Where Does Your Advisor Get Their Clients?

Where Does Your Advisor Get Their Clients?

Understanding how an RIA gets clients can be an important factor for prospective clients or for advisors looking to join an RIA.

Every registered investment adviser (RIA) is looking for the same thing, more clients. Understanding how an RIA gets their clients can be an important consideration for prospective clients of an RIA and for individual financial advisors looking to join an RIA.

RIAs use various tools to develop clients and grow their business. The particular business development model used by an RIA can give you valuable insight into, among other things, how the company may work with you and what is important to them. So, let’s take a look at the different models and how they can affect you as an end user …

Organic Referrals

One of the most common ways RIAs get new clients is through what I will refer to as “organic” referrals from existing clients. An organic referral typically involves an existing client of an RIA who provides the RIA with a potential client introduction without receiving anything of value in return. Most RIAs use organic referrals as at least one component of their business development plan, and indeed for some it is their only avenue for growth. What does that tell a prospective client or an advisor looking to join the RIA? Usually, if an RIA is receiving a lot of organic referrals from existing clients, it is reasonable to assume that they are doing a good job for their clients. Otherwise, clients wouldn’t be referring friends, family members, and colleagues and risking those relationships. So, it is worthwhile to ask an RIA about the percentage of their client growth that comes through organic referrals from existing clients.

Similar to an organic referral from an existing client, an RIA might also receive referrals from a professional service provider, such as an estate planning attorney or certified public accountant, with whom the RIA has an existing relationship. In some such cases, the attorney or CPA simply does so to develop a relationship with the RIA with the hope that the flow of referrals will go both ways.

Paid Referrals/Solicitations

On the other side of the spectrum, an RIA might obtain new clients through paid leads. For example, an RIA also might get new clients from affiliated broker-dealers who serve as custodians for the RIA or perform other services. Most of the discount brokerage companies (e.g. Fidelity, Schwab, TD Ameritrade) have referral programs where they send certain clients to pre-screened RIAs for wealth management services. In return, those brokerage companies may receive a portion of the fee paid by the client to the RIA, typically 0.25%. In some situations, this referral fee might continue for as long as the client stays with the RIA. While there may be several other factors that lead a broker to refer a client to a certain RIA, the possibility of a referral fee is certainly one that should be considered when a client is deciding whether to hire a particular RIA. Therefore, it is important to ask the broker who makes the referral if they have sales targets they need to meet and/or if they personally benefit from the referral. Don’t just assume they are doing it out of the kindness of their heart. Another example is a situation similar to that which I described earlier where an attorney or CPA refers his or her own clients to an RIA, but the RIA pays the attorney or CPA either a flat fee or a percentage of the fees billed to the client.

RIAs can also use third-party solicitors to find new clients. In this scenario, the RIA pays a cash fee to someone who is not an employee of the RIA to find clients and make introductions. Oftentimes this fee is a portion of the advisory fee charged to the client for a certain period of time. There is nothing inherently wrong with such arrangements, or other referral situations in which an RIA pays for client leads. However, such arrangements should be disclosed to the client so that they can evaluate the potential conflict of interest and make an informed decision. Such referral arrangements should be disclosed in two ways. First, the person making the referral (and being paid for it) should provide the prospective client with a document that discloses certain information about his or her arrangement with the RIA, including the fee to be paid. Second, the RIA should disclose such arrangements in the Form ADV that they file with the SEC, which can usually be found at www.adviserinfo.sec.gov.

A paid solicitation is different from an unpaid referral, and a prospective client might have a very different perception of client growth based on referrals from people who expect nothing in return versus growth based on paid solicitations. This is just one more piece of information that a prospective client should have in hand when deciding whether to hire an RIA.

Mergers & Acquisitions

Lastly, advisors can grow through acquiring, or merging with, existing advisory firms. There are several firms out there that will buy out an existing firm entirely. Such a model can be efficient and effective because, as you create economies of scale and grow larger and larger, it gets easier to bring on more RIAs to take advantage of that scale. There also are a handful of companies out there that have become the predominant players in what is considered the “roll-up” market for advisors. There are a number of reasons that a prospective client should know if the RIA they are considering is one of these companies. For example, the rate of an RIA’s growth might impact their ability to provide services to their clients at the same level if the RIA is not built to handle that scale.

