IRS Asks for Comments on Determination Letters for 2019
The agency ended its determination letter program effective in 2017, but said it will measure the need for exceptions in a variety of ways including annual input from the Employee Plans (EP) community.
In Notice 2018-24, the Internal Revenue Service (IRS) requests comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond provision of determination letters for initial qualification and qualification upon plan termination.
Revenue Procedure 2016-37, provides that, effective January 1, 2017, the sponsor of an individually designed plan may submit a determination letter application only for initial plan qualification, for qualification upon plan termination, or if the IRS makes a special exception. In that notice, the IRS said it anticipates making exceptions based on program capacity to work on additional applications, and the need for rulings in certain areas. The agency said it will measure need in a variety of ways including annual input from the Employee Plans (EP) community.
Comments are requested on specific types of plans for which the Treasury Department and the IRS should consider accepting determination letter applications during calendar year 2019. Circumstances for consideration include, for example, significant law changes, new approaches to plan design, and the inability of certain types of plans to convert to pre-approved plan documents.
The IRS says comments that suggest expanding the scope of the program for a particular type of plan should not merely state the type of plan, but should also specify the issues applicable to that type of plan that would justify review of that particular plan type under the determination letter program. Such issues may include specific plan features and special plan designs applicable to that type of plan, or unresolved questions of qualification in form with respect to that type of plan.
Comments may be submitted in writing on or before June 4, 2018, per instructions provided in the notice.
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Broker/Dealers Must Move to Support True Financial Planning
More than 60% of advisers polled by Cerulli Associates agree that client demand for “financial planning” is increasing; at the same time, broker/dealers are refining their digital planning support for advisers in order to retain top talent.
The latest reporting from Cerulli Associates shows U.S. financial advisers are assuming more comprehensive planning responsibilities, implying to researchers that “a breadth and depth of relevant resources” will increasingly become a critical differentiator among broker/dealer (B/D) home offices.
“Cerulli data shows that more than 60% of advisers agree that client demand for financial planning is increasing and that their financial planning process differentiates their practice from other advisers,” Shtyrkov says. “Avid adopters of comprehensive planning will need support from home offices and other partners to scale these offerings as they grow their practices.”
The Cerulli analysis argues broker/dealer firms must be prepared to put real dollars and staff effort into providing all the necessary ongoing support that surrounds effective financial planning services—as opposed to point in time, product-based advice. Firms that invest effectively here will gain a competitive edge over those that lack the scale to invest in building and maintaining this support.
“Scale creates an opportunity for many B/Ds and large registered investment advisers (RIAs) to support financial planning specialists and offer internal planning resources,” Shtyrkov adds. “Given their smaller size, however, many RIAs lack centralized planning support and, instead, partner with third-party firms for additional resources.”
On Cerulli’s analysis, for many firms, the balance between scale and depth determines the extent to which they can support true financial planning initiatives.
“B/Ds with scale can hire advanced planning teams of financial planning specialists that deliver personalized support for nuanced cases,” the research explains. “For example, these teams employ CPAs who specialize in tax efficiencies, attorneys with estate planning backgrounds, and CFP professionals who can help clients with complex planning issues, such as concentrated stock options and business planning. These highly-skilled positions are more difficult for smaller firms to invest in and sustain.”
The Cerulli analysis concludes that genuine financial planning is “a time-consuming and labor-intensive process, but it provides a sizeable opportunity.”
“As planning adoption grows, firms with an adequate range of resources to support the needs of adopters will be most likely to recruit and retain advisers who value comprehensive planning,” says Kenton Shirk, a director at Cerulli. “Cerulli believes that a strong financial planning support system will become an increasingly important competitive advantage for B/D home offices.”
Fee practices change along with service models
The Cerulli reporting finds fees for financial planning and other services are evolving in response to providers’ profit pressures and clients’ concerns about the value received.
“While adoption is increasing overall, pockets of the adviser community, including women and Millennial advisers, are more receptive than others to creating a planning-centric practice,” the research suggests. “Cerulli believes that financial plan deliverables will evolve toward technology-based, collaborative interactions.”
As the report lays out, traditional printed financial plans “today can become outdated almost as soon as they are completed.” Instead, clients increasingly expect adaptive, web-based planning solutions that help them understand and manage their plan as an ongoing project.
“As planning adoption grows, broker/dealers with the adequate breadth and depth of resources to support advisers’ [digital] planning needs will be most likely to recruit and retain advisers who value comprehensive planning,” the analysis concludes.
In terms of pricing their services, with growing adoption of financial planning, Cerulli finds some advisers charge a separate fixed fee for creating a financial plan, but this remains a relatively small portion of revenue.
“By putting a dollar figure on the fee, the explicit amount can sometimes cause greater resistance from clients and prospects, even when asset-based fees could be higher but are instead expressed as a percentage,” Cerulli explains. “Non-asset-based fees (e.g., flat fees, hourly, retainer) enable wealth managers to better reflect implicit costs and present additional opportunities when working with high-net-worth investors.”
These findings are from the second quarter 2018 issue of The Cerulli Edge – U.S. Advisor Edition, which discusses the evolving fees for financial planning and other services in response to providers’ profit pressures and clients’ concerns about the value received. More information on obtaining Cerulli research is available here.