Increasing Your Return on Life.®

Frank Talk - 1st Quarter Newsletter (2015)

Published: 01/01/2015

Table of Contents


Written by: Frank Fantozzi

Happy New Year!

On behalf of your entire team at PFS, I hope you and your family had an opportunity to reconnect with family and friends over the holidays as well as time to reflect on the past year and the opportunities that lie ahead.  

2014 Reflections

The past 12 months marked a number of milestones for our clients and team at Planned Financial Services (PFS). In 2014, we:   

  • Celebrated our 20th Anniversary as a successful wealth management firm and ended the year as an even stronger team, providing enhanced capabilities as a result of welcoming the Plax & Associates Financial Services team to the PFS family in October 2014. 
  • Hosted our Sixth Annual Cleveland Economic Summit at Cleveland’s Windows on The River in June and look forward to hosting our Seventh Annual Economic Summit in spring 2015. Watch for our “save the date” communication for the 2015 event early in the coming weeks.
  • Enjoyed an evening of fun and entertainment with our clients and friends at the English Oak Room at Tower City Center when we hosted our 20th Anniversary gala in September. We were grateful for this opportunity to spend time with and thank our clients and centers of influence who we credit with our growth and success over the past two decades.
  • Introduced our (K) PLUS CardTM, a wallet-sized, plastic card developed by PFS exclusively for 401(K) PLUSSM clients and their employees. It provides employers with an innovative way to keep plan-specific information in front of employees and retirement plan participants.
  • Continued to be sought after by numerous nationally syndicated news outlets for our financial market insight, including CNN, The Wall Street Journal, The New York Times, and ABA Trusts & Investments.
  • Ushered in our enhanced trading platform, further streamlining our money management capabilities and making it easier to quickly direct investment changes for our clients. The platform also enhances our ability to tactically manage client investments through Riskalyze software. This cutting edge software is designed to accurately measure client risk, and then accurately measure the risk of any given portfolio to align specific investments with client objectives.   

The Year Ahead

As we begin the New Year, in addition to finding that more clients are seeking to refine and enhance their investment strategies, they also seek an overall approach to their financial management. Clients are engaging us to provide in-depth financial analysis and planning, utilizing our secure web-based WealthPlanTM system providing 24/7 access to their financial plans and account balances, as well as online storage for personal documents and other important financial information. As the economy continues to expand, we expect to encounter continued volatility in the financial markets. We are making necessary adjustments to client portfolios, using our state-of-the-art Riskalyze software to measure and manage risk.

In 2015, we have plans to expand our 401(K) PLUSSM corporate retirement plan offering. We plan to add additional talent in this area 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.

2015 Market Outlook

As many of you may recall from our recent email communications addressing the financial markets and economy, we expect the U.S. economy will expand at a rate of 3% or slightly higher in 2015, which matches the average growth rate over the past 50 years. This forecast 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.

At 65 months (through the end of November 2014), the current recovery is the fifth-longest expansion since World War II, and is already longer than the average economic recovery since that time (58 months). * Looking back over just the past 50 years, the average expansion has been 71 months. On that basis, the current recovery may surpass the average in the middle of 2016.

*According to the National Bureau of Economic Research, the nonpartisan think tank that determines business cycle start and end dates.

The United States is in the middle stage of the economic expansion, presenting investment opportunities and risks for investors. While the U.S. economy has grown over time, the growth has not been in a straight line. The variations in the pace of growth around the long-term trend are called economic cycles. Economic cycles have four distinct stages: recession, early (recovery*), middle (mature), and late (aging).

