Wealth Management
(New York)
Any advisor will have noticed the big industry push towards model portfolios, and in particular, model ETF portfolios. To many, this might be a “what gives?” moment. The reason why is actually a simple one for both advisors and asset managers. For asset managers, models can be a very nice singular location to gather up assets. For advisors, it is all about saving time and getting the best of a wide array of ETFs. Model portfolio can allow advisors to get access to a range of best-of-breed products without the need to proactively take the time to diversify client Dollars into those funds.
FINSUM: Model portfolios are going to keep growing. They are generally a win-win for both advisors and managers.
(Washington)
All advisors are already nervous about Biden’s planned tax hikes on wealthy clients. As a quick refresher, the Biden administration wants to raise long-term capital gains taxes to 39.6% (in addition to applicable local and state taxes), as well as eliminate the “step-up in basis” at death in inheritance. This has major implications on its own, but advisors and CPAs have brought up another significant issue with the tax hikes completely aside from the increased level of taxation: it is extremely hard to document the original basis for many assets. This is particularly true for illiquid assets like real estate and small businesses—which often constitute the largest portion of an estate. According to Ed Zollars, a CPA, “How do you estimate the basis, especially when the person who had the best chance to answer that is deceased?”. KPMG summarized the difficulty of the situation further, saying “For a flow-through entity that’s been around for 45 years, in theory, I’d have to go through 45 years of tax returns … Many times, records aren’t handily available, and obtaining transcripts from the IRS is hard, too”.
FINSUM: On top of everything mentioned, remember that basis changes all the time in both LLCs and real estate, either by capital put in the company or through 1031 exchanges. This will be a reporting nightmare!
(New York)
Something very interesting is happening in the annuities market: a new generation is taking the lead. While for many advisors, getting Baby Boomers into annuities as they near retirement has been the focus, a new generation—Gen X—has been turning to the product because of a lack of pensions. According to a new industry study “investors under 55 are considerably more interested in annuities than Baby Boomers; 58% embrace the product as an alternative to pensions”. According to Jean Statler, CEO of the Alliance for Lifetime Income, “The high level of interest in annuities and protection among younger investors is extraordinary … Unfortunately, there’s still a large gap between what investors say is important to them and what financial professionals think is important”.
FINSUM: This makes a lot of sense. The generations younger than Boomers have experienced more income insecurity and retirement uncertainty and are more focused on their ability to control their own retirement income.
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(Washington)
Any advisor has likely read about Biden’s new tax proposals on the “wealthy”…see the full story on our partner Magnifi’s site
(Washington)
Earlier this month the DOL took a major step. On June 11th, as part of its annual regulatory agenda, the DOL announced that it would be broadening the scope of its fiduciary rule. In particular, the DOL is planning to broaden the ERISA definition of who counts as a fiduciary under the rule, which would mean more advisors are covered. According to leading industry lawyer Josh Lichtenstein, “There are a lot of career people at the DOL still working there and it's not clear to me that their views would have necessarily changed just because of the 5th Circuit's action … So I am expecting to see a pretty fulsome rewrite of the definition of who is a fiduciary”.
FINSUM: That is a pretty substantial comment from Mr. Lichtenstein, and not one most advisors want to hear. Stay tuned.
(Washington)
Biden is going after the mother of all tax hikes, though it is deftly spread across a number of different areas so it takes significant effort to add it all up. That is partly by design, but partly by necessity, since the wealthy tend to face taxes across a number of different parts of their financial lives—income, capital gains, corporate taxes, inheritance. The reality though is that if you combine all of Biden’s proposals, wealthy individuals living in states with high income taxes (like New York) could face tax bills of over 80% when accounting for all the areas above. This would include a new top personal income tax rate, new higher corporate tax rates, the elimination of “step-up basis” in inheritance taxes (and potentially a higher inheritance tax rate), and state taxes of over 14% in New York.
FINSUM: This only precedents for this level of taxation in US history were during World War I and World War II, when tax rates got into the 90% percent range. Even then, though, there were easy loopholes and deductions to allow individuals to avoid that top rate.