Like their financial advisors, many Americans are worried about both their physical and financial health amidst the economic fallout of the COVID-19 pandemic, but relief is on the way for many. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (or CARES) Act, the largest economic aid package in modern American history, took effect. Now and in the coming months the CARES Act should ease some of the current hardships Americans at all income levels are facing.
Under the legislation, investors may have access to higher-than-normal distributions and/or loan amounts from IRA and 401(k) accounts. If individuals have taken a loan from one of those retirement accounts, they can now receive extensions on repayment of that loan for up to one year. If you have clients who are investors or small business owners with liquidity needs due to hardship, the CARES Act may provide them with temporary relief.
The CARES Act includes some key provisions may allow investors to access retirement savings if they are currently experiencing adverse financial consequences related to the corona virus outbreak. We provide an overview of these CARES Act provisions below, but note that corporate retirement plans, such as 401(k)s, are not required to adopt them. Each plan will differ, so financial advisors should check with plan administrators and/or employee benefits managers (if their client is not yet retired) to determine which options may be available for clients based on their company’s plan. Many plan administrators are still assessing how to incorporate these options into their corporate plans.
Of course, clients should be advised to carefully consider all other options before tapping into retirement savings. Withdrawing retirement savings now may require liquidating investments at low values and potentially creates a tax obligation. Be prepared to assist your clients as they evaluate the options and repercussions with their overall financial well-being in mind.
Additional Time for IRA Contributions (2019)
With Tax Day pushed to July 15, what does that mean for your clients’ IRAs and Roth IRAs? They now have until July 15, 2020 to make 2019 contributions to those accounts, so if they are facing financial hardships, they have a little extra time to contribute to those accounts.
For those clients who can contribute the maximum amounts now, the earlier the better: it will likely allow their investment to grow more rapidly if markets improve in the coming quarter. It is key to monitor any contributions they make to IRAs after April 15 and between July 15 to ensure they are they are credited to the correct year: 2019 and not 2020.
Required Minimum Distribution (RMD) Rules Suspended for 2020
As you may be aware, Under the CARES Act, RMDs are waived for 2020 for IRA, 401 (k), 403(b) and 457(b) plans.
This is important to note, because RMD amounts are calculated using the balance of one’s retirement account on December 31 of the prior year. Since those values are based on the equity markets at that time, it means individuals would be required to take an RMD based on much higher account values. That would leave many investors taking out a higher percentage of their current IRA and paying a “disproportionate amount” of taxes, according to American Retirement Association.
Given the rapid decline in equity markets that has occurred between December 31, 2019 and March 27, 2020, the day the CARES Act was signed into law, it may makes sense for clients to forgo their RMDs in 2020 if they don’t need liquidity now. Leaving the funds invested will allow time for the market to stabilize and avoid taking an RMD at what would be a loss in 2020.
Broadly speaking, retirement plan participants can get a waiver on their RMD:
IRA Beneficiaries Subject to A Five-Year Payout Rule
If you have a client who is a “non-designated” beneficiary of an IRA inherited in 2015 or later, they may be subject to a five-year payout rule if they inherited the account from someone who died before reaching age 70 ½. That means that by 2020, the balance remaining would have to be liquidated. Under the CARES Act, there is the option to extend the distribution for a full year, meaning, clients wouldn’t have to take a required distribution until December 31, 2021.
If you have a client dealing with a major financial hardship at the moment, the CARES Act allows certain coronavirus-related distributions from retirement accounts like 401(k)s and IRAs until December 31, 2020. Dependent upon the provisions their company or 401(k) administrator’s plan, they may be able to take a COVID hardship distribution of up to $100,000 and the tax liability can be spread over three years, if so desired.
These COVID hardship distributions are available to individuals age 59 ½ or younger under the following conditions:
Under normal circumstances, anyone under the age of 59 ½ would be penalized at a 10% early withdrawal penalty rate, but under the CARES Act, it is waived as long as a distribution is taken by December 31, 2020.
It’s important to remind clients that they will have three years to repay the amount withdrawn back into qualified retirement plans and IRAs without incurring income tax on the distribution, plus, the amount repaid will not be subject to contribution limits normally imposed. If they are unable to re-contribute the amount within that three-year period, they will owe income tax on it; however, the distribution can be reported as taxable income evenly over the years 2020, 2021, and 2022.