So why is all of this important? The bottom line is that, for many people looking for someone to help them with their financial planning and investments, size matters. At the same time, a lot of the marketing and promotional aspects of the investment advisory business focus on size, specifically the amount of assets under management, or AUM, of an RIA. For example, rate of growth is one of the primary ways that advisors are ranked by various publications. Therefore, while size can be important for many reasons, it is important to look deeper into the metrics one uses to evaluate an RIA’s size.

It is important to understand where an RIA’s growth is coming from in order to evaluate if they are truly living up to the expectations of their clients. One of the most impressive growth indicators for a company is if they are receiving a substantial number of referrals from existing clients. However, that growth might be viewed differently if they are growing because of paid solicitation programs. Similarly, if they are expanding because they are acquiring other advisors, it could lend a different interpretation of rapid growth in AUM.

None of these models are necessarily good or bad for prospective clients, but it is something to keep in mind. It is also important that your RIA is upfront with you about these and other issues. At my firm, Spotlight Asset Group, we have found clients through both referrals from existing clients and by bringing on existing advisory firms or individual advisors. While we don’t currently participate in any paid solicitation programs, it is something that we would consider under the right circumstances. No matter what approach we take, we always ask ourselves how it best serves both our existing clients and prospective clients.

Where Does Your Advisor Get Their Clients? 1

Stephen Greco, CEO

Join the Spotlight Asset Group Newsletter

Where Does Your Advisor Get Their Clients?

Understanding how an RIA gets clients can be an important factor for prospective clients or for advisors looking to join an RIA.

Every registered investment adviser (RIA) is looking for the same thing, more clients. Understanding how an RIA gets their clients can be an important consideration for prospective clients of an RIA and for individual financial advisors looking to join an RIA.

RIAs use various tools to develop clients and grow their business. The particular business development model used by an RIA can give you valuable insight into, among other things, how the company may work with you and what is important to them. So, let’s take a look at the different models and how they can affect you as an end user …

Organic Referrals

One of the most common ways RIAs get new clients is through what I will refer to as “organic” referrals from existing clients. An organic referral typically involves an existing client of an RIA who provides the RIA with a potential client introduction without receiving anything of value in return. Most RIAs use organic referrals as at least one component of their business development plan, and indeed for some it is their only avenue for growth. What does that tell a prospective client or an advisor looking to join the RIA? Usually, if an RIA is receiving a lot of organic referrals from existing clients, it is reasonable to assume that they are doing a good job for their clients. Otherwise, clients wouldn’t be referring friends, family members, and colleagues and risking those relationships. So, it is worthwhile to ask an RIA about the percentage of their client growth that comes through organic referrals from existing clients.

Similar to an organic referral from an existing client, an RIA might also receive referrals from a professional service provider, such as an estate planning attorney or certified public accountant, with whom the RIA has an existing relationship. In some such cases, the attorney or CPA simply does so to develop a relationship with the RIA with the hope that the flow of referrals will go both ways.

Paid Referrals/Solicitations

On the other side of the spectrum, an RIA might obtain new clients through paid leads. For example, an RIA also might get new clients from affiliated broker-dealers who serve as custodians for the RIA or perform other services. Most of the discount brokerage companies (e.g. Fidelity, Schwab, TD Ameritrade) have referral programs where they send certain clients to pre-screened RIAs for wealth management services. In return, those brokerage companies may receive a portion of the fee paid by the client to the RIA, typically 0.25%. In some situations, this referral fee might continue for as long as the client stays with the RIA. While there may be several other factors that lead a broker to refer a client to a certain RIA, the possibility of a referral fee is certainly one that should be considered when a client is deciding whether to hire a particular RIA. Therefore, it is important to ask the broker who makes the referral if they have sales targets they need to meet and/or if they personally benefit from the referral. Don’t just assume they are doing it out of the kindness of their heart. Another example is a situation similar to that which I described earlier where an attorney or CPA refers his or her own clients to an RIA, but the RIA pays the attorney or CPA either a flat fee or a percentage of the fees billed to the client.

RIAs can also use third-party solicitors to find new clients. In this scenario, the RIA pays a cash fee to someone who is not an employee of the RIA to find clients and make introductions. Oftentimes this fee is a portion of the advisory fee charged to the client for a certain period of time. There is nothing inherently wrong with such arrangements, or other referral situations in which an RIA pays for client leads. However, such arrangements should be disclosed to the client so that they can evaluate the potential conflict of interest and make an informed decision. Such referral arrangements should be disclosed in two ways. First, the person making the referral (and being paid for it) should provide the prospective client with a document that discloses certain information about his or her arrangement with the RIA, including the fee to be paid. Second, the RIA should disclose such arrangements in the Form ADV that they file with the SEC, which can usually be found at www.adviserinfo.sec.gov.

A paid solicitation is different from an unpaid referral, and a prospective client might have a very different perception of client growth based on referrals from people who expect nothing in return versus growth based on paid solicitations. This is just one more piece of information that a prospective client should have in hand when deciding whether to hire an RIA.

Mergers & Acquisitions

Lastly, advisors can grow through acquiring, or merging with, existing advisory firms. There are several firms out there that will buy out an existing firm entirely. Such a model can be efficient and effective because, as you create economies of scale and grow larger and larger, it gets easier to bring on more RIAs to take advantage of that scale. There also are a handful of companies out there that have become the predominant players in what is considered the “roll-up” market for advisors. There are a number of reasons that a prospective client should know if the RIA they are considering is one of these companies. For example, the rate of an RIA’s growth might impact their ability to provide services to their clients at the same level if the RIA is not built to handle that scale.

So why is all of this important? The bottom line is that, for many people looking for someone to help them with their financial planning and investments, size matters. At the same time, a lot of the marketing and promotional aspects of the investment advisory business focus on size, specifically the amount of assets under management, or AUM, of an RIA. For example, rate of growth is one of the primary ways that advisors are ranked by various publications. Therefore, while size can be important for many reasons, it is important to look deeper into the metrics one uses to evaluate an RIA’s size.

It is important to understand where an RIA’s growth is coming from in order to evaluate if they are truly living up to the expectations of their clients. One of the most impressive growth indicators for a company is if they are receiving a substantial number of referrals from existing clients. However, that growth might be viewed differently if they are growing because of paid solicitation programs. Similarly, if they are expanding because they are acquiring other advisors, it could lend a different interpretation of rapid growth in AUM.

None of these models are necessarily good or bad for prospective clients, but it is something to keep in mind. It is also important that your RIA is upfront with you about these and other issues. At my firm, Spotlight Asset Group, we have found clients through both referrals from existing clients and by bringing on existing advisory firms or individual advisors. While we don’t currently participate in any paid solicitation programs, it is something that we would consider under the right circumstances. No matter what approach we take, we always ask ourselves how it best serves both our existing clients and prospective clients.

How Do You Manage Risk With Time?

How Do You Manage Risk With Time?

By Aaron CFP®, Managing Director

 

“Successful investing is about managing risk, not avoiding it.”

-Benjamin Graham

There are many ways to manage risk.  One way is with time.

Take a look at the green bars in this chart, representing the range of investment returns for U.S. stocks from 1950 through 2018 (as represented by the S&P 500 Shiller Composite).   On the left side of the chart we see that since 1950 the worst one-year performance for U.S. stocks was a loss of -39% and the best year for stocks was a positive return of 47%.   That is a dramatic range.

How Do You Manage Risk With Time? 3

Now consider the 5-year rolling period.  Notice how the range narrows significantly from -3% to 28% and how the risk of loss is significantly lower than any one-year period.  If you invested in the worst 5-year period for stocks since 1950 your loss would only be -3%.

When we look at the 10-year and 20-year rolling periods, the range of returns continues to narrow.  From 1950 through today, a period of time that included several major market disruptions (the 1973 oil embargo, Black Friday, the tech bubble, and the Great Recession, to name a few), the worst 10-year period for the U.S. stock market resulted in a loss of just -1%. The worst 20-year period since 1950 resulted in a positive return of 6%.

What we learn from the data is that time is an important consideration when we consider investment risk.  If you plan to invest for a short period of time your risk of losing money by investing in stocks is significantly higher than if you have a longer time horizon.  Structuring your investments with time in mind may help mitigate risk.  Is it worth the risk to invest money in the stock market if you need that money in the next 12 months?  Probably not.  But what if you are investing money that you don’t need for 10 or 20 years- is it worth the risk of investing that money in the stock market?  It may be.

Talk to your Spotlight wealth manager about structuring your investment portfolio around your time horizon.  Don’t avoid risk; use risk management strategies instead.

How Do You Manage Risk With Time? 4

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

How Do You Manage Risk With Time?

By Aaron CFP®, Managing Director

 

“Successful investing is about managing risk, not avoiding it.”

-Benjamin Graham

There are many ways to manage risk.  One way is with time.

Take a look at the green bars in this chart, representing the range of investment returns for U.S. stocks from 1950 through 2018 (as represented by the S&P 500 Shiller Composite).   On the left side of the chart we see that since 1950 the worst one-year performance for U.S. stocks was a loss of -39% and the best year for stocks was a positive return of 47%.   That is a dramatic range.

How Do You Manage Risk With Time? 3

Now consider the 5-year rolling period.  Notice how the range narrows significantly from -3% to 28% and how the risk of loss is significantly lower than any one-year period.  If you invested in the worst 5-year period for stocks since 1950 your loss would only be -3%.

When we look at the 10-year and 20-year rolling periods, the range of returns continues to narrow.  From 1950 through today, a period of time that included several major market disruptions (the 1973 oil embargo, Black Friday, the tech bubble, and the Great Recession, to name a few), the worst 10-year period for the U.S. stock market resulted in a loss of just -1%. The worst 20-year period since 1950 resulted in a positive return of 6%.

What we learn from the data is that time is an important consideration when we consider investment risk.  If you plan to invest for a short period of time your risk of losing money by investing in stocks is significantly higher than if you have a longer time horizon.  Structuring your investments with time in mind may help mitigate risk.  Is it worth the risk to invest money in the stock market if you need that money in the next 12 months?  Probably not.  But what if you are investing money that you don’t need for 10 or 20 years- is it worth the risk of investing that money in the stock market?  It may be.

Talk to your Spotlight wealth manager about structuring your investment portfolio around your time horizon.  Don’t avoid risk; use risk management strategies instead.

How Do You Manage Risk With Time? 4

Aaron Kirsch CFP®, Managing Director

Escalator Up, Elevator Down

Escalator Up, Elevator Down

By Aaron CFP®, Managing Director

“Escalator up, Elevator down” is a good metaphor to describe movements in the stock markets.

On September 20, 2018 the S&P 500 Index peaked at 2930.  The index gained approximately 17% over the previous 12-month period.   It took only three months to wipe out that gain.

We can sometimes forget that stock markets are volatile (as described in detail in our October 30, 2018 post That Was Fast! by Stephen Greco, CEO).  2018 was an average year for volatility but it seemed worse because 2017 was unusually calm.  The standard deviation (a measurement of volatility, for those of us who didn’t fall asleep in statistics class) for the S&P 500 Index from 1926 – 2017 is 18.7%;[1]  in 2017 it was a mere 6.7%.[2]

It can be a challenge for us to ignore short-term fluctuations with around-the-clock investment news but it is important to keep your focus on long-term results.  Speak with your Wealth Manager about how volatility affects your investment portfolio and your long-term financial plan.

 

 

[1] See: DST Systems Inc. (n.d.). Evaluating Investment Risk at http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088

[2] See: Forbes (December 12, 2018). Market Volatility: A Return To The Old Normal at https://www.forbes.com/sites/sarahhansen/2018/12/12/market-volatility/#4e346efd71f0

Escalator Up, Elevator Down 7

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

Escalator Up, Elevator Down

By Aaron CFP®, Managing Director

“Escalator up, Elevator down” is a good metaphor to describe movements in the stock markets.

On September 20, 2018 the S&P 500 Index peaked at 2930.  The index gained approximately 17% over the previous 12-month period.   It took only three months to wipe out that gain.

We can sometimes forget that stock markets are volatile (as described in detail in our October 30, 2018 post That Was Fast! by Stephen Greco, CEO).  2018 was an average year for volatility but it seemed worse because 2017 was unusually calm.  The standard deviation (a measurement of volatility, for those of us who didn’t fall asleep in statistics class) for the S&P 500 Index from 1926 – 2017 is 18.7%;[1]  in 2017 it was a mere 6.7%.[2]

It can be a challenge for us to ignore short-term fluctuations with around-the-clock investment news but it is important to keep your focus on long-term results.  Speak with your Wealth Manager about how volatility affects your investment portfolio and your long-term financial plan.

 

 

[1] See: DST Systems Inc. (n.d.). Evaluating Investment Risk at http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088

[2] See: Forbes (December 12, 2018). Market Volatility: A Return To The Old Normal at https://www.forbes.com/sites/sarahhansen/2018/12/12/market-volatility/#4e346efd71f0

Escalator Up, Elevator Down 7

Aaron Kirsch CFP®, Managing Director

Avoid These Tax Scams

Avoid These Tax Scams

By Aaron CFP®, Managing Director

According to the IRS, thousands of people have lost millions of dollars to tax scams, but you don’t have to be a victim.  There is plenty of information on the IRS website (www.irs.gov) that can help you avoid these scams.  Here are four of the IRS “Dirty Dozen” tax scams for 2018 that you, your family, and your friends should know about:

Phishing

This scam involves fake emails or websites in which criminals attempt to steal personal information. Scam emails and websites can also infect a taxpayer’s computer with malware. Avoid opening emails or clicking on web links claiming to be from the IRS.

