You Deserve a Fiduciary

Who can you trust to give you the best possible financial advice? Interestingly, during times of personal crisis such as job loss, divorce or death of a spouse, the vast majority of Americans turn to family and friends rather than financial advisors, according to a recent survey from AARP Financial.

I understand that impulse. It is natural to turn to those you know care most about you in your time of need. However, as is the case when you require medical care or legal advice, or even home maintenance, it is crucial to work with someone who is well-informed in addition to being well intentioned. Ironically, although the combination of expertise and care is especially necessary for your finances, it can be exceedingly difficult to find. That is, of course, unless your financial advisor is a fiduciary who is bound to put your needs and interests first, in all cases.

You might assume that all “financial advisors,” like attorneys and CPAs, have a fiduciary duty to act in the best interests of their clients. That is not the case. When I meet with prospective clients, they are surprised to learn that there are professional financial advisors who practice at a lower standard.

In fact, federal and state law holds only Registered Investment Advisors (RIAs) to a Fiduciary Standard that requires those advisors to act solely in the best interest of the client, even if that interest is in conflict with the advisor’s own financial interest. Further, RIAs must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement, as well as adopt a Code of Ethics and fully disclose how they are compensated.

Bernhardt Wealth Management is a Registered Investment Advisor and my team and I are proud to call ourselves fiduciaries. Investors should accept nothing less from advisors managing their money.

What is One of Your Greatest Life Experiences?

One of the greatest rewards my team and I receive is the knowledge that by serving as our clients' personal chief financial officer our clients have more time to to spend with their family, focus on their business and/or profession, give back to their community or pursue other things that are important to them. It is our hope that they can then lead a fuller life as a result of our service.  Or as Horace said "“Carpe diem! Rejoice while you are alive; enjoy the day; live life to the fullest; make the most of what you have.”

What is one of your greatest life experiences?  I recently had one of the best life experiences I have ever had.  I hiked four days and 52.6 miles in the Grand Canyon.

On January 5th I hiked down the South Kaibab Trail to Phantom Ranch.  The photo below is me on the South Rim of the Grand Canyon at the South Kaibab Trailhead.

On January 6th, I left Phantom Ranch and hiked part way up the North Kaibab Trail. On my way back I stopped to have lunch at Ribbon Falls.

On January 7th, I hiked part of the Clear Creek Trail from Phantom Ranch.

On January 8th, I left Phantom Ranch at 6:00 AM to begin my hike out of the Grand Canyon on the Bright Angel Trail.  Here is a photo of me at the Bright Angel Trailhead after I reached the South Rim.

A couple in their 60s stopped me as I left the Grand Canyon and asked questions about my experience.  I answered all of their questions and could not say enough good things about my four days in the Grand Canyon.  Her final comment to me as we parted was “the glow on your face says it all.”

The combination of the beauty and grandeur of the Grand Canyon plus not having access to news, television, internet, cell phone service, etc. made this one of my favorite experiences. What is one of your greatest life experiences?

I invite you to post your comments to this blog and list one or more of your greatest experiences. For some I am sure it will be a marriage or birth of a child. For others it may be an award or achievement. I would love to learn what is one of your greatest experiences and hope you will take the time to post your comments.

You can click on the following links for Album #1 and Album #2 if you want to see other photos and my comments about each photo.

And may each day of your life be lived to its fullest!

I Invite You to Visit ExecutiveLeadersRadio.com

As a farm boy from Nebraska I grew up in a close knit community where your word was your bond. A personal connection to both my community and my work has always been integral to my happiness. Early in my career when I was an accountant, I changed professions primarily because I did not have self-satisfaction in my work. When I transitioned to the wealth management industry, I realized it was the satisfaction I gained from interacting with clients one-on-one, and doing all I could to help them reach their goals that was missing from my previous work.

Today, I enjoy trusting and productive long-term relationships with a wonderful group of clients. And through my involvement with Executive Leaders Radio, I get to help share the inspirational stories and words of wisdom of successful business owners and executives. We hope their stories inspire and motivate young men and women.

You may want to encourage the young people you know to listen to past broadcasts of the show at Executive Leaders Radio. And please feel free to contact me if you would like to recommend a business owner or executive we should interview on the program.

What You Don’t Know Can Hurt You

The Role of Financial Literacy in Determining Retirement Plans by Robert Clark, Melinda Sandler Morrill, and Steven G. Allen is the latest publication in the National Bureau of Economic Research’s Working Papers series. Based on responses from more than 1,500 workers nearing retirement at three large U.S. companies, the researchers arrive at a sobering conclusion. They state, “Although retirement-related decisions will affect workers’ well-being for the remainder of their lifetimes, many do not possess enough basic financial knowledge to confidently make optimal choices.”

