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Mentor RIA Consulting

Allowing you to focus on what you do best

My Blog


Negative Interest Rate Fun

Posted on October 11, 2019 at 11:10 AM Comments comments (0)
Negative interest rates, could there be anything more unappealing? Banks don’t like it because they have to pay the government interest on the reserves they hold and have not made available to lend. The government believes that the negative rates will lead banks to loan out the money instead of holding it and that as a result the economy will improve due to the added funds out there working.  The idea is also to boost inflation, a bit, also to help the economy. Of course, the government also requires the banks to hold substantial reserves in case there is a liquidity crisis (such as a run on banks).
The European multi-year experience with negative rates, which is continuing, has not proved to be the panacea the governments felt it would be and the expected boost to the economy has not materialized. How does this affect the rest of us? Well, for starters it does not mean that the banks will charge their customers to put money into savings at the bank but also means that the interest rates customers receive are paltry at best. More worrying is the fact that despite these efforts by the central banks/governments to boost the economy, the desired results have not been achieved. As always, your personal situation may vary but there is so much that is out of your control that the best one can do is hope that the government is doing the right thing. Hope is not a plan, they say, but there is little else we can do with regard to the actions of the central banks and the governments they serve.

Timing Social Security Benefits

Posted on August 21, 2019 at 12:40 PM Comments comments (0)
There have been plenty of studies examining the mass of data collected about Social Security including the timing of claims, the average benefits, the annual adjustments to benefits, claiming strategies and more. One fairly consistent finding of these studies is that a significant number of workers claim their benefits as soon as they are available and very few defer their initial claim for benefits to age 70. The consensus seems to be that those who claim when first eligible, age 62, are making a mistake that will cost them greatly in terms of the total benefits received over a lifetime.
At the other end of the spectrum, despite much being said about the great advantage of 8% annual benefit growth for those who wait to claim for years after reaching full retirement age, it apparently has not caught on. Of course, the statistics may be misleading since under prior law, one could claim and suspend at full retirement age and still receive the benefit of that 8% annual increase while a spouse could receive benefits on the suspended worker’s record. That would not be an initial claim at age 70 but would sure be getting that higher benefit.
Depending on one’s personal situation, that early claim may make sense where the claimant is not working, has few other resources and a limited life expectancy. To build value for a longer life expectancy and to potentially enhance a spouse’s benefit options, waiting to claim makes very good sense. If one is still working or has substantial resources such as pensions, annuities and other assets, then waiting to make that claim has a positive impact. With many folks worried about outliving their money, deferring that benefit claim for Social Security may be the best choice they can make.
If in doubt, get advice from your financial adviser to see how waiting may benefit you. 

Updating Coverage to Meet Changing Needs

Posted on July 31, 2019 at 3:15 PM Comments comments (0)
A common issue facing many investors is knowing when the reasons for owning a particular investment no longer apply and how best to exit that investment. One area where this issue may arise is with the ownership of multiple life insurance policies. Often sold as an investment, life insurance may build cash value in addition to its provision of a death benefit in the event of an early and unplanned death.  The ability to combine the risk protection of pure life insurance with the choice of investments within the policy is attractive to some.
However, the passage of time will change almost everyone’s circumstances and this often means that the original insurance investment no longer fits current needs. For example, insurance purchased to ensure provision for a spouse and children upon an early death may no longer be needed when the children have reached adulthood and are making their own way. Insurance intended to provide liquidity to pay estate taxes upon death may no longer be necessary due to the enormous increase in the personal exemption amount making most estates federal estate tax free. A change in income may make large premium obligations prohibitively expensive and no longer desirable.
In all these cases, a review of the insurance and the intent behind it may help to focus on what to do next. An exchange for a new policy, with perhaps better features and more in tune with your needs is one option. Cancelling a policy and investing the proceeds is another. Borrowing against substantial cash value might provide current liquidity where required. Certainly, your financial advisor and insurance agent should be able to provide you with information about your choices and what might work best for you. In addition, you may well consult with your attorney or accountant to be sure you understand the income tax consequences, if any, of a planned change.   

A Most Important Consideration in Planning

Posted on July 12, 2019 at 5:26 PM Comments comments (0)
Financial planning is a central part of what most investment advisers do for clients. Simply recommending investments because they are surefire winners (as if they ever really can be) will fall flat without consideration of the context of a client’s investing. That involves many factors ranging from age and health to employment status and from the nature of assets to the details of spending and estate goals. However important all these factors – and more – may be to a financial plan and its associated investment recommendations, there is one factor that plays an outsize role and at the same time may be all but invisible to the adviser.
This important factor is the client’s underlying psychological and emotional motivations for how the client makes financial decisions and what those decisions are. All too often, these motivations are not fully understood by the client, let alone the adviser. If a financial plan is to be successful, it must somehow be tailored to fit those motivations as well as all those other factors we need to weigh and consider in making a financial plan and recommendation.
A couple of brief examples: An adviser told me about a client who often came to the adviser for advice on how to handle a variety of financial issues. The client disdained his attorney and CPA and turned to the adviser who, naturally, was somewhat flattered. Turns out, the client’s main motivations were not the adviser’s knowledge and abilities but the fact that the client thought he was smarter than anyone else and did not want to pay the hourly fees his attorney or CPA would charge for the advice. Ouch!
In another case, a client in a second marriage gradually, over a period of several years, increased the goals and spending for the spouse and in particular in the context of a survivor plan if the client were to die early. This continued, the adviser told me, until things reached the point that the planning significantly reduced the estate for the children of client’s first marriage. When this was pointed out to the client, there was a great deal of surprise and uncertainty expressed by the client who apparently was unaware that the changing goals had such an effect. Why the client had not considered the issue was likely some unconscious motivation that was not thought through. Ultimately, a variety of options for meeting both types of goals without shortchanging either was offered by the adviser and allowed the client to reconcile the conflicting goals.  

Considering Schwab’s New Advisory Subscription

Posted on April 24, 2019 at 8:54 AM Comments comments (0)
Schwab recently announced a new offering for investors – a subscription plan which includes both investment management and financial planning. After an initial setup fee of $300, the charge is a fixed $30 monthly. The fee includes “unlimited” access to certified financial planners. When compared to the fee structure used by most investment advisers, this is an offering that could cost investors much, much less than they pay to an adviser who charges a percentage of assets under management.
Much has been said about how this may affect the financial industry and, in particular, investment advisory firms. Investors who are not interested in building a deep relationship with one adviser but wish to have access to services on demand will find this approach attractive. Those who are price conscious will also see a lot to like with the subscription service. However, these are almost certainly the very same clients that serious investment advisers would not be seeking to serve with their businesses. The mass affluent as a group can generate substantial fees for their service providers but the business model used by many investment advisers render these investors unattractive on the basis of fee versus time and effort spent on services.
The consensus among advisers seems to be that to differentiate themselves – and their fees – from the Schwab offering, the best course is to clearly communicate their value to their clients. Certainly, the personal relationship most advisers establish with their clients differs from the availability of a remote planner who may not be the same person each time a client seeks an update or advice.  What do you think – and what might your approach to this be?

Choosing a Financial Planner

Posted on February 9, 2019 at 10:22 AM Comments comments (0)
Financial planning is a vague term and is susceptible of many possible constructions. Almost anyone can call themselves a financial planner and many do. Some are very well credentialed while others are not so much. If you are considering working with a financial planner, you may want to learn exactly what they are offering and what experience they have as well as what fees and what benefits you can expect in a relationship.
If a financial planner is going to provide recommendations about specific investments, it is necessary for that planner to be registered with the SEC or an appropriate state regulator. A good starting point then in choosing a financial planner will be to ask about any registrations the planner holds as well as inquiry into other designations (such as CFP, CPA, CFA and the like). The planner should be more than happy to share such information with you.
The next step is to ask for a copy of the planner’s client agreement. This document should lay out in some detail what the rights and obligations of the planner and client will be during the relationship. It should clearly state the nature of any fees and costs to be borne by the client, when and how they are to be paid and what exactly the client can expect to receive in return. Separately, the planner may have a disclosure document such as the Form ADV Part 2 which registered investment advisers are required to provide their clients. Any such disclosure document should also be examined to learn about how the planner does business.
If a planner does not provide you with a client agreement to review or won’t provide any detail about the planner’s qualifications, customer referrals, or other documentary information such as registrations, then it would be wise to look for a different planner. It does not seem worthwhile to enter a business relationship with someone who is not open about their business or is prepared to do business without a formal agreement.

Kiddie Tax Update

Posted on January 30, 2019 at 10:59 AM Comments comments (0)
As you probably already knew, the kiddie tax is the attempt of the taxing authorities to prevent high income adults from shifting income to children who enjoy a lower tax rate. With the tax law overhaul at the end of 2017, a couple of changes in the rates mean higher taxes for many children for the next several years before the law sunsets in 2025.
The focus of the kiddie tax is on unearned income such as interest, dividends , capital gains and the like. This type of income is usually derived from assets which have been gifted to the child or contributed to a trust of which the child is beneficiary. Earned income is not the focus of the kiddie tax so a working child is not taxed as heavily on that income.
Prior law subjected the unearned income to a parent’s marginal tax rate where that rate was greater than the rate applicable to the child as an individual taxpayer. Under the current law, the first $2,200 of unearned income is taxed at 10% while additional unearned income is now subject to the estates and trusts rates. It is important to understand that the estates and trust tax brackets are very narrow and the applicable tax rate can increase rapidly as a result. The first $2,600 of unearned income above that $2,100 threshold for kiddie tax applicability, is taxed at 10%. However, unearned income above $2,600 and up to $9,300 is taxed at a 24% rate while the next bracket applies a 35% rate for amounts up to $12,750. Amounts above that income level are taxed at 37%. This means a much heavier tax burden is likely where there is any significant unearned income.
Other rules pertaining to the applicability of the kiddie tax – such as ages, classification as a student, and provision of support – are unchanged. If you have made significant gifts to minors resulting in unearned income to them, you will want to ensure that you are prepared for the impact of these changes since you will see them in the 2018 tax returns you are currently completing.

