Market’s Long Overdue Correction Seems to Be Starting

8 04 2013

Jonathan N. Castle, CFP®, ChFC®

Jonathan N. Castle, CFP®, ChFC®

I thought I would take just a moment to let everyone know that we have been watching the market closely. It looks like the long upward sprint the market has taken over the last 4 months might be coming to a pause.

This is not unusual at all; billions of dollars have been fed into the capital markets over the last 4 months as the veil of uncertainly about taxes and fiscal policy has been lifted. Pension funds and individual investors have flooded the stock markets and stock mutual funds with more dollars this past quarter than we’ve seen in a long, long time. Wall Street’s traders have seen their target prices for stocks met, exceeded, and exceeded again. In general, the economic data we’ve see reported has been mostly positive, with just enough bad news to remind us that the stock market still has its dangers, but not enough to get investors worried that another recession is around the corner.

So, with the information we have at present, it looks like we are in for a regular, run-of-the-mill correction of about 3 to 7%. This happens, on average, 3 times per year, and is the normal breathing of a healthy and functioning market.

It is important to keep in mind that large, painful, and excessively long bear markets typically occur only during times of great economic upset (Great Depression, Great Recession, Tech Bubble Burst, Oil Embargo). We are monitoring all of our indicators and have far better warning systems in place than existed in 2007 and 2008, and expect to be able to sidestep a great deal of the damage that those “Perfect Storms” tend to dish out. At this time, Recession Alert(TM) places the odds of the United States economy entering a recession within the next 6 months at only 6.4% – indicating that the stock market remains the best place to be for investors trying to stay ahead of taxes and beat inflation.

However, unexpected or “surprise” events can turn a normal 5% correction into an abrupt harsh 20% correction. This occurs every 3-4 years, on average. Good examples are the stock market “crash” of 1987, the breakout of Desert Storm, minor recessions, the downgrading of the US debt in 2011, and other geopolitical occurrences. Currently, we have two primary concerns that would fall into this category – the prospective bailout of Cyprus (and the EU issues that seem to never end), and the possibility of Kim Jong-Un actually engaging in real military conflict for no apparent reason other than to appear as a strong leader to his people.

The risk of military conflict does not lie in Korea’s ability to hurt the US; that risk is minimal from a military confrontation perspective. While the North enjoys a huge advantage over the South in artillery abilities, those abilities would likely be quickly eradicated by the overwhelming air superiority the US and the South enjoys. The real risk lies in the possibility of China, South Korea, or Japan entering any such the conflict and creating massive instability in the Far East. I believe that China would likely rather see peace in the region, but so far, they have taken a wait-and-see approach.

Whatever happens, we will remain vigilant and observe events as they develop. Ultimately, I believe that normal market functions will continue and am very optimistic about some of the developments we see occurring within our economy – especially in the areas of energy production, rail, manufacturing, home-building, and electronic medical records. I feel it is likely that the decade-long “Secular Bear Market” we have been mired in for the last several years is approaching an end, and that now is a great time to be a long-term investor! However, it remains important to make sure that investors are aware of their risk tolerances – and that portfolios are constructed properly in order to weather those occasional unexpected thunderstorm that can blow in rapidly and give us an uncomfortable bump now and then.

S&P500 1 Year Chart

S&P500 1 Year Chart

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

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A Valuable Tip for the Business Owner

13 12 2012

Jon Castle, CFP, ChFC

Jon Castle, CFP, ChFC

As the end of the year approaches, it can be easy to become swamped with end of the year tasks. We look at that calendar almost daily, mentally ticking off that ever growing “to-do” list of things that we need to get done by the end of the year. I won’t even go into creating a list of examples; I’m sure that if you are a business-owner, that list has already popped into your head and you are populating it even as you are reading this article.

I would ask that, once things settle down a bit – maybe even after the New Year – that you take off your “employee” hat and put on your “owner hat” just for a little while. No – I mean really take off the “employee hat.” Learn to think of your business as a Chinese puzzle or a Rubik’s Cube that you can hold in your hand. You own your business. It is a widget, a device, a tool, a construct of your own making that you must tinker with, work on, improve, re-engineer and tweak until you get it right. Why bother? Because some day – maybe not today – but someday in the future – you will hand that widget to someone else. Maybe… just maybe… if you solve the puzzle… if you do it right… someone will hand you a size-able chunk of money for that widget as you move on with your life.

This perspective of ownership takes a while to develop – but is one of the distinguishing characteristics of those successful entrepreneurs who truly get rewarded and compensated for the time and effort that goes into building a business. A business owner who eventually retires and sells a splendidly crafted business can enjoy a retirement that most never even dream of. A young entrepreneur who creates or acquires a business, cultivates it to perfection to the degree that it is purchased for a handsome sum… creates a life for herself that few others can even imagine.

How does one do this? Ultimately the key is working on the business instead of just in the business. We’ve all heard the same old mantra about creating business plans, setting goals, creating milestones, etc., etc., etc. This is not what I’m talking about. What I’m suggesting that you do is spend the time figuring out how to make you, the business owner,– and your most valuable and experienced employees, expendable within the business.

“What?” you may initially scream? “Me expendable?” Yes, that’s exactly what I mean. If your business relies upon your experience… your relationships… the collective knowledge that only you and your most experienced employees have… then you do not have a business. You have a job. You have a gang, a group, a team of people working together to get things done. This is not bad; quite the opposite. However, you do not have a Rubik’s Cube that you can perfect and then turn to someone else and have them buy that product. Essentially, you have a job.

Ideally, business are the most sell-able (and the most valuable) when they run themselves and the owner is not critical to the successful functioning of the business. When an owner can hire someone off the street, with only a little training, to fill the human needs of the business, and have the business continue to function at a high level of efficiency – then the business has inherent, proprietary value and can itself be sold as a product. When procedures are documented, and automated workflows exist within the business, so each task necessary is performed, tracked, and documented, in the proper order, by the right person, at the right time… so the service or product the business produces gets done. Ideally… without the owner being critical to that cycle.

Is this possible within your business? If not… how can it get that way? Set as a New Year’s resolution to deeply think about the way your business would operate… if you weren’t there. Impossible? Maybe. But maybe not. Or maybe you could get halfway there. Set a New Year’s resolution to start thinking that way. You might be surprised at what your business looks like by the end of next year!

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements





Stock Market at a 4-year High… Again…

23 08 2012

While it has been an unusually long pause between market updates this time, I can assure you that we were not asleep at the wheel. In this instance, no news was good news, as the stock market has maintained its generally upward trend for the past several months with only moderate volatility for us to endure.

As of this writing, the United States stock market is approaching the high of 13279 on the DOW and 1419 on the S&P500 that it had previously reached on May 1st of this year, before the 10% correction that we went through during June and July. Since then, we have had generally uninteresting economic news on the domestic front, no real political unrest that has given us pause, and the Europeans continue to struggle through massive debt issues and one of the worst recessions that region of the world has had to face in several decades.

It can be easy to fall into the trap of thinking that “something good” must actually happen for the stock markets to go up. This is actually not the case. Given the fact that bond markets have gone up continually over the last several years, the current prices of bonds are so high, that most investors have begun to realize that future returns of the bond market are likely to be disappointing. We are beginning to see a shift of capital from what is historically an asset of moderate risk and return (bonds) to an asset class that historically has been riskier – but is currently acknowledged to be undervalued (stocks – especially blue chips).

As a result – nothing spectacular is happening in the economy to move us measurably forward, but as money shifts from bonds to stocks (or from sideline cash to stocks) – the price of stocks will tend to move up simply as a result of supply and demand. In other words – beause more and more investors are dissatisfied with the expected returns from bonds in the forseeable future – stocks seem like a more attractive alternative, especially for long-term investors. The current owners of the stocks must be convinced to sell them – and this “convincing” is done by investors paying higher and higher prices for the stocks over time.

Approaching a new or previous high is not without danger, however. Those who have invested for a while also understand that when the market approaches a previous high mark, it may fail to break through – almost as if an invisible lid has been placed upon the market itself. Sometimes, even in bull markets, the market must pull back and “take a new run” at the “lid” to break through. Currently the market does not have a great deal of momentum; while investors are buying stocks, they are not doing so with enough gusto or wild abandon for us to be convinced that a breakthrough will occur. So… a potential correction may be in store for us.

As we have mentioned before, we are of the belief that the stock market will likely remain in a “trading range” for several years – with a slight slant to the upside (just enough to make investing worthwhile, I suspect) but not a roaring bull market that we enjoyed after the last recession. Instead, we are likely to enjoy several months of upmarkets, followed by several months of downmarkets… squeaking out 7 to 8% returns on an annualized basis, and paying for it with a good bit of volatility and lack of market direction. Dividends will likely play a significant role in creating portfolio growth. We have adjusted portfolios to try to maximize investor returns (within risk tolerance) for this scenario, and continue to admonish patience.

Most experts believe that we are unlikely to see any real economic or fiscal news between now and the election. While it is possible that world events may cause unrest, or that some good news may come out of Europe that bolsters markets for a while, in general it seems that most institutional investors are in a “wait and see” mood. Market movements, however, can give some insight into likely election results. A strong stock market during an election year has historically increased Presidential approval ratings and would likely increase the chance of the current President being reelected. If, on the other hand, the market should falter between now and November, incumbent approval ratings are likely to decline, thus increasing the odds of the Romney/Ryan ticket being successful on election day.

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093  www.WealthGuards.com  Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements





The Market feels a bit… “Toppy.”

5 03 2012

Jonathan N. Castle, CFP®, ChFC®

Where does the time go?  It is already nearly the end of February and it seems like 2012 is speeding along faster than last year!  So far this year, the financial markets have been reasonably good to all of us, with the S&P 500 up about 8.5%, the Dow up 6.6%, and the NASDAQ up an eye-popping 13.9% as of this writing.

The Dow Jones Industrial Index has broken through the psychological barrier of 13,000 – the highest it has been since March of 2008 a few times now.  In fact, the markets have been remarkably – almost eerily – calm for the last 3 months, quietly marching upward, shrugging off the occasional bad news (such as the Greek bailout nearly unwinding last week and the ever increasing tension over oil in the mideast) with little more than an occasional flinch. 

As we have said for the past 8 months, we remain cautiously optimistic.  “Moderately Bullish” is a term that I have used in the past.  Based upon historical behavior of Secular Bear Markets, we expect that over the next 3 years or so, we will see substantial ups (and downs) in the markets with a slight overall uptrend.  

As it pertains to the current rally, we believe this leg of the rally is probably due for a drawback of some kind.  The next chart shows our reasoning for this.  When the market approaches a point where it had difficulty breaking through previously (such as the Dow’s 13,000 level), this is known as “resistance.”  Typically, as a market index approaches a resistance level, it generally will pause, draw back, and then, IF the level is to be broken, will punch through that level to achieve new highs.  Similar to a person drawing back before breaking through a door, the market will generally draw back before “breaking out” to a new level.  As we are at that resistance level now, a drawback would be a natural – even necessary – part of a normal market rally. 

Despite the recent market rally, we do not feel it is time to break out any party hats on a new sustained bull market just yet.  There are a number of reasons to remain cautious about the markets:

  • According to the Investment Company Institute – the total inflows (new money) going into equity (stock) mutual funds from February 1st through February 15th was a little over 4.6 Billion Dollars.  While this seems like a lot, compared to the inflows to bond funds, which netted 15.2 Billion – it was just a trickle.  Clearly, investors are not ready to assume lots of stock market risk just yet, and the recent rally did not have the market breadth that would indicate the start of a new bull market.
  • The price of oil is going up.  Part of the reason is that US refineries shut down every May to retool to EPA requirements, so oil nearly always rises during this part of the year.  However – increased tensions in the mideast are also driving oil prices higher.  Higher oil prices mean slower economic growth.  As businesses must pay more for energy, they spend less on payrolls and other things which drive growth.
  • Europe’s financial situation is still quite a mess.  While it seems that the European Union is working feverishly to keep from imploding – and they may well succeed – the fact is that Europe is already mired in what appears to be a deep recession.  This will have a global impact, slowing growth in emerging markets as well as within the United States.
  • Our National Debt is a significant problem – and only getting worse.
  • We are in an election year, so significant economic policy will likely not be passed until next year.  Given the uncertain outcome of the 2012 elections, it is anyone’s guess as to whether any new policies will be helpful or harmful.
  • The Bush tax cuts are set to expire this year.  This expectation is curbing business spending.
  • And the list goes on… given the recency of the 2008 market crash, investors are not yet hungry enough for returns to take additional risks and dive head first into the markets. 

However – there are numerous reasons to be bullish as well.  Institutional investors are slowly beginning to see the opportunity in stocks – and have publicly stated their plans to acquire more stocks in their portfolios over the next several years in preparation for a future bull market.  Some reasons to own stocks – and to expect the market will go up are: 

  • Stock valuations are more attractive than they have been in decades.  Based upon the price of stocks compared to company earnings, stocks are cheap.  In the past, investors who loaded up on stocks at current valuation levels were handsomely rewarded over the next 10 years.  Institutions know this – and their demand for stocks during this period may well keep the market afloat.
  • We are seeing a new “flurry” of IPO’s (Initial Public Offerings).  New companies – such as Facebook – offering publicly traded stock for the first time.  Historically, when there are a lot of IPO’s, the market does well.
  • We are seeing a significant increase in companies buying back their own stock.  Not only does this activity boost the stock market – but it is also an indication of what company insiders think of the future prospects of their companies.  Who would spend good money to buy their own company stock – unless they believed the company woud do well?
  • Corporations are hoarding more cash than ever.  While initially this might seem a bad sign – it is a an indicator of the huge potential that exists.  Eventually, this cash will be deployed.  When it is – there is enough of it to have an enormous impact upon virtually all parts of the economy.
  • Currently, the dividend yield on the Dow Jones is a very attractive 3.07%.  So, hypothetically if the market only goes up 5%, an investor who owned the Dow Jones would reap over 8% in total return.  It is only a matter of time before return-starved pension funds, institutions, and corporations currently investing in Treasuries earning less than 3% begin to move money to other assets to seek greater returns.  When this begins, the market has the potential to move up very quickly.

This balance between bullish and bearish factors is a normal part of the recovery process, but makes for a challenging investment environment. In summary, we remain cautiously bullish, with an expectation for occasional market corrections which may exceed 20% or more.  Likely, it will feel like taking three steps forward, only to take two steps back.  However, we feel that reasonable gains are available with the correct strategy.  The most successful investors that we have worked with have carefully chosen their risk tolerance, and then invested in portfolios scientifically designed around that risk tolerance – and remained focused on the long term.  

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.   

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser.  http://www.WealthGuards.com 






Should I Still Invest in a Crappy Economy?

20 09 2011

By Jon Castle, CFP®, ChFC®

It does not seem to matter who the potential investor is – whether they are already retired, are nearing retirement, or are a younger person with quite a bit of time until retirement… the question is often the same.  With interest rates being so low… with the markets unpredictible and volatile – what should I do?  The questions aren’t even really so straight forward as, “why should I invest my money now,” or “should I pay off debt first,” or even any of the other questions that, as a financial advisor for more than 15 years now, I’m used to getting.  The questions I am hearing now seem to have taken on the tone of confusion, despair, and a lack of direction, versus the questions I used to get such as “how should I invest,” or”what type of account – a Roth or a traditional IRA – should I have?”

Yesterday, when talking to a rather successful, nearly retired client on the telephone, she mentioned that she feels that she always has to take two steps backward for every three steps forward, and ideally, she would rather not see her account fluctuate at all once she retires next year.  “Isn’t there just something we can do with our money to earn a steady 6-8% or so with no risk?”  Unfortunately, the answer is NO.  While there might be many product salesmen out there who will try to convince you otherwise – the answer is still NO.   If there were -then all the institutions and large organizations in the world, who spend millions and millions of dollars trying to find or design such assets would have already found them.  A classic example of people and institutions trying to get outsized returns with no perceived risk is the recent mortgage debacle, and we saw how that turned out.

So – back to the original question – With the Economy on shaky footing (to say the least) and with the markets being… unusually volatile, to put it lightly – what should I do?

To answer this question, I had to turn to the history books, tenured academic research, and even some new research – but I think I found the answer.  Do EXACTLY what you have been told to do throughout the years.  Live below your means – save a portion of your income (assuming you are working and saving for retirement) and invest in a fully diversified portfolio designed specifically for your risk tolerance.  In fact – it is having the GUTS to invest during times like these that separate the winners from the… folks who wish they had as much money as the winners.

Last year, Dimensional Fund Advisors tapped into the database held at the Center for Research in Security Prices (CRSP) at the University of Chicago – the nexus of more Nobel-Prize winning research in economics than any other institution on the planet – to identify IF there was a direct correlation between a poor economy (as defined by low GDP) and poor investor returns.  In other words – SHOULD I STILL INVEST IN A CRAPPY ECONOMY?”

The Dimensional Study started by taking all of the world’s developed economies, examining their annual GDP growth from 1971 – 2008, and dividing them into two groups – High Growth, or Low Growth – for each year.  Clearly, much of what we hear on the news is about GDP growth – is our economy growing or not?  The higher the economic growth, the better – as this means reductions in unemployment, increases in personal wages, and, generally, a feeling of well-being, versus the cloud of general malaise that seems to have decended upon the world as of late.

Once the economies were divided into High Growth and Low Growth – the performance of their stock market indices was compared to their GDP Growth.  The question:  Does a poor economy (low GDP Growth) accurately predict poor investor returns?  The question was not – can an investor perform poorly during low-growth times (of course, we know that is possible) – but is there a clear and determinable correlation between a bad economy and a bad investor experience?

Oddly enough – the answer is NO.

                              AVG GDP                      AVG RETURN              Risk (Std Dev)

High Growth               0.92                             12.90%                          23.07

Low Growth               -4.02                            13.52%                          23.04

The data for Emerging Markets was similar, but quite honestly, the data for Emerging Markets only went back to 2001, and I felt this was just too short a time period to draw any reasonable conclusions.

When I first saw the data, I thought… well… this might be a sales pitch just to keep investors invested… we are still looking back only as far as 1971.  What about other periods of lousy growth?  And what about for the US in particular?  I wanted to check the data myself.  So, I delved into the CRSP database myself, using the French and Fama indices that go back as far as 1926, and to the Bureau of Economic Analysis (BEA.GOV) and compared hypothetical investor returns to the GDP growth (or lack thereof) during the 1970’s and during the Great Depression.

One particular period of interest to me was the years from 1972 to 1982.  Yes, this was after 1971, but I wanted to look at it further and in more depth from a portfolio manager perspective instead of just looking at the stock market.  How did it feel?  Remember the oil embargo?  Our defeat in Vietnam? The Cold War?  Carter’s “Misery Index?”  Double Digit Inflation?  During this period of time, the average GDP Growth was only 2.7% – well below the historical average of 3.4%.

The second period of interest was the period of the Great Depression.  Now the Great Depression itself lasted from 1929 to 1941 – but for this particular exercise, I wanted to look at the period starting about 2 and a half years AFTER the crash – starting with the summer of 1932 until the attack on Pearl Harbor, or December 1941 – the long, grinding years of the Depression.  During that period of time, our average GDP Growth was only 2.0% – the longest and weakest period of below-average growth on record for the United States.

My question was – how could today’s investors, using a properly designed, diversified portfolio,  have done during that time?  Were these two periods of time – arguably the worst periods (economically) in the past hundred years – a bad time to be invested?

Assume a relatively simple, domestic portfolio:  T-Bills (15%), 5-Year Treasuries (15%), US Large Stocks (11%), US Large Value, or underpriced, dividend paying stocks (21%), US Small Value Stocks (18%), US Small Stocks (10%), and Very Small, or Micro-Cap Stocks (10%).

Looking at the indices only (remember – there were VERY few mutual funds at the time of the Depression, and certainly no ETF’s,) we can get an idea of how an investor might have done.  The following numbers do NOT account for any fees, commissions, taxes, etc – but we can still draw conclusions.

From the period of 1932 – 1941, the above, simple, diversified portfolio (indices only) would have achieved an AVERAGE ANNUAL return of… wait for it… 19.29%!!  In fact one dollar invested as described above in the summer of 1932 would have grown to about $4.50 by December of 1941.  During the Great Depression!!

From the period of 1972 to 1982, the above, simple, diversified portfolio (indices only) would have achieve an AVERAGE ANNUAL return of… 14.82%!!  One dollar invested as described above in December of 1972 would have grown to about $3.49 by December of 1982.  During the Carter Years and the Misery Index!!

Were there periods of volatility, market corrections, and even stagnation in the investor’s portfolio?  Absolutely – in particular, a sharp market correction in 1936 would have scared out many undisciplined investors, and a particularly unpleasant 18 month bear market from 1973-1974 would have tested investor mettle.  But the facts remain – a fully diversified, properly balanced investor would have been able to achieve significant returns during those times.  In fact – there are a number of economic theories that suggest that investors who have the GUTS to invest (and remain invested) during these uncertain times are the ones who enjoy the GREATEST rewards.  These are the riskiest, most emotionally draining times to invest – as a result, the Capital Markets reward those investors more readily and more predictibly than the comparatively “timid” investors who only remain invested during the “good” times.

Today, the Fed and the International Monetary Fund (IMF) are projecting the US economy’s GDP growth to be about 2.7% for the next two years.  The media harps daily on the miserable shape of our economy, and politicians are using the economy as opportunities to further their agendas.  These are things that we must endure as a people, or change with our votes.

However – it is critical to SEPARATE our concerns about the economy – from our own INVESTMENT POLICY.  The two are NOT necessarily correlated.  A miserable economy – historically – does NOT mean miserable returns for an investor who is disciplined, creates a sound, diversified, low-cost investment STRATEGY with strict risk controls, and then implements it with courage and discipline.  In fact – it is EXACTLY these types of investors who have historically been the winners over the long term.

___________________________________________________________________________

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.





Should my financial advisor and attorney discuss my Will?

15 08 2011

by Michelle Ash, CFP®, CDFA™

Imagine this:  a husband and wife learn that the wife is probably going to pass away in the next few months due to a terminal illness.  While dealing with their grief and trying to enjoy their remaining time together, they also try to prioritize putting financial affairs in order so that the husband has less to deal with after her death.  He will be busy learning to be a single dad to their young children, and helping them cope with the loss of their mother.  Avoiding the hassles of probate and any other avoidable financial issue is a high priority to them.  They meet with their financial advisor, discuss their situation, and ask him to help them make sure everything is in order.  He takes a brief look at things and assures them that all of the accounts he handles will be transferred with no problems.   Unfortunately, the advisor overlooked the fact that the two taxable accounts he manages were not in joint name of husband and wife, but rather were only in the wife’s name.  The couple took the advisor at his word, only to find out later that he was incorrect and assets that should have just simply transferred to the husband would now be tied up in the legal process of probate.  Months later, the husband still awaits the process to be complete.  Adding insult to injury, probate assets are not available to any heirs until probate is finished, so the husband has to go without this money that would otherwise be very helpful to him until probate is done.

A recent blog reader posed the topic of this particular post:  “Should my financial advisor meet with my will lawyer to make sure everything is okay when I die?”

After reading the story I just shared, which is unfortunately true and was told to me by a recent new client to our firm, I have to say that my general answer to this question is – YES, there should be coordination between your financial professionals and your estate planning attorney.

Does this mean that every financial planner should be going with every client to every discussion about a will, trust, power of attorney or any other estate planning document?  Not necessarily.  But it is important to realize that when you spend the time and money making your estate plan, you might as well take the next step and make sure that the estate plan is going to actually be effective once it needs to be.

Components of a basic estate plan

Let’s stop for a moment and define what I mean by an estate plan.  Generally, every adult’s estate plan should consist of a Last Will & Testament which documents what happens to your possessions when you die.  Your estate plan should also probably include ancillary documents such as a health care power of attorney, living will, and durable power of attorney.  These ancillary documents are things that come into effect in the event of your incapacity, not your death.  You might think that incapacity would be pretty rare, but what if you were in a bad car accident and unable to make health care decisions for yourself for a few days?  Who has the authority to do that for you?  A health care proxy (also called health care powers of attorney) can direct who has that authority.  A durable power of attorney indicates who you authorize to make financial decisions for you.  A living will indicates the conditions under which you want to be kept alive if you are either in a persistent vegetative state or end stage of a terminal illness.

Many people hear the term “estate planning” and may think “I’m not wealthy enough to need estate planning.”  True estate planning, however, is about a broad range of issues, including health care (and spending of assets for it), children fighting over money, second marriages, caring for elderly parents, and multigenerational relationships, among other things.  Consequently, these are issues that can affect all of us, not just those one might deem as “wealthy”.

Having the documents isn’t enough

Clearly in my example the couple did make the effort to ensure their estate plan would be carried out as they wished.  Perhaps involving the estate planning attorney, however, could have helped the couple know for certain what items needed to be addressed prior to the wife’s passing.  Perhaps the financial planner and the attorney could have worked together to make sure the planner was clear on what changes needed to be made.

Estate planning work is often extremely complex.  Many individuals develop one or more trust documents to go along with their will.  Some people own businesses and have buy/sell agreements and other contractual arrangements that will take effect in the event of their death.  Every professional has a specialty and while many financial planners have some degree of experience or expertise in the area of estate planning, the ultimate authority on how to carry out the client’s legal wishes after death is the attorney.

Recommended action plan 

My suggestion and full answer, then, would be as follows:

1) Hire an attorney who specializes in the area of estate planning in your state.  Just like a general practitioner doctor is not a brain surgeon, a general attorney is not necessarily a specialist in knowing all of the in’s and out’s of estate laws in your state.

2) Work with that attorney to develop an estate plan that addresses your needs.  It may be very simple; it may be complex.  Ultimately the design is up to the both of you.

3) Tell the attorney up front that you will want their help ensuring that all of the pieces of your estate plan are coordinated after they draft it for you.  It may cost you extra for this assistance, but what’s the point of paying for estate plan documents if they aren’t going to work?

4) Tell your financial professionals that you are updating your estate plan and want their help coordinating the pieces with your attorney.  Be sure to tell ALL of your financial professionals:  investment advisors, accountants, insurance professionals, even your bank, because each of them may play a role in proper coordination.

5) Many attorneys will draft instructions for you that you can take to the financial professionals, telling them what needs to happen.  If your attorney gives you these instructions, provide them to your financial professionals.  If the financial professionals don’t understand the instructions, disagree with them, or have something else that needs to be discussed, give all of the professionals and attorney permission to talk to one another.  You will likely have to sign disclosure forms allowing them to do so, but at least then you won’t have to be the go-between, trying to interpret what each is saying when there may be terminology you are unfamiliar with.

6) When you believe that all of the coordinations are done, let the attorney know what actions have been taken and ask them to check that everything is in good order.  You will likely need to provide the attorney with updated financial statements so they can verify the actions that were taken.  They may charge you extra, but here again, an ounce of prevention is worth a pound of cure.

In person meetings required?

Should these meetings and coordinations happen in person between the professionals?  Maybe; much of that depends on the complexity of your estate situation.  A large majority of what needs to happen can probably be coordinated by email or phone.  But if you have a large estate which will have a lot of complexity, it may be best to put all of the professionals in the same room.  This will allow them to brainstorm the possible solutions, pros and cons of each, and share them with you so that you can determine the solution that fits you best.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your attorney and/or financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.