Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a discussion of the Senior Safe Act, legislation currently winding through Congress that would make it easier for financial advisor to report suspected elder abuse amongst their clients without fear of litigation for breaching client privacy (but sadly, only when reporting to government agencies, and not family members). Also in the news this week is a lobbying effort by the Investment Adviser Association to allow clients of RIAs to automatically be deemed accredited investors, regardless of their actual income or net worth, and be allowed to rely on the RIA’s recommendations (subject to fiduciary duty) as protection from overly risky investments.
From there, we have several advisor technology articles this week, including a review of social media management software Grapevine6, the Canadian portfolio management software platform Croesus (now looking to grow its adoption amongst RIAs in the US), a discussion of how technology vendors are trying to step up to help large advisory firms cope with the DoL fiduciary rule requirements, and a look at how the most successful advisors are disproportionately likely to be heavy adopters of technology (but affluent investors are still most likely to choose their advisors for more ‘traditional’ reasons like years of experience and expertise/capabilities).
We also have a few more technical articles this week, from a look at how the Medicare “Hold Harmless” provisions are projected to strike once again for 2017 (which will limit Medicare premium increases to just 0.2% for most, but spike Medicare premiums for higher-income individuals as much as 22%), to a discussion of the rules for holding foreign stocks and claiming the foreign tax credit, and an analysis of the rules for the Net Investment Income Tax (NIIT) as applied to non-grantor trusts (where the 3.8% surtax can kick in after just $12,400 of income).
We wrap up with three interesting articles: the first is a look at how many parents who take time out of the workforce to care for children, seeing that child care may have consumed most or all of their take-home pay already, may be grossly underestimating the long-time financial impact of staying home with children once accounting for how time out of the workforce can permanently change a worker’s income and career trajectory; the second is an analysis of how income inequality may actually be driven less by the concentration of national income in the hands of capitalists or merely going to higher-skilled professions, and more a result of the barriers that many professions have erected in the name of consumer protection that may have (unwittingly or on purpose) limited competition and (artificially) inflated incomes; and the last is a look at Millennials, who are often lauded for having an “entrepreneurial mindset” but are actually forming new businesses at a significant lower rate than prior generations did at the same age, raising the question of whether competition from mega-firms and the overhang of student debt may be permanently impairing Millennial entrepreneurship, or if the reality is just that the Millennial entrepreneurship needs another decade to germinate before it really starts to blossom (given that in reality research shows the peak age for entrepreneurs to start a business is 40-something anyway, not as a 20-something).
Enjoy the “light” reading!
Advisers May Get New Tools To Combat Elder Financial Abuse (Kenneth Corbin, Financial Planning) – Financial advisors who work closely with elderly clients are often the first to become aware of potential elder financial abuse, but client privacy laws can limit an advisor’s ability to intervene on the client’s behalf. The address the issue, the House of Representatives recently passed the Senior Safe Act, which would provide liability protection to advisers (and broker-dealers and other financial professionals) who report suspected abuse to a “covered” agency (e.g., Adult Protective Services, law enforcement authorities, or state/Federal regulators), as long as they have received training on how to spot signs of elder abuse. Notably, though, the legislation would not protect advisors who report potential abuse situations to the client’s family members (if permission to speak with them hadn’t already been granted). Advisor and broker-dealer advocacy groups have urged the Senate to pass its companion version of the legislation as well, so that it may soon be enacted into law. At the same time, some states at also looking at state-level legislation on the issue, that would either protect advisors reporting suspected elder abuse, or in the extreme actually requiring them to do so.
