State of the Industry Podcast: “Capital Gains Tax Changes – What This Could Mean for Your Firm and Your Future” – Audio Transcript

Scott: This podcast was recorded on July 20th, 2021.

Welcome to the “State of the Industry” podcast. I’m Scott Hanson with Allworth Financial. Thanks for joining us. Typically, we…on the “State of the Industry” we’ll interview somebody just for the podcast. We did a webinar recently with Skip Schweiss. Skip is the president of the Financial Planning Association talking about capital gain taxes. And we thought it was such a good webinar, we had such a great feedback. Let’s have this as a podcast for our podcast listeners as well. So, I hope you enjoy it. I hope you learn something.

Just kinda letting you know where we’re headed here. Skip Schweiss was kind enough to take some time to join us. I’ve known Skip for, I don’t know, 15 years, something like that, Skip?

Skip: Feels about right.

Scott: Skip had started off in, what, the 401K side of business originally. Was there where you began?

Skip: REA custody and then over time I got involved in the retirement plan business, servicing business, and then also in public policy advocacy which I think is what led me here today.

Scott: Right. And so, Skip was at TD Ameritrade for a number of years and was essentially the one who worked with our lobbyists, would fly to Washington on a frequent basis, and spend time with all the lovely people on Capitol Hill. And he’s currently the President of the Financial Planning Association. And I think there’s what? 19,000 people or so that are members. And by the way, if you’re not a number of the FPA, I encourage you to join the FPA. And they’ve got a conference coming up this fall that I’ll have Skip talk about before we finish things off. So, looking forward to hearing from Skip and hearing his comments. I’m not gonna tell you much about myself because you can learn more if you want anyway. But this is what we’re gonna be talking about today. And not necessarily addressing each one of these specifically, but these themes are gonna be woven into our conversation today.

So, it’s really the details of the proposed legislation and what it might mean, how this could impact the value of your firm if you’re at a time where you’re thinking about…figure out some sort of succession plan or a sale in the next few years. Why selling and executing a succession plan or partnering now could save you some money down the road. We’re gonna look at the potential benefits of instalment sales and maybe some pitfalls there as well, how partnership equity could lower your tax exposure, and then we’ll have some Q&A. So that’s basically where we’re headed today. So, Skip, you’ve spent a lot of time on Capitol Hill. First of all, what do you think the likelihood of a capital gain tax happening this year, change in the capital gain tax rates?

Skip: I think it’s highly likely. And when you say happening, you mean a bill passing this year? I think it’s highly likely. I’d give it an 80% to 90%.

Scott: And then what do you think the likelihood of that being retroactive? The date was April 22nd or something when it was announced.

Skip: Twenty-eighth. Yeah, April 28th was the day of the president’s proposal and there was some initial talk about if they would ultimately pass something, they would make it retroactive to that date. I think that’s very unlikely actually. There’s quite a bit of opposition to making it retroactive.

Scott: And if you were a betting man, so you’re betting that there’s gonna be a change. You aren’t betting that it’s gonna be retroactive.

Skip: Right.

Scott: What do you think the rate’s gonna be, right? I mean, so we start out of this super high number. I don’t think anyone thinks it’s gonna be as high as income tax rates but where do you think it’s gonna end up?

Skip: Yeah. I think a betting person might assume it’s gonna be somewhere between where it is today and the current proposal. This current proposal at, you know, 39.6% plus the 3.8%. They call it in the proposal a Medicare tax. It came in with the Affordable Care Act but whichever. You combine those. You get 43.4%. I don’t think too many people are betting it’s gonna be 43.4%. But versus today’s 23.8, combing those two, I think you could bet it comes in somewhere in the 30 to low 30s range.

Scott: Wow. It’s been a while since we’ve had capital gains in that range, 30%. I mean, it wasn’t that long ago it was 15.

Skip: Right. It’s, what, 15 and 20 depending on your bracket today.

Scott: Yeah, or zero.

Skip: So that would be a jump. Or zero, right?

