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RFG Advisory Group CIO, Rick Wedell, Featured in Insights into Wealth Management article

by: Birmingham Business Journal
published: March, 23rd 2017

Insights into Wealth Management

Q: What are some of the top trends or issues that could affect the personal finances of individuals in 2017?

Mark Wesson: One is potentially lower taxes. That could drive an increase in spendable income, which could drive savings and capital formation, and then spending and potentially inflation in the future. A second thing is less regulation. That could increase company profits, wages and the number of jobs, which again could drive saving and spending and potential inflation. The last thing is pro-business oriented government agency leaders who could push pro-business policies, which would enable new companies to start, form capital, expand, and increase their labor market and wages. And again, this could drive savings and investment and potentially inflation.

Rick Wedell: The number one factor is economic growth and continued wage growth over time. We came out of 2016 with a fairly strong employment picture, and that’s continued into early 2017. We’ve seen decent strength in the labor market with unemployment hovering just below 5 percent. That’s leading to wage inflation, which should trickle through to increased disposable income. On the tail of that, when I think of our clients who are entering into retirement age or are already in retirement, there are three key factors that are affecting them right now. One is the steepening of the interest-rate curve, which can be painful for clients with significant duration in their portfolios. Then there is the overall volatility in the marketplace. The volatility exiting 2016 has been pretty benign into the early part of 2017. That can sometimes give folks a false sense of the stability of the marketplace. Lastly, there is the impact of increasing inflation. The Fed is raising interest rates, and they generally do that in response to inflation in either producer prices or consumer prices. For a lot of retirees when they think about how much they spend or need to save, they forget about keeping pace with the inflation rate. That needs to be a factor. After being in a relatively benign inflationary period for the better part of the last decade, we’re going to finally start seeing those consumer prices tick up a little bit, and that will be a bigger factor in people’s portfolios.

Tracy Bell: Tax rate changes are likely to lower tax rates for most people. There are proposals to lessen the number of tax brackets and lower the rates. There are calls for elimination of the 3.8 percent Affordable Care Act tax and the alternative minimum tax. Itemized deductions may be capped or greatly limited, but the standard deduction may be increased. The estate tax is on the agenda again, but its exclusion amount is already quite high. For hedge fund and private equity investors, there may be changes to the way carried interest is taxed that would increase the tax burden on those earnings. Mortgage rates may continue to climb in 2017. If the labor market remains healthy and economic growth steady, long-term interest rates may continue to climb. If you’re house-hunting, pay attention to the direction of interest rates since they directly impact your monthly payment. This also holds true for adjustable rates on credit cards or home equity lines. There has been some discussion of modifying student loan system to make the loan payments income-based rather than fixed. None of this is law yet, but it is under discussion.

Grant Cardwell: Everyone wants to point to the political environment and how that is impacting the various markets right now, and while that is important in the short term, it is not something that we should be overly concerned with when it comes to long-term financial planning. The most important topic right now is discipline. Discipline to continue funding 401(k)s, IRAs and individual investment accounts. Discipline to continue to pay down debt. Discipline to fund 529 accounts for education. Discipline to stick to your plan.

Q: What factors should someone consider when looking at the best way to plan for their financial future?

Wedell: The best way to plan is to actually start planning. There are a staggeringly low number of individuals who have actually started to plan for their retirement. Certainly people may have money in a savings account or tied up in the equity of their home or set aside for a college plan. But they don’t necessarily have a unified view of what their financial picture is, what their goals are and what they need to do to achieve those goals. That brings me to the second factor, which is that it’s really helpful to get professional advice with this type of stuff. We’re all different with different circumstances and considerations. As you think about laying out what your goals are for retirement, there are a number of different ways you can save for them. All those things factor into a plan that can be developed to provide for you over the course of your lifetime. And it’s really hard to do this by yourself if you’re not familiar with the industry. So it behooves you to reach out to somebody who does this for a living and have a candid conversation about where you are and what you want to achieve, so you can lay out a plan for how to achieve that.

