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South Carolina Business Review June 2009
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Wow, what a harrowing swing we have seen in the stock and bond markets of late. Asset allocation, which reduces the downside risk of investing, provided no safety in the July to August market correction. All major equity indices were down at least 10% from their earlier market peaks. Why? We are seeing a realization of some of the fears that were first showing up in theory in February 2007.
Not Planning Can Be Costly
Education planning has become even more crucial to many families over the past few years, mainly because the cost of a good education has grown dramatically faster than the overall rate of inflation. Some experts predict that, if your child is born today, you may need more than a quarter million dollars in savings to pay for tuition and living expenses at a quality college or university. The right education planning can put the burden of paying for your child’s education on your portfolio without forcing you to take on extra jobs or go deep into debt.College savings plans are a key element to education planning. Not long ago, many states established “529 plans.” These savings portfolios operate similarly to a retirement plan, but the proceeds can be used for education expenses, like tuition and books with recent legislation making earnings tax free.
Stress and Taxes
April is one of the most stressful months of the year for many Americans. Submitting your tax return is easier than ever, thanks to innovative software and electronic tax filing. However, this also means that more of us are putting off filing our taxes until the last minute. Neglecting your long term income tax planning is a costly error that can impact how you live now and how you’ll enjoy your future retirement.Without proper income tax planning, you can fall victim to two portions of the tax code that can severely impact how much you can spend now and save for later. First, your tax bracket determines how much of your income you must pay to the IRS each year. If you enjoyed a significant raise, or your spouse returned to work after an absence for child care or education, you could fall into a higher tax bracket that requires you to pay higher taxes.
Second, a growing number of families are now subject to the Alternative Minimum Tax. Originally designed as a tax on the super-rich, the AMT forces a minimum tax on families with AGIs above a designated threshold. Unfortunately, that threshold has not risen at the same pace as salaries and real estate values, meaning that you could wind up paying more taxes than you had planned.
For these two reasons alone, you should make income tax planning an important part of your annual routine. Just like a regular check-up with a doctor or a dentist, an income tax planning session can alert you to the early warning signs of trouble. Meeting with these professionals can identify ways that you can reduce your overall tax burden.
Income tax planning doesn’t have to be stressful, and it doesn’t have to involve last minute meetings with your financial planning team. If you begin your income tax planning process during the summer and fall, you can map out a financial strategy that legally reduces your adjusted gross income without stunting your earning potential. This way, you can ensure that you and your family enjoy a consistent quality of life without any surprise bills from the IRS.
Have You Planned
A recent survey of Americans showed that most of us – especially those of us who have not yet reached our fiftieth birthdays – put off retirement planning, for a variety of reasons. Many of us feel that retirement is too far off to start thinking about. Some Americans think that retirement planning makes them think too much about their own mortality. (more…)
The Battle Has Been Won but What About the War
At BFS, we have built our practice and more importantly, our reputation, by putting client interests first. We have built nice careers from serving our clients without conflicts of interest. Does everyone in my profession practicing as a CPA or CFP® work this way? How about a broker or an insurance agent? No. Do some people see financial planning as a simple way to increase revenues and offer products to clients? Unfortunately, yes. However, comprehensive, financial-planning takes skill, education and time in numerous disciplines and first and foremost is about the client. That is why I am so very pleased with a recent court decision and how it has the potential to put the client first again.
I confess – as a comprehensive, fee-only, financial planner – I am a fiduciary and feel that any person in my field who is serving a client should be one as well. I want every person providing investment advice to be obligated – by professional standards and regulatory and statutory authorities – to focus on the client and not the financial needs of the brokerage firm, insurance company or other firm for whom they work. As an advisor who practices this way, this is how I desire for my competitors to act. Lastly, if I were a client this is what I would expect as well.
However, it seems the SEC doesn’t share my view, and most professionals who give investment advice are not and probably never will be fiduciaries. As such, I felt especially vindicated in May when the DC Circuit Court of Appeals struck down the SEC’s rule that brokers could offer financial advice for a fee without becoming registered investment advisors or living up to fiduciary standards. The court told the SEC that professional advisors can not give their best advice “unless all conflicts of interest between the investment counsel and the client were removed,” and that the major focus of the Investment Advisers Act of 1940 “was to substitute a philosophy of full disclosure for the philosophy of caveat emptor.”
The court went further and said the 1940 Act was created to “safeguard the honest investment advisor against the stigma of the activities of faux professionals who follow fraudulent or deceptive practices.” Brokers have been living under this so called “Merrill Lynch exception” since 1999. So why am I not celebrating? Honestly, I am more worried today than before the decision because the decision made it clear that brokers cross into fiduciary territory simply by charging fees for their advice. A broker-dealer representative under the Act is exempt from RIA registration if that person offers investment advice that is “solely incidental to the conduct of his or her business as a broker or dealer, and who receives no special compensation therefore.” In other words, if the advisor acts solely in a transactional matter, no registration is required. When is the last time you heard someone holding themselves out as an advisor say they were simply completing the transaction vs. providing advice? Take a look at a business card. Does it say “transactional facilitator” or “advisor”?
I’m worried that the court’s ruling has backed the supporters of this business model into a corner. Those who have not been registered and putting clients first, have little choice but to adapt. If these companies decline to register, then they have to turn those asset management accounts into brokerage arrangements and take a blow to their credibility. If they decide to register as investment advisors, then every recommendation will be scrutinized by the courts in light of their conflicts of interest.
Given the changes at hand and the money associated with it, there are bound to be changes but what kind and how severe? That is open to much debate and will play out in the press, Congress and back offices of many firms in the coming months.
In the mean time, advisors should simply take a fiduciary oath to their clients and put their interests first.