Scott: Yeah, for…if you don’t have a lot of income, it’s at…there are some planning opportunities. And so, with…I mean, we’re in a time right now. It’s been a really interesting political, you know, environment the last number…well, the last number of years, for crying out loud. But if we think about what the election, and then we ended up having…I think most people were thinking that we’re gonna know where the Senate stands. But we didn’t. We had to wait till January. And looking at Georgia, I think many people, at least myself, I thought, “Well, clearly, they’re not gonna vote in two democratic senators. They’re gonna want some sort of gridlock in Washington so that one party doesn’t control everything.” And then we ended up with a 50-50 split in the Senate. And so, they don’t quite have the mandate. They don’t have 51. But they’ve got 50 and of course, Harris, vice president, is the tiebreaker. Well, what does this mean politically right now? I mean, what has to happen for us to have any sort of change here?

Skip: Yeah, it’s a great question. And I believe, like you did, that…let’s just say I was quite surprised that Georgia voted two democratic senators to go to Washington. And so, we ended up with a 50-50 as you point out which means…and as you further point out, that means the democrats control because they control the White House and Kamala Harris would be the tiebreaker. But it also means they’re on thin ice, you might say. I don’t mean that necessarily in a negative way but I mean they’re aware, the democrats are aware that if they overstep, they could easily lose the Senate next year. And in particular, you’ve got, like, a fairly right-leaning democrat in Joe Manchin from West Virginia who’s gonna wield a lot of power in this negotiation. And he’s the kinda guy who might say, “You know, you need my vote. You need all 50 to make this happen. And you don’t get mine unless you, you know, come down from that 43% to…” You know, he’s proposed 28 plus the 3.8 which is where you get into the low 30s…

Scott: And that’s what Manchin is… Joe Manchin’s come back and said he’d be good for 28.

Skip: Yes. Yep.

Scott: And he seems like the…he feels like the most powerful person in the Senate right now.

Skip: I think that’s accurate, yeah. I think all eyes are on him. There’s even speculation…I emphasize speculation that at some point he could switch parties. He seems to be always on the kinda the right wing of the democratic party in the Senate.

Scott: When was the last time we…we saw that in the…was it Clinton years the last time we saw someone switch?

Skip: Oh, boy, you’re testing me now. But it’s been a while. Right.

Scott: It’s not very common when you see someone switching in the Senate. So, let’s assume that Manchin’s, Joe Manchin’s 28% number sticks plus the 3.8% Obamacare tax. When would you propose that…not propose. When would you guess that would come into effect? Would that be beginning of next year? Retroactively some other date?

Skip: Forecasting is a tricky business, of course, but I would…if I had to guess, I would say Jan 1 of ’22. Now if you [crosstalk 00:08:08]

Scott: Well, if you’re talking about forecasting…strictly business…the challenge is, like, as financial advisors, both working with our clients as well as trying to be good stewards of our own businesses, it’s, like, looking at probabilities of outcome, right. That’s what I think what Evans is trying to do right now. Like, what is the probability of an increase and what’s the likelihood of when that’ll be effective and then we can make decisions both for our own firms. We can make decisions for our clients. That sort of thing. So right now, with the recording…it’s July 20th, is the time we’re doing this recording right now and many are watching live as well. But we are just starting to see the Infrastructure Bill, you know, it’s getting narrowed down. I mean, does it feel like this administration doesn’t…is losing a bit of the power that it had a couple of months ago?

Skip: It does, Scott. And I’m reading a number of analyses in the last couple of weeks that suggest that the administration is losing some momentum on some of its proposals. You go back to the 50-50 split Senate and some more right-leaning or moderate-leaning democrats kind of applying the brakes a little bit to some of this. You’ve got the republicans who, of course, in this hyper-partisan era are just gonna pretty much oppose anything the president proposes. And there’s general consensus around the need for an Infrastructure Bill but the republicans are the ones in there right now saying, “That’s all good. You wanna spend a trillion or a trillion-two.” Crazy to me, as an aside, how we toss around that T word these days. But how are you gonna pay for it? And so, you’ve got that as well and, you know, we’re gonna talk probably more about this capital gains and some other things in the Biden administration proposal but we don’t have a bill yet.

