Why Financial Industry Regulations Impacts You

Currently, the financial advisory industry is in the midst of numerous regulatory changes with the most important issue involving the definition of “financial planner” and “financial advisor” and whether these titles require professionals to have a legal responsibility to put their clients’ interests first.  As the law stands now, only advisors registered with the SEC (or state regulator) are held to the fiduciary standard (Note: all financial advisors at Lighthouse Financial Advisors are registered with the SEC and adhere to the fiduciary standard).  Fiduciary standards are typically associated with professions such as medicine and law.

The difference is fiduciaries get paid to provide advice, while brokers get paid based on the investment products they sell.  Unfortunately, most consumers do not understand the difference.   The sales side of the industry is lobbying hard to keep the current standards in place, while the fiduciary advisors are working to create professional standards and mandatory disclosure to consumers.

The goal is to create a new profession that people will recognize for higher standards and personal care.  This will result in less expensive financial products, clear consumer information and more planning options for the middle class.

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Basis of Investment Decisions

We at Lighthouse Financial Advisors believe in investing strategically in Dimensional Fund Advisors (DFA) mutual funds because of their unique approach of translating financial science into practical investment solutions for clients.  We invest in Dimensional to build portfolios along the dimensions of expected returns that can be pursued in a cost-effective manner.  Their dynamic, market-driven process and flexible trading strategies allows them to manage the tradeoffs that matter for performance, while balancing opposing premiums, diversification, and costs.  Dimensional’s process is applied consistently across a broad range of competitively priced strategies, which span asset classes and geographies, to help meet the diverse needs of investors worldwide.

At Lighthouse, we avoid the traps of Conventional Investing.  Those are making prediction bets, searching for the “best” fund managers, investing based on what the media says and being influenced by stock tips from acquaintances.  We, and DFA, base our investments on the four principles of Strategic Investing listed below:

1)      Market Equilibrium:

  • Trying to outsmart other investors is very tough to do, almost so that we feel it is impossible.  Market prices are based on many competitive buyers and sellers with the same public information, but different opinions about the expectations of an investment.

2)      Diversification:

  • Regardless of what you’re invested in, each holding carries risk one way or the other.  By investing in many groups of investments around the world you help reduce the risk of losing your overall net worth.

3)      Asset Allocation:

  • We work with you to discover the Investments you’re comfortable making.  Various groups of stocks and bonds carry various degrees of risk and expected return.  We want you to feel comfortable in the investments you decide on.

4)      Purpose and Discipline:

  • Investing is the journey to a personalized financial destination.  First, the plan is created, then the process gets put in place and then you finalize with the product to invest in.  Whether it is a good or bad market you should always stick to your plan.

 

For more information on Dimensional Fund Advisors, view their site at: http://us.dimensional.com/

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I Got a Guy & Second Opinions

Many prospective clients we talk to already have someone they consider a financial advisor or close too. 
 
Your guy could be an accountant that only prepares your taxes, but does little tax planning.  Or an insurance/annuity salesman where seemingly every problem can be fixed with complicated annuities or costly whole-life insurance.
 
All too often, your guy is a relative or family friend with the best of intentions, but wrong allegiance – to their company and not to you.
 
Here are potential signs your advisor may be working against your best interests.
1. There isn’t a “CFP” or “RIA” after their name.
2. He’s pitching products rather than asking questions.
3. You’re not sure how she gets paid.
4. He won’t promise in writing to put your interests first.
If and when you find yourself questioning whether the person in front of you giving advice is offering objective guidance, please always consider a second opinion.  Better yet, interview 3-4 different advisors.  I know we truly appreciate an educated consumer and are always willing to provide a second perspective.
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Why it is Important to Have a Will

According to a recent study, more than half of Americans age 55 to 64 do not have wills (the numbers are worse for those 45 and 54).  I want to focus on the ramifications of why a will is necessary and why it is important to act now to discuss the matter with your financial planner.

