Insightful Discussions
Feb 23, 2018

Managing and Growing Your Wealth

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Continued economic growth and a mostly favorable economic forecast are good signs thus far in 2018. However, even in a stable market, it’s good practice to protect assets against any future volatility. We asked four financial professionals for their advice on solid investment strategies and long-term planning goals.

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What is your outlook for the stock market in 2018?

SUSAN WILLETT: We are still cautiously optimistic. The market has reached an all-time high and continues to rise. The underlying fundamentals are still attractive, and the new tax bill is spurring growth, so we see further potential. As always, we continue to advocate diversification in all markets, since no one has a crystal ball.

SCOTT WINSLOW: We believe stocks are likely to outperform bonds in 2018. We also think that after a very low-volatility market in 2017, normal volatility will return.

After years of domestic equities outperforming international equities, we believe it is time to have exposure to international stocks. Our position is based on a strengthening economy, an accommodative monetary policy and the stimulating effect of the government’s reduction in regulation and taxes for corporations.

MATTHEW THOMPSON: As an estate planning attorney, my focus is on the transfer of clients’ assets to their chosen beneficiaries, whatever those assets might be. I don’t provide investment advice.

That said, we always pay close attention to the market, interest rates and other economic factors, because varying conditions make different planning strategies more or less appropriate at the time. We must be nimble and take advantage of circumstances as they change, because some strategies are best employed when the market is down.

So long as the current run continues, we all will be happy when we check our accounts. If there is a temporary dip in the market, however, we’ll be prepared to take advantage of it from an estate planning standpoint.

BRETT TUSHINGHAM: The current trends in data we follow bode very well for certain sectors of the U.S. economy, at least in the short term.

Our investment process is data-dependent, so our outlook changes as the data changes. On a longer-term basis, the outlook is anybody’s guess. We don’t make long-term projections because we feel it is futile.

That being said, U.S. growth has accelerated year over year for six straight quarters. Wages are increasing, company profits are improving, and unemployment is near all-time lows. All those factors historically bode very well for certain sectors in the U.S. economy, including technology and consumer discretionary stocks, and not so well for bonds and bond proxies, such as utilities.

We have some concerns down the road, like the level of consumer debt and the rise in student loan default rates.
Market volatility will return at some point, so people should be prepared and employ an asset allocation that fits their situation.

What is the most common mistake people make in financial planning?

THOMPSON: Some people just don’t have a plan or, if they do, they get bored with it and chase something more exciting that gets them off track.

In my role as an estate planning attorney, it is interesting to see how different clients with very similar backgrounds and incomes can end up in completely different places economically over time, largely because one took their plan seriously and the other ignored it.

TUSHINGHAM: Not having a plan at all. I know it sounds silly but it’s as simple as that.

One of my favorite sayings is, “If you don’t know where you’re going, any road will take you there.” That applies in this situation. You need to establish goals, develop strategies to get there and proactively monitor your progress to determine if any modifications are necessary.

And by not having a plan, there’s no way to determine that. There’s no way to determine if you’re saving enough, living above your means, or getting further away or closer to achieving your goals.

I feel that is the biggest mistake, but other mistakes include paying excessive fees for investment management, using retirement assets to pay for children’s college - thereby jeopardizing their family’s ability to achieve their own retirement goals - and just not having an investment process at all and letting emotions drive investment decisions.

WINSLOW: Procrastination and not saving enough. We live in a consumer- driven culture. Many people fail to discipline themselves in their spending. We try to counter that by educating our clients on the time value of money and how that relates to the cost of discretionary goods.

Not having a disciplined savings and investing plan makes it easy to buy unnecessary goods and services, creating habits that equate to a spending vacuum. Nabell Winslow Investments has its own simplified budgeting process that makes planning easy without cumbersome spreadsheets and journals that make financial planning so boring and tedious.

WILLETT: Not doing it. Not having a plan is never an option. People put it off for various reasons, just like they do going to the dentist. But making a plan can be the single-most important decision you ever make. There’s a reason the saying goes, “An ounce of prevention prevents a pound of cure!”

How do you advise clients regarding income tax-deferred investments versus other investments?

WINSLOW: Most firms deploy some kind of asset allocation and diversification process to protect clients. At Nabell Winslow, we take it many steps further. We do asset location planning. This process is how we construct portfolios based not only on tax, but also on investment strategy. We are likely to put more passive strategies in non-retirement accounts - versus more active - that create gains or taxable income in the deferred accounts.

We also construct plans that map to the client’s tax returns, both in the accumulation stage and the retirement years. We aim to have strategies designed to have strong after-tax results.

WILLETT: IRAs and other tax-deferred vehicles offer unique benefits that few other planning techniques do, so they should be taken advantage of to the fullest. No one likes to give money away and that’s what happens when a tax benefit is available, so take advantage of the savings. At Old North State Trust, we offer self-directed IRAs for investments in unique assets, such as real estate, LLC, etc., that don’t typically fit into other IRAs.

TUSHINGHAM: Tax-deferral and compounding are extremely valuable tools in building wealth. We always recommend that clients contribute enough to their employer retirement plans to obtain any company matching contributions or, as we call it, “free money.”

Above and beyond that, it usually makes sense to optimize employer retirement contributions in accounts, such as 401(k)s. The 2018 limit is $18,500 and $24,500 for people over the age of 50 before year-end.
Sometimes people in lower tax brackets will benefit more by contributing to a Roth 401(k), and that just depends on the client’s situation. For most self-employed people, we utilize accounts like SEP IRAs, Solo 401(k)s and cash balance plans. These plans allow business owners to contribute substantial amounts of money on a pre-tax basis.

We firmly believe in tax diversification - having multiple buckets of assets to choose from when income is needed down the road. Therefore, we also encourage investing in taxable accounts on an after-tax basis to compliment the pre-tax investing in company plans and IRAs. Distributions from IRAs and 401(k)s will be subject to ordinary income tax. Taxable account distributions will be subject to capital gains tax, which is usually much lower for clients. This provides us flexibility by giving clients the money they need when they need it in the most tax-efficient manner.

THOMPSON: For many of our clients, much of their wealth is tied up in retirement accounts. Any distribution from a traditional IRA is subject to income tax. Being tax-adverse, a lot of our clients are predisposed to take only the “required minimum distributions” from those accounts.

In some cases, however, we encourage clients to consider drawing on their IRAs more aggressively if they are likely to be in a lower tax bracket than their children, who otherwise will inherit the IRA accounts and eventually be responsible for the tax at their higher rates.

For clients who have charitable objectives as part of their estate plan, we try to source those gifts from the IRAs, because the charities do not pay tax upon receipt of funds from the IRA.

To the extent clients want to have individuals as the beneficiaries on their IRA accounts when they die, we want to make sure those beneficiaries can receive the assets in an income tax-efficient way. When a beneficiary is named outright, she can choose to establish an inherited IRA account and “stretch out” the distributions over a period as long as her life expectancy. This results in smaller amounts of income being realized annually by the beneficiary, as opposed to all of the income being realized at once if the IRA is simply cashed out.

Some clients, however, want to leave assets in trust for their chosen beneficiaries - rather than outright - for asset protection, management, tax or other reasons. Normally, designating an IRA to a trust can cause an accelerated pay-out - and a less-efficient income tax result.

We spend a lot of time incorporating provisions into our trusts so that the stretch-out rules apply as if the trust beneficiary had been named individually. The IRS rules around IRAs are complex, so the trust needs to be properly designed to avoid an inefficient tax result.


How could the federal tax plan impact estate planning, particularly for clients with existing formula gifts?

THOMPSON: The new tax law doubles - from $5.5 million to $11 million - the amount an individual can leave in total to beneficiaries other than a spouse or charity without incurring gift or estate taxes. The law remains that transfers to a spouse or charity are not subject to gift or estate tax. Therefore, a married couple can pass about $22 million without transfer taxes if they plan correctly. These larger exemptions likely eliminate the gift and estate tax as a major concern for most people.

Estate planning, however, always has been about much more than minimizing gift and estate taxes. Our clients, regardless of level of wealth, are concerned about many other practical issues.

They want to ensure what they leave is protected against their beneficiaries’ creditors. They are worried about making sure a young beneficiary’s inheritance doesn’t create a disincentive for him to work. They want to make sure a disabled beneficiary doesn’t lose her benefits because of what was left to her. They worry how to benefit a current spouse while ensuring the children of a prior marriage are not disinherited. They are looking for ways to simplify and make private the administration of their estates upon death. These and other issues are universal.

Even with the increased exemptions, I do think clients with a net worth of more than $7 or $8 million should consider keeping in place documents that contemplate and plan for the possibility of estate tax, and for those with very large estates, these documents are a necessity.

There simply is too much risk that the exemption figure will go back to a lower amount if the current law sunsets as scheduled in a few years. In the current environment, there is a premium on the documents being flexible, so various factors can be evaluated and elections made at the time of death to achieve the best tax result.

Regarding “formula gifts,” many older documents were drafted when the estate tax exemption figure was much lower.
In those documents, we frequently see a carve-out of the exemption amount to children immediately, with the remainder passing to a surviving spouse. Now that the exemption has increased so dramatically, that sort of plan could result in the surviving spouse being disinherited altogether!

In general, we are suggesting clients brush off and review with us documents that are more than a few years old.

WILLETT: The new law raises the lifetime exclusion amount significantly, so advisors should be discussing existing estate plans with clients to ensure their plans are still appropriate. For example, the new limits will eliminate the need for the old “A/B” planning or Credit Shelter/ Marital trust plans for many couples. It will simplify plans greatly.

WINSLOW: The first thing clients should do is set up a meeting with their estate planning attorney and other advisors. The recent tax reform has raised the exemption up to $22.4 million for a married couple. Most people do not have that kind of wealth, thus the estate tax will only affect a fraction of one percent. Most gifting strategies opt to forgo the step-up in cost basis to elude the estate tax. We have seen many scenarios already in which ceasing the gifting strategy will likely have a better forecasted outcome to the family.

How has technology changed the way in which people invest?

TUSHINGHAM: Technology has made access to information more readily available. It has also provided people with alternative investment platforms, like robo-advisors.

I personally feel that the increased investment options have forced advisors to become more transparent with their fees and services. This has resulted in advisors developing their own robo-platforms to compete, as well as fee compression across the industry. More financial advisors are now displaying fees on their websites, which I’m all for; we do that here. It allows people to compare fees and services to industry peers. In the past, they couldn’t do that.

People are more informed. They are asking their advisors questions, and advisors are being forced to substantiate their value proposition and prove their worth, which is great for the consumer.

WILLETT: We live in an extremely fast-paced, information-driven world. Technology has put information within reach for everyone, so that we all know exactly what the markets are doing every second. That helps our clients become much more informed. It also helps us stay connected with our clients more than ever before.

We can communicate with clients all over the world via e-mail, Skype and all sorts of creative ways. Technology is ever-present and a tool just like so many others that we use to enhance our client experience.

THOMPSON: I can’t speak to the investment side, but one trend we see is people using estate planning documents they find or produce on the internet.

I like to think our clients pay for my advice, and the documents we produce and techniques we employ are just an extension or result of that advice. I worry that people who use internet documents are not getting that advice, and I wonder whether those documents really are appropriate for their circumstances or accurately reflect their intent.

WINSLOW: Technology has and will continue to change the way people conduct all aspects of their lives in an exponential way. Investors have more access and options than ever before.

Just 10 years ago, most clients received paper statements, whereas today only a small percentage request paper statements. We have clients very late in retirement reviewing their accounts online, when just a few years ago they said it would never happen.

What cybersecurity measures are in place to protect against the risks of new wealth-management technology?

WINSLOW: Regulation in the financial services industry has grown exponentially due to opportunistic people out there without integrity. We have put in long hours of incorporating sophisticated encryption software to protect our clients.

However, technological solutions are only one measure of protection. We are constantly educating our clients on how to curb their risk of fraud. At the corporate level, we are putting policies in place to have strict procedures to protect our clients’ assets and information. We take pride in getting to know our clients and protecting them from identity theft.

TUSHINGHAM: Technology can make life easier and pose more problems at the same time. Cybersecurity has come to the forefront recently, as it should. Many well-known companies, such as Yahoo, LinkedIn and Equifax, have suffered breaches.

As a firm, we utilize many measures to combat breaches. We use third-party cybersecurity monitoring. We encrypt all our files. We use two-factor identification. We change passwords quarterly. We encrypt all emails that contain personal data, such as account numbers and social security numbers. We vet our service providers to ensure they are using similar measures, so our clients are protected.

WILLETT: We have developed an entire set of policies and procedures to combat cybersecurity. In fact, our regulators have even started a separate examination process specifically for IT functions due to the heightened nature of the risk posed by this aspect of our industry.

What are the benefits of working with a wealth advisor versus a robo-advisor?

WILLETT: What are the benefits of ever having human interaction instead of talking to a machine, especially when dealing with something as important as your financial wellbeing? There simply isn’t any comparison.

A human advisor can not only answer your questions and help you design a plan tailored to your specific needs but also help you address issues you may not have even thought about.

They can provide you with real-life examples from their experience, work with your other advisors, meet and get to know your family, learn about who you are and what’s important to you, understand the nuances of the relationship and a million other things that can only come from having a relationship.

TUSHINGHAM: This just depends on what the person is looking for. For someone who believes in a buy-and-hold investing strategy and seeks limited or no planning, the robo-advisor could be a sound solution. That’s why you’re seeing so many financial advisors and firms develop their own robo-advisor platforms.

Alternatively, someone looking for assistance with more complex planning matters, such as tax-mitigation strategies, social security optimization and late-stage college planning, which we specialize in, should benefit by working with a fiduciary financial advisor.

For example, we help clients integrate their college planning and retirement planning into one strategy. Some colleges now cost over $300,000 to attend, and most families aren’t receiving the guidance they need when it comes to paying for college. Our goal is help families get their children in the right school, pay the lowest price, graduate with minimal student loans and protect their retirement assets.

College selection is the most important part of the college planning process. Most kids don’t graduate in four years and the dropout rate is increasing, so some aren’t graduating at all, which means students are taking on a lot of debt and have no degree to show for it.

We look at college as an investment in terms of how much income and loans will be used to fund it and what the student is likely to make with that degree when they graduate. Some children are being asked to make an investment the equivalent of a mortgage at age 17. We want to guide them in this process. Ultimately, we just want them to make a wise investment in education and their future.

I think it’s important to match the child with the college from a personality standpoint. Is the college too big? Do they want to be close to home? Does the college offer a broad array of majors in case the student is unsure of a career path?

We offer college assessment tests to try to determine what interests a student has, what majors might be a good fit and what jobs they might want to pursue after college. We also like to match the client with a college where the child’s academics rank in the top 20 percent of the incoming freshman class. This makes the student more desirable, and the college is more likely to offer merit aid. And we want to match a child with a college based on the family financial situation.

Clients also looking for a more tactical investing approach and transition planning - someone going through a divorce, the death of a family member or sale of a business, for example - might be better off working with a fiduciary advisor, such as a certified financial planner.

People seeking financial advice should have options, so they can match their needs with the appropriate services.

THOMPSON: From my experience, a financial advisor can help protect a client from investment decisions based on emotion. They can ask hard questions and make the client deal with issues they would otherwise ignore. They also can recognize issues that are not strictly investment-related and help bring in professionals to ensure those issues are addressed.

As an example, I had an elderly client’s financial advisor call me because she noticed unusual withdrawals from her account. It turned out one of the client’s children was using the account for her own purposes, and we were able to address the situation before it got too out of hand. A robot-advisor would not have called me.

WINSLOW: A skilled and experienced wealth advisor will be able to offer a much more complete array of services to coordinate your wealth. Robo-advisors provide vanilla offerings that may be appropriate for very small accounts.

However, in the end, they will struggle with the new fiduciary laws, since they cannot get to know the client and coordinate with other professionals while managing income, taxes and other risks that investors face.


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

TUSHINGHAM: This depends on what you’re trying to accomplish. The new individual estate exemption is $11.2 million. That’s $22.4 million for married couples. This will dramatically reduce the number of households subject to estate tax and reduce the need for gifting as an “estate reduction” strategy.

However, many states still have a state-level estate tax. North Carolina is not one of them, fortunately. So, depending on where you live, it might still be beneficial to utilize a gifting strategy to reduce the size of your estate. Gifting appreciated assets to people in lower tax brackets can really be an effective tax-planning strategy when done properly.

It really depends on what your goal is. For example, we use gifting as a strategy for college planning. So, families who will not qualify for need-based financial aid can gift appreciated assets to their children. Then, the children can sell the assets after college and use the proceeds to pay down student loans or for a down payment on a house.
Additionally, the taxes paid can be substantially less when compared to the parent’s tax rate.

WINSLOW: At Nabell Winslow, we incorporate a three-legged stool approach. We believe clients need to pass on human and intellectual capital, as well as financial capital, to the next generation.

Human capital are the skills to interact with people. Having integrity and empathy, among other things, are crucial traits to pass to the next generation. Intellectual capital is education. Both formal education and real-life experience are necessary for the next generation to astutely deal with a changing world and have the leg up they will need to compete.

Last of all is financial capital, although without the first two legs of the stool, this will not matter. Access to financial capital is important. It has been said that making your first million is the hardest. Financial capital opens doors and allows for investment in opportunities that may not have been there without it. We believe if there are three strong legs to the stool, it will create the most optimal outcome.

WILLETT: Work with a trusted advisor to develop a reasonable, flexible plan. I always say plan for the worst and hope for the best, because no one can predict the future. You need flexibility to allow for both scenarios.

Great things can happen with the transfer of generational wealth, but statistics show it can also lead to the total loss of that wealth by the third generation. The advisor needs flexibility to be able to work with whatever develops in the future.

THOMPSON: More of our clients are leaving assets in trust for their children and more remote descendants, rather than making outright distributions to them. The reasons for using a trust are compelling. A properly designed trust will be creditor-protected, be it from a divorcing spouse, a debt collector or otherwise. It also can provide controls and tax efficiencies that otherwise are not available with outright distribution.

For a beneficiary who would not need a trust but for the protections and advantages it provides, that beneficiary can be established as her own trustee. She can be given broad discretion regarding investment and distribution decisions, as well as the right to direct any remaining trust assets upon death. Of course, the trust can be more restrictive if circumstances warrant it.

Another consideration we discuss with clients is making lifetime gifts instead of having all assets pass at death.
Smaller gifts made at an earlier point in life often are more helpful to the recipients. Plus, our clients often find a real satisfaction in witnessing the recipient enjoy the gift. Of course, working with a financial advisor to ensure you can afford the gift without impacting your lifestyle is important.

How can clients ensure their assets are used responsibly by their heirs?

WINSLOW: As noted before, clients must work on advocating for strong human characteristics and education for their heirs. That being said, circumstances do arise that create needs. We believe clients should have a competent, experienced estate planning attorney to consult and draft trusts that act as financial servants to their family when they pass. Creating a well-thought-out estate plan is a responsibility of stewarding your assets that should not be taken lightly.

THOMPSON: In an ideal world, our clients would feel comfortable that their values regarding money and financial responsibility have been imparted on their children and grandchildren before they receive an inheritance. As a practical matter though, we often use trusts to reinforce those lessons and values. Trusts terms can be flexible and custom-fit the situation.

For example, many clients create terms to provide for education and exploration at young ages and incentivize work through young-adult years, finally allowing partial and full control upon reaching certain ages or milestones. These terms, in essence, allow you to continue the education of the younger generations even after you are gone.

WILLETT: No matter how much you trust or distrust the next generation, people do change and so does the law, so build flexibility into the plan. There are some great techniques for building incentives into plans that require beneficiaries to meet certain goals or adhere to specific guidelines to receive benefits.

Nothing will guarantee that your loved will become the person you want him or her to be, but at least these tools will provide peace of mind that your assets will be used wisely.

TUSHINGHAM: I think it starts with financial literacy. I’m a big proponent of financial literacy and educating children at a young age on some of the basics of sound financial planning. This includes investing early, minimizing debt and utilizing tax-deferred accounts, to name a few.

The more informed children are at a young age, the more likely they are to make sound financial decisions later in life, such as choosing the right college and minimizing student loans.

For 100-percent assurance, families can always establish trust accounts that dictate when children can access money, how much they can access and for what purpose. So, utilizing financial literacy and trust accounts in concert will be the best choice for some clients.

What are your top three tips to investors for managing their portfolio in 2018?

WILLETT: Diversify - same advice in 2018 as always!

Be timely. Don’t be a market timer, but don’t wait for things to happen; be proactive.

Manage cash. Interest rates are creeping up, but there are some pockets of opportunity out there for good cash returns. We have an excellent one at Old North State Trust, so take advantage of ones when you find them.

TUSHINGHAM: Our investment philosophy is predicated on protecting principle and avoiding major drawdowns in portfolios.

That said, our recommendations are based on risk management. So, number one would be to focus on your asset allocation. I think most people are taking more risks than they think they are. Asset allocation means spreading your wealth across different assets, like stocks, bonds, cash, real estate and commodities. Avoid going “all in” in one asset class and adopt an allocation that will help you get through the next correction.

Second, use proper position sizing. This means that within each asset class, make sure you’re taking equal risk in all your investments. By risk, we mean the volatility of each investment. Some investments go up and down more than others. For example, you shouldn’t be investing the same amount of dollars in a small technology company when compared to a Blue-chip stock.

Third, have an exit strategy. We utilize stop losses on most investments. When a certain investment hits a set price target, based on its historic volatility, we generally sell and reallocate the proceeds. It’s just another way we manage risk. It’s a sound risk management process that takes all the emotion out of investing. The last thing you want to do is invest with emotion.

WINSLOW: Review your cash and income strategy. Knowing your income and cash is secure for the next six to 18 months will make you a better investor. If that means taking some gains to replenish your emergency fund, do it. We believe that when you know your bills are paid, you can probably better stomach the likely return to volatile markets.

Consider increasing your exposure to international stocks. The U.S. stock market had a great year in 2017 and, though we still like the U.S., it is hard to ignore the recovery and lower valuations in the international markets.

Consider active fixed-income strategies. It is likely we will continue to see interest rates rise. The rise in interest rates puts a lot of pressure on bond prices. Risk management of portfolios is a constant concern and doing so in a rising rate environment is a challenge. A good strategy to consider is finding tactical strategies and different credit strategies to mitigate your exposure and also give you some return.

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