Handling Those Difficult Conversations about Business Succession

Summer is one of the most popular times of the year for multi-generational families to get together. If you’re a member of a business family, it’s often when relatives discuss who is going to take over the family business someday. Whether at the lake cottage, the beach house or on a group trip abroad, family members are away from the daily distractions of work and home. They’re in a much better frame of mind to do some collective soul-searching.

Just don’t drop this heavy topic on an unsuspecting family member when they’re lining up a putt, hooking a fish or chasing young toddlers around who may be hungry, cranky or in need of a diaper change. It needs to be a little more deliberate than that.

According to AES Nation, there are four key steps to having a successful family succession planning meeting:

Step 1: Plan the meeting.
If you’re an owner or founder, it’s a good idea to get your thoughts together ahead of the conversation. It’s okay to jot down some notes or talking points, but you don’t need to distribute them to others or type up a formal agenda. Just broach the subject of succession planning as part of a casual conversation with your heirs. To take the edge off, many clans include fun activities around their “family meetings” such as golfing, family softball games or wine-tasting events. Just don’t make the sporting activities too competitive-- emotions may already be running high during these gatherings.

I come from a business family. I still have fond memories of sitting down together to eat blue crabs in my home state of Maryland. These bonding moments are nice on their own, and they also help promote a better meeting.

Step 2: Conduct the meeting.
I recommend holding the family meeting at a resort or a tucked-away family property so you can mitigate day-to-day distractions. It’s also a good idea to bring in an objective outside professional—say the family’s CPA—to serve as both a referee and meeting facilitator to keep the discussion on point and moving along. You can also bring in the family attorney, wealth manager, multi-family office executive, or family business consultant among others. Just make sure that person is impartial.

Step 3: Follow up actions
After the meeting, it’s very important to capture each participant’s next steps and to make sure action items don’t fall through the cracks when they get back to their day-to-day routine. Before the meeting concludes, make sure everyone goes home with a written “to do” list. That way they’re held accountable--the youngest generation can’t expect the elders to do everything for them.

Step 4: Assess the outcomes
Let’s say the topic of umbrella insurance came up at the family meeting, and everyone agreed to disclose how much coverage they had—even if they didn’t have it. To make sure the collective family assets are sufficiently protected, every head of household in the extended family should have it. It may require several follow up calls and emails to each family member to get this done. I’ve found this kind of assignment is a good litmus test for the young adults in the family to see if they’re responsible enough to take over the family business. If they can’t handle a simple task like getting their insurance coverage together, how can you expect them to be responsible enough to run a successful family business? 

My own family business story

My late father founded a successful concrete business. I worked for him every summer, and by the time I was finishing up college, I knew the concrete business wasn’t for me. I got along pretty well with my dad, and it had nothing to do with the physically demanding work or the intense Maryland heat. I just didn’t have the passion for it, and I think my dad recognized that, too. Also, before my dad started his own company, he worked for another concrete company where everyone resented the owner’s son who was brought in to run things. The son wasn’t a good manager, and the other employees didn’t respect him. Dad didn’t want to put me in the same position, and I’m thankful for that.

Research from Northwestern University finds that only one-third (30%) of family businesses make it to the second generation,  and only one in eight (13%) make it to the third generation.

Those stats seem depressing at first, but they shouldn’t surprise you. Most founders start their businesses because they’re deeply interested in their chosen industry, plus they’re very good at it, and they see a niche in the marketplace that isn’t being filled. That’s what got them excited early on—they had a vision and saw an opportunity. However, founders can’t expect their children or grandchildren to have the same skills and passion for that industry. Moreover, even if they do, the window of opportunity might no longer be there 25 to 50 years later.

North Baltimore was booming when my dad launched his business. There was a huge need for concrete. However, now it’s not growing much so it wouldn’t have been the same opportunity for me, and I would have resented being pressured into running the company in the current environment.

After college, dad always told me to work for somebody else for a couple of years and then start my own company. That’s the model he followed, and it’s exactly what I did--just not in his industry. Ultimately, I think he respected that decision. It was the best thing for his business and our family, and he continued to run business ideas past me until he passed away last February.

Four ways to exit your business

I’ve found there are four good ways to transition out of your business when the time comes. Just make sure you are 100-percent ready to exit. More on that in a minute.

1. Family transition

Before handing over the reins to your business, it’s very important to know whether any of your children have the ability--and the desire--to take it over. It’s going to take a serious conversation with your children as they get older since the thought may have never crossed their minds. Even if do seem passionate and interested in taking over, you’ll need to be brutally honest about whether or not they have the managerial skillset to be a good leader, decisionmaker and owner.

Even if all the above boxes are checked, you also need to consider the long-term viability of your business. You don’t want to transition a dying business to your kids or put them in charge of a firm that’s mired in a slow-growth or no-growth industry—like the concrete business in North Baltimore. Performing a SWOT analysis of your Strengths, Weaknesses, Opportunities, and Threats can help you get a better handle on the long-term prospects of your business.

2. Employee Transition

If your kids don’t have the chops (or desire) to own and operate your business, you could be better off transferring it to key employees. A management buyout or other transition to key employees generally involves a sale to those employees, often over time. However, an employee transition only works when you have capable and highly motivated employees interested in owning the business. Just because they’ve been there 20-plus years, doesn’t mean they’re qualified. However, if you do have the right type of successor already on your payroll, this type of transition will provide you with cash over time.

3. Third Party Sale
Selling to an outside third party—perhaps disappointing to the owner and employees--might give you the highest multiple for your business. That’s especially true if your kids or key employees are not interested in (or capable of) taking over the business. You could sell to a competitor, or to a complementary business that might gain synergies from owning your business. That being said, there is going to have to be a transition period in which the clients meet the new owners, and the new owner works with the seller. I have found that third-party sales are by far the most common in our geographic area.

4. Wind up
Winding up the business may be the option of last resort if the business depends too heavily on you for sales or operations. Alternatively, maybe the kids and employees are not practical options for a transition. Maybe you're in a dying industry, or the business is otherwise too hard to sell.

With any option, you'll want to structure the arrangement to minimize tax by using your lifetime capital gains exemption if possible-- $866,912 for 2019. It's important to note that you don't have to claim the exemption all at once - you can carry it forward

It’s never too early to start planning

Regardless of which exit strategy you choose; you need to start planning at least five years in advance.  As mentioned in my previous article, you need to get your financial and operations in order. It’s not a simple process, and it will take time. Please…don’t be a do-it-yourselfer here.

TIP: If you’re part of a family business, don’t ever use the family dinner table as a conference room. One day before my dad passed away; my teenage sons told me they didn’t want to visit their grandparents anymore. When I asked why they told me it was it was boring because all they ever did was sit around the table listening to my dad and I talk about business. Does this sound like your family?

Avoiding common succession mistakes

Here are some other errors you want to avoid when it comes to transitioning the family business:

  1. The owner isn’t ready to give up control.

  2. The owner has no ideas on how they’ll spend their time after leaving the business.

  3. The owner doesn’t agree with the children’s vision for the company.

  4. The owner doesn’t set reasonable expectations and isn’t honest about his or her concerns and fears.

  5. The owner pressures children to take over the business when the kids aren’t passionate about it.

  6. The owner rushes into the exit decision. As mentioned earlier, it takes at least five years of careful planning.

Conclusion

All families that own a business struggle with succession issues. There is no easy solution. You need to start early, feel out the children, see if they’re interested and assess the situation to see if they’re capable of taking over the reins. If they’re not, please review the other transition options outlined in this article. If you or someone close to you is wrestling with family business succession planning, please don’t hesitate to contact me.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

A Tax-Efficient Way to Enjoy Classic Cars and other Pricey Collectibles

A Flip-CRUT can help affluent accumulators long before the euphoria of a new acquisition (or sale) wears off

Key Takeaways:

  • Collector cars are considered tangible personal property. When the property is sold for a profit, owners must pay capital gains tax at a higher rate than for marketable securities.

  • Because they are so caught up in the fun part of acquiring, collectors often overlook various planning methods they can use to reduce tax liabilities prior to the sale.

  • A Flip-CRUT is a special type of charitable trust that is suitable for holding non-income-producing assets that will be sold at a later date.

