Four guidelines to consider before you refinance your home

Four guidelines to consider before you refinance your home

The topic of mortgage refinance has been in and out of the news cycle for what seems like a decade or more. It hasn’t been quite that long, but there are definitely some homeowners who are on their fourth or fifth refinance within the last 10 years. Are they making sound financing decisions or simply chasing the momentum and fever pitch of historically low mortgage rates? I spent four years selling real estate and three years writing mortgage loans, and over that time, I saw people make a number of foolish decisions. That said, there are four main criteria that I consider when helping clients make the decision of refinancing their mortgage and none of the criteria are based on how many times they have refinanced or the recency of their last refinance. Let’s walk through each of the four to better understand when the environment is right for you and your financial situation. 

How much will your rate go down?/How much will you save per month? 

I list this first because, in my opinion, it is the most important component to the overall decision. That said, it isn’t the only component. I would caution anyone who only looks at rate to be careful because solely focusing on rate can lead to a bad decision. For example, if someone only has three years left of their mortgage, even a full 1% drop in rate may not justify a refinance. Comparing the terms of your existing mortgage to the proposed refinances and running the numbers is the only way to know for sure that the refi is a sound financial decision. This is typically the first thing that I do when helping a client analyze their mortgage loan options. 

What is the total amount of closing costs for the new loan? 

This one is often overlooked in the craziness of underwriting and gathering the necessary documents. However, it is critically important to determine if the numbers make sense. For example, if your refinance is going to save you $100 per month and the closing costs are $2500, then you will break even in 25 months. We, then, need to consider how long you plan to stay in the house. In this scenario, I would only recommend moving forward on the refinance if you are planning to stay at least four more years. Otherwise, the total savings is just not meaningful enough.

How does the new loan term compare to the remaining term of your existing loan? 

This measurement can be deceiving in how it relates to your monthly saving. Let’s say you have 23 years left on your existing loan and you refinance into a new 30 year mortgage. The lower monthly payment is a result of the lower rate and the loan term adjusting back to 30 years. Therefore, even though your payment will be lower, it doesn’t mean you are actually saving that amount of money. Continually resetting your loan back to a 15- or 30-year term can become a vicious circle which leads to never actually paying off your mortgage. 

What is the balance on your current mortgage?

Simply looking at the mortgage rate comparison will not give you enough information to determine if a refinance makes sound financial sense. If a mortgage balance is $50,000, we would need a sizable drop in the interest rate to justify the cost and effort as opposed to a $300,000 mortgage where a quarter percent drop in rate could absolutely justify a mortgage refinance. 

In the end, it is imperative that a full and proper analysis be done before paying an application fee or locking a rate. Seek out the advice of a well established mortgage loan officer or your financial advisor and fully understand all of the loan options before making a final determination. This will ensure a sound financial decision. 

Nate Condon

What is a Certified Financial Planner®?

What is a Certified Financial Planner®?

Whether you’ve had a financial advisor for years or you manage your own financial plan, you’ve likely seen the acronym CFP® before, even if it’s just been in passing. So, what does it mean and why does it matter? 

What is a CFP®?

CFP® stands for Certified Financial Planner® and is a certification acquired through the Certified Financial Planner Board of Standards, a nonprofit organization that serves the public by establishing and maintaining professional standards in personal financial planning.

Because of the sheer amount of financial professionals – and the fact that anyone can call themselves a financial advisor (and many iterations) – one of the CFP Board’s main priorities is to provide a certification that is the recognized standard of excellence. With thousands of hours of practical experience required, the CFP® certification is by no means easy to achieve. And the work isn’t done once the certification is complete. A CFP® must adhere to a rigorous set of requirements, one of which is committing to the fiduciary duty to act in clients’ best interests.

While there are a number of factors to consider before choosing a financial advisor, the CFP® designation can be a helpful guide in that decision. 

Certified Financial Planner® – Quick Facts

  • 87,784 Certified Financial Planners®
  • 76.8% are male
  • 23.2% are female
  • Wisconsin ranks 19th in the number of Certified Financial Planners® available
  • There are 1,707 CFP® professionals in Wisconsin
  • CFP® certificants must prove themselves in 72 area of expertise and log thousands of hours of practical experience

Walkner Condon Financial Advisors is fortunate to have four CFP® professionals on our team, serving a variety of clients, whether they live in Madison or abroad. Below you will find more background on each CFP® at Walkner Condon and their areas of expertise. 