Clients and their financial advisors need to check with their retirement plan administrators to find out if their plan allows for hardship distributions for COVID-19 related reasons. Additionally, they should consider the tax liability that will occur if they are not able to repay the amount to the plan account.
Loans from Qualified Retirement Plans
Loans against a 401(k) or other qualified retirement plan are impacted, too. If clients already have a plan loan outstanding with an amount due, they may be able to delay that loan repayment for up to one year through December 31, 2020. Also, if they have a retirement plan that allows for loans, limits may have been increased to as much as $100,000 or the lesser amount of 100% of an individual’s vested account balance as allowed under the CARES Act.
If your client is an investor that needs liquidity, the CARES Act has a few options, but it is imperative they consider the advantages and drawbacks of a plan loan vs. a hardship withdrawal.
Need more information? Visit B. Riley Wealth Management.
B. Riley Wealth Management does not provide tax or legal advice. Consult with your tax or legal professional. The preceding is an overview compilation of CARES Act information available at the time of publication and does not address all aspects of the CARES Act provisions. For complete details, visit: www.congress.gov or www.treasury.gov.
~ 8 Minute Read
As a professional working with professionals, I and I am sure you are always concerned about delivering what you promise, providing a value added experience to your clients and not missing key elements of services that will result in clients achieving more benefits than they paid for your professional services.
Part of making sure this happens is keeping current in your profession with constant learning, ensuring you understand your clients as fully as possible in “all” respects and always asking yourself, and your clients, if you are delivering the best possible service and fulfilling their expectations.
After “formally” “coaching” for 19+ years, I decided to “confront” the question, “Am I coaching or is it something else?” The answer is, “YES!” and “NO!” and it is “something else.” Let me explain.
In the fifth and latest edition of “Coaching for Performance” by Sir John Whitmore it says, “Coaching is all about a journey and nothing about instruction or teaching. It is as much if not more about the way things are done as about what is done. Coaching delivers results in large measure because of the powerful working relationship created, and the means and style of communication used. The coachee does acquire facts and develops new skills and behaviors, not by being told or taught but by discovering from within, stimulated by coaching.”
Another coach who primarily focuses on life coaching and whom I greatly admire and trained with some years ago starts with a quote that frames the coaching approach. “You cannot teach a man anything. You can only help them discover it within himself. – Galileo Galilei. This approach also centers on the use of questions that are in fact part of every coaching approach. The focus in this approach as in every approach is that the coach focuses on client – who the person is, what they think is true, how they behave, and what they value.
Again, among other points, coaching principles that are common in all approaches include:
This approach also focuses on helping clients learn rather than teaching them. Clients are to discover “the answer” for themselves through questions, some of which may be part of an approach called “GROW.” For example, here are a subset of typical questions designed to aid discovery vs. to teach:
(W) Way Forward:
These and many more are great questions and incorporated into most coaching approaches. Virtually everything addressed in the author’s approaches I have studied are valid, helpful, and appropriate.
So, if all these approaches are so great, why do I have a however? Some Financial Advisor’s I have spoken to and coached have claimed some form of ADD, Attention Deficit Disorder or ADHD, Attention Deficit Hyperactivity Disorder. Though I am not a doctor, unless medical experts have diagnosed it, I am not convinced these self-diagnosed conditions are true. What I do think is true is what was written in “A Comprehensive Guide to Attention Deficit Disorder” Edited by Kathleen G. Nadeau, Ph.D. In Chapter 16 by Dr. Nadeau, she says, “The manifestations of attention deficits in adults are often most evident in the workplace environment, for it is at work that the greatest demands for planning, memory, organization, teamwork, and precision are placed on us.” She goes on to say however that there is there is much to gain by recognition that some traits associated with adult ADD may, in fact, be beneficial in certain work environments. In my clinical experience, I find that some ADD adults make excellent salespeople…due to their social skills.”
In an article by Phil Krone (https://www.productivestrategies.com/is-adhd-affecting-your-sales-results/) he says, “Recently, I was training a group of salespeople and professionals in consultative selling and developing customized sales processes for each of them. Somehow, the topic of ADHD came up and knowing smiles appeared around the room-at least, among the sales reps. We’ve heard from time to time, and you might have too, that “many” salespeople have ADHD and are perhaps even better off for it. Is that really true? Are individuals with ADHD more likely to choose sales as a profession over others?”
“Salespeople with ADHD can be excited by new meetings and networking,” explains Dale Davison, an executive coach in Wilmette, Illinois, who specializes in adults with ADHD (www.dale-davison.com). They are good at starting conversations and building that initial relationship. They are charming, outgoing, and genuinely interested in whoever they’re talking to.”
