Society investing – Good investments helping other Americans

When you were making investment decisions in the past, you were likely seeking ways to grow, preserve or protect your investments. You may have bought stocks, bonds, mutual funds or ETFs (that ultimately own various types of stocks and bonds for the most part). Have you ever thought of how that investment actually contributes to society? When you buy a share of Apple stock, does that money go to Apple? Unless the company is having a secondary stock offering, the proceeds would go to the seller of the security on the other side of the trade.

What about buying bonds? You are actually lending money to the issuers of the securities seeking debt much in the same way that you may have taken on debt from a bank to buy a house or car. If you are creditworthy, you have demonstrated enough financial stability to have credit extended with the likelihood of paying off the debt over time. Even when you buy a CD from a bank, or a Treasury from the U.S. Government, you are actually lending your money and receiving a small (and today that’s really small) amount of interest. Are you contributing to the economy, or simply looking for somewhere else to put your money other than a mattress?

What if you could effortlessly direct your money in a highly effective and methodical way to find qualified borrowers with strong credit scores and financial stability seeking to borrow a little money? What if you could identify responsible Americans that need money to reduce their interest costs of high rate credit card loans, or need money for home improvement, or need money for education? Let’s also hypothetically say that these borrowers may have outstanding loans for $10,000 at 18% with a credit card, but could consolidate that to pay it off in 3-5 years at a 14% rate? What if you were the bank, and could lend them money at 14%?

Now, let say there’s not only one borrower. What if there were 100, or 1,000 or 100,000 or 1,000,000 or more American borrowers?   What if, instead of giving them a bunch of your money, you could contribute a little bit across a bunch of loans, and essentially become the bank? What if this was automated so you would not be distracted by the daily activities of hundred of loans? Well, it’s here.

Let’s think about it a little further. How closely related is a loan for a debt consolidation related to the movement of General Electric or Google stock? How is it related to a 10 year treasury rate, or a municipal bond from Maryland? What about the relationship to gold or metals? What if those other investments had no bearing on the loans in which you participate? Well, they really don’t.

This is not a dream, it is a reality, and it has been going on under your nose for almost 10 years. It’s called peer-to-peer (P2P) marketplace lending. It is not only an investment worthy of part of many investor’s portfolio, but it is a socially aware contribution to America and Americans. What I am saying here is that not only is this a very compelling investment, but it also happens to go to help American families trying to improve their own financial situation. In fact, you may not be an investor reading this, you may be someone that either needs credit at more attractive terms, or know someone that may benefit from marketplace lending. It works both ways, because it mutually benefits both parties. The borrow pays less interest, but the lender still earns higher interest than other investments.

This is not an experiment; it is a fast growing industry creating real and tangible social and economic impacts for both borrowers and lenders. For me, I call it Society Investing. It feels good, and it is a sound investment for investors seeking to increase their income without a sacrifice of increased market volatility. Pick up the phone and call us. We love to answer your questions. Call Ethos Private Wealth at (305) 602-1000.

Is School School School the new mantra???

In many parts of America, the “location, location, location” mantra for the most important factor in a home purchase has been replaced with “schools, schools, schools”. Makes sense, right? With property taxes in many parts of the county equivalent to 3% or greater of the assessed value of your home, and with a private kindergarten, elementary, grade, middle and high school costing $15,000 to more than $30,000 per year, it’s easy to understand why parents are looking for advantages.

Sure most parents want to see their child have the opportunity to achieve as much as they can without being limited by a second-tier pre-college education. In fact, I have a client who chose their house, and bought it online, nearly exclusively on the triangulation of the house location to provide the best education available in the state for elementary, middle and high school. Face it, if you are able to provide your children with any scholastic advantage based on the physical location of your house, you may be thinking school, school, school.

In fact, there are some new on-line real estate tools that help you choose a home based on the search of a particular school district. So, for your children or grandchildren, the new mantra for a home search may be school school school.

