Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Archive for August, 2011

The Changing World of Health Insurance: MLR’s Slam Commissions

Posted by William Byrnes on August 31, 2011


Increased medical loss ratios (MLRs) are devastating health insurance producers’ balance sheets and driving agents out of the health insurance business. As of  January, the Obama Administration’s Affordable Care Act increased the MLR requirement imposed on health insurance companies, forcing many carriers to reduce agent commissions by 25 percent or more.

The objective behind imposing MLRs is to ensure that consumers receive the full value of their premium dollars. This is accomplished by implementing a shift in how insurance carriers spend their money. Insurance carries are now required to spend premium dollars on direct medical services, rather than on administrative costs and profits. Under the new MLR program, insurers must spend 80 to 85 cents of every dollar on direct medical services. Insurers who fail to meet the MLR requirement must either adjust their premiums to account for any discrepancies, or refund excess premiums to consumers.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of health care reform in Advisor’s Journal, see Long-term Care Insurance Reform Act of 2010 (CC 10-46), Changes Affecting Large Employers in the 2010 Health Reform Law (CC 10-17), Changes Affecting Business in the 2010 Health Reform Law (CC 10-16), & Changes Affecting Individuals in the 2010 Health Reform Law (CC 10-15).

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STOLI Scheme Lands Insurance Agent in Jail

Posted by William Byrnes on August 29, 2011


A California insurance agent will spend years behind bars for his part in a stranger originated life insurance (“STOLI”) scheme that swindled six victims out of almost $800,000. In addition to being sentenced to 3 years 8 months in jail, Victor L. Weber, 55, was also ordered to pay restitution to his victims.

In the typical STOLI arrangement, investors or promoters approach seniors to allow investors to purchase life insurance on the seniors’ lives. Insureds are typically enticed to sign on the dotted line by promises of “free life insurance,” cash payments, vacations or other perks. Insureds are usually unable to purchase needed life insurance because their life insurance capacity is occupied  by the investor owned policy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of stranger-originated life insurance in Advisor’s Journal, see New York Court of Appeals Upholds STOLI Arrangement (CC 10-106) & Recent STOLI Case Is a Big Win for Insurers (CC 10-59).

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modern trends surrounding captive insurance – webinar

Posted by William Byrnes on August 26, 2011


Captive Insurance webcast

 

CLICK HERE TO REGISTER – No COST!

Please join us next month as we discuss the modern trends surrounding captive insurance. Wealth managers who have an interest in captives will likely find the information and presentation useful. CLICK HERE TO REGISTER

For additional information on captives see, Advisorfyi.com–States Competing for Captives Insurance Business,Alternative Risk Transfer RevisitedCaptive Market Continues to GrowLLC Series and Cell CompaniesGroup Captive Insurance Companies and Year End Tax Considerations, and A Dollar Saved…Captive Insurance Company Costs

CLICK HERE TO REGISTER

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The Pitfalls of Transitioning Between Firms

Posted by William Byrnes on August 26, 2011


If you’re considering transitioning your book of business to a new firm, maintaining the confidentiality of client information should be your principle concern. Accomplishing  a move without becoming the target of a lawsuit can be a daunting task. However, there is a protocol of best practices that if followed correctly can significantly lower the risk of violating confidentiality.

In 2004, three wirehouses – Citigroup Global Markets, Inc. (“Smith Barney”), Merrill Lynch, and USB Financial Services, Inc. – created the Protocol for Broker Recruiting (the “Protocol”). The Protocol’s objective is to protect clients’ privacy and flexibility when choosing Registered Representatives (“RRs”) – especially RRs who are switching firms. By reducing litigation over RRs transitioning to new firms, the high costs associated with competitive recruiting efforts can be minimized and client information can remain protected.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of broker-dealer issues in Advisor’s Journal, see  Is a Hybrid Practice Model Right for You? (CC 11-46), What’s Driving the Increasing Appeal of the RIA Model? (CC 11-69).

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IRS QTIP Ruling: Perils of Future Changes

Posted by William Byrnes on August 25, 2011


Clients often want to use Qualified Terminal Interest Property trusts (QTIPs) to separate certain funds to care for a surviving spouse, while retaining some measure of control over the general distribution of the funds—whether they will be distributed to children or a charity. But navigating the QTIP rules as client’s circumstances naturally endure change can be cumbersome.  The danger exists when errors that seem trivial, result in eliminating any transfer tax benefit of the trust.

A recent IRS private letter ruling (PLR 201117005) provides us with a good reminder of the QTIP rules and an example of creative QTIP planning that provides the surviving spouse with adequate lifetime income while giving the grantor (and the surviving spouse) a degree of post-death control over disposition of the trust assets.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber)

For a graphic illustration of the QTIP trust, see the Concepts Illustrated practice aid at G—Credit Shelter Trust and QTIP Trust.

For coverage of QTIPs and other techniques useful in estate planning for blended families, see the Advisor’s Journal article Estate Planning for Blended Families (CC 07-16).

For in-depth analysis of marital deduction planning, see Advisor’s Main Library: G—The Marital Deduction.

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SEC Okays CFP Board’s Request to Dig into Applicants’ Backgrounds

Posted by William Byrnes on August 24, 2011


Cerftified Financial Planners (“CFPs”) and CFP applicants can longer hide their discplinary history behind the shield of client confidentiality. At the request of the Certified Financial Planner Board of Standards, Inc. (“CFP Board”), the Securities and Exchange Commission (“SEC”) issued a no action letter that gives brokers and advisors unlimited discretion to share customer complaint information with the Board without fear of reprisal from the SEC. The no action letter eradicates advisors’ ability to assert client confidentiality as a justification for not disclosing customer complaint information to the CFP, giving the Board free-reign to scour members’ backgrounds.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of the financial planning industry in Advisor’s Journal, see Wall Street Reform Act Mandates Study of Financial Planning Industry (CC 10-73).

For in-depth analysis of financial planning concepts, see Advisor’s Main Library: A – The Need For Financial Planning.

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SEC Okays CFP Board’s Request to Dig into Applicants’ Backgrounds

Posted by William Byrnes on August 22, 2011


The dynamics of the confidentiality is enduring change. Certified Financial Planners (“CFPs”) and CFP applicants can no longer hide their disciplinary histories from the CFP Board under the shield of client confidentiality. At the request of the Certified Financial Planner Board of Standards, Inc. (“CFP Board”), the Securities and Exchange Commission (“SEC”) issued a no action letter that gives brokers and advisors the  to share customer complaint information with the Board without fear of reprisal from the SEC. The no action letter removes advisors’ ability to maintain client confidentiality as a justification for not disclosing customer complaint information to the CFP, giving the Board free-reign to scour members’ backgrounds.

What impact will this heightened need for disclosure have on the advisor- client relationship?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of the financial planning industry in Advisor’s Journal, see Wall Street Reform Act Mandates Study of Financial Planning Industry (CC 10-73).

For in-depth analysis of financial planning concepts, see Advisor’s Main Library: A – The Need For Financial Planning.

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New Cancellation of Debt Rules Leave Grantors on the Hook

Posted by William Byrnes on August 19, 2011


The collapse of the secondary market for life insurance during the recent financial crisis left a lot of trusts anxious to dispose of large face value life insurance policies. Trusts that handed back policies in satisfaction of premium finance loans were then struck, along with their grantors, with massive tax bills for what is known as cancellation of indebtedness or cancellation of debt (COD) income.

The IRS recently released proposed regulations that address the income tax treatment of cancellation of debt income of trusts. Although this highly technical area of the law may not be of interest to lay audiences, it is a vital aspect for advisors selling high-value life insurance policies.

 

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of an interesting case involving a premium financed policy in Advisor’s Journal, see Lawsuit Seeks to Hold Insurer Responsible for Suspicious Death (CC 10-101).

For in-depth analysis of life settlements (which can be structured as a premium finance transaction), see Advisor’s Main Library: B—The Life Settlement Industry.

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IRS High Net Worth Initiative: Fearsome Beast or Paper Tiger?

Posted by William Byrnes on August 16, 2011


The IRS commenced the Large Business and International Division’s high-wealth industry group (“HNW Initiative”) in October 2009 with the aim of examining high-net worth individuals for income tax compliance. But the Service may be “using more rhetoric than resources,” according to Syracuse University’s Transactional Records Access Clearinghouse (TRAC). TRAC’s April 14 report, based on information compiled from public records, accuses the IRS of having “very skimpy” audit goals for the HNW initiative.

TRAC’s orginal goal was to audit a mere 122 returns for the 2011 fiscal year. However, according to reports, TRAC will fall far short of this modest benchmark, and instead only audit 19% of the projected returns for the first six months of the year.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

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Getting Your Feet Wet in the Social Media Market

Posted by William Byrnes on August 15, 2011


If you’re one of the two out of three financial professionals who are out of the social media loop, you could be missing opportunities to boost your advisory business. Although the SEC and FINRA are cracking down on firms for social media misuse there’s still a wealth of untapped marketing potential for advisors brave enough forge into this new territory.

Social media sites like Facebook, Twitter, and LinkedIn can be used to build opportunities – if you know how to use them to the best of your advantage.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

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Private Placements Becoming Much Riskier for Firms

Posted by William Byrnes on August 14, 2011


There may be an increased need for caution when offering the newest private placements to clients. FINRA and the SEC are actively examining private placements and the firms that sell them. And if the regulators believe that something is amiss, they won’t hesitate to impose severe fines on everyone involved in the sale. As part of its ongoing sweep of firms that sold interests in failed private placements, FINRA has issued sanctions against two firms and seven individual principals of those firms. FINRA accuses them of causing significant investor losses by failing to conduct a reasonable investigation before offering the private placements for sale to investors.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

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Are Portfolios-To-Go Threatening Your Business?

Posted by William Byrnes on August 13, 2011


The value that consumers place on traditional portfolio managers seem to be rapidly changing. A growing number of consumers are opting for pre-packaged, low-cost portfolio managers. Portfolio-to-go companies can, at least nominally, provide many of the same services as full-service brokerage firms, since the companies are registered as either investment advisors or broker-dealers. Minimal overhead and services allow portfolio managers flexibility to offer those services without the “high” price tag at brick-and-mortar institutions. Portfolios-to-go have seen a surge in popularity recently, bringing in over $3 billion in assets over the past three years. In a world where post-recession fears have almost everyone bargain shopping, are online portfolios-to-go the Walmart of investing, set to dominate the market and phase out traditional wealth managers? Or are these pre-packaged portfolios an opportunity in disguise?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

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Turning Plan Sponsors’ Risk into Reward

Posted by William Byrnes on August 12, 2011


Barry Flagg continues his popular series, this month discussing the cash value of life insurance as a factor of suitability. The desirability of a permanent life insurance product is influenced by the degree of cash value liquidity throughout the life of the policy. All other factors being equal, the higher the liquid cash value after deduction of cost of insurance charges and policy expenses (including contingent surrender charges), the more suitable the policy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of income taxation of life insurance, see Advisor’s Main Library: D–Gain Or Loss On Surrender Or Sale

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Do Your Clients’ International Assets Create Criminal Tax Exposure?

Posted by William Byrnes on August 12, 2011


Retirement plan sponsors face increasing regulatory scrutiny and significant liability as plan fiduciaries. Can you leverage off these fiduciary concerns and generate advisory business for your firm?

There are a couple of key approaches you can use to address sponsors’ concerns about their fiduciary responsibilities and sell to the plans and their sponsors.

Believe it or not, there are a number of plans that don’t use an advisor—with the plan sponsor choosing to go it alone to save a few dollars. As reported in a previous edition of the Advisor’s Journal, a significant of number of employee retirement plans (19%) don’t use an outside investment advisor.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Could 2011 & 2012 Gifts Come Back to Bite the Grantor

Posted by William Byrnes on August 8, 2011


Whether or not to give substantial lifetime gifts in 2011 and 2012 is going to be a hot topic between now and the end of 2012. But deciding whether to take advantage of the record high ($5 million) gift, estate and GST tax exclusion amount and low (35%) transfer tax rate isn’t a trivial matter.

Even your most tax savvy clients are going to need help deciding whether to take advantage of the new law.

The problem is that the new law—which was put into place by the Tax Reform Act of 2010—is scheduled to lapse on January 1, 2013. So is it worth taking the risk that Congress will radically change transfer tax laws for years post-2012? And what will happen to your clients’ transfer tax liability if Congress does change the law?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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How Many Basis Points Is the Competition Charging for Advisory Services?

Posted by William Byrnes on August 5, 2011


A recent study has blasted the popular belief that lowering your rate will increase your volume of clients. Likely surprising to most, the truth is that lowering your rates could backfire and decrease your attractiveness to potential clients.

PriceMetrix, Inc., a software firm, published the study, which focused on the needs of wealth management firms and their advisors. They considered data from 380 million transactions conducted between 2007 and 2010. Included in the data pool were 1 million fee-based accounts and 4 million transactional accounts totaling over $850 billion in investment assets.

The results of the study show that advisors are miscalculating the appropriate value of their services—and losing money in the process— averaging $20,000 in lost fees.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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What’s Driving the Increasing Appeal of the RIA Model?

Posted by William Byrnes on August 4, 2011


A large majority (86%) of advisors who are with an independent broker-dealer find the idea of life at an independent registered investment advisor (RIA) appealing, according to a Schwab Advisor Services study released on March 29th. And when the advisor knows someone who has already made the switch, the number who like the idea of making a move to the RIA model jumps to 95%.

One significant consideration for advisors considering a switch to an RIA is regulatory. Those who fully transition to the RIA model will dump FINRA for the SEC. But whether that’s an advantage or downside to the transition is open for debate.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Is the Life Insurance Gender Gap Really Closing?

Posted by William Byrnes on August 3, 2011


Historically, the amount of life insurance purchased by men dwarfed that of women. Although the gender gap is closing, there’s still a discrepancy between the amount of life insurance coverage owned by men and women. A recently released study by the Life Insurance and Market Research Association (LIMRA) revealed that, although men and women own life insurance in nearly equal numbers, and women are working now more than ever, the amount of coverage owned by women is still fewer than men.

Historically, men have been the main source of household incomes; but recent research has revealed that about 30 percent of women earn more money than their husbands. Despite this change, LIMRA’s studies found that women’s life insurance ownership has not increased proportionately. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of life insurance in qualified plans, see Advisor’s Main Library: A – Life Insurance in Qualified Plans & 412(i) Plans.

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FINRA Plans New Power Grab as SEC Falters

Posted by William Byrnes on August 2, 2011


FINRA is continuing its recent power-grab in the face of a largely impotent and underfunded Securities and Exchange Commission. As the next stage in an increasing series of regulations and information reporting requirements, plans are in the works for a new-and-improved examination program that could further increase the information reporting requirements of member firms and significantly increase their compliance burden.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA regulatory action in Advisor’s Journal, see Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08),  SEC Approves FINRA Suitability and Know-Your-Customer Rules (CC 11-17), & New FINRA Rule Restricts Brokers’ Outside Business Activities (CC 10-110).

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It’s not Facebook that’s making Microsoft Obsolete: Advisor Technology Trends

Posted by William Byrnes on August 1, 2011


Despite the ever-increasing popularity of social media sites like Facebook and Twitter, social media sites are not yielding the results advisors initially envisioned. In terms of building a stronger client base, social media and cold calling were shown to be ineffective ways of generating new revenue – they tied for last place in the recent study by Advisors Trusted Advisor. The producer-client relationship requires a high level of trust, and the use of social media sites, whether for advertising or networking purposes, can have the tendency of disturbing the producer-client relationship. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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