Making Cents | John P Napolitano

Saturday, December 1, 2012

MAKING CENTS: Do your homeworking when picking a financial advisor

If part of your plan for the New Year is to hire or change financial advisors, it is never too early to start that process. Many people do not ask enough questions when vetting out a new advisor, and simply hope for the best.

Ask is what the prospective planner feels is his or her most helpful service for their clients. This will give you a glimpse into what that particular advisor also favors. If the answer is investment dominated, then you know that investing is likely to be a big part of the deliverable. If the answer is insurance oriented, it would be reasonable to assume that the advisor sells insurance. There may be no right or wrong answer to this question, but make sure that it is an answer that suits you and matches what you are looking for.

Ask about the resources beyond those of the advisor that you are interviewing. Some clients prefer the large brand name behind the advisor and others may prefer a smaller independent practice. Some like a specific expertise, such as investments, estate planning or insurance while others will want a deep bench of subject matter experts across a wide range of expertise within one firm. Ask who specifically will be assigned to your situation besides the person you are interviewing.

Inquire about how the advisor gets paid. There are two parts to this question. The first part may be about the method of compensation. Advisors may get paid in a variety of ways ranging from flat fees to commissions, and all combinations in-between. You should understand how your advisor will be paid. The second part you want to know is what percentage of their overall revenue comes from what sources. If you have an advisor who receives commissions, ask what the breakdown of commission income is from investments, insurance, annuities etc. Also ask about the companies whose products they sell and whether any one company occupies more than 25 to 50 percent of their commission income in a given area. For advisors who are fee-only advisors, ask what percentage of their income comes from the financial planning and what percentage comes from asset management. Also ask if there are any related parties who they regularly use for insurance or other services.

Learn about the disciplinary history of the firm, the advisor, and anyone else on that advisory team who will work with you. This information is readily available from the state, the SEC or FINRA online.

Ask the advisor to describe their best clients to you. Force the advisor to be detailed about the income, net worth, age and fee ranges that these best clients pay. From there, decide if you fit that profile and feel believe that they can meet your needs.

Evaluate whether you can feel comfortable enough to let the possible advisor know about your most private personal and financial matters. Do they speak in plain English, listen carefully to your needs and answer in a language that you can understand? If not, keep shopping.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

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Saturday, November 24, 2012

MAKING CENTS: A time for taking stock.

Now that Thanksgiving is behind us, don’t leave behind the expression of gratitude for what is working out well in your life. Today, instead of reminding you of yet another financial issue that you should attend to, we are here to give celebration for those things that you have done to improve your financial situation in the past 12 months.

With record low interest rates, were you able to get a lower rate on any outstanding loans? Bankers tell us that the mortgage markets have become more available to many, but I still see many FICO credit scores that are crushing people’s ability to take advantage of the low rate situation from late payments dating back to the height of the financial crisis in 2008. If you were not able to take advantage of low rates, hire a specialist to help with your credit score.

Have you paid down debt? The trend in the U.S. is still one of de-levering, or paying down debt. If you made progress reducing your debt, celebrate. This step is vitally important to the U.S. economy as a whole and may mean the difference between a successful financial plan and one plagued by interest expenses.

How about helping out a family member? Were you able to lend money or other resources to help out a friend or family member in need? If you did, celebrate that act of kindness. If it is your intention to collect repayment for that loan, document the loan with an interest rate that perfects your right to receive repayment.

Did you finally get a current will and the other estate documents needed to protect your dependents should you not make it until next Thanksgiving? While obtaining or updating an estate plan is not most people’s idea of a fun date, you should feel good about not leaving your dependents and financial realities up to your state of residence to decide what happens to your assets upon your death. And for those with greater than $5 million in assets, this could be the last call for estate tax savings.

Have you had a sit down with the family about money? All levels of wealth may benefit from this. At the lower level, your kids need a basic understanding of budgeting, fiscal responsibility and coming to grips about your financial realities - and what you can do to make them more to your liking. This discussion is even more significant for those with a family business or an estate plan that involves your children’s services as a trustee or executor. This is especially significant where assets such as a family business or a family vacation home are involved.

And the last word of celebration is for you. Congratulations to those who took control over what you can control to make the most of your one and only life on this planet? Do you love your job? Did you get professional advice? Are you taking the time to be with loved ones? Did you get involved in activities that make your life more meaningful or fun?

Saturday, November 17, 2012

MAKING CENTS: Who do you trust when it comes to your investments?

Have you earned your own trust? I recently signed on to a popular financial site, and there was one of those quick pop up polls. The poll was asking who you trust when it comes to your investments. Seventy-four percent of survey respondents said that they trust themselves first. Roughly 9 percent voted their dog as second and almost 7 percent said that they trusted their independent financial advisor.