Walkner Condon’s Certified Financial Planners®

Jonathon Jordan is one of the Partners at Walkner Condon and a Certified Financial Planner®.  He decided early in his career that simply selling investment and insurance products did not offer the full value of what a financial advisor should provide to their clients.  After going through the rigorous coursework and classes, he began using this wealth of knowledge to help the clients he was already working with as well as many others since.  He works primarily with families and businesses on their long-term goals such as retirement planning, college savings, estate planning and other philanthropic goals. He is giving back to the financial advisor community by becoming a CFP® mentor for others that have decided to work towards this esteemed credential. Link to Jonathon’s no-cost, no-obligation initial “fit” meeting.

Anna Lautenbach, M.A. (Acct), M.S. (Mgmt), recently joined Walkner Condon as both a Certified Financial Planner® and one of the Founding Partners of Walkner Condon Tax Services. Anna’s practice focuses on comprehensive planning with high net worth individuals with a tax and investing strategy that will maximize their wealth by being cognizant of tax implications on changing portfolios. She assists business owners at all stages in their business, including succession. As a Certified Exit Planning Advisor, she can help you position your business for a successful sale and prepare for the next stage in life. She has an affinity for working with women advisors, helping to empower and guide them to financial success. Link to Anna’s no-cost, no-obligation initial “fit” meeting. 

Mitch DeWitt works with individuals and families looking to devise a plan of attack for their financial goals as well as an execution strategy. Typical clients of Mitch’s include those in technical fields such as engineering, software development and programming, or healthcare, among others. Clients seek Mitch’s advice when they are looking to come up with a charitable gifting strategy, how to approach sizable positions of stock that they have obtained through their employer’s stock plan, or when they want to learn more about sustainable investing strategies. An engineer by background, Mitch enjoys being thorough in all stages of the planning process. Link to Mitch’s no-cost, no-obligation initial “fit” meeting.

Stan Farmer, J.D., is the Director of International Financial Planning for Walkner Condon’s International Group. Stan works with a wide variety of cross-border families, including American expat individuals and couples working, retired, or semi-retired abroad. Many client families have multiple nationalities represented (for example, a U.S. and a non-U.S. spouse with dual national children), while other clients are foreign non-U.S. persons who have financial assets in the United States and, in most cases, other countries as well.  These clients present complex financial planning challenges that Stan endeavors to help them identify and overcome. Traditionally, a CFP® becomes an expert in helping clients navigate the myriad of technical tax and estate planning rules in the United States and in their particular state of residence. For Stan’s clients, these U.S. rules still apply (because the U.S. is unique in its approach to taxing its citizens regardless of where they reside), but there is usually a whole other set of foreign (often very different, sometimes conflicting) rules that apply his clients because they are residents and often domiciles of another country. Stan develops financial plans for clients that consider each client’s unique and overlapping tax exposures and recommends strategies to enable these cross-border clients to achieve their financial planning goals in a globally tax-compliant and tax-efficient manner. Link to Stan’s no-cost, no-obligation initial “fit” meeting.

What are my 401k options if I get laid off?

What are my 401k options if I get laid off?

By Mitch DeWitt

Dan Corcoran – the newest member of the Walkner Condon team and social media/marketing extraordinaire – and I were having a casual conversation over coffee one morning, and we naturally turned to the topic of sports. Dan has a background in social media and marketing in the semi-professional hockey space, and I have been a lifelong sports fan, primarily rooting for my Michigan Wolverines and the Detroit professional sports teams (it has been a rough time to be a sports fan in Detroit lately). Dan mentioned the recent ESPN layoffs, which I was previously unaware of. It’s safe to say that most sports fans probably grew up watching SportsCenter and have tuned into ESPN to catch our teams’ games at some point. Being the financial advisor that I am, I thought of the financial planning opportunities and the considerations of rolling over a former employer’s retirement plan. Being the marketing guy that Dan is, he told me to write a blog. (By the way, if you’re one of the many folks who have lost a job over the last few months, here’s another helpful blog about working through a job loss). 