Bell: Have realistic expectations for investment returns. Get rich quick isn’t the way things work. Compounded returns over time is the way to reach success. Have a plan for major financial needs. Time is very much on your side if you start early. Most people underestimate how much money it will take to live comfortably in retirement. They may have contributed to a 401(k) or IRA but never run the numbers to get a realistic assessment of what their retirement balance might be in 10, 20, 30 years. Asking that question five years before you plan to retire is too late. Find a financial professional to help you and keep you accountable if you don’t feel comfortable doing this yourself. Manage your budget and cash flow. Fund the essentials first. It might sound cliché, but live below your means. You will be much happier and less stressed if your finances aren’t a point of worry. Be patient. Markets go up and markets go down. There will be good years and bad years. Expect this before it happens and don’t let down years deter you from your plan. Over the long-term, the odds are very much in your favor. Take advantage of your financial professionals. Your investment advisor, tax advisor and attorney are all there to help you. Be sure they know each other and have your permission to speak with each other on your behalf. Meet with them on a regular basis and ask them to benchmark your progress against your goals.

Cardwell: Most importantly, you have to know where you want to end up. Your destination. This will drive most – if not all – of your decisions, both financial and non-financial. For every individual, family, etc., that destination is going to be different. Knowing how much money you will need to retire, managing different risks, funding education, fulfilling your charitable desires, minimizing taxes, etc. are different for everyone, but everyone has a destination.

Wesson: It starts with coming to the realizations that you need to plan for your future and that professional financial planning advice would be valuable to you. Then you need to seek the right advisors to match up with your situation and what your plans are. It’s crucial to pull together the right team of legal, investment, financial planning, banking and insurance advice to help you determine the plan. Organization comes next, then figuring out where you are, what your goals are and where you’re headed. Assessing your key risks and how to mitigate those risks helps in the planning phase and leads to a much more tailored plan. Finally, creating a plan that fits today and matching it with an investment portfolio that dovetails with that plan will enable the best start to achieving your goals.

Q: What are some questions individuals or families should ask before choosing a wealth manager?

Cardwell: Definitely ask how the representative is compensated. Is he selling products and earning commissions? If so, will he be acting in your best interest or his own? As a fee-only firm, we have no hidden agendas, and helping our clients thrive is what drives us. As they thrive, so do we. It’s what sets us apart from typical wealth management firms. You should also ask yourself if you trust the person who will be managing your money. Do you have a team of individuals with talents and specialties who can help you as your needs grow and change?

Bell: You obviously want to know about the manager’s experience and educational background. Does the manager normally work with people like you? This is especially important if you have a complex financial and estate situation. Has this manager pursued additional education through professional designations or certifications? Have they been awarded a professional designation such as CFA, CFP,or CPA? The reputation of the firm is important. Does it have the reputation of treating clients fairly? What kind of investment vehicles does the manager offer? Are these choices public and liquid or proprietary and difficult to exit? Both can be appropriate but it is important to know the difference. Is the manager required to act in a fiduciary capacity with clients? How are fees charged and how transparent are the fees? Will the manager commit to disclosing all types of fees ahead of time, including those you may not see because they are imbedded in financial products? Are you comfortable with this person? Do they seem to genuinely care about your family’s situation? Does your investment philosophy align with the manager’s? Years of experience and academic credentials do not supersede the ability to work with your advisor on a personal basis. You should feel like this person cares about you.

Wesson: When someone chooses an advisor they need to ask, who is paying the advisor? Are they working directly for me, or is a product manufacturer paying the advisor and therefore creating a conflict of interest with what’s best for me. The second thing to ask is, do the advisor’s interests in helping me align with what I’m trying to accomplish? Do they integrate planning, risk mitigation, tax optimization and investment advice, or do they just sell products? And then, you should ask yourself if this is someone you can trust and have a good working relationship with long-term?

Wedell: It’s really a question of trust. So the first thing you should ask yourself before you ask the advisor any questions is, do I trust this person? And you should listen to your gut on that. Because if you don’t trust them, you shouldn’t work with them. The second thing is, are they acting in my best interest? There are people who act as a fiduciary on your behalf who are paid a flat fee for their services and don’t earn commissions or get paid in different ways, and they’re held to a fiduciary standard. In other words, they are required by the law to act in your best interest. And then there are other wealth managers and financial planners who act more on a commission-based, brokerage-type account relationship. And it’s not that there aren’t wonderful people who work on that side of the industry, but you should know that they are not necessarily a fiduciary for you. They’re not held to that standard. And then the last question is, are they qualified to do what they’re being asked to do? Within that is, what are they doing versus what are they outsourcing to other people? If they’re doing the financial planning and determining your risk tolerance and helping to decide what you should be saving for and how much goes into each bucket, and then they outsource the investment management to a third party, that may be fine. If they are well qualified to manage money and run investment strategies, then that may be fine. But you should think about what it is you’re asking that person to do, then ask that person what their qualifications are to actually go out and execute what they’re being tasked with.