  • At some point the trust converts permanently, or “flips,” to making regular payments just like a standard CRUT.



Collectors, especially car collectors, have been of interest to us for many reasons. Not only do they tend to be HNW individuals, but they also tend to be uniquely passionate and driven by their hobby (no pun intended). At a recent collector car auction, a rare Ferrari sold for $7.5 million in less than 10 minutes of bidding. In fact, at this particular auction site, 12 cars each sold for more than $1 million, while the auction average was more than $336,000 per vehicle—serious financial commitments for all sides of the transaction indeed.

However, when you take away the passion of the frenzied bidding and the joy of the new acquirer and the relieved seller, there is a personal economic impact that must be considered. Collector cars and other collectibles are considered tangible personal property. So when they’re sold for a profit, capital gains tax is owed by the seller. Tax at the federal level is 28 percent, while state tax varies depending on the residency of the seller. Because they are so caught up in the fun part of collecting, collectors and their advisors often overlook various planning methods they could have used to reduce taxes prior to selling.

Real-world example

As an example, let’s take the $7.5 million Ferrari. The seller purchased the car for $2.3 million and invested another $600,000 in a complete ground up restoration. That means that before selling costs his tax basis is $2.9 million and thus his capital gain was $4.6 million. A nice check to the federal government of nearly $1.3 million is now owed by the seller. He nets around $3.3 million, and life goes on.

However, let’s look at an alternative approach that might make this transaction much more favorable for the seller. Prior to the auction, our 63-year-old seller and his 61-year-old wife transfer the Ferrari to a Flip Charitable Remainder Unitrust (Flip-CRUT). A Flip-CRUT is a special type of charitable trust that allows non-income-producing assets to be placed in trust, and sometime later in the future after the asset is sold, generally the trust “flips” to a Standard Charitable Remainder Unitrust (SCRUT) and begins distributing income normally to the husband and wife who established it.

What are the consequences of this transaction for the seller? First, because the balance of the trust will pass to charity when the last of the sellers dies, there is a charitable income tax deduction available. The amount of the gift is based on the current value of the property, not on what it will be worth in the future. Because this is tangible personal property, the deduction is calculated on the tax basis of the contributed property, not on the full fair market value.

In this case, we know the basis was $2.9 million. This produces a charitable income tax deduction of a little more than $683,000. Even in the 35 percent income tax bracket, this will save almost $240,000 in income taxes. And, like other charitable deductions, our Ferrari seller has this year and the next five years to utilize the deduction on his income tax return. Next, there is NO capital gains tax due on sale. Flip CRUTs are exempt from income tax, and therefore the sale leaves the entire $7.5 million available for reinvestment. Ultimately, this will produce an income stream for our selling couple that will continue for their lifetimes. Income from a 6 percent payout trust, which was used for this example, begins at $450,000 per year.

If all goes perfectly, the Ferrari sellers will receive more than $12 million in income from the trust over their lifetimes. They’ll save more than $1.5 million in income tax and leave a charitable gift of close to $10 million to the charities they choose. They will also remove the value of the Ferrari or its sales proceeds from their estates. And while they have done that, they have also removed it from their children’s inheritance. That issue can be resolved if they so choose, normally with the purchase of life insurance outside the estate to replace the “lost” asset.

Conclusion

While collectors pursue their passionate assets, they and their advisors must position themselves in a way that allows the collector to be better-informed about the various choices that are available for the ownership and effective disposition of their collectible assets. This may mean millions of dollars to the collector over the course of a collecting lifetime.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Should I set up a Traditional 401(k) for my Business?

There are several different 401(k) and IRA retirement plan options that allow for the same tax treatment as a 401(k), but each has different contribution limits and costs. The different options a business owner should consider include several different 401(k) types, the SIMPLE and SEP IRA, and defined benefit (pension) plans.

Does your business have employees?

If your business has employees, you will want to consider either a 401(k) plan or a SIMPLE IRA.  The type of 401(k) plan you choose will be determined by several factors, including cost and if you want to make employee contributions.  If you do not want to contribute towards a retirement plan for your employees, you should consider a traditional 401(k), which allows for discretionary employer contributions, subject to testing.  Businesses with more than 100 employees making over $5,000 should consider a SIMPLE 401(k) or SIMPLE IRA, because they are easier to set up than traditional 401(k)s.  Employers with less than 100 employees should consider a Safe Harbor 401(k).  If your business has no employees, move on.