So, before we go any further, what is a rollover? The IRS defines a rollover as the following:  “A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan.” Sounds pretty straightforward. But there are many rules about what types of accounts can be rolled over and what types of accounts are acceptable destinations. Furthermore, there are some tax traps that people can fall into. If done correctly, a rollover of tax-deferred assets should not be a taxable event. Unfortunately, I’ve seen “do-it-yourselfers” attempt to roll over their assets from a former employer’s retirement plan and have realized a large and unexpected taxable event. This is where we come in: to help people advise on their options with their retirement plans, make a decision on their best course to align with their retirement goals, and then confidently execute the plan. 

If I got laid off, what are my options with my retirement plan / 401(k)?

Roll it over to another qualified plan or IRA

The IRS publishes a rollover chart to show what they would deem an acceptable rollover. In many cases, we find ourselves interpreting this chart and educating our clients on where they can roll their retirement assets as well as what makes the most sense for their situation. Again, if done correctly, a rollover should not be a taxable event (unless you want it to be in the case of a conversion. More on this in my next point). Many people come to me saying that they want to “consolidate” their accounts or “transfer” their accounts. This presents another education opportunity with clients, since a transfer is treated differently than a rollover. A transfer typically refers to the same type of account moving from one institution to another (e.g. Roth IRA at Fidelity to a Roth IRA at TD Ameritrade), whereas a rollover refers to moving assets from one type of account to another (e.g. 401(k) at Fidelity to a Rollover IRA at TD Ameritrade). Furthermore, there are direct rollovers and indirect rollovers. Direct rollovers are where your assets are sent from one custodian to another (e.g. Fidelity to TD Ameritrade). No taxes are required to be withheld when a direct rollover is performed. An indirect rollover is where you do take possession of your assets during the rollover process. In this case, you are required to withhold taxes from the distribution amount. To avoid paying taxes on an indirect rollover (and ensuring that the amount withheld isn’t included as taxable income), you must deposit your assets into another qualified plan or IRA within a 60-day period. You also must ensure that the amount distributed from the original account (including the withheld amount) is fully deposited into the new account. Generally speaking, direct rollovers are preferred to indirect rollovers because withholding is not required. You will receive a 1099-R for the tax year that you conduct a rollover. Rollovers are reportable to the IRS even though they are not taxable. A 1099-R is issued whether the rollover is direct or indirect. However, in the case of an indirect rollover, it is up to the taxpayer to prove that they properly rolled over their assets to avoid a taxable event (when they file their tax return).

Convert it to Roth

You may be able to convert all or a portion of your tax-deferred assets in your retirement account. Converting your tax-deferred assets to Roth will be a taxable event. Some might wonder why you would want to do that. Let’s say someone might be in a lower tax bracket in the current tax year vs. a higher tax bracket when they take money out of the account in the future. The thought is that if it is going to be taxed at some point, why not tax it at a lower rate? We help many clients analyze their different “buckets” that their assets are in: taxable, tax-deferred, and after-tax (there are technical differences between “after-tax” and Roth, but that is beyond the scope of this blog). Depending on the situation there might be a reason for a client to spread out their assets between the three buckets or it might make sense to heavily favor the Roth bucket, for example. If the client’s circumstances align to make a Roth conversion, it may occur all at once or over a phased approach over several tax years. This is something that should be coordinated between a financial advisor like us and a tax advisor.

Keep it where it’s at

Many plans will allow you to keep the assets in your 401(k) (or similar retirement plan). Although they are able to force you to move the balance out of the plan, usually if there is a less than a $5,000 balance in your account. You might want to do this if you like the investment options, the fee structure, or simply the convenience of not having to take any action.

Cash it out

Yes, this is an option, but in most cases it’s not recommended because of a potentially large tax bill. Additionally, it may be detrimental to your financial plan and ability to obtain retirement goals. Usually, the only time this makes sense is when someone finds themselves in an unexpected and dire financial situation. 

It is worth having a conversation with us if you find yourself in a situation where you have been laid off or even if you have several outstanding 401(k) accounts spattered across different retirement plans and financial institutions. We would love the opportunity to educate, offer some guidance, and eventually help execute your plan. You can reach out directly to us here, so we can get the conversation rolling (pun intended, I couldn’t help it).

