Goal Or Financial Decision?
Tuesday, September 02, 2014 18:11

Tags: client communication | client education | financial planning

I've been asked some puzzling questions during my career. Most of these fall into a category that I call "goal or financial decision."

Once, when I volunteered for a financial planning hotline, I was asked if it was better financially to buy a house or have a baby! I was flabbergasted. My inner voice wanted to answer, "If you're asking that question, you should never have kids." I opted for the professional response, saying "It all depends on your personal goals and priorities." I further emphasized that financial planning could help them determine what their cash flow could enable.

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The honest financial answer would have been "neither." Babies cost money as do houses. To maximize net worth, it would be best to have no children and live in a shack. That way, all of their money would be working for them. However, many people want children and many also want to own a comfortable home. Those are goals.

The job of the financial advisor is to help clients achieve their goals by guiding them to make sound financial decisions. It is key to know the difference between a goal and a financial decision.

For example, clients often ask if they should pay off their mortgage. It is not too difficult to estimate the after-tax cost of a mortgage vs. the expected net return on investments. This is obviously the appropriate way to analyze such a question. But, is it always this obvious? No.
There are some clients that have a goal of owning their homes free and clear. If this is a goal, then it is our charge to help them reach that goal. It is not appropriate to talk them out of their goals just as it is not appropriate to tell them what we think their goals should be.  Thus, when I am questioned about paying off a mortgage, I always ask if paying it off is a goal before embarking on an analysis.

There are many other examples of blurred lines between goals and financial decisions. I've been asked if it would be better tax-wise to buy a bigger home with a larger mortgage. To this question, I typically explain my "shack theory" and advise the client to live in what they consider to be a suitable home. They must decide what they want; only then can I help them determine if they can afford it.

I remember young mothers questioning whether or not it would be "worth it" to go back to work. It's true that I can calculate the after-tax cash flow from employment compared to the cost of child care. But I would not be doing my job if I just jumped into the numbers. Before doing so, it is imperative to know if the client wants to work or prefers to stay home. Then the question is "Can I afford to go to work (or stay home)?" The advisor's job then becomes determining if and how the client's goal can be achieved.

The bottom line is that, as an advisor, you must pay attention to what your clients want. If you focus solely on the financial analysis, your clients will not be getting the advice they want or need.

Is Our Tax System Fair?
Wednesday, July 16, 2014 16:37

Tags: social security | tax law | Taxes

The media seems to cover income tax issues on an ongoing basis. Many advisors are not CPAs, so explaining concepts to clients can be quite challenging at times.  One of the most controversial topics centers on “regressive” vs. “progressive” tax structures.  So what do these terms mean? Understanding the definitions are important to forming an opinion about how to create a “fair” tax system.  

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The terms “regressive” and “progressive” refer to who pays relatively more tax than others.  A regressive tax causes lower-income people to pay a higher percentage of their incomes than higher-income people.  A progressive tax causes higher-income people to pay a higher percentage of their incomes than lower-income people.


For example, the sales tax is considered a regressive tax.  Why?  As a consumption tax, the tax is relatively higher for lower-income people.  Since lower-income people tend to spend more of their earnings on consumables than higher-income people, they will pay more percentage-wise.


On the other hand, the Federal income tax is progressive because the tax brackets increase as income increases.  Thus, higher-income people will pay more percentage-wise than lower-income people.


Surprisingly, Social Security is a regressive tax.  The Medicaid portion (1.45% for employees and 2.9% for self-employeds) is neither regressive nor progressive because it is imposed on all earned income.  However, the Social Security tax (6.2% for employees and 12.4% for self-employeds) is only imposed on earned income up to $117,000.  So, employees earning under $117,000 pay a total of 7.65%, but employees earning more than that pay only 1.45% on the higher earnings.


Attempting to not get into politics, I’d like to share some of my thoughts as both a CPA and financial advisor. In my opinion, low income taxpayers need a break. No matter what changes are made to our tax systems, there needs to be no tax on people earning less than poverty level. This is currently not an issue from an income tax standpoint, but it is a huge issue when talking about Social Security. As a tax person, I have seen several cases where taxpayers were disabled or unable to work in full time jobs. Rather than take social assistance (like Welfare or food stamps), these people worked in their own businesses to earn enough money to make ends meet. Unfortunately, at tax time, although no income taxes were due, they were subjected to 15.3% Social Security tax. Because there is no exemption for low income earners, this tax can cause extreme hardship.


Where should the line be drawn between encouraging success without taxing high income earners too much? I can’t say I have the answer to that. I think there needs to be a balance. And, I don’t believe that the AMT accomplishes what it was designed to do: Eliminate unreasonable advantages from tax loopholes. When the primary “loopholes” are state taxes and mortgage interest, the AMT unfairly burdens those people living in states with high income taxes and home prices. Is it fair to require Californians and New Yorkers to pay more tax?


Unfortunately, there are no easy answers. We can’t start from a “clean state” and change everything at once. That would cause economic crisis. However, we can begin to make changes that will move our tax system to one that is more “fair.” What will eventually happen is anyone’s guess!

Protecting The Innocent
Sunday, June 29, 2014 20:04

Tags: annuities | client education | selling

I've written about the "evils of annuities" before. What is amazing to me is that annuity-pushers are still ripping people off and getting away with it!

Here's a case in point. A friend of mine emailed me that her parents were talked into buying an annuity. They were invited to a "free" steak dinner by a "financial planner" to listen to an "educational" presentation. (The quotation marks are intentional. The sentence should read: They were enticed into a sales pitch with a steak dinner by a shyster.) After hearing the presentation, the signed up for an annuity in the amount of $40,000.
Now, $40,000 might not seem like a lot for those of us advising clients with portfolios of several million dollars. For my friend's parents, $40,000 was a huge chunk of their savings. The scumbag who sold them this annuity made a commission many times over the cost of their dinners. And who knows how many others fell prey to this scheme?
Let's look at the problem. My friend's parents did not have much in liquid savings. Sure, they have some IRAs, but non-retirement cash was minimal. Now, the vast majority of it is tied up in an annuity.  If they want to take money out, it will cost them seven percent of what they put in! The penalty will decline to zero after seven years. In other words, my friend's parents will lose money if they want or need to access their funds prior to seven years from now. At ages 75 and 78, this seems almost criminal. 
What if they manage to let the annuity grow without taking money out? Should they utilize the funds down the road, any growth would be subject to tax at ordinary rates. Growth from investments held personally would be taxed at lower capital gain rates. If the annuity passes to their heirs, the ordinary tax on the growth will be payable by them. If my friend's parents had let their funds grow in a taxable account, any amounts passed on to their heirs would avoid tax altogether (because of the basis step-up).
As RIAs, we can't protect everyone. But we can educate our clients, friends and employees in the hope that they will share this warning with their circles. 

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If You're An Advisor In Maryland: Tell Your Clients That Living Longer Could Make Their Heirs Wealthier
Tuesday, June 03, 2014 15:21

The good news for UHNWIs residing in Maryland is that the longer they live, the wealthier their heirs will be. The bad news is that if they die within the next four years, their heirs may have to pay state estate taxes. 

On May 15, 2014, Governor Martin O'Malley signed into law a bipartisan bill "recoupling" Maryland state and federal estate taxes over the course of the next five years.

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David Albert, CPA, JD, CFP, who was kind enough to put me on his email newsletter list, says in a blog post that the state disconnected its rules from the federal system in 2004 and enacted a cap of $1,000,000 on its estate tax exemption, even though the federal estate tax exemption is more than five times greater.
As a result of this new law, Albert says the number of Maryland estates that will be exposed to the Maryland estate tax will be significantly incrementally reduced in stages over the next five years, when the Maryland and federal estate tax exemption will be at parity.



Receive Two Continuing Education Credits For Today’s Webinar, "75 Ways To Generate Tax-Alpha (Part 1)" by Bob Keebler -- Plus Big Discounts On Bob's Tax Aides For Advisors
Thursday, May 29, 2014 11:14

Tags: tax efficient investing | Taxes

Bob Keebler at 4 p.m. ET today delivered the first installment of a two-part webinar program, entitled, “75 Ways To Generate Tax-Alpha.” Replaying the special 100-minute session will give you twice as much CPE as our usual one-hour sessions, and Part 2 will also be a two-credit session and Part 3. In addition, attendees at today’s webinar will receive big discounts on the following tax tools for professionals from Keebler Tax & Wealth Education:

  • The Advisor's Guide to The Top 30 Tax Planning Ideas for 2014 is 148-page guide for professionals about: bracket management, income smoothing, income shifting, reducing taxable Income, net investment income tax strategies and wealth transfer strategies. With more than 60 examples about using utilize these strategies with your clients, this is a handy reference guide for any financial advisor. While the guide costs $99 normally, A4A members attending today’s will receive a discount code for a 30% discount ($69).
  • Bob Keebler’s Roth Conversion Calculator is an Excel spreadsheet for calculating whether a client should convert. Its graphical reports allow advisors to quickly absorb results and change assumptions. Moreover, unlike other calculators, it’s not a “black box.” You’ll able to look “under-the-hood” and determine how the calculations are made. Comes with a 34-page guide to conversions, a sample client marketing letter, and a sample client memo to help you better explain Roth Conversions to clients. While the guide regularly sells for $49, A4A members attending today’s will receive a discount code 50% discount ($24.50).


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