Lessen your Tax Bite in Retirement

The Tax BiteKeep More – Setting Ground Rules for a Tax Smart Retirement

Nearly all business owners, high income earners and retirement savers are interested in reducing income taxes. This is understandable as income taxes are generally the highest-rate tax business owners and high income earners will pay during their lifetimes.

Part of a successful investment plan is comprehensive tax planning, and one must also consider the tax impact on assets which will be relied upon in retirement. Without some awareness and organized planning, the tax bite on long-term investments can be significant. In fact, a study Lipper, a mutual fund tracker, showed that from 1997 to 2007, the typical equity fund investor had their returns reduced by 16 percent to 44 percent as a result of taxes. Poof! Left unchecked, tax consequences can dramatically change long-term financial planning. This is why reducing retirement asset taxes through proper tax diversification is a critical element to financial success.

Most investors will rely on the following asset types during retirement:

  • qualified employer or individual retirement plans (QRPs)
  • securities and investment funds
  • real estate and other personally owned assets

With the exception of Roth 401(k) and Roth IRAs, QRPs are subject to income taxes when they are distributed. Due to the high marginal tax rates in the past, many retirees may be losing 40 percent to 50 percent of their QRP funds to taxes (state and federal). Ouch.

A personally or jointly owned investment portfolio may be subject to a host of tax treatments as it grows or when it is converted to cash. Long-term capital gains taxes will be assessed on the appreciation of portfolio assets. Qualifying dividends earned in the portfolio will also be taxed at the long-term capital gains tax rate. Short-term gains, interest income, and foreign dividends will be taxed at ordinary income tax rates.

Most real estate and other investments are subject to federal capital gains taxes and state income taxes when they are turned into retirement cash. Depending on the state of residence, today’s long-term rates may range from 20 percent to 33 percent and have been higher in the past. In addition, a portion of the gain may be subject to ordinary income tax rates due to depreciation recapture.

Understand fees, but focus on taxes Many investors spend little time on tax planning, but instead focus on investment-related fees rather than investment-related taxes. Although it is important to ask about fee schedules, other issues should also be considered when selecting a financial advisor.

No one wants to overpay for investment advice, but focusing solely on the fee to the exclusion of tax considerations is worth of pause for consideration. For example, if one assumes an 8 percent average gain (even if it seems a bit optimistic based on the past 80 years), taxes could be an expense of up to 4 percent. Focusing on a 1 percent investment fee and ignoring a 1.5 percent to 4 percent potential tax liability expense seems counterintuitive.

Tax planning for retirement is a critical element in building financial prosperity and long lasting legacy wealth. Here’s what you can do:

  • Maximize account types that help minimize tax drag under current law
  • Use the right asset classes within in QRPs in conjunction with other taxable securities and account types
  • Coordinate with your advisor to managing taxation of transactions. That is, harvest gains or losses in a given year depending on your tax situation
  • Understand how to select the best QRP for your unique needs
  • Incorporate tax-advantaged investments (such as municipal bonds) to limit current taxable income if you are in a high tax bracket
  • incorporate charitable planning for current and future deductions and income streams
  • Explore appropriate solutions in coordination with your tax professional to identify other tax deduction or tax credit strategies to meet your financial, social and or legacy goals.

Conclusion Investors may not have their eye on the right place when it comes to investment returns. Ultimately, it is important what you keep, not what you earn. There are many tax efficient strategies in coordination with retirement planning that can help increase after tax returns. Having awareness and an approach to address how taxes impact your investments can lead to higher after tax returns, and long term wealth building that takes steps to liberate you from financial and tax worries.

Is the 4% Rule right for you?

Four percent rulePlanning to retire? How much can you withdraw and still be OK? There’s nothing simple about figuring out what percentage of your nest egg you can safely withdraw each year in retirement. You don’t want to be frugal, but also don’t want to outlive their savings. The “4% rule” may be a possible starting point to a tough question.

Sure, there’s been plenty of criticism over this approach. Two common criticisms are: 1) Some suggest that this rule of thumb should be adjusted since average returns rates may be substantially lower that historical returns, and 2) others suggest that this approach unnecessarily forces retirees to reduce their equity exposure, even if they are down in value.

How can you put this in perspective?  First consider that the 4% Rule is based on worst case scenarios – that includes century old return data including the Great Depression. While we can’t predict the future, rule of thumbs serve a purpose – they create generalities, not custom tailored answers for any single person. People like to understand generalities in many facets of life, and using the 4% Rule as a starting point, is simply another generality. If you are 60 or 90 years old may impact your likelihood of success of a 4% withdrawal.

Selling stocks at the bottom?  Some critics of the 4% Rule suggest that it forces retirees to sell their stocks even after they’ve lost value. Not quite right.

Don’t forget, that with ongoing portfolio rebalancing, and the ability to determine where to withdraw funds, this challenge is diminished. In fact, if the stock portion of the portfolio is underweighted, it is possible that equities are bought to achieve a certain strategy.

Plan and adjust.  Life is not static, and there are variables that can throw off a safe withdrawal rate such as taxes or unexpected medical needs. Those people that are flexible with their lifestyle needs may be able to have an adaptable approach to withdrawals. For instance, if a retiree is willing to cut their expenses by 10% through a market downturn, they may be able to increase spending later.

How much retirement income will be fixed or variable?  We see fewer and fewer families that are relying on pension income and social security as a main component of their retirement income needs. Consider this, what if 100% of your retirement spending needs came from your savings. How would a market downturn impact you? Conversely, what if 75% of your retirement income was derived from pension, social security and other highly predicable income streams, how would a market downturn feel in that scenario? It’s obvious to see that the greater amount of predicable income you receive as a percentage of your overall needs, the more peace of mind you may have about dramatic portfolio movements.

A Plan for you is the best one.  Ultimately, the best withdrawal rate is the one designed for your individual circumstances, and it should be frequently reviewed to assure sustainability. We have great tools to help predict your retirement outcomes based on a stress-test scenario, and that can help you get more comfortable around a comfortable withdrawal from your saving. We do not view your situation as a generality, but the 4% Rule is one that creates a starting point.

Here we are… it’s 2014, and I’ve got a New Year’s resolution proposal for the financial service industry: resolve to raise the bar!

If you know me, then you know how strongly I believe that we should raise our standards – whether it’s in the area of impartiality, education, client service or professional competency. We have a huge opportunity to distinguish ourselves by raising a very low bar set by our regulators.  It’s really easy to live up to low standards, and it is time that we take it upon ourselves to help the industry ascend from the depths that history has taken it.

Would investors object to higher standards? Would regulators object to higher standards? Let’s move to embrace a new and higher set standards – creating a community of excellence for those who wish to pursue the worthwhile efforts. We are in such a unique position to help investors, help ourselves and show true leadership in the industry where there is no clear current leader.

Education is one of the foundation elements to actuate a change. A good place to start is education around the safety of client assets, or custody. There are rarely conversations about this, and it serves as an important education point. Why not have conversations about control and separation? We are missing an opportunity to talk about checks and balances. We are missing a chance to educate clients around a subject that they are eager to hear about – keeping their assets safe.

But that’s just the beginning, and simply one element of attention. We can do much more, and we can be much more as a community.

Why should we continue to wait for Congress to establish regulatory requirements and mandates among wealth advisors, asset managers and third-party custodians. Our regulators have already demonstrated that they are not able to agree, and they continue to settle for mediocre standards. They may be contempt with that, but why should we? That simply does not seem “suitable” – nor does it help investors.

There are always some that will be satisfied with being so-so. But, we have a unique opportunity to do more than what is required, to build a higher expectation and establish a higher moral standard that can advance the industry. And, we can do this because we want to, not because we have to.

Sure, I always set a high bar. But, I’m not being so idealistic here that I think cancer can be cured with chicken soup, or that greed will be a thing of the past, or that honesty in the world will run rampant. What I do believe is that we hold the power to actuate change that can serve as a quantum leap in the industry. If not now, then when?