Charitable Gift Letters of Intent

Posted on January 21, 2019 at 9:46 AM Comments comments (0)
Charitable gifts are an important part of many persons’ financial plans, not only doing good but also providing some level of satisfaction to the donor. Charitable gifts may range from a small amount paid in cash to very large sums transferred in kind, by check or other manner. When the amount is at all substantial and particularly where it is intended by the donor to fund a particular project of the charity, it is not uncommon for the charity to ask for a pledge or some other form of written confirmation of the planned gift.
This is where things may get complicated for the donor. Depending on the source of the funding promised, it may not be advantageous for the donor to provide a formal, or even verbal, pledge to the charity. A pledge becomes an enforceable obligation of the donor. This is not a problem where the donor intends to write a check to the charity and has the resources to do so. However, where the donor holds funds invested in a donor advised fund, under IRS rules that fund is not permitted to transfer money to the charity as it would benefit the donor by satisfying the donor’s legal obligation.
Not surprisingly, there is an approach which will both permit the donor advised fund to make the recommended grant to the charity and provide the charity with a written confirmation of the donor’s plan to gift that money. This is called the non-binding letter of intent. The letter will state the donor’s intent to recommend that the donor advised fund make a grant to the charity as well as explain that the decision to act upon the recommendation lies with the public charity which runs that donor advised fund.
The point of this discussion is to remind those with charitable intent that it is important to ensure that whatever you do satisfies the various legal requirements so that the gift you want to make can be effectively done without causing you any problems. Consultation with your attorney or advisor or, more particularly, the donor advised fund where applicable, will help you get the best advice on making that gift. Since charitable giving is so important to so many worthwhile causes, it is well worth the effort to do it right.

Choosing the Right Fiduciary

Posted on January 11, 2019 at 8:55 PM Comments comments (0)
Quite apart from working with financial advisors or brokers who may or may not be fiduciaries, the choice of those persons who are to carry out your wishes and instructions is critical to the success of your plans. Whether it is a will naming someone as your personal representative or executor or a trust effectuated by a trustee who is to provide for a spouse, future generations, or even a charity, the naming of the fiduciary may be determinative of the success of your planning.
Often the best choice is a competent and trusted family member with whom you can discuss your intentions and wishes and address potential conflicts among beneficiaries and other family members. If you are fortunate, there will be such a person to name as your executor or trustee and they will be available, willing and able to serve when the time comes. Of course, things change over time and people may die, move away or otherwise be less desirable in the fiduciary role. Here is where the ability to write a new will – with a new executor – or to amend a revocable trust with a new successor trustee can make things work.
On the flip side, the attorney drafting your will or trust may choose to name a firm or person you do not know to act as the successor executor or trustee when you die or are no longer able to handle your affairs. Be very careful here, because this unknown professional may or may not be competent and will almost certainly not know (or probably even care) about your intentions and wishes nor have any understanding of your reasons for the plan you are attempting to implement. Like many trust companies, these fiduciaries are in business to make money but not necessarily to make an effort to carry out your wishes. All too often these fiduciaries are reluctant to surrender control or be responsive to the beneficiaries and will charge top dollar for their services any way.
This is not to say that a corporate trustee that YOU select will necessarily be the wrong choice. Such a fiduciary could be the best choice depending on your situation but only where you have the opportunity to understand what to expect and why. The existence of a relationship with the proposed fiduciary can be much more important and a stronger reason for a selection than simply being available to offer a service. Make sure you understand who will be responsible for handling that will or trust when you cannot and that you are comfortable with the choice.

Considering Donor Advised Funds

Posted on December 19, 2018 at 5:34 PM Comments comments (0)
Currently a very popular charitable giving technique, the donor advised fund makes it easy to fulfill donative intent without a great deal of effort. With the very low contribution thresholds some of the funds allow (Schwab, Fidelity and Vanguard for example), donor advised funds are available to practically any investor for a small initial investment. That investment could be in cash, mutual funds/ETFs, stock and other types of investments. What’s more, the funds offer a wide variety of choices of charitable recipients as well as in the investment allocation of the funds.
Some interesting attributes of these funds include the ability to take the income tax deduction for a charitable donation immediately while deferring the actual distribution to charities for some time. The transfer is of course irrevocable – hence the availability of that immediate deduction –but it permits one to pick and choose the charitable recipients and timing. Of course, it is also important to note that there are administration fees and investment costs associated with the funds and that will effectively reduce the total passing to the ultimate charitable beneficiaries.
If you are considering a donor advised fund, do your homework and understand the costs, limitations and requirements associated with the fund you are considering. Compare this approach to the making of a direct gift to a qualified charity which will be deductible without the additional costs and steps coming with the donor advised fund. For some, the additional control with your own direct gift is more important while others will be very happy with the ease of use and convenience of the donor advised fund. Happy gifting!