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C.H. Robinson

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The Brexit Impact on Investors

Written by Summit Wealth on .

Five years from now, what we will all be saying regarding June 24, 2016? As many of you have heard, the Global markets are down at the beginning of the trading day today due to the "Brexit." "Brexit" is the term for a referendum for Great Britain to leave the European Union. (If you remember your high school government courses, referenda are non-binding. Of course, many governments will abide by the majority decision, though in a tightly contested vote you may see additional referenda.) Scotland largely voted to remain in the European Union.

Markets were down big overnight, when it became clear the vote was to leave the European Union. We are very early in suggesting what the markets will do in the long term, but we do have some thoughts to share.

Try to keep in mind that one day (or year, for that matter) does not predict how you will do in the market. Much the same way that one note does not make a symphony. Markets tend to overreact on most news. At the beginning of trading Friday, the markets were down 500 points on the S&P 500, but in context this is not that significant of a move. For those that follow stock markets, 500 points is a pretty big swing, compared to what we are used to seeing on a typical day. But, for those that truly follow the markets on a daily basis, this move only takes us back to where we were at the end of the last quarter. If memory serves me correctly, we certainly didn't hear from anyone about the poor shape of his or her portfolio.

Some of what you will see on Friday is the impact of an annual event, the reconstitution of the Russell Indices (primarilly the Russell 1000 and 2000 – large and small cap US stocks). A reconstitution is the realignment of the holdings in a benchmark due to certain stocks coming in or leaving the benchmark due to not meeting the criteria to remain. This well publicized event (in the investment community), in and of itself will add volatility to the market. We usually don't blog this type of event as it typically does not account for a jaw-dropping move in the market, but in combination with the "Brexit" vote, we should expect more volatility.

For those that hold some gold, now may be the time to sell. Though the day is not over, we are seeing gold prices up a greater percentage than the stock markets are down. And, we would not be complete if we didn't mention that most portfolios hold bonds, which are offering your portfolio some downside protection, the reason we hold them in the first place.

Most major global events will invoke some reaction from the markets. Which market, and by how much is anyone's guess. Mark our words, you will hear from all of those that predicted this. Our recommendation is to ignore those voices, as one correct prediction means absolutely nothing. We should be interested in the long-term impact, not the knee-jerk reaction that we typically see within minutes of an announcement. In this case, the markets priced in a substantial increase early in the week – in many cases we are seeing an erosion of those increases.

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BEWARE: Another Tax Scam on the Loose

Written by Summit Wealth on .

It appears that students are the latest target of callers claiming to be employed by the Internal Revenue Service. The scammers are telling their victims that they owe a "student tax" and must pay that tax quickly or they will be reported to the local police. Unfortunately, this scam comes on the heels of another telephone scam whereby IRS impersonators demand payment of overdue taxes in the form of iTunes gift cards.

Please be sure to warn those you care about not to fall for these high-pressure scammers. They should know that the IRS will not make unsolicited calls regarding a tax debt or demand immediate payment of any tax owed. The IRS also does not threaten to report you to law enforcement or have you arrested for not paying your tax debts.

If you or someone you know receives one of these calls, please contact the Treasury inspectors at (800) 366-4484 and report it to the Federal Trade Commission by filing a consumer complaint at www.ftc.gov.

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Annuities Are Not Likely the Answer

Written by Summit Wealth on .

I was reading an article this morning about how the Financial Industry Regulatory Authority (FINRA) has levied a $25 million fine (the largest ever) against MetLife for misleading investors and steering them into high-fee annuities that don't deliver the benefits they promised. It is the largest fine charged against a firm for misconduct involving variable annuities, and the second largest fine FINRA has imposed against a company in any matter.

"Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning," Brad Bennett, FINRA's chief of enforcement said in a statement. "Firms engaging in this business must ensure that the information on the costs and benefits of these products provided to customers is accurate and that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling."

Of course, MetLife settled the case without admitting or denying any wrongdoing.
What I have outlined above is pretty compelling evidence that annuities are not likely the answer to most retirement planning conundrums.

  • They typically carry high annual expenses;
  • Many have long-term surrender charges;
  • They turn capital gain income into higher-taxed, ordinary income; and
  • Those that sell them often times do not represent the best interests of those they are selling them to (i.e. not a Fiduciary)

If you have questions about annuities and the potential role they may play in your retirement planning, please contact us. We are glad to help.

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Is Life Insurance Really an "Investment?"

Written by Summit Wealth on .

When analyzing life insurance for our clients, the first question we like to ask is "What is the purpose of the insurance?" Life insurance certainly is an important tool in protecting your family if the unthinkable happens. We recommend life insurance for such purposes of paying off your home, funding college education for your children, funding part or all of your surviving spouse's retirement in the event of your untimely death.

However, many permanent life insurance (e.g. variable universal life) policies are sold as an investment, which in our opinion should be a secondary consideration, in most cases. The way you really "win" is if you die prematurely (before your life expectancy) That is a pretty high price to pay. Insurance companies, as you would expect, price (i.e. your premium) their life insurance so they make a profit and sales people make a commission. The insurance company bases the premium, in part, on your life expectancy. The internal costs of life insurance products can be expensive (2.5% to 4% per year in fees) which materially discounts your investment return potential.

We have seen many life insurance illustrations, provided by life insurance agents, that show a (non-guaranteed) cash value growing in variable life polices leaving large windfalls to the beneficiaries at your death, tax free. If you look a little closer, you will see the problem with many illustrations is the hypothetical rate of return is greater than you should expect to receive from an investment portfolio. For example, we have seen illustrations with returns of 10% or greater. This means (assuming 2.5% to 4% per year in fees) you actually have to get a return, year-after-year, of 12.5% to 14%. You should know that while life insurance proceeds are passed income-tax free to your heirs; they are not necessarily passed estate tax free.

As odd as this sounds, if you don't have a life insurance need for life insurance think twice about buying life insurance. Many times investing what would be life insurance premium dollars into low cost mutual funds would be a more efficient investment option. If you do have a need for life insurance, consider using level term policies, which tend to have lower internal costs, and there is no penalty if you terminate the policy if there is no further need. There are, of course, situations where you would want to consider permanent life insurance, for example: estate tax (especially with illiquid assets, such as a business or real estate), and business continuation (e.g. partnerships).

If you would like help determining what is best in your situation, we are happy to help. We are not licensed to sell insurance, but we can provide an unbiased analysis of your life insurance need. Should you have a need for life insurance we can work with you and your current agent, or we can refer you to a life insurance broker who can place you with life insurance appropriate to your needs.

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Retirement Reality Check

Written by Summit Wealth on .

According to Franklin Templeton's 2016 Retirement Income Strategies and Expectations survey, 41% of the 2,019 adults surveyed indicated that they are not saving for retirement (compared to 35% in 2014). And while the amount of people saving is down, their concerns for retirement are up because 70% of all respondents indicated they have stress about their retirement savings / investments (versus 67% in 2015). Unfortunately, both of these questions are trending in the wrong direction the last three years.

This second response seems to be logical to us. If you aren't saving for retirement, then, of course, your stress level about retirement should be higher.

Of those surveyed, 65% indicated that they do not have a good understanding of how much they need to accumulate to retire or how much they should expect to spend on an annual basis. Similarly, according to the survey, 60% are concerned about how they will pay their medical expenses during retirement.

Does this hit home? If it does, now is the time to design your strategic financial plan and begin making tactical decisions to help you achieve financial success.

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