The IRS does not initiate contact with taxpayers via email about a bill or tax refund.  Do not click on links or download attachments from unknown or suspicious emails.

Phone Scams

The IRS has seen a surge of phone calls by criminals impersonating IRS agents who threaten taxpayers with police arrest, deportation, license revocation, and other penalties.  They demand cash through a wire transfer, prepaid debit card, or gift card.

The IRS does not initiate contact with taxpayers via phone and never calls to demand immediate payment using a specific payment method.  The IRS typically will first mail a bill to any taxpayer who owes taxes.  The IRS does not threaten to bring in law enforcement to arrest you for not paying.  The IRS cannot revoke your driver’s license, business license, or immigration status.

Identity Theft

Taxpayers need to watch out for identity theft at all times, and during tax time when some criminals file fraudulent returns using someone else’s Social Security number.

Always use security software on your computer with firewall and anti-virus protections, and use strong passwords.  Learn to recognize and avoid phishing emails, threatening phone calls, and texts from thieves posing as legitimate organizations such as a bank, credit card company, or government organization (including the IRS).

Fake Charities

There are groups masquerading as charitable organizations that solicit donations from unsuspecting contributors.  Many of these fake “charities” use names similar to familiar or nationally-known organizations.

Take a few minutes to research an organization to ensure your hard-earned money goes to legitimate charities. The IRS website has tools to check out the status of charitable organizations.

For More Information

See the article “IRS wraps up ‘Dirty Dozen’ list of tax scams for 2018; Encourages taxpayers to remain vigilant”
https://www.irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant

Avoid These Tax Scams 9

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

Avoid These Tax Scams

By Aaron CFP®, Managing Director

According to the IRS, thousands of people have lost millions of dollars to tax scams, but you don’t have to be a victim.  There is plenty of information on the IRS website (www.irs.gov) that can help you avoid these scams.  Here are four of the IRS “Dirty Dozen” tax scams for 2018 that you, your family, and your friends should know about:

Phishing

This scam involves fake emails or websites in which criminals attempt to steal personal information. Scam emails and websites can also infect a taxpayer’s computer with malware. Avoid opening emails or clicking on web links claiming to be from the IRS.

The IRS does not initiate contact with taxpayers via email about a bill or tax refund.  Do not click on links or download attachments from unknown or suspicious emails.

Phone Scams

The IRS has seen a surge of phone calls by criminals impersonating IRS agents who threaten taxpayers with police arrest, deportation, license revocation, and other penalties.  They demand cash through a wire transfer, prepaid debit card, or gift card.

The IRS does not initiate contact with taxpayers via phone and never calls to demand immediate payment using a specific payment method.  The IRS typically will first mail a bill to any taxpayer who owes taxes.  The IRS does not threaten to bring in law enforcement to arrest you for not paying.  The IRS cannot revoke your driver’s license, business license, or immigration status.

Identity Theft

Taxpayers need to watch out for identity theft at all times, and during tax time when some criminals file fraudulent returns using someone else’s Social Security number.

Always use security software on your computer with firewall and anti-virus protections, and use strong passwords.  Learn to recognize and avoid phishing emails, threatening phone calls, and texts from thieves posing as legitimate organizations such as a bank, credit card company, or government organization (including the IRS).

Fake Charities

There are groups masquerading as charitable organizations that solicit donations from unsuspecting contributors.  Many of these fake “charities” use names similar to familiar or nationally-known organizations.

Take a few minutes to research an organization to ensure your hard-earned money goes to legitimate charities. The IRS website has tools to check out the status of charitable organizations.

For More Information

See the article “IRS wraps up ‘Dirty Dozen’ list of tax scams for 2018; Encourages taxpayers to remain vigilant”
https://www.irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant

Avoid These Tax Scams 9

Aaron Kirsch CFP®, Managing Director

Why You Should Never Write A Check To Your Favorite Charity

Why You Should Never Write A Check To Your Favorite Charity

By Aaron CFP®, Managing Director

Don’t Write That Check

We all have our favorite charities and some of us are fortunate enough to support those charities financially. Because of certain rules in the tax code there are typically better alternatives than writing a large check. Let’s look at two specific strategies.

Gifting Stock

Gifting stock that you have owned for more than one year and that has gone up in value is a great way to avoid capital gains taxes and support a non-profit organization. And if you itemize deductions you can take a charitable deduction for the stock’s fair market value on the day you give it away.

Let’s say you bought a stock for $4,000 ten years ago and it’s now worth $10,000. If you sold that stock and paid 20% Federal capital gains tax on the $6,000 of gain your tax would be $1,200. You would receive $10,000 from the sale of the stock, minus $1,200 in capital gain taxes, netting you $8,800 which you could then donate to your favorite charity. But if you gifted that stock to the charity then the charity, being a not-for-profit organization that does not pay taxes, would sell the stock and net $10,000 in proceeds from the sale. Neither you nor the charity would pay capital gains tax. That’s $1,200 more to your favorite charity. That makes a lot more sense than just writing a check, doesn’t it?

Donating Directly From Your IRA

If you donate to charitable organizations and are taking required distributions from your Individual Retirement Account, you should consider making donations directly from your IRA.

The tax law passed by Congress in 2017 doubles the standard deduction and limits itemized deductions for state and local property taxes to $10,000 (which affects many taxpayers in states with high property taxes and state taxes). This means that you may not be itemizing your deductions in 2018 and therefore not receive any deductions for your charitable contributions.

A “Qualified Charitable Distribution” allows anyone who is 70 ½ or older to donate money directly from an IRA to a charitable organization without that gift counting as income (up to $100,000 per year). Any money you transfer through a Qualified Charitable Distribution counts towards your required minimum distribution (the charity must cash the check by December 31).

For example, a client could make an annual gift to his or her alma mater directly from an IRA. Or a couple who donates regularly to their church could set up monthly distributions directly from an IRA. That way, instead of taking money out of the IRA and paying taxes before making the donation, they can send the funds directly to their favorite charities without having to pay taxes on an IRA distribution.

Another benefit of a Qualified Charitable Distribution is that it reduces your Adjusted Gross Income (AGI) which determines how much of your Social Security is subject to income taxes and determines the amount of your Medicare premiums in the following year.

Conclusion

There may be better ways than writing checks to support your favorite charity. Consider gifting stock and making donations directly from your IRA. Please contact your Wealth Advisor at Spotlight Asset Group or consult with your accountant to discuss these and other charitable giving strategies.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Why You Should Never Write A Check To Your Favorite Charity 11

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

Why You Should Never Write A Check To Your Favorite Charity

By Aaron CFP®, Managing Director

Don’t Write That Check

We all have our favorite charities and some of us are fortunate enough to support those charities financially. Because of certain rules in the tax code there are typically better alternatives than writing a large check. Let’s look at two specific strategies.

Gifting Stock

Gifting stock that you have owned for more than one year and that has gone up in value is a great way to avoid capital gains taxes and support a non-profit organization. And if you itemize deductions you can take a charitable deduction for the stock’s fair market value on the day you give it away.

Let’s say you bought a stock for $4,000 ten years ago and it’s now worth $10,000. If you sold that stock and paid 20% Federal capital gains tax on the $6,000 of gain your tax would be $1,200. You would receive $10,000 from the sale of the stock, minus $1,200 in capital gain taxes, netting you $8,800 which you could then donate to your favorite charity. But if you gifted that stock to the charity then the charity, being a not-for-profit organization that does not pay taxes, would sell the stock and net $10,000 in proceeds from the sale. Neither you nor the charity would pay capital gains tax. That’s $1,200 more to your favorite charity. That makes a lot more sense than just writing a check, doesn’t it?

Donating Directly From Your IRA

If you donate to charitable organizations and are taking required distributions from your Individual Retirement Account, you should consider making donations directly from your IRA.

The tax law passed by Congress in 2017 doubles the standard deduction and limits itemized deductions for state and local property taxes to $10,000 (which affects many taxpayers in states with high property taxes and state taxes). This means that you may not be itemizing your deductions in 2018 and therefore not receive any deductions for your charitable contributions.

A “Qualified Charitable Distribution” allows anyone who is 70 ½ or older to donate money directly from an IRA to a charitable organization without that gift counting as income (up to $100,000 per year). Any money you transfer through a Qualified Charitable Distribution counts towards your required minimum distribution (the charity must cash the check by December 31).

For example, a client could make an annual gift to his or her alma mater directly from an IRA. Or a couple who donates regularly to their church could set up monthly distributions directly from an IRA. That way, instead of taking money out of the IRA and paying taxes before making the donation, they can send the funds directly to their favorite charities without having to pay taxes on an IRA distribution.

Another benefit of a Qualified Charitable Distribution is that it reduces your Adjusted Gross Income (AGI) which determines how much of your Social Security is subject to income taxes and determines the amount of your Medicare premiums in the following year.

Conclusion

There may be better ways than writing checks to support your favorite charity. Consider gifting stock and making donations directly from your IRA. Please contact your Wealth Advisor at Spotlight Asset Group or consult with your accountant to discuss these and other charitable giving strategies.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Why You Should Never Write A Check To Your Favorite Charity 11

Aaron Kirsch CFP®, Managing Director

That Was Fast!

That Was Fast!

By Stephen Greco, CEO

That Was Fast!

As October began, we found ourselves enjoying a steady diet of great economic news and a market that was up for the year. What a difference a few weeks makes. Over the last four weeks, essentially every major asset class is down, including bonds, US stocks, and international stocks. Specifically, the S&P 500 is down 8.4%, small-cap stocks are down 12.2%, the Nasdaq is down 10.3%, emerging markets (EEM) are down 10.2%, and international developed markets (EFA) are down 10.9%. We have also seen individual stocks like Amazon (AMZN) and Netflix (NFLX) correct 20% and 30%, respectively, from all-time highs reached earlier this year. Volatility has increased significantly as well, with the VIX (a measure of volatility in the market) opening at 11.99 on October 1st and now sitting at 24.16, essentially doubling in about a month. While the market has had a significant downturn over the last few weeks, we don’t feel it will turn into a recession.

Why is this happening? A few events have popped up over the past several weeks that have driven the market lower.

Interest rates have increased dramatically relative to the last several years.

The average rate on a 30-year mortgage has risen above 5%, a key psychological level, creating some concerns over a possible slowdown in the housing market. In fact, the housing market continued to deteriorate as sales of new homes plunged to near their lowest level in two years. The Commerce Department reported that new-home sales ran at a seasonally-adjusted annual rate of 553,000 last month, their lowest rate since December of 2016. September’s reading was 5.5% lower than August, and 13.2% lower than at the same time last year.

Algorithmic and momentum trading exacerbate market swings.

Most of you have probably heard of “black box” or “high frequency” trading, which uses powerful computers to effect huge volumes of stock transactions at extremely high speeds. This type of trading accounts for a significant percentage of all trading in the markets and, as a result, many analysts believe it is a large contributor to the enhanced volatility we see in the market these days. The reason for this is that high frequency trading uses computer-based algorithms to tell an automated trading system when and how to trade based on certain conditions being present. So as soon as a stock or index hits the data point the formula is based on, trades will execute automatically. As this type of trading has proliferated we have seen massive moves in the markets when stocks or indexes breach major technical levels. Below is a chart of the S&P 500. The blue line is the 200-day moving average, which is a widely viewed level for a lot of technical traders. It is also a metric that is used by a lot of computer-based trading systems. As you can see, once the S&P 500 got below the blue line and couldn’t close back above it, you saw a pretty large drop in the index.

SOURCE: thinkorswim® TD Ameritrade, Inc.

SOURCE: thinkorswim® TD Ameritrade, Inc.

An opportune time for profit-taking and deleveraging.

When the markets see increased volatility, positions that are up the most are usually the ones that decrease the most. AMZN and NFLX aren’t dramatically different companies today compared to a couple months ago, yet they have seen massive drops in their stock price. We believe that much of this is a result of profit-taking, deleveraging in the market (i.e. paying off margin balances and reducing overall debt), and companies reducing their estimates to account for some of the new headwinds we have seen in the market.

Going forward, as I stated earlier we don’t expect these conditions to develop into the next recession. The economy is actually very strong with some of the highest GDP numbers in years and unemployment being at record lows.

While it is never fun to deal with downturns, they are a normal part of the economic cycle. As you can see in the chart below, markets typically see a decline of 10% or more in most calendar years. Even when the market ends positive for the year, there is usually a downturn at some point.

That Was Fast! 13

What isn’t normal, relative to recent history, is the volatility we have seen of late. It used to take months for a market to correct 10%, now it takes weeks or days. We think this volatility is going to stick around for a while, so be prepared. The Federal Reserve has removed most of its stimulus, essentially taking off the market’s training wheels. Anyone with young children knows that, when this happens, very rarely does your child ride off into the sunset on their first try. But after a few falls and some bumps and bruises, they eventually figure it out. We think this is a good analogy for where the market is right now and where it is heading over the next few months. It may be a rough ride with some bumps and bruises to come, but eventually the market will figure it out.