Do you want to contribute more than $56,000 in a retirement account?

If you answered yes and you are an older business owner, you should consider a defined benefit pension plan, which would allow much higher contribution amounts than any 401(k).  If you plan on contributing less than $56,000 annually, move on.

Are you looking to contribute more than 25% of your net compensation?

If you are, you should consider a Solo 401(k).  This allows you to contribute up to 100% of compensation or $56,000 (plus catch-up contributions).  If you will be contributing less than 25% of your net compensation, a SEP IRA would allow the same benefits as a Solo 401(k) but with less administration costs.

To learn more about the best retirement plan options for your business, check out this flowchart.

If you would like to schedule a call see what retirement plan would be optimal for you as a business owner, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Why Couples Should Have a Financial Agenda Before Cohabitating

Make sure you have considered the financial, emotional and legal implications of "officially" moving in together before taking the plunge.


Key Takeaways:

  • The latest U.S. census data show there are now more nontraditional households in America than at any other time in our nation’s history.

  • Financial planning issues have never been more complicated for soon-to-be-joined couples—especially when one or both members of the couple are affluent.

  • Depending on how you and your spouse feel about your financial position, age and health, chances are estate plans, financial plans and other legal documents need updating.

Couples that are planning to move in together—whether young adults or seniors--should have a serious discussion with each other, as well as with their adult children, parents and financial advisors, who may be affected by their decision to cohabitate. They should also make sure they’re in sync with each other when it comes to personal, career, financial and family goals. Couples should also be very open about each other’s health status and any prior financial commitments they may have.

Here are eight key questions that soon-to-be-official couples should discuss before taking the next big step in their relationship:

1. What are each partner’s assets, liabilities and income? Make sure your partner can tell you ALL of the assets and debts they have in their name. They should be able to include everything if needed, along with a copy of the last two years’ income tax returns. Be honest about how much each other earns and about other sources of income (e.g., rental from a property or income from a trust fund).

Discuss debts in detail (how does each partner plan to pay them off?) and credit ratings. Bring up prior financial problems such as an inability to handle debt or a bankruptcy.

2. Does your partner want or need a cohabitation agreement? This may be a delicate topic, but you should address it head-on, especially if one partner has greater assets than the other.

3. How might wills, trusts and/or health care directives and powers of attorney be handled? Will each partner name the other as the primary beneficiary of their assets, life insurance policies and retirement plans? If there are children from a prior marriage, who will be the primary beneficiary? Who should be the one to take care of matters should something happen to either of them? If one partner has a larger estate, marriage may provide some estate-tax savings. Talk it out until you agree on what’s fair.

4. Does your partner have your same view about savings and retirement? Discuss attitudes regarding savings for the short term and the long term. Are they savers or spenders? If still working, when are you each planning to retire? What resources does your partner have for retirement, and how do they want to live those years?

5. How does your partner manage finances? Will he or she keep separate bank and investment accounts? Will you have only joint accounts, or have something in between?

If you use joint bank accounts or hold title to assets in each other’s names, then that can be used as evidence during a breakup that you had an “agreement” to divide all of your respective assets evenly. If your partner is certain that they want joint ownership of some assets, be sure an attorney drafts provisions in a written agreement specifying who owns what and what happens in the event of a breakup. The agreement should also provide guidance about handling money transfers to the other. Be sure the terms of a gift or loan are clearly stated to avoid misunderstandings later if there is a break up.

Who will pay the bills? How will expenses be divided? Will each partner do this equally or will those duties and obligations be based on income. Will one of you handle all of your financial responsibilities related to couple-hood? Will you and your partner invest together or separately?

Make sure to talk about your respective feelings toward debt. Is one you more comfortable than the other when it comes to taking on obligations? Does one of you view debt like the plague? If so, how will this be handled?

