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How to approach legacy assets in your estate planning

Legacy assets may not always be worth much, but it’s still important to handle them in the right way: by communicating with your family members about your wishes.

By Mark Hartnett, president, Argent Family Wealth Services

After a loved one passes away, surviving family members frequently find themselves squabbling not over money, but over personal items left behind.

In many cases, the value of these so-called “legacy” assets is more sentimental than monetary — a great-grandfather’s shotgun, for instance, or a mother’s engagement ring.

These assets may not be worth much, but it’s still important to handle them in the right way — by clearly specifying in your will who gets what. The key is to remain intentional with your planning.

The first and most important step is to communicate with your family members about your wishes. Ask for their feedback and collaborate as a group to ensure everyone is on the same page regarding the fate of your ‘67 Chevy. No matter how small the legacy asset, list it in your estate. Doing this now will go a long way to keep the peace and avoid potential sibling quarrels.

You may determine it best for some assets to be sold, such as those with high monetary value. But many legacy items are likely to be sentimental, which could make them worthwhile to pass along as keepsakes to a special niece or grandson. Have a plan for either avenue by mentioning everything (and everyone) by name. Consider the following checklist:

What percentage of value does it represent of your estate? The item may have great value to you both monetarily and personally, but it could be sold to benefit all surviving family members equally upon your death.

Are there future storage or maintenance costs to consider? It’s not uncommon to forget these details. If you own a classic car, for example, you should consider the cost of storing the vehicle, needed maintenance or regular specialty washes to protect its appearance. These add up over time.

Is there a rate of depreciation to consider, or is it increasing in value? Weigh the item’s past, present and future value. Everything is evaluated differently. Some items might be best to sell immediately or within a few years. Others may be worth significantly more if they’re kept in good shape for a couple of decades. Research these values and seek proper appraisal.

These are just a few things to consider. There are many other angles to keep in mind when it comes to different legacy assets, which is why you should consult with a wealth management advisor. Most importantly, be sure to keep everyone apprised of your plans and wishes for these treasured possessions so that your gifts remain gifts — not a potential burden or kindling for a dispute.

 

Humble Confidence

By Kyle McDonald, chief executive officer

 

About five years ago, I figured out what sets our company apart.

It was November 2013 and I was reading a blog post by TV sportscaster Samantha Ponder in which she talked about growing up, and what has changed and what has stayed the same throughout her life. As a young woman, Samantha said, she didn’t feel particularly pretty and was kind of an outcast. Today, things are just the opposite. She is a telegenic, highly successful professional.

What has stayed the same throughout her life, she said, is the way she grounds herself in good times and bad by working to maintain an attitude of humble confidence – being sure of herself, her beliefs and her skills without letting it go to her head.

That idea of “humble confidence” struck a chord with me. It gave words to how I’d been thinking about Argent Financial Group for some time. It describes how we are with each other and with our clients. In fact, I think it’s the definition of a fiduciary, which has been fundamental to our company since we began.

The client is at the center of Argent’s organizational model.

Being a fiduciary means you are in the service business, and to serve someone you must place your needs behind the needs of the other – i.e., be humble – but you also must have confidence in your abilities, or your service will be of little value.

I think it also means that you are not “salesy.” Our responsibility as a fiduciary is not to sell a product, but to learn what is in the client’s best interest and do all we can to see that those interests are met. Because of this, our primary focus is on building relationships built on trust and respect, because you can’t really understand what a client needs until you have formed a relationship with him or her.

Humble confidence also means that the client is at the center of Argent Financial Group, and the closer you are to the client, the more vital you are to the health of our company. This means the higher up you are in our company’s internal structure, the more people you serve here. This is illustrated in the infographic of our “Client Relationship Model” that accompanies this blog, which shows how everyone in the company serves the relationship managers who directly serve our clients. This is an example of how humble confidence pervades our entire organization.

Because we foster a culture of humble confidence here, we naturally attract people who feel the way we do about serving others. In fact, our commitment to having a strong, supportive company culture is a result of our discovery several years ago that an attitude of humble confidence is what makes Argent the kind of company it is. And “discover” is the right word. The foundation of humble confidence goes back to the beginning of our company. It is a concept we have held true to all along; we just didn’t have a name for it. It’s kind of like an onion: As we peel back the layers, we find what was there all along.

