Why should you work with a financial advisor? (Part 1)

Eliminating unnecessary expenses is one basic key to good financial management.

Source: Why should you work with a financial advisor?

Reblogged from the Evangelical Christian Credit Union

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Three ways to lower your taxable estate

estate-tax

Three ways to lower your taxable estate:

The financial planning cycle is an all-encompassing process that includes Investment planning, Insurance Planning, Tax Planning and Estate Planning among other areas. In one form or another your investment planning affects your estate planning which affects your tax planning which affects your insurance planning.  Clients tend to think about these areas separately. Clients tend to think in terms of going to their Lawyer for their estate planning, their financial planner for their investment planning, their CPA for their tax planning and their insurance person for their insurance.  A good financial planner will be able to direct clients to the professional who makes the most sense for their situation, but a financial planner can be viewed as the Quarterback for this process.  Financial advisors who provide comprehensive financial planning services need to identify areas of a client’s financial picture that require more attention and in-depth analysis.  Such is the case for clients looking to lower their taxable estate. These clients will certainly need the help of the financial planner, the insurance sales-woman, the CPA and the Attorney at all once.  Knowing which professional to employ could have a significant affect on your assets.  Without further ado, here are three ways you can lower your taxable estate:

Gifting Money to your Children and Grandchildren:

Current tax laws allow you to give away $14,000 per year to anyone you would like. However, most people aren’t interested in giving their money away to just anyone. A majority of clients will leverage the tax code to gift money to their children and grandchildren. Whether through cash or investment vehicles such as 529 plans, a parent can gift money to as many people as they would like for as many years as they would like. If your adult child is married, you can double the $14,000 and give $14,000 per year tax free to your children.  If both Mom and Dad are giving money away, you can double that number again to $56,000 if giving to both the Adult child and the spouse.  $56,000 might not be a large enough amount of money on it’s own to make a difference, but over a ten year period of time, that is $560,000.  If you have another married child, over a ten year period of time you and your spouse can give away over $1,000,000. 

529-college-savings

Upfront gifting to a 529 plan:

529 plans offer a special feature that allow you to gift 5 years of assets all at once. Using the numbers from above for planning for one child’s education, you can upfront gift up to $140,000 for a married couple.  For a single individual, again the gift amount is $14,000 per year multiplied by five and you get a $70,000 upfront gift to your child’s 529 account.  Assuming you and your spouse have three grandchildren you’d like to help pay for college, that’s $420,000 you can eliminate from your estate in one year.  Now we are talking significant assets being eliminated from your taxable estate. The cherry on top for this option is you are able to deduct the contributions to the 529 plan from your state taxes. With a tax rate of 5% in Illinois, contributions to a 529 plan could be a considerable deduction to consider. There are some caveats if you pass away before the 5 year period is over. We recommend you work with us and your CPA to understand the full ramifications of this option.

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Establishing an Irrevocable Life Insurance Trust:

Establishing an Irrevocable Life Insurance Trust (ILIT) will require the help of an Estate Planning Attorney.  An ILIT can be used to purchase a life insurance policy or transfer the ownership of an existing policy to the ILIT. The first word of this product/strategy is Irrevocable. That’s an important word.  When you transfer assets into an ILIT, you lose control of managing those assets and making changes to the assets.  By assigning the assets to the ILIT, you are saying “This money no longer belongs to me”.  ILIT’s allow you to pass a significant sum of money to the next generation and avoid estate taxes.  After the life insurance is purchased or transferred, the trust becomes the beneficiary of the policy.  Upon your death, the life insurance proceeds are paid out and held in trust for the trustees of the trust.  For more information, we recommend you talk with us an estate planning attorney.

There are many other ways financial professionals work to lower your estate tax liability. These are just three ideas to help you on your journey.  For more ways to lower your estate tax liability, please call us at 847-290-0753.  You may email me at jose@wisdominvestments.com. 

Jose Cuevas
Vice President
Wisdom Investments
jose@wisdominvestments.com
http://www.wisdominvestments.com
847-290-0753

A Client’s Question: “Where is the safest place for me to invest?”

safety

This question is power packed with many different potential answers.  At it’s core, this question is about risk. This question is “me” focused.  The safest place for me to invest might not be the safest place for you to invest. What does the word safe mean? Does it mean I don’t want to lose any money today? Or, does it mean “I want my future to be safe”.  At the root of most investor questions is some type of psychological unknown the client wants light shed upon. Since this question can cover both product and asset allocation, I will cover product for the moment.

In the financial world, there are many types of products you can purchase or invest in to achieve your goals. All of those products can be put into 5 buckets; stocks, bonds, cash, real estate & commodities.

The first product you can buy is an individual stock. Stocks represent ownership in a company and the return you receive is dependent upon the profit of the company you purchased.  If you buy stock in Microsoft, then you are an owner of Microsoft. If Microsoft goes out of business, you lose all of the money you invested in Microsoft. Out of the five buckets, of course a stock would fall into the Stock bucket.

Next you can buy a bond.  With bonds you are simply loaning your money to the government or to a corporation and they pay you interest in return.  With bonds, if the company goes out of business, you are at least higher on the priority list to get money back over other investors. However, when investing in an individual bond, you still run the risk of losing money. The individual bond goes into the bond bucket.

Savings Accounts: Savings accounts are a cash bucket product and are offered by banks, credit unions and savings & loan institutions. Savings accounts offer a high amount of liquidity. If you need your money withdrawn from a savings account, you are able to walk into the bank or go online and withdraw your money. Due to the high liquidity factor, savings accounts won’t pay you much interest. To see a few available rates for savings accounts, click here.

Money market mutual funds are similar to savings accounts, but the value of money market mutual funds can fluctuate. The price of the money market is targeted for $1, but moves slightly throughout the trading day. Money markets are pools of money brought together by fund companies for the benefit of the account holders to try and achieve a return slightly higher than that of a savings account.  A money market account offers liquidity, however you may have to wait a couple of days for money to transfer from your brokerage account to your bank account. Typically for our clients, the transfer is next day. The money market account goes into the cash bucket.

CD’s might be a bit trickier for most people. To many a cd is considered cash.  However, if you look back at the definition of a bond, you will see the cd is similar.  With a cd, you are loaning your money to the bank, the bank pays you interest, and when your cd expires you get your funds back. The only real difference between the bond and the cd is the cd is guaranteed. In most cases, the cd is FDIC insured. Wisdom Investments would categorize the cd to go into the bond bucket.

Next we have mutual funds. Mutual funds can be a bit tricky as there are many different types of mutual funds. For simplicity sake I will categorize the bond funds into four types: stock funds, bond funds, specialty funds & asset allocation funds. Stock funds would go into the stock bucket, bond funds would go into the bond bucket and allocation funds would hit all of the buckets. The specialty bonds would be focused on the commodities and Real Estate buckets. With most mutual fund portfolios you will have different types of funds that allow you to broadly diversify your money across the multiple markets available to you.  With a mutual fund portfolio, you purchase multiple different types of funds and these funds have underlying securities that make up the value of the mutual fund. For example, if you have a large cap blend fund in your portfolio, you are investing in many different large companies like Microsoft, Coca Cola, & Google. When you invest in a bond fund, you are buying a portfolio of bonds that might include treasury bonds, municipal bonds, & corporate bonds. Within the mutual fund space you can also buy REITS which allows you to invest in real estate and you can buy commodity funds that allow you to invest in the commodities market. Exchange traded funds are similar to mutual funds but offer a lower cost since they are not professionally managed.

Fixed annuities are put together by insurance companies utilizing a portfolio of bonds. The insurance company buys bonds using your money and pays you a fixed return far below what they expect to yield on the bond portfolio. The trick is the insurance company guarantees your return while they bear the risk of the bond portfolio. In today’s market fixed annuities do not typically pay a high enough interest rate to warrant the length of time you will commit to the product. Fixed annuities are also a great way to achieve tax deferral and can be helpful in estate planning. Fixed annuities are part of the bond bucket.

Variable annuities are annuities that have an underlying portfolio typically consisting of mutual funds. The variable annuity company charges the clients for death benefits and guarantees while the client has some peace of mind with their investment. In my view, most variable annuities are too expensive and unnecessary for most clients. If a variable annuity is needed, it’s typically to help transfer a client out of an overpriced annuity that was purchased in the past. These products do offer a death benefit which guarantees a beneficiary would not receive less than a specified amount, but you pay for this feature. As I’ve mentioned in the past, I’ve seen clients paying almost 4% per year for one of these products! In the investment industry, there is a debate going on as to whether or not a portfolio can be sustained while distributing 4% of the portfolio every year. Imagine trying to withdraw 4% and pay 4% per year…..