So, in fact, I think a bill just dropped yesterday around the…who is it? Senator Ron Wyden from Oregon dropped a bill yesterday, I think, on the…I think it was on the step-up in basis. But that’s the first bill. That’s far from the omnibus-type approach that the president wants. So, it’s further guesswork on all of our parts here that we don’t…we have the president’s proposal but it’s just a proposal. It’s gotta be turned into legislation. It’s gotta start in the House. It’s gotta get passed there which it probably would and then go over to the Senate which will be a tougher battleground. And then they’ve gotta reconcile the two into one. So, there’s quite a road ahead yet for some of the stuff to get finalized.

Scott: Yeah, and when…I think what’s…people choose political parties for a variety of reasons, right. And taxation and size of government’s one of those. But there’s also a lot of other social issues. My guess would be that there are probably quite a few wealthy democrats that are supportive of much of what the democratic party puts forward but not really in favor of seeing their capital gain tax rates double. I mean, I’m just guessing if someone’s an executive out of Silicon Valley, they just founded a company or one of the cofounders and have some cash set up and in stock, they’re probably not all that excited about…I think if they’re in California, having more than 50% of it go to the government.

Skip: That’s a pretty good guess. And whether it’s the Silicon Valley tech executive or founder or a New York City real estate investor because they’re also talking about really shinnying down the 1031 exchange exemption. There are democratic voters and probably more importantly contributors who, as you suggest, maybe support most of what the democratic party stands for and advocates for but not everything. And when it starts to look like it’s gonna hit them pretty hard in the pocketbook, they’ll be speaking up.

Scott: And so, you spent time with TD Ameritrade going back to Washington, meeting with people on Capitol Hill, meeting with lobbyists, etc. And there’s a variety of industry organizations, right? You’re the President of the FPA this year, Financial Planning Association, but there’s a handful of other industry organizations. How often are they on the same side of the table when it comes to legislation?

Skip: That’s a good question. It varies but it tends to be…when we see an issue like this of taxes going up, especially on capital gains when you get close to the heart of our industry and profession, a lot of these industry trade, the financial service industry trade organizations tend to unite around those sorts of things. When you get something that’s maybe more regulatory in nature like a fiduciary rule of some kind, that’s when you can see kind of a parting of the ways where maybe the brokerage and the insurance sleeves of the industry might come down on one side and the fiduciary advisor and planner and consumer groups might come down on another side.

Scott: Yeah. Yeah, and I would imagine most people who are in the wealth management industry a variety sorts would be against any sort of government confiscation of additional wealth because it means less business for them as far as that goes. But you briefly talked about step-up basis as well as 1031. So, let’s spend a few moments on that. The step-up basis has been around for as long as I can remember. It’s a great planning tool for clients, particularly people in community property states. It’s, like, let’s…I don’t know. I just think I’ve been a financial planner for 30 plus years and I think about a client I’ve had for 20 plus years that had this relatively large position in some mutual fund that I…like…the capital…when I first met him, like, didn’t make sense to pay the capital gain taxes on it.

And he’s gotten older and it’s not the best thing but it’s like, “Let’s just wait until you pass away or your wife passes away and then we can worry about…and then we can…all that is forgiven. Then we can reposition the assets.” And I think…I know there’s a lot of financial advisors that it’s the same kinda planning. And so, it would be a tremendous impact and change I think for everyone in our industry if that goes away. What’s the chatter right now on Capitol Hill regarding that? So, I mean, it’s looking like all the democrats are supportive of some increase in capital gain tax rate. Are we seeing the same kind of enthusiasm for the elimination of the step-up?

Skip: I’m gonna say no. And just to put a little finer point on the…it wouldn’t be a full elimination of the step-up but the Biden proposal does call for a $1 million exemption. So, $1 million in gains would be exempt which is probably a lot if you’re holding a mutual fund position. It’s maybe not a lot if you’ve got a business you’ve spent your life building. One million for single taxpayers, two million for married taxpayers filing jointly would be the exemption. And then there’s a…and this leads more to your question. There’s an exemption in there for…I think it’s phrased family-owned businesses and farms that are passed down to heirs for operating purposes meaning, you know, I run a farm, I pass away, the farm goes to my children to operate. I think the devil would be in the details on that. You know, what counts as an heir or what counts as a family-owned business? A lot of those business [crosstalk 00:15:52]

Scott: You’ll see a lot of family-owned businesses being created.

Skip: Yeah, right. Right. And I think that last provision was put in there because of a lot of, in particular, agriculture state members of Congress who said, “Wait a minute.” And I come from an agriculture state in the Midwest originally and knew a lot of farmers and ranchers and, you know, if you made them sell off land every time a generation passed away, over some generations, that farm wouldn’t really exist anymore. And you’d have less and less income-generating capacity with each generation. So that’s problematic. Not just for farmers and ranchers but for just small business people in general. And I think there’s a recognition there to your question. I think some democrats get a little uneasy about that one. So, I personally think that one might have a little bit tougher time than the capital gains tax does.

Scott: Then the other one is the 1031 exchange which is funny. I’ve got some fairly good friends in the real estate development business and I’ve always been envious of their…the way they construct their taxes because they’ll have a piece of property. It goes up in value. They pull some cash out of it. They use that and go somewhere else. Then they sell it and do a 1031 exchange. And so, they…like, over 30 years, they hardly pay any income taxes, any capital gain taxes. And of course, when we saw Trump in the White House, you knew that that wasn’t gonna change under his watch because that’s where his wealth was tied up. But what’s happening right now with that?

Skip: So that was also part of the Biden tax proposal. And he is proposing that $500,000 be exempt in any given year. But above that, gains would be taxed. So, you know, he’s going at…if you’re a smallish investor, if you’ve got a rental home or something, you sell fine. If you’re a bigger investor and you’ve got, you know, a bunch of apartment buildings or something like that, that gain would be largely over.

Scott: And has there been a lot of chatter on that? Like you said earlier, there’s actually no… there’s no bill yet with these numbers and these changes.

Skip: Right. It’s just a proposal from the administration and from the executive branch that…the only chatter I’ve heard as I mentioned earlier is…and I don’t wanna make this all partisan but it…that’s kinda the way things do work these days. And there are a lot of democrats who are real estate investors as well as republicans. And if you’re a real estate investor like some of your friends and you see this proposal, you might be on the phone with your elected representatives. So, I think this one, like the step-up, could have a bit of a tougher role than, say, a capital gains tax increase.

Scott: And so, we’ve had the administration comes up pretty early on saying, “Here’s my wish list of, I don’t know, three and a half trillion or four and a half trillion or…” After a while, a trillion here, a trillion there, it starts adding up to some real money. But in order for legislation to happen, somebody needs to come up with a bill, right? And so, you mentioned we saw one from the…senator from Oregon. Any guess where we might see another bill pop up and who’s gonna be behind that?

Skip: I have seen nothing yet. Typically, you’re gonna see those bills come from, like, House ways and means that deals with tax, and the Constitution tells us that tax bills, revenue-raising bills have to start in the House, the People’s House. But I’ve seen nothing on who’s gonna lead that charge at this point.

Scott: And there’s the whole kinda reconciliation process where they can… So once a year or is it once or maybe twice a year and it…I’m a bit confused on how that process works.

Skip: So, if you mean the reconciliation of bills between the House and Senate, that happens on an ad hoc basis as they pass legislation. So, a tax bill might…you can expect in coming months, probably in the next, I would guess, maybe…let’s see. They’re about to go on recess. So maybe in September, you might see a bill come out of the House with as many of these things as they think they can get done. And, you know, they all hash through that. It’ll come out of committee. It’ll go to the floor. It’ll probably get passed and then the Senate will come, will take that bill and it will chop it up. It’s got its own interests and so on. And they’ll change it. and then if they pass one, then the two have to come together. There’s a committee that will be formed of members of the House and Senate and their staffs and they will grind through and they have to match everything up. So, they end up with one bill and then it has to get voted on again and then approved by the president.

Scott: And so, something’s likely gonna happen. They passed it this year. Your guess is probably won’t be retroactive.

Skip: That’s my best guesses, yes, sir.

Scott: Okay. [inaudible 00:21:16] we’ve been talking about those for a bit. So, let’s kinda pivot over to what this might mean for our industry. And as President of the Financial Planning Association, you’re responsible to see the financial advisors of people in a variety of places in their career, a variety of different size firms. From what you’ve been witnessing out there and talking with people, how might this impact the industry?

Skip: So obviously a lot of these proposals would impact advisors’ clients. And that would mean a lot of…probably more meetings and maybe planning opportunities for advisors and planners with their clients. As far as the businesses that advisors run, you know…

Scott: I would actually say that it could be…any time there’s change, it could be good for a financial planner’s business if they wanna use this as a marketing opportunity whether that’s broad marketing or it’s this referral marketing or whatever kinda marketing. Any time there’s some changes, it creates questions for clients and it’s an opportunity for one to grow their business.

Skip: Opportunity to grow their business and to pay more of that growth in taxes and then, you know, I am hearing quite a bit about an acceleration of succession planning and, you know, taking chips of the table and all those phrases. We all know that the average financial advisor is probably my age, maybe 50s or 60s and thinking about maybe phasing out or liquidating part of all of their firm. And I’m hearing a lot of talk about maybe we better get that done in 2021. Otherwise, it’s gonna…we’re not gonna keep nearly as much of our hard-earned gains over the years if this rolls over to the next year.

Scott: Yeah, and it’s interesting. I mean, right before we came onto this webinar here, I was talking with a colleague internally just about the kind of increase in volume we’ve had of firms reaching out to us interested in maybe doing a deal before the year is up. We were having a discussion like, “How many firms…how many deals can a firm get done whether it’s Allworth or one of the other kinda larger acquirers out there?” It’s a… If suddenly there’s a huge percentage that tries to get a deal done this year, it might be a bit of a challenge.

Skip: Yeah, and you’ve got less than…and it’s stating the obvious. You’ve got less than half a year to go. So, you know, if you’re just thinking about initiating a deal now, you better have your foot on the accelerator hard. And it puts the seller, I suppose, in a little bit less favorable position if they’ve really got a clock ticking of December 31st.

Scott: Well, yeah. I mean, if someone starts in, like, maybe October, starts looking for a buyer…

Skip: Right.

Scott: Yeah. And it’s always…it’s kinda conversations you have with clients about…you always wanna look at what’s…don’t let the taxes, you know, necessarily drive an investment decision. Let it maybe influence it but not drive it. And I think the same thing should be…people be considering right now as well. And obviously, one way to defer as much is by having some equity in whatever someone takes an equity. Typically, tax-deferred when someone swaps their own stock with stock of an acquiring company. So that’s kinda one way to look at things.

Skip: That would make sense.

Scott: Let’s look at some of these questions here and tackle some of these questions. And by the way, if you’ve got a question for us, just…there’s a little thing there. Just enter what the question might be and we’re happy to talk about it. What’s the chatter about a proposal to change status of advisors from independent contractor to employee? Now, this is kind of interesting because if you look at what’s happened…even with the gig economy and some of the attack on that, you look at the…some of the current appointees within the Department of Labor and all that. So, what are we seeing there?

Skip: I think you’re gonna see a tightening up there. And it’s something FPA’s got its eyes on pretty closely because a lot of our…you mentioned our 19,000 members. A lot of those are independent fee-only planners but a lot of those are also advisors at independent broker-dealers where there are…though independent, they are independent. They use the broker-dealer platform for their custody and clearing and so on. But they’re independent contracts. And that would change that business model. Excuse me. That changes that business model dramatically. The Trump administration DoL had passed a little bit of a tweak, a nuanced opening in that, and the Biden administration just took that away basically. And I would expect… In fact, I know that the Department of Labor is looking at a possible tightening of that. Like, what would qualify as a… for someone to be an independent contractor versus no, that looks more like an employee to me.

Scott: And because we’ve already seen some tightening even in the last couple of years there. Like, it…I mean, I’ve been in this industry for 30 years and I’ve heard this concern through 30 years. And I suppose there’s a time in the future that could have some impact. But I think right now [crosstalk 00:26:52] from the Department of Labor, would it not?

Skip: Yes.

Scott: So, all right. Let’s look at some additional question here. Aaron asked what happens to long-term capital gain loss carryovers if capital gain tax rates go away. I mean, if capital gains rates go up.

Skip: What happens to carryovers?

Scott: We’ve seen the…has there been any…well, right now we don’t have a bill yet, right?

Skip: Right.

Scott: So, I guess there’s a possibility of either eliminating the carryover of capital losses or having them so they’re not worth quite as much.

Skip: I have seen nothing on that yet. Maybe I need to dive deeper into the Biden proposal but I haven’t seen that one.

Scott: I don’t think there was anything in the Biden proposal but obviously things could change in a variety of ways.

Skip: Yep.

Scott: Okay, this is a good question. Skip, you spend a lot of time advocating for advisors and clients on Capitol Hill. What has been your experience with lawmakers and what’s their view of our industry?

Skip: Yeah. So yeah, I sat across the desk from a lot of lawmakers and a lot of their staffs and a lot of the regulators that oversee our industry. Honestly, the regulators understand us a lot better than the lawmakers do because if you’re at the SEC, you’ve got a fairly narrow worldview, you know, the securities industry and its various component parts. If you’re sitting in Congress, you know, and a guy like me walks in there to talk about taxes or, you know, something like that. The last meeting they had was probably from someone in their ear about Cuba and the next meeting they’re gonna have is probably someone in their ear about farm price subsidies or whatever. They have to be kind of experts on 500 different issues, whatever comes at them any given day. So, their worldview of financial services is not nearly as deep as some of the regulators are.

So, a lot of times we have to go in there and do some educating on what’s the difference between a financial planner and REA, a broker, a securities broker, an insurance person. And oh, by the way, there are a lot of people out there who wear multiple of those hats. And it can be kinda confusing. You can see a confused look on the face of a member of Congress when you go into a lot of those. There are actually a couple of members of the House who I think were formally financial advisors in a previous life. There’s a guy from Arkansas whose name is escaping me right now and I think there’s one other who really do understand the differences. And unfortunately, Scott, we all get kind of tarred in Congress at times and with the public as we’re all Wall Street. You know, financial advisors, Wall Street, and Wall Street gets bad headlines sometimes. And so, we’ve gotta overcome some of that ongoing as well.

Scott: Well, I’ve often said that our industry has a poor reputation and it’s well earned. Because there’s some…

Skip: I can’t argue with you.

Scott: Yeah. That’s just some bad actors that continue to pop up. That’s I think humanity but…another question here. I have a 20-year financed sale of my firm to my son in order to minimize our taxes. We’re currently into our sixth year. Would it make sense to accelerate payments in view of the potential capital gains increase?

Skip: Scott, you might answer that question better than I can.

Scott: Into 20…there’s a lot of years still to go. I mean…

Skip: That’s 12 years of uncertainty. And, you know, you could see a capital gains tax increase next year as we talked earlier, and then three or four or five years from now, you could have a different administration and different congressional makeup and those rates could come back down again. That seems to be the way anymore. So how would you answer that, Scott?

Scott: That’s exactly how…I mean, that’s how…you have a long time to go. It probably depends…obviously…odds are it’s a smaller firm. It’s not like there’s millions of dollars that is being transferred every year. So, it’s probably a smaller number, and depending on where the capital gains rates…where the kinda brackets are, might not even impact this individual. So, I think it’s funny. I always…just like, I think, most financial advisors and even ones looking at the sale of a business, the probabilities of outcome and you try to put some sort of probabilities on things that nobody has a crystal ball but at least we understand human nature somewhat. We know how our legislative branch works and we can kinda keep an eye on who’s in there and where the political winds are shifting and what that could mean over a period of time and what’s happened historically on political winds and how long things tend to last before pendulum swings back to the other side and those sorts of things. But I think the bigger…more interesting thing here is a 20-year instalment sale to a family member. That’s a long time. I don’t think I’ve ever seen one that long.

Skip: I think one thing I forgot to mention earlier about the proposed capital gains tax increase as well that you triggered for me when you said, you know, it might be not millions of dollars a year over 20 years is they are proposing that these higher rates would apply on income over million dollars a year. So, if that’s 20 years at, you know, $500,000 a year, depending on your other income, you might not see an increase next year. But any income that pushes above the million-dollar threshold would be subject to that higher rate.

Scott: Another question that came in here. Any thoughts on opportunity zones remaining viable as a tax planning tool as they relate to some of the potential changes we are discussing?

Skip: I will just confess I am far from an expert on that topic, on opportunity zones.

Scott: As am I.

Skip: I’m very vaguely aware of them.

Scott: Yeah, and so I’ve always been a little leery of them. It’s, like, okay. You get some tax breaks if you invest in some crappy investments. That’s what it felt like to me. And you can get tax breaks by investing in lots of things that don’t go up in value.

Skip: Right.

Scott: Right, and so I mean, I think you really didn’t understand what you’re doing in some of these opportunity zones and a typical investor doesn’t have that…they’re just not the experts in that area. Any kinda final thoughts you might have? Let me ask you this. If you are an advisor right now and… let me just ask you this question. Because you see a lot of advisors right now, if you were to step out and say, “I’m gonna become a financial advisor,” what area of the business would you go into? Like, what would your…who would you target? What would your strategy be? You see all kinds of firms. You’ve talked to tons of people.

Skip: I do and have. You know, I’ve been asked that question before and partly I’m biased because I did spend a decade or so in the retirement plan servicing world and I know, Scott, your firm serves some businesses with their retirement plan. You know, it seems like every one of the however many hundreds of thousands of…let’s broadly call them wealth managers in this country are looking for people, individuals who have money that they can manage. But a very small sliver of those are looking for company 401K plans to help them manage. And I’ve said to many people if I were starting today…and just the way you phrased your question. I might put a microscope on that market because there’s half a million 401K plans in this country and not nearly as many advisors chasing that segment as there are the moderate to high-net-worth individuals.

Scott: That’s an interesting point because what we’ve noticed…and we’ve had 12 or 13 firms or so partner up with us, become part of Allworth. Oftentimes you’ll have an advisor that maybe has a couple hundred clients. They also have two or three 401K plans. They know they’re not doing the best job on their 401K because they’re not real experts on it. They have to kinda brush up before they have the means and they…so they’re…but kinda part-time 401K managers. And so, one of the…I think when they join us, they get our 401K team to work on it. But I was just looking through…last night I was looking through our financial numbers, monthly numbers and one of the things we look at is…of course, we look at what’s happened with market values based on what the market’s done. We also look at how much people have deposited. We look at new client, new money. We look at existing client, new money. We look at withdrawals. We look at attrition.

And I was looking at those from different segments of our business and then I was focusing on the 401K, and the 401K, a couple of things to note. Obviously, people are contributing much more money than they’re withdrawing because they’re still working, right? So, they’re not taking that money to spend on things. They’re contributing money. And they tend to be more aggressively invested, right, because many of them are still years away from retirement. So, you kinda start thinking of a… if you believe that long-term equities are gonna perform well over the next 10 or 20 years, one would think that the 401K business is gonna be a beneficiary of that more than, say, someone who’s retired and drawing down.

Skip: Yeah. And the one point you made there…I agree with everything you just said but the one point I often make to advisors is every two weeks, new money comes into that account. So how many of your individual wealth management clients are adding money to their account every two weeks? Probably none.

Scott: [inaudible 00:37:04] It’s a really wonderful industry. It really is. And I think there’s a lot of tailwinds in our industry for advisors. Obviously, there’s some headwinds and this may be one headwind we’re looking at with the capital gain tax increase, the potential increase coming. And I do think it’s an important time for advisors to be paying attention to the political environment and what could be happening here. And as we get further down the year, really, it’s gonna be more important to start having these conversations with the clients like, “All right. If these things happen, this is the impact it could have on your life. Do we wanna make some changes today in anticipation of that?”

Skip: Absolutely. And, you know, there are a lot of other things we…in the hopper in Congress right now we didn’t have time to get to but it looks to me like it’s quite possible the required minimum distribution age could go from 72 to 75. It just went from 70 and a half to 72 a year or 2 ago. But Congress is recognizing people are living longer, working longer, and maybe we shouldn’t force them to take money out maybe causing them tax problems in the process. There’s a part of the Biden proposal…

Scott: [crosstalk 00:38:16] it seems to me that the clients that we have that have a required minimum distribution problem, they’re the ones that have been great savers over the years. They’re not big spenders. They have always lived below their means. They’ve saved well. That’s why they have all this money in their retirement account. They’re not the ones that are retiring early and starting social security at 62, right, which…still the majority start social security early. So, it’s one of these things I kinda look at like who…what percentage of Americans really have a required minimum distribution issue? It’s just…my guess, it’s probably just the wealthier ones.