Business Succession Planning

Business Succession Planning

One of the most difficult yet important decisions that an owner or owners in a business are faced with is how the business will survive or be transferred when they are no longer serving in the same capacity or roles within the business. Many, if not most owners pour their time, energy and resources into growing a successful business and want to ensure that it continues on whether due to retirement, disability, or even death. It is imperative to put together a logistical plan, considering all of the financial and non-financial factors that will need to be addressed to ensure a successful transition of ownership. There are a number of different ways to plan for business succession that if implemented may help your business or organization to thrive long after you depart as owner.

According to Fit Small Business, there are 5 different ways to transfer ownership in a small business. Selling to a co-owner, leaving it to an heir, selling to a key employee, selling to an outside party and selling back to the company. Each one of these has pros and cons to them and it is wise to consider which ones are best suited for your company. In some cases, such as with a sole-proprietorship, the options may be more limited and can cause the succession planning process to be difficult in ensuring a seamless transition. Where there are co-owners or partners involved, the options are greater but the other considerations such as timeline, valuation and the method of funding can create some complications. In this blog post we are going to share with you some of the strategies that can be implemented into your business succession plan.

Selling to a co-owner: Business partnerships are often formed at the beginning or in the early stages of growth for small companies. Generally you see two (or more) owners who execute a partnership agreement that lays out the amount of equity each partner is entitled to as well as what their responsibilities are to the partnership. Over the lifetime of the partnership the company grows and develops with their customers or clients which often can lead to the value of the company to increase as a whole, which each equity holder will realize individually. But what if one of the owners wishes to no longer be involved in the business? What if they suffer an injury that impares them from being able to fulfill their responsibilities? What if something tragic happened like a sudden death for one of them? Any of these situations can be dealt with through setting up a small business succession plan and the best time to implement one is at the outset of the partnership or creation of the company. It is a best practice to periodically review the plan as time goes by and the business evolves.

So what is the best strategy to wind down a partnership like this? The answer is “it depends.” If you are looking to sell to a co-owner or partner you can choose to self-fund the transaction, take out a loan from a financial institution, or negotiate a long-term payout of the equity. In the case of an unexpected situation such as death or disability, oftentimes a business will use a buy/sell agreement that is funded by life insurance. You can use either term life insurance or a permanent policy (universal life/whole life) for this and the proceeds are used for the remaining partner or partners to buy out the interests of the deceased or disabled pattern. Term insurance tends to be more cost effective but does not pay out if the departing owner retires or is disabled. There are permanent policies that can be utilized for those instances. Buy/Sell agreements are taken out between all of the owners involved and have to be continuously funded and updated as the business equity valuation grows.

Outside Purchase: Sometimes there is nobody to sell to within your organization, which can cause an owner(s) to look outside for interest in buying the business and its assets. There are competitors that may want to acquire for strategic business purposes, entrepreneurs and even private equity firms that may want to purchase to strategically grow and spin off the business. The type of business that you own will make a big difference in the valuation of your company for this type of transaction. If your business is in your name as well as heavily reliant on you as the owner of the relationships, it could lead to a lower valuation than if your company was ready to be transitioned in a more turnkey manner. Some business owners may strategically decide to brand their business outside of their own name so that it can help down the road for this type of a business succession. One of the drawbacks to this type of a transition is that the owner or owners are usually giving up the culture and in some cases the future direction of the business to the new owners that probably do not have the same emotional or financial ties to the business as it has existed pre-sale. Selling to an outside buyer generally happens in a cash transaction or procurement from the buyer of a business loan. 

Heir: If the goal of the owner or owners is to keep the business in the family and you have identified one or more members of the family that could “take the reigns” and run the organization, then this is a good way to handle a business succession. It can deepen the client relationships that have been fostered over the years and also decrease the amount of change and frustration that can arise when a company comes under new ownership. It also allows for the owner or owners to still have some involvement in business as they are often consulted or kept around to keep the status quo while the heirs (as owners now) make important decisions on the growth and direction of the organization. In most cases (over 70%) this is not a successful transition due to the fact that most inherited businesses within a family are changed or renamed by the successor and in many cases the family member lacks the skills or drive necessary to keep the business moving forward and growing. While many business owners wish to have the business stay in the family for years to come, it is one of the most likely options to have it be messy and cause disruption to the business. Especially if you have qualified and talented people working for the business that feel minimized or marginalized in the new organization. 

Key Employee(s): If there is someone or a group of people that are integral parts of the company and wish to continue working for and owning either all or a part of the business then selling to a key employee is the way to go. This type of business succession plan is generally the most efficient and positive way to execute due to the strong business relationships with the clients as well as the culture of the firm itself. Generally the key employee or employees are capable and willing to assume the responsibilities of running the organization and have been around for a long enough period of time to have already made an impact in the culture and success of the organization. Many times as the company grows through the years and the owner or owners get older, they will try to cultivate, educate and develop the key employees or employees that they would like to transition the business to. It can have positive long-term financial implications to the owner and also the employees that will take over in the future. 

If you have a business that has equity to it, business succession planning is one of the most important steps that you can take to ensure that the hard work and efforts that have been put in through the years can provide you with the greatest value when you sell or something unexpected happens to one or more of your owners. If you have a business currently but do not have a solid business succession plan in place, reach out to any of the financial advisors at Walkner Condon Financial Advisors for a no obligation meeting and we are happy to help get you started with this important step. There is a lot that goes into the planning involving business retirement plans, structuring the payment or payments to best align with your personal goals and needs, as well as finding the right resources to make the plan come together. We are happy to help!


Jonathon Jordan

How to Hire a Nanny During COVID-19

How to Hire a Nanny During COVID-19

As those with children at home are well aware, the COVID pandemic greatly changed childcare in 2020, and those effects are still being felt as we move into 2021. Many schools are still not meeting in person, daycare centers are either closed or their services are interrupted, and generally speaking, most families’ “normal” childcare setup does not resemble what it looked pre-COVID-19. Not only do many families have to watch their children now that they are home, but they are expected to guide them through their school curriculum and still perform at their day job remotely.

Some families that pay for childcare saved quite a bit of money during the initial pandemic shutdown in early 2020 since they no longer had to pay the recurring childcare bill. However, as more families are back to work in 2021, childcare costs are again part of the monthly budget. I frequently have conversations with my “young family” clients that are expecting a baby. They commonly ask about the costs of childcare and want to plan for the increased monthly expenses. Unless your family is in the fortunate situation of having one spouse stay-at-home or have extended family in the area to help care for your children, you are probably going to have to pay childcare costs. A lot. “A lot” as in nearly the amount of a second mortgage in many cases. I’ve mentioned how expensive it is to raise children in a past blog post.

Instead of focusing on the fact that childcare is expensive, let’s focus on strategies to help reduce some costs, have more flexibility, and (potentially) be an alternative childcare option for those that are worried about how daycare centers etc. are handling their COVID-19 procedures and the exposure to more children. Additionally, we will outline how to go about hiring a nanny and some considerations that come along with that decision. Remember, I’m not an epidemiologist, doctor, public health figure, or the like. Rather, I’m your friendly neighborhood financial advisor that has simply received input from clients informing me that they like the idea of hiring an in-home nanny for multiple reasons: one of which is more control of who their child is coming in contact with in this COVID era (and even post-COVID era now that there is some light at the end of the tunnel with vaccines being rolled out). 

If my family decides to hire a nanny, where do I begin? 

First and foremost you will need to find someone that has demonstrated caretaking qualities, is trustworthy, and aligns with your family’s values. You should interview several candidates. You can find candidates through, local “Mom” groups, or by simply asking others in a similar life stage that are already in your network. If you are going to do a “nanny share” – where you and another family (or two) collectively find a nanny to watch your children as well as the other family’s children – ideally, you find a family that you get along with and have similar or complementary schedules. Joining a nanny share can considerably cut your costs, especially if you have additional children. For example, if you have one child and are paying $300/week for that child to go to daycare, your second child could very well double your weekly payment to $600/week for both children! With a nanny share, it is expected that you should give your nanny a pay increase when you have additional children, but it isn’t expected to double their pay. 

OK, we found a trustworthy nanny, now what?

I would recommend “doing it by the book”, and formally establishing an entity to pay your nanny. This means legally paying your nanny. To be more clear, this means NOT paying them cash under the table! I believe that there is a social obligation to your nanny when you hire them. Some of these responsibilities include withholding taxes for them and paying into unemployment. By formally reporting wages for your employee and paying into Social Security, you provide earnings history (in case they apply for a loan, for example) as well as help them earn Social Security credits. In the situation where you need to lay off or furlough your nanny, paying into the Unemployment Insurance program will allow them to collect unemployment benefits. During Safer-at-Home orders in early 2020, many families furloughed nannies. Assuming they are eligible, your nanny can receive some sort of income through the state unemployment program during their furlough. 

You are considered a Household Employer and your nanny is considered a Household Employee. Many simply establish a sole proprietorship in their name. This is the easiest route but could potentially expose you to more liability (vs. establishing an LLC, for example. You may want to discuss this with an attorney, as I cannot give legal advice). You will have to register for an Employer Identification Number (EIN) online through the IRS. One thing that is overlooked is for the Household Employer to have their nanny complete an I-9 form to show that their employee is authorized to work in the United States. 

I have my EIN, how do I handle taxes and unemployment insurance?

You will have to register your Household Employer through the state. If you pay your nanny more than $2,300 in gross wages to your nanny in 2021 (or $1,000 in any calendar quarter), you are required to withhold and pay Social Security, Medicare, and Unemployment Insurance taxes (see the IRS Household Employer Tax Guide). In Wisconsin, there are a couple of steps to do this. For Unemployment Insurance, you register through the Department of Workforce Development (DWD). You will also need to complete your Business Tax Registration through the Department of Revenue. One common misconception is that your nanny is a 1099 employee; this is not true! Your nanny is a W-2 employee. You should have them complete a W-4 form upon their hire (and associated state form, like Wisconsin’s WT-4) for withholding. 

When it comes to paying taxes, you will have to submit your nanny’s wages on a quarterly basis in Wisconsin. However, as a Household Employer, if your tax liability is low enough as determined by the Department of Revenue, they may change your filing requirement to annually. The Department of Revenue will send you a letter if this is the case. A common mistake is to submit your quarterly Unemployment Insurance payment to the Department of Workforce Development and neglect to submit your quarterly payment to the Department of Revenue, or vice versa. You need to complete both of these items every quarter (or every year, if you have an annual filing requirement). If you are a sole proprietor, you account for your nanny’s federal income taxes withheld taxes when you file your annual tax return, via Schedule H. A good habit is to automatically put your nanny’s withheld amounts in a savings account, knowing that you will have to submit those taxes at some point. You could also withhold an additional amount from your personal wages to help account for any extra taxes that might be due when you file your tax return. 

Now that I’m an employer, what risks are involved?

Being an employer with an employee exposes you to some risks. You should definitely consider a Workers Compensation Policy to protect you and your family in the case of your nanny getting injured or ill while on the job. Become familiar with the laws in your state, as some states require Household Employers to procure a Workers Compensation Policy. The State of Wisconsin does not require you to have a Workers Compensation Policy. 

How do I pay my nanny?

The mode of payment isn’t necessarily as important as tracking your nanny’s gross wages, taxes withheld (federal, state, Medicare, Social Security, etc.). For example, paying them by physical check or even Venmo is fine. I would highly recommend using a software such as NannyPay or HomePay. This will make it much easier for you to track and report quarterly wages to the state, generate a year-end W-2 for your nanny, or provide them with pay stubs. If you use a desktop version of payroll software (that’s correct, there are still desktop software options in 2021. Not everything is in the cloud!), be sure to back up your files frequently on an external hard drive. It would be a huge hassle to re-create your nanny’s wages and withheld amounts if your computer crashes. 

What else should I be on the lookout for?

Review options through your employer’s benefits package that might give you a tax break. I’m specifically thinking of a Dependent Care FSA. Most families that hire a nanny will pay their nanny more than $5,000 (the maximum a married filing jointly couple can contribute to a Dependent Care FSA in 2021) in a given year, you might as well take full advantage of using an FSA so you can pay a portion of child care expenses income tax free. Work with your accountant (or Walkner Condon Tax Services) to see what other tax breaks might be available to you, such as the Child or Dependent Care Tax Credit.

Have I talked any of you out of hiring a nanny? Seems like a lot of work, doesn’t it? It can be more work and more responsibility; however, speaking from experience, I think it is actually quite manageable. I know that my family (and some of my clients) have saved money by going the nanny or nanny share route. If this is something that you would like to learn more about, please reach out to me! I can give you my perspective as a financial advisor as well as my personal perspective since my family has decided to choose a nanny share setup over daycare.

Mitch DeWitt, CFP®, MBA


The Winding Road to a Universal Fiduciary Standard (Or Not)

The Winding Road to a Universal Fiduciary Standard (Or Not)

When one visits the doctor, it gives great comfort to know that the physician has taken the “hippocratic oath” to do no harm, and always put the patient’s needs first. If a specific treatment option, prescription, or advice were given because a doctor had been financially incentivized to do so, it would be a betrayal of that oath. It would erode trust, and irreparably harm the doctor-patient relationship. In financial services, however, there is no hippocratic oath. Over the past few years, we have seen efforts to delineate who is actually a fiduciary and what the responsibility of an advisor is to their client. Here, we take you down a review of what has transpired out of the recent regulatory changes and how it may impact financial professionals and their clients in the future. 

Investment Advisers Act – The Beginning

The Investment Advisers Act of 1940 established regulations on investment advisers. It states who needs to be registered with the Securities and Exchange Commission (now firms with over $100 million in assets under management), as well as the role and responsibilities of investment advisers to their clients. Current regulations have been built on top of this legislation in an attempt to modernize how advisers interact with their clients, as well as the expectations of a certain level of care and limits to conflicts of interest.

DOL Fiduciary Rule – The First Attempt

In 2015, President Obama made it clear that he supported rulemaking that required retirement advice to follow a fiduciary standard. His administration tasked the Department of Labor to develop a framework to establish rules, which involved an extensive amount of feedback from financial advisors, the general public, and the regulators. Out of this came the DOL Fiduciary Rule in 2015, to be implemented in 2016. The rule required advisors to disclose any financial compensation from outside sources due to their recommendations, put their clients’ needs first in all advice, and seek to avoid conflicts of interest. This included receiving commissions, 12b-1 fees (trails paid by mutual fund companies to the advisor or firm), receiving “referral fees” and required any fees collected to be a “fee for service” or an “asset management” fee that was not dependent upon the advice rendered. 

This had a potentially massive impact on 401(k) plan advisors, which were not required to be fiduciaries on their plans previously if they accepted commissions and were acting as “registered representatives” (in contrast to fee-only investment advisors, who must act as fiduciaries). Additionally, the DOL Fiduciary Rule was supposed to impact IRA assets as well, which are not covered by ERISA. This was a major bone of contention, as the Department of Labor was essentially regulating a type of asset over which it arguably had no jurisdiction.

The DOL Fiduciary Rule was one of the first attempts to require financial advisors who received commission-based compensation and the firms that employed them to put their clients first in the eyes of the law. It was intended to help bridge the gap between the appearance of being a fiduciary and actually having to act as one. 

Just because it may have been welcomed by some in the investment advice industry and many in the general public does not mean it was a popular rule, however. Investment companies saw it as a compliance nightmare and a threat to their revenues, particularly in commission-based products. Additionally, it would have granted much greater regulatory power to the Department of Labor over financial advisors and related investment and financial advice-giving companies. There was considerable pushback as a result, and once the Trump administration became involved, the rule was in peril. The implementation was delayed multiple times and, ultimately, killed off in 2018 by the Fifth Circuit Court of Appeals.

Regulation Best Interest, Form CRS, Standard of Conduct for Investment Advisers 

After the ultimate failure of the DOL Fiduciary Rule, the SEC began their attempt to modernize regulations and disclosures in regards to broker-dealers, as well as registered investment advisors. In 2019, the SEC adopted a package of rulemaking and interpretations called SEC Regulation Best Interest, or “Reg BI”, that allowed advisors and firms to enter into “Best Interest” contracts that disclosed the conflict of interest that existed if they received any other types of compensation other than the types allowed under the fiduciary rule. 

According to the SEC, “Under Regulation Best Interest, broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”

Additionally, Form CRS became a required document for both registered investment advisors and broker-dealers. This document was designed to offer a plain English view of the services offered by the investment professional, how compensation and fees work, and any disciplinary history the financial professional has faced. To view an example of this, here is the Form CRS for our firm. 

The SEC also issued their interpretation of the standards of conduct for investment advisers (which, incidentally, is a really well-written document). The goal of this appeared to be a restatement of what is expected of investment advisers – a duty of care and a duty of loyalty. They reaffirmed that an investment adviser is a fiduciary and must act in the client’s best interest at all times. A contrast was made between broker-dealers and investment advisers in that their compensation models may be different, namely the ability to accept commissions in a broker-dealer environment, which causes a separate and distinct difference in the conflicts of interest present and the necessary disclosure.

Regulation Best Interest and Form CRS were implemented with a compliance date of 6/30/2020. The standards of conduct were effective on 7/12/2019.

Code of Ethics and Standards – The Fiduciary Update by the CFP® Board

Seeing a regulatory hole between the Investment Advisers Act of 1940 and a fiduciary standard, the CFP Board has established a set of fiduciary guidelines and rules that govern CFP® professionals. The last major update of these standards was in 2007. Around the same time of developing Reg BI, The Certified Financial Planner Board of Standards developed the Code of Ethics and Standards of Conduct. This went into effect in October of 2019 with enforcement beginning on June 30, 2020

According to the CFP Board, “This is a significant strengthening of the prior standard, which required a CFP® professional to act as a fiduciary only when providing financial planning. The fiduciary obligation includes a duty of loyalty, a duty of care, and a duty to follow client instructions. Other important changes in the Code and Standards include more detailed requirements for fully disclosing material conflicts of interest, obtaining informed consent, and managing those conflicts.” 

The most important part of this update to the rule is the expansion of fiduciary duty to act in the best interests for clients in all situations, not just during the financial planning process. For advisors that hold a CFP® designation, those that are employed at broker-dealers and insurance companies may find new challenges in meeting this fiduciary standard, particularly if they continue to sell commission-based products. 

DOL Fiduciary Rule – Take Two is On The Way

In 2018, the Department of Labor Fiduciary rule was ordered to be sent back to the drawing board to review the viability and come up with any revisions. In January of this year, the DOL sent the revised rules to the OMB (Office of Management and Budget) and in June they were announced. In a shocking move, it was recommended that an exemption that offers “a new prohibited transaction class exemption for investment advice fiduciaries.” This would allow financial advisors and fiduciaries potentially to receive compensation such as commissions, 12b-1 fees, mark-up and mark-down compensation, sales loads, and revenue sharing compensation. This would impact both ERISA accounts (example: 401k plans) and IRAs.

Under the goal of maintaining regulatory efficiency, transactions that are compliant under Regulation BI would be deemed as meeting with DOL Fiduciary Rule standard. A loophole seems to exist in the rule for insurance professionals, which sell annuities inside of retirement plans for a commission. According to the initial proposal, it appears a fiduciary relationship does not exist in a one-time transaction with no expectation of ongoing review as well as no requirements to comply with Regulation BI if one is not a Registered Representative.

As before with the original DOL Fiduciary Rule, this has come under some criticism. In an article from Thinkadvisor, “Barbara Roper, director of investor protection for the Consumer Federation of America, said the rule ‘reopens loopholes in the definition of fiduciary investment advice, making the standard easy to evade. It creates a new exemption to allow advisers to get conflicted compensation, subject only to Reg BI’s weak, non-fiduciary standard.’”

What Does This Rulemaking and Regulation Actually Seek to Accomplish?

First off – are you completely confused yet? If the answer is “yes”, you are not alone. The original DOL Fiduciary Rule by the Obama Administration was definitely a nod towards bringing more investment professionals under a more uniform fiduciary standard. As it failed and Reg BI was implemented, a more “fiduciary lite” version was put into its place. This is likely to follow when the rules are finalized for the new version of the DOL rule. 

Where this goes from here will likely depend on what happens after the presidential election, and where the regulatory winds are focused. There is a chance that this nod to increased focus on conflicts of interest and disclosure will eventually lead to a uniform fiduciary standard at some point for all financial “advisors” — meaning insurance, broker-dealer, and investment advisers. The other possibility is that we continue to see the bifurcation in fiduciary standards applied to these groups, as we have in the most recent series of rulemaking.

One thing is clear to us – the best way to insure that you are working with someone who is working in your best interest and acting as a fiduciary is to hire a financial advisor that works at a fee-only firm and does not accept commissions from the sale of investment products at any time. Additionally, working with a CFP® that follows strict standards of care may also be something that investors seek out when they are looking for a long-term relationship with a financial professional whose practice centers their financial well-being.

Clint Walkner

Jonathon Jordan, CFP®


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