Q: How could a new administration in Washington potentially impact the wealth management or personal finance industries?

Bell: There is current controversy over the Department of Labor’s plans to implement a fiduciary rule when it comes to the management of retirement accounts. This would require anyone managing retirement fund accounts to act in the best interest of the client rather than only having to meet the investment standard of suitability. It is expected that this rule would most negatively affect financial professionals who work on commission and the companies that employ them. It is likely commission-based products will be phased out in retirement accounts, or a disclosure agreement will have to be provided in cases where a conflict of interest may exist. This rule has been on and off again for several years, and seemed set to begin phasing in on April 10 of this year. President Trump signed an executive order delaying the implementation of the rule, but then a Dallas federal judge upheld the rule. However, the DOL has now delayed implementation for 180 days pending further public comment. Financial firms have already prepared for this rule to take effect by selling business units, adjusting fee and compensation schedules for advisors, or exiting the retirement advice business entirely. This back and forth on not only the implementation timeline but now maybe the rule itself is taking place after financial firms have already spent considerable time and effort and made long-term business decisions based on expectations than may now be incorrect. A much more subtle impact may be in the cards longer term when it comes to Federal Reserve bank regulations. Fed governor Tarullo has resigned effective April 5 of this year. He has been the de facto Vice Chairman for Supervision under the Dodd-Frank Act and has taken an aggressive stance with bank regulations. Regulatory policy at the Fed changes slowly, but the resignation of Tarullo suggests an eventual relaxing of regulations that impact bank stress tests and limit the growth of already large banks into bigger institutions. Small banks are likely to experience the most regulatory relief as they aren’t seen as systemically important institutions that may need to be bailed out under dire circumstances.

Cardwell: The key word here is going to be regulation. We have already seen the new administration potentially halt the proposed fiduciary rule. This de-regulation of many industries seems to be a theme, so we will have to keep an eye on this area, being mindful that all industries need a healthy balance of free markets and regulation.

Wedell: A Republican administration is expected to do a lot of things that are pro-business in terms of changes to the tax code, deregulation and potentially increased infrastructure spending. All these things are intended to spur economic growth. The market, as a leading indicator of that, has certainly rallied pretty hard since the election. There are two things that are underpinning the market at this point. First, we continue to see solid progress on the economic fronts, and second, we’ve seen optimism about what the new administration is going to be able to do from a policy perspective. As the optimism for what this administration is going to be able to accomplish meets the reality of the political process, we may see a little bit of difficulty turning expectations into reality, so it’s going to be a very interesting year to see how the markets play out.

Wesson: There are high hopes for less regulation and for more spending and investment in core industries domestically to spur economic growth. What we don’t know yet is how fast those new laws will come into play, or even to what extent they will come into play. That’s a big consideration. Another thing is how re-negotiating trade agreements will internationally impact valuations for international companies or U.S.-based companies with significant operations overseas. On the domestic side it may actually boost some valuations due to increased spending here. It will be interesting to see how it plays out. Also, if we see significant decreases in ordinary income taxes, capital gains taxes and estates taxes, it will drive planning opportunities in the near-term as people look to take advantage of changes.

Wedell: It feels politically that the estate tax might be a very difficult thing to do away with, just given the very small percentage of Americans who the estate tax actually hits at this point, and Trump’s overall base not being a large number of those people. So if you look at the overall political support for tax reform and the Republicans desire to maintain deficit neutrality, we believe you’re much more likely to see either personal or corporate tax reform, while changes in the estate tax feels a little less likely.

Q: Are there any new or potential regulatory changes on the horizon that could affect how people manage their wealth?

Wesson: As mentioned, there is some talk that the Trump administration wants to roll back the Department of Labor ruling that calls for a best-interest standard in dealing with clients, but we don’t foresee anything slowing down or stopping the new rules. Also, a variety of industries could be positively impacted by deregulation and less bureaucracy which could spur economic growth and in turn company valuations. Some of the sectors impacted include energy, financial services, construction, manufacturing and health care. If this happens we could see capital flows and investment portfolio tilts toward these sectors.