Skip: It’s probably the clients of financial advisors.

Scott: Oh, no question. The clients we love, right?

Skip: Right.

Scott: The ones that have been good savers over the years, those are our best clients.

Skip: That’s right.

Scott: Yeah, so the RMD gives the…you think that’s a… you know, that’s obviously something that could be thrown in there. Anything…other things you’re seeing out there?

Skip: Yeah, the RMD has good bipartisan support to push that up. Extending social security taxes on incomes above $400,000. So, you’d have this donut hole of sorts that today the cap is 137,700. Income above that in a year, it is not taxed for social security. That would be the case under the proposal but then you get to 400 and that 12.4% tax would kick back in. The Biden administration seems to settle on a $400,000 number as being kind of “wealthy” and President Biden has pledged he will not raise taxes on people who make under 400,000.

You can tell by my hairline and the color of my beard I’ve been around long enough to see…I remember when 100,000 was considered wealthy by politicians and then the Obama administration set a threshold at 250 and just a few short years later, Biden sets it at 400. So, you see a number of these proposals revolving around the people who make more than $400,000. They’re talking about caping deductions at the 28% level. So, if someone’s in a 35% or 37%- or 39%-income tax bracket, they would only get a 28% deduction, not a 30-something percent deduction.

Scott: And some of these seem like the same things that were kicked around in the Obama administration as well.

Skip: Some of them are. Yep.

Scott: Both those issues were kinda kicked around. You know, it’s interesting, Skip, I’ve got a nephew that had a… graduated with a Ph.D. in political science. Man, I think it was global political science or something. And as you can imagine, he’s on kind of a left side of the ledger when it comes to political issues. And we’re having this discussion about tax rates. And I said to him, I said, “Like, here’s…reality is this. If the tax rates get high enough, at some point in time, I’m just gonna say it’s not worth being in business anymore.” Like, I don’t really need this. Like, I don’t really need to make more money. I was telling him, “Like, personally, I don’t need this.” So, if it’s to the point where if I win, take a bet and I win, I keep 20 cents of the dollar and I lose, I lose the whole dollar, at some point in time, that’s not worth the risk. I’m just gonna close up shop. And he said to me, “I never really thought of it that way.” And I thought, “You have a Ph.D. in political science.” I mean, you know…

Skip: Right. Well, it’s…

Scott: He’s probably gonna be one of the future legislators because that’s kinda the [inaudible 00:41:42].

Skip: Yeah, probably.

Scott: Anyway, so I appreciate the chance and the time you took with us today, Skip, and some insight. Obviously, we don’t have any clear answers but it does give us some more guidance, I think, as we’re…look at both planning for our clients as well as planning for our businesses. So, I think it was valuable time and I greatly appreciate it.

Skip: Great to be with you, Scott. Always good to see you and…

Scott: [crosstalk 00:42:02] the FPA Annual Conference.

Skip: Yeah. It’s actually in-person this year. I know conferences are coming back in. And we’re gonna do ours in-person, September 22nd to 24th in Columbus, Ohio. And we’re planning for a scaled-back event because we’ve done a lot of member surveys and there’s still a chunk of our membership saying, “I’m not getting on an airplane. I’m not going to a conference and shaking hundreds of hands and all of that.” I understand that. So, we’re gonna scale it back a little bit but it’s gonna be awesome to be there in person. And I will be one of those people there.

Scott: Good. Well, it’ll be a good conference, I’m sure. And again, FPA, if you’re not a member, I encourage you to [inaudible 00:42:44] They do a lot of good things for our industry so I encourage you to do that. So again, thanks, Skip, for taking some time.

Skip: My pleasure. Any time, Scott.

Scott: Well, thanks for participating in our “State of the Industry” podcast. Great having you with us. If you’d like to learn more about Allworth Financial, we’ve got a great website called allworthpartners.com. It talks about a partnership program and you can learn about what that means at Allworth. And again, thanks for taking some time to listen to the podcast.

Man: This podcast has been brought to you by Allworth Financial, a registered investment advisory firm with the securities in exchange commission.