Illustrating A Client's Risk Of Outliving Their Money

Dr. Craig Israelsen, one of the nation's foremost experts on implementing low-cost potfolios based on Modern Portfolio Theory, has begun contributng his research to advisors through the Advisor Products video library.

The first video uses a new data visulaization method to illustrate the risk of running out of money in retirement. 

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Explaining Modern Portfolio Theory To Advisor Clients In Pictures, Words, And Music

If you manage assets in diversified portfolios, your clients’ portfolios are probably trailing the S&P 500. Since the financial press reports on performance of the S&P 500, clients usually expect your advice to keep pace with the S&P 500, and you may not be meeting their expectations. Prudent financial professionals who rely on Modern Portfolio Theory are vulnerable to advisors peddling far less prudent advice.  

This video is what Advisor Products is doing to help professionals who doing the right thing to communicate about this issue effectively and inexpensively using modern Internet tools.

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An Update On The Financial Advisor Communications System

The entire Advisor Products team is working hard to achieve an ambitious set of goals that will transform the way financial advisors communicate.

Here’s an update on our work at Advisor Products in launching the Financial Advisor Communications System:

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Answers To Roth IRA Conversion Questions

At the Financial Advisor Webinar Series on December 11, Ben Norquist of Convergent Retirement Plan Solutions delivered a presentation that was highly rated by attendees about how advisors can seize the 2010 Roth IRA conversion opportunity.



Norquist showed a simple web-based application he developed that makes it easy for advisors to calculate complex conversion scenarios to show the net benefit of conversion.



The tool's strength is that it allows you to dynamically on-the-fly change variables affecting a client's conversion options. The variables include future tax rates, the amount of cash available to pay income taxes incurred on the withdrawal of assets being converted from traditional IRAs or qualified plans, the monthly withdrawals of the IRA owner for living expenses, what you'll earn on a traditional IRA that's not converted, required minimum distributions on the traditional IRA, and the amount left for beneficiaries.



While the software is a one-trick pony and is only good for Roth IRA conversion calculations, the opportunity to advise on Roth IRA conversions justifies the software’s $600 perpetual license fee. I don't believe any of the financial planning applications can make these dynamic calculations and illustrations on the fly, making it a great app to work with live in front of clients.



To receive CFP CE credit for this session and dozens of other webinars, please join Advisors4Advisors.



You can also see a replay of the session (without getting CE credit) at the Financial Advisor Webinar Series page on Advisor Products’ website.



At Norquist's session, we had more questions from attendees than we could answer. So Norquist sent me answers to some of the questions we did not have time for. Below are four of the 15 questions he sent me answers for. To see the rest of the Q&A, please join Advisors4Advisors.







Q: Does the five-year rule apply to distributions made from Roth Conversions after age 59½?

A: No. The five-year rule that applies specifically to Roth IRA conversion assets is only pertinent in situations where an individual under age 59½ takes a distribution of conversion assets within five years of the conversion transaction.



Q: Can an individual with a 401(k) plan convert even if he is still employed? Must the plan allow for in-service distributions? If allowed, can this be converted directly into a Roth IRA or must it first go into a traditional IRA?

A: A 401(k) participant can potentially take a distribution of 401(k) assets for Roth conversion purposes provided the plan he is covered under contains some type of in-service withdrawal provision. If an individual is able to request an "eligible rollover distribution" from his 401(k) plan, he can elect to roll over (i.e., "convert") the distribution directly to a Roth IRA without first going through a traditional IRA. (If the 401(k) distribution occurred during 2009, the individual would be subject to the $100,000 income restriction on Roth IRA conversions.)



Q: Can you address re-characterization options if the market should go down after the point of conversion?

A: The re-characterization option basically allows you to "rewind" a Roth IRA conversion and treat the transaction as if it never happened. In situations where the market value of your IRA assets declines following a Roth IRA conversion, the re-characterization option can provide you with the opportunity to undo your original conversion, thereby avoiding an income tax liability on the value of the assets at the time of original conversion. It should be noted that you cannot re-convert the same assets until the latter of a) January 1 following the year of original conversion, or b) 30 days following the date of re-characterization.



Q: What about the impact of estate taxes on Roth IRAs as Income in Respect of a Decedent?

A: Both traditional IRA assets and Roth IRA assets are included in a decedent's overall estate when assessing potential estate tax liability. Part of the beauty of Roth IRA conversion is that, by paying taxes up front, an individual is able to reduce the overall value of his or her estate, thereby potentially decreasing the amount of estate tax liability. While it is true that the beneficiaries of deceased traditional IRA holders are potentially eligible to take subsequent tax deductions due to Income in Respect of a Decedent (IRD), some financial planning professionals believe it is often more beneficial to reduce the aggregate estate tax liability rather than depending on recouping taxes over a period of years through the IRD deduction.








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A "W-Shaped" Recession


Last Friday, at the Financial Advisor Webinar Series, economist-turned-money-manager Rob Stein, predicted a "W-shaped" recession.



Forecasts of a W-shaped recession are drawing attention. See the Carlos Lozada commentary in The Washington Post on April 19, FT Columnist John Authers’ on May 17, or economist Nouriel Roubini on July 16
.



Stein, who heads
Astor Financial LLC, predicted that technology will be among the sectors that gain disproportionately from the coming economic rebound. Stein’s also bullish on China.



Stein, who began his career at the Federal Reserve in 1983, believes The Great Recession of 2008-2009 has combined two recessions in one: a traditional V-shaped recession and a credit-bubble recession. While the US economy is now slowly coming out of the traditional recession and economic growth starting up, a second downturn is likely to follow in the next couple of years because of continuing losses from the credit crisis.



Using a macroeconomic approach, Stein actively manages three styles of broadly diversified ETF portfolios: a long/short balanced fund, growth fund, and low-volatility program.








You can view a reply of Stein's presentation, "Actively Managing An ETF Portfolio." It's free, but you need to register. You can also download his slides.



Next week, CFPs will be able to get continuing education credit on replays of the Financial Advisor Webinar Series at advisorsforadvisors.com.



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