A main reason to draft and execute a will is so you can choose who and when loved ones will inherit your assets, serve as the guardian for your children and make the financial decisions once you pass.  Yes, your spouse and children will most likely inherit your assets if you pass without a will (“dying intestate”) but they may be subject to estate taxes and an expensive, lengthy process called probate.  This is when you seek the courts help in sorting out a deceased person’s affairs.

A common reason people say they do have a will is the cost.  However, if you have a less complicated financial situation, there are numerous online DIY sites such as Legal Zoom or Smart Legal Forms.  They cost is approximately $40-70 for a will, living will, healthcare power of attorney and financial power of attorney.  It is recommended to hire an estate lawyer if you have a large estate or complicated family dynamics.

A forgotten aspect of the estate planning process is to ensure you have the correct beneficiary designations.  Retirement accounts and life insurance have special rules.  All too often, we see parents or ex-spouses listed as beneficiaries when someone has children or gotten remarried.  Although your will may specify your spouse and children are to inherit your estate, retirement accounts and life insurance flow outside of the will.

These are just a few of the many reasons to focus on drafting or updating your will.  Your loved ones will thank you later!

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7 Steps to Success

7 Steps to Success

 

1: Gratitude and appreciation.

Believe it or not, gratitude is the closest thing to a ‘magic pill’ you can take. (Use a daily gratitude Journal.  During your next meeting, ask us about our 21 days of Gratitude we recently complete here at LFA.)

2: Add value to the world and solve problems for others.

Become a problem solver and a value adder, don’t complain find solutions.

3: Help others succeed.

The more you give the more receive back. But the more you help others succeed, the more success
you’ll have in return.  It’s how the universe works.

4: Value your time.

Time management is critical to happiness and success. Set deadlines. Create rewards. Do whatever it takes to guard and protect your time. Time is your most precious commodity.

5: Hard work always, always, always pays off.

Most people aren’t prepared for what it takes to be successful because success requires a sacrifice and
delayed gratification. Your hard work will eventually pay off.

6: Seek out and follow a mentor or coach.

Find someone to be accountable to. Someone who helps you see things differently. You need positive role models to follow and copy. This is how you make faster progress. This is how you maximize your full potential.

7: Surround yourself with positive and successful people.

After all, you become who you hang out with. You’ll end up being positive and successful too.

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Benefits of a CFP® and CPA Relationship

Partnering with a Certified Financial Planner® who is also a Tax Professional (CPA or Enrolled Agent) can offer significant value and time savings.  There’s a close relationship between financial planning and taxes, but non tax professional advisors are not permitted to offer tax advice and are encouraged to partner with CPA’s to ensure proper tax planning guidance and preparation.
 
Clients of Lighthouse Financial Advisors get the benefits of having both services under one roof.  There is no back and forth between advisor and accountant and no lost in translation concerns.  We already know your investment portfolio details, your charitable intent, family changes, income & expense projections, etc.  Not only are these services streamlined, we also proactively plan for taxes during the year since there are few ideas you may implement after the ball drops on New Year’s.
 
All life events involve money…and money means taxes.  The article below highlights planning areas we provide and if you don’t yet work with a dual CFP®/CPA advisor, thoughts for you to bring to your tax professional.
 
Adapted from: 
9 Questions Clients Should Ask CPAs at Tax Time
 
By Elaine Floyd, CFP and Richard J. Koreto
Horses Mouth


1. Will a life event or major purchase affect my taxes? 

Remind CPAs about any births, adoptions, marriages, separations, divorces, or deaths. Have the clients’ children reached a milestone age like 18 or 21? Have they left school and started jobs, possibly changing their deductibility status? 

Death in the family is especially important: Does an inheritance trigger a federal or state estate tax? If an inheritance includes an IRA or 401(k), the tax rules are strict, and failure to properly manage the inheritance could have major tax consequences. 

Major purchases can also have a big effect. A second house may mean another set of home-related deductions. But probably not a third house, as homeowners can typically get deductions from only two residences. 

