Frank Talk - 1st Quarter Newsletter (2020)
Table of Contents
Happy Winter, Clients and Friends!
We hope you and your family are thriving in the new year and excited about the opportunities ahead. As we enter a new decade, we can’t help but reflect on where we’ve been. As 2019 drew to a close, it not only marked the first time ever that the U.S. economy started and ended an entire decade without entering a recession. Looking back ten years, as we rang in the new year in 2010, our economy was still grappling with the aftermath of the most severe economic recession to grip the United States since the Great Depression of the 1930s. Fast forward to December 2019, and the Dow Jones Industrial Average (DJIA) and S&P 500 were posting record highs in back-to-back trading sessions, during what had become the longest bull market on record.
GDP also increased in 2019, to 2.3%. which is in line with average growth in this economic cycle. However, based on data from the Bureau of Economic Analysis, business spending was a drag on growth for the third straight quarter. To learn more about what you can expect in the months ahead, be sure to read our full Market & Economic Update below.
We also want to remind you that tax season is upon us! If you haven’t already, be sure to download your Planned Financial Services 2019 – 2020 Tax Planning Guide using the link below. The guide provides information to help you prepare your 2019 returns, as well as tax strategies you may want to consider going forward.
What's in It for You?
At-a-glance guide to your 1st Quarter 2020 Frank Talk newsletter:
- 2019 Highlights
- 2020 News & Events
♦ Frank is Recognized in Forbes as a 2020 Top Wealth Advisor in Ohio
♦ Save the Date for our 12th Annual Cleveland Economic Summit
- Market & Economic Update
- PFS Celebrated 25 Years Helping Clients Pursue their Return on Life® - Thanks to you, our clients and friends, we had the great pleasure of celebrating our 25th Anniversary as a firm. We were blown away by the number of clients, friends and family members who took the time to join us on a Thursday evening in late October to celebrate this achievement at Sapphire Creek Winery & Gardens. I want to reiterate our gratitude to all of our clients and friends for believing in us—especially in those early years—and trusting us to guide you in making informed and confident decisions. We look forward to helping you and your family work toward enjoying life on your terms for the next 25 years!
- PFS Hosted the 11th Annual Cleveland Economic Summit – In June, we hosted our 11th Annual Cleveland Economic Summit at the world-renowned Cleveland Botanical Garden. The 2019 Summit featured two distinguished speakers: John Lynch, Executive Vice President and Chief Investment Strategist at LPL Financial and Joe Marinucci, President and CEO of the Downtown Cleveland Alliance.
- PFS Welcomed Joseph M. Rogers, II as Finance and Operations Director - Joe supports our team of experienced wealth advisors and financial services professionals to ensure alignment between the firm’s operational and strategic initiatives across business functions, including client services, human resources, finance, marketing and sales, and information technology.
- DETER, DETECT & DEFEND Seminar - In January 2019, we hosted a live seminar on Cybersecurity and Identity Theft Protection at the Corporate College East in Warrensville Heights, Ohio, where we had an opportunity to welcome many clients, friends and their guests. The seminar focused on ways to help protect your personal information and devices to combat growing threats to your personal data, accounts and identity. Attendees gained valuable tips on how to deter, detect and defend against identity theft, cyber-crimes, online fraud and scams.
- 2019 Smart Business: Smart Women Breakfast and Awards Program - For the third consecutive year, Planned Financial Services participated as a program sponsor for the Northeast Ohio Smart Business magazine’s Smart Women Breakfast in April 2019. The annual event addresses issues facing women in the workplace and recognizes the achievements of leading businesswomen, inspiring male advocates, and effective women’s programs through the Smart Women Awards.
- PFS Participated in 2019 Smart Business Family Business & Business Longevity Conference – Frank was proud to participate as a program sponsor and panelist for the Smart Business: Family Business Conference and Family Business & Business Longevity Conference, on September 19, 2019. One of the topics discussed at this year’s conference was the benefits of establishing an advisory board for privately-owned businesses. If this topic interests you, download our step-by-step guide to establishing an advisory board.
