By Jeff Goodnow on December 19, 2019
The business of personal financial advice is a crowded one. As a financial advisor, you are one of more than 200,260 people seeking to earn a living and build a career by helping individual investors plan for their future. It can be hard to continually provide value and grow your client base.
Most financial advisors build their business like everyone else—they hunt for new clients in this large pool mostly by going after the biggest fish: the high net worth investors.
It makes sense to spend time primarily on those prospects with enough money to make the effort worthwhile. But that’s also how every other advisor ends up fishing in the same pond for the same fish.
BREAKING NEWS: Fidelity is now a full HSA solution provider with investment options built in!
We originally wrote this blog post with TDA as the primary investment custodian offered through several other HSA banks. The door is now open to setup HSA accounts through Fidelity and use their investment platform. (For full disclosure, Fidelity is our primary custodian – so you can understand why we are excited!) 🎉🎉🎉
Exciting news for sure, but let’s not get ahead of ourselves. We’ll discuss Fidelity more later in the post.
The Overlooked, Finding a Niche
Meanwhile, there are tons of other prospective clients with assets that get overlooked by the crowd. These investors also have a tremendous need for guidance. Oftentimes, their situations are unique, and less ambitious advisors shy away from the challenges they present.
The good news is that you now have another tool at your disposal to help these clients with the rising cost of healthcare. In this blog, we’ll look at one possible niche market—health savings accounts (HSAs).
We discussed this topic in our recent podcast: “HSA – The Next Untapped Market (Ep 18)”. This blog post will provide even more detail on how you can approach the opportunity in this niche market and help you expand your client relationships. This will allow you to grow your business by helping these clients plan around their unique needs.
Why Choose HSAs as a Market Niche?
Number of personal financial advisors in the U.S.1
Number of U.S. households that own mutual funds2
Number of HSA accounts2
Less than 10% of Americans use an HSA account, whereas almost half of households use mutual funds for investing. The opportunity to bring those two together is what makes an HSA so interesting.
The primary reason advisors aren’t recommending HSA solutions to their clients is they simply don’t understand the long-term opportunity of an HSA. Oh, hello Niche Market.
Let’s face it. Most people hate talking about insurance of any kind. However, most also agree they need various kinds (health, car, home, etc.). The rest of this blog post will focus on the reasons to choose an HSA and the mostly unknown benefits of using an HSA account.
Preparing for Future Health Care Costs
Americans confront the soaring costs of medical care and health insurance every time they visit a hospital or doctor’s office. Many people not only worry about how to pay the large expenses they incur today, but also how they will pay these costs when they are older and in retirement.
Health savings accounts (HSAs) were introduced in 2004 as a tool to help consumers save money to use exclusively for health care expenses, on a tax-preferred basis.
Since 2004, interest in HSAs has grown—in 2019, there were over 26 million individual HSA accounts who collectively held over $60 billion in their accounts.2
Bonus: Employers can make contributions on behalf of the employee.
Many workers can contribute to HSAs through pre-tax payroll contributions—and some employers make or match contributions on behalf of employees to encourage HSA participation. Employees can also make HSA deposits on their own, if they stay within the annual limits. Contributions are increasing in 2020 to $3,550 per year per person or $7,100 per year per family. In addition, those over 55 can use the catch-up provision to add another $1,000 per year.
|$6.9 Billion||21.4%||$64 Billion|
HSA carry-forward assets into 20192
Estimated share of HSA assets in investments by 20192
Estimated HSA assets by end of 20192
HSAs have an advantage over other types of flexible spending accounts. There is no “use it or lose it” requirement. Therefore, money within an account doesn’t have to be spent by the end of a calendar year. This is a sharp difference from the more familiar FSA plans that are much more restrictive.
Balances can roll over from year to year, so people who have few health care expenses are able to build up money in their HSA that can be used to fund future medical needs.
HSA Tip: Some advisors and clients that really understand this HSA benefit may decide to use other after-tax dollars to pay for medical bills so that this HSA tax-free growth can grow more substantially for future or major healthcare use!
However, most HSA assets are held in interest-bearing accounts that generate a paltry rate of return in the current low interest rate environment. These returns can’t keep up with the current pace of overall inflation (under 2% on an annual basis as of November 2019), much less the pace of health care cost inflation (which has averaged 3.6% annually over the past 20 years).3
How the HSA Becomes a Game-Changer
One of the most important benefits of an HSA is the ability to invest the balance.
You read that correctly… The regulations around HSAs do allow individuals to invest their balances to seek higher returns. By achieving market like returns HSA owners can help counter the skyrocketing costs of health care in the future. However, before you jump on the bandwagon – beware of risky investment choices.
It would be wise not to assume too much risk with these assets. Clients may need to tap into their HSA in the event of a medical emergency, and they wouldn’t want to play “catch up” from a major market downturn for longer-term needs.
Financial advisors can provide guidance on HSAs, and risk management may play a role in helping HSA owners balance their risks while growing long-term health care dollars. Of course, the advisor AUM may also grow accordingly making this a win-win.
Potential clients need to know about the following key points when talking about professional investment management of an HSA.
Put total costs in perspective—Many soon-to-be retirees may not realize just how much they may have to pay out-of-pocket for retirement health care costs. Fidelity Benefits Consulting estimated a price tag of $285,000 for the average 65-year-old couple during retirement.4
Know what costs are qualified—Many people who are approaching the Medicare eligibility age may not be aware of what the program will pay for and what is not covered. One big example is long-term care—Medicare does not pay for long-term care expenses, but assets in an HSA can be used for these costs.
Discuss HSA tax benefits—HSA account owners enjoy a “triple play” of tax savings:
- HSA contributions are tax deductible;
- Earnings on HSA balances are tax-free, and;
- HSA withdrawals are tax-free as well when used for medical expenses.
Attack the HSA Market
The topic of HSA’s has been coming up more and more in my daily talks with financial advisors, which we talked about in one of our recent podcasts. In fact, one of our long-time advisors recently brought this to our attention to help a small business owner.
Frankly, I think the small business owner is where each advisor should start. The successful small business owner out there has likely maxed out their 401k and other retirement plans. They are also likely paying out the ass for their employees’ health care.
Introduce the concept of an HSA to these owners! Even if it’s not something they do for their staff, it could make sense for their own personal situation.
|Triple Tax Advantage||It's Investable||It's Your Money|
|Your HSA contributions are tax-deductible, you can spend tax-free,2 and any growth is tax-free too.||Investing your unused HSA money can be a great way to take the sting out of retirement health care costs.||Unused HSA money rolls over every year. Keep your HSA if you move or change employers or insurance.|
Fidelity & TD Ameritrade Offer Investment Options with their HSA Account
Making a recommendation is difficult if you don’t know how to implement.
There are a ton of banks and custodians that handle HSA accounts. They will all be able to provide a debit card, track expenses and allow you to manage the overall experience.
The main difference comes down to if you are interested in investing the HSA assets. Most of the providers have subpar or nonexistent investment options.
We recommend that people choose a bank that has an option for carry-over HSA dollars to use an SDBA (Self-Directed Brokerage Account) allowing for true money management. The client can transfer money back and forth as needed for expenses.
Fidelity has blown the lid off the HSA market now because they are offering a one-stop shop for an HSA solution. Both the banking (save & spend) side of medical expenses and the investment side are all done right through the Fidelity HSA® platform. Simple.
If TD Ameritrade (TDA) is your primary custodian, don’t worry. Although TDA is not a full HSA provider like Fidelity, there are several banks that offer an SDBA as an option to the HSA and use TDA as the investment platform.
Here are a few banks that currently use the TD Ameritrade SDBA investment option.
|HSA Bank||Lively HSA||Sterling HSA|
|(800) 357-6246||(888) 576-4837||(800) 617-4729|
I speak with advisors every single day. What virtually every one of them want is a value-add. They need one new reason to keep current clients faithful and get referrals for more business!
Simply having the discussion is enough to garner more trust, but if they do begin using and investing the HSA it’s a real win-win-win. Yes, the HSA account balances may be small now, but they won’t be forever. And these clients need help to offset future medical costs.
Talking to current clients and prospects about the ability of using an HSA to grow and protect against rising healthcare costs into retirement can become a great niche for advisors.
Like any new topic, a little research is needed to gain confidence before talking to a client or prospect. I would recommend visiting the Fidelity HSA® platform to see what the client experience looks like.
Then, schedule a conversation with me and discuss how HSAs can become a niche opportunity to grow and protect your clients from rising long term health care costs.
Sources cited in this report:
- 1 – Bureau of Labor Statistics, Employment by detailed occupation, 2016. https://www.bls.gov/oes/current/oes132052.htm
- 2 – “2019 Midyear HSA Market Statistics and Trends Executive Summary”, Devenir Research, Aug. 2019. https://www.devenir.com/research/2019-midyear-devenir-hsa-research-report/
- 3 – Federal Reserve Bank of St. Louis. https://fredblog.stlouisfed.org/2017/07/healthy-inflation/
- 4 – “How to plan for rising health care costs”, Fidelity, Apr 2019. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.