Frank Talk - 1st Quarter Newsletter (2016)
Table of Contents
We begin the New Year with gratitude for the opportunity to serve so many individuals, families and businesses seeking advice tailored to their needs and situations. While you’ve undoubtedly heard us say in the past—and will most certainly hear again—our success at Planned Financial Services is a direct result of the trust you have placed in us to provide the unbiased, timely, and relevant advice you seek.
In 2015, we enjoyed the opportunity to further expand the services and resources we offer you, and already have several exciting initiatives under way for 2016. The following stand out among the many programs, events, and additions Planned Financial Services initiated during the past 12 months to further enhance your experience and deepen the value and expertise your dedicated team provides.
2015 Reflections & Highlights
- Hosted our Seventh Annual Cleveland Economic Summit at the Music Box Supper Club in Cleveland’s historic Flats district in May 2015. We look forward to hosting our Eighth Annual Economic Summit in Spring 2016. Watch for our “save the date” communication for the 2016 event in the coming weeks.
- Expanded our corporate retirement plan offering to serve a growing number of corporate clients and their employees seeking to retire with the money they need to live the life they desire in retirement. Chris Waters joined us in 2015, adding further depth to our experienced 401(k)Plus® team. Chris brings a strong background in business and financial services to his role as a Retirement Plan Advisor, helping to ensure plan sponsor objectives are addressed and plan participants receive the level of advice, education, communication, and personalized service that aim to lead to desired retirement outcomes.
- In April, we completed our Beachwood office renovations, providing our clients and team members with a more tech savvy and aesthetically pleasing environment that is both comfortable and conducive to meeting with clients and serving your wealth management needs. If you haven’t had a chance to visit the Beachwood office yet, give us a call and set up a time to stop by.
Awards & Recognition
Your award-winning Planned Financial Services team was again recognized in 2015 by a number of independent business and financial services industry organizations and associations, including:
- America’s top 401 Retirement Advisers: Frank was selected by The Financial Times (FT) for inclusion in its first ever listing of America’s top 401 Retirement Advisers.
- NEO Success Award: Planned Financial Services was named an NEO Success Award Winner for the seventh time. This Award is unique in its combined measurement of success in sales, growth and profitability, and represents the breadth and depth of business in Northeast Ohio. PFS was recognized for achievement amongst its peers, professionals and other award winners at a luncheon on March 2015 in Mayfield Heights.
- Five Star Wealth Manager: Frank Fantozzi, President and CEO of Planned Financial Services was recognized for the third year in a row as a Five Star Wealth Manager, a distinction awarded to less than 7% of wealth managers in the Cleveland metropolitan area. Frank was evaluated on 10 key factors, including client retention rates, client assets administered and favorable regulatory and complaint histories.
Behind the Scenes
Website development: We’ve been diligently working on not one, but two dynamic website platforms to enhance the PFS client experience for you and the friends, relatives, colleagues, and business associates you refer to your PFS team. The new Planned Financial Services site will retain its current site address, (www.PlannedFinancial.com), and update automatically upon launch. The site will provide individuals and families with an enhanced online experience, including a broad range of educational content, market research, and case studies delivered through different mediums, including video. A companion site, 401(k) Prosperity®, which focuses on bringing Simplicity to a Complex World®, will be rolled out simultaneously for our business and corporate clients.
The new sites will also be optimized for mobile access, making it easy for you to interact with us and access account information via your smartphone or tablet. Watch for updates and information about the site launches and any new content we add that may be of interest to you in the coming months. And don’t forget—you can always follow us via Facebook, Twitter, LinkedIn and YouTube.
Corporate retirement plan services: Another important behind-the-scenes initiative we’ve been working on to provide further value to our clients is the rebranding of our 401(k)Plus® system to 401(k) Prosperity®. We feel 401(k) Prosperity® better captures the broad range of services and approach Planned Financial Services takes to providing simplicity in a complex world through the development of highly customized and targeted defined contribution and defined benefit plan solutions for plan sponsors and their clients. We anticipate a formal rollout of the new name to our business and corporate clients in Spring 2016.
Business structure assessment: Planned Financial Services continues to explore business structures that can provide the best flexibility in meeting the changing and growing needs of our clients. The regulatory landscape, along with limitations on the part of broker-dealers, and the types of registered investment advisory services, has led us to commit time and resources in 2016 to finding the best business structure to support our clients. This is similar to the initiative we undertook in 2004, when we switched from WS Griffith Securities to LPL Financial as we outgrew the capabilities of WS Griffith.