- Cynthia Yang Was Named a Forbes Top Next Generation Advisor - Wealth Advisor, Cynthia Yang, CFA®, CIPM, CAIA®, was recognized for a second time by Forbes magazine as a “Top Next Generation Wealth Advisor.” According to Forbes, advisors were selected for the Top Next Generation Wealth Advisors list based on insights from SHOOK Research™, which compiles quantitative and qualitative data. Advisors were evaluated using a variety of criteria and must have been born after 1980 to qualify for the award. Cynthia was first recognized for the award in 2017. Advisors were required to have a minimum of four years relevant experience and acceptable compliance records. Overall ratings were based on, but not limited to: client service models, investing process, business types, revenue produced, and assets under management.
- Cynthia Yang Earned the CAIA® Designation – We were also proud to announce that Cynthia earned the Chartered Alternative Investment Analyst (CAIA®) designation in 2019, the globally-recognized credential for professionals managing, analyzing, distributing, or regulating alternative investments.
- PFS Was Named a Weatherhead 100 Upstart Award Recipient for the 8th Time - In October 2019, we were pleased to learn that Planned Financial Services was named a Weatherhead 100 Upstart company for the eighth time by the Weatherhead School of Management, Case Western Reserve University. Established in 1988, The Weatherhead 100 awards are the premier celebration of Northeast Ohio’s spirit of entrepreneurship and the companies leading the way in Northeast Ohio. The Weatherhead 100, awarded to PFS in 2007, 2008, 2009, 2011, 2016, 2017, 2018 and 2019, is based on sales growth, employment of 15 or fewer employees, and/or companies with less than $1 million in net sales. In 2019, 200 applicants applied for the award in three award categories: Weatherhead 100 Upstart, Weatherhead 100 and Weatherhead 100 Centurion, with 29 awards granted in the Weatherhead 100 Upstart category.
For more information, visit https://weatherhead.case.edu/events/weatherhead100/winners.
- Frank Fantozzi Was Named a “Northeast Ohio Smart 50 Honoree” - Frank was named among Northeast Ohio’s top executives for 2019. Since 2014, the Corporate College Smart 50 Awards, presented by Smart Business recognizes the top executives of the 50 smartest companies in the region for their ability to effectively build and lead successful organizations. Out of 90 nominations received; 50 awards were granted. Frank was recognized for his leadership as a business owner and entrepreneur, as well as his long history of service to the greater-Cleveland community.
- Dan Goldfarb Received Certified Financial Planner Practitioner Certification – Wealth Advisor, Dan Goldfarb, CFP®, ChFC®, CRPC®, was authorized by the Certified Financial Planner Board of Standards (CFP Board) to use the CERTIFIED FINANCIAL PLANNER™ and CFP® certification marks in accordance with CFP Board certification and renewal requirements. Dan is also a Chartered Financial Consultant®and Chartered Retirement Planning CounselorSM with more than ten years of experience helping clients align their values and goals with their financial assets through insightful financial and investment planning.
- Dan Goldfarb Recognized as 2019 “Bright Star” by the Northern Ohio Area Chamber of Commerce (NOACC) Daniel (Dan) Goldfarb, CFP®, ChFC®, CRPC®, was recognized as the Solon Chamber of Commerce’s “Bright Star” for 2019. The Bright Star program, which is administered by the Northern Ohio Area Chambers of Commerce (NOACC), includes 38 chambers of commerce across Northern Ohio. Each year, individual chambers recognize a member as their Bright Star, who has “made a significant impact on the chamber through membership, retention, sponsorship, economic development, operations and/or education.” Each Bright Star honoree must be an active chamber member for at least two years and “is likely to be an unsung hero or a dedicated behind-the-scenes volunteer.” Dan is a member of the Solon Chamber of Commerce in Solon, Ohio which consists of 398 members.
2020 News & Events
Frank Is Recognized in Forbes as a 2020 Top Wealth Advisor in Ohio
For the third consecutive year in a row, Frank was recognized as a Top Wealth Advisor in Ohio in the annual Best-In-State Wealth Advisors list published by Forbes. According to Forbes, the annual list spotlights the nation’s top-performing advisors, evaluated based on a methodology developed by SHOOK Research. Advisors are also evaluated based on personal interviews, industry experience and revenue trends, among other criteria.
Coming soon! 12th Annual Cleveland Economic Summit
Stay tuned for information on our upcoming 12th Annual Cleveland Economic Summit which will take place on June 10, 2020 from 4pm – 6:30 pm at the Cleveland Botanical Garden. Watch for more information and a “Save the Date” email in your inbox in the weeks ahead.
Market & Economic Update
*News that the coronavirus—known as COVID-19—has spread to South Korea, Italy, Japan, and Iran, leading to massive selling around the globe, with many European markets closing down more than 4%. U.S. The Dow fell 1031.61 points on February 24, 2020, marking the third-largest one-day drop ever. Although this made all the headlines, it is very important to remember to look at the percentage drop to get a more apples-to-apples comparison. The 3.56% drop ranks as the 254th largest drop ever, significant but quite a different story.
Although the fear over the pandemic is real, and the potential slowdown in the global economy could hurt 2020 corporate profits, let’s not forget that big down days are part of what long-term investors have had to accept. An average year has more than five separate days with at least a 2% correction for the S&P 500 Index. Even last year, with stocks up 30%, there were five separate days that saw the S&P 500 close down at least 2%.
The United States had held up relatively well in the face of the growing COVID-19 crisis. In fact, the S&P 500 actually gained 1.6% a month after the first reported coronavirus case in the United States on January 21. As the chart below shows, stock market gains historically have been normal after the initial outbreak of various health crises have reached the United States.
Now, could the coronavirus impact the global economy more than previous epidemics and pandemics? That’s clearly a strong possibility, as global supply chains have come to a halt in the world’s second largest economy (China). The good news, though, is corporate America just reported a very impressive earnings season, so the chances of an impending U.S. earnings season recession appear quite low.
Lastly, we’d like to stress that pullbacks and market corrections happen and are part of long-term investing. In fact, since 1980 the average year has experienced a pullback from peak to trough of 13.7%. Even more impressive: Looking at the 29 years that stocks have been green since 1980, we see the average year had a correction of 10.9%!
We will continue to monitor the impact of the coronavirus situation very closely. In the meantime, we would suggest that long-term equity investors consider staying the course and contact us with any questions or concerns about their specific strategies.
We will continue to monitor our portfolios in light of the COVID-19 crisis and other factors impacting the markets, and report on any changes we make to our portfolios in the weeks and months ahead.
If you, or someone you know, has questions or concerns about your personal investment strategy or business finances, please don’t hesitate to reach out to your experienced team of wealth advisors at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.
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To obtain further registration information about Planned Financial Services, please visit adviserinfo.sec.gov.
Real People. Real Answers.
Health, Happiness, and Good Fortune,
CPA, MST, PFS, CDFA, AIF®
President & Founder
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
*Some research was provided by LPL Financial, LLC, February 2020. PFS nor LPL make no representation as to its completeness or accuracy.
Planned Financial Services, LPL Financial, Smart Business and Forbes magazines, SHOOK Research, the Weatherhead School of Management, Case Western Reserve University, and Cuyahoga Community College are all separate, unaffiliated entities.
New Tax Strategies for Charitable Givers
You donate to charity primarily to support causes that are important to you. But you’ve probably, over the years, also enjoyed the tax benefits associated with charitable giving. The passage of the Tax Cuts and Jobs Act (TCJA) changed or eliminated such benefits for many charitable donors. However, tax-saving strategies may still be available.
