Thinking Financial Planning

FPA Tip of the Week: The American Recovery and Reinvestment Act

This week the Financial Planning Association approached me to help provide advice on how individuals could better understand the changes in their withholding that they are now seeing in their paychecks due to the America Recover and Reinvestment Act (ARRA). This turned out to be their FPA "Tip of the Week" for May 11, 2009, which I'm reprinting below (the FPA's web site actual page can be found here):

How to Benefit from the American Recovery and Reinvestment Act

You wouldn't be alone if you didn't understand all the provisions of the American Recovery and Reinvestment Act, especially the one that affects your pay check, the one that makes it seem like your taking home more money each pay period.

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

If you receive a paycheck and are subject to withholding, the credit will typically be handled by your employer through automated withholding changes in early spring. According to the IRS, these changes may result in an increase in take-home pay and the amount of credit will be computed on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

So what does this mean to you?

Perhaps, nothing. But as with many things financial, tax law changes represent the perfect time to check in with a financial planner to have your situation reviewed. Find a Financial Planner. "I believe this warrants all taxpayers taking a closer look at their federal withholding," said FPA member, John Kilroy, CPA, CFP®. "No one should assume their withholding is in line with what ultimately may be due at tax filing time. I believe this to be true in any year, but even more so now as this "credit" influences amounts withheld. My advice: Anyone who receives a paycheck should work with a tax professional (now - if not sooner) to project whether he or she may be over or under withheld. The worst thing that may happen is for a taxpayer to learn they are not eligible for the Making Work Pay Credit after it has been given to them in their paycheck."

According to the IRS, "it is not necessary to submit a Form W-4 to get the automatic withholding change.  However, an employee with multiple jobs or a married couple whose combined income places it in a higher tax bracket should consult the IRS Withholding Calculator and, if necessary, submit a revised Form W-4, Employee's Withholding Allowance Certificate, to ensure enough tax is withheld. Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding including a special Making Work Pay worksheet. Learn more about the Making Work Pay tax credit

Financial planners and financial planning firms also offered these tips:

"The result of the change is that many employees will have their withholding reduced automatically in anticipation of the ARRA tax credit," said FPA member, Gary Kinghorn, director of product management at AdviceAmerica. "The best case scenario is that employees should be seeing larger take-home pay, and the same tax obligation next year."

Kinghorn also said, "employers, who are responsible for determining the changes in withholding, have general guidelines as to the new withholding schedules, but if the employee is not eligible for the ARRA tax credit (because they are be working two jobs or their spouse makes too much), the result could be an under withholding. Employees don't need to file a new W-4 form to get the reduced reduction, but they should consider reviewing the specifics of the tax credit (or consult their local financial planner and CPA) if there's a chance they aren't eligible. If that's the case, they should file a new W-4, increasing withholding, if they wish to more closely manage their withholding to their actual tax obligation."

Others agree. "Yes, consumers should review and possibly change their withholding," according to First Command Financial Planning. You should review your previous and currrent pay stubs and determine the difference in withholding.  You can either use the IRS withholding tables found in IRS Circular 15-T  or request an additional amount be withheld on their Form W4.

Google Search Insights Shows Interest In Financial Planning Over Time

I've been doing some research into state of the art web search analytic tools to refine our own marketing campaigns here at AdviceAmerica. Google has an insanely interesting tool now called Search Insights which tells marketers how the relative search trends for a particular keyword or concept varies over time, and to a (much) lesser extent what might be impacting those trends. You can even get trend insights for keywords based on seasonality, or geographic distribution (city, country, whatever). 

I know a lot of financial advisors are ramping up their social media marketing along with taking advantage of online search marketing (to the extent their firms allow), but this is not a how-to for SEO analysis. What I found interesting was what happened when I analyzed the trends in search on the keyword "financial planning" to see how consumer interest may have changed over time. You can get the full results or dig for other insights yourself here. Here's the main trend report:

The chart is a relative scale from 0-100, so we aren't looking at absolute search numbers, but the relative frequence of "financial planning" searches compared to all other searches over time. From a relative peak of 100 it has steadily drifted downward so that the percentage of searches for "financial planning" is only about 40% of what it was five years ago. (I won't go into details about what the letters mean, and believe me, I'm no expert on this stuff, but it looks like Google Labs has some more work to do. If you link to the page to try it yourself, I think you'll see what I mean).

Fortunately, I attribute this less to an overall decline in the interest of financial planning, but that the web has gotten much more cluttered with less relevant stuff and with more access by kids, so that while the percentage trend is down, I'm quite confident that the overall search volume must be going up. I'll leave that as an exercise for the reader to prove anecdotally, since Google doesn't provide search volumes here.

One definate trend worth noting is the spike each year from a low at the end of the year up to a new higher value in January. People obviously aren't interested in financial planning as we head into the holidays and Xmas shopping takes over, but come January, paralleling the trend for people going on a diet, I guess, people start searching out financial planners to get the new year back in order. This is a profound and consistent seasonal effect, which I guess you could anticipate, but I haven't seen so clearly demonstrated with factual evidence like here.

Another cool datapoint is where is "financial planning" the hottest right now? Go ahead take a guess. According to the map below, its Australia:

And if you follow this link, to drill down slightly further, you find that the hottest region is the island of Tasmania. Go figure!

Anyway, like a lot of Google tools, the amount of interesting insights that can be gained are overwhelming, IF you've got the time to play around and experiment. Let me know if you find some other interesting insights for the financial planning market or your practice overall.

Consumer Perceptions of Financial Planning

The Financial Planning Association has twice yearly events for their Major Firm constituents where about 100 financial planning advocates from the large wire houses and broker dealers get together to share ideas and best practices about financial planning. The last such event was in NY about two weeks ago. One of the presentations was on consumer perceptions of financial planning, based on at least four studies either conducted or commissioned by the FPA over the last three years. It's always good to know your market, and if you are selling the merits of a financial plan (as either an end in itself or a means to another revenue opportunity), its helpful to know what the market thinks about your service.

I would not say that the results of the study highlighted anything that was particularly unexpected, but it reinforced a lot of truisms that most of us probably believe, and put a lot of quantitative data behind the assumptions we make about clients perceptions. For those us like Dennis Hopper who stand in the middle of an intersection and say with stern conviction, "You Gotta Have a PLAN!!!", the results of the survey may be a little disappointing. The key takewaway is that across most demographics, the perceived value of a financial plan is fairly low. ($144 was perceived as "inexpensive" and over $400 was perceived as "expensive"). Naturally this improves somewhat in the six-figure income range, but not as much as one would think. The top three takeaways according to the presentation, though, show the opportunity for advisors:

• Consumers have an established idea of what "financial planning" and a "financial plan" are. However, education in the value, purpose and possibly the true definition is needed.
• Consumers are driven to professional planning by retirement planning and base their choice of planner on reputation, fees and service specialty.
• Providing a written, professional plan, tangible actions and reinforcing client confidence increases client satisfaction and positively impacts your bottom line.

Like I said, not exactly earth-shattering, but it's important to keep in mind that the more planners educate clients on the need for planning, the more the clients will appreciate it and develop a more trusted relationship with the advisor. The decisions that are made have a more defensible and justifiable framework, and the perception of the advisor, even if things get off track through tough times, will generally remain higher.

There's about 45 pages of compelling charts and data in the presentation that backs up all these conclusions. Let me know if you are interested. The next Major Firm Symposium will be at the FPA Show this October in Anaheim.

Surprising Drop In Retirement and Education Savings

At a recent lull in this week's T3 Conference here in Dallas I had a chance to read an article by Andy Sutton at FinancialSense.com that had some surprising facts about the drop off in savings into both retirement and education accounts over the last year:

• 529 plan contributions are down an average of 60% from 2007 according to a 529 plan representative who materialized at my office door a few weeks ago.

• According to TD Ameritrade, 63% of people with retirement plans stopped contributing to them in 2008.

• Only 21% of individuals surveyed in the above study had more than $50,000 in investable savings.

• Unemployment (32%) and increases in health care premiums (25) were the leading reasons why people stopped contributing to retirement plans in 2008.

• Nearly 25% of survey respondents in the 35-44 age group said they’d completely stopped contributing to retirement accounts in 2008. This more than any other group.

I know for my own personal situation that I've slowed contributions to the kids' 529 plans as much as feasible because I've lost trust in the limited asset allocation models that the state 529 plans allow and I prefer even a taxable, but fully controlled, strategy for savings. (SKF, KGC, MZZ have more than made up for the tax benefits as the 529 plans which are generally down by at least 35%).

This has to be a challenging situation for financial planners, especially as college cost concerns are almost overriding retirement planning as the foremost objective of families these days, particularly in the education-conscious middle class. On that note, I was lucky enough to attend a technology panel session here at the T3 conference by Ted Buchan who has a education planning-oriented practice in San Diego. It sounds like he has a great practice and really takes a holistic approach to education planning within an overall financial plan. He and his partner also go well beyond just 529 plans and give guidance on financial aid planning and taking advantage of tax breaks most CPAs can't find.

Can Financial Planning Save Us from Bubbles?

I found a great article on the Journal of Financial Planning website today titled,"Can Personal Financial Planning Save Us From Bubbles?", written by Professor Conrad Ciccotello at Georgia State Univ. It provides another great advantage to financial planning rather than pursuing the hottest investment trends regardless of goals or personal consumption needs.

The premise is that investors, even smart, professional investors, tend to conform to herd mentality and the headlong rush into a particular asset class helps to create financial bubbles, whether its the dot com stocks or housing bubbles. Because bubbles always burst, much to the detriment of investors and the broader economy, keeping them from inflating in the first place is always the problem. Harken back to Greenspan's comments on "irrational exuberance" and how it's hard to detect a bubble when you are still in one. The alternative to following the herd mentality is to do financial planning, and let each individual's needs drive their particular investment strategy, much to the benefit of everyone involved and the larger economy as a whole. I'll let Prof. Ciccotello explain further:

So what can personal financial planning do to save us and our clients from bubbles? In short, it can provide us the discipline to avoid blindly following the pack. The key is in the financial planning process, in particular the goal-setting aspect. Your goals are yours alone, independent of any other person's goals. Logically, what others are doing to achieve their goals is not relevant to you. Staying on your path will be more likely if your goals are concrete to you, as opposed to abstract.
    
What has this professor learned over the last decade of teaching graduate students? I now spend more time discussing goal-setting before getting to calculations. Goals are the reason we invest. Investment is deferred consumption. What is the consumption, when is it planned to be, and how important is it to you? An economist would say that your goals should lead to maximizing your utility; a more concrete statement would be that your goals are what you consider important, or what makes you happy. Studies of the economics of happiness broadly show that happiness is linked to a number of factors, including family, freedom, work, charity, and faith.

Lastly, it is often argued that experienced investors are the best at avoiding market bubbles. I think experience really means goal clarity in an investment context. Individuals' investments are made to further their future hopes and dreams—that is, their goals. No one has more experience with his or her own goals than that specific individual. If the client truly owns those goals, and their implementation has been linked to a portfolio strategy, the planner has done a great service. The client will be less likely to abandon the strategy which is aimed at maximizing the probability of success for a riskier one during good times (or a lower risk one during poor times).

Great advice we can all take to heart!

More Regulations on the Way for Financial Planners?

An article I found today at Financial-Planning.com caught me by surprise. It indicates that the three major financial planning organizations, the CFP Board, the FPA, and the NAPFA, were coming together to explore a unified approach to guiding congressional legislation aimed at reforming the financial services industry. In a nutshell, they are looking at what further regulations, if any, should be imposed on financial planners to protect consumer interests in light of recent heavy economic losses.

Leadership of the Certified Financial Planner Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors are conducting a review of regulatory gaps in the delivery of advice to consumers and issues regarding appropriate standards of conduct for the financial planning profession. Financial planning is currently regulated indirectly through licenses held by investment advisors, securities brokers and insurance producers or consultants, but is not regulated as a profession.

In the coming months, the three organizations will seek feedback from planners on the regulation of their profession. They will also contact organizations that share their belief that high ethical standards and qualifications for advisory services are more necessary than ever.

While I'm all in favor of a healthy dose of oversight, accountability, and a strict level of ethical conduct, I have to chime in that more stringent regulations on financial planners is not essential to address the present situation. My suspicion is that this is a cosmetic move to increase credibility as investor losses mount, and overall trust in the profession has taken a beating.

So far, the financial planning industry, and the professionals that belong to these organizations and carry their official designations, such as CFP, have usually held themselves to higher standards of ethical conduct and exhibited a more realistic analysis of financial markets than their non-planning oriented counterparts. In fact, one reason for the popularity of financial planning is that it tries to apply a more analytical, real-world, fact-based approach to investment decisions than the recommendations  and "hot tips" by the salesman, hucksters and momentum traders in the industry.

The bulk of the regulatory problems that we are facing are less of a result of the ethics and expertise of the financial planners, but on the lack of transparency and oversight of the instruments being sold, and a complete loss of integrity across the regulatory systems themselves, to which I would include the SEC, and the ratings agencies. If an advisor sells a AAA rated instrument that goes bad, who should get the blunt of further regulations, the advisor or the ratings agency?

I'll be following this topic closely, because I definately think there is some clean-up and regulatory oversight required in the industry, but the certified and concientious financial planners are generally the bastions of integrity and whose interests have been most closely aligned with the consumer without additional regulations.

//Gary