You’ve worked hard your entire career. With your nose to the grindstone, you’ve let your retirement assets grow on autopilot. Suddenly, you find yourself sitting on a pile of money. What do you do next?
What is a fiduciary advisor?
While the Department of Labor has a complete booklet outlining fiduciary responsibilities, the essential elements can be broken down into bite-sized chunks. These elements apply to both retirement plans and personal investments.
“Fiduciary advisors have two main duties while managing money, which include a duty of care and a duty of loyalty,” says David Rosenstrock, Founder and Director at Wharton Wealth Planning, LLC in New York City. “Duty of care means fiduciaries are required to make informed business decisions by reviewing all of the available information about your financial life before making recommendations or plans.”
If you want to focus on one phrase that best defines fiduciary, it would be “best interests.” Setting aside the SEC’s “Best Interest Rule,” which some fiduciary proponents question, the term in its original context is fairly straightforward in meaning.
“Financial advisors who act as a fiduciary are obligated to promote the best interests of their client,” says Katie Sheehen, Managing Director, Wealth and Fiduciary Strategist at SVB VB Private in Boston. “Therefore, advice given and investments selected are always tailored to the client’s needs. When picking a financial advisor, there are a lot of things to consider, size, location, and specialty, but whether or not these advisors are a fiduciary should also be top on that list.”
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Do you really need a fiduciary advisor?
There are many different types of financial professionals to choose from. Not all of them offer fiduciary services, and some of them offer both. It’s important you ask any potential service providers if they will be engaging with you in a fiduciary capacity. Why is this important?
“A major benefit of working with fiduciaries is that they always look out for the client’s best interests and disclose any conflicts that may negatively affect the client (which relates to duty of loyalty),” says Rosenstrock. “This can have a profound impact on the decisions you and your financial advisor make in collaboration and what your advisor might have you do to preserve or grow your wealth.”
With roots dating back to the Magna Carta, which prevented the practice of trustees depleting the resources of the orphans they oversaw, you know when dealing with a fiduciary, your assets cannot be legally harvested for someone other than yourself.
“Fiduciary advisors are legally bound to not use a client’s assets for their own benefit,” says Rosenstrock. “This relationship and standard of care serve to prevent situations where there are conflicts of interest. For example, a financial planner may encourage you to use certain investments because he or she could have a stake in them. Advisors may favor certain products because they can benefit from them. Fiduciary advisors have a duty to explain why they are making a decision and what you could gain or lose from it.”
When would you not need a fiduciary advisor?
Still, there are times when the advantage offered by working with a fiduciary is not right for you.
“The most common reason to work with a fiduciary is so that you theoretically receive the greatest level of unconflicted, unbiased advice possible,” says Ryan D. Brown, partner and attorney at CR Myers & Associates in Southfield, Michigan. “Fiduciaries are legally obligated to give advice that is in your best interest, not theirs. Working with a fiduciary to manage your entire financial portfolio may make sense if you believe it will need to be actively managed and looked after on a regular basis, and thus justifiable to pay that fiduciary his or her regular ongoing fee. It would not, however, make sense to pay a regular fee for mundane tasks that you might very well be capable of performing yourself.”
If you have the time, the interest, and you feel confident in your long-term health, you can certainly manage your own investments, even if you know very little about portfolio management.
“Investing can be taught,” says Ryan Derousseau, Financial Planner at Thinking Cap Financial in Huntington, New York. “While many investment advisers like to complicate issues, most investors need to place their money in a few index funds and then just continually invest in those funds. But there are a few situations where a fiduciary/investment advisor would be beneficial.”
When would someone want to use a fiduciary?
If you are a do-it-yourselfer, it’s OK not to work with a fiduciary for your own assets. Note the qualifier here. Suppose you are responsible for someone else’s assets, either as a personal portfolio trustee or as a corporate retirement plan sponsor. In that case, you cannot ignore your fiduciary responsibilities. If you aren’t a professional fiduciary, it likely makes sense to hire one.
“It is most critical for a fiduciary to be brought in to handle investments when there is a significant amount of assets involved and/or complex financial decisions that require expertise and impartial advice,” says Danny Ray, Founder of PinnacleQuote Life Insurance Specialists in Jacksonville, Florida. “This includes retirement planning, estate planning, and managing large investment portfolios.”
Even if you’re only in charge of your own assets, you may find yourself in a position where it might benefit you to hire a professional fiduciary.
“A fiduciary is most important when you do not have the financial knowledge, experience, or ability to make smart investment decisions,” says Andrew Lokenauth, Founder of Fluent in Finance in Tampa. “This could be due to age, lack of experience, or other factors that make you vulnerable to financial harm. By hiring a fiduciary, you can be sure your investments are being managed wisely with the goal of making more money.”
What is a typical fiduciary fee?
You probably are wondering about this. Will you be paying a premium for what appears to be a premium service?
Fortunately, serving as a fiduciary has become the standard business model for investment advisors. Yes, it is required for SEC-Registered Investment Advisers, but not all financial professionals must register with the SEC. Often, it’s not one’s registration that reveals a fiduciary; it is in the nature of how they receive compensation.
“The basic concept around the term fee-only fiduciary, which is another category of fiduciary advisor, is that this type of advisor only can receive compensation directly from the client for services provided,” says Rosenstrock. “In other words, fee-only advisors do not receive sales-related compensation from their employer or third parties (like fund companies). In this instance, fees can take the form of a flat rate, an hourly fee (or project-based fee), a subscription fee, or a percentage of assets under management. Fee-only advisors can work with clients on a one-time financial planning basis or on an ongoing basis, depending on what suits the circumstances best.”
If you’re looking for a true fiduciary advisor, perhaps you should first ask about fees. Imagine the service provider earns commissions or other income based on product sales. Should this be the case, you may find that product does not produce investment results compared to unconflicted alternatives, thus, costing you more in the long run.
“There are many well-regarded regional and national brand name storefronts that do not follow fiduciary standards, and this may be in direct conflict with what is in the best interest of prospective clients,” says Rosenstrock. “Most financial advisors have to sell investments that are suitable for clients, but fiduciaries must act with a higher standard of care. As a result, fiduciary advisors may be less expensive because client accounts aren’t charged commissions. A fiduciary advisor is important if you plan to give an advisor discretionary control of your account, if you aren’t sure what you need, and if you want sound, objective advice. When seeking wealth-planning strategies, it is important to bear in mind that not every firm providing financial advice is a fiduciary advisor.”
Are you concerned you don’t know enough about investing to do the right thing? Or are you concerned that you don’t know what you don’t know? In either case, you’ll want help.
You’ll need to make sure that this help works solely in your best interests.
Should this be the case, you’ll need to work with a fiduciary.
Bonds See 2023 Recession, Stocks Aren’t So Sure
The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.
The Evidence From The Bond Markets
The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.
Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.
The Stock Market
In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.
In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.
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That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.
Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.
However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.
Which States Have The Highest And Lowest Life Expectancies?
There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.
Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.
Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.
Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.
Life expectancies are a basic measure of well-being
As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.
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By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.
Significant influences on life expectancy calculations
Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.
When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.
In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.
Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.
You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.
IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’
Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
Tax Debt Resolution Schemes
“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.
“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”
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Offers In Compromise
Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.
An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or exceptional circumstances exist.
Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.
First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).
You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.
The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.
Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.
Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.
You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.
By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.
Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.
“Pennies On A Dollar”
What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.
The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.
While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.
You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.
An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.
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