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C.H. Robinson

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Do Your Financial Advisor's Incentives Align With Yours?

Written by By Matt Wright, CFA® on .

A few weeks ago my son was in need of some Cub Scout gear, so I stopped at a local Scout Shop. Our den leader had told me the few specific items that we needed and that everything else was optional. Nonetheless, the Scout Shop employee made a good effort to sell me items that we didn't need. He even pointed out that the amount I was spending was way less than I would spend on sports equipment later on, implying that justifies spending more money when I don't need to. That might work on some people, but I'm guessing not many financial advisors fall for this!

The experience reminded me that every type of business, even a non-profit, has a conflict of interest with its customers. Ideally, a transaction is beneficial for both the business and the customer, but an adversarial tension exists nonetheless.

As with any industry, financial advisors have conflicts, too, but you may not be aware of how different business structures can impact the alignment of interests with an advisor and you, the client. Summit Wealth Advocates, for example, is a fee-only advisor. This means that all of our compensation comes directly from our clients. We are not paid by outside companies to sell their products or services or provide referrals to them. As a result, when we make financial recommendations to clients, we do so as if we are sitting on the same side of the table as them.

This is not the case for all financial advisors, many of whom still operate on more of a traditional sales model where they are paid commissions from the company selling a product, a cost the client doesn't see directly. This business model has typically provided the salesperson a commission. The conflict with this business model is that the salesperson may have an incentive to replace a client's old products with new ones over time in order to generate new commissions.

Some recent moves in the mutual fund industry highlight one way that these conflicts still exist. Responding to regulatory changes, several major firms have announced that some "C class" mutual fund shares held for a specific period (e.g., 10 years) will be converted going forward to "A class" shares. The C class and A class shares of a particular fund represent the same underlying investments – the only difference is how the commissions are paid to the salesperson. Mutual fund A shares generally pay more up front with less on an ongoing basis (e.g. 5.75% up front and 0.25% each year), while C shares may pay nothing up front but more on an annual basis (e.g. 1.0% each year.

Consider a financial advisor with a large portion of his or her income coming from C share mutual funds sold at varying times in the past. As a hypothetical, he/she may be receiving compensation of 1.0% each year from the fund companies. However, as time goes by, portions of this 1.0% income stream will be converted to a 0.25% income stream. That loss of income to the advisor is a cost savings to the client, which seems great at first glance. But look at the incentive problem this just created for the advisor! Will they sit idly by and watch their income decline? Or might some be tempted to convince clients to swap into new products that will get them back to a higher income stream? Will the new products actually be more suitable for the clients both for investment and tax purposes?

Do you really want to be in a position of having to question the motivation of why your advisor is making a recommendation? At SWA, we don't want our clients or ourselves to be in that position, which is why we believe a transparent method of compensation is in everyone's best interest.

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Why We Use Asset Location Strategy

Written by Bruce Primeau, CPA, CFP®, PFS on .

Most people want to know how their investments are performing but what really matters is how they are performing on an after-tax basis. This is important because it is what translates into how much you can actually spend from your portfolio.

At SWA, we have developed an Asset Location Strategy (ALS) that encourages each client to build a globally diversified portfolio utilizing a passive, tax-efficient investment approach. We do this by advocating that clients build measurable balances across account types with different tax characteristics, including:

  • Taxable: Individual or Joint investment accounts, Employee Stock Purchase Plan, etc.
  • Tax-Deferred: 401(k), 403(b), Traditional IRA, Deferred Compensation Plan, Employee stock option plans, etc.
  • Tax-Free: Roth IRA, Roth 401(k) and 529 Plans

As each client adds to each of these tax classes, we install an overall asset allocation that is in line with their tolerance for risk. We manage holdings across all three account types in a manner that strives to maximize after-tax wealth. Here is an example of how a client portfolio with asset location is constructed and managed:

  • Taxable Accounts: We prefer clients own equities in taxable accounts as clients can receive tax-preferential rates for doing so. For example, qualified dividends and capital gains capital gains are subject to Federal tax rates of up to 23.8% (including capital gain surtax) compared to the top Federal ordinary income tax rate of 37%.
  • Tax-Deferred Accounts: Withdrawals from these accounts are generally taxed at ordinary income tax rates. Bonds create ordinary income so our preference is to have clients own bonds in this tax class. Because bond income is taxed at ordinary rates and typically client income is greater now than in retirement (when funds are withdrawn), bonds are typically less desirable to own in taxable accounts.
  • Tax-Free Accounts: Unlike the other two tax classes discussed above, gains from tax-free accounts can avoid taxation (assuming all distributions are qualified). Basically, the first two account types force you to share some of your gains with Federal and, for many of us, State tax authorities. But since Tax-Free accounts (primarily Roth IRA and Roth 401(k)) don't have this tax liability attached, we want clients to overweight them with investments that have the highest long-term growth potential, such as International and Emerging Market Stocks.

NOTE: This is meant as an illustration only and holdings will vary based on individual client circumstances.

Managing a client's portfolio in this manner will undoubtedly result in performance variances between each account due to the fact that what is owned in each account is unique and performs in different ways. For example, in 2017:

  • Most Taxable and Tax-Free accounts in an SWA asset location strategy performed well, which primarily hold stocks. Overall global stock index gained 24.0%1 before fees and transaction costs.
  • Most tax-deferred accounts lagged other tax classes due to heavier weightings in high quality bonds, which gained a more modest 3.5%2, also before fees and transaction costs.

While it might seem more appealing to have each account type invested to the same asset allocation and thus show a similar return each year, this can actually produce a less satisfactory result when taxation is considered.


For example, if each account in the portfolio is invested in the same asset mix, here are a few consequences.

  • Taxable accounts might hold positions in bonds, REITs, etc. which produce ordinary income each year that is taxable at a client's highest ordinary income tax rates. This produces an unnecessary tax drag on this portion of a client's portfolio.
  • Tax-free accounts may grow more slowly over the long term since the bond component held in these accounts is likely to produce less long-term annual returns than equity asset classes. This means you are not maximizing the account type that you don't need to share with the government!
  • Transaction fees to the client are significantly increased by having to purchase every holding in every account, as opposed to having a selected number of holdings in some accounts.

The bottom line is that there are ample reasons for SWA to manage client portfolios the way we do. From a long-term perspective, we believe this is the best way to maximize after-tax wealth and produce spendable cash flow from an investment portfolio. Our goal is to help our clients achieve their financial goals, even if a method might seem unconventional at first.

1Based on the returns of the MSCI All Country World Index NR USD. Source: Morningstar
2 Based on the returns of the BloombergBarclays US Aggregate Bond TR USD. Source: Morningstar

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Don't Be Kanye--Keep Your Personal Data Safe!

Written by Matt Wright, CFA® on .

Kanye West recently met with President Donald Trump in the Oval Office in a highly publicized event. While the general discussion was outside the scope of our role as wealth advocates, one incident during the meeting prompted us to once again remind everyone about the importance of keeping your personal information safe. Mr. West pulled out his iPhone and, on live TV, punched in a password of 000000 to access it.
While it's arguably better than having no password at all, it was clearly chosen for maximum convenience, not security. We can only hope that he is taking more precautions with other private information and his financial security. But are you doing your best to protect your personal information and your financial accounts? Here are a few tips to consider.

  • Use strong passwords. SplashData, an internet security firm, provides an annual list of the most common online passwords showing that "password" and "123456" have ranked at the top each year since 2011. Don't make this too easy for hackers! A strong password is generally longer than 8 characters, but consider that a minimum. And don't use the same password on multiple sites as the hacker needs to only crack one of your passwords and then reuse it on other sites you may use.
  • Consider using a password manager. A common reason why people use weak passwords is that we all have so many of them for different purposes that we can't keep track of them all. Consider using a password manager to reduce how much you need to remember, and it will allow to use unique passwords at different sites. The password manager allows you to create unique, long and very complicated passwords, without the need to remember.
  • Limit who you share information with. While it's unlikely you'll have an opportunity to give away your password on national TV, control who has access to your personal data. Access to your data should be locked (physically or electronically) at all times.
  • Watch out for Wi-Fi. Don't log into accounts on unsecure Wi-Fi connections (for safety essentially everything outside of your home should be considered unsecure). IF you do use an outside Wi-Fi, confirm with the location what the exact Wi-Fi name is. Unfortunately, there are a lot of hackers that are setting up Wi-Fi connections that sound very much like the legitimate Wi-Fi name. At home, set up a guest Wi-Fi network that visitors can use without being able to access your personal home network.
  • Be skeptical about emails and calls asking you to act urgently. Whether it's a call from the IRS demanding overdue tax payments or an email from a financial institution telling you to log in to your account to review something – STOP! If you are uncertain whether it's a legitimate contact, don't do anything right away. If it's possible that the IRS really does want to talk to you, they will mail you a letter so simply hang up. If you are prompted to log in to a financial account, don't click on a suspicious link (consider all links suspicious), instead open a new browser window and go to the website directly.

While it's hard to avoid all risks no matter what you do, taking some of the precautions above might greatly reduce your vulnerability.

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Apply Now for Financial Aid for Post-Secondary School in 2019-2020

Written by Jon Govin on .

If you have children in or going to post-secondary school for the 2019-2020 school year, now is the time to file your Free Application for Federal Student Aid, more commonly referred to as the FAFSA. The filing period begins October 1 each year of the year prior to attending college.

Why complete the form, let alone early? In order to gain access to federal financial aid the student and parents need to complete and submit the FAFSA. And, some schools set priority deadlines for financial aid, first-come, first-served. Some parents ask if it is necessary "to go through the hassle" if they don't expect financial aid because of their high income or assets. The short answer is absolutely, YES, regardless of income or financial assets. Remember, federal financial aid includes federal student loans, which are generally available to anyone. And, while you may not need it now, you never know what the future may hold.

I am no fan to more paperwork, but honestly, this form is not all that complicated and takes far less time than you think. I find the most complicated part to be remembering the password that I only use once per year. The form has been streamlined, and if you file online you can connect to the IRS to pull in your tax return information. And now there is even a phone app called myStudentAid. There are plenty of help buttons in the online FAFSA to explain the questions, or contact your SWA Advisor for assistance.

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Maximizing Tax Savings for Charitable Contributions

Written by Bruce Primeau on .

Well, Congress took their best shot at tax simplification for 2018 and, by doing so, has changed the way many people will make charitable contributions moving forward. For some, itemizing deductions will no longer be necessary as it will be difficult for them to come up with more deductions that the standard deduction amount affords them. For others that have total itemized deductions close to the standard deduction amount, a new opportunity exists. The opportunity I am referring to is bunching multiple year's charitable contributions into one year. Let me show you what I mean:

  • We have a married couple that typically gives about $5,000 to various charities each year. They usually itemize deductions each year, but in 2018 their total itemized deductions will total only $23,000. So, the standard deduction would be their obvious choice each year moving forward. For the next 3 years, their total deductions against ordinary income look like this:
    • 2018: Standard deduction - $24,000
    • 2019: Standard deduction - $24,000
    • 2020: Standard deduction - $24,000
    • Three year total deductions = $72,000
  • If, instead the couple accelerated their $5,000 annual cash charitable contributions into 2018 using a Donor Advised Fund (DAF), their total deductions against ordinary income would look like this:
    • 2018: Itemized deductions - $33,000
    • 2019: Standard deduction - $24,000
    • 2020: Standard deduction - $24,000
    • Three year total deductions = $81,000

By contributing 3 years' worth of charitable contributions ($15,000) to a DAF in 2018, they get the charitable contribution deduction in 2018, despite the fact that they may give that $15,000 away over the next several years (no requirement to give those funds away in 2018). In total, they receive $9,000 more of tax deductions over the next 3 years, which, at a combined federal and state tax rate of 30%, they would save about $2,700 of tax. Not a bad strategy, given the fact that the client is merely accelerating the cash gifts to the DAF.

Another excellent strategy involving a DAF is to contribute $15,000 of appreciated securities instead of cash. The donor receives the same tax deduction and pays no tax on the $15,000 of appreciated securities they donate. This can be a great diversification technique that can save tax dollars in more than one manner (capital gains tax as well as ordinary income tax).

Please let us know if you have any questions regarding this strategy or if you feel it is one you may want to consider.

North Metro: 763.355.5873
227 East River Parkway
Champlin, MN 55316-5873

South Metro: 612.987.9112
5871 Crossandra Street SE
Prior Lake, MN 55372-3337

West Metro: 763.639.3425
322 Greenhill Lane
Long Lake, MN 55356

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