Be careful about having both of your names on a credit card. Will each of you be liable for what the other one charges. If so, your respective credit ratings can be at risk. Make sure your partner understands that if they decide to sign a joint credit card application, they should cross out the word “spouse” and substitute “co-applicant,” so you are not being presented to the world as a married couple.

6. What is your partner’s approach to financial risk? Is one of you a risk-taker and the other risk-averse? Can the two live together without driving each other crazy financially? Are you each willing and able to make changes as needed?

7. Does your partner have insurance? Find out how much and what kind of insurance each of you has. Are you both insurable? Can either of you qualify for any additional coverage through an employer?

With homeowner’s insurance, both of your will be on the policy if you co-own your residence. If only one of you is an owner, then the other needs to be named as an additional insured or must have renter’s insurance.

If each of you owns a car, the insurance company will want to issue two separate policies. That will cost you more because you won’t get a multiple car discount. If you decide to co-own each of your cars, determine the potential liability if one partner has a car accident. Find out how well you and your partner are covered if driving someone else’s car (including rental cars). Have an attorney cover the issue of ownership of the cars.

Each of you should have umbrella insurance to provide additional protection beyond the car and homeowner policies.

8. What names will each of you use on official financial and legal documents? Is either taking on the other’s last name? Be careful when one takes on the other’s name. Calling one’s partner a “husband” or “wife” or presenting oneself as a married couple can have serious consequences. Each of these actions may be used to support an argument for a division of assets and support payments if you break up.

Conclusion

An estimated 120 million Americans—including millions of unmarried couples that live together---do not have an up-to-date estate plan to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. As there are many potential legal and financial traps with cohabitating, this may be an excellent opportunity for you and your partner to discuss your changing situation with a qualified financial advisor. The more you can keep your legal and financial house in order, the more you can enjoy the process of getting to know your partner better in a fulfilling and deeper way.

A number of organizations, including The Financial Awareness Foundation, have excellent resources about estate planning for non-traditional couples.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Generous Business

How you can use your business as an engine for generosity

Key Takeaways:

  • Giving interest in a business may enable owners to double their current cash giving, while dramatically reducing their tax liability.

  • Most business owners are not aware they can give a portion of their business to charity.

  • Giving an interest in a business generally has no adverse impact on the owners’ lifestyle, cash flow or capitalization of their business.

  

Hundreds of successful business owners throughout the country are discovering unique ways to use their businesses as engines for generosity. Take the Kuipers, for example.

Bill and Katrina Kuiper own and operate a pharmaceutical distribution company. The company produced about $1 million of net profit last year and was recently valued at $10 million. The business has grown by double digits from its inception 12 years ago, and it’s expected that the company’s performance will continue for the foreseeable future.

The Kuipers are a generous family that gives approximately $100,000 annually to various charities. In addition to supporting their local church, they are actively involved in local charities that support their city’s homeless community, and they have a deep passion for combating human rights abuses globally—especially human trafficking. They also give very generously of their time.

Considering their healthy annual income, Bill and Katrina live a relatively modest lifestyle. They live exclusively on the $200,000 salary that Bill receives from the company. Because of the high growth prospects the business has enjoyed from its inception, Bill has always reinvested most of his profits in the business. However, reinvestment has limited the Kuipers’ capacity for charitable giving. They would love to give more, but they simply lack the available cash resources with which to do so. Or so they thought.

Make charitable intentions go further

A savvy advisor recently shared a strategy with the Kuipers that allows them to increase their annual giving dramatically, even doubling their current cash giving, by using their most valuable financial asset—their business.

The Kuipers’ learned that they could gift a relatively small interest in their business each year to secure the maximum charitable deduction allowed under existing tax rules. Taxpayers may generally deduct up to 50 percent of their income each year through charitable contributions. If a gift is made in the form of a noncash asset such as a business or real estate, the charitable deduction is limited to 30 percent of income.

So the Kuipers’ decided to make a charitable gift of an interest in their business equal to $300,000, 30 percent of their business’s $1 million income. Based on the value of their business, this represented a gift of a 3 percent interest ($10 million divided by $300,000).

The gift was intentionally made to a donor-advised fund for two primary reasons:

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1. Because a donor-advised fund is classified as a public charity under the tax rules, Bill and Katrina receive a full fair-market-value deduction for their gift. Had they made a gift to a private foundation, their deduction would have been limited to their income tax basis in the business—which is quite low in comparison to the value of the business.

