Why financial professionals are changing their business models.

By Money On Tap 

A major shift has occurred in the financial world. More and more financial professionals have moved away from the industry’s traditional compensation model to a new one – in the eyes of many of them, a better one.

Increasingly, financial professionals are introducing their clients to fee-based accounts. This means a change in the way a financial advisor is paid for some or all services. It also implies a meaningful change in the advisor-client relationship.

Traditionally, financial professionals have been paid through commissions linked to trades or product sales. Opinions about this compensation model vary. Many in the industry accept it, but with reservations. It has the potential for conflict of interest, which may affect how a client is served and consulted.

Commission-based advisors may feel pressure from a Wall Street investment company to “push” select financial products, even though these products might not be appropriate for all clients. They seek to create a trusted relationship with each of their clients, yet they may end up feeling more like a financial salesperson than a financial advisor.

The careers and businesses of fee-based advisors are not so product driven, not so brokerage rooted. In the fee-based model, the financial professional earns the majority of his or her compensation through fees linked to either a) the amount of client assets under management, b) the creation, deployment, and refinement of financial strategies, or c) financial consultation offered on retainer or by the hour.

Fee-based advisory accounts help to promote long-term client relationships. The advisor is not seen as a product salesman by a cynical client, but as a resource, a knowledge broker, and a partner in a client’s effort to save and invest for the future. When the client’s investment accounts do well and grow, the advisor’s compensation grows proportionately.

In addition, a financial professional working by a fee-based compensation model may be licensed as an investment advisor under a fiduciary regulation. That means he or she has a legal and ethical obligation to act in your best interest, place your financial interests above his or her own, and be transparent about fees and any potential conflicts of interest. (All CERTIFIED FINANCIAL PLANNER™ practitioners are required to work by a fiduciary standard.)1,2

There are investors and retirement savers who may find a fee-based advisory relationship with a financial advisor to be more expensive when compared with the relationship they had under a commission-based compensation structure. In such cases, the commission-based structure may be maintained, as its potential lower cost might be advantageous to the client. In the main, though, we are witnessing a great movement away from what was the norm to a new paradigm. An advisor paid mostly or wholly through fees is an advisor well positioned to create candid, trusted relationships with loyal clients for years to come.

Citations.

1 – time.com/money/5176238/5-questions-financial-advisor-sallie-krawcheck-ellevest/ [2/23/18]

2 – al.com/business/index.ssf/2018/02/ask_the_right_questionsof_your.html [2/16/18]

 

Tax reform has lowered the threshold.

By Money On Tap

If you itemize, you should note the reduced medical deduction threshold for 2018. This year, you can deduct qualified medical expenses exceeding 7.5% of your adjusted gross income. Next year, the threshold for the medical expense deduction returns to 10% of AGI. (The Tax Cuts & Jobs Act of 2018 also allowed the 7.5% threshold to apply retroactively to the 2017 tax year.)1 

So, if you are considering surgery or dental work in the future that could mean sizable out-of-pocket expenses for you, it might be better from a tax standpoint to schedule these procedures for 2018 instead of 2019. 

What kinds of unreimbursed expenses qualify for the deduction? The list is long. For a start, the Internal Revenue Service says these types of expenses may qualify as tax deductible: out-of-pocket fees to medical and dental professionals, psychiatrists and psychologists, and certain nontraditional medical practitioners; money spent to participate in a weight-loss program in response to a doctor-diagnosed condition or disease; payments for prescription drugs and insulin; payments for smoking cessation programs and prescription drugs to facilitate nicotine withdrawal; money spent on inpatient treatment or acupuncture at a rehab facility; and, money spent on inpatient hospital care or residential nursing home care.1,2

That last item deserves further explanation regarding nursing homes. If a taxpayer is in a nursing home first and foremost to receive medical care, the I.R.S. says that the cost of that care and any lodging and meal costs borne by the taxpayer are deductible. Should the taxpayer reside in a nursing home primarily for other reasons, the I.R.S. limits the deduction to the medical care provided.2

Other potential medical expense deductions are worth noting. You can of course deduct payments made for health care aids such as wheelchairs, false teeth, service animals and guide dogs, hearing aids, contact lenses, and reading or prescription eyeglasses. In addition, you can usually deduct insurance premiums that you have paid for insurance policies covering medical care or long-term care (as opposed to premiums paid on these policies by your employer). Lastly, you can often deduct transportation costs you incur related to qualified medical expenses: bus, train, and plane fares; gasoline expenses; parking and toll fees.2    

What kinds of expenses do not qualify? The cost of basic toiletries and toothpaste cannot be deducted; the same goes for cosmetics. Expenses for cosmetic surgery are usually not deductible, and neither are expenses for wellness programs or vacations. Non-prescription, over-the-counter drugs or medicines are non-deductible. Nicotine patches and gum may not be deducted, unless they have been prescribed for you. Burial and funeral expenses are also ineligible for the medical expense deduction.2 

Talk to a tax professional about the possibilities here. You may find it advantageous to itemize in 2018 using Schedule A so that you can claim medical expense deductions and take advantage of what could be the last year for the 7.5% threshold. Or, you might find that taking the newly enlarged standard deduction makes more financial sense. If you think your household will have significant medical expenses this year, it might be wise to compare the options.