While we do not expect our broker dealer relationship to change, how we provide registered advisory services can. As we assess the best possible structure to serve your growing needs, we continue to focus on potentially providing the flexibility we believe our clients require to be able to custody assets at other custodians in the future (outside of LPL Financial) if truly necessary. In addition, we want to retain our ability to provide broad choice in investment and asset classes, especially in the alternative investment area, to help our clients better manage risk and thus add value and consistency across their portfolios. Modifications to our business structure will also enable us to unify trading and registered investment advisory fees, creating parity and uniformity in fees and services across all client accounts. This will ensure that clients who joined us as a result of our union with Plax & Associates, as well as new clients who may join us as a result of any future acquisition, enjoy the same high level of service, access, and advice from our award-winning team. We will keep you posted on developments as we move forward.
LifeAct®: Frank has served on the Board of Directors for LifeAct, formerly Ohio’s Suicide Prevention Education Alliance (SPEA) for a number of years. In late 2015, Planned Financial Services funded a Brecksville Broadview Heights High School education program for 9th graders in conjunction with LifeAct: Recognizing Teen Depression & Preventing Suicide. The ongoing program will help young people recognize the warning signs in themselves and others, helping to prevent families from suffering the unspeakable loss of a child to suicide.
Financial Market Overview
As we indicated earlier this month, what a rude awakening the markets have brought to our New Year after a relatively flat year for returns in 2015. While some of our comments from the 2016 First Half Market Outlook discussed a rebound for earnings, we also outlined why we felt volatility would continue and even increase over what we saw in 2015. In fact, markets are starting 2016 off with the same growth concerns, spurred on by the faltering Chinese market start and the continued heightened volatility that made the second half of last year a challenging one for investors.
Calendar year 2015 was highlighted by essentially flat returns across stocks with the:
- S&P 500 advancing +1.4%
- Russell 3000 losing (-3.04%)
- Dow Jones losing (-2.36%)
- Barclays Aggregate Bond Index advancing +0.6%
- Cash returning +0.2%.
Notably, this was the first time in over 60 years that all these major investment categories were simultaneously unchanged — plus or minus 3% — over a full calendar year.
With the Federal Reserve (Fed) raising rates for the first time in nine years—which traditionally signals fiscal tightening by the Fed as we approach the back half of the market cycle—and along with the arrival of the presidential election campaign season, we continue to move another year closer to the end of the current economic expansion.
We clearly expect more volatility in 2016, but we didn’t expect it so soon in the year. Normally, the first few trading days of the year are buoyant as investors look optimistically ahead. Instead, 2016 has started off on a sour note, as a rise in geopolitical tensions stemming from North Korea’s possible nuclear test, discord between two of the most powerful Middle Eastern countries, and the ongoing fear of terror attacks at home and abroad have all weighed on investor sentiment. Continued concerns arising from the slowdown of the Chinese economy have brought about volatile movements in global currencies and have driven down the price of oil to levels even lower than in the depths of the Great Recession.
While some investor confidence has been rattled by the recent volatility, overall consumer and corporate optimism remain constructive. To date, there are only limited signs that the market’s global growth concerns have begun to negatively affect U.S. economic activity. The labor market continues to showcase strength, with an average of 212,000 jobs created per month over the last six months. In addition, layoff announcements remain near all-time lows and new claims for unemployment insurance continue to hover near the lowest level in 42 years. Importantly, the Institute for Supply Management (ISM) services reading for December 2015 came in near all-time highs and indicates that the services sector, which represents over 80% of the U.S. economy, remains strong and has not been hindered by the global weakness in energy prices or manufacturing.
Risks remain, however, as continued declines in energy prices have delayed vital capital investment by a major segment of the U.S. economy, corporate earnings remain muted, and manufacturing remains weighed down by tepid global demand and a stronger dollar. Although the turmoil in the oil markets remains a top concern, the lower prices should help speed up the painful supply adjustment process and may bring about greater stability as the year unfolds. Should the supply-demand imbalance in energy stabilize as we expect, this could be a potential catalyst for additional capital spending and accelerated profit growth as 2016 progresses.
Overseas, the Chinese economy continues to struggle as it embarks on what will be a lengthy transition from a manufacturing-based, export-led economy to a more consumer-led, domestic economy. Perhaps more importantly, the market seems to be losing confidence in the Chinese government’s ability to manage this transition as well as it managed its economy over the past 15 years. However, other emerging markets are still adding to global growth, and central bank actions in the Eurozone and Japan should help to boost growth in those countries. In addition, we continue to expect China’s growth to stabilize, as it has the resources to do more to stimulate its economy.