It’s the same with culture. I now know that we had been thinking about culture since the beginning. That is, we have always known that we wanted to have a company where people were treated with care and respect, and we have always acted on those beliefs. As the company continues to grow, we learn more and more about ourselves, and the more we learn, the better our company becomes for both employees and clients.

Stay Humble; Be Confident.

What Every Investor Needs to Know About the Fiduciary Standard

There’s a lot of jargon in the financial service industry. And much of it probably flies right over the heads of most investors.

But if there’s one word that every investor should know and understand, it’s “fiduciary.”

The fiduciary standard is a set of regulations requiring advisers to always act in the best interest of their clients, to disclose any potential conflicts of interest, and to be transparent about how they’re being compensated.

“Being a fiduciary is the highest legal duty of one party to another. It has a legal, moral and ethical component,” said John Allen, Market President of Argent Trust’s Greenville office.

At Argent, all of our trust advisers and registered investment advisers follow the fiduciary standard. But throughout the financial services industry as a whole, this standard is far from universal.

According to a 2015 report from the White House Council of Economic Advisers, Americans lose about $17 billion a year in investment returns due to advisers and brokers steering them toward securities that aren’t in their best interest and may include higher fees and lower returns than similar products.

The SEC has recently announced plans to expand the fiduciary standard to some advisers who currently aren’t required to follow it. And while that could be good news for investors, there may be unintended consequences.

To help understand what all of this means, let’s tackle a few big questions regarding the fiduciary standard.

Who has to follow the fiduciary standard?

To answer that question, it helps to understand the overall makeup of the financial services industry. Financial advisers are broken down into three client-facing groups: trust advisers, registered investment advisers (RIAs) and broker/dealers. Trust advisers and RIAs have been legally required to follow the fiduciary standard since 1940. Most broker/dealers are currently exempted from the requirement, though some voluntarily choose to follow it.

At Argent, providing this level of service is baked into our company culture.

“We’ve worked under the investment fiduciary standard for decades,” said Timothy Barrett, Senior Vice President and Wealth Adviser in Argent Trust’s Louisville office. “Our attitude is different. We don’t sell on performance. With many stockbrokers, they’re constantly trying to beat benchmarks, sometimes at the expense of long term goals. We sell on services and on our fiduciary responsibilities. We take good care of our client’s money and do what’s in the best interest of families.”

Why is the fiduciary standard important?

When you invest your money, you want to feel secure that your financial adviser is putting your needs before their own. Without the fiduciary standard, an adviser only has to make sure that an investment is suitable for their clients — even if similar ones might be a better fit. This is known as the “suitability standard.”

“It doesn’t have to be the best product or the cheapest product, it just has to be appropriate,” Allen says.

Some proprietary products have a variety of hidden fees attached to them that non-fiduciary advisers aren’t required to disclose to clients. They also aren’t required to disclose conflicts of interest, which could include receiving a bonus to promote a particular investment.

“A front-end loaded fund might pay the broker 6 percent up front, for example, with a small management fee going forward. Securities with a rear-end load would charge a fee when you get out,” Allen says.

Does that mean I shouldn’t invest with brokers?

Brokers have an important purpose in the financial services world, says Byron Moore, an Argent Advisor in Ruston, Louisiana. They’re often the only resource available to investors who don’t have a large amount of money, and because they don’t have the additional fiduciary requirements, their services tend to be less expensive as a whole.

“It’s a basic rule of economics. If you impose a higher cost, through increased regulation, on an industry, it’s going to show up somewhere. It could show up in reduced supply or trimmed back services,” Moore said. “There has always been a need for people to just execute transactions. Using a broker involves a lower cost, and if you’re capable of looking out for your own interest, that may be all you need.”

What do the proposed fiduciary rule changes mean for me?

If you’re a client of Argent, any changes being proposed won’t affect you at all. The current debate strictly involves the world of broker/dealers. Currently, only broker/dealers who oversee retirement plans are required to follow the fiduciary standard. The Securities and Exchange Commission wants to expand that requirement to all broker/dealers, a change that could come as early as this fall.

“I think that the regulation is well intentioned, like a lot of things, but by the time the sausage is made, it causes as many problems as it solves,” Moore says. “It helps to some degree, but a lot of it is about how things appear instead of substantively changing the playing field.”

