Biz Journal Insightful Discussions

by | Feb 26, 2019

BizJournal Brett

There is always some level of uncertainty when planning for the long-term. There were changes to the way how college financial aid is calculated in 2017. Most of the tax code for individuals and business owners was changed in 2018. Proactive planning is a must in order to benefit from these changes, mitigate your risks and to solidify your retirement plan.

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Market fluctuations, changes to tax laws and political uncertainty can weigh heavily on day-to-day investment decisions. But considering a certain amount of ambiguity will always be a given, the best approach to wealth management is planning for the long-term – in particular, paying for a child’s college tuition, exiting your business, retiring, ensuring long-term elder care is in place, and leaving assets to your family.

We asked four local professionals to share financial planning and accounting strategies for managing wealth through uncertainty and into the future.

What is your outlook for the stock market in 2019? 

BRETT TUSHINGHAM: Our risk management process is predicated on measuring trends in certain data points. Two of the most important trends for forecasting future market returns are growth and inflation. Both of those data point have been trending downward for most global markets over the past year.

If that trend continues, we would expect investments like treasuries, gold and bond proxies, such as utilities and REITs, to outperform. We are tactical in nature, which means, at the moment, we would overweight those sectors as part of a diversified asset allocation strategy.

What is the most common mistake people make in wealth management? 

TUSHINGHAM: The most common are procrastination and not proactively planning your financial success. You need to take action, develop a plan and monitor it closely.

The last thing you want to do is act on whims and let emotions drive important decisions. Without a plan, you’re going to have a tough time knowing where you’re going and how close you are to achieving your objectives. Once a plan is set in motion, you will want to be proactive and monitor it on a regular basis. In 2017, the rules surrounding calculating college financial aid changed. In 2018, the tax laws were overhauled.

These are just a few examples of how changes could have substantially impacted one’s financial plan. Once again, establish a plan and be proactive.

How is technology continuing to change the ways people invest and/or manage finances? 

TUSHINGHAM: All the data you could want can now be accessed on your phone. Clients can buy and sell securities with a few clicks. Robo-advisors have emerged as an alternative investment platform for investors.

Technology has given consumers additional investment options and forced some financial advisors to become more transparent with their costs and validate their value proposition. This is great for consumers, as it allows them to compare fees and services to industry peers and make more informed decisions.

Are there benefits to working with a wealth advisor versus a robo-advisor? 

 TUSHINGHAM: Absolutely. Clients looking for a more proactive planning and investment approach or help with a specific transition, such as divorce, would probably be better suited working with a wealth advisor. In addition, some advisors work with a specific profession or demographic, which might appeal to some people.

Our “Personal CFO” service, for example, is targeted for physicians and executives. We plan all a family’s financial affairs, from late-stage college planning, to retirement planning, to optimizing their Social Security.

We also coordinate with a team of professionals, including CPAs, attorneys, mortgage brokers and insurance agents, to ensure that nothing gets missed. This appeals to busy professionals with greater planning needs.

That being said, do-it-yourself investors with limited planning needs might be attracted to a robo-advisor. People seeking financial advice should have options, so they can match their needs with the appropriate services.

What is fee compression and how does it impact investors and/or advisors? 

TUSHINGHAM: Technology has reduced the cost of doing business and consumers have more options than ever when it comes to automated investment platforms.

Advisors are being forced to justify their fees. A common consumer question might be, “Why am I paying over two percent in fees for limited planning and passive investing?” It’s a valid question that advisors should be able to provide a quick answer to.

How can taxes impact a person’s long-term financial goals? 

TUSHINGHAM: An essential part of any financial plan is mitigating taxes. Families should ensure that they are obtaining 100 percent of the deductions and credits for which they are eligible at all times. This starts with optimizing retirement plans and encompasses tax strategies to ensure that their income stays below certain levels when possible. This ensures that they don’t lose out on any available deductions, credits and even college financial aid.

The benefits of proactive tax planning can clearly be seen for families in the distribution or retirement phase of their life. When should we begin our Social Security benefits? Which accounts should we draw from first? Do we do the Roth conversion? All these decisions need to be coordinated to help minimize taxes and optimize cash flow, so clients can meet their lifetime spending needs.

What tax breaks are the most beneficial for small business owners to consider in terms of their wealth management? 

TUSHINGHAM: Tax reform in 2018 brought about the deduction QBI. The deduction allows some business owners to take a deduction for up to 20 percent on certain business income on their personal returns. Any type of “pass through” business that is not a C Corporation is eligible. Not all income is eligible, and some businesses will lose the deduction above certain income limits, so proactive planning is necessary.

Business owners can also hire family members, which can provide a number of benefits. So long as the job is legitimate and pays a reasonable wage, parents can deduct the wages, reduce their taxable income and potentially qualify for a larger QBI deduction. Children usually pay nothing in taxes, thanks to their standard deduction ($12,200 in 2019), so the earned income makes them eligible to fund a Roth IRA and the employment provides them with valuable experience.

Bonus: Get our free flowchart “Am I Eligible for a Qualified Business Income (QBI) Deduction?”.
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 How can an exit plan help a small business owner effectively manage wealth? 

TUSHINGHAM: A proper exit plan will not only maximize the value of a business but also ensure that the seller has adequate assets to support their retirement needs. We see this firsthand, as most of our clients are physicians who have become partners in their firm and want to plan for that eventual day when they sell to someone else.

Most business owners are reactive when it comes to establishing an exit strategy and aren’t prepared for a disability or death of a partner or haven’t established a clear succession plan. Having an exit plan in place can protect owners from the unexpected, keep them in control and preserve what they have worked so hard to build.

What is your best piece of financial planning advice for self-employed individuals? 

TUSHINGHAM: From a tax and retirement planning standpoint, I’d have the optimal benefit plans in place to attract talented employees and minimize taxes.

One-person and husband-and-wife businesses can take advantage of small business 401(k) plans, also called Solo 401(k)s, that have minimal expenses and maintenance and allow them to contribute over $50,000 each annually.

Larger firms should look to establish traditional 401(k) plans, 529 savings plans and flexible spending accounts for themselves and their employees. Most plans are now offered on digital platforms that allow for quick implementation and online onboarding of employees at reasonable costs. These plans offer tremendous tax benefits and can help attract and maintain employees.

How can people prepare now for future expenses, such as their children’s college tuition? 

TUSHINGHAM: We blog about college planning extensively, as the cost of education is out of control. Families aren’t receiving the advice they need from advisors, children are graduating with more student loans than ever, and parents are jeopardizing their retirement by subsidizing the tab.

For starters, start saving early in a college savings plan. There are a number of different plans, so you will need to do some research to determine the best fit. Savings grow tax-deferred and can be withdrawn tax-free for most school expenses.

You also need to employ late-stage college planning strategies that focus on college selection, financial aid, tax aid and wealth management. This should start before your children enter their junior year of high school. Some schools now cost over $300,000 to attend. You can’t afford not to plan for it.

What advice would you give about transferring assets to future generations? 

TUSHINGHAM: This depends on what your goal is. From a tax standpoint, the estate tax exemption for 2019 is up to $11.4 million for each spouse. This means that you can leave up to $11.4 million to your heirs without paying any federal estate tax. The exemption is also portable, which means any unused exemption by one spouse can be transferred to the surviving spouse.

The number of households subject to estate tax should be minimal, thereby reducing the need for “estate reduction” strategies, such as annual gifting. That being said, gifting appreciated assets to people in lower tax brackets and charities can be an effective tax-planning strategy for paying less income tax.

If your goal is to have more control of the assets or protection from creditors, then other strategies should be explored.

A number of different trusts can be established for control, asset transfer and asset protection. Your estate plan should be coordinated with the rest of your financial plan to ensure that nothing gets missed.

How do the investment practices of younger generations (i.e. Millennials and Gen Z) differ from those of their parents? 

TUSHINGHAM: Younger generations are embracing technology. They do everything on their cell phone, from paying bills to viewing their investment statements. They are looking for mobile-enabled, user-friendly technology platforms to review their finances and conduct business.

Their parents are catching up to this trend, as most all of our clients prefer to receive their information online now. We currently meet these expectations with online account opening and transfers, client portals and online meetings.

What are your top three investment tips for 2019? 

TUSHINGHAM: For parents with children in high school, develop a late-stage college planning strategy. Find a college where your child will fit in and garner merit aid. This is “free” money, such as scholarships and grants, that is not tied to your income or assets. College is an enormous investment and the primary funding tool should not be student loans or Mom and Dad’s retirement assets.

Mortgage rates have come down and online money market rates have gone up as of late. Look for opportunities to refinance mortgages or consolidate other debts while making the same monthly payments, thereby not increasing the term.

Most banks are paying their clients next to nothing on savings. Explore online money market options that are currently paying over two percent, liquid and FDIC insured.

People in retirement need to take an honest assessment of the risks in their portfolio. Would they be willing to sit through another 50-percent correction as part of a buy-and-hold strategy or, more importantly, could they afford to if they are also drawing income from the portfolio? During this distribution stage they need to manage portfolio volatility and optimize how they turn investments into retirement cash flow.