It is important to remember that investing is a marathon, not a sprint. It is about endurance. Volatility has always been a part of investing and always will be. In fact, over the last 15 years, every calendar year has seen at least one pullback of at least 6% and a median correction of 14%. So while volatility is normal and even expected, it is always nerve-wracking. These short-term market flare-ups are often quick and severe, but fueled by feelings of fear and concern over perceived risks that may not be actual threats.
We expect volatility to remain heightened for the remainder of 2016, which is common as the business cycle ages, and in turn, makes sticking to your long-term investment plans even more important to avoid locking in losses and missing out on opportunities. This current pullback, which is now approximately 5% year to date and 7% from the November 2015 highs, could continue over the short term as fear and concern trump much of the good news coming from the U.S. economy.
What remains key to weathering these short-term bouts of volatility is a commitment to a well-formulated plan and a long-term focus. Your team at Planned Financial Services will continue to publish timely “Market Noise” updates throughout the year, providing economic and financial market insights, and tips for weathering volatility and avoiding the temptation to adopt a herd mentality or make decisions based on emotions, both of which can easily derail your strategy along the path to your goals.
As we help families move forward with their 2016 financial planning, we continue to make your Return on Life® our top priority. We are making any necessary adjustments to client portfolios, using our state-of-the-art Riskalyze software to measure and manage risk, and providing clients with the education and information they need to retain a long-term perspective and focus on their individual goals. If you or someone you know needs our advice, we are only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with the guidance of PFS. We welcome and are grateful for the many introductions our clients continue to provide.
Health, Happiness, and Good Fortune,
Frank Fantozzi, President
CPA, MT, PFS, CDFA, AIF
Planned Financial Services
Registered Investment Advisor
Managing Finances Following the Death of a Spouse
When a husband or wife dies, the surviving spouse usually feels overwhelmed by the many difficult challenges that lie ahead. One of the first is addressing financial matters. Here’s what recently bereaved spouses need to do as soon as they’re able.
Pull everything together
Before you do anything else, gather financial records in one place. These include your spouse’s Social Security number, will and, if applicable, trust documents. You’ll also need to access beneficiary designations for retirement accounts, life insurance policies, real estate deeds, military records, and statements for investment, bank, credit card and other accounts.
Then determine whether you or another individual is the executor or personal representative of the will and the trustee of any trusts. If there’s no will or trust, you’ll need to petition the courts to be named as personal representative or executor. At this point, you may need to hire professionals to assist in the probate process or administration of any trusts and to help you prepare tax returns.
Also obtain certified copies of your spouse’s death certificate from your funeral director or local government. You’ll probably need to show this document to several organizations, so be sure to request multiple copies.
Look into life insurance
If you’re unsure about what life insurance policies your spouse may have owned, check bank statements for evidence of premium payments. Note, however, that premium payments may not have been required in recent years for some policies.
To claim life insurance benefits, you’ll need to provide a certified copy of the death certificate. Benefits typically pass to beneficiaries income-tax-free. But you may want to consult with your tax advisor to determine whether, from an estate planning perspective, you should consider disclaiming any benefits so that they’ll pass to the policy’s secondary beneficiary.
Claim employee benefits
If your spouse’s employer provided a pension you may be entitled to benefits, as long as you’re named as the beneficiary. Your spouse’s employer may also have provided group or individual life insurance and accidental death and dismemberment policies. If so, you’ll need to file a claim for these benefits to the extent applicable.
You also may be entitled to:
- Back pay or bonuses your spouse was due,
- The rights to company stock your spouse purchased through an employee stock purchase plan, and
- Stock options or restricted stock your spouse earned.
- Was your spouse receiving government benefits, such as Social Security, Medicare or veterans benefits? You’ll need to contact those agencies to update their records and, where applicable, get your benefits adjusted.
You’ll also need to update account registrations for assets held at banks and brokerage firms, and for titles for other property, by providing a certified copy of the death certificate. Accounts registered in your spouse’s name only may require additional paperwork to prove that you’re the rightful heir or are acting as the personal representative or executor of your spouse’s estate. This will require a court-certified copy of your spouse’s will. For assets that were held in a trust, only the trustee can direct (based on the trust’s terms) what happens to them.
For retirement accounts such as IRAs or 401(k) plans, the beneficiary designation form — not the will — determines who inherits the assets. IRS rules govern how these assets can pass from one person to another, so be careful. Any decisions you make are irrevocable and could trigger taxes and penalties.
How to avoid regrets
Making major financial decisions while you’re grieving can lead to mistakes and regrets. Ask a family member or friend to act as a sounding board and to help with the legwork. And be sure to consult professional advisors with any questions.
Opportunities abound for income-oriented investors
Bond investors have found income tough to come by in recent years. Even though interest rates rose in 2015, they remain historically depressed. But bonds aren’t the only option for those who rely on their investment portfolio for regular income. Consider the following alternatives.
Some companies distribute a portion of their available cash to shareholders via dividends as an extra enticement to invest. Dividend-paying companies usually are mature, established businesses with slower growth characteristics in relatively defensive market sectors. They often boost their dividends over time, providing investors with the potential for rising income in addition to capital appreciation from a rising share price.
Such characteristics may make dividend stocks attractive in an inflationary environment — unlike bonds, whose interest payments decline in real terms as the cost of living rises. Dividend stocks also provide a tax advantage: Qualified dividends are subject to long-term capital gains rates, as opposed to the higher ordinary-income rates that apply to taxable bond interest.
However, dividend-paying stocks do carry investment risk. If, for example, the company fails to meet performance expectations, its share price is likely to drop and shareholders can lose money. Also, dividends aren’t guaranteed. Companies that encounter financial difficulty may choose to reduce, suspend or eliminate their dividend payments.
Preferred stock is a hybrid security with both stock and bond characteristics. Preferreds are typically less volatile than stocks and, like bonds, they pay regular income, which, depending on the type of preferred stock, may be taxed at the “qualified” rate of no higher than 15%. But like stocks, they lack a fixed maturity date and aren’t as directly sensitive to interest rate shifts.
Income from preferred stock is senior to that of common stock dividends. This means that a financially troubled company must meet its obligations to preferred stockholders before those of common stockholders — but after those of all creditors and bondholders. Also, preferreds aren’t evenly issued across market sectors. Certain types of companies, such as financial institutions, issue preferred stock much more often than, say, software companies. So if you invest in preferreds, you’ll need to consider how such investments might affect your portfolio’s diversification — and, by extension, its risk profile.
Senior loans — also known as floating-rate bonds — are income securities with little to no interest-rate risk. These bonds’ interest-rate payments are regularly reset along with short-term rates. So when rates rise, senior loan income payments also rise. But note that payments are still considered interest for tax purposes and will be subject to tax at ordinary-income rates.
Senior loans are the first to be repaid if an issuer can’t meet its financial obligations. However, they’re generally issued by companies with low credit ratings. So while their interest-rate risk is relatively low, their credit risk can be high. In a weakening business environment, senior loans may experience price declines.
Real estate investment trusts
Real estate investment trusts (REITs)* own portfolios of commercial properties. In exchange for favorable tax treatment, they’re required to pass 90% of their taxable income directly to their shareholders. Accordingly, REITs can be a source of relatively high yields for investors.
Keep in mind, though, that REITs are equities. This means that, although they can realize capital appreciation, their yield generally declines as the market appreciates. On the other hand, REIT dividends aren’t “qualified,” so they’re taxed like bond interest at ordinary-income rates.
Many REITs focus on particular property niches, such as apartment buildings or shopping malls, and on certain geographic regions. This makes them vulnerable to downturns in those niches and regions. Even REITs that are diversified across the real estate sector are at risk of losing value when the general real estate market declines or interest rates rise.
It’s important for your income-oriented portfolio to keep pace with market and interest-rate shifts and maintain a risk level you’re comfortable with. Talk to your financial advisor about striking the right balance.
* This article’s discussion of real estate investment trusts (REITs) is limited to publicly traded REITs. Nontraded REITs carry additional risks not discussed here. Also, investing in real estate entails risks, including changes in: the economy, supply and demand, laws, tenant turnover, interest rates (including periods of high interest rates), availability of mortgage funds, operating expenses and cost of insurance. Some real estate investments offer limited liquidity options.
Making Meaningful IRA Contributions is Easier Than Ever
Over the years, the rules governing IRA contributions have been relaxed somewhat to encourage greater participation. In 2002, individuals could contribute a maximum of $2,000 a year to a traditional IRA, and strict income limits applied to those covered by another retirement plan. But for 2015 and 2016, you may be able to contribute up to $5,500 a year combined to a traditional and/or Roth IRA, and income limits are more generous.