2. The donor-advised fund provides a mechanism allowing the Kuipers to make a single charitable gift but ultimately support numerous charities, as the donor-advised fund is merely a conduit to the end charities that the Kuipers support. Once the donor-advised fund receives cash—either from annual distributions of income from the business or proceeds from an eventual sale of the business—Bill and Katrina can then grant that cash from their donor-advised fund to any number of charities that they recommend.

Because Bill and Katrina are in the highest marginal tax bracket (45.6 percent combined federal and state), their gift provided a $300,000 charitable deduction saving $136,800 in taxes. The business interest gift increased their total annual giving from 10 percent to 40 percent of their income.

However, the Kuipers had an additional 10 percent of income that could still be offset by charitable contributions. Their advisor suggested they take a portion of the income tax savings that they had just realized from the business interest gift and make an additional cash gift that would be sufficient to use their remaining 10 percent deduction capacity. So Bill and Katrina made an additional cash gift of $100,000 from the $136,800 of tax savings. The additional cash gift also provided a charitable deduction, saving $45,600 more in taxes and taking their total giving to the maximum deductible amount, 50 percent of income.

The giving strategy described above had no adverse impact on Bill and Katrina’s lifestyle or on the capitalization and cash flow needs of their business. In fact, their cash flow actually increased due to the tax savings they realized. Despite the fact that the Kuipers gave $100,000 of the tax savings to charity, at the end of the day they still had $82,400 of additional cash flow from making these gifts—$36,800 after $100,000 of the initial tax savings from the business gift was made in the form of cash, plus $45,600 in tax savings from the subsequent cash gift.

Combining a vacation and mission

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Most of the $82,400 of increased cash flow was reinvested in their business. However, they did use a portion of it to fund a two-week combined vacation and mission trip to Africa that had an unexpected, transformational impact on their lives. In addition to experiencing the beautiful sights and sounds of Africa, including an unforgettable safari, they had a unique opportunity to meet their ”adopted“ daughter, 9-year-old Christina, whom they’ve supported for years through a child sponsorship program with an international charity that combats child poverty. The Kuipers’ trip marked the first time in over 12 years that Bill had taken a full two-week reprieve from the demands of running a successful business.

Bill and Katrina are planning to continue this pattern of giving each year. Another benefit of this strategy is that their wealth, as represented by their business, will actually increase over time. That’s despite giving additional gifts in their business. Because their business is growing at double digits each year, and because they are gifting an interest in their business of only 3 percent each year, the value of their retained ownership continues to increase. At the same time, the Kuiper’s charitable giving has increased dramatically, to 50 percent from 10 percent of their income.

Conclusion

The Kuipers’ greatest joy comes from witnessing the lives that are touched and transformed by the charities with which they partner. The business-interest strategy they’ve implemented has enabled them literally to double their support for their charitable endeavors. That’s because their current cash giving has correspondingly doubled as a result of giving a portion of the tax savings generated from their business-interest gift. The Kuipers are also excited about the fact that at some point in the future, when their business is sold or liquidated, very significant additional assets will be available to support the charities they care about. This is a result they had never imagined possible until a creative advisor shared with them how their business could be a powerful engine for greater impact and generosity.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Should I Rollover my Dormant 401(k)?

401(k)’s make up a large percentage of many people’s retirement savings. These days, it’s not uncommon to change jobs several times over ones career, which can potentially mean having 401(k)’s scattered across different companies, in danger of being forgotten or invested improperly.  Read below to see if rolling over your old 401(k) will benefit you.

Is the plan well-managed and meeting your needs?

Many clients answer this question with “I don’t know”.  If that’s your answer as well, you should consider referencing your “Plan Summary Document” and your 401(k) statements to see what it is currently invested in, the fees associated with it, and the quality of your investment choices.  Often times, clients believe old 401(k)’s to be have low or no costs, while in reality they can be very, very expensive. 

Regardless of your answer above, it would be beneficial to check your 401(k)’s plan documents to see if it might be cost effective to rollover your old plan into an IRA.  Even if the 401(k) meets your investment objectives and is low cost, it may be better to roll it over.  Having separate 401(k)’s means you have to make sure to take Required Minimum Distributions, which clients overlook.  If these aren’t taken, it can mean a large tax penalty.  Check out this flowchart to learn more.

If you would like to schedule a call with us to talk about a potential 401(k) rollover or other planning needs, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Don’t Sell Your Business

There are better options

Key Takeaways:

  • Selling your business—or selling at the wrong time—can be a big mistake that you’ll regret for a long time.

  • If you sell your business, make sure you act like a bank if you hold paper.

  • Winding down your business can be much more satisfying and profitable than selling it to a third party or an outsider.

  • Simple is often a better way to leave your business than via a complicated strategy.

We spend lots of time talking with business owners about various strategies for exiting their businesses. Too often, we find owners choose strategies that just don’t serve them well.

If you choose the wrong exit strategy, what should have been a great retirement filled with joy turns into a nightmare.

Consider this scenario.

You’ve decided to sell your business. You’ve found a business broker who finds you a buyer. There’s only one problem: Your broker tells you that the buyer wants to pay you only 40 percent up front, and you are going to need to “be the bank” and finance the rest of the purchase.

After much soul-searching, you decide to go through with the transaction. After all, you’ve worked hard your whole life, and you know that the culmination of your business career is the sale of your business.

So, you’ve sold your business. You no longer control what happens. And to make matters worse, you’ve not treated the sale the same way that a bank would.

A year goes by and you find that your payments from the buyer start arriving late. You call the buyer and he tells you that he’s lost 20 percent of your clients and, because of that, he’s having a hard time getting the cash to pay you.

You have a choice: You can take back your business (with the attendant legal hassles) or you can hope that the buyer gets the business he needs in order to pay you. Neither choice is very attractive. You don’t feel you want to rebuild your business. Instead, you just sit by and hope things don’t get worse.

Another six months pass by, but instead of your payments being late, they just stop coming entirely. Again, there is little that you can do about this. You’ve sold your business and agreed to the buyer’s terms. There is nothing in your sales agreement that allows you to take over the business immediately. You’re forced to take the seller to court to get your damaged business back.

In the time that you’re working the legal system, you learn that your buyer has not only lost the majority of your clients, he’s also damaged the business so badly that there’s nothing you can do to salvage the situation. Now the money you planned to get from your business for retirement isn’t going to be there.

What do you do now?

First, don’t do a transaction like this.

If you sell your business to someone else and you have to act as the bank for the transaction, then for goodness sake, act like a bank! This means you need to do a thorough credit review of the person or group buying your business.

If you are providing financing, make sure that you get all the guarantees up front that a bank would get. This includes making sure that your buyer provides you with a personal guarantee. Not only do you want a personal guarantee, you also want to make sure there are real assets behind the personal guarantee.

When you make it easy to walk away, you’ll find that buyers will stop paying when life gets tough … and it always gets tough. If you really want to collect all the money from your sale that you’re entitled to, then be prepared to say NO to a sale unless you get a personal guarantee and appropriate security agreements from your buyer.

Better yet, try a different way to leave your business.

Selling your business is not always the best option. We have worked with many owners using a different strategy. We call this the “wind down.” Instead of selling your business, you make your business smaller.

The wind down is very simple: You find a home for 80 percent of your clients and you keep the top 20 percent of your clients—the ones who add the most value to your business.

Remember the 80/20 rule.

The reason this strategy works so well is because of a simple truism that exists in most business. Over the time you’ve been in business, you have accumulated many accounts on your books that you wouldn’t take today.

When you first started your business, you would take any client who walked in the door, right? Twenty years later, you’re still serving that client. They take up lots of time and don’t provide much in the way of revenue. It’s really OK for you to tell them that you’re retiring and that you’re going to help them find a great new home.

If you look at your book of business and only focus on the top 20 percent of your clients, you’ll likely keep 80 percent of your revenue, remove 80 percent of your costs and make much more money working just one day a week.

Isn’t that a much better way to leave your business? There is only so much golf that you can play and there are only so many trips that you can take. Wouldn’t it be nice to keep your hand in an industry that you’ve grown to love?