“Once it’s time to ‘buckle down,’ however, they may lose interest or not know how to organize to follow up,” Davison says. “They may know their product inside and out but have so many ideas that they find it tough to limit their thoughts and organize presentations.” This is actually where coaching can help. Those areas that require planning, memory, organization, teamwork, and precision as well as accountability are explicitly where coaching adds value.
It’s also why I take a very pragmatic approach to practice management coaching. The first goal of my approach to coaching is to help advisors define and implement a set of processes that will save them time and energy while “ensuring” their clients are very well serviced. The intent is that little if anything falls through the cracks throughout the life of the client-advisor relationship. With a structured and organized set of processes, the advisor can have the time to devote to the second goal of my coaching approach, which is helping advisors grow their practice in terms of AUM and production. The top methods to acquire new clients are discussed in detail so that advisors can be successful in fulfilling their growth objectives.
This approach to practice management coaching is described as “coachulting,” a combination of coaching and consulting. The structure and methodologies of coaching are numerous but are predominantly facilitating.
Much coaching is about asking questions and challenging the coachee. It can also involve a teaching, training, and/or a development process so individuals and/or teams can achieve their desired results.
Consulting however provides advice in a particular area of expertise. It helps individuals and organizations improve their performance primarily through the analysis of existing organizational issues and the development of plans for their improvement. Consultants provide external objective advice and access to the consultants’ specialized expertise. Because of their exposure to and relationships with numerous organizations, consultants are also aware of “best practices.”
Consulting is an understand (the situation), tell, and do methodology while classical coaching is more of an ask, guide, and monitor methodology. Consulting is a more time-consuming process because of the need for data collection through interviews, data and interview analysis, information synthesis, development of conclusions and recommendations, and reporting. Consulting has end points such as “Here are the action recommendations and/or here is the process,” or “We have completed system implementation and/or the users are trained.”
Coaching may or may not have an end point. The end point can be a specific amount of time to get the coachees to a specific point or to a point where they believe they have enough knowledge and consistency to continue on by themselves. In some cases, coaching engagements can go on indefinitely. In these cases, the coach may be constantly monitoring execution by the coachee and being an accountability coach and a “brainstorming” partner. The coachee may want a part-time “partner” with whom to check progress and continue to bounce off ideas. As some advisors and teams do not have anyone with whom they can regularly discuss their business, brainstorm with, and be accountable to, a coach can be a valuable resource. The right coach will care about your practice as much as you do.
It’s important to decide what the engagement is, coaching or consulting or a combination of both. With financial advisors, my experience is that a blended methodology is best (i.e., “coachulting”). The coach understands the business issues, provides advice, shares best practices, questions decisions, offers alternatives, and partners with the financial advisor, in this case, to help develop the structure and organization that their practices need to grow their businesses.
The tools and techniques discussed and used tend toward consulting because they tend toward advice. The coaching part of an engagement helps financial advisors define those areas they and the coach believe can best serve the advisor, and the coach then works with them on how best to approach development and implementation. While many of the areas addressed in coaching engagements with advisors are similar, engagements are uniquely designed for each FA based on the advisor’s current situation, their wants and needs, and where they want to be at some future point in time.
What I know about FAs is:
My experience suggests that with practice management coaching for FAs, advisors want to establish a coaching process that works within their high-pressure, time-constrained environment with specific help provided by a coach that can give specific answers to specific questions such as:
Yes, there are many questions that have to be asked and answered to have a context to address the above questions. However, I have not found that financial advisors have the time and even patience for a more traditional coaching approach.
Note that I am open to being wrong. I have not surveyed advisors so if you disagree with my thesis or agree, I would love to hear from you. Contact information follows. Thank you.
David I. Leo
David Leo is Founder of Street Smart Research Group LLC. He is an author, speaker, coach, consultant and trainer to financial professionals. David is an experienced business manager who works solely with Financial Advisors, Planners and firms who want to organize, structure & grow their businesses by attracting, servicing, and retaining affluent clients.
If you would like additional details or have any questions about his articles or an interest in coaching schedule a free 45 Minute Strategy Session @ https://calendly.com/davidileo or contact him @ David@CoachDavidLeo.com. Call 212-598-4229 (Office) or 917-379-1249 (Cell) and visit @ www.CoachDavidLeo.com