Alternative Investments (“alts”) and The Flight to Safety – Part II

Jim Lorenzen, CFP®, AIF®

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession.  It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post.  Another alternative investment is deferred annuities.

People love guarantees.  Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople.   And, there’s some truth to that.  Guaranteed income or withdrawal riders and  equity indexed annuities do tend to have high costs.  Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever.   I have other issues.  The first is, does an annuity make sense at all?  – Any annuity.   There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices.  They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue:  the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb?  Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies.  Options can work, but they also carry additional costs and risk.

Talk to your advisor –  a real one would be a good idea – to see what your plan should be.

Jim


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Alternative Investments (“alts”) and The Flight to Safety.

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The more things change, the more they stay the same.

Jim Lorenzen, CFP®, AIF®

The financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.  What?  I’ll explain.

The industry, comprised largely of product manufacturers and their sales arms (these days it seems anyone can say their a ‘financial advisor’), has a long track-record of constantly packaging new products to take advantage of a demand among investors that the product manufacturers create through their marketing.   New ‘issues’ (created by marketing) give rise to new products to be sold to fill a marketing-driven demand.  Changes in product innovation to generate new sales is the constant that never changes.

This doesn’t mean it’s all bad; it’s just that it can be difficult for spectators to recognize the game without a program.

Alternative investments get a lot of press these days – especially if there’s a perceived risk of a down or bear market… a perception that’s  convenient to exploit at almost any point in time.  The media likes ratings, so profiling people that called a market  top or decline – and made money – is always good for attracting an audience.  And, since there’s  always someone on each side of a trade, finding someone on the right side  isn’t difficult.

I’ve always felt that many fund managers operate like baseball free agents.  Being on the right side of a call gets them on tv, which in turn attracts new assets, which in turn leads to bigger year-end bonuses.  I could be wrong, or not.

Many captive “advisors” are putting their clients into “alts” these days because their employer firms (the distribution arm for the product manufacturer) are emphasizing them.

My sales pitch for alternatives:   With alternatives, you can have higher costs, greater dependency on a fund manager’s clairvoyance, less transparency, low tax-efficiency, and limited access to your money!  What do you think?

Don’t get me wrong.  It’s not a black and white decision.  They can have a place in a well-designed portfolio; and, while many endowment funds and the ultra-wealthy do tend to own alts, most of us aren’t among the ultra-wealthy and risk mitigation is important.

What can you do?  What should you consider instead?  Well of course that depends on your situation – everyone’s different.   But, I’ll have a few thoughts you can chew on – and discuss with your advisor – in my next post.

Jim


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

College or Retirement: Does a 529 Plan Make Sense?

Maybe there’s a better way to accomplish both!

Jim Lorenzen, CFP®, AIF®

Can’t afford to save for retirement because you need to accumulate money for your kids’ college expenses?   Sound familiar?

Most parents are willing to put their kids’ education ahead of their own retirement needs, according to a T. Rowe Price survey.   In fact, their research says it’s true of 74% of parents – all willing to prioritize college saving over their own retirement needs.

But, is that the smart thing to do?

529 plans tend to be the primary college savings vehicle, but parents could be, and often are, jeopardizing their own financial security.  529 plan do offer tax breaks for their depositors; but those tend to be low dollar amounts and then often limited to only state income taxes.   A 401(k) or IRA can cut their federal taxes up to 40% for every dollar they deposit!  –  And, it’s even more if the parent’s employer is matching contributions!  This isn’t rocket science.

As for investment choices, 401(k) and IRA menus still tend to offer greater flexibility and access to thousands of mutual funds, ETFs, even individual stocks, bonds, and certificates of deposit.

 The Liquidity Issue

While 529 plan assets can be withdrawn at any time, if it turns out you have no qualified higher education expenses to match the withdrawal amount, the earnings can be taxable income – and there could be an additional 10% penalty on the income portion.

There are, however, ways to tap retirement accounts with minimal impact from taxes, costs, or penalties:   You might be able to borrow from your retirement plan at work – maybe with no application and at low interest rates – and Roth IRAs allow withdrawals of contributions at any time for any reason with no taxes or penalties.  Earnings can be withdrawn after age 59-1/2 without taxes or penalties, as well.   Note:  Those under age 59-1/2 will be taxed on the earnings portion of a Roth IRA, or any part of a traditional IRA, as regular income.  However, a pre-59-1/2 IRA or Roth IRA owner may avoid the 10% penalty if the money is used for qualified higher education expenses.

Caution:  It’s worth noting that any distribution from a parent’s retirement account may be counted as income when calculating subsequent years’ financial aid and may reduce any needs-based benefits.

Speaking of needs-based awards and benefits, while no more than 5.64% of 529 plan account value will be considered each year before any needs-based money is awarded, retirement account assets usually aren’t counted at all!

Retirement should be your number one priority.  Structured properly, retirement funds can be arranged to provide solutions for multiple objectives and minimize Uncle Sam’s dip into your wallet, as well.