Investment Adviser Association Wants RIA Clients Designated As Accredited Investors (Mark Schoeff, Investment News) – Under current law, an “accredited investor” is one who has a net worth of more than $1 million (not including the value of a home), or an annual income of at least $200,000, and being an accredited investor is necessary to purchase private placement unregistered securities that are viewed as being more risky. Under Dodd-Frank, the SEC is must the accredited investor standard every four years (and revise it if necessary/appropriate). Accordingly, in a comment letter submitted to the SEC, the Investment Adviser Association has suggested that the accredited investor definition be changed in its next update to include the clients of RIAs, regardless of whether the client otherwise meets the income or net worth requirements. (The SEC considered a similar proposal last December and rejected it.) The basic reasoning for the proposal is rather straightforward: since RIAs are already subject to a fiduciary duty when managing assets on behalf of clients, should have the discretion to access private placements, and the fiduciary obligation can provide the requisite accountability and protection the accredited investor rules were intended for. However, some advisors have expressed concerns, not wanting to be in the “gatekeeper” position for private placements and fearing the potential liability risk that could result; on the other hand, the Investment Adviser Association notes that the proposal would merely permit RIAs to recommend private placements to otherwise-non-accredited investors, but those firms would still have the discretionary choice not to do so.
5 Ways Grapevine6 Can Jumpstart Advisors’ Social Media Marketing (Craig Iskowitz, WM Today) – Social media is an appealing channel to maintain engagement with clients and prospects, but it can be time-consuming to find or create relevant content to share, which is leading to the rise of “digital content management” platforms. The solutions range from Vestorly (which uses an artificial intelligence engine to provide recommended stories), to AdvisorStream or Hearsay Social (which try to ease compliance concerns with a list of 100%-pre-approved content), while Iskowitz notes that Grapevine6 is a potential mid-point solution. The platform facilitates content “curation” (sharing third-party articles) by drawing from a list of 6,000 online publishers and 50,000 articles, from which the advisor can draw on an initial list of content to share. And once the software sees which articles clients are clicking on, it can further adapt recommended content to match client interests (though notably, other platforms like Vestorly have a similar learn-over-time capability); Grapevine6 can also look at interests of current social media connections to try to make further refinements to recommended content selections to share. Firms that buy the enterprise version of Grapevine6 can also use it to share pre-populated streams of the firm’s own internally generated content (e.g., company blog posts, videos, and articles), and the software provides a compliance workflow to ensure the content gets appropriate approvals first, before pushing the content out to social media channels like LinkedIn, Facebook, and Twitter (and integrates to popular social media management app Hootsuite). An upcoming feature will include an “Opportunity Card” that scans the news for events that could result in money movement opportunities with prospects, such as an announced job chance or a company being acquired (though notably, Hearsay has a similar “social signals” feature). One notable caveat, though, is that Grapevine6 can important contacts from social networks, but does not have full integration with any advisor CRM systems (though Salesforce is slated as first on the list), which also makes its analytics weaker than competitors like Vestorly. Notwithstanding some of the limitations, though, Iskowitz suggests that Grapevine6 is a strong option for advisors, given the turnkey setup and minimal time commitment to get started, and should improve as additional features roll out over time.
RIAs Get A Powerful Portfolio Tool With Croesus Advisor (Joel Bruckenstein, Financial Planning) – Croesus is a portfolio management software solution that has operated in Canada since 1987, and has in recent years begun to expand into the RIA marketplace in the US. The platform itself is comprehensive, covering models and model management (including firm-wide models and advisor-specific models), trading, performance calculations, reporting, billing, an adviser dashboard (with customizable widgets and “boards” to track specific information), a client app and portal, and more. The software also includes a ‘moderate’ CRM that can track client information and has some task management capabilities as well (to manage investment-related tasks directly within the software), though it lacks the workflow capabilities that a larger advisory firm would need. Croesus even has a document storage vault option for clients, which provides unlimited storage, but is limited to only .pdf files, Word documents, and emails. Overall, it appears that Croesus is probably best for small-to-mid-sized RIAs that could leverage the all-in-one platform, and won’t necessarily “miss” the limited integrations to traditional advisor CRM/workflow platforms.
Will Tech Ease The DoL Burden? (Jerry Gleeson, Wealth Management) – With new oversight responsibilities under the DoL fiduciary rule, large financial services firms are looking to technology vendors to help figure out the best way to manage the looming requirements. And given the size of the firms involved and the amount of dollars in motion, it represents an immense near-term opportunity for #FinTech firms to fill the void, especially around compliance-related functions that historically have not been a traditional advisor technology focus. In fact, some are concerned that there simply won’t be enough time to plan, design, and deploy technology solutions by the initial DoL deadline next April. Notably, though, many tech vendors seem to be working on “DoL compliant” solutions, without any clear understanding of what exactly large financial services firms need – in other words, there may be a rush of compliance technology innovation spurred by the regulation, but not all of it will likely pan out (though some surely will). The situation is further complicated by the fact that many firms still aren’t certain what their new business processes will be – for instance, how the sales and review process may have to change to comply with the Best Interests Contract Exemption requirements. Nonetheless, start-ups are expected to emerge to fill the void, and large players like Morningstar and Envestnet are also working on solutions.
Tech Matches Wealthiest Clients With Advisers (Mitch Caplan, Financial Planning) – In its latest Adviser Authority industry survey, Jefferson National finds that the advisors with the highest incomes and largest asset base are significantly more likely to be “tech obsessed”, using twice as many technology tools as competitors, and focused on both adding new technology and consolidating existing technology solutions. This also includes the adoption of “robo” tools by advisors, which are more likely to be adopted by the most successful advisors, and not merely with their ‘mass market’ clients but also their higher net worth clientele. In fact, Jefferson National also surveyed affluent investors, and found that a subset of tech-savvy ultra-high-net-worth clients strongly prefer advisors who utilize such tools, where in-person meetings and phone calls merely supplement the technology tools. Notably, though, overall an advisor’s tech-savvy doesn’t necessarily appear to attract clients; while advisors often noted that they are implementing technology to attract clients, investors report that their decision in choosing an advisor is driven by his/her years of experience, holistic advice capabilities, and their fiduciary status, while the advisor’s use of technology ranked drastically lower (even for Millennial and Gen X clients). In other words, the top advisors appear to be using technology to improve their back-office efficiency and scalability to have a more successful practice, but it’s still the more ‘traditional’ factors that drive prospective clients to select an advisor in the first place.
Higher Earners Face Steep Hikes In Medicare Premiums (Anne Tergesen, Wall Street Journal) – Thanks to low inflation, Social Security’s annual cost-of-living adjustment for the coming year is projected to be only 0.2%. Under Medicare “hold harmless” rules, though, that limits next year’s Medicare Part B premium increase to just 0.2%, even though premiums were scheduled to increase more. As a result, the majority of Medicare enrollees (about 70%) who are eligible for hold harmless won’t face a premium increase, but that means the other 30% (predominantly those whose incomes are high enough to trigger income-related premium adjustments) must share the remainder of the increase, which is projected to spike their Medicare Part B premiums approximately 22% from $121.80/month to as much as $149/month in 2017. For top income earners (more than $214,000/year as an individual or $428,000/year as a couple), Medicare Part B premiums could jump as high as $467.20/month (up from $389/month in 2016). Notably, a similar issue arose when the Medicare hold harmless rules kicked in last year, when premiums would have jumped as much as 52% but Congress intervened to make the increase just 16% instead, and those who were eligible for hold harmless last year (and this year) remain locked into the “old” Medicare premium of just $104.90/month (from 2014). Ultimately, the final numbers will be determined in October.
Understanding Tax Implications Of Foreign Stocks (John Burke, Journal of Financial Planning) – Most countries tax dividends that their companies pay, both to domestic and foreign investors. As a U.S. investor who owns a foreign stock, that creates the risk of double-taxation – where the U.S. investor has the foreign stock’s dividend taxed once in that foreign country, and again in the U.S. To minimize this exposure, many foreign countries have signed tax treaties with the U.S., eliminating the taxation of “foreign” dividends paid to U.S. investors. For countries that don’t have a tax treaty eliminating double taxation, U.S. tax law provides some relief, allowing any taxes withheld from foreign stock dividends to be claimed as either a tax deduction on the investor’s U.S. tax return, or a dollar-for-dollar foreign tax credit. Notably, though, the foreign tax credit is only available to the extent that the individual has a U.S. tax liability (which means retirees who manage their portfolios tax-efficiently ironically might not have enough tax liability to claim the credit as an offset), and the foreign tax credit is further limited by a calculation to measure what percentage of the total U.S. tax liability is associated with foreign income. In the case of mutual funds, foreign dividend taxes paid (and the associated foreign tax credit amount) are reported on Form 1099-DIV, allowing investors to claim the credit. For small foreign tax amounts (below $300 for individuals or $600 for married filing jointly) the credit is claimed directly on Form 1040; for larger foriegn tax amounts, a supporting Form 1116 must be filed. Notably, though, the foreign tax credit is not available for foreign stocks owned by (and foreign dividends paid to) an IRA or other retirement account (as the retirement account itself has no tax liability to be offset by the tax credit); as a result, those who want to maximize the foreign tax credit (or avoid losing it) should aim to own foreign stocks in a brokerage account and not a retirement account for asset location purposes.
Planning For The Net Investment Income Tax For Non-Grantor Trusts (Julie Welch & Cara Smith, Journal of Financial Planning) – The Net Investment Income Tax (NIIT) was created under IRC Section 1411 as part of the Affordable Care Act in 2010, but didn’t take effect until 2013. The NIIT imposes a 3.8% surtax on any investment income (including dividends, interest, non-qualified annuities, royalties, rents, and other passive income, as well as capital gains) that falls above $250,000 of Adjusted Gross Income (for married couples). However, when it comes to non-grantor trusts (and estates filing an income tax return), the NIIT threshold is just $12,400 of income (when the trust hits the top ordinary income tax bracket). Fortunately, to the extent that a trust passes its income through to beneficiaries, the income tax consequences (including exposure to the NIIT) go along with it and the trust claims a Distributable Net Income (DNI) deduction. However, in the case of capital gains, the situation is more complicated, as capital gains are typically allocated to a trust’s principal, which means they remain in the trust and ineligible for a DNI deduction (and subject to the NIIT) even if trust “income” distributions to beneficiaries otherwise occurred (unless the trust document or local law specifically allow it). Given these dynamics, strategies for non-grantor trusts to manage the NIIT include: distribute income to beneficiaries who are not subject to the NIIT (given the threshold is $12,400 for trusts but $250,000 for married couples), including using the trustee’s discretion if possible; invest in tax-exempt assets (from municipal bonds to life insurance or deferred annuities); consider how expense deductions are allocated (between the trust and beneficiaries) to maximize NIIT deductions; and if the trust includes holdings in an operating business, choose a trust fiduciary who is active in the business (which makes the trust’s income related to an active business with a material participant rather than a passive business, avoiding the NIIT altogether).
Calculating The Hidden Cost Of Interrupting A Career For Child Care (Michael Madowitz & Alex Rowell & Katie Hamm, Center for American Progress) – 65% of children younger than age 5 have all co-habitating parents in the workforce, and the average annual cost to have two children in a child care center is nearly $18,000. This tension between the cost of child care and the need for parents to work – in large part, to afford the child care itself – raises challenging questions for many families about whether it’s even worthwhile for both spouses to work, as opposed to simply having one parent not earn income but take care of the children to save on the costs of child care. In fact, since 1999, the percentage of mothers working outside the home has been declining, as child care costs have continued to spiral higher. However, this study from the Center for American Progress notes that families may be underestimating the financial consequences of staying home to raise a child, given not just foregone earnings but the adverse impact of lifetime earnings and career trajectory that can result for taking time out of the workforce. In other words, the trade-off is not merely between earning income and using it for child care versus providing the child care directly, but the opportunity cost of changing a person’s lifetime career trajectory. To help communicate this, the organization developed a calculator tool to help illustrate this opportunity cost (the “hidden cost” of staying home to take care of a child). In addition, the issue raises the question of whether U.S. policymakers should be doing more to address child care policies; one Department of Labor study found that if strengthening work-family policies to match other advanced economies resulted in similar levels of women’s labor force participation (the U.S. now ranks 6th), the U.S. would see an additional 5 million women in the labor force and $500B of increased GDP. Other policy options include the potential for a significant child care tax credit, which may partially repay itself over time by boosting the number of women in the workforce (especially given that women earn the majority of college degrees but are currently more likely to interrupt their subsequent career for parenting).
Make Elites Compete: Why The 1% Earn So Much More And What To Do About It (Jonathan Rothwell, Brookings) – In recent years there has been a growing awareness of rising income inequality, yet there is little understanding of what has actually been causing it. Some have suggested that it’s driven by a shift in the share of national income going to workers versus capitalists, yet a deeper look reveals that most of the shift in recent decades was simply driven by the growing portion of non-salary compensation (e.g., healthcare and retirement benefits) not captured in traditional measures of laborer income (and once adjusted, the shift of income from labor to capital mostly vanishes). Alternatively, some economists have suggested that the greatest riches are tied primarily to those who exhibit superior levels of IQ, skills, and economic contributions, yet while intelligence and skills suggest some income mobility, some industries appear to just pay higher compensation regardless of skill (including the financial services industry, which averages 26% greater income) while others pay lower than skill levels would imply (e.g., those working in eating and drinking establishments). And even the founding of tech companies – often attributed to driving the 1% – doesn’t appear to hold up, as the most important tech industries (i.e., software, internet publishing, computer and electronics manufacturing, etc.) only represent 5% of the workers in the top 1%. So what is driving inequality? Rothwell suggests it is a combination of our rules ‘protecting’ non-accredited investors that in practice may be shifting the best returns on capital to a small subset of hedge fund owners, and the state-level protections that apply for many professions (e.g., lawyers, doctors, and dentists) that prevents a number of their “professional” job tasks from being done by others for less pay (for instance, legal groups opposing legislation that would allow some legal functions like document preparation to be done by non-lawyers, or physician groups opposing an expansion in the role for non-doctor nurse practitioners). In other words, while professional barriers are designed to help ensure minimum levels of competency and protect the public, they may also be preventing sufficient competition amongst professional services high-income earners, which are actually the majority of the top 1% of income earners (not tech entrepreneurs).
The Myth Of The Millennial Entrepreneur (Derek Thompson, The Atlantic) – While Millennials are often viewed as having a “start-up mentality”, recent research has revealed that the share of people under age 30 who own a business has fallen by a whopping 65% since the 1980s. Which means at best, Millennials may have an entrepreneurship mentality, but they’re most definitely not behaving like entrepreneurs. In fact, the average age for a successful start-up founder is about 40 years old, the peak age for business formation is for those in their 40s, and the only age group with rising entrepreneurial activity in the past two decades are those aged 55 to 65! So why isn’t the generation with an entrepreneurial mindset turning into entrepreneurs? In part, the impact of student debt appears to be a significant inhibitor, both an outright financial limitation, and causing a mental shift amongst Millennials to seek out jobs with a more steady salary (and an overall decrease in risk-taking desire). Also complicating the situation is the growing concentration of large firms – when CVS, Walgreen’s, and Rite Aid own 99% of the national drug store market, there aren’t (m)any local drug stores being created, nor are many local book stores opening up in a world where Amazon and Barnes & Nobles alone sell half the country’s books. Ultimately, this is significant not only because Millennials themselves aren’t starting businesses, but that a slower pace of business creation could adversely impact the level of innovation for the U.S. economy overall. Fortunately, though, the fact that so many startup founders actually work for a decade or two and then go start companies (in their 40s) means that Millennials may ultimately drive a wave of startup activity as well… just not for another decade (until the oldest Millennials reach their early 40s). And the growth in entrepreneurship classes in schools means that the Millennial generation may actually be better trained than any prior generation to become entrepreneurs… once they finish working their through student loan debt overhang. But for the time being, Millennials are still overwhelmingly more likely to be employees than entrepreneurs.
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.