Wedell: The DOL ruling effectively says that for retirement accounts on a go-forward basis, you need to act as a fiduciary for your clients. The way the DOL has defined that is if someone is selling a commission-based product in a retirement account, then they will need to get the client’s signature that the client understands it’s a commission-based product and they believe the advisor is acting in their best interest. The commissionable product actually is prohibited under the law, and you have to sign a best-interest contract in order to sell one of the prohibited products to the client in a fiduciary relationship. The Trump administration has said they would like the Department of Labor to do a cost-benefit analysis of the rule to analyze whether the rule will create unnecessary lawsuits, does it confuse the client, does it prevent the clients from accessing products that they would otherwise have access to, etc. The view we take at RFG is that the industry is and should be moving towards a fiduciary standard, where advisors are acting in the best interest of their clients all the time. Why wouldn’t you want your advisor to be held to a fiduciary standard? So our firm is embracing that change. And regardless of whether the Department of Labor says we have to, we’re trying to actively move our clients towards that model, because we really believe it’s the future of the business.

Wesson: Our firm made the decision from the beginning to create a fee-only practice that is accountable to the fiduciary standard all the time. Not only is this where the industry is headed, it’s where client sentiment is today. Clients don’t trust the advisory community like they did 15 years ago, which is why they are demanding transparency and accountability from their advisors.

Bell: Potential tax law changes may cause people to adjust their asset mix or make taxable bonds more advantageous versus municipal bonds. Potential changes to estate and gift tax rates or exemption levels could make it advantageous for some to revisit their wills and estate plans.

Cardwell: The easy answer is that we do not know, but that does not mean that we cannot plan for different possibilities. The incoming administration has been relatively transparent on their desires, mainly as they relate to taxes, so there are an abundance of business, personal and estate planning strategies that may be utilized depending on what, if any, legislation is passed. The most immediate planning strategy is to increase income in 2017 in anticipation of taxes being lowered. We are in the position of being independent of our affiliate CPA firm, yet benefitting from the association with the CPAs in our firm who bring additional knowledge to our planning and analysis. Working with these CPAs, we have been proactively addressing most of these issues already so we are ready if and when something happens.

Q: What is your firm’s strategy for working with clients to maximize their wealth?

Wedell: Our investment strategies are strategic in nature. We’re not market timers. We don’t believe you can effectively time an entrance into a market or an exit from a market. Markets tend to climb walls of worry. There’s always a reason to be invested or to not be invested. We don’t believe anyone can accurately predict that. The consequences are if you instead take a risk-based approach to investing, which is to define what your client’s risk tolerance is – how much are they willing to lose – and then construct a portfolio that maximizes the amount of return they can generate from that risk, you will actually outperform more of a market-based timing strategy. So we get clients in the office and talk to them about what their goals are, how much capital appreciation they are looking to generate, and how much risk are they willing to take. Then we seek to construct portfolios that aim to provide as much of a return to investors as they can for that level of risk.

Bell: Hearing our clients’ stories is the first step in the process. We want to understand your family, career, goals and other factors. This means knowing a client’s entire financial situation, even if we are not managing all their wealth. We want to be sure what we’re doing complements what others are doing so the client is on track for success. Our approach is both consultative and collaborative involving your attorney or CPA when needed. Once we understand your big picture and expectations, it’s time to choose an investment mix of stocks, bonds and maybe alternative investments that is likely to reach your return requirements over time without exposing your assets to too much risk. These investments should be made in a way that maximizes the client’s tax planning for education, retirement or generational wealth transfer. We want to create solid, disciplined plans in pursuit of long-term financial goals. Then begins the process of monitoring and adjusting as needed. After initial portfolio construction, we monitor performance of the asset mix and each mutual fund, exchange-traded fund, or individual stock or bond portfolio within the investment mix against expectations. Clients are kept informed of progress through investment review meetings where returns and asset growth are measured against expectations. Any changes to a client’s situation are discussed and adjustments are made to the investment mix accordingly.