At Wisdom Investments, we take a managed mutual fund approach utilizing a balance of conventional and academic based investment strategies. We believe having a diversified, low-cost, & changeable portfolio is in most investors best interests.  The safest place for you to invest is the product with the risk tolerance that helps you strive towards accomplishing your goals. If you’d like to learn more about how we help you “Make Smart Decisions With Your Money”, please call us at 847-290-0753 or email me at jose@wisdominvestments.com.

Jose Cuevas
Vice President
Director of Financial Planning
www.wisdominvestments.com
847-290-0753

 

 

 

In Response To President Trump’s Latest Executive Orders

 

executive-order

In Response To President Trump’s Latest Executive Orders: 

Today, President Trump signed two executive orders that will significantly impact the current state of financial regulation in our country. Due to the financial crisis that took place between 2008 and 2010, massive regulations contained within the Dodd-Frank Act were imposed on the financial system. These regulations were designed to help protect the public from potential abuse by financial institutions. While we believe some measures of the regulations were well intended, we believe there have been some unintended negative consequences.  The financial industry was already a heavily regulated industry prior to Dodd-Frank.  

The second executive order President Trump signed is in response to the Department of Labor’s Fiduciary rule, that was scheduled to be effective in April of 2017.  The rule states that retirement advisors must act in the best interest of their clients. This is an enhancement to the  suitability rule currently in place.  Under suitability, advisors are obligated to recommend investments that are suitable, or appropriate for clients, based on the client’s income, investment knowledge and risk tolerance.Under the Fiduciary rules, financial professionals are legally obligated to put their client’s best interest’s first rather than simply finding “suitable” investments.The Fiduciary rule would have resulted in many advisors no longer being able to receive commissions on the sale of retirement products as such commissions would have been deemed to be a conflict of interest.   

At Wisdom Investments, we believe in fiduciary responsibilities and many of you already know we act in a Fiduciary capacity for our clients. This executive order will delay the fiduciary rule until the current administration has the opportunity to review and amend the rule. Clearly these two executive orders send the signal that the Trump administration feels the current regulatory state is unnecessarily burdensome.  These moves by President Trump are another indication that he intends to follow through on his campaign promises. While loosening regulations will ultimately help benefit business, the executive orders will face backlash from the Democrats arguing the decrease in regulation will negatively affect middle class investors.   

In summary, the status quo for investors remains the same. At Wisdom, we believe the Fiduciary standard will eventually be passed and we are supporters of the standard. We currently do business under that standard because we believe the fiduciary standard is beneficial for clients. The fiduciary proposal did have many ambiguous provisions and we are hopeful the postponement and review will provide clarity.   

In the meantime, if you know someone who is upset about the postponement or just know someone who is interested in working with a firm that always puts their clients’ interests first, in a fiduciary manner, have them call us or send us their name and we will contact them.  We place great value in the confidence you show in us and will do our very best to earn that continued confidence.   

Bill Kmiecik & Jose Cuevas 
Wisdom Investments
www.wisdominvestments.com
847-290-0753

Professionally Managed Mutual Funds or Index Funds? What if that’s not the question?

The Christian Financial Planner

barronsCONVENTIONAL INVESTING & INDEX INVESTING VS. EVIDENCE BASED INVESTING
Should you utilize actively managed funds (conventional investing) or use index funds (passive strategy)? This has been a debate for quite some time. For decades, conventional investing is all we knew. Indexes on the other hand weren’t supposed to be the investment. Indexes were designed to be the measurement for conventional investing. After the indexes were created, it was discovered that most of the professionally managed funds couldn’t beat the index. What we’ve learned through years of history and study is that only about 15% of the actively managed mutual funds available have beaten the indexes. So, as an investor if you knew you had an 85% chance of making less money than your designated index, what would you choose? Yes, 15% of those mutual funds did beat the index. The problem is you had no idea before hand what mutual fund was…

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Professionally Managed Mutual Funds or Index Funds? What if that’s not the question?

barrons

CONVENTIONAL INVESTING & INDEX INVESTING VS. EVIDENCE BASED INVESTING
Should you utilize actively managed funds (conventional investing) or use index funds (passive strategy)? This has been a debate for quite some time. For decades, conventional investing is all we knew. Indexes on the other hand weren’t supposed to be the investment. Indexes were designed to be the measurement for conventional investing. After the indexes were created, it was discovered that most of the professionally managed funds couldn’t beat the index. What we’ve learned through years of history and study is that only about 15% of the actively managed mutual funds available have beaten the indexes. So, as an investor if you knew you had an 85% chance of making less money than your designated index, what would you choose? Yes, 15% of those mutual funds did beat the index. The problem is you had no idea before hand what mutual fund was going to beat the index and how much risk they were going to take to do that.

From this explanation, you might say “Great. Thanks. I’ll go buy that index fund now”. And, you might be ok if you did that on your own. Chances are you would be better off if you bought the index fund and held onto it than if you had invested conventionally. However index funds have their own set of problems. These are problems you don’t hear advertised due to the massive amount of inflows into index funds right now. Plus, you have billionaire investor extraordinaire Warren Buffet telling you to buy index funds. A downside of utilizing index funds are the Hidden Costs. One of the hidden costs of owning an index fund is something called “Reconstitution day”. An index fund must follow an index or else it’s not an index. If a stock is no longer part of an index, what happens? The stock is moved out of the index. What happens when a stock is performing well and has increased in size? It moves into the index. The problem is this all happens on the same day. Everyone knows it’s coming. So, what happens? The stocks being sold decrease further in value and the stocks added to the index increase in value. By the time this happens, you have lost money on both ends.

There’s a third approach. This third approach was designed by noble prize winners from the University of Chicago and is implemented through Dimensional Fund Advisors. Unfortunately, the average investor can’t walk into Dimensional funds and use this approach. But, we will gladly help you incorporate this strategy! We believe this third approach is a better option. Actually, it’s been proven to be a better investment. Rather than trying to predict what’s going to happen in the market, we embrace the market pricing. We say, “You know, most of those guys on Wall Street are pretty smart and they have way more information than we do”. So deciding that most of the analysts have it right, we move to consider expected return. We know that not all stocks are going to have the same return. The same is true in the real estate market. The value of a Beverly Hills  home is going to grow faster than homes in Cleveland. Even though you know the Beverly Hills home is going to appreciate faster, you might still want that Cleveland home because it’s also going to appreciate. We may not want to own every home in Cleveland, but we know we want some of them. Translate this to stocks and you have an idea of why we think certain stocks should and shouldn’t be in our portfolio. As fund managers at DFA pick these stocks they start to discern, “is the stock too expensive?”, “is it right for the portfolio?”, “can we get the stock cheaper tomorrow”?  Then by eliminating stocks that are too expensive or have appreciated too much, a basket of stocks is created for clients to invest. In addition, it’s been proven over time that value stocks outperform growth stocks with less risk. Knowing this, portfolios are created with a tilt towards Value. A quick note: 82% of Dimensional Funds have beaten their index.

This is just one of the many reasons you should choose to work with our firm. We’d love to introduce you to evidence-based investing. Email me today to learn more about how this approach can help you with your goals.

Best,

Jose Cuevas
Vice President
Wisdom Investments
jose@wisdominvestments.com
847-290-0753

 

 

Investment advice or sales pitch? New rule will make it clear

THIS POST WAS WRITTEN BY GAIL MARKSJARVIS OF THE CHICAGO TRIBUNE
The original content can be found at http://mobile.digitaledition.chicagotribune.com/infinity/article_popover_share.aspx?guid=6092dd31-3a55-45c1-9a0b-fe075af7fa3f

Investment advice or sales pitch? New rule will make it clear

Gail MarksJarvis

On Money

 

Should you trust the adviser who’s telling you what to do with your money?

Unfortunately, many should not. The sad story is that if you are like most Americans, you are easy prey for the money advice business that’s involved with over $14 trillion of Americans’ retirement savings.

Typically, people seek out professional advice about their money because they don’t have a clue about how to proceed. But investing properly is a mystery, the fine print that goes with products like annuities is overwhelming, and finding the right person to help can be just as perplexing.