Citations.

1 – tinyurl.com/yabhctua [2/15/18]

2 – irs.gov/taxtopics/tc502 [1/31/18]

How the Tax Reforms Will Take Effect

After 20 months of relative calm, this volatility needs to be taken in stride.

Money On Tap

Are you upset by what is happening on Wall Street? It may help to see this pullback within a big-picture context. Corrections have become so rare as of late that when one occurs, emotion threatens to influence investment decisions.

So far, February has been a rough month for equities. At the close on February 8, the Dow Jones Industrial Average was officially in correction territory after a slide occurred, which included two 1,000-point descents within four days. Additionally, nearly every U.S. equity index had lost 7% or more in the past five trading sessions.1,2

This drop is troubling, yes – but not as unsettling as it may first seem. The market has been up for so long that it is easy to dismiss the reality of its occasional downs. Last year’s quiet trading climate could legitimately be characterized as “abnormal.”

Prior to this current retreat, the S&P 500 had not fallen 5% from a peak since June 2016. It went more than 400 trading days without such a slump, setting a record. In this same calm stretch, the index also went through its longest period without a dip of 3% or more.3

During a typical year, there are five trading days when equities descend at least 2%, plus one correction of about 14%. On average, equities take roughly a 30% fall every five years.4

This year, the kind of volatility normally seen in the market has returned. It may feel like a shock after so much smooth sailing, but it is the norm – and while the Dow’s recent daily losses are numerically unprecedented, they are also proportionate with the level of the index.

A few things are worth remembering at this juncture. One, Wall Street has had more good years than bad ones, as any casual glance at its history will reveal. This year may turn out well. Two, something similar happened in the mid-1990s – a long, easygoing bull run was suddenly disrupted by major volatility. That bull market kept going, though – it lasted four more years, and the S&P 500 doubled along the way. Three, this market needed to cool off; in the minds of many analysts, valuations had become too expensive. Four, the economy is in excellent shape. Five, earnings are living up to expectations. Last week, Thomson Reuters noted that 78% of the S&P firms that had reported this earnings season had topped profit forecasts.1,3

Wall Street may be turbulent, but you can stay calm. You could even look at this as a buying opportunity. Assuming this is a correction and nothing more, the market may regain its footing more quickly than we think. Typically, the average correction lasts less than 90 days. Consider any moves carefully – and talk with a financial professional if you have concerns or anxieties about this volatile episode for the markets.5

Citations.
1 – cnbc.com/2018/02/08/us-stock-futures-dow-data-earnings-fed-speeches-market-sell-off-and-politics-on-the-agenda.html [2/8/18]
2 – markets.wsj.com/us [2/8/18]
3 – money.cnn.com/2018/01/22/investing/stock-market-today-extreme-calm-pullback/index.html [1/22/18]
4 – marketwatch.com/story/panicked-about-a-stock-market-crash-what-you-need-to-remember-can-fit-on-a-single-notecard-2018-02-08 [2/8/18]
5 – cnbc.com/2018/02/07/the-quicker-the-sell-off-the-faster-we-recover-says-market-watcher.html [2/7/18]

When Will the Business Cycle Peak?

Fear Must Not Inhibit a Financial Strategy

Layering Your Retirement Income With Tax Efficiency In Mind…

There are a lot of ways to help minimize taxes. When working with our clients, we talk with them about creating balance. Saving taxes is important now, but many times, people forget about saving taxes in the future too. How much will this mean for them later on?

Five Retirement Landmines: Avoiding These Can Help You Get Where You Want To Be!

In today’s world, with so many factors in play there are things you have to be careful of when investing.  Now of course, you can’t avoid all of these landmines, but you need to be aware of what they are, and steps you can take to minimize, and in some cases, eliminate those dangers.

Simple, Common mistakes you want to make sure not to do.

On today’s show, we are going to spend the bulk of it talking about something that is very important. Insuring you know where your financial assets are going after you are no longer here. I know we have talked about it in the past, but today, we are going to dive into estate planning blunders and how you can avoid making the simple and common mistakes that people make when it comes to their money.

We are also excited to introduce an new segment “Money In The News”.  Getting you everything financially newsworthy to be armed at the water cooler.

