Increasing Your Return on Life.®

Frank Talk - 3rd Quarter Newsletter (2015)

Published: 07/01/2015

Table of Contents

Editorial

Written by: Frank Fantozzi

Happy Summer!  We were extremely pleased that so many of you were able to join us in May at our 7th Annual Cleveland Economic Summit. This year’s event was held at the Music Box Supper Club overlooking Cleveland’s resurgent downtown waterfront. More than 120 business leaders, corporate executives, clients and other guests gathered to hear expert commentary on the local economy from myself, the national economy from 1David F. Lafferty, Senior Vice President and Chief Market Strategist, Natixis Global Asset Management, and the latest life-business performance advice from noted sports and business expert Dr. Kevin Elko.

Mr. Lafferty presented his current financial views on market and economic conditions and his financial market outlook for the remainder of the year. Mr. Lafferty said he believes the stock market still provides an attractive opportunity for investors overall, particularly in relation to bonds, which he indicated were relatively expensive right now. He did point out that tax-free general obligation municipal bonds were currently priced attractively compared with U.S. Treasury securities. Mr. Lafferty also noted that interest rates were being held in check, despite any actions by the U.S. central bank, due to heavy debt borrowing overseas.

 Dr. Elko delivered an engaging and inspiring talk on the role of attitude in overcoming adversity and how to take greater control of life by not allowing others to control what you do and think. He talked about the value of continual effort and never giving up on one’s goals and dreams. Dr. Elko  emphasized the importance of taking ownership and personal responsibility for one’s words and actions, and how letting go of the need to be right all of the time can open doors to living the life you desire while enhancing both personal and business relationships and performance.

PFS Named Top U.S. Retirement Adviser

In early June, I was both pleased and proud to learn that I had been selected by The Financial Times (FT) for inclusion in its first ever listing of America’s top 401 Retirement Advisers.

To qualify for the FT list, advisers had to have 20% or more of their total firm assets in defined contribution plans. FT 401 advisers were selected from a nationwide group of advisers specializing in serving the $3 trillion market for defined contribution retirement plans.

The Financial Times notes that FT 401 advisers are in the vanguard of specialization; the average adviser on the list has 71% of his, or her, total practice’s assets under management concentrated in defined contribution plans. Qualified advisers were then graded based on seven broad factors including plan assets under management, growth in plans and assets, degree of specialization in the business, experience, participation in plans advised, industry certifications and compliance record.

It is truly an honor to be among a handful of colleagues selected from Ohio, with only three other advisers from Cleveland included on the list—especially at a time when the defined contribution retirement business is facing dramatic change.  We have a great team that makes my role on our team easier. As our retirement plan clients are aware, the Supreme Court recently affirmed that employers providing retirement plans must be more vigilant in monitoring them, which means they will rely more heavily on plan advisers and superior products like our 401(k) Prosperity. The Department of Labor has also proposed new rules that put plan advisers and compensation under greater scrutiny. We are honored that the FT has recognized us for our leadership in this important field.

Today, more than ever, individual as well as retirement plan clients need a knowledgeable, trusted adviser with years of experience helping them invest for retirement. While the economy has delivered six consecutive calendar years of positive returns for stocks since the end of the 2008–2009 Great Recession, as measured by the S&P 500 Index, constructing a strategy for the remainder of the economic expansion will require a tricky assembly. Divergent monetary policies reveal an uneven global recovery that has triggered an uptick in stock market volatility as we note in our mid-year outlook.

PFS 2015 Mid-Year Outlook

Economic Expansion “Under Construction”

The U.S. economy hit an unexpected soft patch to start the year due to a severe winter freeze, the West Coast port strikes, ongoing effects of lower oil prices, and the surging U.S. dollar. Returning to a more normalized 3% growth level will be crucial to build further upon the market’s first half gains.

After successfully delivering the U.S. economy out of the recessionary “warehouse,” how does the Federal Reserve (Fed) assemble an exit strategy from its six-year policy of zero interest rates? With unprecedented levels of accommodative monetary policy rendering any traditional instruction manual pointless, the Fed will have to use its entire toolbox to construct a delicate increase in interest rates without disrupting the fragile economic growth and the wavering confidence of businesses, consumers, and investors.

Corporate earnings growth continues to search for that spark to ignite equity advances. In the U.S., lackluster profits aligned with weak first quarter 2015 economic growth to produce the lowest level of year-over-year corporate earnings growth in 11 quarters. Overseas markets are looking for a power boost from the very accommodative monetary policies of global central banks across Europe and Asia, in an attempt to spur sustainable growth, improve earnings, and avoid deflationary forces.