The early stage of the economic cycle following a recession, usually referred to as a recovery, is typically characterized by stimulus from the Fed as economic activity, employment, and the stock market recover the losses stemming from the recession. The U.S. economy has passed this early stage and is now firmly in the middle or mature phase. By historical standards, the economic recovery that began in mid-2009 has been by far the most tepid recovery on record, with GDP through third quarter 2014 just 11% above its 2009 trough.
In all recoveries since the end of World War II (WWII), the economy expanded 24% on average in the first five years of recovery. The current recovery even lags the last three (beginning in 1982, 1991, and 2001), which we believe are the most comparable. Five years into those recoveries, the economy stood 16% above its recession lows. The pace of this recovery thus far has lagged behind those prior in each of the major GDP categories.  

Although the weak pace of this recovery has been frustrating for both the public and policymakers alike, there have been several silver linings. The lackluster expansion has put downward pressure on hiring, wages, and in turn, inflation, as the economy continues to operate well below its long-term potential growth rate. The lack of inflation has allowed the Fed to be patient in its journey toward removing the massive amount of stimulus it has added to the economy since 2008; but another solid year of economic growth in 2015 could tighten labor market conditions and likely begin to drive wages higher.

This transition from a subpar recovery to a more normal recovery in 2015 is likely to convince the Fed—which ended its quantitative easing (QE) program on schedule in October 2014—that the economy has made enough progress on the road toward the Fed’s dual mandates of full employment and low, stable inflation to start normalizing policy. At that point (likely in the latter half of 2015 or early 2016) the Fed may begin slowly raising its fed funds rate target, starting the long journey back to more normal, and higher, rates. Importantly, the start of Fed rate hikes does not signal the end of economic expansions. Indeed, since 1950, the start of Fed rate hikes meant that the economy was roughly 40% through the expansion.

Another positive outcome of this modest economic growth is the economy has not yet built up any imbalances or excesses. Imbalances, rather than high-profile shocks (such as the late-1990s tech bubble and the 1973 oil embargo), have been the cause of a vast majority of recessions in the post-WWII era. The lack of overbuilding, overspending, and overinvesting in virtually every sector of the economy since 2009 supports our belief that the current expansion may have more room to run.

As we help families move forward with their 2015 financial planning, we continue to make their Return on Life® our top priority. We are always honored to help our clients’ friends and business associates take greater control of their future with the guidance of PFS, and welcome the many referrals our clients continue to provide.

Continued health, happiness and prosperity in the New Year ahead,   
Frank Fantozzi, President

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You’ve Inherited a Large Sum of Money…Now What?

Written by: Sarah Horrigan

Consider this fact: Nearly $30 trillion will pass from one generation to the next during the next 30 years, according to a recent study by Accenture. Could you be one of those coming into a significant inheritance? And, if so, do you know how best to handle the wealth?

If a family member bequeaths a large sum to you, consider depositing it in a money market fund or certificate of deposit while you mull your options. These vehicles are liquid, meaning you can easily withdraw the funds once you know how you’d like to invest long term. Because FDIC insurance limits for interest-bearing accounts are $250,000 per depositor at each financial institution, you may need to spread the money among multiple banks to protect yourself.

As you consider ways to spend and invest your inheritance, consult your financial advisor. Why? A large influx of cash can greatly alter your financial situation and thus the strategies that are appropriate for you. For example, you and your advisor may decide to change your focus from capital appreciation to capital preservation and income.

Before getting too excited about the size of your inheritance, don’t forget about Uncle Sam. If you’re inheriting a large estate, federal and state estate taxes might take a big bite.

But the tax news isn’t all bad. If you’re inheriting securities, you can benefit from the step-up in basis rule: Your tax basis in the shares will be based on their value on the day you inherit them. So if you then sell the shares, you won’t owe income tax on any capital gains earned while your loved one held them.

Finally, if you have minor children, consider creating trusts to provide for them in the event of your untimely death. You’ll gain peace of mind that their finances will be managed by a competent financial professional or trusted family friend.


Written by: Elizabeth Plax

Realize Estate Planning Benefits While Retaining Control

After working hard your entire life to build your net worth, it’s normal to not want to give up control of your property, as is required for certain estate and asset protection strategies. A relatively new trust — the beneficiary defective inheritor’s trust (BDIT) — provides powerful estate tax planning benefits while allowing you to retain control of your property.