So if you’d dismissed IRAs in the past, you may want to take a fresh look at these valuable tax-advantaged savings vehicles.
Contributions made to a traditional IRA may be deductible, and account funds grow tax-deferred. No tax is due until withdrawals are made — likely in retirement when you might be in a lower tax bracket.
If you’re age 50 or older you can make “catch-up” contributions. For 2015 and 2016, that’s $1,000 a year, for a total IRA contribution of $6,500. Spouses can each contribute $5,500 a year, for a total of $11,000 (or up to $13,000 with catch-up contributions) per couple.
Note that you must have earned income at least equal to what you contribute to your IRA. And if you’re age 70½ or older, you can’t contribute to a traditional IRA.
Limits on deductibility
Although more people are eligible to make deductible contributions to traditional IRAs than in the past, income limits still apply. For the 2015 tax year, if you’re single and participated in an employer-sponsored retirement plan (such as a 401(k) plan), your eligibility to deduct your traditional IRA contribution will begin to phase out (or gradually be reduced) if your adjusted gross income (AGI) exceeds $61,000. It will be eliminated if your AGI exceeds $71,000.
AGI phaseout amounts for married couples vary. If you and your spouse both participated in an employer-sponsored plan in 2015, your phaseout range for making deductible contributions is $98,000 to $118,000 joint AGI. This limit applies to both spouses. If only one of you was covered by an employer-sponsored retirement plan, only that spouse is subject to the $98,000 to $118,000 joint AGI phaseout range. For 2015, the noncovered spouse’s phaseout range is $183,000 to $193,000 joint AGI.
Even if you run up against income limits, you can still contribute to an IRA — your contributions just won’t be deductible. However, you still benefit from tax deferral because you won’t have to pay tax on your contribution’s earnings until you make IRA withdrawals in retirement.
Contributions to Roth IRAs aren’t deductible — regardless of your income level or participation in an employer-sponsored plan. But qualified withdrawals are tax-free, meaning that account earnings can avoid tax permanently.
Roth IRAs offer other benefits as well. Those 70½ and older can make Roth IRA contributions as long as they have earned income equal to those amounts. Also, Roth IRAs aren’t subject to the required minimum distribution (RMD) rules that apply to traditional IRAs (and most employer-sponsored plans). So if you don’t need the money during your retirement, you can let the account continue to grow tax-free for the benefit of your heirs. (Heirs other than spouses will be subject to RMD rules, however.)
Although Roth IRAs share annual contribution limits and deadlines with traditional IRAs, Roth income limits are higher. If you’re single, your phaseout range for eligibility to make Roth contributions for the 2015 tax year is $116,000 to $131,000 AGI. For married joint-filing couples, it’s $183,000 to $193,000 joint AGI.
As of this writing, the U.S. dollar is coming off sharp gains relative to its currency counterparts around the world. Such a situation — or its reverse, a falling dollar — is likely to have profound effects on the global economy and financial markets, not to mention on individual businesses, consumers and investors.
In other words, shifts in the value of any currency create financial winners and losers. Understanding why can give you insight into your portfolio’s past performance, as certain sectors are more likely to be exposed to foreign currencies. According to Zacks Investment Research, for example, information technology and energy companies, on average, derive more than half of their revenues from overseas, thus making them more vulnerable than many other industries to the effects of a strong dollar.
Utilities and telecommunications companies represent the other extreme, remaining mostly domestically focused.
Tax-free withdrawals and lack of RMDs can make converting a traditional IRA to a Roth IRA a good idea for some retirement savers. There’s no income limit on conversions. However, in the year of conversion, you’ll owe income tax on the amount converted.
Take another look
If income and other restrictions have led you to bypass IRAs in the past, it may be time to reconsider them. You might now be eligible to deduct traditional IRA contributions or make Roth IRA contributions. You have until April 18, 2016, to make 2015 tax year contributions. But the sooner you contribute, the sooner you put your money to work. Talk to your financial advisor to learn how an IRA might help you realize untapped tax benefits and what role it might play in your larger retirement savings strategy.
Sidebar: Watch out for new rollover limits
The IRS has clamped down on the number of tax-free IRA rollovers individuals can make in any one-year period. Effective for IRA withdrawals taken in 2015, you can execute only one traditional IRA rollover in a 365-day period, regardless of how many traditional IRAs you own.
This restriction doesn’t apply to trustee-to-trustee direct transfers between traditional IRAs or rollovers into IRAs from qualified retirement plans, such as 401(k)s. You can make as many of these tax-free transactions as you wish.