The standard deduction, personal exemption and certain other figures the Internal Revenue Service adjusts for inflation will take their biggest jump in three years in 2012. But some items that are indexed for inflation won't change at all, while a few coveted breaks will actually shrink next year with changes in the law.
Items subject to indexing don't always change because there are often minimum adjustment amounts, and in some cases there hasn't been enough inflation to bump the figure to the next level, says Mark Luscombe, principal federal tax analyst at CCH Inc., an information publisher in Riverwoods, Ill. That applies to the annual gift tax exclusion, which only rises in thousand-dollar increments. It remains at $13,000 for 2012.
An increase in the lifetime exemption from the gift and estate tax to $5,120,000 in 2012, up from $5 million per individual this year, gives wealthy clients the opportunity to make more tax-free gifts, says Katie Colombo, an attorney at Oshins & Associates LLC, in Las Vegas. A married couple can gift an additional $240,000 next year without triggering federal gift tax even if both spouses have used the full exemption currently available to each of them, Colombo says.
The highest ordinary bracket, 35%, starts at taxable income of $388,350 in 2012 on both single and joint returns, versus $379,150 this year. Taxpayers whose ordinary tax bracket is 15% or lower pay no tax on qualified dividends and long-term capital gains. In practical terms, that means in 2012 married couples can have taxable incomes of as much as $70,700, and singles as much as $35,350, before their dividends and long-term gains are taxed. That's up from 2011's $69,000 and $34,500, respectively.
But the news isn't all rosy. For individuals, the exemption from alternative minimum tax is scheduled to take a precipitous drop next year with the expiration of a provision of the 2010 Tax Relief Act. For business owners, Section 179 expensing will be capped at $139,000, down dramatically from 2011's $500,000 limit. And the deduction will begin to phase out when a business purchases more than $560,000 of qualifying assets.
The IRS announced many 2012 figures in Rev. Proc. 2011-52, at http://www.irs.gov/pub/irs-drop/rp-11-52.pdf.
-Eric L. Reiner
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Investors Can Change Irrational Behavior
Investors often have tendencies to do irrational, stupid things.
But irrational investor behavior can be changed, say experts in behavioral finance, so that people eventually learn to act in their own long-term best interest.
Dr. Russell James III, a behavioral finance expert, said at a Napfa conference in New York in October that there is a neurological basis for financial decisions. James, an associate professor in the division of personal financial planning at Texas Tech University, presented findings along with Donald Duncan, the founding partner of D3 Financial Counselors LLC in Downers Grove, Ill., and a board member of the Midwest Napfa Region.
"It's important to understand behavioral concepts so we as planners can better serve clients," Duncan said. He added that better judgment of client reactions to risk and loss scenarios can help planners identify behavioral biases and develop appropriate alternatives to recommend investments more appropriate to each client.
"The planner can either change the client's perspective to reflect reality or change the recommendations to match the client's perspective," Duncan said.
James told the audience that once investors understand the underlying causes of their actions, they can then create a framework or a future concept of the same event that may be more advantageous and help them better achieve their goals. He outlined what in behavioral science is known as a "dual self" model or approach to maximize rational decision-making.
Studies by Harvard University professor Drew Fudenburg and David K. Levine of Washington University suggest that many sorts of decision problems should be viewed as a game between a sequence of impulsive short-run actions and more patient longer-term actions.
In the first action, investors are concerned with one brief period and in the second, with the "lifetime utility" of their actions, James said. By applying this theory, it's possible for investors to change their current perception of an event to a future concept of the same event, which might produce more rational decision-making to facilitate better outcomes.
The second application of this theory involves the use of pre-commitment investment strategies where investors commit in advance to a financial agreement, circumstance or product that can help them accomplish their financial goals. Such behavior might lead to holding more illiquid assets like real estate, or making stronger commitments to save money.
James said Texas Tech is conducting behavioral studies on how and why clients switch advisors during stock market volatility. The researchers are also interested in how financial happiness differs neurologically from other forms of happiness and how estate planning differs from other types of planning.
At his firm, Duncan said, his goal is to help clients develop a future-oriented perspective and to constantly reinforce it. As part of his financial planning work, he aims to focus clients on goals they can envision--such as what retirement will look like--to keep them on track. "It helps overcome the emotional side of the question, and to engage in the practical side," he said.
-- Bruce W. Fraser
Taking It To The Streets
"CFP" and "RIA" aren't initials that immediately register with the general public. A couple of advisor industry groups aim to change that.
In April, the Certified Financial Planner Board of Standards launched a four-year, $36 million public awareness marketing campaign to increase both brand visibility and provide its CFP professionals with potential customer leads.
The CFP Board has long realized the importance of market surveys to monitor consumer awareness of its CFP brand, but this year's campaign takes it a step further by using the board's market research to develop a composite portrait of its ideal customer and shape an advertising campaign directly around it.
The research identified the CFP designation's core audience as being mass affluent households with 35- to 64-year-old adults who have investable assets of between $100,000 and $1 million. The CFP Board says this group represents about 14 million adults, or 6% of the U.S. adult population.
The CFP Board's promotional campaign consists of TV, print, radio and Internet-based ads targeting the likes of CNN, Fox News and the History Channel, as well as the Wall Street Journal and Barron's, among others. The campaign expanded its reach this summer with the sponsorship of select National Public Radio programming.
The ad directs consumers to a dedicated Web site (www.letsmakeaplan.org) that, among other things, contains a list of ten questions to ask when choosing a financial planner and a search box to help consumers find a CFP-certified professional in their vicinity. The ad campaign's pitch: A CFP Board certified professional can help you stay on course with your financial goals.
The CFP Board drew on market research from Symonds Media that tracks consumers' purchase habits, media habits and attitudes to help craft its campaign. The goal is to generate a positive consumer impression about certified financial planners. Based on market research, consumer awareness of certified financial planners is just 28%.
"There's usually a waterfall effect with products and services," says Thomas Crowder, the CFP Board's managing director of marketing and a former ad agency and Verizon advertising executive. "You advertise them to increase awareness, and then at the lower level you are increasing preference and intent to use. So certainly we would expect to drive searches and leads as part of this effort.''
The CFP Board said it will review the campaign in 2013 to determine whether it's effective.
Meanwhile, Schwab Advisor Services in September launched "RIA Stands for You," a multimedia campaign that defines the independent RIA category. Schwab Advisor Services designed the campaign to be used by and shared among its advisor clients. The campaign launched with digital banner ads on WSJ.com, Bloomberg.com, Forbes.com, Economist.com and TheAtlantic.com.
A consumer-facing Web site (www.riastandsforyou.com) offers video vignettes on the potential benefits of using an independent RIA featuring advisors telling their stories and highlighting their independence, their approach and their commitment to their clients. The Web site also lists questions to ask when choosing an advisor.
The overall goal of Schwab's ad campaign, says Bernie Clark, executive vice president and head of Schwab Advisor Services, is to hammer home the message that RIAs provide independent investment advice.
Industry analysts offered mixed reviews of the two brand campaigns.
"Both campaigns are long overdue and will have substantial positive impact on the growth of their respective targeted advisor channels,'' said Charles "Chip'' Roame, managing partner of Bay Area market research and strategy firm Tiburon Strategic Partners. He added that the campaigns are essential for certified financial planners and RIAs to offset the $200 million ad campaigns spent by traditional warehouses.
"The main issue for independent advisors is the lack of awareness that they even exist versus the well established wirehouse brands,'' Roame says. "The CFP has a similar issue--it's a powerful designation, but it's unknown to the vast majority of consumers and everyone calls himself a planner in one way or another.
"I think the home run is when a group of independent advisors brand themselves,'' he continues. "I bet some advisor group does that with a big ad budget in the next 12 months.'' Tim Welsh, president and founder of Larkspur, Calif.-based consultancy firm Nexus Strategy, praised both marketing campaigns as "noble efforts,'' but said such campaigns need to be done on an industrywide level to be effective.
"All those category campaigns like 'Beef: It's What's For Dinner' that were very successful were also very large in terms of their budgets,'' he says.
Welsh credits the CFP Board for its attempt to broaden CFP professional brand awareness, but given its modest ad budget compared to large corporations, he offers it likely won't make a big dent in consumer awareness. "Arguably they're not Nike, McDonald's or Coca-Cola,'' Welsh says. "Whenever you embark upon a brand-building awareness campaign in the retail mass market space, you need hundreds of millions of dollars to move the needle" Among CFP licensees, some grouse that if the CFP board has $36 million to spend, it might consider lowering annual fees. But other veteran certified financial planners give the CFP Board campaign a thumbs-up.
"Anything that builds the CFP brand is a good thing,'' says Thomas McFarland, a CFP certificant and founder of the Darrow Company, a Boston-based wealth management firm.
-- Jim McConville
Mysterious Bonds
Investors sorely lack information about whether they're getting a fair price on the bonds they are buying, according to The Bond Investor Study by Charles Schwab. The recent study makes the case that bond buyers generally don't know how much brokers are marking up bonds, how much others are selling the same bonds for, or if brokers are selling from their own inventory.
"Bond and fixed-income investments can be confusing to the investor because they are opaque," says Peter Crawford, a senior manager at Schwab who oversees its fixed-income platform. He adds it's becoming more of a problem as the population ages and older investors want to switch to bonds from stocks.
According to the Schwab study, 73% of bond investors want pricing details and 44% say they cannot figure out how much their bonds are being marked up. Another 24% have no idea how their bond firm is compensated.
The Schwab survey included 510 investors with a minimum of $250,000 in investable assets and at least $25,000 in bonds purchased in the last two years. The survey respondents averaged nearly $500,000 in bonds and had an average of $1.8 million in household savings and investable assets.
The survey shows only 35% of the investors believe they always get the best price from their bond broker, 40% say they don't know how to get the best price, and 40% say it's either too complicated or too time-consuming to shop for the best price.
Michael Martin, president and chief investment officer of Financial Advantage Inc. in Columbia, Md., says the bond industry is inherently less transparent than other investments. "The interest rate and credit quality are two drivers of the price, as well as the duration of the bond," he explains. "For bonds, the middleman is in the driver's seat and the client is in the dark." Martin says he doesn't see that situation changing anytime soon.
Mike Nozzarella, an advisor at The Tarbox Group in Newport Beach, Calif., says larger advisors have tools available to help them garner more information about bond transactions, but that the sector remains a black hole for most retail investors. "If you're buying a bond, there is no way of knowing what the broker bought it for or if they are taking it from their own inventory," he says. "It's just one of those areas where there's still little transparency for the individual investor."
Nozzarella says that the Municipal Securities Rulemaking Board is attempting to make more information available about municipal bonds on its Web site (http://emma.msrb.org). Even so, he adds, many investors might lack the background to evaluate the available information.
Crawford says Schwab is trying to make bond trading more transparent by providing comparisons of bond prices so investors can see what other firms are charging for the same bonds, making available trade history so that investors can see how the bond has traded, and being up front about its own mark-up of $1 per $1,000 bond on U.S. bonds.
He notes that Schwab's system of providing comparisons can assist advisors.
Colyer notes that the credit rating acumen of Moody's, Fitch Ratings and Standard & Poor's has come under fire because of the role they played in the housing bubble debacle. Since then, some financial advisors are doing their own credit research or finding new sources of credit research. He says credit research around fixed-income bonds involves being familiar with the debt of a company, its profitability, long-term outlook balance sheet and knowing whether an investment in the company will pay off at maturity.
AAM, through its educational arm, AAM University, teaches classes to advisors in areas such as advanced portfolio management in fixed income securities, credit analysis and analyzing corporate capital structures. Colyer says he's seeing advisors staying fairly short in their Treasury maturities because they're afraid rates will go up. They're also looking for income via dividend-paying equities, and he says advisors are showing greater interest in principal-protected notes.
Colyer adds that advisors are also adding real estate investment trusts (REITs) and preferred equities to the income portion of client portfolios.
"Real estate investments tend to do well in times of inflation," Colyer says. "Although the housing market is still broken, we think there's value in buying a diversified portfolio of REITs made up of commercial buildings, apartment buildings or self-storage facilities."
Regarding preferred equities, he adds that financial advisors have the burden of doing research on the underlying credit just as with a corporate bond.
-Juliette Fairley