It doesn’t take a math major to realize that the rest of the investment field combined only garnered about 10 percent of the survey respondents’ trust. Considering that nearly every day of the week I am presented with a do-it-yourselfer’s portfolio that looks more like a monkey and dartboard portfolio, I wonder how these self-trusting investors would rank themselves in terms of the quality of their do-it-yourself portfolios?

For those with enough courage, put your portfolio through some of the diagnostic and review tests that a professional would do, and see if you have earned the trust that many apparently have in their money management skills.

The first test most want to do is a performance test. Sure, performance matters, but relative performance is even more meaningful than absolute performance. Absolute performance means your actual raw returns expressed as a plus or minus. But relative performance takes that absolute performance number and asks questions regarding risk.

Exactly how much risk did you take in order to earn that rate of return? If you took abnormally high risk, and returned market-like returns, your absolute performance would not be very good. If on the other hand, you took very little risk and earned market-like returns or better, your absolute performance is good.

If you own only a few investments, you may have relative returns that look pretty good when examined in a vacuum, but then you must consider the risk of a large concentrated position. That inherently adds risk to a portfolio simply because of the inherent risk of any given single holding.

Next examine the volatility of your portfolio. Volatility is a measurement of instability or the range of expectations for your investments, either one-by-one or for your portfolio as a whole. Most individual investors have not been exposed to how much volatility may be inherent in their holdings. This may be enlightening to those with the courage to check.

It may also be wise to look at each individual holding, and examine how your holding compares with alternative holdings in the same industry, sector or country. If you learn that you have a dog compared to the alternatives available, consider a change.

Saturday, November 10, 2012

MAKING CENTS: Precautions can mitigate losses in next storm

Witnessing back-to-back storms right in our backyard sends a strong message. Stuff happens, and there are obvious natural disasters that no one can prevent. But getting your house in order to protect what is important to you is something that you can start to fix today.

What would bother me, for example, are the drawers of old photos from my childhood and then of raising a family myself. While I don’t frequently look at these old photos, losing them would feel like a material loss to me. The solution could be to get these photos and negatives scanned and saved in some digital format, and then stored in a safe place.

If your house includes things that are of material value, take a look at insuring these possessions. Most homeowner policies have limitations on home contents, and items of great value will frequently not be covered for full value unless specifically identified and separately named in the policy. Items that may fall into this category include collectibles, art, jewelry and furs.

Take time to inventory your valuable items, and save this inventory in a safe place. Be specific with the details of each item, and back them up with an appraisal or an invoice from the purchase. Some insurance professionals even recommend a photo or video library to show exactly what you are protecting.

Also look at your coverage for a second home, a rented home or one that a dependent child may be renting while away at college. Do not assume that everything is covered through your homeowner’s policy without having a discussion with your insurance agent.

Financial records often reside in the basement. When these documents get destroyed, praying that you never need them simply isn’t strong enough. Like your old photos, either store these offsite in a protected place or scan them into electronic files.

Discard most records older than 7 years. Older documents that should be retained are items such as invoices and cancelled checks for material home improvements, purchase documents for a residence and any original information regarding insurance policies or loan agreements that are still outstanding.

While you cannot control or determine when the next storms will hit, you can call a tree company now to rid yourself of dead trees and limbs that may cause harm in a future weather event. As you may have learned, if you wait to make that call until the wind blows your tree down, you’ll pay a lot more for the same service.

Friday, November 2, 2012

MAKING CENTS: The election won't end all uncertainty for the markets

The next time you read this column, some of the uncertainty clouding the financial markets will begin to unravel.

We will know our next president, the Senate race will be over and the financial markets will begin the process of digesting the consequences of each.

But don’t think for a minute that these are the only issues that will continue to weigh heavy on all of the financial markets. Issues such as tax rates, interest rates, Europe and the Middle East will linger just like issues we haven’t considered yet shall arise.

You cannot control any of these issues. Yet if these issues keep you awake at night, fearful of the consequences to your tax bill, the rate of inflation or the return on your investments, address them one by one.

Start with the expiration of the Bush era tax cuts. If you feel that the increase in the capital gains tax rates and the increase in the taxation of dividends is more than you can tolerate, consider the consequences of selling now. These consequences may include the amount of current taxes that you’ll pay and the implications of this type of drain to your nest egg. It also raises the question of what to do with the money after you sell your holding.

Some feel that these tax increases alone may cause investors to reduce their exposure to these assets if the tax cost will rise so dramatically. And even if there are not more sellers than buyers to depress prices, others wonder whether these types of assets may be worth less in general because of the additional taxes to pay on the dividend income and eventual capital gain.

If your anxiety is from the possible volatility increase in financial assets as these issues come to a head, assess the consequences of both selling and holding. Ask yourself what type of annual returns you need on your nest egg to reach savings objectives? If you need a rate greater than what is available in today’s low interest rate environment, but simply can’t stand the volatility, then look at how much you may need to reduce your monthly spending in order to minimize your mental anguish.

