Category Archives: CapWealth Blog

Millennials spur trend of SRI — socially responsible investing

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on Oct. 27, 2017.

Photo: Anchiy, Getty Images

Millennials have lived through the longest war in United States history as well as the worst recession since the Great Depression. Coming of age amid such trying times, millennials are motivated differently than other generations. This generation wants to feel like they are a part of something that is making a difference — for the common good, for happiness and for hopefulness — in the world.

So, with a cohort so acutely concerned with how they are impacting the world, how does that influence their advisers and their investment choices?

Parameters

Financial advisers take many factors into consideration when building a portfolio and financial plan for their client. Some of these constraints are: time horizon, liquidity, risk tolerance, legal and regulatory factors, tax concerns and unique circumstances. Under this last guideline, clients can give their financial adviser parameters for what they feel comfortable investing in or what they don’t.

Socially Responsible Investing (SRI) is essentially an investing strategy that considers environmental, social and corporate governance (ESG) criteria to not only create competitive returns, but also to provide positive societal impact. SRI is something that your clients might inquire about, and financial advisers need to choose appropriate investment vehicles that abide by those guidelines.

Evolution

The evolution of SRI has been one of organic growth as the landscape of investing and politics has changed. Traditionally, baby boomers and Generation X did not want their financial advisers to invest in companies that deal with tobacco or alcohol or what is commonly known as “sin stocks.” But, with the advancement of technology, SRI has taken the foundation of what sin stocks stood for and expanded it.

The Forum for Sustainable and Responsible Investment is now the leading voice in the advancement of sustainable, responsible and impact investing across all asset classes. Investors not only care what products or services a company provides, but they also care about the environmental and societal impact that they have on the world. Our world today is faced with a new set of problems that wasn’t at the forefront 50 or 60 years ago. Some of these include obesity, poverty and sustainable agriculture. Leading ESG criteria these days include board issues, pollution, human rights, climate change, executive pay and conflict risk.

How to invest

According to the 2016 Report on U.S. Sustainable, Responsible and Impact Investing Trends, “more than one out of every five dollars under professional management in the U.S. — $8.72 trillion or more — was invested according to SRI strategies.” That figure confirms an increase of 33 percent from 2014 to 2016 and accounts for 22 percent of the $40.3 trillion in total assets under professional management in the U.S. tracked by Cerulli Associates.

There are 1,002 funds that incorporate ESG criteria, including mutual funds, exchange-traded funds (ETFs), variable annuities and alternatives. The largest ESG ETF is the iShares MSCI KLD 400 Social. It is comprised mostly of large-cap companies with slightly higher exposure to technology, industrials and real estate and lower exposure to financials and energy compared to the average large-cap ETF. It does tend to track the S&P 500 within a few points.

Common misconceptions 

While growing in popularity, there are still some misconceptions about SRI. It is often assumed that these strategies produce lower returns. However, just because a company complies with these standards doesn’t necessarily mean that the returns will be lower or higher than the broader market or its competitors.

Another misconception is that the criteria used to screen SRI investments is only negative. Yes, there is screening to exclude companies involved in activities that are deemed unacceptable or have a negative impact on the world. However, there is also positive screening for how much investment is being done to solve environmental, community or societal problems.

Finally, many presume that SRI is only involved in public equities. But, it is also utilized in fixed income, real estate and private equity. What is important to note is that for millennials, it’s not always just about a return; it’s also about the impact an investment is making on the world.

Jennifer Pagliara is a financial adviser with CapWealth Advisors, LLC, and a proud member of the millennial generation. Her column, which appears every other week in The Tennessean, speaks to her peers and anyone else that wants to get ahead financially.

Opinion: We’re long overdue for tax reform

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on Oct. 12, 2017.

The last time the U.S had any major tax reform was in 1986. That was 31 years ago – in the midst of birthing our millennial generation!

Throughout Donald Trump’s presidential campaign, tax reform was one of his biggest promises of change. And, truthfully, there has never been a better time for the GOP to create these changes with control of the White House and both houses of Congress.

A blast from the past

Let’s go back to the last time there was a major change to the tax code. (Some of us weren’t even born, yet, while others may have just started kindergarten.) At that time, Ronald Reagan was president, and the world looked like a much different place than it does today. The goal back then? To simplify the tax code and more fairly redistribute the tax burden. Sounds familiar, doesn’t it?

Some of the changes successfully made with the 1986 Tax Reform Act were similar to what’s being proposed in today’s reform package, such as consolidating and reducing the number of income tax levels. Another similar focus for both reform packages is on the loopholes that allow certain people to avoid paying taxes.

Three decades later

Since 1986, a number of loopholes, credits and deductions have been added to the tax code, accounting for a 44 percent growth in such additions and resulting in a tax code that went from 30,000 to 70,000 pages. (Are you shaking your head and wondering how that’s possible?)

Throughout our lifetime, lawmakers have added modifications intended to encourage certain behaviors — everything from buying hybrid vehicles to replacing your home’s windows; from adopting children to putting them in daycare. And, now we have a tax code that’s once again quite complicated and confusing — and in need of another major overhaul.

With that understanding in place, let me point out the framework of the changes proposed in the current tax reform package.

Changes for families and individuals

  • The number of individual tax rates would shrink from seven to three. Those rates would be 12, 25 and 35 percent. However, the income ranges have not yet been determined for those brackets.
  • The standard deduction increases to $12,000 for single filers and $24,000 for married ones.
  • The child credit would increase to $1,000 per child under the age of 17.
  • Most of the itemized deductions will be eliminated, which includes personal exemptions of $4,050.
  • There are still incentives for homeownership, retirement savings, charitable giving and higher education. Those deductions are staying around.
  • The alternative minimum tax (AMT) will be eliminated. This tax was designed to keep wealthy taxpayers from using loopholes to avoid paying taxes. It normally becomes effective for filers making between $200,000 and $1 million.
  • The estate tax would also be eliminated. This tax applied to the transfer of any estate valued over $5.49 million upon the death of the owner. Currently, an estate of this size is taxed at 40%; anything under $5.49 million is not taxed.

Changes for businesses

  • The corporate tax rate would be reduced from the current rate of 25 percent to 20 percent.
  • The reform also proposes changes to how multinational companies are taxed on profits made outside of the U.S. Currently, companies with overseas profits are only taxed when they bring those funds back into the U.S. The new tax reform states that those companies would be subject to the tax of the government where the money is made instead of just what’s brought into the U.S.

These changes are pretty drastic. The end goal is to put more money into the taxpayer’s hands and, in turn, into the economy, ultimately increasing GDP and boosting a healthier overall economy. Whether this proposed reform will pass still stands to be seen, but it is certainly time for a simplified tax code.

Jennifer Pagliara is a financial adviser with CapWealth Advisors.

Millennials: Are you expecting your parents to leave you an inheritance?

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on Sept. 29, 2017.

There are an endless number of reasons that people don’t like to talk about money. When you live in the South, it can be especially taboo. Navigating discussions about family wealth with children and young family members can be tricky, but nevertheless, it’s important to make the effort, especially for the young adults in the family.

Getty Images/Stockphoto

At this point, millennials stand to inherit $30 trillion dollars in assets from their foregoing generations. That will be the largest wealth transfer of any generation. However, some may be shocked at what they actually receive. According to a new Natixis U.S. Investor Survey, nearly 70 percent of young people expect to get an inheritance, while only 40 percent of parents plan to leave anything for their children.

While you might be cringing at the thought of bringing up this topic with your parents, it’s important that you have an open dialogue with them to understand their wishes and how that might possibly impact you. This could honestly save both you and your parents a lot of frustration, uncertainty and wasted time.

There are likely several reasons why your parents have not previously discussed their wishes with you. First of all, many people don’t want to confront the fact that they will die someday. Also, parents sometimes don’t want children to be aware of what they could inherit because it could hinder their motivation in life and in their careers. And finally, it can just be flat out uncomfortable.

Here are some tips on how to tactfully approach the subject with your parents:

Don’t go into the conversation with any expectations. You might be surprised by what your family has planned. There is a real possibility that your parents plan to spend their life savings during retirement and not leave you (or your siblings) anything.
Acknowledge that this might be an uncomfortable conversation but one you feel is important to have. A good segue into this discussion is to ask if they have a strategy in place to carry out their wishes after they pass away.

Take exact numbers off the table. Encourage the idea that it’s not about the amount they are leaving you; but rather, you want to understand how their wishes could impact your own planning.

Ask for their advice. Explain that you are beginning to take a more active role in planning for your own retirement and want to know if they have a will, power of attorney, insurance policies or any other estate planning documents in place. Ask for their suggestions on what you should be doing at your age.

Start small. If you are dreading a formal sit down, then simply start the conversation naturally when you feel the timing is right. However, if you have siblings, you might want to ask in advance if they would like to be included in the discussion so it can be at a time when they are around.

Don’t think of this as a one-and-done conversation. Financial situations can change as life change happens and as time goes on. Keep an open dialogue to ensure everyone maintains an understanding of what’s to come.

The most important thing to remember is that your inheritance is a contingent asset, meaning you have no control over whether or not you will receive the amount your parents intend to pass down to you. If you plan for your financial future as if you won’t receive it, you are only going to be better off if something does come your way.

Jennifer Pagliara is a financial adviser with CapWealth Advisors.

Don’t make these mistakes when insuring your home

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on Sept. 14, 2017.

Hurricanes Harvey and Irma have wreaked havoc over the past couple of weeks. Unfortunately, none of us can escape natural disasters; however, you can be proactive and ensure that your home and personal belongings are properly insured before a disaster strikes.

Photo: Michael Blann, Getty Images

Homeowners insurance is not something anyone wants to pay, especially when you have never had to file a claim. Nevertheless, it is necessary to ensure that the cost to rebuild or fix your home is covered. A standard homeowner’s insurance policy will provide the insurer costs related to damage of the interior and exterior of the home, often related to fire, hurricanes, lightning, vandalism or other covered disasters. However, damage not normally covered, which requires separate riders or add-on provisions, is that which results from flooding, earthquakes and poor home maintenance.

Even if you aren’t a homeowner. You can still protect your belongings through a renter’s policy. This policy does not provide coverage for the structure or dwelling where you live, but it will protect up to a certain amount of coverage for your personal belongings.  According to a Nationwide Insurance survey, an estimated 56 percent of renters between the ages of 23 and 35 do not have renters insurance. I assume that a lot of millennials skip on this because they believe their possessions are not valuable enough to insure. However, there is a big misconception around this fact that I will discuss below.

Below are a few common mistakes and misunderstandings about homeowner’s insurance:

Underinsuring your home

A common mistake insurers make is only buying enough coverage for the remaining balance of their mortgage or the current value of their home. Both would most likely not cover the amount it would cost to rebuild their home. A professional can better estimate of how much it would cost to completely rebuild your home, and certain agents provide this service for free. That is the amount you should aim to cover.

Understanding your coverage

It’s important to know exactly what your home insurance covers and what it doesn’t. If you don’t know how to read your policy, be sure to ask your insurance agent for specifics. For example, flood insurance is not generally part of a standard insurance package. Many here in Nashville experienced the flood of 2010, where most of the areas affected were not considered in flood plains, and thus did not have the appropriate coverage. According to FEMA, more than 20 percent of flood claims come from properties outside the high-risk flood zone. You will need an extra rider for flood and earthquake coverage.