Just where do the employees fall short? While nearly all of the workers surveyed were covered by defined benefit pension plans, 56% didn’t know what their pension would be once they retired. And when asked about national retirement programs like Social Security or Medicare, workers got only 50% of the answers correct. Alarming, just 37%, knew 66 was the age that they could retire with full benefits.

Make this year the year you take maximum advantage of your retirement plan at work. Contribute all you can to your 401(k), at least enough to qualify for any company matching funds. If you receive a raise, increase your contributions. This year’s plan limits are $16,500, or $22,000 if you're over age 50. If you are self-employed, or have self-employment income from consulting work or a hobby, there are additional retirement savings vehicles you can use, including Individual 401(k) plans, SEP-IRAs, SIMPLE IRAs, or Keoghs.

You should also consult with an independent financial advisor if you have questions about your retirement plan.

Now Law: Estate Tax Rate and Exclusion

I have previously written on my amazement that Congress allowed the estate tax to lapse last year and of the many plans put forth to reinstate the death tax. With the signing of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the estate tax has been reinstated for 2011 and 2012 at a maximum rate of 35% with a $5 million per person exemption. In 2009, a 45% maximum tax rate was accompanied by a $3.5 million exclusion. Beginning in 2013, however, the exclusion drops to $1 million per person and the estate and gift tax rate increase to 55% – that is, of course, unless further legislation is enacted.

Interestingly, the new law retroactively reinstates estate taxes for 2010 at the rate of 35%. However, executors of estates of decedents who died in 2010 are permitted a taxation choice. They can distribute assets to heirs estate-tax-free but with a carryover basis (generally the original purchase price), or step up the basis to the market value (generally at time of death) and pay the current 35% rate on anything above the $5 million exemption. A step-up in basis means the value of an appreciated asset is readjusted at a higher market value for tax purposes upon inheritance versus what the value of the asset was when it was originally purchased.

Because this is a complex decision for estates over $5 million with highly appreciated assets, be sure to contact your financial advisor, attorney, or tax advisor for advice.

Other notable estate tax changes for 2011 include:

• New portability rules that allow any unused exemption to be passed to a surviving spouse. Therefore, a married couple can exempt up to $10 million.
• A new lifetime gift tax exemption of $5 million per person ($10 million per couple.) Taxable gifts made in 2011 and 2012 will be taxed at the rate of 35%.
• A generation skipping transfer tax (GSTT) exemption of $5 million per person ($10 million per couple) with a 35% tax rate. Note: The GSTT is not portable.

If you are unsure if the new law impacts your estate plan, you should consult your attorney to determine whether your estate plan needs to be updated or modified.

Ring in the New Year with a Financial Check-up

January is a great time for an annual financial check-up. These five steps can help you plan for your future:

• Construct your balance sheet: List assets held in brokerage and savings accounts, college savings and 401(k) plans, insurance policies, and real estate. Then, list your liabilities including your mortgage, auto loans, and credit cards. This exercise may generate a to-do list. Maybe you’ll want to up your 401(k) contributions or attack consumer debt.
• Update your budget: You need to plan for any life changing events on the horizon--the birth of a child, a new home, children going to college so you can continue to fund what matters most to you.
• Check your emergency fund: In the wake of the recession and with unemployment still high, it’s absolutely necessary to keep six months of your current income in a liquid, interest-bearing account to manage unexpected expenses or a job loss. If you dipped into your emergency fund last year, replenish your account.
• Check your credit score: Routine credit checks uncover costly mistakes and can protect you from identity theft. You can request your report for free, once a year. Contact any of the three major credit agencies: Equifax, 800-685-1111; Experian, 1-888-397-3742; or TransUnion, 800-888-4213 or visit them online.
• Review your legal documents: Take a look at your will (or trust), power of attorney, and advance medical directive. Also, as retirement accounts and life insurance normally pass outside of your will, you’ll want to check that your named beneficiaries still reflect your wishes.

An independent financial advisor can answer any questions on the above or other matters that you have as you review your financial situation in the New Year!  Happy New Year!

Giving’s on the Rise—and a Deadline Approaches for Foundations

Now’s the season for helping others who are less fortunate than you by giving your time, talents and resources to a worthy charitable cause. According to “The Nonprofit Fundraising Survey: November 2010,” compiled by the Association of Fundraising Professionals, Blackbaud, the Center on Philanthropy at Indiana University, the Foundation Center, GuideStar USA Inc., and the Urban Institute's National Center for Charitable Statistics, charitable donations in the U.S. are on the upswing, but still have not climbed back to pre-recessionary levels.

Specifically, 36% of the charities surveyed recorded an increase in donations during the first nine months of 2010, compared to just 23% that saw an increase in 2009. Additionally, just 37% of the charities reported lower donation levels this year, versus the 51% that experienced declines last year. Other findings: Organizations focused on international causes such as the Haitian earthquake and Pakistani flood relief efforts reported the greatest increase in donations. Domestic health organizations and religious charities reported the greatest declines in contributions.