Too often, Americans end up in the arms of advisers who aren’t really there to protect and help them. They are salesmen or saleswomen, not true advisers who put clients’ needs first. These brokers aren’t rewarded by their employers for steering you into top-quality investments or insurance at the lowest price. They are hired to sell, just like the guy on the car lot. And that means many will sell what’s most lucrative to them and the firms that keep them on the job — not necessarily what’s best for you.

These so-called “advisers” may have titles like “financial consultant.” They may devote time to little league, community organizations or religious institutions. They may have clients who are rich or famous. But what they often won’t tell you — unless you probe for it — is that they aren’t paid to give you the best advice. And amid the naivete of some clients, their sales behavior can be like taking candy from babies. Americans are wasting about $17 billion a year on unnecessary fees in connection with investment advice that isn’t aimed at their best interests, according to the government.

Faced with the prospect that millions of Americans will run out of money in retirement and become a burden on government, the U.S. government took action last year to try to take some confusion out of the advice business. The Department of Labor is imposing what’s known as the “fiduciary rule” to improve the chances that when an adviser gives money advice it’s actually untainted advice — best for you, and not a disguised sales pitch. Numerous investment and insurance firms, plus business organizations ranging from the U.S. Chamber of Commerce to the Insured Retirement Institute and the Securities Industry and Financial Markets Association, sued to stop the new rule.

Those fighting the fiduciary standard claim that tightening rules around advice will lead firms to stop helping clients, especially people with little money in individual retirement accounts and workplace plans such as 401(k)s. The stakes are huge for the industry: There is about $25 trillion in U.S. retirement assets, including about $14.4 trillion in IRAs and plans such as 401(k)s, that would be subject to the fiduciary standard.

The industry’s fight continues, with U.S. Chamber President and CEO Tom Donohue noting in a recent blog post, “we are urging immediate action to undo the Department of Labor’s Fiduciary Rule.” With the Obama administration leaving office, and new Republican leadership promising less government regulation, the fight against the fiduciary rule goes into a new phase.

Fearing an overturn of the fiduciary standard, the Consumer Federation of America in the last days of the Obama administration circulated a report that takes aim at investment business lobbying efforts.

Barbara Roper and Micah Hauptman of the federation examined the websites of over a dozen brokerage firms and found that they emphasize “advice” and help “planning” for retirement. Yet the report said the lobbyists for those same firms have been fighting the fiduciary rule by claiming that they don’t promise advice and that clients know the consultant sitting across the desk from them is only a salesperson.

“Their marketing is grossly deceptive and securities and insurance regulators have an obligation to step in and bring a halt to the misrepresentation,” the report said.

As it now stands, when April arrives the new fiduciary rule will start being phased in with investment professionals having to live under tougher controls if they want to give advice on IRAs and 401(k)-type plans.

Under the fiduciary rule, brokers will have to make it clear that they are salespeople. People who give advice will have to declare themselves “fiduciaries” on paper.

But don’t take comfort in these new protections yet. First, know they aren’t in place now. So if you want to determine if you can trust an adviser now, you must ask if he or she is a fiduciary and examine their two government-required forms: ADV Forms I and II. Certain credentials — such as a certified financial planner or registered investment adviser designation — will help you spot fiduciaries. But also check out the person on BrokerCheck (www.brokercheck.finra.org) to see if your adviser or the firm has been in trouble with regulators. On the ADV form, also examine whether the person gets commissions — a business arrangement that could mean the adviser collects a fee based on what he or she sells you.

To see if your adviser has been picking solid or weak mutual funds for you, type in the name of your fund at http://www.finance.yahoo.com. Then go to “performance” for that fund and scroll to “trailing returns benchmark.” See one year, five year and 10-year performance. You want a fund that consistently has had a return at least as strong as the “category” return for more than a year.

If your adviser is picking stocks for you, ask the adviser to show you how your stock portfolio has performed compared with a benchmark like the Standard & Poor’s 500 index for large company stocks or the Russell 2000 index for smaller companies.

gmarksjarvis@chicagotribune.com

Twitter @gailmarksjarvis

The original content can be found http://mobile.digitaledition.chicagotribune.com/infinity/article_popover_share.aspx?guid=6092dd31-3a55-45c1-9a0b-fe075af7fa3f