2. What will my tax bracket be in 2014? 

A tax bracket is the rate at which the last dollar of income will be taxed. Knowing your client’s tax bracket helps you calculate the tax efficiency of various investment or financial planning proposals. 

A paycheck change is only one factor, so don’t make immediate assumptions: Tax brackets can change for many reasons, including changes in tax law as well as changes in tax filing status. Tax filing status depends on whether your client is married or single and whether there are dependents to claim on the tax return or not. A change in income or an increase in interest and dividends or even gambling or lottery winnings could also change a tax bracket. 

3. Can you help me estimate my income for 2014? 

Go beyond salary. Bonuses, freelance assignments, investment income, alimony winnings, and more all play a role. And it’s not enough to know gross income. It’s also important to have an estimate of adjusted gross income, modifications to adjusted gross income, and taxable income. Each of these types of income is dependent on various deductions or credits that need to be estimated in order to come up with projections for the new year. 

Why is this even important? An accurate estimate of 2014 income allows you to properly manage retirement savings plans, for example. 

In order to estimate the various forms of income for 2013, clients will need to provide their tax advisors with certain information so the numbers can be crunched. For example, the CPA will need to know if the client plans on making approximately the same amount of charitable contributions this year as she did last year. And if there was a one-time or unusual event last year, such as a sale of an asset, the CPA will need to adjust the estimate accordingly. 

4. Do I have any remaining loss carryforwards going into 2013? 

Loss carryforwards are tax losses as a result of selling investments at a loss. The IRS only permits deducting investment losses to the extent that they are offset by gains of up to $3,000 a year. Any losses in excess of this can be carried forward to future tax years, hence the name “loss carryforwards.” 

A CPA can help clients determine your client’s loss carryforwards by looking at past tax returns. The answer can help you and your client better understand how investment activity affects their tax situation. Occasionally, you may want to suggest selling some assets to absorb some of these previous losses for precisely this reason. “Tax loss harvesting” is traditionally a year-end activity, but it really should take place throughout the year as investment opportunities present themselves.
 
 
5. Am I eligible for a Roth conversion? Is it recommended? 

A Roth IRA conversion allows workers to convert traditional IRA assets to a Roth to avoid taking required minimum distributions in retirement and avoid paying tax on any distributions taken. A Roth conversion also involves paying taxes on the assets converted, since contributions to traditional IRAs are made on a tax-deferred basis. A CPA can estimate the tax that would be due on a Roth IRA conversion. 

Clients should also ask their CPAs for an estimate as to what the tax liability would be on a partial Roth conversion—such as one that might bring them up to the top of their current tax bracket. The CPA’s estimate of the “bracket-completion” amount is likely to be the most accurate estimate of the tax clients might pay in the event of this type of partial conversion. 

The CPA is likely to have an opinion on whether a Roth conversion is a good idea or not. Definitely encourage your clients to discuss the option with their CPA as well as discuss it with you before making a decision, as any conversion will have investment and retirement implications, as well as tax consequences. 

6. Should I increase my retirement plan contributions? 

The IRS hasn’t increased the contribution amounts for most types of retirement plans in 2014, so there’s no incentive there for making contribution increases.
Retirement Plan Contribution Limits
Type of Retirement Account
Additional 2014 Contribution
Maximum Contribution
401(k), 403(b), most 457 & federal govt. thrift savings
None
$17,500
IRA
None
$5,500
IRA catch-up contributions
None
$1,000
401(k) catch-up contributions
None
$5,500
Source: IRS
However, that doesn’t mean clients should just leave it as is. Phase-out limits for various plans have increased, so even if a client’s income is up, he or she may still be able to put away more. This is a good conversation to have this time of year.

7. Do you have any recommendations for reducing my 2014 taxes? What about 2015 and beyond? 

CPAs can recommend a number of strategies that might help reduce tax liability in the future. A variety of laws, such as ACA, have changed the playing field. Some of the strategies may be complex and may need your input as well as the CPA’s. Others may be within your control. 