Changes wrought by the TCJA
There are two ways the TCJA may impact your charitable giving. The first is that the TCJA cut tax rates for most (but not all) people, making charitable giving more expensive. Say that a married couple donates $10,000 to charity each year. In 2017, they were in the 28% tax bracket, so the after-tax cost of their donations was $7,200. Now, that same income level’s rate is only 24%, increasing the after-tax cost of their donations to $7,600. The cost of giving will be even higher if they no longer benefit from itemizing deductions.
This leads to the second change: an increase in the standard deduction, making itemizing less likely to be beneficial for many taxpayers. The TCJA nearly doubled the standard deduction, with 2020 amounts of $12,400 for single filers and $24,800 for married couples filing jointly. In addition, it reduced many itemized deductions, including those for state and local taxes, now limited to $10,000. And it eliminated miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor. Itemizing provides a tax benefit only when itemized deductions exceed the standard deduction.
Consider the Clarks, a married couple with $7,000 in deductible mortgage interest expense, $10,000 in deductions for state and local taxes, and no other itemized deductions besides charitable donations. The $24,800 standard deduction means they’ll receive no tax benefit on their first $7,800 in charitable donations.
Alternative methods of boosting benefits
However, the Clarks may be able to boost the tax benefits of charitable giving by “bunching” donations into alternating years. Suppose the couple ordinarily donates $6,000 per year to charity. They can enjoy additional tax savings by donating $12,000 every other year instead. For example, they might make no donations this year and claim the standard deduction ($24,800) when they file their 2020 income tax return and then donate $12,000 next year and take $29,000 in itemized deductions on their 2021 return ($10,000 in state and local taxes, $7,000 in mortgage interest and $12,000 in charitable donations). This generates an additional $4,000+ in deductions over a two-year period.
If you bunch donations and itemize (or itemize because you have enough individual deductions), keep in mind that the TCJA increases the limit for cash gifts to public charities and certain private foundations from 50% to 60% of your contribution base — generally, your AGI. Other contributions continue to be limited to 50%, 30% or 20% of AGI, depending on the kind of property donated and the type of charitable organization. Excess contributions may be carried forward up to five years.
Because the TCJA also doubled the gift and estate tax exemption (for deaths and gifts after December 31, 2017, and before January 1, 2026), most taxpayers don’t need to consider charitable giving as a strategy for reducing these taxes. Nevertheless, if you’d like to leave a charitable legacy, you may want to include charitable giving in your estate plan.
As tax-efficient as possible
As you continue to support charities, make sure your giving is as tax-efficient as possible. Talk to your tax advisor about all available strategies. © 2020
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
DAFs Offer a Low-Cost Alternative to Private Foundations
Charitable givers sometimes establish private foundations to manage their philanthropic activities. But foundations are costly to set up and subject to excise taxes, minimum distribution requirements and other regulatory requirements. If you’re looking for a more cost-efficient vehicle for leaving a charitable legacy, consider a donor-advised fund (DAF).
TCJA provides a boost
DAFs are particularly valuable in light of changes made by the Tax Cuts and Jobs Act (TCJA). By nearly doubling the standard deduction, eliminating miscellaneous itemized deductions, and limiting deductions for state and local taxes and certain mortgage interest, the act reduces the number of taxpayers eligible to itemize. Now, some taxpayers need to donate more in a given tax year to benefit from charitable income tax deductions.
One strategy for maximizing deductibility without increasing your overall expense is to “bunch” charitable contributions in alternating years. A DAF allows you to make substantial deductible contributions in one year without the need to identify a specific charitable beneficiary or send them the funds right away.
How it works
A DAF is an investment account — similar in many ways to a mutual fund — that accepts tax-deductible contributions. A “supporting organization” sponsors the fund and you advise the sponsor where you want your charitable dollars to be distributed. To comply with tax regulations, the sponsor must have the final word on how your funds are used. But in practice, DAFs usually follow your recommendations.
Like private foundations, contributions to DAFs are immediately deductible (subject to income limits), but DAFs offer several advantages over foundations, including:
Lower cost, easier setup. Unlike foundations, which typically have substantial start-up costs and take months to set up, a DAF can be established in the time it takes to open a mutual fund account, often with a minimum contribution of $25,000 or less.
Fewer administrative burdens. Running a foundation requires you to appoint a board, hold regular meetings, keep minutes and file separate tax returns. A DAF’s sponsor handles most administrative duties.
No excise taxes. Foundations are subject to excise taxes on their net investment income and must pay additional excise taxes if they fail to meet minimum charitable distribution requirements. DAFs aren’t subject to these taxes.
Higher deduction limits. Currently, cash contributions to DAFs (together with other cash donations to public charities) are deductible up to 60% of adjusted gross income (AGI), and noncash contributions are generally deductible up to 30% of AGI. For foundations, these limits are 30% and 20%, respectively. Plus, you can generally deduct the fair market value of appreciated assets donated to a DAF. For foundations, deductions are limited to your cost basis in these assets (except for publicly traded stock).
Privacy. It’s easier for contributors to DAFs to remain anonymous.
The most important advantage of a private foundation is control. When you establish a foundation you remain in full control over management of the foundation’s investments and distribution of its funds. Assets contributed to a DAF become the sponsor’s property and you’re limited to an advisory role (although, as previously noted, the fund usually follows your advice). A foundation can also be a great vehicle for getting your family involved in charitable activities. It can even hire family members and pay them a reasonable wage for their services.
Keep an eye out
As you weigh the pros and cons of DAFs vs. private foundations, be sure to monitor developments in Congress and state legislatures. From time to time, legislation is proposed that would impose additional restrictions on DAFs or curtail their benefits. © 2020
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
What Bond Investors Need to Know About Yield
For most investors, bonds play an important role in a diversified portfolio. There are several types of bonds, including corporate bonds, municipal bonds and U.S. Treasuries. But although the relative risks and rewards vary, different bond types operate in substantially the same way. They pay investors a set amount of interest, typically on a semiannual schedule, and return the original principal at maturity. Along the way, the price of the bond fluctuates.
To evaluate the performance of bonds, investors often are told to compare yields — essentially, the expected return on individual securities. Yet this isn’t as straightforward as it sounds because there are a couple of definitions of “yield.” Let’s review these definitions and how they relate to your investments.
First off, it’s important not to confuse a bond’s current yield with its coupon rate. The coupon rate is the annual interest you receive as a percentage of a bond’s par (face) value. For example, if a $100 bond pays $5 of interest each year, its coupon rate is 5%.
Current yield represents a bond’s annual interest payments as a percentage of the price you paid for it. So if you buy a bond at face value, the current yield and coupon rate are the same. But if you buy a bond at a discount or premium, the two measures diverge. Say you purchase a $100 bond in the secondary market for $85. In that case, the current yield would be 5.9% ($5/$85).
Current yield has the advantage of simplicity and it reflects the amount of income a bond will generate each year. But it may not be the best gauge of your overall return. Current yield doesn’t reflect reinvestment of interest payments or the gain or loss you may realize upon return of principal. For instance, if you buy a $100 bond for $85, you’ll enjoy a $15 gain when you receive the full face value at maturity. Conversely, if you pay a premium for the bond, you’ll experience a loss.
Yield to maturity
If you wish to measure the performance of a bond over several years or compare its expected returns to other bonds, yield to maturity (YTM) can be valuable — particularly if you plan to hold the bond to maturity. YTM measures the annual return on your investment based not only on annual interest payments, but also on the eventual return of principal at maturity. Typically, a calculation assumes that interest payments will be reinvested at the calculated YTM rate. If interest rates change over the life of the bond, your actual rate of return will be different.
If you don’t expect to hold (or don’t have the opportunity to hold) a “callable” bond to maturity, YTM is less relevant. That’s because it’s difficult to predict how much you’ll receive for the bond, or when you’ll receive it.
Yield to call
A callable bond can be redeemed before it matures, on one or more “call dates.” Some bonds are redeemable at face value, while others may be redeemed at a premium. Another option is a scaled structure. Here, the bond is redeemable at a premium on the first call date and then the call price declines on each successive call date until it reaches face value.