Although there are many packages still in transit as we approach the midpoint of 2015, the biggest challenge for the market is putting the necessary pieces together to construct the backdrop for solid global economic growth, stable prices and currencies, and expanding corporate profits. The task is complicated by the Fed’s expected first interest rate increase in nine years later this year.

We continue to expect that the U.S. economy will expand at a rate of 3% or slightly higher over the remainder of 2015, once economic conditions recover from yet another harsh winter—and other transitory factors—that held back growth in the early part of 2015. This forecast matches the average growth rate over the past 50 years, and is based on contributions from consumer spending, business capital spending, and housing, which are poised to advance at historically average or better growth rates in 2015. Net exports and the government sector should trail behind.

Overseas, ongoing quantitative easing (QE) by the European Central Bank (ECB) will help to anchor the nascent economic recovery in the Eurozone, while easing already put in place from the Bank of Japan (BOJ) should secure acceleration in Japan’s economy in the second half of the year. In China, growth has slowed from the unsustainable 10–12% pace seen in the first decade of the 2000s to around 7% this year, but we continue to expect Chinese policymakers to use all the tools in their toolbox (monetary, fiscal, and regulatory) to hit the 7% growth target.

In anticipation of ongoing volatility in the financial markets, we continue to make adjustments to our portfolio strategies and work closely with clients to help ensure risk is managed in line with client goals and objectives. As always, we are available to address your questions or concerns about the markets and economy, and strategies to help minimize risk exposure.

In closing, please remember that we are always honored to also help your friends and business associates pursue their Return on Life® and we welcome and are sincerely grateful for the many referrals our clients and professional partners continue to provide.   

Continued health, happiness and prosperity,    


Frank Fantozzi, President
CPA, MT, PFS, CDFA, AIF
Planned Financial Services
Registered Investment Advisor


1David Lafferty, Natixis Global Asset Management, and Dr. Kevin Elko are not affiliated with LPL Financial.


Four Mid-Year Planning Tips to Lower Your Tax Bill

Written by: Sarah Horrigan

Probably the last thing on your mind in the middle of summer is your 2015 tax bill. However, now is an opportune time to take these four steps to possibly lower your tax liability next spring:

  1. Examine your tax bracket. For 2015, the top income tax rate is 39.6% for individuals with taxable income over $413,200 ($464,850 if you’re filing jointly with your spouse). If you think your 2015 income will reach this threshold and may not again next year, consider reducing your taxable income by deferring income or accelerating deductible expenses.
  2. Account for the 3.8% net investment income tax (NIIT). This tax is applicable if your modified adjusted gross income (MAGI) is more than $200,000 ($250,000 filing jointly). NIIT applies to your net investment income for the year or the excess of your MAGI over the threshold, whichever is less. You can lower your tax liability by reducing your MAGI, reducing net investment income or both.
  3. Analyze your investment income. The capital gains rate is 20% for taxpayers in the 39.6% tax bracket this year. If you have (or are expecting to have) sizable taxable gains, you may want to sell some depreciated investments to generate losses that you can use to offset your gains.
  4. Check your withholding and estimated tax payments. Keep tabs on required quarterly estimated tax payments to avoid underpayment penalties. Be aware that making catch-up estimated tax payments later in the year generally won’t help you escape underpayment penalties, unless the bulk of your income came late in the year. However, you can make up the difference and avoid — or at least reduce — penalties by increasing income tax withholding between now and December 31. Withholding can come from your salary, IRAs or Social Security. It will be treated as if it had been paid ratably during the year.

© 2015


Bring Your Estate Plan Into the 21st Century

Written by: Elisabeth Plax

You know your estate plan accounts for your physical assets, such as real estate, art and collectibles, and vehicles. But does it cover “digital” assets such as e-mail and online bank accounts? If you don’t include digital assets in your estate plan, your estate’s executor and your family members may have difficulty accessing them without going to court.

Defining digital assets

Digital assets include e-mail accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, and accounts with social networks like Facebook, LinkedIn and Twitter.

For a business, digital assets might include websites, domain names, client and other databases, electronic invoices, e-mail correspondence, and a variety of important records and documents that are stored electronically on the company’s servers or on a Web-based storage site.

Assessing negative outcomes

Traditionally, when a loved one dies, family members go through his or her home to look for personal and business documents, including tax returns, bank and brokerage account statements, stock certificates, contracts, insurance policies, and loan agreements. They may also collect items such as photo albums, safe deposit box keys and correspondence.

Today, however, many of these items don’t exist in “hard copy” form. Unless your estate plan addresses your digital assets, how will your family know where to find or access them?

Suppose, for example, that you opened a brokerage account online and elected to receive all of your statements electronically. Typically, the institution sends you an e-mail — which you may or may not save — alerting you that the current statement is available. You log on to the institution’s website and view your statement, which you may not download to your computer. If something were to happen to you, would your family or executor know that this account exists?

Perhaps you save all of your statements and correspondence related to the account on your computer.

But would your representatives know where to find them? And if your computer is password protected, how would they get in?

Even if your family knows about a digital asset, they’ll also need the username and password to access it. If they don’t have that information, they’ll need a court order to access the asset. This can be a time-consuming process — and delays may cause irreparable damage, particularly when a business is involved. If your representatives lack access to your business e-mail account, for example, important requests from customers might be ignored, resulting in lost business.

Implement planning solutions

The first step is to conduct an inventory of all your digital assets, including any computers, servers, handheld devices, websites or other places where these assets are stored. Next, talk with your estate planning advisor about strategies for ensuring that your representatives have immediate access to these assets in the event something happens to you.

Although you might want to provide in your will for the disposition of certain digital assets, a will isn’t the place to list passwords or other confidential information. For one thing, a will is a public document. For another, amending your will each time you change a password would be expensive and time consuming.

One solution is writing an informal letter to your executor or personal representative that lists important accounts, website addresses, usernames and passwords. The letter can be stored in a safe deposit box, with a trusted advisor or in some other secure place. However, the problem with this approach is that you’ll need to update the list each time you open or close an account or change your password.

A better solution is to establish a master password that gives your representative access to a list of passwords for all your important accounts, either on your computer or through a Web-based “password vault.”

Using online tools

Another option is to use an online service designed for digital asset estate planning. Several companies now offer tools for passing on digital assets. Popular services include Entrustet, AssetLock, VitalLock and Deathswitch.

Each service establishes procedures for releasing passwords and other information about digital assets to a designated beneficiary in the event you die or become incapacitated. Some require a death certificate or other confirmation, while others send you periodic e-mails and release information to your designated representative if you fail to respond to the e-mails.

Addressing ownership

The strategies outlined here help your representatives identify and gain access to digital assets after you’re gone. But it’s also important for your estate plan to deal with ownership issues involving digital assets.

This can be done in your will. Or you can set up a trust that provides the trustee with the authority to manage digital assets and transfer them to your beneficiaries according to your wishes.

Rolling with the changes

Your estate plan shouldn’t be a static document. Review and revise it regularly to address major life changes and, in the case of digital assets, technological advances. Your estate planning advisor can help you update your plan.

© 2015


How Risky is Your Portfolio?

Written by: Frank Fantozzi

Using metrics to quantify it

How has your portfolio performed thus far this year? It’s a simple enough question that’s actually less straightforward than it might seem. That’s because a portfolio’s return over the short term provides little insight into whether the result was achieved through good decision making — or despite it.

In fact, to fully understand your results, you need to consider your investments’ performance on a risk-adjusted basis. To that end, various statistical measures make it easier to see how much risk a manager has assumed to generate a certain level of return.

Risk metrics

The following are common risk metrics that help investors understand how their portfolio is positioned:

Beta. Beta measures how sensitive an investment is compared with the overall market (usually represented by the S&P 500 index). A fund or portfolio with a beta of 1.0, for example, would have the same level of volatility as the market as a whole. Investments with a beta of less than 1.0 would be less volatile than the market, while investments with a beta of greater than 1.0 would have displayed increased volatility.

If most of your investments have a beta higher than 1.0, you can expect more volatility in your asset values. That may be appropriate if you’re investing for long-term goals and have a high risk tolerance, but less so if you’re nearing retirement or have little appetite for market fluctuations.

Alpha. Alpha measures how an investment or an overall portfolio performed relative to a benchmark. A portfolio with an alpha of 2.0 would have outperformed its benchmark by two percentage points, while an alpha of -2.0 would have underperformed to the same degree.

This metric reveals how the manager did vs. how well the manager was expected to do. In other words, alpha measures the amount of value a manager provides.

Sharpe ratio. The Sharpe ratio — named for its creator, Nobel laureate William Sharpe — provides a straightforward way to make apples-to-apples comparisons of investments’ risk-adjusted performance. The math is complicated, but it’s enough here to note that the higher the Sharpe ratio, the better.

