Increasing Your Return on Life.®

Frank Talk - 1st Quarter Newsletter (2014)

Published: 01/01/2014

Table of Contents


Written by: Frank Fantozzi

Happy New Year…indeed!  This year carries special significance and excitement for Planned Financial Services and our clients. In 2014, we celebrate our 20th anniversary as a successful financial planning and investment management firm.

Reflecting over the past two decades, we are grateful for the opportunity to serve so many individuals, families and businesses seeking advice tailored to their needs and situations. Our success is a direct result of the trust you have placed in us. We have enjoyed the opportunity to broadly expand the professional services and resources we offer you, and have continually challenged ourselves to enhance the best-in-class, personalized service provided to our clients.

This commitment has resulted not only in exponential growth in new client referrals and assets under management, but repeat industry and community recognition and awards including The Weatherhead 100, NEO Success, and COSE Ten Under 10.

FI-360 certified, PFS ranked as one of the nation’s 300 Most Influential Defined Contribution Plan Advisors by 401kWire (an award based on industry nominations and firm statistics), providing further evidence of our commitment to the corporate clients we serve every day.  
Yet nothing we have achieved as a firm comes close to the pride and gratitude that comes with knowing we have delivered on our promise to help each of our clients pursue and improve the Return on Life® they desire. That is what it is truly all about.

Prior to founding Planned Financial Services in 1994, I was successfully engaged as a CPA with one of the nation’s top accounting firms. While I found the work both challenging and fulfilling, I became increasingly disturbed by the fact that many of my clients were unable to experience the same level of objective and proactive advice from their investment providers that I was able to provide from a tax and accounting perspective. The result was a lack of coordination in their financial strategies that frequently resulted in poor investment or financial decisions that could easily have been avoided with comprehensive planning from a holistic perspective.

Our ability 20 years ago to bridge insightful financial advice with well-crafted investment portfolios allowed our clients to weather some of the toughest market and economic conditions and come out on top is a testament to our philosophy that successful financial management is never about investment returns alone—it is about how your financial investment decisions work to further the individual Return on Life® you seek. That was the premise for launching Planned Financial Services and what we continue to help clients achieve today—a full 20 years later.

20 Years and Growing  –  our commitment to you stands firm

I want to personally thank each of you who have contributed to our growth throughout the years. None of this would be possible if our clients did not trust our advice and value our services. We believe that the value of our firm is measured by the collective net worth of our clients—our family—but without this trust, there would be no family. Your personal introductions to new clients and from other professional advisors who also refer us, has built our firm. We value these relationships and are steadfast in our commitment to maintaining these long-term relationships and friendships.

Outlook 2014

The New Year brings new expectations for the economy and financial markets, including many reasons investors should consider returning to the basics of growing and preserving their portfolios and spending less time gauging the actions of policymakers. We believe the economy and markets are becoming more independent of policymakers for the following reasons:  

  • After two “clean” lifts to the debt ceiling since 2011, which ensured any risk of default on Treasury obligations was avoided, we are unlikely to see concessions in exchange for a third increase in 2014—making a high stakes fiscal battle unlikely.
  • The Fed is likely to begin to taper its bond-purchase program, known as quantitative easing (QE), early in 2014, signaling a commitment to reducing its presence in the markets and transitioning to a post-QE environment.
  • Europe is emerging from recession, which means less need for direct life support from the European Central Bank or painfully austere fiscal policy as deficit targets are eased.

We feel these circumstances may result in acceleration in growth which is likely to bolster investor confidence in the reliability and sustainability of the equity markets and investing environment as a whole. Specifically, we expect that:  

U.S. economic growth may accelerate to about 3% in 2014 after three years of steady, but sluggish, 2% growth.  Many of the factors that resulted in a drag on the markets in 2013 are fading, including U.S. tax increases and spending cuts, the European recession, and growth accelerating from additional hiring and capital spending by businesses. Over the past three years, weakness in government spending subtracted about 0.5% each year from gross domestic product (GDP) growth. Just adding that 0.5% back to GDP in 2014 would, by itself, make a material difference in achieving 3% growth in 2014.

Bond market total returns could likely be flat as yields rise with the 10-year Treasury yield ending the year at 3.25-3.75%.  High-yield bonds and bank loans are two sectors that have historically proven resilient and often produced gains during periods of rising interest rates. In 2013, both sectors were among the leaders of bond sector performance during a year of higher interest rates. Historically, longer-term bond yields have tended to track the change in GDP growth when unleashed from Federal Reserve actions. Our expectation for a 1% acceleration in U.S. GDP over the pace of 2013 suggests a similar move for the bond market.

