MAKING CENTS: Expanding your annual financial check up

As the calendar marches toward the start of another year, there are certain financial rituals that many astute investors embrace. They routinely scour their portfolios for gains or losses to harvest, look to see that their allocations are in line with their expectations and look around for ways to reduce the income taxes they’ll pay for the year.

These are all good practices, but this year I’m going to ask you to expand the scope of your year-end rituals to include matters frequently ignored.

Start with a re-cap of the past year. Look at income and expenses, and compare that with where you expected to be for the year. Did you save as planned, did you pay down debt and in general did your cash flow stay the path that you need to accomplish your objectives?

Now look at last year’s forecasts and compare that to where you stand today. Are you still on track to retire by age 68? What changes may you need to make in the upcoming year to get back on track?

An annual examination of assumptions versus actual in your financial forecasts can help alter courses to get you back on track.

As you are looking through your portfolio, ask yourself if you have significant concentration risk. Concentration risk is when one or more investments occupy too much space in your overall portfolio. How much is too much is open for discussion, but many experts feel that any more than 10 percent of your portfolio in one holding may be too much.

For married taxpayers with taxable incomes less than $75,000, the capital gains tax rate will be zero. All too often I see people with concentrated positions because they are afraid of paying taxes on the gain. If that position later suffers dramatic losses, most investors wish they had sold and paid the tax to salvage some of the value.

Take a look at your insurance policies. Are you adequately covered for any perils? Perhaps there are new issues in your life such as an underage driver or an inherited house that you now own with your two siblings. Also take a look at your life insurance. Some types of extended term life insurance, for example, have consequences including the termination of coverage at the end of the stated term.

Look at your wills and trusts. Do the executors, guardians and inheritance provisions still make sense?

For most, the guidance of a skilled professional is beneficial. If you always do it yourself, you may be consistently overlooking the same things.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Decoding alphabet soup when it comes to financial advisors

Earlier last week, a friend poked fun of my email signature because of all the initials after my name. 

Lots of professionals use designations in their signature; some recognizable and some not. The question you need to ask is whether the initials, (AKA credentials or designations) are necessary and would a credentialed professional deliver better service and results than a non-credentialed professional?

Of course, the answer is maybe.

I know professionals within every area of personal finance, law and accounting. Some are great at what they do and others are not. Some have advanced designations and credentials, and some do not. While I am a big fan of credentials and designations, the lack thereof are not grounds for divorce from your current professional service providers.

Bottom line is that even the professionals with designations, degrees or credentials that you recognize often specialize within their broad profession – so learn about their areas of expertise before you blindly hire one because of the credential.

In the financial world, there are way too many designations for anyone to know what each one of them means. Some, while not widely known are very rigorous and demanding. Others, however, are simple course work with no continuing requirements to stay current and no ethics requirements. In fact, many states even prohibit the use of certain designations because of their lack of rigor. Rigor is generally determined by the quality of the educational institution, and evaluated by any continuing education requirements and/or ethical standards of conduct that must be followed.

Designations that showcase one as a specialist in the area of assisting senior citizens has generated a lot of attention amongst regulators and compliance officers of larger firms. Elder financial abuse is high on the list of regulators, and alerting the public about designations that lack merit is a good step in avoiding abuses.

For advisors with no designations or credentials, ask why not? Dig a little deeper and ask how they stay current on new trends and laws, and what guides their ethical behavior.

For advisors who do have designations, ask for a detailed explanation of each one. Find out about the examination requirements and learn about the experience requirement. Ask who provides the training. Ask about the continuation educational requirements. Ask about the ethics and policing. Any credential worth touting should have a rigorous code of ethics and standards of conduct and the authority to enforce the rules.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: For some, the better the rate, the worse the time to borrow

In general, you would think that a period of sustained lower interest rates would be a good thing for borrower

 

image source: englishbloggroup27.com

And in general, it is. But for many, this period of low rates has caused frustration and not materially changed their lives for the positive. Many have been locked into older, more expensive loans and not been able to refinance or sell their existing home to buy a smaller, lower-cost home.

Credit scores are a big cause for not being able to secure a great rate. If your score is too low, forget about it. If you have a score over 675 or so, you may get an offer but it will not be at the lowest rate published. For scores above 725, you may qualify for a great rate that you see advertised. I applaud the industry for coming up with an objective standard, but it too has problems. According to a recent report released from The Federal Trade Commission, as many as 25% of all FICO scores may contain an error that negatively impacts their personal score.

Even worse, good luck fixing it! There are reported methods for correcting a problem, but getting it done and properly reflected on your credit report is probably harder than getting an appointment with Ben Bernanke.

Mortgage underwriting has also changed. Since the days of liar loans, it is a good thing that mortgage underwriting has tightened up. But it has tightened so much, that even a great credit score may not qualify you for a new loan. I’ve seen two families declined for a new mortgage that would have qualified quite easily at just about any other time in history. One is retired, and regardless of their cash balance or equity in real estate, the lack of a job and a weekly pay check caused them to receive a declination. Similarly, a wealthy business owner client with no debt and several million of investable assets was declined because his company showed a loss in the prior year.

As tough as mortgage underwriting is today – it may be getting even tougher. The plan is to let the market dictate rates and underwriting standards as opposed to the government backed entities of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan mortgage Corporation). As these entities’ role diminishes, and the private sector takes over, the mortgage market will change again. Underwriting will stay tough, and maybe even get tougher. Rates may rise for all borrowers, but especially for those with less than stellar credit.

For those where a new loan would be helpful, seek advice and clean up your credit situation before you run out of options.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

MAKING CENTS: Building a strategy for funding business

One of the key elements in starting or growing a business is developing a comprehensive financing strategy. 

A long-term plan can help reinforce short-term spending discipline and reduce the likelihood your business will burn through capital too quickly.

Creating a capitalization strategy requires an understanding of the business activities your company plans to finance, estimates of how much these activities will cost, and knowledge of appropriate sources of financing.

Once you understand the business activities you need to finance, you can develop an annual budget and estimate your capital requirements for at least the next two years. Many experts recommend planning for worst-case, realistic, and best-case scenarios. This approach may decrease your likelihood of underestimating your capital requirements, which could cause you to run out of money or pass up potential opportunities. You may want to consult outside sources (such as your accountant) to ensure your budget is as reliable as possible. Your local chamber of commerce or a regional business association may help you estimate expenses such as utilities or payroll that tend to vary regionally. A professional association that represents your industry may have information about standard costs, margins, and financial ratios.

After researching your capital needs, you're ready to consider potential sources of funding. The first source should be your own capital. You maintain total control, but would need to assess the consequences on the other parts of your financial plan. Of course, the use of the capital is risky, and may not deliver the steady type of investment returns that you’ve experienced from other passive investments.

Family and friends are another source of capital. From this crowd, you may get more flexible terms.

Banks are not exactly the best place to finance a startup business unless you really don’t need the money. It is most likely that a bank will want your personal guarantees along with a lien on your real estate as well as your other accounts maintained at the same institution.

Loans guaranteed by U.S. Small Business Administration or a business development program sponsored by state government are another option. These may take a little more time, but are designed for small businesses.

Another category of investors are called “angel” investors. Angel investors are investors who are familiar with the startup and incubation businesses. These people are often former executives or successful entrepreneurs themselves, and may contain considerable management or operational experience that you may use. Sometimes these angels also require an active role in the company, yielding less than full control in your hands as the venture’s founder.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL