Each year brings a new deluge of industry information that high-performing wealth advisory teams need to digest, and 2018 is no different. For starters, the Tax Cuts and Jobs Act will have an immediate impact on high-net-worth clients and is top of mind. But the new tax legislation is not the only important development advisors should be aware of. There are a number of new trends, insights and breakthroughs coming from all angles within the wealth management industry. Below we provide a brief overview of the five most important issues we believe advisors need to know for 2018.
Tax reform. In a nutshell, most investors will experience the trade-off between lower rates and fewer deductions. The seven tax bracket structure remains in place, but five of the seven rates are lower beginning in 2018. At the same time, many deductions are limited, such as the $10,000 cap on state and local taxes, and others are eliminated all together, such as miscellaneous itemized deductions. Whether these changes result in a lower overall tax bill will depend on the specific client, but there are some strategies that could play an important role moving forward, such as the lumping of certain deductions every other year. Other customary strategies familiar to advisors such as the importance of tax-deferred growth, harvesting year-end losses to offset any capital gains, and gifting appreciated securities to charities remain in place.
State initiatives. Some states have recently increased the tax advantages of 529 college savings plans by increasing or introducing an income tax deduction. Also, the number of states that offer 529 ABLE accounts has doubled in the last year, offering families the opportunity to take advantage of a tax-free savings account for disabled beneficiaries. While 17 states including the District of Columbia still impose either an estate or inheritance tax, the exclusion in some states is the same as the new $11.2 million exclusion at a federal level, while in other states a $1 million exclusion remains. Forty-two states have enacted some form of legislation that allows a user’s representative access to their digital assets upon death or disability, but only if the user’s legal documents have been properly updated. Finally, Nevada has become the first state to pass its own fiduciary rule, while other states consider similar legislative action.
Retirement income. At the start of 2018, the yield on the 10-year Treasury bond was 2.4% while the S&P 500 dividend yield was an even lower 1.8%, creating a challenging environment for generating retirement cash flow. The good news is that Social Security beneficiaries will get a 2% raise, but in many cases, the raise will be offset by higher Medicare premiums. As more companies seek to de-risk their pension liabilities, participants who traditionally received a pension are increasingly offered the opportunity to take a lump sum and will need assistance making the most informed decisions. In some situations, reverse mortgages may still be a viable solution for “house rich, cash poor” scenarios, but with the rule changes by the Department of Housing and Urban Development in October 2017, some available loan amounts may be lower.
Behavioral finance. Last year ended with Dr. Richard Thaler winning the Nobel Prize in Economic Sciences. Many advisors know Thaler from The New York Times best-selling book “Nudge,” which he co-authored. Thaler believes people often need a push in the right direction to help make better decisions. A great example of a nudge is auto-enrollment in employer-sponsored retirement plans. The opt-out rate is frequently reported as less than 10%. As the wealth management community comes to terms with the fact that individual investors are irrational and emotional, a better understanding of how investors think, make decisions and process information is critical. Three recent research breakthroughs that are must-reads involve how cash on hand has a higher correlation to investments, income and indebtedness; how investors are more likely and therefore, more trusting, of certified financial planners than stockbrokers; and the importance of helping widows think about money issues if and when the time comes to enter a new long-term relationship.
Advisory teams. To service the complex needs of wealthy clients, more advisors are forming teams. To maximize operating efficiencies, however, careful consideration needs to be given to the team’s vision, structure, member roles and responsibilities, and a host of other factors. In late 2017, Janus Henderson Investors partnered with Cerulli Associates and the Investments and Wealth Institute (formally known as IMCA) to gather information from more than 2,800 practices and distinguish the attributes of the most productive teams. Among the key learnings are that teams are more likely to win high-net-worth clients, top-quartile teams offer more services than other teams, and top-quartile teams have a broad mix of advanced credentials while bringing together a diverse mix of advisors with varying backgrounds, strengths, expertise and experiences.