ABCs of a BDIT

The BDIT strategy is based on the principle that, unlike the person who establishes a trust (the grantor), a trust beneficiary can receive substantial rights in a trust without causing the assets to be included in his or her taxable estate.

A BDIT is set up by a third party — typically, a parent or grandparent — who names you as beneficiary and trustee. As trustee, you manage the trust assets and exercise certain other rights over the trust. 

To ensure the desired tax treatment, however, the trust should also name an independent trustee to make decisions regarding discretionary distributions, tax issues and trust-owned insurance on your life. Usually, BDITs are structured as dynasty trusts, so the trust can continue to benefit your children, grandchildren and future generations without triggering gift, estate or generation-skipping transfer tax liability.

For this strategy to work, the BDIT must have “economic substance.” So it’s critical for the third-party grantor to “seed” the trust with his or her own funds. 

If you give the funds to the third party, the IRS likely will treat you as the trust’s creator and the BDIT’s benefits will be lost. If you sell assets to the BDIT in exchange for a note, an oft-cited rule of thumb says that the seed money should be at least 10% of the purchase price.

If the grantor lacks the resources to contribute that much, many experts believe that having a creditworthy third party (such as your spouse) personally guarantee the note is sufficient to lend the transaction economic substance.

Creating the “defect”

A BDIT is structured to be intentionally “income tax defective.” (The preferred method of creating the “defect” is to grant you, as beneficiary, carefully designed lapsing Crummey withdrawal rights with respect to the entire trust contribution.) This accomplishes two important objectives:

  1. It ensures that you’re treated as grantor for income tax purposes. By paying the trust’s income taxes, you enable the trust to grow tax-free and you reduce the size of your estate.
  2. It allows you to enter into tax-free transactions with the trust.

The second item makes it possible to leverage the BDIT to produce significant estate planning benefits. It allows you to sell appreciating, discountable assets to the trust tax-free, thus removing those assets from your estate and allowing you and your heirs to enjoy all future growth transfer-tax-free.

To ensure the transaction isn’t treated as a disguised gift, it’s critical to sell the assets for fair market value and to ensure that the interest rate and other terms of the note are comparable to those in arm’s-length transactions.

Professional help required

As with all sophisticated estate planning strategies, the devil is in the details of the planning and execution. If your BDIT is incorrectly set up, you could be in for a surprise from the IRS. An estate planning attorney should be the person who drafts the trust.

Sidebar: Exercise your rights over BDIT assets

Like other third-party trusts, a properly structured beneficiary defective inheritor’s trust (BDIT) will shield assets against claims by your creditors. In addition, you can exercise a variety of rights over the trust assets without triggering estate taxes. These include the right to:

  • Manage trust assets,
  • Receive trust income,
  • Withdraw assets from the trust (limited to an ascertainable standard, such as amounts needed for your “health, education, maintenance or support”),
  • Receive discretionary distributions, in any amount, as determined by an independent trustee,
  • Remove and replace the independent trustee,
  • Use trust assets (such as a home) rent-free, and
  • “Rewrite” certain provisions of the trust by exercising a special power of appointment to distribute the trust assets to anyone other than yourself, your estate or your creditors.

Take the Alternative Route

Written by: Frank Fantozzi

Alternative investments seek to balance portfolio risk and return

Alternative investments (or “alternatives”) have gone mainstream in recent years. Nontraditional asset types such as real estate and commodities have long been a part of individual portfolios. But hedge funds and hedging strategies, such as long-short, increasingly are becoming popular with investors seeking better diversification and risk-adjusted returns. That said, alternatives involve unique risks and aren’t appropriate for every investor.