Cardwell: The answer goes back to discipline. Discipline for us as advisors in how we build our clients’ portfolios, how we stick to our long-term plan, and how we do what we say we are going to do. Discipline for our clients in their spending, saving and overall decision making. One of the biggest hindrances to portfolio growth is bad timing. We are wired to be terrible investors as our natural sense of self-preservation often results in making poor market decisions. The other, which is a way we feel we set ourselves apart from many firms, is knowing and understanding our clients’ entire financial picture. Many of our clients have ties to our CPA firm, which usually allows us to know our clients’ situations on a deeper level that is not always related to finances.

Wesson: Our strategy begins with our philosophy, which is to do what’s in the best interest of the client all the time. We first seek to gain the big-picture perspective from the client and from the historical academic research about the marketplace. We meet with our clients, understand who they are, what their values are and help them get their financial lives organized. Once we develop a good understanding of their willingness and ability to take risks in light of their goals and time horizon, we design a portfolio to optimize taxation and the available returns in the market over the long-haul.

Q: What are some of the tax considerations when it comes to developing a wealth management strategy?

Bell: Taxes are inevitable and needed to fund the functioning of government services and legal protections that guarantee rights and the orderly flow of business. However, Uncle Sam has created exemptions and ways to avoid or diminish tax burdens. We should take advantage of those opportunities. For most people, contributing to a tax-deferred retirement plan is step one. Start early and maximize your contributions. Once retired, examine the source of your retirement income. Distributions from a tax-deferred retirement plan are taxed as ordinary income. Distributions from a taxable investment account are taxed at the lower capital gains rate to the extent there are gains, or not at all if principal is distributed. You may be able to lower your effective tax rate or move down a bracket by varying the sources of your retirement income. For investment accounts, turnover can unnecessarily increase your yearly tax burden. If your investment manager or mutual fund is trading frequently, you many find yourself the recipient of large capital gains distributions at year end. Taxes diminish returns, so investment strategies that seek to offset gains with losses or keep turnover low can mean your wealth grows more over time. If you are in a high tax bracket, ask your advisor if you would be better off in municipal bonds as your fixed income investments. For higher net worth individuals, engaging the services of a tax attorney can be beneficial. Many times people complain about the cost of a more complex plan, but if you truly need these services, these professionals will save you much more than you spend on their fees. There are gifting and asset transfer strategies that can reduce the estate tax burden at death, thereby shifting more assets to future generations. Life insurance held in a trust may be appropriate in some of these situations. Those transacting in appreciated real estate may want to consider the use of tax laws that allow gains to roll into new, qualified investments, thereby delaying the tax bill. Small business owners considering a sale or transfer to the next generation need to begin planning for this far in advance, not six months before. All these more complex situations should be discussed with a tax attorney who can advise and draft the legal documents needed. Financial advisors are conversant in tax considerations, but they are not tax experts and cannot give tax advice. Don’t forget that your CPA is a valuable resource for you and your financial advisor when minimizing the tax code’s impact on your wealth.

Cardwell: Being positioned with the state’s largest CPA firm right down the hall, we place significant importance on tax-conscious investing. One extremely important tax consideration that a lot of investors forget is that every dollar saved in a traditional IRA, 401(k) or other tax-deferred account will be taxed at ordinary income rates when it is withdrawn, meaning you will benefit from only about 70 to 80 percent of the account value. Capital gain distributions are something else that we can plan around and can save our clients from paying tax on phantom income. Lastly, Roth IRAs, when used properly, can be one of the more powerful tools as they not only accumulate tax free, but withdrawals are also tax free.

Wesson: We take an integrated approach to tax considerations and how a client’s portfolio is impacted. We consider gains, losses, deferment of taxes, credits, gifting and other strategies based on each client’s particular situation. We take a comprehensive view and then we integrate each tax consideration into our portfolio optimization system to maximize both the balancing and long-term structure of the investment portfolio.

Wedell: It’s always said that it’s not about what your rate of return is, it’s about how much of that money you get to keep at the end of the day. Everybody’s situation is different, but in general we want to try to avoid creating short-term capital gains. We want to hold positions a little bit longer in order to make any gains we’ve had in those positions long-term not short-term. We want to be efficient about recognizing losses in the portfolio as they occur, and timing sales around recognizing those losses as short-term if we can. We want to use tax-advantage strategies in non-qualified accounts. So if you just have a personal savings account or a regular brokerage account, you want to use your more tax-efficient investments within those accounts. And when we get to things like IRAs and other tax-shielded vehicles, we can use those for the more tax-disadvantage portions of your portfolio. Things that throw off ordinary income. But all these things are part of the individual conversation that you have with the client about their portfolio and their particular situation. If you’re saving for college, there are plenty of different tax-advantage structures that you can use that aren’t available if you’re saving for something else. So you really need to know what is the need and goal of the client before you can come up with a definite list of the things you need to do.