Think Total Return

 

Never touch your principal in retirement? Think again.

By Money On Tap

More than a century ago, an American financial archetype emerged – the household that lived on the interest earned by its investments, never touching its principal.

Times have changed. While the Vanderbilts, Carnegies, and Rockefellers could do that back in the Gilded Age, you will likely face a tough challenge trying to do the same in retirement. The reason? Low interest rates.

The federal funds rate has not topped 3% since the winter of 2008. In fact, the nation’s benchmark interest rate has been under 2% since October 2008. In today’s interest rate environment, you will need a substantial investment portfolio to live solely on income and dividends in retirement. In some parts of the country, a million-dollar portfolio might not generate enough income and dividends to help you maintain your lifestyle.1

Try another approach – the approach used by institutional investors. Wall Street money management firms and university endowment funds frequently rely on the total return investment strategy. In a retirement income context, this means that you strategically sell some assets to complement the dividends and interest income you receive.

Portfolio rebalancing is central to the total return strategy. The recurring ups and downs of the financial markets gradually unbalance a portfolio over time. A long bull market, for example, will usually leave a portfolio with a larger stock allocation than initially desired. To get back to the portfolio’s target allocations, you need to sell shares of stock (or, stocks aside, amounts of other kinds of investments). The proceeds of sale equal retirement income for you.

Before you pursue this strategy, you need to determine two things. One, do you have a portfolio built so that you can potentially derive income from diverse asset classes? Two, assuming you have that diversification, how much dividend and interest income is your portfolio likely to generate this year? The amount may fall short of the income you need. Rebalancing might be able to help you make up the slack.

Besides being fundamental to a total return approach for retirement income, rebalancing may also help you accomplish other objectives.

Rebalancing keeps your portfolio diversified, so that your retirement income does not depend too heavily on the performance of one asset class. It can stave off a potentially risky response to the ongoing desire for yield (some investors, frustrated by poor returns, direct money into high-risk investments they barely understand). It may also allow you to sustain your lifestyle and spending; relying only on dividends and interest may cause you to pare your spending back and notably reduce your quality of life.

Think total return. Explore the total return approach to retirement income planning, today.

Citations.
1 – thebalance.com/fed-funds-rate-history-highs-lows-3306135 [12/13/17]

Annuities …. Love’em … Hate’em

Should We Reconsider What “Retirement” Means?

Build your emergency fund this year.

by Money On Tap

How much does the average American household have in the bank? Estimates vary, but the short answer to this question is “not enough.”

 

Last year, a GoBankingRates poll discovered that 57% of U.S. households had less than $1,000 in deposit accounts (although, 25% reported having at least $10,000). A 2017 analysis from Moebs Services, a research firm consulting banks and credit unions, noted that the average U.S. checking account contained around $3,600.1,2

    

Eyeing these numbers, you get the sense that – in an emergency – most households have less than a month before their liquid savings run out. Is this true for your household? Hopefully, your cash reserve is much larger; if that is not the case, now is as good a time as any to bolster your emergency fund.

 

Building up an emergency fund may be easier than you think. As financial upsets are thankfully infrequent, you have long periods of normalcy in which you can amass cash. Can you save $50 a month toward that goal? You will have $600 after 12 months if you do or $1,200 in 12 months if your spouse saves along with you. That may not seem like much, but even that little pool of cash could suffice.

 

Keep in mind, the whole goal of an emergency fund is to deal with sudden – and presumably acute – expenses. In the grand scheme of things, these emergency costs will likely be trivial compared to the total expense of your retirement. If you end up directing more of your money to your retirement fund than your emergency fund per month, who can blame you? Your retirement fund is presumably invested in equities and has the chance to grow and compound over time. It addresses what is arguably your top financial need – the need to provide yourself with financial stability after you end your career.

 

Some households need larger emergency funds than others. A high-earning, child-free couple living without much debt in a relatively inexpensive metro area might need one to absorb only 3-4 months of expenses. A family reliant on one paycheck might need one that is much larger, as severe financial trouble could surface if the breadwinner loses a job or falls ill.

  

Emergency funds can also help in other kinds of money crises. While an emergency is an unexpected event calling for an immediate response, you may be able to sense other financial disruptions and inconveniences coming. Maybe that garage door keeps malfunctioning or your eight-year-old computer has trouble booting up. These are signals that you will need to write a check or pull out that debit card soon.

 

Living without an emergency fund can invite worry. It is an anxiety too many households have had to accept. Plan to save a little each month (or more than a little, if you can manage), so that you may create a bit more financial “breathing room” in your life.

Citations.

1 – cnbc.com/2017/09/13/how-much-americans-at-have-in-their-savings-accounts.html [9/13/17]

2 – tinyurl.com/yacqwq4p [7/13/17]