At the end of the day, there are only a few items that matter. They start with who you are and what you want to do with your time. Beyond that, the financial issues that you control and will matter the most in your financial future are how much you make and how much you spend. Don’t guess, know what you spend each month.

How much you save and how much you earn on those savings is the second component.

Saturday, October 27, 2012

MAKING CENTS: Business Owners year-end tax strategies

Many business owners are sitting on their hands when it comes to committing significant cash to any project; from expansion to hiring these owners commonly cite uncertain tax and regulatory policy as some of their biggest fears for the future growth of their businesses. Regardless of future policies, there are still some tried and true tax planning opportunities available for owners to reduce their 2012 tax burdens now.

The first involves those who need equipment for their businesses. This equipment can include office furniture, computers or any type of depreciable office or manufacturing equipment used in your workplace. Under section 179 of the internal revenue code, businesses can deduct up to 100% of the cost of new equipment in the year that the equipment is placed into service. The limit to this deduction exceeds $130,000 and is scheduled to drop to $25,000 in 2013. In addition to the up-front section 179 deduction, equipment purchases may also be eligible for a bonus depreciation deduction of up to 50% of the cost of the items placed into service.

The key for purchases made this year is that the asset is in fact placed in service. Ordering today and installing in February 2013 will not help you. The stuff has to be in your shop and ready to go by 12/31/2012.

Vehicle purchases can also qualify for vehicles placed in service before 12/31. For large SUVs and trucks, the benefits are even better with both section 179 deductions and bonus depreciation rates available.

If you need to hire anyone, consider hiring a Veteran. By hiring an unemployed Veteran, you may be eligible for tax credits from $2,400 to $6,600 depending on a few factors. The Vet must begin work by 1/1/2013 for the employer to receive the tax credit. More details on the tax benefits of hiring a Veteran can be found at www.dol.gov/vets/.

For employers with benefit plans, take a look at upgrading your employee benefits. This advice is sometimes a tough one for larger employers to swallow because it is typically a one way street. That is once benefits get richer for employees, it is very difficult to scale them back during tougher times. But if your company is fairly profitable, and you have none to only a few key employees, upgrading your benefit plans could be one of the best tax planning moves for you. The candidates for upgrade may include your group plans for health, life, disability or dental. Your retirement plan may also be eligible for a major upgrade increasing your annual contribution and the resulting deduction substantially.

Of course, no one really knows what is going to happen next year. A rational approach to save taxes this year is to examine where you stand as of now, and attempt to forecast what your entire year will look like. With that knowledge, you can make a sound judgment about the magnitude of any tax savings move made now as opposed to waiting around to see what happens next near.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

Saturday, October 20, 2012

MAKING CENTS: Getting through future retirement roadblocks

If someone asked you your three greatest concerns about maintaining or improving your life style during retirement, what would they be? Think of this for a moment before you read on.

Under the category of additional food for thought, let me introduce some other factors to consider that may impact your retirement way down the road.

The first thought is inflation. We have been spoiled for the past several years with a historically lower than average inflation rate according to the U. S. bureau of statistics. On top of that, the statistics that you hear about in the popular press exclude two very important categories. These stats exclude food and energy costs, which may or may be more volatile 10 or 20 years from now.

These statistics also do not include price increases that are due to performance improvements. Each year, the inflation numbers routinely exclude quality enhancements to certain products or services, even if that product or service is no longer offered without the enhanced new feature or benefit.

This may be material for someone who likes to stay ahead of the technology and quality curve. Perform a stress test on your savings, and run a scenario with significantly higher inflation and see where that leaves you.

Another factor is your assumed rate of return. What are you using in your forecasts? Of course, we all know what fixed rates are today. For many, using today’s guaranteed rates alone will flag a potential problem way down the road. But even for those with risk in their portfolios are not guaranteed to hit their total return targets.

Many experts are warning that riskier assets classes may not grow in the next decade or two as well as they did during the last bull market run with greater volatility. This will be a challenge for conservative investors who need more than what today’s risk free rate of return may provide.

Their challenge is to be a bit more tactical in their allocations, and actively attempt to avoid losses while increasing your to more asset classes.

Taxes will also change. While no one knows for sure whether income taxes will go up or go down, most professionals would suggest that you consider higher taxation in the future. Stress test your net cash flow in retirement by assuming a tax increase, and see what that does to your nest egg.

Another factor that many will not completely consider is longevity. People are living longer today. This can cause several issues for you later in life. Take a look at your basic living expenses if you add another ten years of life. Is your savings adequate to handle that extra ten years? What does your forecast look like if you purchase long term care insurance?

While that may mitigate the consequences of a long term catastrophic illness, the cost of the coverage itself may be an expense that gives rise to future cash flow shortages.

There are two ways to settle this issue for you. Run the numbers under a few stress test scenarios or stick your head in the sand and spend less.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth