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Author: Kevin Lao

Ep. 24 – Self Funding Long-term Care Expenses

Most people go into retirement without Long-term Care Insurance. Meaning, they plan to “self-fund” Long-term Care expenses. But really, what ends up happening is that a family member, or family members, will end up providing the care.

In fact, 70% of care provided is done by unpaid caregivers (aka family members).

This goes against what most people’s primary goal is in retirement; “Never to be a burden on their loved ones.”

The problem is the “self-funding” plan wasn’t communicated properly to their loved ones. Or, there was no “self-funding” plan to begin with.

In this episode, we’ll dive into the different assets you could tap into during retirement to “self-fund” long-term care costs, and tips and tricks on how to implement your plan while maintaining your dignity (at home!).

Here are a few links referenced in the show:

Genworth Cost of Care

Publication 502 (IRS)– Qualified Medical Expenses

I hope you enjoy this episode.

Ep. 23 – Using Hybrid Long-term Care to Fund Extended Care Costs in Retirement

This is part 2 of 3 in our series, “How to pay for Long-term care costs in retirement.”

Rodney Mogen and Peter Ciravalo from BC Brokerage are my guests again today and they bring a ton of knowledge on this topic! There is a reason Hybrid Long-term Care policies make up the majority of insurance products sold today. However, because there are so many different types of products and how they fit into a client’s situation, oftentimes retirees and pre-retirees can feel overwhelmed with where to start.

I hope you enjoy this episode and make sure to hit “FOLLOW” so you don’t miss out on part 3, “How to self-fund extended care costs in retirement.”

Here is how to get in touch with BC Brokerage!

BC Brokerage Website

Only Fee Only Podcast

Ep. 22: Paying for Extended Care with Traditional Long-term Care Insurance

One commonly shared concern for all retirees and pre-retirees I’ve spoken to over the years: “Never be a burden on your loved ones.”

As we all go through the aging process, the potential need for extended care is more and more at the forefront.

However, many pre-retirees and retirees fail to prepare for this because financial advisors focus more on selling products instead of real planning.

In episode 17, Harley Gordon joined us to discuss the consequences of not planning for extended care.

In this 3 part series (episodes 22-24), we will talk about the three ways to pay for extended care expenses:

Part 1 – Traditional Long-term Care Insurance

Part 2 – Hybrid Long-term Care Insurance

Part 3 – Self-funding extended care costs

In parts 1 and 2, I had the pleasure of speaking with Peter Ciravalo and Rodney Mogen from BC Brokerage. Peter and Rodney have a wealth of product knowledge but with a financial planning mindset.

I hope you enjoy this episode’s 3-part series.

Here are a few links we referenced in the show.

Genworth Cost of Care

BC Brokerage Website

Peter’s LinkedIn

Rodney’s LinkedIn

Purpose in Retirement, Purpose of this Podcast

The Wall Street Journal just came out with an article called “How to Retire Better, From Retirees Who Learned the Hard Way.”

What’s interesting is that 2 of the 3 suggestions had NOTHING to do with money or finances! It was all about purpose and relationships. So, this podcast is dedicated to talking about this NON-financial topic, “Purpose in Retirement.”

Also, many of you are new listeners whom of course I’ve never met before! Welcome! As a result, I thought I would share my personal story on WHY I initially launched this podcast in 2021, and how that purpose has evolved over time.

I hope you enjoy this show!

I’m including a couple of links below:

WSJ article 👈 Purposeful Retirement (book by Hyrum Smith) 👈

Ep. 20 – How to Reduce Taxes on Your Social Security Income

Did you know your Social Security benefits in retirement could be 100% tax-free? 

Perhaps you didn’t even know Social Security would be taxable as many of you paid into the system for decades!

Today we will unpack how Social Security retirement benefits are taxed, and most importantly how to reduce taxes on those benefits in retirement.


A few notes for the listeners:

Provisional Income / Social Security Tax Rates for 2023

Individual

  • Not Taxable: Less than $25k
  • Up to 50% Taxable: $25k-$34k
  • Up to 85% Taxable: Over $34k

 Married Filing Jointly

  • Not Taxable: Less than $32k
  • Up to 50% Taxable $32k-$44k
  • Up to 85% Taxable: More than $44k

A helpful Kitces.com article

https://www.kitces.com/blog/the-taxation-of-social-security-benefits-as-a-marginal-tax-rate-increase/

How to Reduce Taxes on Your Social Security Retirement Benefits

If you have already begun drawing Social Security, you might be surprised to learn taxes are owed on some of your benefits!  After all, you’ve been paying into the system via payroll taxes, so why is your benefit also taxable?   If you have yet to begin drawing Social Security yet, you can never say you weren’t told!  As a result, I’m often asked if there is a way to reduce taxes on your Social Security benefits.  This blog post will unpack how Social Security taxes work and how to reduce taxes on your benefits.  Make sure to join our newsletter so you don’t miss out on any of our retirement planning content (click here to subscribe!).  I hope you find this article helpful!

A brief history of Social Security

roosevelt mt rushmore

The Social Security Act was signed into law by President Roosevelt in 1935!  It was designed to pay retired workers over the age of 65.  However, life expectancy at birth was 58 for men and 62 for women!  Needless to say, there weren’t a huge number of retirees collecting benefits for very long.  As people began to live longer, several key provisions were added later.  One was increasing the benefits paid by inflation, also known as Cost of Living Adjustments (COLA).  Another was changing the benefits from a lump sum to monthly payments.  Ida Fuller was the first to receive a monthly benefit, and her first check was $22.54!  If you adjust this for inflation, that payment would be worth $420.15 today!  If you compare this to the average Social Security benefit paid to retirees of $1,782/month, those early payments were chump change! 

The Aging Population has Led to Challenges

According to data from 2021, life expectancy at birth is 73.5 years for men and 79.3 years for women!  In 2008, there were 39 million Americans over age 65.  By 2031, that number is projected to reach 75 million people!  We’ve all heard of the notion that older (more expensive) workers are being replaced by younger (less expensive) workers.   While taxable wages are going down and retirees collecting benefits are increasing, the result is a strain on the system.

Social Security benefits are actually funded by taxpayer dollars (of course).  If you look at a paystub, you will see FICA taxes withheld automatically.  FICA stands for Federal Insurance Contributions Act and is the tax revenue to pay for Social Security and Medicare Part A.  The Social Security portion is 6.2% for the employee and 6.2% for the employer, up to a maximum wage base of $160,200.  So, once you earn above $160,200 you likely will notice a “pay raise” by way of not paying into Social Security any longer.  Medicare is 1.45% up to $200,000, and then an additional 0.9% for wages above $200k (single filer) or $250k (married filing jointly).    

Up until 2021, FICA taxes have fully covered Social Security and Medicare benefits.  However, because of the challenges mentioned earlier, FICA taxes no longer cover the benefits paid out.  The good news is there is a Trust Fund for both Social Security and Medicare for this exact reason.  If there is a shortfall, the trust fund covers the gap.  The big challenge is if nothing changes, Social Security’s trust fund will be exhausted in 2034 and Medicare’s in 2031. 

How are the taxes on Social Security calculated?

The first concept to understand is that the % of your Social Security that will be taxable is based on your “combined income,” also known as provisional income.  If your combined income is below a certain threshold, your entire Social Security check will be tax-free!  If your combined income is between a certain threshold, up to 50% of your Social Security benefit will be taxable.  And finally, if your income is above the final threshold, up to 85% of your Social Security benefit will be taxable.  Here are the thresholds below.

how is social security taxed

How is “Combined Income” calculated?

The basic formula is to take your Adjusted Gross Income (NOT including Social Security), add any tax-exempt interest income, and then add in 50% of your Social Security benefits. 

If you are retired, you likely will have little to no earned income, unless you are working part-time.  Your adjusted gross income will be any interest income, capital gains (or losses), retirement account distributions, pensions, etc.  This is important to note because not all retirement account distributions are treated the same!  Additionally, capital gains can be offset by capital losses.  So even though your cash flow might exceed these numbers significantly, you still might be able to reduce or even eliminate how much tax you pay on your Social Security Income. 

Let’s look at two examples (both are Married Filing Jointly)

Client A has the following cash flows:

  • $40,000 of Social Security benefits
  • $50,000 Traditional IRA distribution (all taxable)
  • $10,000 of tax-free municipal interest income

The combined income in this scenario is $80,000.

Half of Social Security ($20,000) + $50,000 IRA distribution + $10,000 municipal bond income = $80k.

Notice how the municipal bond income is added back into the calculation!  Many clients try to reduce taxes on their bond interest payments by investing in municipal bonds.  However, it’s important to note how this interest income might impact other areas of tax planning. 

In this scenario, 85%  of their Social Security benefit will be taxable. 

The first $32,000 of income doesn’t trigger any Social Security taxes. 

The next $12,000 will include 50% ($6,000)

And finally, the amount over $44,000 ($36,000) includes 85% (85% * $36,000 = $30,600).

$6,000 + $30,600 = $36,600

If you divide $36,600 by the $40,000 Social Security benefit, it gives you 91.5%.  However, a maximum of up to 85% of the Social Security benefit is taxable, so in this case, they are capped at 85% and $34,000 will be their “taxable Social Security” amount.

Client B has the following cash flows:

  • $40,000 Social Security Income
  • $50,000 Roth IRA distribution
  • $4,000 Interest Income

Client B’s provisional income is only $24,000!  

Half of Social Security ($20k) + $0 retirement account distributions + $4,000 interest income = $24,000

As you can see, the Social Security benefits are identical to client A.  However, the $50,000 retirement account distribution is from a Roth account, and in this case, it was a tax-free distribution.  And finally, the interest income was way down because the client elected to reduce their bond allocations in their taxable account and instead owned them inside of their IRAs (which is not taxable). 

So despite having essentially identical cash flows, Client B enjoys 100% of their Social Security check being tax-free!  In other words, they have reduced their taxable income by $34,000 compared to client A!

A huge challenge arises for clients who are under the max 85% threshold.  Each dollar that is added to their retirement income will increase how much Social Security is taxed!  If someone is in the 50% range and they take an additional $1,000 from a Traditional IRA, they will technically increase their adjusted gross income by $1,500!  $1,000 for the IRA distribution and $500 for taxable Social Security income!

helped retired couple reduces social security taxes

What can you do about reducing taxes on Social Security?

So while you shouldn’t let the tail wag the dog, you should absolutely begin mapping out how you can make your retirement income plan as tax efficient as possible!  Here are a few ways to reduce your “combined income” and thus reduce your taxes on Social Security payments.

Roth Conversions

Simply put, a Roth conversion allows you to “convert” all or a portion of your traditional IRA/401k/403b to a Roth account.  Of course, you will have to pay taxes on the amount converted, but all of the growth and earnings can now be tax-free! 

This is perhaps one of the most impactful strategies you can incorporate!  However, you must start this strategy at the right time!  If you are still employed and perhaps at the peak of your earnings, you may not benefit from Roth conversions…yet.  However, if you recently retired and have yet to begin the Required Minimum Distributions (RMDs), you might find it to be a valuable strategy if you execute it properly.  

One of our most recent podcast episodes is about this topic; you can listen to it here.

Avoid the RMD Trap!

The RMD trap is simply the tax trap that most people with Traditional IRAs or 401ks run into.  In the early years of retirement, your RMD starts out quite low because it’s based on your life expectancy according to the IRS.  However, each year the amount you are required to withdraw increases.  By the time you are in your 80s and even 90s, the amount you are taking out could exceed what you need for cash flows!  But despite needing it for income or not, you have to withdraw it to avoid the dreaded penalties, and this could push you into higher tax brackets later in retirement.  And of course, this could also increase the taxation of your Social Security check! 

Roth conversions help with this, but it could also help to try to even out the distributions!  Instead of just waiting for the RMDs to balloon, perhaps you devise a better withdrawal strategy to target a certain tax bracket threshold throughout your retirement.

Asset Location strategies

You may have heard of the term “Asset Allocation,” which involves careful selection of asset classes that align with a portfolio’s objectives.  In essence, what % of stocks, bonds, real estate, and cash does the portfolio hold?  Asset Location involves selecting which accounts will own those asset classes in order to maximize tax efficiency and time horizon. 

When we looked at the Social Security examples earlier, you probably noticed Client B had less taxable interest income.  This is because they elected to reduce the amount of fixed income in their “taxable” account, and moved those assets into their IRAs. 

Alternatively, you might have a longer time horizon with some of your accounts, like a Roth IRA.  Given Roth’s tax-free nature and the NO RMDs, this account is a great “long-term” bucket for retirement income planning.  As a result, you might elect to have this account ultra-aggressive and not worry much about capital gains exposure, etc. 

You should take advantage of the tax characteristics of different “buckets” for retirement income planning.  Not all of your investment accounts should look identical in that sense.

Tax Loss Harvesting

Perhaps one of the most UNDERRATED strategies is tax loss harvesting.  Oftentimes when the market is down, people bury their heads in the sand hoping that things will improve one day.  And this is certainly better than selling out and moving to cash!  However, there is one step many people miss: realizing losses when the markets are down.  These losses can then be used to offset capital gains, and even reduce your ordinary income! 

I oftentimes hear pushback that people don’t want to offload investments at a loss because they were trained to “buy low and sell high.”  This is a great point, but with tax loss harvesting, after the loss is realized, you then turn around and replace the investment you sold with something similar, but not “substantially identical.”  That way, you avoid the Wash-Sale rule so you can recognize the tax loss, but you stay invested by reallocating funds into the market. 

Episode 19 of The Planning for Retirement Podcast is all about this topic and you can listen to it here! 

Qualified Charitable Distributions

qualified charitable distributions

Okay, so you missed the boat on Roth conversions, and you are already taking RMDs from your accounts.  Qualified Charitable Distributions, or QCDs, allow for up to $100,000/year to be donated to charity (qualified 501c3) without recognizing any taxable income to the owner!  Of course, the charity also receives the donation tax-free, so it’s a win-win!  I oftentimes hear of clients donating to charity, but they are itemizing their deductions.  Almost 90% of taxpayers are itemizing because of the Tax Cuts and Jobs Act of 2017.   QCDs can be utilized regardless if you are taking the standard deduction or not!  And the most powerful aspect of the QCD is that it will reduce your RMD dollar for dollar up to $100k. 

Let’s say your RMD for 2023 is $50k.  You typically donate $10k/year to your church but you write a check or donate cash.  At the end of most tax years, you end up taking the standard deduction anyways, so donating to charity doesn’t hurt or help you. 

Now that you’ve learned what a QCD is, you go to the custodian of your IRA and tell them you want to set up a QCD for your church.  You fill out a QCD form, and $10k will come out of your IRA directly to your Church (or whatever charities you donate to).  Now, your RMD is only $40k for 2023 instead of $50k!  In essence, it’s better than a tax deduction because it was never recognized as income in the first place! 

Two important footnotes are the QCD has to come from an IRA and the owner must be at least 70.5 years old!  It cannot come out of a 401k or any other qualified plan! 

We wrote an entire article on QCDs (and DAFs) that you can read here.

Final Thoughts

Retirement Planning is so much more than simply what is your investment asset allocation.  Each account you own has different tax characteristics, and the movement of money within or between those accounts also has tax consequences.  Instead of winging it, you could save tens or even hundreds of thousands of dollars in taxes in retirement if you are proactive.  However, the tax code is constantly changing!  In fact, the Tax Cuts and Jobs Act of 2017 is expiring after 2025, so unless something changes, tax rates are going up for most taxpayers.  Additionally, the markets are beginning to recover, so strategies like tax loss harvesting or Roth conversions become less impactful.  But, there is still plenty of time and opportunity!   

Thanks for reading and I hope you learned something valuable.  Make sure to SUBSCRIBE to our newsletter to receive updates on me personally, professionally, and of course, content to help you achieve financial independence!  CLICK on the “keep me up to speed” button below.

-Kevin   

keep me up to speed

Ep. 19 – Tax Loss Harvesting to Create Tax Free Retirement Income

Sometimes “hanging tight” isn’t the best solution during times of volatility. We’ve had two bear markets since the Great Recession of 2008. COVID-19 was the first, and the inflation that ensued thereafter in 2021-2022 led to the second. Tax Loss Harvesting involves selling investments when they are down in value (in a taxable account) to create a realized loss for tax purposes. You can then use these losses in current or future years (retirement) to reduce taxes!

These opportunities don’t come every year, so it’s important to take advantage while you (still) can!

I hope you enjoy this episode!

Ep. 18 – How a Roth Conversion Strategy Could Save Our Client Over $427k in Taxes Throughout Retirement

Roth conversions are definitely gaining lots of popularity, especially with the Tax Cuts and Jobs Act of 2017 expiring in 2026. Because of this, I have noticed consumers believe they should automatically start converting their IRAs and 401ks to Roth accounts!

First and foremost, you have to run the numbers. For every scenario that is a “home run” like the one I’ll discuss today, there is a scenario where it does not make sense. Or, perhaps the time isn’t right (yet).

Make sure to check out this latest episode to hear the first of our three-part series from our recent educational workshop, “How to Reduce Taxes in Retirement.”

Enjoy!

Q1 2023 Market Update

Despite two major US banks failing, coupled with central banks’ attempt to fight persistent inflation, the US and International markets experienced some positive momentum!

The Banking System

One of our recent articles was about the collapse of Silicon Valley Bank (SVB), the 2nd largest US bank failure in history.  This sent a ripple effect into the banking system, particularly a flight of deposits from smaller regional banks to big banks.  

JP Morgan posted a 52% jump in its first-quarter profits.

Wells Fargo topped analysts’ projections by 10 cents a share in Q1.

Citigroup also beat analysts’ estimates on revenue.  

In short, customers were worried that their bank might also fail following SVB and Signature’s collapse.  As I discussed in our previous post, which you can read here, SVB and Signature were heavily concentrated on client bases that had unique challenges in this economy (tech industry and crypto).

However, bank capitalization looks very healthy and has been on the uptrend since 2008 following the Global Financial Crisis.  This is one positive impact of tighter regulation on big banks following The Great Recession.

Source: JP Morgan Asset Management

The real fallout

Despite big banks experiencing an inflow of deposits from smaller banks, they are still facing tighter lending standards and rapidly increasing interest rates.  They now have to pay us all higher yields in return for their money market or CD accounts.  Smaller and more regional banks, however, will face a reduction in deposits AND increased lending standards.  Regulators and board members are going to be watching like a hawk to ensure more banks don’t have the same risks that SVB and Signature Banks did.  

As banks tighten their lending standards, individuals and businesses are going to struggle to get loans.  Individuals who could previously afford that new or used vehicle might not qualify any longer.  Or, people shopping for their first home can’t afford the mortgages given the rapid uptick in rates.  

Businesses that rely on these smaller and regional banks for loans to keep their lights on or survive this challenging market will find it harder to get capital.

All of these ripple effects will contribute to a slowing economy.

But after all, this was the Fed’s goal ever since they announced their rate hike and quantitative tightening strategy back in 2021.  Their main objective was to fight inflation, and they needed to slow the economy in the short run to win the battle in the long run.

Speaking of inflation...

After setting 40-year highs in 2022, inflation is finally cooling a bit.   The peak was 8.9% in June, but we’ve seen a gradual decline ever since.  The March numbers were just released and showed a 5% year-over-year CPI figure.  The Fed’s target overall is 2%, so we are still a ways from that number.  Despite the trend going in the “right” direction, I don’t believe the Fed will get all the way to their 2% goal unless unemployment falls exponentially over the coming months.  The cooling inflation story is the primary reason the market has rallied since the start of 2023.  Inflation under check means the Feds might actually STOP raising interest rates very soon.  The market is pricing in one more 0.25% rate hike and then the expectation is rates will level off and eventually fall in 2024.  

The real question is, has the Fed done so much damage with its policy that they send the economy into a recession?  If this happens, they could even pivot to rate cuts as early as the end of 2023 or the beginning of 2024.  My hope is that they take a pause and let the economy settle itself out.  

Source: JP Morgan Asset Management

Unemployment and Wages

The unemployment story has been a big part of why inflation has been so sticky. 

We entered 2020 with a 3.5% unemployment rate, which was a 50-year low.  After topping over 10% unemployment (briefly) in 2020, the US now has a 3.6% rate.  Additionally, wage growth is at 5.3%, which is above the historical average of 4%.  So, if people are “working” and wages are still growing, it’s no wonder inflation has been so tough to fight.  People did not stop spending money in 2022 because of prices going up.  Sure, consumer discretionary categories took a hit, but the core goods and services were still being purchased at elevated prices.  This is a big reason I don’t believe prices are going to come down as much as the Feds want them to.  Why would corporations cut prices when their consumers have the wages to buy them?  

One of the chips likely to fall is the unemployment story in big tech firms.  Since 2018, Amazon and Meta (Facebook’s parent) have almost doubled their workforce.  During that same period, Microsoft increased its workforce by 53%, and Alphabet by 60%!  Meanwhile, Apple only grew its workforce at a moderate 20% rate.  

Remember the Paycheck Protection Program in 2020?  This was a federal loan to corporations to keep their employees on payroll during COVID.  All they had to do was use at least 60% of those loans to cover payroll and the “loan” was forgiven.  The word on the street is that big tech used their loans to go on massive hiring sprees.  Not because they NEEDED that many more workers, but to reduce the talent pool for their competitors and have their PPP loans forgiven!  Now that the economy is slowing, we’re seeing big tech begin layoffs.  Coincidently, Apple hasn’t laid anyone off just yet.  

Look at this headline from a Fortune article:

‘Penned’ tech specialists are earning six-figure salaries to ‘do nothing’ and string out 10-minute tasks. Some are even using the time to scuba dive

Some of the highest unemployment numbers by industry are:

  1. Farming – 7.4%
  2. Mining, quarrying, oil and gas extraction – 6.5%
  3. Construction – 5.6%
  4. Leisure and Hospitality – 5%
  5. Transportation and utilities – 4.6%

Meanwhile, big tech unemployment is only at 2.6%, up from 1.5% to start the year.  All of the remote workers that migrated out of the big cities during the pandemic are now experiencing some layoff concerns, and it will be very interesting to follow that narrative as big tech continues to cut their unnecessarily large workforces.  

Returns by asset class, YTD

As you can see year to date, all of the major asset classes are positive.  International, developed economies are in the top spot, with US Large Cap a close second.  What’s very encouraging is that the fixed-income markets are now showing positive returns after a rough 2022.  

During the re-balancing process for our clients at the beginning of 2023, the only asset classes we added exposure to were Large Cap Growth companies (big tech) and international equities.  This isn’t to pump our chest to say “I told you so.”  However, part of our process is to sell the winners and buy the losers.  Big tech was the worst-performing asset class in 2022, and stock performance is a leading indicator.  What I mean is, the layoffs and bad news for big tech this year were already priced into the market in 2022 (at least we hope so).  We talked a lot about interest rate increases during 2021 and 2022 and how it would impact tech companies.  After the brutal selloff in 2022, valuations looked much more attractive going into 2023…hence, buying the loser.  So far year to date it’s paid off well, but that’s not to say there isn’t more volatility ahead for big tech with the challenging interest rate environment they face.  

The same can be said about international equities as they had a rough go in 2022 but are very well positioned from a valuation perspective for the decade ahead.  International stocks tend to do well during periods of high inflation, like in the 70s and 80s.  However, geopolitical concerns with Russia/Ukraine and China still make international stocks much more volatile.  

Final thoughts

Attempting to time the market is very dangerous.  If you look back at the past year, consumer sentiment has been at record lows.  People have not been feeling good about the economy.  This feeling oftentimes leads to investors flighting to safety.  How many articles have you seen about I-Bonds or CD Rates over the last 12-18 months?  Well, stock market returns typically accelerate very quickly after a recovery.  In fact, more than 50% of the best daily S&P 500 returns occur during a bear market.  So if you bailed out during 2022, you did not get the benefit of a strong Q1 in 2023!  

While we are going to be experiencing a tighter economy for the foreseeable future with higher rates, there is now hope with the inflation story beginning to unfold.  Let’s hope the market is correct in that the Fed will only increase rates one last time at 0.25% and be finished.  The unemployment and wage growth figures will be key to watch over the coming months as that will dictate how quickly inflation comes down in late 2023.  

If you are curious about how the market has impacted your financial goals, we’d love to hear from you!  You can either send me an email at [email protected] or book a Zoom call with us.  

Until next time, thanks for reading!

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Benefits of Working with an Independent Financial Advisor

Thinking about your financial future can be mind-numbing, let alone searching for a financial advisor who can help you.  Why are there so many different titles?  Do they all do the same thing?  Is a financial advisor a fiduciary?  Are they ALWAYS a fiduciary?  Finally, what differentiates advisors who work for large companies vs independent firms?  In this blog post, we will  unpack and answer those questions for you, and help you understand the benefits of working with an independent financial advisor.

Quick Disclosure

I spent the first 12 years of my career as a financial advisor for a large broker-dealer and a large bank.  In 2020, I made the decision to go independent for all of the reasons I will talk about below and I haven’t looked back.  So YES, I am extremely biased in my belief that the independent financial advisor avenue is where clients are provided the best service!

Let’s start with a general lay of the land. 

The Wall Street Crash in the autumn of 1929 led to an increase in regulation of the financial industry.  As a result, Theodore Roosevelt officially signed the The Glass-Steagall Act of 1933, creating a clear division between different types of financial services companies.  Simply put, insurance companies were then designed to sell insurance and banks were either investment banks or commercial banks.  Wall Street Firms/Broker-Dealers sold securities. 

Decades later, The Financial Services Modernization Act of 1999 was passed, and this law deregulated the financial services industry and essentially allowed everyone to play in each other’s sandbox.  Insurance companies could now sell securities, banks could sell both insurance and investments, and brokers could now sell insurance products and act as a bank. 

This led to a drastic shift in the financial advisor’s role.  In the 1980’s, an insurance agent would just sell insurance.  Over time the role of an insurance agent evolved, and now new hires at insurance companies are being licensed not just to sell insurance, but to sell variable products like annuities and mutual funds and even manage client assets as an investment advisor. 

In the banking world, you have representatives who help customers with deposits, but they also have licensed insurance agents and investment advisors on staff.  Have you ever gotten a call from your existing bank about a “wealth management” offering?  If you keep a meaningful amount of cash in the bank, the goal for the wealth management team is to convince those banking clients to also purchase both insurance and investment products. 

And finally, the wall street folks.  These large brokers and investment banks can now sell annuities, life insurance, long-term care insurance etc.  

My initial take on this...

I’m very keen on the idea of looking at everyone’s situation comprehensively.  As a Certified Financial Planner, I believe we need to ensure all assets on the balance sheet are coordinated and risk is managed properly.

The biggest challenge I see, however, is that the big firms aren’t truly looking at it that way.  Their main goal is to increase and diversify revenue for their stakeholders.  I’ll say it again, their main goal is to increase and diversify revenue for their stakeholders.  Not for you.  Not for your family.  But for THEIR balance sheets.  

When it comes down to working with a financial advisor, there are some phenomenal advisors that work for large firms.  The challenge is they all have their own metrics and minimums they must achieve in order to be successful and reap the rewards.  So whether consciously or subconsciously, the consumer is always left thinking, “Is this recommendation 100% in my best interest?”

This is at the core of WHY I decided to leave a big firm and launch an independent firm.  Rather than having people wonder if the recommendations are aligned with their best interests, why not simply cut out the conflicts of interest???

Let’s get into some of the reasons why working with an independent financial advisor could benefit you.

Fiduciary Standards

fiduciary independent financial advisor

It is much more difficult to abide by a true fiduciary standard when you are acting as a fiduciary some of the time.  Oftentimes advisors who are working for insurance companies or big banks might have incentives to recommend certain products.  These products often follow the less arduous standard of “suitability,” and not a fiduciary standard.  This means the product just has to be suitable at the time the recommendation is made.  This can often lead to conflicts of interest in working with clients. 

Kyle Newell, Owner and Financial Planner of Newell Wealth Management based in Orlando, Florida said this reason was a big motivator to go independent. 

“My main driver in going completely independent, is the freedom to make decisions solely for the benefit of my client.  No production/sales goals to hit, no shareholders to make happy, or managers to make look good to the higher-ups,” said Kyle. 

When you hire an independent financial advisor, they are working for YOU, not their employer!  Isn’t it nice to be sitting at the SAME side of the table as your advisor when discussing your financial future?

The Ability to Customize

customize retirement plan

At most big firms, the investment models are pre-packaged for clients.  The advisor might do some sort of risk questionnaire, and anyone who has the same risk score will have identical portfolios. 

But what about personalization?  What about taxes?  What about the time horizon of different accounts?  What about different financial objectives? 

As an independent firm, we utilize cutting-edge research and analysis but we’re able to implement it in a way that is customized to each individual family. 

I’ll give you an example.

By late 2021, we knew interest rates were going to begin to spike in 2022 (because the Fed told us so).  We had used primarily bond mutual funds and ETFs up to that point as interest rates were historically low over a decade.

At the beginning of 2022, we began to transition out of the traditional mutual funds and ETFs for some of our clients and implement their own customized individual bond portfolios.  Additionally, we used hedging strategies within the fixed-income space to protect against the rise of rate hikes.  This helped save tens and even hundreds of thousands of dollars for clients over the past year.  

This would have been virtually impossible working at a big, institutionalized firm. 

The ability to be nimble and pivot during uncertain times is invaluable over the life of a client relationship.

Independent Financial Advisors Have Modern Fee Schedules!

Have you heard of the financial advisor who babysits client assets for a management fee and does NO financial planning?  (I’VE HEARD A FEW STORIES!)

Consumers are getting smart and are tired of overpaying for financial advice that doesn’t deliver.  Many people are learning about different models like “advice only,” “flat fee financial advisor,” or “one-time engagements.” Most of the big firms charge the traditional methods of either commission-based compensation or a percentage of assets under management.  But more importantly, they don’t require any financial planning for that fee!

Jeff McDermott is the owner of Create Wealth Financial Planning, an independent firm based in St Johns, FL serving young families and professionals.  He had this to say about the fee models of independent advisors;

“A client who doesn’t fit the traditional advisor mold because they don’t yet have substantial investment assets, are looking for planning to address specific needs, or possibly hourly or one-time project planning might be more likely to find a good fit in the independent financial advisor world.”

My firm, Imagine Financial Security, serves retirees and pre-retirees for a flat fee.  Our firm also provides one-time financial plans to ensure clients are on track. 

It’s fun to be able to serve people in different ways that are innovative and ultimately better for the client. 

Innovative Technology

One of the biggest challenges as an advisor working for a large firm is adopting and adapting to new technology.  Oftentimes these big enterprises have technology embedded in their systems that are years or even decades old.  If they had to change their technology, it could take years to integrate properly.  Imagine the impact of making a change that affects one million or two million customers! 

Many independent firms serve fewer than 250 households making new integrations much more palatable. 

“The independent advisor space has advanced significantly in technology and breadth of services available,” says Newell.

Our firm utilizes two financial planning tools to help address the needs of our pre-retirees and retirees.  RightCapital allows us to model cash flows and changes in a retirement scenario using Monte Carlo analysis.    

We also use Income Lab to help manage withdrawal rates for clients throughout retirement.  Additionally, if there is a need to make an adjustment, Income Lab is there to ensure those are made in a timely fashion. 

Furthermore, these tools allow us to model Roth conversions to identify tax planning opportunities. 

This has been a game changer to add further value to the families we serve.  

Tax Planning

Speaking of Roth conversions, now we are getting to the heart of retirement planning challenges…TAX PLANNING!  Once you crossover a certain asset threshold, let’s say $1mm of investment assets, taxes in retirement become a big deal.  Social Security taxes, Medicare surcharges, tax bracket management, Required Minimum Distributions, and finally, death taxes.  The value of maneuvering through all of these hurdles successfully in retirement is worth far more than how the investments are performing relative to their benchmarks.

Every movement of money has a tax consequence.  So, wouldn’t it be nice to know what those tax consequences are before the money is moved??? 

Does your advisor have a copy of your most recently filed tax return?  If the answer is “no,” then how in the world are they able to know what the impact of money movement is on your tax situation?  

The more money you can save on taxes in retirement, the more you will have to travel or gift to your grandkids!  Win-win!

Specialization

niche, specialist

If you look at the client roster of a traditional financial advisor working at a bank or broker, you will find the demographics vary widely.  There might be a 25-year-old just getting started with their investing career all the way to a 65-year-old preparing to retire.  This might seem great on the surface as that advisor can serve multiple demographics.  However, how specialized is that advisor in working with people just like YOU?  Many independent firms specialize in working with a specific age demographic, occupation, or even serving those with certain political beliefs!  This specialized expertise allows for a deeper understanding of the client’s needs and ultimately adds more value to the relationship.

Think of a general practitioner vs. a specialist.  If you need heart surgery, you’re probably not going to see your family doctor.

It's all about the relationship

I know we’ve talked about some of the value adds and financial benefits of hiring an independent financial advisor.  But at the end of the day, the relationships and families we serve are at the forefront of why we do what we do.  

I was talking to a friend who works at a larger firm and he complains annually about how much his annual goal has increased.

And don’t get me wrong, I have business and personal goals myself.  Any motivated individual has goals.  However, when the goals get in the way of serving your clients, that’s a problem.  And that is at the core of why independence is so important to me and many others who continue to break away from big firms.  

When I review the list of families I serve, I get excited.  Helping people plan for retirement is extremely rewarding.  But furthermore, I love to help people reduce fear and start living their BEST years with the gift of time!  Who wants to sit around and play with their investment portfolio (and likely screw it up), or try to find tax planning opportunities rather than pursue their passions!?  Or spend more time with their families?  Retirement is not the end, it’s the beginning of financial freedom!  So enjoy it!

In Summary

Simply put, the independent advisor movement is growing in popularity. According to Fidelity’s 2020 Advisor Movement Study, 2/3 of all advisors who left employee financial advisor arrangements in the last 5 years left for independence.  And the trend is only accelerating.

Third-party organizations like XY Planning Network, NAPFA, Fee-Only Network, and Wealthtender all offer “find an advisor” search tools to help you narrow down what you’re looking for. 

Our firm focuses on working with individuals and couples who are over 55 and have accumulated at least $1mm for retirement (or will have accumulated at least $1mm when they do retire).   If you are curious about how we can help you, feel free to book an initial 30-minute “Mutual Fit” meeting so we can get to know one another.  Also, make sure to subscribe to our blog so you never miss out on our latest posts!

Until next time. 

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