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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Are All Financial Advisors “True” Fiduciaries?

Jim Lorenzen, CFP®, AIF®

The short answer is ‘no’.   Mark Tibergien, CEO of Pershing Advisor Solutions, is quoted in this month’s issue of Wealth Management saying, “When we look at those who are breaking away [from traditional brokerages] and forming their own firms, we recognize that they are making a fundamental change from being an employee to being a business owner, from being a broker to being a fiduciary advisor and from being a product advocate to being a client advocate.”

According to the article, written by Mindy Diamond, president of Diamond Consultants, a nationally-recognized boutique search and consulting firm in Morristown, N.J. specializing in the financial services industry, here are just a few of the things she mentions to look for:

  1. Ability to serve the client first. Captive advisors, she says, essentially serve as product advocates for the firm and are limited to the products and platforms approved by their firms.  Independent advisors, on the other hand, serve as client advocates with access to the whole of the market – the ability to ‘shop the street’ for products and solutions that best serve the client.
  2. Higher level of transparency. At an independent firm, safe asset custody is separate from the advisor’s business and product manufacturing, creating a process of checks and balances.
  3. A clearer payment structure. Unlike the wirehouses, independent advisors aren’t paid according to a grid – a performance measurement based on selling ability and not meeting the client’s needs.  Higher production levels result in a higher percentage commission payout from the firm to the advisor.   Independent advisors are business owners with fully disclosed compensation that’s easy to understand.
  4. Ability to select the technology and services that best suit their clients – not what the ‘house’ provides.

It’s worth noting that independent registered investment advisors (RIAs) have legal fiduciary status automatically.   This may not be true in all instances when the advisor is considered an RIA representative only for the planning stage but reverts to registered representative (RR) status for product selection and implementation.

It pays to know who you’re dealing with.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Ageing Issues Make Financial Planning More Important than Ever!

Jim Lorenzen, CFP®, AIF®

When I was a  kid, no one I knew had Alzheimer’s.  Heck, no one my parents knew had it.  In fact, I don’t think anyone even knew what it was!

There may have been a few special-needs children around, but I never saw one in either elementary or high school.   Attention deficit disorder (A.D.D.)?  Never heard the term.

What a difference a generation of changes make:  changes  in health care advances as well as in people’s lifestyles.  People are living longer – that’s a good thing; but new challenges face us all.

According to the Alzheimer’s Association, Alzheimer’s is now the 6th leading  cause of death in the U.S.  Between 2000 and 2016, deaths from heart disease actually declined by 11%; but deaths from Alzheimer’s increased 123%!

5.7 million Americans are living with Alzheimer’s today.  One in three seniors dies with Alzheimer’s or another form of dementia.  16.1 million Americans are providing 18.4 billion hours of unpaid care for loved ones suffering from Alzheimer’s and dementia.  It’s not covered by Medicare, and all those politicians who want to “reform” health care are  amazingly silent about solving this problem.

Virtually every family I know has been touched by Alzheimer’s (including my own) or special needs issues affecting children or grandchildren (again, including my own).

Many ‘baby-boomer’s’ have become known as the ‘sandwich’ generation – taking care of both parents and children or even grandchildren, due to the combination of increased longevity coupled with these new medical challenges families are facing.

It’s never been more important to have a long-term multi-generational financial plan in-place.   Many parents, for example, don’t realize that may have created plans for their special-needs child’s financial security that will actually disqualify the child’s eligibility for government benefits in the future… and that their plan needs to preserve that eligibility while seeing that the child will be secure all the way through the child’s own retirement.  Who pays the rent and utilities when the child is older and the parents are gone?  Where  does the child  live?  Who pays the rent or mortgage.. or property and other taxes?   How about transportation – for life?

Indeed, the challenges today are greater than  ever before because the issues are different.  When should a person begin planning?  Now.  It doesn’t  matter your age.  Do it now.

It’s not about being an investment guru; it’s about having a strategy tied  to a plan – and arranging assets to accomplish long-term objectives.

Do it now.   Okay, I’ll shut up.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Retirement Withdrawal Strategy May Need a New Twist!

Jim Lorenzen, CFP®, AIF®

The right retirement withdrawal strategy shouldn’t follow conventional wisdom blindly.  What’s right for you might be very different.

Conventional wisdom says retirees should withdraw funds from taxable accounts first, tax-deferred accounts (IRAs, 401(k)s, etc.) second, and tax-free money (Roth IRAs for example) last.

But, should you do it that way?

The current tax laws aren’t permanent.  These current low rates some taxpayers enjoy may not last forever.  Maybe it might make sense to withdraw money from tax-deferred accounts during years when you can take full advantage of these low marginal rates.

Another idea:  Convert funds from tax-deferred accounts to a Roth IRA to take full advantage of the 15% tax bracket (be sure to pay the taxes from other taxable money); or, you may want to reserve funds in a tax-deferred account to accommodate the possibility of large tax-deductible expenses, such as medical costs which can occur later in life.

These are  ideas only.  Your situation is unique.  Don’t do anything without talking to your team:  You financial, legal, and tax advisors can help you craft the strategy that’s right for you.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Interesting Financial Statistics You May Not Know

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Jim Lorenzen, CFP®, AIF®

I came across some interesting stats in the most recent Journal of Financial Planning; I thought you might find a few of them interesting – I know I do.

A recent survey revealed that 65% of respondents said they mistrust the financial services industry.  Only 2% said they trusted financial professionals “a lot”.  Yet, 58% of those with 401(k) plans said they wanted help choosing investments.

93% of Americans think that advisors who provide retirement advice should put their clients’ interests first.  53% mistakenly believe that all financial advisors are required to do so.  Only 21%, however, understand the difference between a planner who is a fiduciary and one who is not.  Maybe this is what leads to the gap in trust.   50% of investors who work with a financial planner say they know for certain their advisor is a fiduciary.

It appears both investor education and advisor trust need to be improved.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Retirement Income Knowledge Less Than Believed

Jim Lorenzen, CFP®, AIF®

There’s seems to be a huge gap between perceived retirement income knowledge (how much people really know) and the knowledge people actually possess.

That appears to be the conclusion one can draw from the results of the American College’s National Retirement Income Survey.  The survey used questions commonly used to gauge financial literacy and the results of the quiz were pretty poor.  The mean retirement income literacy score was 47%… only 26% of older Americans passed the literacy quiz in 2017.

While only 12% of those with the lowest levels of wealth ($100,000 to $199,000) passed the quiz, the passing rate for those with $1.5 million or more in wealth was only 50%!

If  you would like to take the American College’s Retirement Income Literacy Survey for yourself and read the full report on the national survey results, you can do it here.

Enjoy!

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Don’t Make These IRA Mistakes!

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Jim Lorenzen, CFP®, AIF®

Have you reviewed your beneficiary forms lately?  You should.  IRA mistakes there can’t be fixed after the IRA or plan owner dies.

The two biggest problem areas most prone to beneficiary form:  Divorce and trusts.  Problems often arise when someone erroneously believes that a trust takes care of naming the beneficiary for IRAs.   It doesn’t.

When someone names a trust in a will as the IRA beneficiary, a problem can arise when a new will is prepared with no trust named.    Most new wills revoke the old ones – so the trust under the first will no longer exists as a beneficiary leaving no named beneficiary.

Other problems arise when a trust is created to inherit an IRA but never named on the IRA beneficiary form.  The trust must be named on the IRA beneficiary form; and if a new trust is created to inherit the IRA, the IRA beneficiary form must be updated again.

Make sure your IRA beneficiary forms name the correct beneficiary – and contingent beneficiaries.  And, if the trust is named, make sure it’s still accurate.

If you want to learn more about IRAs, I’m never hesitant to recommend Ed Slott’s books and DVDs.  He’s one of a very minute number of ‘gurus’ (you’ll often find him on PBS) who is actually the ‘real deal’ (he’s also a CPA) when it comes to dispensing well-researched retirement and taxation knowledge.

Hope you find this helpful!

Jim

 


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Three Quick Tips for Building Family Wealth

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Jim Lorenzen, CFP®, AIF®

Here are three quick tips you might find helpful:

Choose your beneficiaries wisely when allocating inheritance money.  Leave tax-deferred accounts (IRAs and non-qualified annuities, for example) to younger family members.  They’re likely in a lower tax bracket and have longer life expectancies for taking the required minimum distributions, which means the distributions will be smaller, as well.    Highly appreciated assets are best left to beneficiaries in higher tax brackets as long as the cost-basis can be stepped up to the current price levels.  This means wealthier recipients can sell the asset with little or no tax consequences.  The high-income beneficiaries would most benefit from the tax-free benefits from life insurance policies.  Talk with your advisors.

Don’t be too eager to drop older life insurance policies.  Some may wonder why keep the policy if they no longer need it.  Those older policies may be paying an attractive interest rate, which is accumulating tax-deferred.  Secondly, those small premiums may well be worth the much larger tax-free payoff down the road.   How to tell?  Start by dividing the premium into the death benefit.  Got the answer?  If you think you’ll pass away before that number (in years), you probably should keep paying.

Convert Grandpa’s IRA to a Roth IRA.    When grandpa passes away, his IRA assets will likely be passed down to children and grandchildren, which means they’ll have to begin taking taxable required minimum distributions (RMDs) – which means they’ll probably be taxed at a higher rate than grandpa would have paid on his own withdrawals.  If grandpa converted some or all of his traditional IRAs to Roth IRAs while alive, this problem wouldn’t happen.  Smart kids might want to encourage this and even offer to pay the tax bill on the conversion now!

Hope you find this helpful!

Jim

 


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.