Q: What is the difference between a wealth manager and a certified financial planner? How do I know which ones is right for my needs?

Cardwell: Certified Financial Planner, or CFP, is a professional designation, much like a CPA. Wealth manager is a broad term used in the industry that could relate to planning firms, investment firms and insurance agents. The bottom line is you should research the firms you are considering. A deep, knowledgeable planning team of CFPs is a great place to start.

Bell: A CFP is a professional designation that a wealth manager may choose to pursue. The CFP designation assures you, the investor, that this person has a base level of investment and financial planning knowledge as covered by the CFP program, and a minimum level of experience in this field. CFP holders also pledge to uphold certain ethical values. Anyone can call themselves a wealth manager, but a CFP cannot use those letters unless he or she has satisfied the requirements. There are other highly respected professional designations in the financial industry with slightly different areas of emphasis. Most people know about Certified Public Accountants, or CPAs. You will also frequently see Chartered Financial Analyst, or CFA, Chartered Life Underwriter, or CLU, and Chartered Financial Consultant, or ChFC. There are many more, but those are generally considered the cream of the crop and have high standards of knowledge and ethical requirements. If your advisor lists a professional designation as a qualification, do an internet search and find the professional organization’s website. There you can read about the program’s requirements and decide for yourself the value to place on the designation.

Wesson: Keep in mind that they may be one and the same. There is such a wide spectrum of terminology. I define a comprehensive wealth manager as someone who integrates all the different aspects of the financial-services industry – whether it be insurance, taxation, investment management, financial planning – into a plan for the client. But that person may also be a certified financial planner.

Q: What are some of the top wealth management challenges or opportunities for small business owners?

Wedell: The most difficult thing when you start to talk to a business owner is, what are the particular needs and how does that business ownership perform within the context of their overall portfolio? Because while the value of that business doesn’t necessarily show up on their account statement on an annual basis, it is generally a very significant portion of their overall net worth. So what we like to do as we get this whole picture of a client’s wealth is to incorporate how that business is performing – what is it tied to, how does it perform through the various cycles – into our construction of the rest of that individual’s portfolio. For example, we work with a lot of clients in east Texas who are oil and gas operators and owners. A significant portion of their net worth is tied up in oil and gas exploration, transportation, etc. For those individuals to then additionally own more oil and gas exposure within their portfolio or as an income-generating security is probably inappropriate, because they already have so much of their portfolio concentrated within that industry. And we also might want to look at industrials and chemicals that are correlated with the oil and gas industry and move the client away from those as well and get more into classic-growth technology and consumer staples, things that aren’t correlated with the business they own. The second thing is to recognize that a significant portion of their net worth is tied up in a typically volatile, illiquid equity. So when we think about the construction of the rest of their portfolio, we may want to be more conservative to account for the fact that so much of their net worth is tied up in an equity investment in a small business.

Bell: We find one of the top challenges of a business owner is having the time to focus on the management of his or her personal, liquid wealth because they spend so much time managing the business operations. A financial professional can be immensely helpful in these situations. If the client will take the time to initially gather information and participate in constructing a wealth management plan, a financial advisor can take the implementation and monitoring from there. The financial advisor should help keep the business owner on track with periodic updates and communication in a way that fits the business owner’s busy schedule. It is even more important for a financial professional to know the personal or family situation of a small business owner. I have reminded these clients of upcoming personal tax payments, car tag renewals and school tuition payments, and made sure the liquidity was there when needed. I sometimes feel like I bug these people too much, but it’s necessary to get their attention and keep things on track. They are busy and pulled in many different directions. As far as protecting the value of a small business, planning in advance is key. I’ll go back to mentioning again the importance of CPAs and tax attorneys. We often have small business owners call us a few months before they plan to sell the business. They have an idea of the taxes they will owe and are frantically seeking a way to reduce that tax bill. It’s too late at that point. A successful small business owner needs to plan early for transferring the value of the business, either through a sale or to the next generation, in order to maximize value transfer and minimize taxes. If your small business really takes off, don’t wait to put the planning in place. You may not sell or transfer for 10, 20 or even 30 years, but there is much you can and should do now.