If you have any questions regarding your specific situation or portfolio, please don’t hesitate to contact myself or your Wealth Manager.

That Was Fast! 14

Stephen Greco, CEO

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That Was Fast!

By Stephen Greco, CEO

That Was Fast!

As October began, we found ourselves enjoying a steady diet of great economic news and a market that was up for the year. What a difference a few weeks makes. Over the last four weeks, essentially every major asset class is down, including bonds, US stocks, and international stocks. Specifically, the S&P 500 is down 8.4%, small-cap stocks are down 12.2%, the Nasdaq is down 10.3%, emerging markets (EEM) are down 10.2%, and international developed markets (EFA) are down 10.9%. We have also seen individual stocks like Amazon (AMZN) and Netflix (NFLX) correct 20% and 30%, respectively, from all-time highs reached earlier this year. Volatility has increased significantly as well, with the VIX (a measure of volatility in the market) opening at 11.99 on October 1st and now sitting at 24.16, essentially doubling in about a month. While the market has had a significant downturn over the last few weeks, we don’t feel it will turn into a recession.

Why is this happening? A few events have popped up over the past several weeks that have driven the market lower.

Interest rates have increased dramatically relative to the last several years.

The average rate on a 30-year mortgage has risen above 5%, a key psychological level, creating some concerns over a possible slowdown in the housing market. In fact, the housing market continued to deteriorate as sales of new homes plunged to near their lowest level in two years. The Commerce Department reported that new-home sales ran at a seasonally-adjusted annual rate of 553,000 last month, their lowest rate since December of 2016. September’s reading was 5.5% lower than August, and 13.2% lower than at the same time last year.

Algorithmic and momentum trading exacerbate market swings.

Most of you have probably heard of “black box” or “high frequency” trading, which uses powerful computers to effect huge volumes of stock transactions at extremely high speeds. This type of trading accounts for a significant percentage of all trading in the markets and, as a result, many analysts believe it is a large contributor to the enhanced volatility we see in the market these days. The reason for this is that high frequency trading uses computer-based algorithms to tell an automated trading system when and how to trade based on certain conditions being present. So as soon as a stock or index hits the data point the formula is based on, trades will execute automatically. As this type of trading has proliferated we have seen massive moves in the markets when stocks or indexes breach major technical levels. Below is a chart of the S&P 500. The blue line is the 200-day moving average, which is a widely viewed level for a lot of technical traders. It is also a metric that is used by a lot of computer-based trading systems. As you can see, once the S&P 500 got below the blue line and couldn’t close back above it, you saw a pretty large drop in the index.

SOURCE: thinkorswim® TD Ameritrade, Inc.

SOURCE: thinkorswim® TD Ameritrade, Inc.

An opportune time for profit-taking and deleveraging.

When the markets see increased volatility, positions that are up the most are usually the ones that decrease the most. AMZN and NFLX aren’t dramatically different companies today compared to a couple months ago, yet they have seen massive drops in their stock price. We believe that much of this is a result of profit-taking, deleveraging in the market (i.e. paying off margin balances and reducing overall debt), and companies reducing their estimates to account for some of the new headwinds we have seen in the market.

Going forward, as I stated earlier we don’t expect these conditions to develop into the next recession. The economy is actually very strong with some of the highest GDP numbers in years and unemployment being at record lows.

While it is never fun to deal with downturns, they are a normal part of the economic cycle. As you can see in the chart below, markets typically see a decline of 10% or more in most calendar years. Even when the market ends positive for the year, there is usually a downturn at some point.

That Was Fast! 13

What isn’t normal, relative to recent history, is the volatility we have seen of late. It used to take months for a market to correct 10%, now it takes weeks or days. We think this volatility is going to stick around for a while, so be prepared. The Federal Reserve has removed most of its stimulus, essentially taking off the market’s training wheels. Anyone with young children knows that, when this happens, very rarely does your child ride off into the sunset on their first try. But after a few falls and some bumps and bruises, they eventually figure it out. We think this is a good analogy for where the market is right now and where it is heading over the next few months. It may be a rough ride with some bumps and bruises to come, but eventually the market will figure it out.

If you have any questions regarding your specific situation or portfolio, please don’t hesitate to contact myself or your Wealth Manager.