Weekend Reading For Financial Planners (October 10–11)

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.

Fidelity To Raise RIA Custody Asset Minimum To $100M, Perhaps Signaling Challenges Of Current Custodial Model

(Alex Ortolani | Wealth Management)

Under the current RIA custody model, RIAs and their clients receive ostensibly 'free' custodial services from the firm they work with in the sense that there typically aren't explicit fees based on assets or client headcount (and, in recent years, no ticket charges for trades either). However, clients end up paying for these services in other ways, from the spreads that custodians earn from client cash that sits in (relatively low-paying) sweep accounts to expense ratios on proprietary funds in which advisory clients are invested.

On the other side of the ledger, serving RIAs comes at a cost to the custodians, from hiring service teams to support firms on the platform to administrative costs involved with serving as the custodian for client assets. Given the current model, this means that custodians can earn more when firms bring more assets to the table.

Amidst this backdrop, Fidelity told certain firms on its platform late last week that it is raising its minimum client asset threshold to $100 million for all RIAs (up from a previous threshold of $15 million set in 2008; Fidelity in 2013 also mandated a $2,500 quarterly fee for firms with under $15 million in client assets on the platform). Firms that fall below the minimum have until June 30, 2027, to meet the new requirement or start the process of moving off the platform. A Fidelity spokesperson said that the change is expected to affect a few hundred firms.

With the new threshold in place, smaller RIAs on the platform could be looking for a new custodian for their clients' assets, while firms that work with multiple custodians (and fall under the new threshold in terms of their assets held with Fidelity) could end up shifting these assets to one of their other custodians or another one entirely. Sensing opportunity, other custodians have jumped at the chance to entice firms that will need to move off of Fidelity to join their platforms (so while affected firms might not enjoy the repapering that comes with a change of custodian, it appears that they won't necessarily have trouble finding a new home).

In the bigger picture, Fidelity's move (ostensibly made to ensure RIAs have sufficient assets on their platform to make them profitable) further demonstrates the challenges of the current custodian fee model, whereas an alternative approach where clients pay a direct platform fee for the services the custodians provide (and then perhaps receive a rebate for the cash sweep, securities lending, and other services where custodians currently earn revenue) could provide a more sustainable revenue stream for custodians as well as more explicit (and predictable) expenses for RIA clients.

New SEC Examination Handbook Offers Clues To How RIAs Can End Up On The Regulator's Radar

(Tracey Longo | Financial Advisor)

The Securities and Exchange Commission (SEC) conducts periodic examinations of RIAs under its purview to ensure they are abiding by relevant regulations and ultimately to reduce the chances that clients will be harmed. On the other side of the table, these examinations can potentially be time-intensive for firms that are already busy serving their clients. Which suggests that understanding the factors that could lead the SEC to select a particular firm for examination could allow them to take actions to avoid drawing excessive attention.

In a new and expanded 19-page examination handbook, the SEC offers clearer answers to what can get firms on its radar than were provided previously. According to the handbook, when deciding which firms to examine, the SEC might take into account prior examination history, disciplinary history involving employees or affiliates, how long it's been since the firm was last examined, as well as products or services that create potential conflicts of interest. Other potential 'red flags' include, amongst others, management turnover, financial stress on a firm, and whether it has custody or access to client assets.

In terms of smoothing the examination process, the regulator noted that keeping regulatory filings accurate and current can both make exams more efficient and reduce findings resulting from them. Also, exam staff are instructed to maintain an ongoing dialogue with firms about outstanding requests and potential findings (giving firms the chance to raise issues that they believe examiners might have misunderstood). Though notably, the regulator said that while firms can use cameras and screen sharing during videoconferences with examiners, the staff do not consent to the use of recording, transcription, or artificial intelligence-powered notetaking tools (suggesting that firms might double check that such tools aren't automatically set to record or take notes during meetings with examiners!).

In sum, the SEC's updated examination handbook suggests that firms that are proactive in keeping their regulatory filings updated and don't engage in high-risk behaviors that could lead to client harm could find themselves on the receiving end of examinations over time. Which suggests that time spent focusing on policies, procedures, and documentation could be a good investment in minimizing time burdens on a future exam.

SEC Proposes Framework For Advisor Custody Of Cryptocurrencies

(Kenneth Corbin | Barron's)

Since the first block of bitcoin was mined in January 2009, cryptocurrency has transformed from an obscure, experimental corner of the market to a 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 consumer attention. Advisors interested in helping clients purchase and manage cryptocurrencies have faced several challenges in doing so, from ensuring client holdings could be maintained securely to navigating the regulatory environment.

While the broader introduction of cryptocurrency ETFs a few years ago provided interested advisors and their clients an easier way to gain exposure to certain cryptocurrencies, some clients continue to have direct cryptocurrency holdings (while others might prefer to make additional purchases in this form). Amidst a broader effort to clarify regulations surrounding cryptocurrencies, the SEC recently released a proposal that would set rules for advisors to hold custody of clients' cryptoasset holdings. The change would allow advisors to self-custody crypto holdings on behalf of individual clients or funds if they determine that another custodian isn't available and if they demonstrate that they have expertise in safely handling digital assets. Firms who do so will be required to store clients' cryptoassets siloed from one another and mitigate cybersecurity risks associated with those holdings.

In the end, the latest proposal (which will be subject to a comment period) would provide greater regulatory backing for advisors and firms who are interested in direct custody of clients' cryptocurrencies or other cryptoassets. And while that might be a limited subset of advisors (with some preferring to stick to cryptocurrency ETFs or deciding that they don't want to manage cryptoassets at all), those who do could carve themselves a place with prospective clients looking for an advisor to directly manage these assets.

The Benefits Of Having An HSA 'Succession Plan'

(Christine Benz | Morningstar)

Thanks to the 'triple tax advantage' HSAs enjoy (i.e., pretax contributions, tax-free growth, and tax-free withdrawals for qualifying expenses), their balances can grow significantly over time through a combination of employee contributions, potential employer contributions, and tax-free compounding. While it's not necessarily a 'problem' to have a large HSA balance, it is important for account owners to recognize how HSAs are treated after death and, better yet, to create a 'succession plan' for them to ensure the assets receive tax-friendly treatment.

To start, an individual who inherits an HSA from their spouse can continue enjoying the benefits of tax-free compounding and tax-free distributions for qualified expenses throughout their lifetime. An issue arises, though, when an HSA is left to a non-spouse individual. In this case, the account loses its HSA status and the balance becomes taxable to the recipient in the year they receive it (notably, this is worse treatment than an inherited IRA, which allows certain non-spouse beneficiaries to withdraw the balance over 10 years [with some having Required Minimum Distributions along the way]). Given the comparatively poor tax treatment of an HSA for a non-spouse beneficiary, some account owners (if single, or their surviving spouse) with charitable intentions might elect to leave the HSA to charity and other accounts (with better tax treatment) to individuals.

Given the onerous tax treatment of HSAs for non-spouse beneficiaries, financial advisors can support clients by ensuring they consider HSAs within their broader estate plan, including deciding the optimal recipient for it and ensuring that beneficiary designations are made correctly (while also helping clients find ways to draw down these accounts in an efficient manner during their lifetimes!).

HSAs Cover More Than Clients Might Think...But Don't Push The Boundary

(Kathryn Miller | Financial Planning)

Health Savings Accounts (HSAs) can be attractive for several reasons, including their 'triple tax advantage', where an individual can make pretax contributions, receive tax-free investment growth, and make tax-free qualified withdrawals. The latter item is particularly important, however, as withdrawals made for unqualified purposes are subject to taxation (and a 20% penalty if the account owner is under age 65).

The IRS provides guidance regarding what qualifies as a qualifying expense. In general, expenses that qualify include those for the diagnosis, treatment, mitigation, cure, or prevention of disease. This ends up providing a rather wide net of expenses, though, including everything from doctor's visits to prescribed medicines, and even a portion of long-term care expenses. On the other hand, expenses that might fall into the category of general 'wellness' (e.g., a gym membership purchased solely for fitness reasons) typically don't qualify.

Notably, eligible expenses don't need to be associated with a distribution from the HSA in the same year. Rather, an individual could save the receipts for unreimbursed expenses and take a withdrawal (several) years down the line, giving the funds invested in their HSA more time to compound. In this case, it's important to maintain receipts for these expenses, both to show the qualifying amount that can be distributed, but also to verify that the expenses incurred are eligible (though keeping receipts is a good practice for those who use their HSA to pay for expenses throughout the year as well, as they can provide evidence that they were indeed eligible if audited).

Ultimately, the key point is that while HSAs can be valuable accounts for those who maintain them, they can require a bit of work to ensure that the full 'triple tax benefit' is received. Which offers an opportunity for financial advisors to add value for their clients both by explaining the potential value of HSAs (and determining whether being on a high-deductible health plan that qualifies them for HSA contributions is the right option for them) and by encouraging them to keep proper records to ensure they use it compliantly.