Overall, charitable organizations remain “guardedly optimistic” about 2011. In fact, 47% plan to spend more, while only 20% expect to make budget cuts.

If you have a family foundation, you know that to avoid taxes for under-distribution, you must generally distribute at least 5% of the value of investment assets (minus fees and investment taxes) each year. Ideally, of course, this annual amount has been calculated and distributed throughout the year. However, as the year draws to a close, it’s often wise to take a look at the year’s distributions to avoid shortfalls.

Missing the 5 percent distribution can result in penalties from the IRS, but often the agency allows the offending foundations to make up for their miscalculations by contributing more than 5 percent in the following year. However, missing your mark could also result in higher taxes on investment income.

A Question of Ethics

In her recent article “Why do investors trust advisors, but not Wall Street?” Susan Antilla explores the disconnect between investors who proclaim their distrust of the financial securities industry, but exempt their financial advisors from that profound mistrust. In fact, it seems many investors are so trusting of their advisor that they fail to vet them properly. For example, the article includes details of an arbitration won by actor Larry Hagman where Citigroup Inc. was ordered to pay $1.1 million in damages, plus $439,000 in legal fees for the mishandling of his account by a broker who had seven customer disputes registered with the Financial Industry Regulatory Authority.

Investors looking to work with an advisor can avoid such a situation by working with a fiduciary, someone who is sworn to act in their best interests. In addition to being a fiduciary, I am governed by the professional codes of conduct that accompany my CPA, CFP^® and AIF^® designations.

While Citibank was justly punished, our society has become too willing to excuse serious ethics violations. For example, although Congressman Rangel was convicted of 11 ethics charges, amazingly, he is not going to lose his seat. What does this teach our children? Our kids are certainly getting mixed messages – like the one highlighted in a recent Washington Post story about a Fairfax County high school that allows cheaters to retake tests.

Sadly, we have witnessed too many examples of unethical behavior from political leaders over the last two decades. And the same is true in business world with Enron, Worldcom, Madoff, the list goes on. As is the case in my business, there must be consequences to ethical violations. All politics aside, we must strive to set a positive example for our young people and underscore that there are consequences for ethical violations.

Passage Likely for Estate-Tax

Although agreement seemed highly unlikely just weeks ago, Democratic support for a plan put forward by Republicans and accepted by President Obama seems to be gaining steam. The compromise in waiting would reinstate the estate tax at 35% for two years starting next year, with the first $5 million of an individual’s estate exempted. According to data from the nonpartisan Tax Policy Center, this plan would result in about 43,540 taxable estates in 2011, and raise about $34.4 billion.

Arizona Republican Jon Kyl authored the current estate tax provision accepted by the President. Although House Democrats offer tough opposition, it’s likely there are enough moderate Democrats to side with Republicans and President Obama to pass the bill. If Congress doesn’t act before the end of the year, the estate tax, which lapsed in 2010, is set to return at a 55% rate, with a $1 million exemption on January 1, 2011.

The battle over the state tax has long provoked heated philosophical debate. As Lee Farris, senior organizer on estate-tax policy for United for a Fair Economy, has noted, there’s more than simple politics at work as Congress works towards forging an agreement. According to Farris, “an agreement has proven more complicated than splitting the difference on the numbers because this has been cast as a moral issue” being debated between those who believe the estate tax destroys family businesses and those who argue it is necessary to preserve meritocracy in the U.S.

Interestingly, if a plan is passed this year, Congress may allow this year’s heirs to choose whether they factor taxes based on this year’s rules, whereby some inherited assets are subject to higher capital-gains taxes, or next year's rules – whatever they may be. Stay tuned.

Still Dreaming of Early Retirement?

In spite of all your best laid plans, there may be a glitch in your retirement dreams. If you retire early, before you would qualify for Medicare, you may be looking at a costly gap in your health insurance. If you figure you will simply keep the coverage you have from your employer, think again. The nonpartisan Employee Benefit Research Institute (EBRI) recently examined data for private-sector establishments to answer the question: How many employers offer retiree health benefits to early retirees? Here’s what EBRI found:

• Overall, 444,150 private-sector establishments offer health benefits to early retirees, or about 11.2 percent of the total.
• Large employers are much more likely to offer retiree health benefits than small employers; 34.5 percent of employers with 1,000 or more workers offered them, compared with 1.2 percent of employers with fewer than 10 workers.
• Of the 984,697 employers with 1,000 or more workers, the 34.5 percent account for 339,720 employers that offered early retiree health benefits.

While these statistics don’t boost your confidence in your plans to rely on your employer, keep in mind that there is plenty more uncertainty in the mix. As companies cut costs to survive in an increasingly challenging economy, keep in mind that health benefits to retirees could be on the chopping block. Also, it is anyone’s guess what will happen to healthcare reform when the new Congress takes over.