Insurance isn’t just for possessions

Homeowners and renters insurance policies don’t just cover personal property. They also protect the insurer from liability lawsuits. If your dog bites a visitor or someone falls down your stairs and breaks his or her leg, your insurance will provide protection. You are liable for what occurs in your home (if you own it or not) and need to be covered. This is where renters can benefit from a policy regardless of the value of their possessions.

Cost

Do not fall into the trap of buying the cheapest policy available. Also, understand your deductibles. You might believe you only pay one flat deductible if you file a claim, but often for natural disasters, like hurricanes or earthquakes, you end up paying a percentage of your coverage which could be up to 5 percent for flood or 10 percent for an earthquake. If your coverage is $500,000, you could be out of pocket $25,000 or $50,000.

If you’re feeling overwhelmed with picking the right policy, utilize your insurance agent or financial advisor. That is what he or she is there for. It’s best to ask questions now before you are in a situation where it is too late.

Jennifer Pagliara is a financial advisor with CapWealth Advisors.

Millennials: Is social media use harming your finances?

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on September 1, 2017.

How much time do you spend on social media every day? I can feel your dread as you count minutes, which often turn into hours, of your day lost to the online abyss. It is easy to spend five minutes on Facebook while in the checkout line of the grocery store or two minutes on Twitter at a stop light. No judgement from me. I am just as guilty as everyone else.

(Photo: Getty Images/iStockphoto)

The tiny computers we have in our hands have led us to escape into other people’s lives, if only for a minute or two, rather than deal with what is in front of us. We can scroll and like people’s pictures rather than process how we feel about events going on in our lives or the mountain of bills piling up. Now I realize that not all of my generation is like that. However, on a whole, I think the habit of escaping to social media is translating into harmful millennial financial behaviors.

 

Many of you might be scoffing at the idea that the time you spend online has any effect on your finances. However, I am here to discuss how it might be in ways that you didn’t even realize.

We know that money is always one of the top stressors for every generation. However, it is particularly weighing on millennials who potentially don’t have the knowledge or life experience to deal with money issues.

Too much debt is the No. 1 source of financial stress according to Student Loan Hero. When you are young and beginning your career, money is often quite tight. You add a large amount of debt on top of everything, and it can seem impossible to overcome. So what do you do? You ignore it.

I can’t stress enough that you will only make the problem worse by not facing it head on. Get off social media and come up with a plan.

In 2015, Deloitte found that 47 percent of purchases made by millennials were influenced by social media. So not only are we running to Instagram and SnapChat to escape what is happening in our lives, we are also buying things based on what we see on these platforms.

Everyone puts their best self on social media platforms. Even if we think that we are not gullible enough to fall for these advertisements, they are subtly influencing our spending behaviors. It is easy to want to “keep up with the Joneses.” We have all seen a friend or celebrity on social media that has caused us to try and find what he or she was wearing or research what they are selling. Your phone makes it possible to buy whatever you just saw with one click.

Millennials are notorious for spending more money on experiences than other generations, but we also like our conveniences and comforts. Charles Schwab found that we spend more money on coffee, “hot” restaurants and taxis/Ubers than older generations. So the next time you impulsively want to buy something, stop and think if you really need it.

3 Allowance Apps to Help Teach Your Children Financial Responsibility

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on August 24, 2017.

(Photo: daoleduc, Getty Images/iStockphoto)

The most common way to begin teaching financial responsibility to our children is by giving a weekly allowance. It’s a direct, effective approach that empowers children to make financial decisions for themselves.

Once a child must make her own decisions on whether to spend or save her own money, chances are she will begin viewing money very differently. If parents just dole out cash to pay for things the child wants, it’s easy for a child to see money as an abstract concept at best or an unlimited resource at worst.

Ownership changes the game. When it’s their own money, children begin to learn the difference between wants and needs. Making choices and prioritizing financial resources is a fact of life, and this is a child’s introduction to it.

Allowance no longer has to involve parents handing cash to their children once a week. Like almost everything else, there is now an app for that! Actually, there are many smartphone apps available to help parents and children manage their allowance. These apps can actually send the allowance, track spending, teach budgeting lessons and even monitor chores.

Do you have a list of chores on your refrigerator that your children can do for extra money? You can incorporate those chores into the app and get rid of the fridge list forever.

Unless your bank offers an app for children that is tied to an actual bank account, most of the allowance apps will create a virtual allowance for your child. Think of it as a “store credit” that your children have with you.

Every week, their allowance is added to this credit and with your permission, they can buy whatever they want. Parents still have to actually complete the purchase transaction but after that’s finished, the parent simply deducts that amount from the child’s virtual account by logging the transaction into the app.

There are a lot of choices for parents that want to use web-based software or a mobile app for managing allowances. Here are just a few that you might want to check out:

Bankaroo

This app is more appropriate for teens than younger children but it was actually developed by an 11-year old and her father. This virtual bank allows a teen to track their savings as well as what mom and dad owe them for chores. It also has tools for learning how to set goals, budget and even do some basic accounting. One nice feature not found on every allowance app is the ability for parents to remove funds so kids had better make sure they make their bed every morning!

iAllowance

While most allowance apps are free, iAllowance costs $3.99.  It’s another virtual allowance tracker for parents and kids with some nice features that we didn’t find in other apps. iAllowance can send reminders to the children about household chores or other responsibilities around the house. Parents can add extra money or rewards for good deeds or when the kids meet certain goals. When a child wants to spend some of their allowance, the parent simply taps their account to purchase the item and the amount is deducted from their balance.

Piggybot

This app is designed for kids ages 6 to 8 and not only tracks allowances and spending but also can show youngsters how much more they need to reach their goal and how long it will take to get there based on the child’s spending and savings habits. Using this app, kids can add pictures of the things they want and create a slide to show off the things they’ve already purchased. This can help teach the concept of goals and rewards. The app also has a feature where a child can share some of their money with a sibling.

It is important to remember that the role of allowance in a child’s life is to give them an opportunity to practice managing money—and that is all.

Joline Gofrey, author of “Raising Financially Fit Kids,” suggests parents repeat this mantra to themselves regularly: “An allowance is not an entitlement or a salary. It is a tool for teaching children how to manage money.”

Allowance apps can be a great way for our children to practice managing money.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.

Link: http://www.tennessean.com/story/money/2017/08/24/3-allowance-apps-help-teach-your-children-financial-responsibility/593260001/

What You Need to Know About IRAs

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on August 18, 2017.

We have all seen the bright yellow how-to books that were once the most popular go to guides to learn about whatever topic you had trouble understanding. Football for dummies, Auto repair for dummies and even Parenting for dummies are just three of the 1,950 titles in circulation.

Photo: Getty Images

For some of you, finance can seem like a completely different language, and you need a guide to help you start saving for retirement. Individual retirement accounts, most commonly known as IRAs, are types of plans that many employees and employers utilize for that very reason.

Here’s a brief overview of four different types of IRAs to help begin your decision on what type of IRA is right for you.

Traditional IRA is an individual retirement account that allows you to invest pre-tax dollars that grow tax-deferred. There are no income limitations, and you are taxed at ordinary income when you withdraw after 59.5. For 2017, the contribution limit is $5,500 or $6,500 if you are over the age of 50. All or some of these contributions are tax deductible depending on your situation.

Roth IRA is an individual retirement account that allows you to invest after-tax dollars that also grows tax-deferred. When you make withdrawals after the age of 59.5, your distributions are not taxed. There are income limitations that the IRS mandates each year based on your modified adjusted gross income (AGI). If your filing status is:

Married:

  • Less than $186,000: up to $5,500 or $6,500 if over age 50
  • Between $186,000 and $196,000: a reduced amount
  • More than $196,000: $0

Single:

  • Less than $118,000: up to $5,500 or $6,500 if over age 50
  • Between $118,000 and $132,999: a reduced amount
  • Over $132,999: $0

The important thing to remember is that you can only contribute a combined $5,500 or $6,500 per year to a Traditional and Roth IRA — not to each one. When starting your career, employees earn less income than later in life, we often recommend contributing to a Roth IRA while you are still under the income limitations.

SEP IRA is a simplified employee pension individual retirement account that provides business owners with an easier way to make pre-tax contributions toward their employees’ retirement as well as their own.

These contributions are tax deductible, and there are no income limitations. However, the employee cannot make contributions to their SEP IRA- it is only the employer. The money that your employer contributes for you will grow tax deferred and is taxed at ordinary income when withdrawn after 59.5.

For 2017, the maximum contribution is a $54,000. Unlike qualified plans, like 401(k)s, SEP IRAs are easy to administer. The start-up and maintenance costs are also much lower. Any business owner with one or more employees can start this type of plan.

Simple (Savings Incentive Match Plan for Employees) IRA allows employees and employers in a small business to contribute pre-tax money to a retirement plan. The company must have less than 100 employees to qualify to use this type of plan.

Again, like the SEP IRA, a Simple plan is much cheaper to start, maintain and administer than qualified plans. For employees to contribute, they must have at least $5,000 in compensation in any two previous calendar years.

Employers can make two types of contributions: dollar-for-dollar matching contribution (not to exceed 3 percent of the employee’s compensation) or a 2 percent non-elective contribution to all eligible employees, regardless if they make a contribution or not. For 2017, the maximum contribution limit is $12,500 or $15,500 if over the age of 50.

Because everyone’s situation is unique, we highly recommend consulting your financial advisor before making any decisions on where to start investing.

Jennifer Pagliara is a financial advisor with CapWealth Advisors. 

Link: http://www.tennessean.com/story/money/2017/08/18/what-you-need-know-iras/578465001/

5 Financial Skills Teens Need

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on August 11, 2017.

From age 13 through 18, teenagers should open their eyes to essential adult financial concepts like keeping track of money, investing, understanding business basics, handling credit, and talking to a banker or adviser.

How to keep track of money:

Once children earn or save a reasonable amount of money, it is probably time to open a

(Photo: Jamie Grill, Getty Images/Tetra images RF)

checking account for them at your bank. With the widespread availability of online banking, your children can always know the exact amount in their bank account.

Most banks today have real-time processing so your financial fledgling can access real-time balances, and we know it can take mere minutes for money to fly through kids’ hands!

How to invest:

Unfortunately, most school systems don’t allocate much time in their curriculum on sophisticated economic concepts like investing. So the burden of teaching this lies with you as parents. Make sure your teens understand the basic types of investments such as stocks, bonds, mutual funds and real estate.

Teens should understand that every investment comes with a certain amount of risk; the higher the potential earnings on an investment, the higher the risk. To mitigate the risk of losing money due to a dip in one of your child’s investments, teach them the essential concept of diversification. To practice these concepts, play a virtual investing game like smartstocks.com with them.

Understanding business basics:

It’s important for your teens to understand how a business runs. From managing the inflow and the outflow of costs to monthly budgeting and earning a profit, there are a host of factors that affect the success of a business.

Again, I’ll suggest a simulated business model that your teens can play on the computer. Look at simulations like Business Tycoon, WeWaii, or even business-related games on the Big Fish Games website. Always oversee your kids as they play these games and try them for yourself before deciding if they are appropriate for your children. Make running a business fun and entertaining!

How to handle credit:

A huge caveat is needed here: if your child has a difficult time controlling their spending already, consider waiting to introduce them to using a credit card. If you’re confident your child can manage one and they have mastered responsibility over their checking account, sit them down for a serious talk first and foremost.

Point out that credit cards are how most people get into serious financial debt. Illustrate what happens when credit is not repaid in a timely manner — not only are 15 percent interest rates killer, but it could affect their ability to get a loan for a car or a house in the future. Establish strict guidelines about credit card use. For example, credit can only be used when purchasing necessities like gasoline and they can only use it when they have that amount in checking. Further, establish that every time they make a purchase with their card, they pay the balance immediately. This will deter an “I’ll pay it later” attitude that gets kids in trouble every time. Finally, monitor, monitor, monitor their credit use!

How to talk to a banker/adviser:

Bring your kids with you to the bank or your next meeting with your financial adviser. This will help them become familiar with how to talk about finances.

Most children will not need to know how to buy and sell securities for their own portfolios, but they will, most likely, meet with financial professionals throughout the balance of their life.

By allowing older teenagers to tag along and observe your financial meetings, your children will begin to understand the importance of financial responsibility.  Allow them to get a holistic view of what adult finances look like and encourage them to ask questions. These advisers and bankers could be part of child’s future financial success, so get your kids comfortable with approaching them now so that they may carry this with them in the future.

These are just a few things that children should be prepared to handle financially as they get older. Empower them to be good stewards of wealth. Be a financial role model in their lives and set them up for great success.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.

Link: http://www.tennessean.com/story/money/2017/08/11/5-financial-skills-teens-need/553050001/

Robo-advisors: The future of investing or the latest financial craze?

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on July 21, 2017. Read it at The Tennessean here.

Technology has undoubtedly created, destroyed and changed countless industries in the last 20 years.

The financial services has not been immune to this disruption. In 1980, there were approximately 5,500 people working on the floor of the New York Stock Exchange. Today, that number has dwindled to around 700.

This mass decrease is mostly attributable to electronic trading. Some of the other technological advances have affected the industry I work in in unexpected ways. I don’t believe that 30 years ago many financial advisors would’ve guessed that there would be an option available for people to work with a robot who would give them financial advice. However, today that is very much a possibility and robo-advisors are on the rise. But, the biggest question is, are they right fit for you and your family?

What are they?

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. Typically, a client will take an online survey to give data on their current financial situation and future goals. Then, the robo-advisor will compute where the client should invest his or her money. Most advice is based on modern portfolio theory.

In the United States, there are currently over 200 robo-advisors and more are launching every single day. In general, the fees associated with this new way of investment advice range from free to about 0.75 percent. There is normally not a minimum that is needed to start investing, unlike many financial advisors.

They are limited to what types of accounts they can manage. They generally stick to IRAs and taxable accounts. Having only begun in 2008, they’ve had a relatively short existence thus far.

Where is the emotion?

While I realize that I undoubtedly bring some bias to this discussion, let’s explore three ways in which working with an advisor is different than with a robo-advisor:

Holistic approach: Many advisors, the firm I work for included, approach managing money holistically. Yes, we actually manage the money inside your account(s). However, we do so much more. Do you need help evaluating or buying insurance? Do you have an estate plan for how your money should be distributed when you pass? How should you invest the money in your 401(k)?

The list is endless. While there are some robo-advisors that are offering add-on services to help with questions outside the scope of managing your money. However, those services do cost money. My firm, for instance, does not charge for these services. We charge one fee that encompasses everything.

Not just a number: Money is emotional. When you decide to use an advisor, you’re entrusting someone with your livelihood, your hard-earned dollar and your financial future. The stock market moves up and down on a daily basis. It can be a stressful experience to watch those movements. Part of my job is to explain to my clients why their account is doing well or why it isn’t. Do you want to be just a number in a computer? Can your advisor answer your questions when you’re concerned with the direction of your account?

Fiduciary: As a reminder, a fiduciary duty means that a financial advisor must have a client’s best interests in mind at all times. Not all advisors currently operate under this duty; however, the industry as a whole is moving in this direction. There is also quite a debate on whether or not robo-advisors can uphold this duty. Can a robot have your best interests in mind at all times?

Know your advisor

As always, I want my readers to make smart, informed financial decisions. You might be just starting your investing journey, which is often the reason investors go with robo-advisors. Perhaps there’s other good reasons. Whatever the reason, just remember that, as with many things in life, the cheapest option is not always the best option.

Jennifer Pagliara is a financial advisor with CapWealth Advisors. 

Help Your Kids, Don’t Make Them Helpless

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on June 30, 2017.

At the end of this past school year, my middle-school-age son didn’t turn in a paper. My son, who is smart, hard-working (normally) and a good student, took a 0, on purpose.

As if grades didn’t matter. As if all the work he’s put into school didn’t matter. I was shocked — so much so that I had a sudden vision of him growing up to become a lazy and entitled brat of privilege. My shock became fury.

Two kinds of opportunities

Our children live our lives until they build their own lives. We work hard to provide the best education possible, a nice home, vacations and all the material things that our children enjoy. But our children need to understand that all these things we give them are opportunities.

That one day, all the opportunities provided by mom and dad — to be nurtured, to gain knowledge, to make good choices, to learn from mistakes, to experience the good life — will be gone.

The opportunities will then be their own to find, to create and capitalize upon. We’ve done all we could do to get them to the plate. Now they’re taking their own swing at the American dream.

When we heard about my son’s paper, he received a lecture on responsibility, respect and not taking anything for granted. Very directly, we told him how he’s enjoying the results of our swing at the American dream. Whether or not he fully understood, I’m not sure. But I am confident that he’ll never deliberately bomb a school assignment again. And hopefully he got the message that opportunities are everywhere around him.

Avoiding rich-kid-itis

Though I may have overreacted when I learned about the paper, my worry is one that many families share. Having worked hard all your life to attain wealth, be it the upper-middle-class or filthy-rich variety (ours is the former, not the latter), how do you ensure your kids aren’t infected with rich-kid-itis?

How do you teach kids, who’ve only known comfort and plenty, to become independent, productive adults with a work ethic?

Raising independent, productive children

  • First, you must model the behavior you want from your kids. Don’t be blasé about the things you’ve earned. You worked hard to get them and your children need to know that. You value the things you have not because they’re inherently nice, pleasurable, comfortable and expensive, but because of the discipline and labor that was required to attain them. Simpler, less pricey things have value, too, for the same reason.
  • Value what you’ve earned, but value people more. Always think of others and have respect for them, no matter their origins, their vocation, their social strata or their tax bracket. You demonstrate this to your children very simply: in how you treat people. Another is through charitable giving and philanthropy. You don’t have to be rich to give to a food bank or volunteer some time.
  • Make them work. Not only should your children have duties at home, but they should have part-time and/or summer jobs when they’re teens. Nothing instills the value of hard work better than a low-glamour, low-wage job.
  • Finally, your children need to know they’ll be relying solely upon themselves to build a career, find purpose, and get through life’s highs and lows. Sure, you can help them, but don’t make them helpless by giving them too much financial support.
  • I recommend sharing the parable of the man of faith who was sure that God would save him from a flood. First a car, then a boat, and finally a helicopter came, but he declined help from them all. He perished and when he got to heaven, he asked the Lord why he didn’t save him. God replied: “I tried. I sent a car, a boat and helicopter.” Explain to your child that each of those was an opportunity. Help is great, but you must also learn to help yourself.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.

8 Financial Tips for Surviving and Thriving in the Real World

The following article from Tim Murphy contains some financial tips specifically for recent college graduates and Millennials, but all of us would do well to abide by this wisdom! Please feel free to pass this along to any young adult just entering the “real world.”

From Forbes.com

Some 1.8 million students will graduate with a bachelor’s level degree in the U.S. in 2017. That’s a whole lot of Millennials entering, and learning to survive, the real world: earning a living, paying back loans, paying bills and saving for a rainy day, a car, a home and retirement. My hope is that with the following advice—let’s call it a blueprint for early adult financial success—the newly minted graduate that you know can quickly turn surviving into thriving!

1. Create a budget. Manage and track your expected and actual income and expenses using software programs such as Mint or You Need a Budget.

A budget isn’t a one-and-done task. Rather, it’s a work in progress that must be adjusted as your financial circumstances change. And believe me, your financial circumstances will always be in flux. Hard work tends to lead to promotions, getting older tends to lead to marriage and kids, improved finances tends to lead to larger purchases and investments, and so on.

The golden rule of budgeting is to always live within your means, and the only way to know you’re doing that—or to alter behavior in order to do that—is to track what’s coming in and what’s going out. If you’ve heard your parents and grandparents say that bit about living within your means, they were right. As you get older, it’s amazing as much smarter your parents and grandparents get!

2. Have an emergency fund. Life is full of surprises. Like broken-down cars, rent increases, lost jobs and worse. Squirrelling away some savings in an emergency fund —3 to 6 months’ worth of expenses — can really save your bacon when life throws you a curve. You don’t want to put unplanned expenses on a credit card if you don’t have to—that’s incurring debt and interest, which is insult to injury after an unexpected expense.

Ally Bank pays 1.05% on balances in savings accounts, by the way. Earning interest on cash is practically unheard of today, so this would be a good home for your emergency fund.

3. Save and invest. Try to save at least 10% of your income in retirement account, be it a traditional or Roth 401(k), a traditional or Roth IRA, or similar account. At a minimum, save enough to get your employer’s full match on your 401(k) plan. Otherwise, you’re leaving free money on the table.

A Roth IRA is a fantastic investment vehicle for almost everyone in their early 20s. That’s because contributions are taxed at your current rate, which is probably low given that’s the start of your career, but earnings and withdrawals at retirement are tax-free. Plus, there is an income limit. So sock some money away in a Roth IRA before you make too much to do so!

No matter the investment vehicle, speak to a financial planner such as myself on how those funds should be invested. See #5 below.

4. Repay your student loans. Graduates with loan debt need evaluate how best to pay back their federal and/or private loans. Visit the Education Department’s website to determine the right repayment plan, how to make payments and what you can do if you can’t afford your payments.

If you’re facing a dilemma on whether to build an emergency fund, invest or pay off loans, my advice is to build an emergency fund first. Then decide whether an investment or loan repayment will likely reward you best. According to the Department of Education, interest rates on federal loans to undergraduates have ranged from 3.4 percent to 6.8 percent over the last decade. When you pay off a student loan, you’re earning a “return on investment” roughly equal to the interest you no longer have to pay. If you expect to exceed that ROI with your 401(k) or other investments, then do that second and pay off loans last. For a benchmark, the S&P 500 has averaged an annual return of about 7 percent since 1950.

5. Hire a financial advisor. You might not think you have enough income or assets, but now’s a good time to begin a relationship with a competent, reputable financial advisor. An advisor doesn’t just help you invest money. He or she can provide guidance on budgeting, managing debt, making insurance decisions—anything related to money and finance.

If you’re parent or grandparent of a recent grad, consider giving a gift that keeps on giving: an hour or two consultation with a good financial advisor.

6. Living for today or saving for tomorrow? If all this financial advice feels like rain on your graduation parade, it’s not. You don’t have to choose between living for today and preparing for tomorrow. You can, and should, do both.

The secret is striking a balance between your consumption decisions and your investment decisions. The former is for your current, short-term quality of life, the latter is for your future, long-term quality of life. You need to develop a strategy and habits that contribute to that strategy for accomplishing both without compromising either.

7. Your reputation is your most valuable asset. Everyone was young once and everyone has made a bad decision, two things that have a strong correlation. The difference today is that your decisions can be captured, recorded and disseminated to the world in an instant through hand-held devices and social media. Consequently, poor judgement can have remarkably quick consequences. So remember, your reputation is always on the line. Make good decisions and refrain from over-sharing via social media.

8. Change is constant; learn how to manage it. There will always be challenges, opportunities and transitions in your life, some good and some bad. To be successful and to be happy, you have to learn to navigate what life throws at you and make good decisions. It’s important to have help, be it family, friends, mentors or faith, to turn to when life begins to feel overwhelming.

Should I consolidate my loans?

The answer depends on your individual circumstances.

Pros

  • If you currently have federal student loans that are with different loan servicers, consolidation can greatly simplify loan repayment by giving you a single loan with just one monthly bill.
  • Consolidation can lower your monthly payment by giving you a longer period of time (up to 30 years) to repay your loans.
  • If you consolidate loans other than Direct Loans, it may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness. (Direct Loans are from the William D. Ford Federal Direct Loan Program.)
  • You’ll be able to switch any variable-rate loans you have to a fixed interest rate.

Cons

  • Because consolidation usually increases the period of time you to have to repay your loans, you might make more payments and pay more in interest than would be the case if you don’t consolidate.
  • Consolidation may also cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your current loans.
  • If you’re paying your current loans under an income-driven repayment plan, or if you’ve made qualifying payments toward Public Service Loan Forgiveness, consolidating your current loans will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness or Public Service Loan Forgiveness.

Fight the Instinct to Flee, Flee the Instinct to Fight

The following column from Phoebe Venable, CapWealth Advisors President & COO, appeared in The Tennessean on June 16, 2017.

As the stock market marches on, setting new highs, some investors are starting to feel a little stress.

They can’t square the strong markets with the pandemonium that is the news: Terrorist attacks in Europe, North Korea edging closer to nuclear weapons, the Russian attempt to influence U.S. elections and Trump’s latest tweet, among others. Surely the markets are due for a correction, maybe even a crash, right? I should sell while the market is high before it’s too late!

That’s our emotions talking. Our “fight or flight” response. Our cognitive biases. I’m not saying they’re right or wrong, I’m saying beware. Be calm. Be self-aware. Because all those emotions and cognitive biases, they often don’t have a clue.

Emotions are a shortcut, often over a cliff

In human decision-making — a process of weighing inputs, assessments, probabilities and predictions — emotions are a shortcut. We use emotions to hurry up and simplify all that analysis and make ourselves more comfortable. While “fight or flight” can be handy when a saber-toothed tiger is bearing down on us, it’s often not so useful for approaching long-term investing. To complicate things even more, we’re not all emotionally similar. Some have bias for loss aversion, some for fear and anxiety, some for overconfidence, some for elation, others for regret.
You may see the same market at an all-time high and think, “I need to buy! Everyone else is! I’m going to miss the boat!”

The markets are more resilient than you think

Two things to bear in mind. First, the financial markets and the global economy are more resilient than we think. Second, the returns of the average investor are astoundingly atrocious.

Exhibit 1: According to a study by InvestTech Research that looked at 11 major geopolitical events of the past century, only two — the Nazi invasion of France in May 1940 and Japan’s bombing of Pearl Harbor in December 1941 — led to market losses over one-week, three-month and one-year periods.

In the case of Pearl Harbor, the one-year decline was less than 1 percent. President Kennedy’s assassination? A year later, stocks were up more than 20 percent. Also worth noting, the bull markets of the last century have on average lasted longer than bear markets. But no matter how long they last, bull markets always end. The one we’re in now will too eventually.

Exhibit 2: People are generally terrible at predicting when the market will swing from bull to bear, bear to bull. According to the market research company Dalbar, the 20-year annualized returns by asset class from 1996 to 2015 is topped by REITs at 10.9 percent, followed by the S&P 500 at 8.2 percent.

At the bottom is oil, at 3.3 percent. The returns of the average investor? 2.1 percent. Incidentally, the rate of inflation during those two decades was 2.2 percent, which means the average investor really didn’t even break even.

Either know and trust thyself — or a good adviser

My point is that every investor should know thyself. Understand your own emotions and cognitive biases so that you recognize how they might steer you wrong. After knowing thyself, then trust thyself. Make sound, emotion-free decisions and have patience.

Trying to time the market by selling when you think it’s high and buying when you think it’s low has been many an investor’s very successful strategy for going broke. If you can’t trust thyself, then I highly recommend you find a good financial adviser and trust him or her.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors, LLC. Her column on women, families and building wealth appears every other Saturday in The Tennessean.

Breaking Down Your First Real-World Buck

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on June 9, 2017. Read it at The Tennessean here.

Congratulations to all those who have graduated and are starting first full-time jobs. Earning a college, vocational or associate’s degree is no small feat. You should feel proud.

Along with pride, you may also feel apprehension, and rightfully so. From experience, I can tell you that the transition from school to “the real world” is not always a smooth one. It can be a shock to be on your own, with no mom or dad to fall back on.

It can also be a shock to learn how far your dollar goes: not far at all.

Let’s break down your new paycheck to see how it’s diminished before it even gets in your hot little hands. I’ll also offer advice on what to do with your paycheck before you start spending it.

Before you get paid

If you haven’t had a paycheck up until this point, you’re in for a rude awakening. Whatever your annual salary is, that’s definitely not the figure ending up in your bank account. Here’s where it goes before it goes to you.

Federal Income Tax:

The federal government takes a cut of your paycheck each tax period (unless you defer it) depending on how much money you make. These tax brackets change depending on whether you are married, file head of household, and other deductions and credits.

There could be potential reform in federal taxes under the new Trump administration, so be sure to follow the news on this. Currently, Americans pay an average of 20 percent of their income in federal taxes, including income, Social Security and Medicare taxes. If you make $40-50,000, that average is more like 11 percent

FICA Social Security:

FICA stands for the Federal Insurance Contributions Act, a payroll tax which funds Social Security and Medicare. Social Security, as you have probably heard, is a program that we pay into to receive benefits when we retire and for those with disabilities. By law, 6.2 percent of your gross income goes to Social Security.

FICA Medicare:

This tax is used to subsidize health insurance for people 65 and older and those with disabilities. You pay 1.45 percent of your gross income to Medicare.

State Income Tax:

In this respect, you’re lucky — maybe. Tennessee is one of only nine states that does not take additional tax from your paycheck. Instead, Tennessee has state sales tax of 7 percent. Combined with local sales taxes, Tennessee has one of the highest sales-tax rates in the country. So they get you post-paycheck.

City Tax:

Some cities levy income taxes. Nashville does not. However, Metro does have a 2.25 percent sales tax, making the combined sales tax rate for Nashvillians 9.25 percent.

SDI:

This stands for State Disability Insurance. Some states have a mandatory tax to benefit people who become injured on the job or have to take family or medical leave. Tennessee doesn’t have an SDI tax.

After you get paid

Federal, state and local governments have taken their bites. Now I’m going to advise something crazy. Set aside even more to begin building the foundations for a financially secure lifetime. I’ll also briefly solve — for most situations — a common dilemma for young workers: do you build an emergency fund, invest or pay off loans first?

Emergency Fund:

Life happens. Broken-down cars, rent increases, lost jobs and worse. Squirrelling away some savings in an emergency fund —3 to 6 months’ worth of expenses — can really save your bacon when life throws you a curve ball. For that reason, I say this is your first saving priority.

401(k):

Next, I cannot stress enough the importance of beginning to save for retirement now if it’s at all possible — even if it’s $25 or $50 each pay period. History shows that 6-7 percent annual return is a reasonable expectation on stock investments. Moreover, many employers offer a 401(k) match. Finally, you’re young and the power of compounding interest is on your side, so make the most of time you can never get back.

Paying off student loans:

According to the Department of Education, interest rates on federal loans to undergraduates have ranged from 3.4 percent to 6.8 percent over the last decade. When you pay off a student loan, you’re earning a “return on investment” roughly equal to the interest you no longer have to pay. If you expect to exceed that ROI with your 401(k) or other investments, then do that second and pay off loans last.

Jennifer Pagliara is a financial adviser with CapWealth Advisors.

Adults Aren’t Vanishing, They Just Look Different

The following column from Jennifer Pagliara, CapWealth Senior Advisor, appeared in The Tennessean on May 26, 2017. Read it at The Tennessean here.

Ben Sasse, the Republican senator from Nebraska, is an accomplished man. At 45 years of age, he’s already served as president of a college, an assistant secretary in the U.S. Department of Health and Human Services, and has earned three master’s degrees and a doctorate from illustrious institutions such as Harvard and Yale. In addition to being accomplished, he’s principled. Whether you agree with his politics or not, early on in the election last year, Sasse repudiated Trump and never backed down — a rather lonely stance as a Republican.

An accomplished and principled senator

As yet further proof of his achievement and sense of virtue, Sasse has just published a book titled “The Vanishing American Adult: Our Coming-of-Age Crisis—and How to Rebuild a Culture of Self-Reliance.” There’s a lot to like about the book. But there’s also some of it that I take issue with, particularly the disparagement of my generation, the millennials.
I’ll start with what I like. Sasse sings the praises of hard work, travel and reading books, and compellingly explains why. All three teach you about the world and yourself, expanding your mind beyond the immediate, the familiar and the comfortable. Work, in particular, is a favorite subject of Sasse’s, and he shares an incident from his time as president of Midland University that in part inspired him to write his book.

Some students were asked to decorate a 20-foot Christmas tree. They decorated the bottom seven or eight feet, the part that was easy to reach, and then quit without even looking for a ladder.

Writes Sasse: “I simply couldn’t reconcile the decision to leave while the work was still incomplete with how my parents had taught me to think about assignments. I couldn’t conceptualize growing up without the compulsion — first external compulsion, but over time, the more important internal and self-directed kind of compulsion — to attempt and to finish hard things, even when I didn’t want to.”
I completely agree that calling it quits like these students did is pitiful. But I think Sasse comes down too hard on millennials. He fails, for instance, to point out that my generation volunteers more than previous generations and that we’re on track to become the most educated generation in U.S. history. That’s awfully adult of us, I’d say.

Maybe adulthood has more than one definition

Sasse reveres “gritty work experiences” such as farm and ranch work, which he did as kid and which he now ships his own kids off to do in the summer for the construction of their character.

While I would agree that learning the value of hard work is laudable, even critical, and that there are too many people of all ages piddling unproductively on their digital devices, Sasse leaves himself open to some ridicule here.

For starters, less than 2 percent of the American population works in agriculture today. Mark Zuckerberg has probably never driven a tractor — nor even dug a hole — but he built Facebook from scratch. He’s not only shaped the course of human history, last year his company had revenue of $28 billion and today he’s worth nearly $60 billion. And, by the way, he and his wife have pledged to give 99 percent of their Facebook fortune to charity. That’s accomplishment. That’s principled. And last year, a GoDaddy survey found that 40 percent of millennial professionals worldwide consider him their biggest role model.
Moreover, the senator could be accused of fretting over upper-middle-class problems. While he’s concerned about his privileged children learning the lessons of good work, his critics might say there are still plenty of Americans simply looking for good-paying work.
As I said, there’s a lot to like about Senator Sasse’s book. But I don’t think the American adult is vanishing, at least not at any greater rate than in eras before. I think there have always been responsible, hard-working people and less responsible, less hard-working people. Perhaps adulthood looks a little different today and, like beauty, is in the eye of the beholder.

Jennifer Pagliara is a financial adviser with CapWealth Advisors. 

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