The HSA 'Deathbed Drawdown': Making Tax-Efficient Distributions Of Large Balances (When There Isn't Much Time)

(Ben Henry-Moreland | Nerd's Eye View)

Given the poor tax treatment of inherited HSAs for non-spouse beneficiaries, it's important for advisors to consider the risks of an account owner being unable to use up their funds and to plan for potential ways to quickly draw down the account in the event the HSA owner will not outlive their HSA funds (and does not have a spouse who could inherit the account).

One such strategy is to advise clients to keep track of any qualified medical expenses they incur after establishing the HSA that were not already reimbursed from the HSA. Because if the owner ever needs to quickly withdraw funds from the HSA, they will be able to do so tax-free to the extent that they have any previously unreimbursed medical expenses from any point after the HSA was established – which could allow the HSA owner to make a tax-free 'deathbed drawdown' of a large amount (or even all) of their account, which would otherwise become taxable income if inherited by the account beneficiary.

At the same time, it's important to consider the role of the HSA within the broader scope of events occurring near a client's death, as family members might prefer to focus on other issues (particularly if the HSA balance is a small portion of the overall estate). Also, when a 'deathbed drawdown' is enacted, it's important for key family members to understand their roles and ensure that any funds withdrawn from the HSA are still distributed according to the HSA owner's wishes.

The key point is that the more that advisors (and their clients) can plan in advance for the contingency of needing to quickly withdraw HSA funds, the more likely they will actually be able to do so (though some account owners might have elected earlier to leave the HSA to a charitable organization). Because although it (hopefully) isn't likely that any one person will need to do a deathbed HSA drawdown, as more people establish HSAs and accumulate large balances, the odds are that the need to quickly withdraw those funds will become increasingly common – making it all the more valuable for advisors (particularly those recommending HSA maximization strategies) to have tools for doing so while still maximizing the tax advantage of the HSA!

How Families Can Beat 7% Mortgage Rates And Lower Their Tax Bills

(Laura Saunders | The Wall Street Journal)

In addition to dealing with the rising home prices experienced this decade (which can increase the size of down payment needed), those in the market to buy a home (and need to borrow to do so) are also facing a rising rate environment, with traditional 30-year mortgage rates now north of 7%. Amidst this backdrop, those with the means to do so could provide family members with much-needed financial support to make a home purchase.

For those looking to provide down payment support, various gifting strategies are available. First, it can be valuable to recognize that the annual gift tax exclusion ($19,000 in 2026) provides significant flexibility to support a loved one without eating into one's lifetime exemption or having to file a gift tax return. Because the annual exclusion is on an individual basis for both givers and recipients, a married couple could give up to $76,000 each year to a married child and their spouse while staying under the exclusion amount (and if there are generous grandparents involved as well, this amount could move higher). While some parents or grandparents might give in cash (e.g., to hold on to appreciated shares in a taxable account so they receive a step-up in basis), those who do give stock can take advantage of tax arbitrage opportunities to minimize the tax bite. For instance, a parent in a higher capital gains tax bracket than their child might gift shares of stock to the child (so that they owe a lower [perhaps 0%] rate when it's sold), while a parent who has a high-income child but lower-income grandparent available might gift the shares to the grandparent, who can sell them at a lower rate.

Another route for providing housing support is an intra-family loan, which can give the parent or grandparent the opportunity to generate income from interest received at the Applicable Federal Rates while the loan recipient benefits from a rate significantly lower (currently about 5% on loans longer than 9 years) than standard mortgage rates. That said, those engaging in this strategy need to ensure that they follow relevant IRS guidelines to ensure the loan is made correctly and that the lender is willing to take the risks associated with making the loan (and that the loss of liquidity fits within their own financial plan!).

Finally, families might consider how disclaimers can be used after the death of a loved one to transfer wealth in a way that is tax efficient and supports a home purchase. For instance, an individual who stands to inherit an account from a deceased spouse might choose to disclaim it if they already have sufficient assets to meet their needs, if the assets might be subject to Federal or state estate taxes in the future, and if the deceased's estate plan was set up so that the assets would pass to a desired individual (perhaps a grandchild who is in the market for a home purchase), as this process does not allow the person making the disclaimer to name a recipient of the assets themselves.

Altogether, families with sufficient wealth (and sufficient trust) have several potential avenues to support a child or grandchild who might otherwise struggle to buy a house in the current market environment. Further, given the rules surrounding certain strategies (and the implications of making these gifts for the giver's financial plan), financial advisors are well-positioned to support this process and ensure it ends up working well for all parties involved!

The High Costs Of Not Shopping For A Mortgage

(Veronica Dagher | The Wall Street Journal)

The home-buying process can be stressful, from finding the 'right' property to negotiating price and terms with the seller. Another key element of making a solid financial decision is finding a suitable mortgage lender and choosing the rate and terms of a mortgage. However, a recent study suggests that some homeowners are speeding through this process, potentially costing them thousands of dollars in the process.

According to research by Bankrate that analyzed 3.2 million mortgage originations tracked in federal housing data and benchmarked them against its own digital loan marketplace, 87% of borrowers paid above the competitive market rate, with those with higher incomes and who are older are often the ones paying the steepest price. For instance, while approximately 72% of borrowers younger than 35 'overpaid' for their loan, this number rose to almost 82% for those between ages 55 and 64. This could be due partly to regulatory guardrails (e.g., strict fee caps) embedded in FHA and VA loans that younger borrowers might use, though older generations appeared to be less likely to shop around compared to younger borrowers. Another group more likely to overpay were those with the best credit scores, who might stick to one lender because they are less concerned with being approved for a mortgage (even if it might mean taking on a higher rate and related fees).

In the end, while there are many reasons a borrower might choose not to shop around for a mortgage (e.g., preferring to rely on a local lender rather than a digital platform for such a major purchase, or perhaps due to the time costs involved with filling out forms and submitting documentation to different lenders), there could be a dollar cost to doing so. Which perhaps offers advisors the chance to offer hard-dollar value for clients buying or refinancing a home by helping them identify lending options that might come with (significantly) lower lifetime costs (and perhaps easing some of the burden of providing financial documentation during the process!).

Determining When It's A Good Idea To Pay Points For A Lower Mortgage Rate

(Cox, Followill, and Olsen | Journal of Financial Planning)

When shopping for a mortgage rate, homebuyers (or those refinancing their current loan) are often given the option of 'buying down' the rate on offer by paying 'points' (with 1 point representing 1% of the loan balance), or prepaid interest (though they can also be offered the opportunity to be paid points themselves in return for taking a higher rate). While this option can provide flexibility (e.g., the opportunity to lock in a lower rate for the life of the loan for those with the cash to pay for the points upfront), calculating whether a rate buydown offer is worthwhile can be a complicated endeavor.

In general, the benefit of taking a rate buydown offer is expressed in the timeframe where the borrower would break even on the 'investment' made of prepaid points (i.e., by paying less in interest each month due to the lower rate). For instance, a breakeven period of five years might be attractive to a borrower who plans to live in the home for more than that time (and perhaps doesn't anticipate refinancing during that period either). Calculating this breakeven period can be tricky, though, as there are many factors to consider, starting with the number of points and size of the rate buydown being offered, but also potentially extending to the current interest rate environment, the borrower's tax rate, and a discount rate applied to the assets used to pay the points (as they could be used to increase the size of the borrower's down payment or be invested elsewhere). Notably, borrowers might also have personal preferences that could influence this decision as well (e.g., a desire to maintain greater cash liquidity rather than 'investing' it in points).

Under a wide range of scenarios, the authors offer general guidelines on the break-even periods given particular rate buydown offers. For instance, if a lender offers a 0.25% lower rate in return for paying 1 point, a borrower could expect to break even between 54 and 62 months into the loan, whereas those receiving a 0.5% lower rate for paying 1 point would break even in approximately 26–27 months. Notably, the breakeven period is longer if the borrower also demands an ROI on the original investment (given the opportunity cost of paying the points). The authors calculate this for a borrower who not only wanted to breakeven on the points paid, but also achieve a 'return' of the same amount. In this case, the 0.25% lower rate would have a (much longer) breakeven point of 128–230 months, while the 0.5% lower rate would have a breakeven period of 55–62 months.

Altogether, given that the decision of whether to take an interest rate buydown offer is complicated (and comes at a time when a homebuyer might be facing stress from the other homebuying decisions that need to be made), financial advisors can offer value by helping them determine whether such an offer might be worthwhile, not only financially but also given the client's plans for the house and liquidity preferences!

The Gap Between The Rich And The Very, Very Rich Is Getting Wider

(Rachel Louise Ensign and Justin Lahart | The Wall Street Journal)

Recent years have seen an explosion of wealth in the U many private companies have seen their valuations soar as well (with some of those less exposed to the stock market seeing home price appreciation, amongst other sources of wealth). Notably, while wealthy individuals on the whole have seen their net worths increase, there has been a divergence between the ultrawealthy and other wealthy households.

According to Federal Reserve data, the top 0.1% wealthiest Americans have seen their total wealth more than double since the end of 2019, with this group gaining a total of $14.5 trillion during this period (about $10 trillion of which came from gains in equities), at an average household wealth of $200 million. This group now controls about 15% of the nation's total wealth, up from just over 10% since the Great Recession. While the cumulative change in net worth (in percentage terms) between the top 0.1% of households and the next 9.9% roughly tracked each other through 2020, they have diverged over the past several years, with those in the top 0.1% seeing their net worths increase by approximately 175% (since the end of 2014), compared to about 110% for those in the latter group.

In sum, while the group of wealthy individuals as a whole have seen their net worths rise over the past several years, those at the top of the wealth ladder have seen even greater growth. Nevertheless, given that wealth is growing overall (with those in the bottom 50% seeing the fastest growth in percentage terms since 2019 [due in part to the smaller baseline]), financial advisors could see further opportunities to support clients, not 'just' the (highly competitive) ultra-wealthy market, but also those with emerging wealth!

The Rich Are Getting Richer. So Is Everyone Else.

(Ben Carlson | A Wealth Of Common Sense)

Amidst regular headlines about the astronomical (and still growing) wealth of the richest households, it can be easy to lose sight of wealth gains further down the wealth ladder. Which could be instructive when it comes to understanding how individuals end up with their wealth (and the planning needs they might encounter).

Research from Owen Zidar and Eric Zwick in their new book "The Everywhere Millionaire" found that nearly five million U.S. households had net worths of at least $5 million as of 2022, with two million clearing the $10 million mark, and 65,000 having at least $100 million. They note that most of these wealthy individuals own a private business, with three-quarters of decamillionaires and nearly all centimillionaires doing so (indicating that this is a primary path to the highest levels of wealth). The authors describe this group as "Main Street Millionaires" whose businesses aren't building the latest AI-powered tool but rather are auto dealers, dentists, doctors, accountants, contractors, lawyers, and beverage distributors.

Notably, improvements in income and wealth aren't limited to those who might have nurtured a business over the course of several decades. For instance, while Millennials started behind Boomers and Gen Xers in terms of (inflation-adjusted) income in their early 20s (perhaps due to a greater propensity to attend college during this period), their median wage and salary income passed these groups at age 25, with the younger Gen Z cohort doing so at age 23. Looking at (inflation-adjusted) wealth, Millennials overtook Gen X by age 32 and even in terms of homeownership (which has become more challenging in terms of higher prices and interest rates in recent years), Millennials caught up to Gen X at age 42 (though still trail the homeownership rate of Boomers when they were the same age). Which, altogether, suggests that younger generations are on pace to end up wealthier than their older counterparts (though of course not every member of each generation has seen similar wealth gains).

In the end, while wealth has become increasingly concentrated at the very top in relative terms, groups across the wealth spectrum have seen gains in absolute terms and younger generations appear to be catching up to, and in many cases surpassing, the income and wealth of their predecessors. Which perhaps speaks to the opportunity for financial advisors to serve not only those with established wealth, but also those with emerging wealth, who could end up seeing their net worth (far) surpass that of previous generations.

Rich Enough

(Evan Armstrong | The Leverage)

When individuals assess how wealthy they are, they might consider this question in absolute or relative terms. Which can lead to dramatically different results depending on where they live and who they see as their peers.

For instance, the Bay Area has seen immense wealth growth during the past several years as AI-related private companies have gotten higher and higher valuations (leading many of their employees to experience huge growth in their 'paper' wealth, as their shares might not yet be liquid). For instance, Armstrong estimates that 40,000 individuals in the Bay Area who currently or previously worked at an AI company have seen their paper wealth increase by between $1 million and $10 million since ChatGPT launched in late 2022, with an additional 6,000 seeing gains of $10 million to $100 million and 400 experiencing growth of $100 million to $1 billion. With so many individuals experiencing massive wealth gains concentrated in such a small geographic area, it could be easy for those in this group to lose sight of their absolute wealth gains even if the growth in their wealth doesn't stack up in relative terms.

Further, given that individuals don't necessarily seek money for its own sake but rather for the increased wellbeing it can provide, previous research indicating that wellbeing increases with wealth in logarithmic terms (i.e., it requires a doubling of income to double wellbeing, so an individual would gain the same wellbeing from $50,000 of income to $100,000 of income as they would from moving from $1 million of income to $2 million of income) suggests that those in this wealthy group (who might be putting in particularly long hours in the office) might not see as much of a return as they could expect from such riches.

Ultimately, the key point is that while some individuals have seen their wealth explode over the past few years, this change won't necessarily translate into greater happiness and wellbeing. Which perhaps suggests a role for financial advisors in helping clients who are suddenly wealthy manage this wealth not only in financial terms but also in helping them explore ways to translate it into actual lifestyle and wellbeing gains in the process.

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.