However, any increased level of transparency is ultimately a good thing for investors, Barrett says.

“I don’t want to buy a refrigerator that’s simply marked up and could be purchased cheaper elsewhere. I don’t want that at Best Buy; why would I want that with my broker?” he says.

How can I feel secure that my adviser is looking out for my best interest?

Ask your financial adviser if they are serving you in a fiduciary capacity. If they’re not, take that fact into account as you weigh the pros and cons of investments that they suggest to you.

If you’re looking for an adviser and you don’t know where to start, your best option may be asking people you know.

“Talk to friends and neighbors you trust. Ask who they use, if they’re good, if they communicate with clients the way they want to be communicated with. I always suggest interviewing at least three candidates before deciding to work with any kind of financial adviser,” Moore says.

Ultimately, Barrett says, the reputation of an adviser or a company carries as much value as any legal standard.

“From a purely competitive side, the reputation of being ethically minded is what keeps you in business,” he says.

How Argent is driving employee engagement to transform company culture

By Brooks Campany
Director of Recruiting, Engagement and Culture

At Argent, client satisfaction is a big measure of our success. But it’s not the only one.

We know that having happy employees makes for a more motivated and — let’s be honest — pleasant workplace. So, we’re in the midst of a conscious push to nurture our culture and engage each of our 240 employees spread across 25 offices and 12 Southern states. Although we’re not all in the same place physically, we want each employee to feel that they’re part of a wider workplace community.

The results of our recent annual Gallup survey are evidence that we’re making progress. The responses we gathered from the survey showed an actively engaged workplace culture with a high level of satisfaction. And that’s a great thing to see.

The survey, given at the end of 2017, included 12 questions that produced their own scores in addition to two composite pieces of data: an Engagement Index and an Overall Satisfaction Score. Taken as a whole, these 14 data points/measurements allow us to measure our progress year over year, and also provide a picture at how we compare against other companies.

The results

Here’s what we found:

  • The Engagement Index, with approximately 90 percent participation, increased 4.6 points from 3.94 in 2016 (on a five-point scale) to 4.12 in 2017. Although that may seem like a small point increase, last year our Engagement Index placed us in the 59th percentile of the Gallup database. This year, we’ve leapt up to the 82nd percentile.
  • Our 2017 ratio of engaged employees versus actively disengaged ones dramatically increased to 256 percent of our 2016 ratio. In 2016, the ratio was 4.8 to 1 — that is, one actively disengaged employee for every 4.8 engaged employees. In 2017, that ratio was 12.5 to one.
  • Our Overall Satisfaction Score also significantly increased, from 4.24 to 4.42 on a five-point scale. This score places us in the 96th percentile of the Gallup database — a significant ranking!

Digging a bit deeper into specific questions, we were encouraged to see that employees responded positively to the statement “My supervisor cares about me.” The overall score of 4.48 out of 5 ranked in the 93rd percentile among companies in the Gallup database.

How we compare

In 2016, employees gave average scores below four to half of the 12 questions. In comparison, in 2017, we only had two questions receive average scores below four:

  • Our lowest score related to employee recognition. Although it increased from 3.32 to 3.58 year-over-year, a gain of 7.8 percent, we still only ranked in the 62nd percentile. This is an area that we acknowledge needs additional work.
  • Although responses to the statement “I have a best friend at work” also received low scores, we think the wording of the question may not have accurately expressed the goal of quality workplace relationships that we hope Argent employees’ experience.

Looking forward

As a whole, we think there’s a lot to be proud of. But there’s also room for improvement. So where do we go from here?

In 2018, we’ll place a greater focus on improving recognition of our employees. We think a key aspect of this will be in strengthening the relationships between managers and their direct reports. To accomplish that, we’ll provide training to our managers to give them the tools for leading their Management by Objectives (MBO) process. In addition, we’ll resume our TINYpulse employee surveys, with an emphasis on questions that give us data to better structure our manager training efforts.

We know our company is only as strong as its employees, so we intend to keep up our efforts to maintain a healthy internal culture at Argent in 2018 and beyond.

 

Tax reform is here. What does it mean for high-net-worth individuals?

As we enter tax season, the real-world effects of the recently enacted Tax Cuts and Jobs Act of 2017 are becoming clearer for many taxpayers. Although there remains a great deal of detail to be understood, from what we know today, there are plenty of changes for high-net-worth individuals to be excited about.