For example, consider two funds, each returning 25% total over a period of three years. If the first fund’s Sharpe ratio is 1.0 and the second fund’s Sharpe ratio is 0.7, you’ll know that the first investment was able to achieve the same performance while taking on less risk — making it more attractive.

R-squared. This metric indicates how closely an investment correlates with its benchmark (typically the S&P 500 for equities and the Treasury Bill for bonds). It’s measured on a 100-point scale, with 100 indicating an investment perfectly in sync with the market, and 1 indicating virtually no relationship.

This metric can help you determine how diversified your portfolio is. It also can help you understand the effectiveness of beta when applied to your investments. If, for example, your portfolio has a low R-squared, beta probably won’t provide you with as useful risk information.

Looking ahead

These statistical measures of risk and reward are useful tools for portfolio analysis. But keep in mind that they’re backward looking and don’t necessarily tell you anything about how your investments will perform in the future, or whether your portfolio managers will continue following their existing approach. However, they can help you evaluate managers’ past decisions, and choose among various investment options.

All things equal, investors want to capture the highest possible returns with the least possible risk. Your advisor can help you interpret risk metrics and make intelligent choices for your portfolio.

© 2015

 


When Selling Your Business, Have a Retirement Backup Plan

Written by: Jeremy Bok

The proceeds that come from selling a business can be an important part of your retirement plan. But if you’re counting on the sale to fund most or all of your future expenses, tread carefully. Executing a sale takes preparation, good timing and, often, the help of knowledgeable advisors.

What’s your exit strategy?

Selling a business on short notice reduces your options and threatens your ability to achieve your retirement goals. That’s because buyers operate on their schedule, not yours. Just because you’re eager to sell doesn’t mean buyers are ready to buy. Nor does it guarantee they’ll meet the price you need to fund your intended retirement lifestyle.

It’s especially important to plan ahead if you expect to use the business sale as a main source of retirement funds. Your ability to achieve your goals can be hampered if you’re overly optimistic about the sale price.

By developing an exit plan years in advance of an actual sale, there’s a better chance you’ll achieve your retirement goals. Having a plan gives you time to either boost the eventual sale price of your business (see the sidebar “Building your company’s value”), develop alternative strategies for funding your retirement goals or downscale your future plans.

Be realistic

Setting too high a price is a common mistake for business sellers. Just as you need a realistic view of your home’s price before putting it on the market, you need to determine what your company will be worth to a buyer.

An appraisal from a valuation expert who specializes in small- and middle-market businesses can give you an objective view of what your company might fetch in a sale. However, it’s important not to get too attached to an appraisal number. The merger and acquisition market is constantly in flux, and many factors affect the kinds of offers buyers will make.

Strong management adds value

It can be difficult to let go, especially when you’ve built your business from the ground up. One irony of selling a business, however, is that the more it depends on its owner, the lower its sale price. That’s because potential buyers project your company’s performance after you’re no longer around to guide it. Their financial risk is higher if your company has no history of success without your involvement. Consequently, buyers may reduce their asking price, or insist that you stick around longer during the transition — both of which could interfere with your retirement plans.

In contrast, by building a company to last — one with a strong management team that can sustain the loss of an important member — you create more value that may ultimately result in a higher sale price. In the years leading up to your sale, then, look for ways to make your business bigger than just you. By developing and nurturing your management team, you can turn your company into a more valuable asset.

What’s your backup plan?

It’s perfectly reasonable to expect to fund your retirement with the proceeds of your business sale. But what will you do if the results fail to meet your expectations?

No matter how thorough your preparations, you may not get the price you need, when you need it. Market conditions change, and a buyer that’s interested today may not be interested tomorrow. Accordingly, it’s smart to have a Plan B — an alternate path to your retirement goals in case you don’t receive enough money to fund Plan A.

Your backup strategy should involve regular saving and investing well before your planned retirement date. Your advisor can be instrumental in helping you prepare for the sale of your business while simultaneously giving yourself the maximum opportunity to reach your goals independently of how your first option proceeds.

Sidebar: Building your company’s value

If you haven’t found a buyer willing to pay what you believe is a fair price for your business, consider taking steps to increase its value. To make your company a more attractive acquisition target, consider paying down debt, spinning off noncore divisions, or boosting earnings before interest, taxes, depreciation or amortization (EBITDA).

Too much dependence on a key person, particularly an owner, can hurt a company’s chances of an advantageous sale. So empowering your management team to take on more responsibility will demonstrate that your business is built to thrive in its next chapter — with or without you. Finally, find a knowledgeable merger and acquisition advisor who can recommend value-enhancing strategies and help you position your company in the market to its best advantage.

© 2015

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