8. Should I change my tax withholding for 2014? 

Various situations may mean that clients need to change the amount they withhold from their paycheck. If they’ve gotten married, divorced, or had a baby, they’ll need to make changes on their W-4 form. Also, if they’ve been getting large tax refunds, it may make sense to increase the number of exemptions they take on the W-4 to match up what they pay in tax with their actual tax obligation. 

Most CPAs note that it’s better to evenly match withholding with tax obligations rather than aim for a large refund. That’s because the funds that make up the refund could be invested, saved, or used to pay down debt rather than accumulating in the U.S. Treasury Department only to be returned back to clients in the form of a refund. In 2012, the average tax refund was $2,803. 

And don’t necessarily consider a state and federal lock-step. There may be reasons for separate withholding forms for state and federal—another good question to have clients ask their CPAs.
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Charitable Giving Account – An easier & tax efficient way to be Charitable

We are discussing & recommending to all of our clients to consider opening a Charitable Giving Account/Donor-advised fund. Charitable Giving Accounts have many advantages over the traditional ways of charitable giving.

One of the biggest is record keeping. You make one or more contributions to your giving account during the year. So at tax time there are only one or two tax receipts to track down. If you misplace the information the Charitable giving account has all the information available 24/7. During the year you simple log into your secure giving account (Checks can only be sent to 501(c)(3) public charities) put in the name, address and EIN of the charity and amount. The Giving account automatically sends a check to the charity of your choice. Works just like on line bill pay and you receive a receipt the check has been sent. You can also send checks anonymously.

Another value of the giving account is your ability to increase charitable gifts by avoiding capital gains taxes (Federal, State & NEW Medicare tax on Income over $200K Single & $250K married). This allows you to give more to the charity of your choice and less to the government.

Here’s how it works –

You inherited 100 shares of Apple in 1990 @ $12 dollars per share ($1,200) today those share are worth $55,000. If you sold those shares today you have a capital gain of $53,800.  For a Married couple with income over $250K, you would owe $11,800 Capital gain tax, $2,134 Medicare Investment Income tax & $3,427 NJ Income tax for a combined tax bill of $17,361.  You net $37,639 after taxes. If you were feeling charitable you would have $37,639 to give to charity and receive a charitable deduction for $37,639 for a tax savings of approximately $13,175.

The better way would have been to contribute the 100 Shares of Apple to Charitable Giving Account avoiding the $17,361 in taxes. So now you have $55,000 to give the charity and you also receive a charitable deduction for the full $55,000 for an approximate tax savings of $19,250.  By directly donating appreciated shares, you made a larger charitable gift and saved more in taxes!

It is a huge tax advantage using a Charitable Giving Account plus makes it much easier to donate long-term appreciated securities and parse out to the charities of your choice.

Another advantage is to over fund the Charitable Giving Account during high income years. You receive a larger tax deduction (while still working) and can continue giving in retirement without tapping into your current cash flow. Think of it as a charitable IRA. You fund while working and dole it out during retirement.

Once the funds are contributed to the Charitable Giving Account the funds can be invested in wide variety of investments (Money Markets, Bond Funds, US Stock Funds & International Stock Funds). Yet another advantage is the growth of the funds is tax free and can be given to charity at a later date.

Another advantage is the Charitable Giving Account is not part of your estate and can be passed on to the beneficiaries of your choice.

The only potential drawback is once the money goes into the account it has to be given to a charity. The funds can never be withdrawn for personal use.

If the idea of putting money into a charitable trust doesn’t work for you consider gifting appreciated securities directly to the charity. You will receive the full deduction for the amount contributed and avoid Federal and State taxes on the appreciation.

Of course for this to work you have to be charitably inclined.

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The January Effect – What Is It?

As the end of 2013 approached you probably heard a lot of commentators talking about the “January Effect”.  No, this is not the feeling everyone in the Northeast has about relocating to somewhere warmer.  The “January Effect” is the market phenomenon that the stock market rallies in the month of January with a particular rise in small and mid-cap stocks.