Yield to call (YTC) typically provides the best method of measuring callable bonds. It’s calculated in the same way as YTM, except that YTC assumes that the bond will be called on the earliest possible date. If the bond isn’t called, or if it’s called on a later date, your actual return typically will be greater than the YTC. Issuers are likely to call a bond if they believe they can borrow funds at a lower rate than what they’re paying on the bond. So, the lower current interest rates, and the shorter the time until the earliest call date, the more relevant YTC becomes.
Which measure is best?
The “right” yield depends on the type of bond you hold. For noncallable bonds you expect to hold to maturity, YTM probably will provide the most useful information. For callable bonds, consider calculating their YTC. Finally, there’s the more conservative option: yield to worst. This simply means taking a bond’s YTM or YTC, whichever is lower, to estimate your lowest potential return.
Bonds are an important component of most balanced investment portfolios. But keep in mind that it’s possible to lose money investing in them. Talk to your financial advisor about selecting and evaluating bond investments.
Sidebar: Tracing the curve
If you’re trying to compare short- and long-term bonds, consider consulting the yield curve. This measure is a graph that shows the relationship between bond yields and the length of time until maturity. Generally speaking, the longer the time frame, the greater the risk for the investor and, therefore, the higher the yield.
Typically, a steep yield curve means investors are concerned about tying up their funds in long-term bonds (for example, because they believe interest rates will rise), so they demand a greater yield. Occasionally, the yield curve is flat or even inverted — that is, short-term yields are the same or higher than long-term yields. Some experts believe that this situation signals an economic downturn or recession. However, an inverted yield curve doesn’t necessarily mean you should avoid long-term bonds. © 2020
Investment Fraud: If it seems too good to be true...
Perpetrators of investment fraud know how to push the right psychological buttons to make their “marks” buy worthless or nonexistent securities. Unfortunately, too many investors leap before they look and lose money. But you can avoid such scams by asking a few questions, performing some research and consulting with trusted advisors.
Be particularly alert to these common investment fraud schemes:
Pyramid and Ponzi. The con artist promises high returns, often in a short time period, yet there’s no actual investment product. Instead, the scheme relies on continually recruiting new participants whose money is used to pay “returns” to earlier participants. As the scheme grows, it becomes increasingly difficult to attract enough new investors and pay old ones. Eventually it collapses and most participants lose everything they’ve “invested.”
Pump and dump. Fraudsters use false or misleading statements to recruit investors and boost the price of an obscure and usually low-priced stock. When the stock rises to a certain level, the crooks dump their own shares and disappear. The stock price plummets, leaving investors with nearly worthless holdings.
Advance fee. These schemes usually target individuals holding a failed investment. A fraudster may offer, for example, to take a losing stock off your hands for an attractive price provided you pay an up-front fee. Once you pay the fee, the thief vanishes.
Most investment scams provide warning signs — if you’re looking for them. For example, be suspicious of investments that offer guaranteed returns or remarkably consistent returns even during turbulent times. Also be wary of unregistered securities sold by unlicensed individuals or investments that lack documentation (for example, a prospectus).
You can verify a professional’s credentials with the SEC (sec.gov), the Financial Industry Regulatory Authority (finra.org) and state securities agencies. And if you’re tempted to invest with an unknown “broker” or buy an unfamiliar stock, FINRA’s scam meter tool (tools.finra.org/scam_meter) can provide a reality check.
Most investments must be registered before they can be sold to the public, so plug the security’s name into the SEC’s EDGAR database (sec.gov/edgar). Keep in mind that registration doesn’t guarantee that an investment is legitimate or appropriate. Likewise, lack of registration doesn’t mean that an investment is a scam.
Rely on good advice
Ultimately, the best defense against investment fraud is to work with financial advisors you know and trust. If you’ve received a “hot tip,” always run it by your advisor before plunking down any money. © 2020