Sometimes misunderstood

There’s a misperception that alternatives are high-risk, high-return investment vehicles. Some alternatives do seek higher-than-average returns. For example, global macro strategies can take long or short positions in stocks, bonds, commodities and currencies and such derivatives as futures and options — depending on how the manager believes these assets might perform in response to various global macroeconomic trends. 

However, many alternatives are designed primarily to lower a portfolio’s volatility. In fact, it’s common for certain alternative investment approaches, such as absolute return strategies, to underperform during strongly rising equity markets. The upside is that these particular strategies are expected to hold up better when markets are falling sharply. 

Typically, you might use alternatives as a way to seek returns that have low correlations with stock and bond markets — meaning they’re expected to move out of sync with each other. Certain alternative investments may be able to profit from both up and down markets or they can help hedge against specific risks. This makes them a valuable diversifier alongside traditional, long-only investments, which, by definition, gain only when markets rise. 

Investment types

The alternative asset class includes many different “nontraditional” asset types, such as real estate, leveraged loans, private equity and commodities. Or, it can involve owning investments tied to one or more unconventional trading strategies, including long-short or arbitrage. Alternative investments come in a variety of product “packages,” all of which can vary greatly because of their different investment minimums, liquidity constraints, regulatory oversight, tax considerations and other features. 

Hedge funds and hedge-fund-like strategies have grown in popularity in recent years, particularly with affluent investors. Here are some of the ways you might gain exposure to this asset class:

Hedge funds. Like a mutual fund, a hedge fund is a managed portfolio of securities. Unlike mutual funds, however, hedge funds aren’t publicly traded — they’re generally structured as limited partnerships and are available only to high-net-worth and institutional investors.
There are other important differences: Hedge funds aren’t regulated, are relatively illiquid, have high investment minimums (typically $1 million) and usually charge much higher fees. But the tradeoff is that hedge funds have freedom to use more-complex strategies to achieve their objectives.

Funds of hedge funds. These are diversified portfolios of hedge funds selected by an investment manager. This professional may invest in multiple hedge funds that focus on a single strategy or, instead, allocate among multiple hedge fund strategies in pursuit of an investment objective. If you don’t meet the accreditation standards to buy into an individual hedge fund or don’t have enough funds to invest to meet the minimum requirement, a fund of hedge funds can be an attractive way to diversify your portfolio risk beyond stocks and bonds.

Mutual funds. Traditional mutual funds primarily are “long,” meaning that their managers buy and hold securities expecting their value to rise. In contrast, alternative or hedged mutual funds use nontraditional investment strategies to mimic hedge fund exposure.

Because mutual funds are highly regulated, they have greater transparency and limitations on how aggressively they can pursue these sophisticated trading strategies.

While these constraints mitigate some of the risk, they may also dampen returns compared to a hedge fund with a similar strategy. At the same time, mutual funds are priced daily and offer excellent liquidity, providing you with more flexibility to sell your investment if needed.  

Exchange-traded funds (ETFs). ETFs, which are designed to track underlying indexes through a passive investment approach, are similar to index mutual funds. It’s possible to buy alternative-based ETFs, such as those that follow commodities or currency indexes, as well as those that employ shorting (inverse ETFs) and other nontraditional strategies. ETFs also offer greater transparency, daily liquidity and lower costs than hedge funds.  You’ll need to weigh these factors in addition to your investment objectives and risk tolerance when evaluating alternative investments.

Are alternatives right for you?

The alternative investment category is larger and more diverse and accessible than ever, providing opportunities to meet a range of needs. However, alternative investments may not be right for every investor. They require more scrutiny and research because of their sophisticated investment strategies and higher fees. They also use greater amounts of leverage and may invest in asset types that are more volatile than stocks or bonds.

As with any investment, you should understand the risks of alternatives prior to investing. Depending on your situation, the long-term benefits of lower volatility and higher risk-adjusted returns may outweigh the short-term risks of alternatives. Your financial advisor can help you figure out whether alternatives fit in your diversified portfolio and which ones best meet your needs.

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