Stock market total returns could likely be in the low double digits (10-15%). We anticipate earnings per share for S&P 500 companies to grow 5-10% and a rise in the price-to-earnings ratio (PE) of about half a point from 16 to 16.5. Increased confidence in improved growth should allow the ratio to slowly move toward the higher levels that have marked the end of every bull market since WWII. As 2014 gets underway, we expect the one-, three-, and five-year trailing annualized returns to all be in the double digits for the first time this business cycle. This may prompt many investors to reconsider the role of stocks in their portfolios, especially as interest rates rise and bond performance lags.

While our expectations for the markets are optimistic overall, we remain cautiously so. While we anticipate witnessing new all-time highs in the stock market and higher yields in the bond market in 2014 than we have seen in years, the primary risk to our outlook is that better growth in the economy and profits does not develop. This is among many reasons why is it so important to have a strategy in place that is focused on your individual goals and desired Return on Life®, that is not dependent on chasing short-term market gains, but protecting your portfolio from market shifts in an effort to capture gains while mitigating downside risk. 

As 2014 begins, I renew our commitment to all our clients and professional partners: We want to continue as your trusted advisor for qualified financial, investment, insurance, and benefits advice. We will continue to provide ideas to help you address personal, financial, and social goals through our individual meetings, letters, and electronic communications.

We thank you for your business and your trust in our team as we look forward to the next 20 years helping you pursue the Return on Life® you desire. 

Frank Fantozzi, President

Discussing Finances with Your Spouse

Written by: Sarah Horrigan

Communicate early and often to minimize disagreements

When two spouses don’t see eye to eye on money, it can trigger more than occasional unpleasant conversations. According to a Utah State University study, married couples who reported disagreeing about financial matters once per week were significantly more likely to divorce than those who reported financial-related disagreements less often.  

The secret to sidestepping financial conflict isn’t any different from managing other sources of tension that might arise in a marriage. It involves frequent, open and honest conversations, while maintaining a shared commitment to a solution.

Action steps

Communication strategies can bridge potential divides before they become chasms, and can strengthen both your relationship and your finances. They include the following:
Discuss finances early on. The best time for difficult conversations about money is before you commit to major life decisions with financial implications. Especially if you’re relatively early into your marriage and have never shared finances before, you may not be fully aware of the potential sources of money-related conflict that can await you. However long you’ve been together, there’s no time like the present to discuss your near- to long-term financial goals.  

Manage spending.  Different spending and savings styles can be a big source of conflict among spouses. This is especially true if one makes big purchases without the other’s assent. To maximize each person’s independence while minimizing the potential for serious disagreement about his or her choices, consider implementing an automatic spending threshold. For example, anytime you want to spend $500 or more, talk it over with your partner first. The amount isn’t the important part — it’s the principle that you’re both in this together.  

Share and share alike. When it comes to your financial accounts, operate on a full-disclosure policy. You should both understand what you own and what you owe, how much you make, and how much you’ve saved. In addition, both of you should have equal access to bank, investment, mortgage and loan account statements.  

Think about education. What kind of education to pursue for your children, and how much to spend, are big financial decisions. But they can also be emotional issues, especially if you and your partner have fundamentally different views shaped by your own experiences. For example: Do you favor public or private elementary school? An in-state public college or an expensive private or out-of-state university? Will you pick up the full cost of college and/or graduate school, or should this be your child’s responsibility, at least in part? Rather than assume you and your spouse will be in agreement, discuss these issues well before it’s time to begin paying tuition.

Consider retirement scenarios. Successfully making it to retirement involves a series of important financial decisions. Will you and your spouse retire at the same time? How do you want your retirement to look? Do you both plan to continue working in some capacity? These are all lifestyle questions with big financial assumptions behind them. If you dream of leaving your job early to travel the world, while your spouse wants to earn more wealth to assure a comfortable old age or to give to future generations of loved ones, you’ll need to hammer out a compromise early enough to shape your retirement plan accordingly.

Take the numbers at face value. If you’re considering a major purchase, or wondering whether you need to save more to achieve your shared retirement goals, you may be able to sidestep emotional discussions by doing some simple math. Often it takes the cold, hard logic of a spreadsheet before you realize whether what you want is possible given your financial situation, or whether you’ll need to save more to make it so.

Go on auto-pilot. Once you and your spouse agree about how often to save and invest, move that decision from theory to practice by automating as many of your financial decisions as possible. For example, if you both agree to save $2,000 per month, set up an automatic investment plan with your financial institution to ensure this agreement actually takes place.

Talk. Having just the occasional conversation about your finances may not be enough. Your financial situation is constantly evolving, so regular discussions — perhaps even prescheduled ones you put on the calendar — can help you both stay on the same page. Another worthwhile option is for you and your partner to attend regular meetings with your financial advisor, so that you both always know where you stand.  

Make the commitment

Money conflicts between spouses don’t go away. If they’re problems now, they’ll likely grow bigger over time until you’re ready to address them together, openly and honestly. But the good news is that, when you do, you’re setting the stage for a healthier financial plan and a healthier marriage.

Preferred Stock - Hybrid Securities Behave Like Bonds, Trade Like Equities

Written by: Jeremy Bok

When investors talk about holding shares in a company, they’re usually referring to owning common stocks. But there’s also a second, less widely understood type of stock that straddles both the equity and bond worlds: preferred stocks.

For equity investors motivated primarily by consistent, relatively high income payments, preferred stocks may be worth a look — as long as you’re also mindful of their unique qualities and risks.

Regular income stream

In some respects, preferred stocks resemble their more widely known cousins, common stocks. Preferreds, for example, can be freely traded on stock exchanges, and they also offer the potential for capital appreciation (though typically less than that of common stocks).

In other ways, however, the two equity investment types behave differently, starting with their dividends. Common stock dividends are paid at the discretion of a company’s management team and tend to be more modest than preferred stock dividends. In contrast, preferred stock dividends will continue to be paid regardless, so long as the issuer doesn’t encounter serious financial trouble, decide to retire or call away the shares.

Another important difference is that preferred shareholders have a higher claim on a company’s assets. In other words, if an issuer suspends its income payments, preferred dividends will be repaid before those due to common shareholders (although interest payments due to bond owners receive the highest priority).  

In fact, preferreds have much in common with bonds, especially in their response to changing interest rates. Both types of securities can be expected to see their prices fall when interest rates rise, as other income-generating vehicles paying prevailing rates start to look more attractive to investors.

Income opportunities, but be cautious

Before you consider investing in preferred stocks, be mindful of their risks. For example, if a financially strapped company decides to suspend its dividend, the action would affect the price of its preferred stock. Thus, before investing, thoroughly evaluate the issuer’s ability to continue making its dividend payments.

Changing interest rate expectations pose another risk. If economic conditions improve, for example, and investors begin to anticipate higher future interest rates, preferred stocks typically experience price declines. (The reverse is true as well — if investors think rates are on their way down, preferred stock prices could rise.)  

If you and your advisor are anticipating higher rates, you may choose to delay your investment in preferreds until market conditions appear more favorable. Beware also that many preferred stocks have a call feature, meaning that the company can redeem your shares on a certain date, and at a price that may be lower or higher than the current market price.

Also bear in mind that the preferred stock market tends to be dominated by only a few sectors — primarily financial institutions, as well as a smaller percentage of utilities and telecommunications companies — so you could unwittingly find yourself overexposed to certain areas of the economy. Accordingly, if you own preferreds, consider owning them as a relatively small component of a broadly diversified portfolio.

Ways to invest

Investors have multiple flavors of preferred stock to choose from. Two common types include:

  • Cumulative preferred shares, which entitle investors a right to accrued dividends if the income payments are temporarily suspended, or  Convertible preferred shares, which provide investors with the option to convert their holdings into common stock at a given price.
  • Even though you can buy and sell individual preferred stocks, many investors gain exposure to this asset class through exchange-traded funds (ETFs) or mutual funds, which are professionally managed and generally offer greater diversification opportunities.

Preferred stocks in your portfolio?

Preferred stocks present an investment opportunity as part of a diversified portfolio. Your financial advisor can help you determine whether preferred stocks belong in your portfolio and, if so, how best to invest.  

Sidebar: Varying tax treatment of dividends

In many cases, preferred stock dividends are taxed at the maximum dividend tax rate of up to 20% plus the 3.8% Medicare tax on net investment income. However, not all such dividends qualify for this favorable rate. Bank-issued “trust-preferred stock,” for example, pays dividends taxed at your ordinary income tax rate, which can be as high as 39.6% plus the aforementioned Medicare tax. As with most tax issues, the rules can be complicated, so be sure to get qualified advice about your own situation.

Revise Your Estate Plan to Cover Health Care Directions?

Written by: Frank Fantozzi

What is a person to do if he or she is terminally ill or permanently unconscious, and can’t communicate? Who will make medical decisions on his or her behalf? This is why it’s important to put one’s wishes in writing before a situation like this arises. Generally, that means executing two documents: 1) a living will and 2) a health care power of attorney.

When Jay’s motorcycle accident left him unconscious and on life support, his family had to make the difficult decision of keeping the life-sustaining machines on or turning them off and allowing Jay to die. Jay’s wife thought he’d prefer the latter, while Jay’s parents wanted to hold out and see if he’d wake up.

This unfortunate family debate didn’t have to take place. It could have been avoided if —before the accident — Jay had included his wishes in his estate plan using a living will and a health care power of attorney (HCPA).

Defining the documents

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: 1) a living will and 2) a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide health care providers in the event you can’t communicate and are terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.  

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.  

Working in tandem 

It’s a good idea to have both a living will and an HCPA or, if allowed by state law, a single document that combines the two. A living will typically details the procedures you want and don’t want under specified circumstances. But no matter how carefully you plan, a document you prepare now can’t account for every possible contingency down the road.  

That’s where an HCPA comes in. Although an HCPA can include specific instructions, it can also be used to provide general guidelines or principles and give your representative the discretion to deal with complex medical decisions and unanticipated circumstances (such as new treatment options).

This approach offers greater flexibility, but it also makes it critically important to appoint the right representative. Choose someone whom you trust unconditionally, who is in good health, and who is both willing and able to make decisions about your health care. And be sure to name at least one backup in the event your first choice is unavailable.

Revising your estate plan

Before an illness or an accident, consult with your advisor to revise your estate plan to include a living will and HCPA. Without these documents, your loved ones may have to make medical decisions on your behalf without any guidance. Your tax professional can explain the legal and tax consequences of these particular strategies.

Sidebar: Make your plan accessible

No matter how carefully you plan, your living will and health care power of attorney (HCPA) are effective only if your documents are readily accessible and health care providers honor them. Store your original documents in a safe place that’s always accessible and be sure your loved ones know where they are. Also, keep in mind that health care providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically.

Does Your Child Receive Investment Income?

Walt Moore

If so, follow IRS reporting rules

If your child receives investment income — such as interest, dividends, capital gains and other unearned income (for example, from a trust) — he or she must report it to the IRS by filing an income tax return. Whether your child is required to file his or her own tax return, or you, as the parent or guardian, can file on his or her behalf, depends on IRS rules. And, depending on the age of your child, the income may be subject to the “kiddie tax.”  

The kiddie tax applies to children under age 19 as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income). It works by taxing a child’s unearned income beyond certain limits at his or her parents’ marginal rate. For 2014, a child’s first $1,000 of investment income is tax-free, the next $1,000 is taxed at the child’s rate and any excess over $2,000 is taxed at the parents’ marginal rate. The tax doesn’t apply to children who are married and file jointly or to children who aren’t dependents (that is, whose earned income provides more than half of their support).

You may elect to report your child’s investment income on your tax return if his or her total interest and dividend income is less than $10,000 and the child is subject to the kiddie tax, has no other income of any kind and has not made any estimated tax payments. In this case, you must fill out Form 8814, “Parents’ Election To Report Child’s Interest and Dividends,” and attach it to your tax return. If this election isn’t made or your child’s investment income is $10,000 or more, he or she must file an income tax return and include Form 8615, “Tax for Certain Children Who Have Unearned Income,” as part of the return.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All indexes mentioned are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. High yield are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. Bank loans investing involve risk including credit, interest rate, market, default and liquidity risk The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. All examples are hypothetical and not intended to predict or project the performance of any specific investment. Actual results will vary. to the special risks of the underlying mutual funds. Target funds may involve fees related to both the target fund and the underlying funds. Investments in equities have been volatile historically. Investments in fixed income securities fluctuate in value in response to changes in interest rates. A portion of this material was prepared by LPL Financial and PDI Global. PDI Global is a separate entity from LPL Financial and Planned Financial Services. Securities offered through LPL Financial, Member FINRA/SIPC.

Want help? Let's talk.