There are several theories for the January Effect’s positive performance including:

– Investors selling losing positions in December to tax-loss harvest or offset taxable gains before year-end and then investing the excess cash in January.

– mutual fund managers becoming more conservative and taking less risk as the year ends, then becoming more aggressive in the new year.  In this case, small-cap stocks usually reap the benefits.

Research by notable professors Eugene Fama and Kenneth French shows the smallest 10 per cent of stocks averaged a 7.9% return in January from 1926 through 2011, versus an average of 0.9% in the other 11 months.  Large-cap stocks showed no such anomaly.

Of course, past performance does not guarantee future results and the historical trend has not been as pronounced in recent years.  Some additional reasons you would be ill-advised to put too much emphasis in the theory include fundamental economic and market conditions, tax harvesting occurring earlier in the year and increased transaction costs.

While the “January Effect” makes for interesting conversation and enjoyment at guessing what it actually means, the best investment strategy is based on your risk profile, time horizon and cash flow needs and not timing the market.

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Planning for the Unexpected

We have had the unfortunate honor of working with many widows – both young and old, breadwinners and stay-at-home mothers.  Whether there’s any warning or not, the death of a spouse is a tragic loss, but you can help your loved ones by making sure these basics are covered:

Life Insurance:  If others are financially dependent on you, life insurance (generally term insurance to cover an actual financial need of a specific duration) can replace your income and keep from adding financial hardship to emotional hardship.

Estate Planning Documents:

Will – Directs where you want your property to go, helps to preserve your family wealth, appoints a guardian for minor children if both parents die together

Medical Directive – expresses your wishes for medical treatment, extraordinary measures, and life-ending actions when you are unable to provide those directions

Power of attorney – names someone to manage your financial affairs when you cannot

Financial Directions:  These are incredibly important in easing the process of transferring assets to your survivors and bringing your financial matters to a close. We recommend a centralized location for keeping all your financial info, passwords, estate planning documents, and any other wishes.  Even with everything in place like this, the process can is overwhelming and lengthy, but your family will appreciate what you’ve done to lessen the burden.

This is the time of year that we most focus on family.  Taking the time to plan for the unexpected is a gift to our families that will last forever.

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One Month Left

Where did the year go?  Good thing there is one month left to take full advantage of all the tax deductions available for you.  One thing I’ve seen during the past two tax seasons  at Lighthouse Financial Advisors (LFA) is how clients benefit when everything they need for taxes is organized and complete before the year end, instead of waiting until April 15th of the following year.  This last month provides ample time to advantage of the following tax savings strategies:

  • Retirement Account Contributions:  If you haven’t maxed out for the year yet, try to increase the amount you contribute in the month of December.
  • Charitable Donations: What better time of the year to give?  If you haven’t opened a Fidelity Charitable Giving Account yet, reach out to any one of us at LFA for an easy to-do application.
  • Mortgage Interest Deduction: If you add up the amount you have paid in mortgage interest for the year, and combine it with the amount of your charitable donations, you may reach a number that exceeds the standard deduction, making it worthwhile to itemize.
  • Medical and Dental Expenses: They are often the largest expenses for retired people. Start getting all expenses organized.
  • Required Minimum Distributions (RMDs): Make sure you take your RMD before the year end.  Let your advisor know if you would like to take advantage of using your RMD to pay and offset the amount you owe in taxes.
  • HSA Contributions:  They are tax deductible; you can use your contributions to reduce your tax liability.

These are just a few of many ways to offset what you owe for taxes.  So reach out to any of us here at LFA to discuss what you can do to help lower your 2013 taxes!

T


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Contact

Lighthouse Financial Advisors

3 Harding Rd Suite B
Red Bank, NJ 07701

P: 732.747.6697
F: 800.886.0302
info@lfadvisors.com

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Disclosures

Client Relationship Summary – Form CRS
Firm Brochure – Form ADV 2A

Recent Posts

The Importance of Doing Your Tax Planning in April – Yes in April!

The US Economy

The Story of RMD’s and IRA’s

Happy Holidays and Cheers to a New Year!!!

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