Brian Puckett's Blog

Dissecting the Robo-advisor Trend: Do I Still Need a Human Advisor?

Some of you may remember the Jetsons, the television animated sitcom about a futuristic family whose everyday life was made easier by flying cars, moving walkways, and electronic gadgets galore. Indeed, some of the tech-driven devices that seemed most fantastical in the 1960s when the show debuted are a reality today—namely flat-screen TVs, video chat, digital newspapers, smartwatches, and, of course, robots.

In our business, there’s been a lot of chatter about robo-advisors, which provide digital financial advice based on mathematical rules or algorithms. According to Cerulli Associates, robo-advisor platforms have racked up more than $71 billion in assets under management through the third quarter of 2016. Taking a big-picture look, that figure is expected to climb to $489 billion by 2020, and represent roughly 22 percent of all assets managed by registered investment advisors. A number of large investment firms already offer robo-advisor platforms, and more are adding the feature this year or considering doing so.

Certainly, investors are attracted to these platforms because they are relatively low cost and easy to use. And for some investors, especially younger ones with relatively simple investment needs, they provide a real service. However, there are multiple reasons why most people still need human advisors.

For starters, we know our clients. To us, clients aren’t just numbers—they’re like family. We take the time to get to know each and every one of you and your individual circumstances. A good advisor is always on call to help clients through life’s ups and downs. You can’t call a computer when you have a question. And computers don’t know you personally. They certainly can’t offer you a shoulder or a helping hand when you need one. Human advisors can do this, and, in fact, do this quite frequently.

Robo-advisors are designed to help investors with straightforward investment strategies, but many people have more complicated needs. Human advisors, for instance, can be invaluable in helping clients determine tax-advantaged strategies for their personal circumstances. Many of our clients also have complicated family dynamics and inter-generational inheritance issues that computers are ill-equipped to deal with. Computers are good at many things, but the nuances involved in complicated financial matters are best left to a human being.

At Align, we believe robo-advisors have a place in the larger context of financial advice. However, we think it’s a mistake for people to rely on computers as their sole means of financial guidance. As financial advisors, we work closely with you and guide you toward the most appropriate investment decisions for you and your family. Please don’t hesitate to reach out to discuss further how we can best assist you.

CASHING OUT IS NOT A CASH COW

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

We’ve recently been approached by a few nervous investors, who, thanks in part to Election Day jitters, are considering cashing out a sizable portion of their portfolio. While this may seem like a good idea at first, there are more downsides to cashing out than you might think. A sounder course of action is to stick to your long-term plan and not let Election Day distractions disrupt a sound investment strategy.

Certainly cash is becoming more popular these days. According to the most recent Wells Fargo/Gallup Investor and Retirement Optimism Index survey, 43 percent of investors reported having moved their money to cash or cash equivalent savings over the past year — far more than those moving money to stocks or bonds. Investors also revealed they have an average of 19 percent in cash savings and 11 percent in CDs or money market accounts.

But while some people view cash as king, there are several reasons why it may not be as desirable for long-term investors. For starters, unlike the 1980s when you could earn savings interest rates of 14 percent or more in CDs, today’s rates are only a small fraction of that. Stocks, on the other hand, have a well-documented history of outperforming the major investment choices, including gold and bonds. What’s more, when you factor inflation into the equation, you lose even bigger with cash because it erodes your purchasing power, meaning you can actually end up with negative growth. Some savvy investors call this “going broke safely”.

Here’s another problem with taking a cash-heavy position. Nobody can time the market effectively. Even professionals often fail miserably when trying their hand at market timing. So, by cashing out, you take on the new risk of earning a substantially lower return. The more often you switch in and out of cash, the more risk you pile on. It’s a loser’s game.

Remember, that, over time, the stock market has a strong history of rebounding, even after significant corrections. If you are investing for the long-term, you’ll most likely have time to ride out market fluctuations and still come out ahead. Jumping in and out of cash positions makes long-term growth even harder to achieve.

Certainly there are reasons an investor would want to keep a portion of his or her portfolio in cash—such as short-term needs and goals—and we even advise it in some instances. However, we don’t recommend most investors keep a high portion of their portfolio in cash for the reasons stated above.

While cash may seem to perform better in the short term, research supports the importance of sticking to your asset allocation, which is specifically tailored to your age, your risk tolerance and investment goals. We know staying the course may seem scary in light of Election uncertainty and other outside pressures, but we urge you not to let unfounded fears topple a sound investment strategy.

