, and ambitions – and begins to be pulled in multiple directions, such that without some kind of scaffolding that keeps everyone aligned with the firm’s vision, it won’t be long until the firm’s leaders find themselves spending all their time simply trying to understand what everyone is doing (to say nothing about actually getting them to work together toward a single purpose).
One system that firms can use to provide a structure around which to run and grow their business is the Entrepreneurial Operating System (EOS). Developed by Gino Wickman and outlined in his book Traction: Get a Grip on Your Business, EOS is, at its core, a framework for firm leaders to define the vision they have for their business and ensure it is carried out at all levels of the organization.
As Levin writes, EOS is designed to systematize many of the components of running a business – such as holding meetings, identifying and solving problems, and staying focused on core long-term objectives, rather than being distracted by “shiny objects” – where entrepreneurs often find themselves getting stuck over and over again. With an effective system in place, firm leaders can use these components as tools to actually get things done, and achieve “traction” in getting to where they want to go.
Though not specifically designed for advisory firms, EOS has gained a following in the advisory industry, where it is common for firms to grow from a solo advisor to a small ensemble to 10 employees or more – over the course of which a founder can find themselves stuck in the “accidental business owner” role of (reluctantly) spending more time on managing people and a business than on working with clients. For these firms, EOS can help firm owners smooth the bumpy road from sole owner to organizational leader by providing the tools to “professionalize” how they run their businesses.
(Lauren Weber and Chip Cutter | Wall Street Journal)
One of the defining narratives to emerge during the economic recovery from the early shock of the pandemic has been the red-hot job market and accompanying “Great Resignation”, where workers changed jobs in droves (often attracted by opportunities for higher pay, better working conditions, or more scheduling flexibility and work/life balance). The environment has been empowering for workers (many of whom endured a decade-plus of comparatively stagnant job markets following the Great Recession), but for employers, the tight labor market has caused increasing difficulty attracting and retaining talent, and so many businesses are looking for ways to step up their efforts in that regard.
The obvious way for a business to attract more talent is to offer higher pay. But for companies on the traditional annual performance review and pay raise schedule, waiting several months until the next scheduled review cycle might mean losing talent to other companies who can offer a more immediate pay boost. As a result, some businesses fighting to retain their existing employees (and attract new ones) have accelerated their pay raise cycles to biannual or even quarterly frequencies. In one survey, about 20% of respondent businesses said they plan to review such “off-cycle” pay raises as necessary in 2022.
Firms have also tried other tactics for keeping employees in their seats, including offering one-time bonuses and increases in benefits like vacation time. But the shift to accelerating permanent pay increases perhaps marks an acknowledgment that the current job market might persist for some time. Though it remains to be seen whether firms will shift back to a 'slower’ review schedule once the market does slow down, for now, it seems that the high demand for talent – and perhaps the need for firms to more frequently (and creatively) remind their employees how much they are valued – requires a shakeup in the traditional cycle.
(Steve Glaveski | Harvard Business Review)
As the COVID-19 pandemic necessitated lockdowns across wide swaths of the country and many businesses shifted from physical offices to fully remote work environments, there were those who believed that the transition to fully digital offices would eliminate many of the shortcomings of the traditional workplace. Commutes would be a thing of the past, common office annoyances and interruptions would be avoided, and meetings would be significantly less of a burden on schedules once they were no longer held in a conference room.
The reality of the first two years of the remote work era, however, has shown that realizing those utopian visions (if it is even possible to do so) at the very least requires some deliberate effort on the part of the companies transitioning to the remote work environment. Because, as Glaveski writes, most companies have yet to go beyond the stage of essentially recreating the physical office environment: commuting times have been replaced by longer work hours, office interruptions by constant Slack notifications, and endless physical meetings by, well, endless video meetings.
A better way of achieving the potential of remote work starts with acknowledging that much of that potential is centered around the idea of workers having greater autonomy and control over their workday. Interruptions (like Slack and email notifications) keep us constantly plugged into our communication channels, while meetings dropped at random throughout the workweek can leave us feeling like we have little control over our schedule. Both allow little time for focused deep work, leaving workers feeling constantly behind on tasks and leading to higher stress and worse work/life balance. On the other hand, “asynchronous” communication – that is, communication that is available when we need it, but doesn’t bother us when we’re trying to stay focused on other things – allows workers to better stay on top of their work without the constant pull of instant communication.
One key tool that is well-adapted to remote work is the task board (such as Trello or Asana), which can contain all communication related to a project within one location accessible by all who need it, enabling employees to check for status updates, leave feedback, and ask questions without the need for a distracting “ping”. Another way that companies can help their employees keep control over their schedule is by tightly restricting how and when meetings are used (such as limiting meetings to a specific set of regular “office hours” or implementing a company-wide “meeting-free” day each week).
Ultimately, however, the level of success at transitioning to remote work depends on how widespread the adoption is of the tools the company uses to make the transition work. As the famous saying goes, “Culture eats strategy for breakfast”; it is up to the company’s leaders to breed this culture, leading by example to showing their employees that it is OK not to be perpetually plugged-in and instantly responsive –which may make the difference between a thriving remote workplace and one that is simply a lonelier version of the physical office.
(Jack Raines | Young Money)
Communication skills are an important part of many jobs (and are helpful for navigating life in general!). And while knowing how to write is generally a requirement for graduating from high school or college, it can be easy to forget what goes into good writing if it is not an everyday part of your job or personal life. But even if writing is no longer a formal ‘requirement’, developing strong writing skills can not only pay off professionally, but also comes with other benefits as well. For example, if there is an idea you believe in strongly, attempting to defend it in writing can help clarify your opinion (or perhaps make you realize that you had less evidence to back up the belief than you thought!).
Writing can also help with problem solving, as structuring an argument in writing can help organize scattered ideas into a cohesive solution. In addition, writing is useful for keeping records of your thought process at a given time. For example, writing down how you felt during a market crisis can educate your future self on how you might react to a subsequent downturn.
Also, writing is scalable, in that a written work can be read by hundreds, thousands, or even millions of other people. This benefit is particularly useful for financial advisors who want to leverage their writing skills to market to potential clients through blog posts or even books. So while writing might not seem like a necessity for a financial advisor, developing these skills can not only help you become a better thinker, but also attract more clients as well!
(Lawrence Yeo |More To That)
Writing can be an enjoyable and productive activity, whether it’s done for personal or professional reasons. At the same time, ‘writer’s block’ is a well-known phenomenon that occurs when you have a hard time coming up with new ideas for your writing. One technique to get over writer’s block is to think about why you are writing in the first place and then how you would give yourself advice on a related topic.
Because humans have many opinions and often enjoy giving advice, framing a potential piece of writing as giving advice to a question you have can often generate ideas. For example, many financial advisors write blogs not only to educate consumers, but also to attract potential new clients. Given this, an advisor looking for topics to write about on their blog could think about a financial issue they are facing in their own life and give themselves ‘advice’ through a blog post (of course, advisors can also generate potential blog ideas through the questions their clients ask as well!).
In addition, another method of overcoming writer’s block is to commit to producing content regularly, perhaps by creating an ‘editorial calendar’, to hold yourself accountable and ensure that you are devoting sufficient time to writing (and if you are finding it hard to put your ideas on paper, creating audio or video content can be a solution!).
The key point is that because we are adept at giving advice (and advisors already do so professionally!), framing a written product as an advice-giving exercise can be a useful way to generate new ideas and content!
Everyone has ideas floating around in their head, but putting them into writing can be a challenge. Once you see your idea on paper (or computer screen), it can look nothing like you expected, and require revisions to communicate it appropriately. Further, after revising the idea to your liking, you still have to think about how a neutral reader (who hasn’t had the idea floating in their head for days or weeks!) will read and understand the piece of writing. Perhaps you need to give additional background that a reader might not be aware of (but comes naturally to you), or perhaps you need to ‘connect the point’ for the reader to ensure that they understand the full implications of what you are trying to communicate.
Similarly, writing can help you flesh out the ideas in your head, and help you make additional connections that were not apparent until you saw the idea written down. And so, writing down ideas can make them more precise and complete (which can be hard to do through other means of communication like talking, in which it's much more difficult to make revisions on the fly). Even if you have high confidence in an idea that is floating in your head, putting it in writing can not only help you refine the idea, but ensure it has sufficient evidentiary backing to convince a reader.
And so, whether it is putting together a business plan, marketing plan, or financial plan, putting the ideas of a potential plan into writing can not only make them more coherent, but with a ‘forced’ process of thinking through the implications in writing them out, also makes the (written) plan more likely to be successful!
We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in 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 "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.