Cardwell: The list of challenges and opportunities for small business owners is nearly endless. The two that immediately come to mind are building wealth outside the business and succession planning. Building wealth outside the business is so difficult for small business owners because of their unwavering entrepreneurship. They pour everything they have into their businesses, which is often what makes them so successful. The major downside of this, however, is that it often leads to a lack of flexibility, meaning you live and die by the success of your business. We are seeing it more and more with baby boomer business owners who are forced to keep working beyond when they would prefer. This lack of flexibility also creates challenges for small business owners when it comes to succession planning. How much is my business worth? Can my child or children handle taking over the business? Is there anyone who wants to buy my business? These are all questions that small business owners will have to address at some point.

Wesson: Small-business owners put most of their time, resources and energy into the business, which is an illiquid asset. It’s the asset they know and the asset that’s producing the income stream and financial viability for the family. So they typically don’t take the time to plan. Many of them early on don’t have significant portfolios outside their business. In dealing with them, it’s really about getting their attention and helping them identify that their greatest source of income and wealth creation is also their biggest risk. Once they identify that, then you can have a productive conversation about how to mitigate that risk through both planning and structuring outside their business. The other thing is helping them think through how to transition their business at some point in the future, whether it be an exit strategy through a sale or some other form. But they’re so busy, focused and committed to their company that it’s hard to get their attention until they have resources built up outside the business to manage.

Q: What should individuals regularly discuss with their wealth managers but often don’t?

Bell: I think the question, “Am I on track?” is not asked enough. Your wealth manager can do projections for you and take into account savings, investment growth, spending needs and retirement dates. Your yearly market values should roughly track those projections. Markets go up and down, so some years will be better and some will be worse. But you should always be within reasonable striking distance of your projected value each year. Sometimes markets disappoint for multiple years. You may need to save more or spend less. Sometimes the opposite will be true and you may find yourself way ahead. Secondarily, investment return expectations and risk tolerance are sometimes tricky things and market environments change over time. Every wealth manager tries to pin these down with clients. But sometimes there are unrealistic expectations. A client expecting the returns of a stock portfolio with the risk of a bond portfolio will never be happy. You should discuss your return expectations with your wealth manager and be sure you are both on the same page. Be specific with what you expect and ask if your wealth manager believes this is a realistic goal. If you don’t see eye to eye, then find a second or third opinion. However, be prepared for those who will choose to agree with you to get your business, rather than being honest with you about your chances of reaching your goals.

Cardwell: One of the things that we have begun to focus more on as a group is charitable intent. This is far too often an afterthought when it comes to financial planning, but it is something that so many people are passionate about and that should be a part of the planning process. We work with clients to identify the why of their giving, and together find the best ways to manage that giving, making the process as easy as possible.

Wesson: The first thing is to help them view planning as dynamic versus static. What that means is throughout the course of life, circumstances change. So the biggest things that clients can discuss with their advisors are changes that take place in their circumstances, be it having a child, buying a business, selling a business or making a major purchase. The second thing is, don’t want until it’s too late. Communicate early about what you’re thinking about doing, instead of waiting until it’s done. Lastly, expenses drive such a large part of a family’s financial success, it’s wise to keep your advisor up to speed on your expense trajectory so they can incorporate this into your plans and help you understand the impact on your long-term financial health.

Wedell: If I have a single issue that is my industry bugaboo, it’s non-communication between spouses around what a family’s financial plan is. We see it frequently where one of the two spouses – typically the husband – has been responsible for saving and creating whatever types of plans and accounts may be out there, some of which the other spouse may not even know about. All of a sudden death happens and the surviving spouse is left to sort out the pieces, which are frequently never written down in any type of coherent form showing everything that they have. And it is really a lot for that spouse to all of a sudden be tasked with trying to figure out where their liabilities are and what are their sources of income. How do they think about health care? How do they think about estate planning? And it happens at what is already an emotionally traumatic time. Women live longer than men, so frequently the widow is left to sort through the pieces of whatever the husband may have planned. It’s really a disservice to both parties to not have that communication between them about what the family’s financial picture looks like. Because to be left in a situation where you don’t know is incredibly traumatic.



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