At Align, we help you craft a portfolio that’s best suited for your particular needs. Please don’t hesitate to reach out to us if you have any questions or concerns.

Brian Puckett | JD, CPA, PFS, CFP®
13921 Quail Pointe Drive | Oklahoma City, OK 73134
T: 405.607.4820 | F: 405.294.3340
125 5th St. S. Suite 201 | St. Petersburg, FL 33701
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With Investing, The Best Recipe is to Put Politics Aside

Amid the election year hoopla, pundits are already theorizing about the impact the candidates will have on the stock market and broader economy. As tempting as it can be to get caught up in this rhetoric, we urge you to tune out the noise and instead stick to your long-term strategy. Making decisions based on political leanings or emotional fervor can seriously threaten your financial well-being.

Consider that cycles of stock market booms and busts tend to happen with surprising regularity—regardless of which political party rules the roost. Also, remember this: no matter who wins the presidential slot, bringing about widespread economic change is highly dependent on myriad factors beyond a candidate’s control, including the balance of power in Congress. So much of what he says/she says prior to the election might never come to fruition. Consequently, retooling your investment strategy based on what may or may not happen months down the road is a risky move.

Certainly there are those who will have you believe, like Chicken Little, that the sky is falling, and you need to take cover. Proceed with caution here. Unscrupulous salespeople can use fear-tactics to peddle just about any product, regardless of whether it’s in your financial best interest.

Back in February, Barron’s ran a cover story noting that U.S. stocks had fallen sharply since Trump and Sanders starting gaining ground in the polls. The article postulated that this could be more than coincidence, but history strongly supports the notion that markets are cyclical. We know from experience that swings and dips are perfectly normal, whereas making quick investment decisions based on unfounded fears and political leanings can do more harm than good to your nest egg.

Think back to 2008. The markets were in turmoil and fears ran high that President Barack Obama’s policies were going to obliterate the Dow. And yet, thanks to the passage of a hefty stimulus bill and other measures to help banks contend with their troubled balance sheets, stocks ultimately rallied, putting an end to the unfounded concerns of the Negative Nellies.

As hard as it may be, we urge you to ignore those around you who suggest that you should take into account politics when determining your investment strategy. Sticking to your asset allocation—which takes into account your age, your goals and your tolerance for risk—is a much better recipe for success than stirring up the pot with which candidate is likely to win an election and what may or may not happen to the economy and the stock and bond markets as a result.

Certainly, there are many ingredients that go into a successful investment strategy, but at Align, we feel strongly that politics isn’t one of them.

How Asset Location Can Help Fatten Your Nest Egg

The U.S. tax code is overly complex, not just for the income you earn working in your career, but also for the income you earn from your investments.

The good news is that by understanding the different tax treatment that applies to different investments—and account types—we can plan a tax-wise asset location strategy. And, successful asset location can significantly minimize the amount of taxes you pay on your investments as a whole. This can lead to a meaningful increase in your after-tax return—the money you get to keep, which is all that really matters.

Brexit: The Disaster That Wasn’t

British voters’ surprising vote a few weeks ago to exit the European Union was a shot heard round the world—particularly by the financial markets. News of the coming “Brexit” created a swift sell-off in the United States and abroad.

But investors’ behavior over the following several days provided a fascinating clue into how short-term markets work, and it underlines why buying and selling in reaction to the Brexit news would have been a terrible idea.

In the wake of the referendum, markets absorbed two days of significant losses—the S&P 500, for instance, dipped by 5%. But within a few days, the S&P had regained just about all of its original losses. And stock markets around the globe had rallied as well.

The best thing that a serious, long-term investor could have done after the Brexit referendum was: nothing. Jumping in and out of the market in an attempt to avoid losses and snag gains typically results in the cardinal investing error of selling low and buying high. And that can create a huge drag on your investment performance over time.

But why did so many investors sell off after the referendum, and why did so many buy back in within a few short days? The answer is that simply that many investors are jittery. They’re like a flock of birds, spooked out of a tree by a strange noise, who fly a few circles overhead and then, realizing nothing is amiss, return to their branches.

That kind of behavior is fine, for birds. For investors though, it invites big losses, along with extra trading costs and, often, taxes that were easily avoidable. Better to heed the simple but powerful words of Warren Buffett: “Successful investing takes time, discipline and patience.”

If you look through market history, you’ll find that markets have regularly gone through rough times—and that they’ve always bounced back. They rebounded from the Great Depression, the Great Recession (sparked by the financial crisis of 2008-2009) and a host of wars, natural disasters, terrorist attacks and other disruptions in between. Remember the Y2K crisis?

We can be sure that there is more volatility to come, as the Brexit referendum aftermath unfolds, and as new crises arrive in the coming years and decades. As always, markets will likely have big reflexive reactions—like those birds bolting from their tree. But as they receive and digest news, markets will ultimately find their true level. And if history is any guide, they will rise over time.

Successful investing follows a funny pattern. Even the best investors usually take one step back, and two steps forward. But that’s the arrangement that serious investors must accept in order to grow their wealth. As headlines come and go, we must steadfastly maintain properly diversified portfolios in order to achieve the best balance between protecting and growing our money. So the next time scary headlines appear in the financial news, take the counsel that the British government offered to the country’s citizens during World War II: Keep Calm and Carry On.

Tools to Help You Make the Most of Your One Financial Life

The typical financial advisor loves to focus on your investments—after all, most earn sales commissions for selling you stocks, bonds, annuities, or mutual funds.

But the team at Align Wealth Management seeks to take care of every facet of our clients’ financial lives, from cash flow to taxes, from insurance to estate planning and charitable giving. Simply put, we believe in treating you as a human being – not as an investment account. And we’re armed with the best tools and technology to make it happen.

Our cornerstone technology for comprehensive planning is a software suite called MoneyGuidePro. MoneyGuidePro helps us gather and consolidate your whole financial life in one place. With it, we—and you—can clearly see your current financial situation 24/7.

MoneyGuidePro clearly illustrates everything from your cash flow to your assets and liabilities. It tracks not just the accounts we manage, but also assets such as bank accounts and loans, all of which can be updated quickly. As a goals based tool, it also records your specific objectives, such as funding college, paying for weddings, buying a home or securing your retirement.

Our clients have direct access to this dynamic tool to ensure that are always on track through the financial planning portal on our website. That’s a big departure from past industry practices, when clients had to call their advisor every time they needed a piece of information. The financial plans themselves used to be paper-based, and often the size of a small phone directory! Now they are electronic and updated in real time. A living breathing plan. Real wealth management.

MoneyGuidePro is full of nifty features. Among them: the “Play Zone,” where you can use sliders to explore the probability of achieving your goals under different scenarios. You’ll see how entering different hypotheticals—saving more, earning different investment returns, retiring earlier or later—affects your statistical probability of success.

You can also learn the impact of higher or lower inflation, different life expectancies, or health-care expenses. In addition, MoneyGuidePro lets us simplify complex calculations to learn, for example, how and when you should claim Social Security in order to maximize your benefits. The more you know about possible future scenarios, the more you can prepare with confidence.

Our investment in technology like MoneyGuidePro reflects our commitment to not only empowering our clients, but also helping them master the many different areas of their financial life. So whether you need guidance on investing, or when to retire, or whether you can afford that big trip or purchase, you can rely on us. We have no financial incentive to focus only on a narrow part of your financial life. Knowing that we can help our clients succeed throughout their entire financial lives is why we love coming to work every day. We are Client Focused. Period.

How to Minimize Taxes in Retirement

If you’re an investor, you’ve surely heard the saying “It’s not what you earn, it’s what you keep.” Minimizing taxes is important when you’re growing your savings for retirement—but it’s at least as important after you’re retired.

That’s why retirees with different types of taxable and tax-deferred accounts should carefully plan the sequence in which they will withdraw money from those accounts. At stake is not just tax savings but also the potential for greater investment growth.

The various account types include traditional IRAs and workplace plans such as 401(k)’s, which are funded with pre-tax dollars. In these vehicles, taxes are deferred until withdrawal so that those assets can compound and grow faster. Roth 401(k)’s and Roth IRAs are funded with after-tax dollars, and their assets grow and are withdrawn tax-free. Finally, many investors have taxable brokerage accounts, which are funded with after-tax dollars and accrue taxes on gains, interest, and dividends.

Let’s look at some of the rules and guidelines when it comes to retirement-account withdrawals. One rock-solid rule is that retirees should prioritize taking their required minimum distributions (RMDs) from their traditional 401(k) or IRA. Failing to do so will trigger penalties—half of the withdrawal that was required—that outweigh any other advantage.

RMDs kick in at age 70 ½. They are calculated based on your life expectancy and the assets in your account. A simple example: A retiree with a 20-year life expectancy and $100,000 in a traditional IRA would be required to withdraw one-twentieth of his assets ($5,000) and pay tax on that amount.

Beyond that, the rules should be considered more flexible based on your individual circumstance and needs. Once RMDs are taken, the standard sequence is to withdraw from taxable accounts, then tax-deferred accounts, then Roths, in order to minimize the tax bite.

In general, taxes are highest on traditional 401(k)’s and IRAs. Withdrawals from these accounts are subject to ordinary income tax, with rates as high as 39.6%. By comparison, long-term gains and qualified dividends in your taxable account are taxed at a lower rate that tops out at 20%.

It’s often best to leave Roth accounts for last. Since they are not subject to RMDs and assets are withdrawn tax-free, it makes sense to let the account balances grow as large as possible.

Withdrawal planning should be flexible from year to year. One reason is that an individual’s tax picture can change based on their expenses, their available deductions and other factors. For instance, large deductions in a given year could drop you into a lower tax bracket. In such a case, it may make sense to withdraw more from a traditional 401(k) or IRA to take advantage of the temporary low tax rate.

On the other hand, retirees should take care to avoid having withdrawals kick them into a higher tax bracket. The bottom line: The taxman doesn’t retire when you do. To minimize taxes and to stretch your retirement income as far as possible, withdrawal planning is a must. Please contact us with any questions you may have.

Giving Clients a Fair Shake

As we’ve previously written, there’s a big difference between stockbrokers and true financial advisors. Brokers are salespeople: Because they’re paid to sell you investments or insurance, they operate under a continual conflict of interest.

True financial advisors, on the other hand, only sell advice, not products. Unlike brokers, they are what’s known as fiduciaries, meaning they must place clients’ interests ahead of their own. Align Wealth Management is a fiduciary firm.

There’s been a major development on this front. Early this month, the Department of Labor ruled that all advisors giving guidance to clients with 401(k)’s or IRAs must adhere to a more stringent “fiduciary” standard. This new rule, which goes fully into effect in 2018, is aimed squarely at brokers. For the first time, brokers will have to act more like true advisors.

At Align, we believe this is a step in the right direction. Consumers should never have to wonder whose interests their “advisor” is putting first. But the fact is that the new DOL rule is riddled with weaknesses. In fact, brokers will be allowed to continue many of the practices that should concern their clients. For example:

Taxable accounts aren’t covered. The DOL’s rule only applies to particular types of retirement plans. That means that brokers can continue to use the old, conflicted approach when advising clients about their taxable accounts.
Sales commissions will continue. Brokers will still be able to earn a payout for each sale they make. They’ll simply have to provide a contract stating that their advice is in their client’s best interests. This compromise allows the old, conflict-prone compensation model to remain in place.
Brokers will be allowed to recommend questionable products. The brokerage industry has drawn criticism for peddling wildly expensive annuities, mutual funds and other more complex products, even if their performance doesn’t merit their cost. Under the DOL rule, they will still be allowed to do this.

It’s important to note that the brokerage and insurance industries fought hard against the Department of Labor’s effort to impose its fiduciary rule. Complying with it will be expensive, and it will no doubt cut into their profits. Make no mistake, brokerage firms will adopt a higher standard of client care not because they want to, but because they’ve been forced to.

Align Wealth Management has always been a fiduciary firm. We chose this consumer-friendly model because we believe it’s important for clients to trust their advisors. Acting in clients’ best interest isn’t something we’re doing grudgingly, it’s our privilege. Caring for our clients in the most objective, ethical way possible is our core value proposition and our business mission.

Maximize Your Returns by Minimizing Your Taxes

Everyone loves earning money, including investment gains—but what’s most important is how much you keep after taxes.

And as you know, taxes are becoming a higher hurdle. The top rate is now 39.6%, plus a 3.8% Medicare surtax on investments for high earners. And that doesn’t include state taxes.

Minimizing taxes, then, is essential for those who want to build real wealth. That’s especially true if we experience more moderate market returns over the next few years. Every dollar counts—and that’s true whether you have a taxable investment account or a tax-deferred account. Eventually, Uncle Sam will want his cut.

At Align Wealth Management, we weave tax management into our investing advice and services. We use the following strategies to help ensure that our clients accrue as little in tax liabilities as possible.

Asset location. If you hold taxable and non-taxable investment accounts, you can gain a tax edge by strategically distributing your investments across your respective accounts. A simple example: Since tax-exempt municipal bonds have built-in tax protection, putting them in a tax-deferred account like a traditional IRA would be redundant. It can be wiser to tuck those munis into a taxable account, and use your tax-advantaged account to house investments that would otherwise be exposed to taxes. Asset location is no minor matter: Researchers at Vanguard have determined that it can boost your net returns by up to .75%.
Tax-loss harvesting. Capital gains from your investments are subject to tax. But losses in your portfolio can be used to offset those taxes. Tax-loss harvesting allows us to use realized losses in order to offset taxable gains, and then to reduce ordinary income, up to $3,000 per year. If you harvest losses in excess of $3,000 in a given year, you can use the remaining losses to neutralize gains in future years.
Long-term investing. When an investment is sold for a profit less than a year after it was purchased, investors are faced with short-term capital gains taxes of up to 43.4%, depending on their tax bracket. It’s vastly preferable from a tax standpoint to hold investments for at least a year, because long-term gains are taxed at a rate no higher than 23.8%. Disciplined, long-term investing is a cornerstone value at Align Wealth Management.

Tax management can also continue to have a significant impact once you’re retired. For example, the order in which you take withdrawals from different kinds of accounts—taxable, tax-deferred and tax exempt—can reduce your annual tax liabilities by thousands of dollars. Research, again from Vanguard, has shown that smart withdrawal strategies can add extra net returns of up to .70% a year.

No one can control the market. But controlling the things that we can—like taxes—can have a powerful impact on our long-term wealth. Please don’t hesitate to get in touch if you’d like to learn more about how to boost your effective gains by lowering your taxes.

SOCIAL SECURITY CLOSING A LUCRATIVE LOOPHOLE Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

Social Security pic — Social Security
Image: ssa.gov

If you’re planning for retirement, you should be aware of Congress’ recently enacted budget deal. Why? Because it eliminates a popular Social Security claiming strategy known as “file and suspend.”

File and suspend is essentially a way for married couples to squeeze the maximum amount of benefit dollars from Social Security over their lifetimes. In some cases, file and suspend is projected to add hundreds of thousands of dollars to a couple’s lifetime retirement income.

Before we go any further, it’s important to clarify that couples who already have the file-and-suspend strategy in place will not be affected by the new legislation. In fact, there is still a six-month window for couples who meet certain age requirements to use file and suspend before the law’s provisions take effect.

In the file-and-suspend strategy, the spouse who is the higher earner claims Social Security at his full retirement age—currently 66 or 67 based on the individual’s date of birth. The filer then directs the Social Security Administration to suspend his benefits immediately. The filing triggers the lower earner’s eligibility for spousal benefits, which are half of the amount of the higher earner’s benefit amount.

Why does the original filer suspend his benefits? Because Social Security rewards those who wait to take their benefits with what are known as delayed retirement credits. For every year after full retirement age that a person delays, their benefits grow by 8%, until age 70. The result is benefit checks that are ultimately much larger than they would have been.

Another advantage of file and suspend is that it boosts the lower-earning spouse’s benefit if the principal earner dies first. Specifically, the surviving spouse’s benefit amount is bumped up to 100% of the deceased spouse’s benefit.

Many in Washington saw the file-and-suspend strategy as a costly and unintended loophole in the system, and with the budget bill that President Obama signed on November 2, they have eliminated it. But couples can still benefit by coordinating their Social Security strategies.

These strategies revolve around the fact that Social Security’s system of delayed retirement credits remains in place. In most cases, couples will continue to benefit by having the higher-earning spouse delays filing to earn those delayed credits.

Particularly in today’s low-interest-rate environment, earning a guaranteed “interest rate” of 8% (the amount your benefit grows for every years of delay between full retirement age and age 70) can be an extremely good deal.

Bear in mind that your Social Security claiming strategy should be coordinated with your income from other sources. For instance, if you delay taking Social Security, you’ll need a reliable source of adequate income to get over the “gap” while you wait to start collecting those benefits.

If you’d like to discuss using your Social Security benefits and other sources of income to create a secure and comfortable retirement, please don’t hesitate to reach out to us. And if you think you may be interested in using the file-and-suspend strategy before the window closes on May 1, you should get in touch as soon as possible to allow enough time for planning and implementation.

http://www.alignmywealth.com/blog/76-social-security-closing-a-lucrative-loophole.html