Estate taxes

A significant change in the new legislation is an increase in the estate and gift tax exemption to roughly $11.2 million ($22.4 million for married couples). This doubles the former exemption of $5.6 million for individuals and $11.2 million for couples. Only a small percentage of households paid the tax at the old levels, and even fewer will pay it now.

Tax reform

The real effects of the recently enacted Tax Cuts and Jobs Act of 2017 are becoming clearer for many taxpayers.

For high-net-worth households who might have been affected before but are now safely under the line, this change could make a difference in the way they approach their financial future.

“The new tax laws may change their planning,” said Timothy Barrett, senior vice president and wealth advisor based in Argent’s Louisville office. “They may have created trusts to capture and preserve a $5- to $6-million estate tax exemption, or double that for a couple. With the exemption amounts now doubled, couples with estates currently smaller than $10 million may be able to simplify their planning tremendously or switch their focus to income tax planning. But be aware that most of the personal tax changes revert back to 2017 law after 2025, which complicates permanent solutions.”

“Depending on how much you have and what age you are, 2018 ought to be a year to review and decide what is right for you and your individual financial situation,” said Howard Safer, CEO of Argent’s Nashville office.

Tax bracket changes

Marginal tax rates under the new tax bill will be lower for many taxpayers starting in 2018 and running through 2025. The top rate has been reduced from 39.5 percent to 37 percent, and will now apply to individuals with over $500,000 in income and couples with over $600,000.

Previously, the top tax rate had applied to individuals making $426,700 or more and couples making $480,050 or more.

A couple filing as “married/joint” with combined income between $237,000 and $351,000, for instance, will see their marginal tax rate fall from 33 percent to 24 percent. Assuming there are no changes in other deductions, this could result in a tax savings of around $10,000.

“Lowered brackets are one piece of much more complex tax change. It all depends on your mix of state and local taxes, mortgage interest and other itemized deductions and whether it makes sense to use the new higher standard deduction. Some people will end up keeping more of their income, and the rate changes are meaningful for all tax brackets. But there are too many moving parts at this point to make a definite call on how much someone will save,” said John McCollum, senior vice president – investments in Argent’s Atlanta office.

“Even though many details are yet to be worked out, the change does benefit high earners who aren’t independently wealthy, because you don’t jump to that top rate so fast now, ” Barrett says.

Pass-through income

A new deduction for pass-through businesses could benefit many high income earners who have an ownership stake in a business. Sole proprietors, LLCs, partnerships and S corporations may be able to deduct 20 percent of qualified business income, albeit with some limitations. This may create an opportunity for certain taxpayers to form limited liability companies that would be eligible for the deduction.

“People will be trying to take advantage of pass-through entities,” Barrett says. “Any high-earner who can work on a non-employee basis will want to explore using a limited liability company.”

Fewer itemized deductions

Some taxpayers may see a benefit from the near-doubling of the standard deduction, which has been raised to $12,000 for individuals and $24,000 for couples in 2018, up from $6,350 and $12,700, respectively, in 2017.

However, new rules regarding itemized deductions — affecting state and local taxes, medical expenses and mortgage and home equity loan interest, among other areas — will play out differently for every taxpayer depending on their individual financial situation. Some may opt for the standard deduction when they may not have before.

“One approach that may be useful for many taxpayers is bunching, in which deductions such as charitable donations are pooled every other year to maximize tax savings through itemization, with taxpayers taking the standard deduction on alternating years,” Safer says.

Boost to the economy

The tax bill’s benefits to corporations are also likely to benefit individual high-net-worth investors. In addition to receiving a permanent cut in the corporate tax rate, from 35 percent to 21 percent, companies will benefit from a sharp drop in the tax rate for repatriation of foreign earnings. This change will allow companies with large amounts of overseas income to bring it back to the U.S., paying 15.5 percent instead of the old rate of 35 percent.

“Many companies had accumulated large amounts of cash earned overseas, and the vast majority was just sitting there. By reducing their tax burden, it eliminates barriers, real and perceived. Companies are going to increase dividends and pay more to employees — you can find hundreds of those stories. More importantly, that cash is going to get invested,” McCollum says.

There is a great deal of detail about these changes that won’t be fully understood until the IRS releases its regulations on how to put these new tax changes into effect.

“The last major tax reform was in 1986, and it took years to fully understand and make that come together,” Safer says. “These laws will evolve in their interpretation.”

“The effects on individuals and pass-through businesses will be more complicated, but the benefit will be real for sure. It just remains to be seen how these various pieces will end up working together to change behavior,” McCollum says. “The bottom line of the tax change is that it’s putting more money in the hands of businesses and consumers to spend and invest instead of sending to the government, and I think that’s why the market has reacted so strongly.”

Fourth Quarter Investment Commentary

Looking Back: 2017 Market Review

The fourth quarter capped yet another stellar year for U.S. stocks. Larger-cap U.S. stocks (Vanguard 500 Index) gained 6.6% for the quarter and ended the year with a 21.7% total return. This was the ninth consecutive year of positive returns for the index. The market’s 1.1% gain in December crowned 2017 as the first year ever that stocks rose in each and every month. The broad driver of the market’s rise for the year was rebounding corporate earnings growth, supported by solid economic data, synchronized global growth, still-quiescent inflation, and accommodative monetary policy. U.S. stocks got an additional catalyst in the fourth quarter with the passage of the Republican tax plan, presumably reflecting investors’ optimism about its potential to further boost corporate after-tax profits, at least over the shorter term.

Foreign stock returns were even stronger, with developed international markets gaining 26.4% (Vanguard FTSE Developed Markets ETF) and emerging markets up 31.5% for the year (Vanguard FTSE Emerging Markets ETF). In the fourth quarter, however, these markets couldn’t match the S&P 500, gaining 4%–6%.

Moving on to bonds, the core bond index fund (Vanguard Total Bond Market Index) gained 3.5% in 2017. This return was close to the index’s yield at the start of the year, as intermediate-term interest rates changed little during the year with the benchmark 10-year Treasury yield ending at 2.4%. Although the Federal Reserve raised short-term rates three times (75 basis points total), yields at the long end of the Treasury curve declined and the yield curve flattened. Corporate bonds across all credit qualities and maturities had positive returns. High-yield bonds gained 7.5% (ICE BofA Merrill Lynch U.S. High Yield Cash Pay Index) and floating-rate loans rose 4.1% for the year (S&P/LSTA Leveraged Loan Index). Investment-grade municipal bonds (Vanguard Intermediate-Term Tax-Exempt) rebounded from a flat 2016, returning 4.5%.

Click Here to read full brief

Monthly Market Brief-January 2018

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief January 2018 for updates.

Here are some key highlights:

POSITIVES:

  • Non-farm payrolls rose 148000, still favorable though lower than expected. Unemployment stable at 4.1%.
  • Fifth month of solid growth in manufacturing payroll, 25000 in December and 31000 in November. Proving to be the driving force for the economy. Best run for manufacturing payrolls in 3.5 years. Construction payrolls are also on a five month winning streak, led by increasing sales of new homes. Housing and construction sector accelerated into year-end as proven by their strong payroll gains.
  • Oil prices steadily moving close to $60 which is the highest since 2014. Higher prices will likely inflate imports (worsening the trade deficit), but is also expected to boost retail sales and manufacturing (specifically energy equipment). Talks about the administration lifting restriction on offshore drilling could increase supply and put downward pressure on the oil price.

CHALLENGES:

  • Trade deficit deepening: Deficit increased to $50.5 billion in November compared to $48.9 billion in October. Partly attributed by the increase in imports on consumer goods and oil imports.

 

 

Monthly Market Brief-December 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief December 2017 for updates.

Here are some key highlights:

POSITIVES:

  • Sales of new homes increased 6.2% in October to 685000 – a new high! This is not signaling to a housing bubble since the sales surge is not coupled with a price surge. Median price of a new home is up only 3.3% on the year.
  • Rising consumer confidence is at a new expansion high (129.5 in November). Largely due to optimism in the job market and expected stock market gains.
  • The stock market highs may partly be due to expectation of corporate tax cuts and their on going effects. GDP growth has been 3% last two quarters while consumer spending as of October has been at 4.2%, posing no threat of over heating.

CHALLENGES:

  • International trade deficit is expected to widen in October to $47.1 billion, up from September’s $43.5 billion, due to falling exports and a jump in imports of consumer products.
  • Growth in corporate profits have continued to lag the growth of the stock market. Pre tax profits packed in 2012 and really have expended only 10% over the past 5 years.

 

Monthly Market Brief-November 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief November 2017 for updates.

Here are some key highlights:


POSITIVES:

  • Despite the hurricane disruptions, Payrolls rose 261,000 in October. In just under 4 years, unemployment gone down from 7% in 2013 to 4.1% in 2017
  • Dow’s bullish run (up 19.1% YTD) and confidence in the job market has been fueling this year’s increasing consumer confidence.
  • The US economy has been resilient, real GDP increased at an annual rate of 3% in the third Quarter of 2017, primarily due to an increase in consumer spending, inventory investment, business investment and exports. This back to back quarterly growth of 3% is a first in three years.
  • Total exports obtained new highs, rising at 2.3% and were largely driven by financial and information services. The decline in dollar has made US products less expensive to foreigners.
  • Another positive is the contraction in imports. Consumer imports and vehicle imports have both been slowing, two trouble spots that have traditionally deepened the deficit.

CHALLENGES:

  • Another positive is the contraction in imports. Consumer imports and vehicle imports have both been slowing, two trouble spots that have traditionally deepened the deficit.

Good Intentions Can Diminish Over Time

Moore for Your Money
By Byron Moore

Question: My plan is to leave everything to my wife after I’m gone and she’s doing the same with me. Then when the second one of us is gone, the kids will get everything more or less equally. That’s what our wills say. We are both in second marriages and both us have our own set of children. But they are all adults, on their own and doing fine. Everyone gets along fine. Isn’t this simple approach the best?

Answer: Your plan strikes me as loving, well-prioritized, simple… and potentially disastrous.

I’ve got no issues with what you intend to do, nor with the intentions of everyone involved. But good intentions have a way of diminishing over time and under stress. Your children are grown. You gave them a home and an upbringing and that’s now bearing the fruit of stability and independence in their own lives as they start their own families. You want to be sure your wife is taken care of if you pass before she does.

But your good-hearted intentions are no guarantee that those intentions will be followed. Consider just a few things that could prevent your intentions from becoming reality.

Lawsuit. I’ve had more than one widow in my office whose husband died as a result of an accident. In one case I recall, the fault of the accident was clearly the husband’s, who had died in the accident. Imagine losing your spouse in an accident, then being sued for his or her causing the accident!

If you simply leave everything of yours to your wife, those assets may be vulnerable in the event of a lawsuit.

Next spouse. People have been known to get married after the death of a spouse. You may swear up and down you won’t, but… see my earlier comments about good intentions. If you or your wife remarries, will they then leave “everything” to that next spouse? Maybe. But isn’t “maybe” a problem? Do you really want someone you’ve never met to inherit what you and your wife have built together?

Future outlaw. Your adult children are all getting along well now. That’s wonderful. But have you ever known of couples that divorce after 20 or 30 years of marriage? I’ve got a whole list of them. After you and your wife are gone, do you want to leave your life’s wealth to your children, who might then have split it with a spouse that splits?

Financial rookie. I have no idea if this caution fits your situation or not. But many couples have one spouse who “handles the money” with little or no interest or involvement by the other. I’ve seen plenty of examples both ways – sometimes the wife calls all the financial shots. Other times, that’s the role assumed by the husband.

If your marriage works like that, do you want your wife’s first year of widowhood to also be her rookie year as the financial manager of the family wealth?

These are only possible scenarios to spark your thinking. I am not an attorney and this column does not contain legal advice. You need to talk to an experienced, qualified attorney concerning all of these matters.

An attorney may suggest the use of certain types of trusts, ownership arrangements or management agreements made ahead of time to address the specifics of your situation. You won’t know any of that until you speak with an attorney.

Your good intentions are a wonderful motivator and a great place to start. Just don’t stop there. Make sure there are structures in place to carry out once you are gone what you so nobly intend while you are alive.

Otherwise, your good intentions might die when you do.

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Investment Insights

Sequence Risk May Be The Biggest Problem For Retirees
by Mike Jones

Over the next several years professionals in the financial services industry are going to be called upon to solve an extremely difficult problem: providing income to millions of retirees who have placed the majority of their life savings into publicly traded securities.With interest rates still hovering around historical lows and stock market prices setting record after record, it is correct to ask, “Where do we go from here?” and “How in the world do we attempt to sustain a fixed or inflation adjusted standard of income from a portfolio of volatile assets?”

The problem is one of simple math. As stated above, millions of investors are depending on investment returns from volatile assets to deliver income from the time they retire until their death. Using averages for investment returns or simulations that work 85% of the time provides no comfort to such investors. It is the sequence of returns that matters most.

What good is it to a retiree to make 50% on your life savings if you have lost 50% the prior year? That would mean your $1,000,000 fund is worth $650,000 after just two years (assuming a 4% distribution rate). Keep that up and you will be broke before you know it. Avoiding a large negative return in the early years of one’s retirement is CRITICAL to making the money last.

Dr. Wade D. Pfau, CFA®, is a Professor of Retirement Income in the PhD in Financial and Retirement Planning program at The American College of Financial Services. He is also a contributor to the College’s Retirement Income Certified Professional® (RICP®) designation program curriculum.

Dr. Pfau graciously shared information from his forthcoming book, How Much Can I Spend in Retirement, to subscribers of the FA (Financial Advisors) website. In the article “Managing Sequence Risk for Retirees,” Dr. Pfau suggests four techniques retirees may employ to mitigate the threat of running out of money in retirement:

1.Spend Conservatively. This techniques advises investors to keep reducing the amount they distribute from a portfolio the more aggressive they make that portfolio. At least at first. This allows the more aggressive investment strategy time to succeed thus enabling the investor a chance to harvest bigger sums down the road. While this is mathematically feasible, it is highly impractical for most retires.

2.Maintain spending flexibility. This approach only works for those retirees who have other sources of income. It espouses a fluctuation in income that is mirrored to the fluctuation in return.  If you have a meager year in performance you take out a meager distribution.  If you have a robust year, it’s party time. This greatly reduces sequence risk but is an option only to a small percentage of investors.

3.Reduce Volatility (when it matters most). I actually like this one and subscribe to it in many cases. A portfolio of reduced volatility risk is a portfolio of reduced sequence of return risk. This concept can be applied two ways. The first is to greatly reduce the risk factors during the early years of retirement. Since it is the investment returns during the first 5 to 10 years of retirement that reek the most havoc on the eventual outcome, then why not just lower the risk? One can also reduce volatility after a period of economic growth and market expansion, i.e. dynamic asset allocation. Not losing money when others are can certainly benefit a retirement portfolio as money will be available to make investments when they become attractive again. Please don’t try this one on your own. It must be applied with discipline.

4.Buffer Assets. This final technique encourages investors in the securities markets to buffer against down markets by setting aside money that can be a resource when markets turn down. The return on these assets cannot be correlated to the securities market as they would not provide a buffer if that were the case. In other words, diversify. But diversify intelligently. Many investors forget that last admonition.

The road ahead for retirees and their investment professionals is going to be a tricky one. We know that. Fortunately, many brilliant minds are thinking ahead to ways to avoid the worst of those potential problems.

If you are nearing retirement and haven’t done so already, talk with your financial advisor about his or her recommendations on how you should approach tapping into your retirement savings to best avoid sequence risk.

 

Market Brief-October 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief October 2017 for updates.

Here are some key highlights

POSITIVES:

  • Although, the income and spending trend has been downward over the past 3 years,consumer spending and personal income are still growing and inflation is low, which makes our dollar go further.
  • The PMI Manufacturing report (reflective of activity in private sector economy) continues to report moderate growth. September figure of 53.1 compared to 53.0 in August, shows little change. Hurricane effects can be seen in delivery delays which has slowed the most since Feb 2016.
  • ISM Manufacturing index has strengthened to an index of 60.8 in September, which is a 13-year best, signifying that there has been growth in the manufacturing sector. Hurricanes increased input prices but did not slow down production.
  • European equities (except for Spain, due to the Catalan referendum) have been up in the last week of September, partially due to weakening of the EURO. Gains ranged from 0.2% to 1.9%.

CHALLENGES:

  • September payrolls are likely to slow down. Forecasters predict only a 95,000 rise for September non farm payrolls (compared to 156,000 increase in Aug). The risk is that Harvey and Irma could further impact the results.
  • Jobless claims in Texas rose early in September, while claims in Florida began to rise mid September. We are yet to see the effects on Puerto Rico.
  •  House sales in the south