You’re going to have to do a few things.

If you decide the wind down is for you, here are some things you’ll have to do to get your practice ready.

  • Find a home for the 80 percent of the clients you want to let go. Think about giving these clients away to a good home with a younger planner. You don’t need the hassle of hoping you get paid for that part of your business and it’s more important to find these clients a good home than it is for you to be paid for the referral.

  • You’ll need to find a way to service the clients you do keep. If you jettison 80 percent of your business, you’re not going to need the staff that you presently have. You won’t want to keep your back office intact. There are many professional service firms that would be more than happy to take over your back office for a relatively small fee.

  • Have a disaster plan in place. As you age, you’re going to want to continue to decrease the number of clients you serve. There’s even a possibility that before you wind down your business completely, a health issue could keep you from serving even the small group of clients you’ve retained. Have a plan in place for reassigning your clients if you can’t serve them anymore.

It’s really not very hard.

Unless you really hate the business you’re in and the business is based on you, a wind down is a much more profitable and satisfying way to leave your business. Setting up a business to pursue a wind-down strategy has fewer moving parts and is much easier than trying to sell your business to a third party. We’re always in favor of the simple solution and hope you are too.

What do you think? Are you willing to give the wind down a shot?

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Incorporating Philanthropy into Your Financial Plan, Part 1

Smart giving strategies for every economic climate


Key Takeaways:

  • As record numbers of boomers approach retirement age, their focus shifts to distribution of assets rather than accumulating wealth.

  • Affluent millennials look for ways to have impact rather than just give away dollars.

  • Do your homework before you give.

  • A Donor Advised Fund (DAF) is a perfect giving tool for all economic climates. Sock away money in the good years, and give from it in the lean years.

The latest Giving USA data shows that charitable donations rose for the fifth consecutive year to nearly $360 billion—passing its pre-recession peak and likely to continue the upward trend.  Researchers indicated that another recession could hurt giving slightly, even though the number of aging boomers coming into liquidity events should offset a downturn to some extent.

As more and more boomers turn 65 every day, the focus shifts to distribution of assets rather than to thinking solely about accumulation of wealth. Giving is a function of individual capacity, which too often is a perception rather than an actual quantified ability.

Giving is not just for boomers and retirees

More and more wealthy younger people are giving generously earlier in their lives. Are millennials really more charitably inclined than boomers and Gen Xers, or are we just hearing more about the good deeds of extremely wealthy tech entrepreneurs?

Experts on philanthropy say that millennials have a more overt concern about the world around them. The problems of the world are very much “front and center” for them because of the Internet and its social media outlets. That said, millennials look for ways to have impact rather than just give away dollars.

Is charitable giving really tied to the economy and financial markets?

Many experts believe there is a tremendous linkage between levels of giving and the types of giving and investment and economic cycles. Charitable giving rises in good times, and, sadly, falls when times are tough. A study of charitable giving during recessions since 1967 found that giving during recessions dropped by slightly more than 1 percent on average, while it rose significantly during the good years. This poses a serious dilemma for charities that don’t have endowments to help cushion the drying up of charitable giving during the lean years. It also creates strategic challenges for family foundations and individual philanthropists who during the lean times see greater need in the human services arena.

We know of one family that was faced with having to reduce its commitment to environmental causes during the economic blizzard of 2008-09. As the family’s wealth and its foundation capital recovered dramatically post-crisis, they are giving even more today they did prior to 2008 to environmental causes they support.

As for good and bad years in the economy, a Donor Advised Fund (DAF) is a perfect tool. Sock away money in your good years, and give from it in the lean years. For donors approaching retirement, the same logic applies. Fund the DAF during your highly taxed working years, get the deduction then, and in your retirement years, make gifts from the DAF. For those who are more technically minded, or if you are the owner of a closely held business or commercial real estate, gifting such property to a DAF can be a smart move. Such transfers can be part of a business exit plan if you have philanthropic goals and want to become more involved in your community post-exit.

How can people of means to have a more “balanced portfolio” of giving?
The most effective philanthropy needs to be driven not by balance but by three things: head, heart and mind. And not necessarily in that order.

Giving to arts and culture has always been strong. People strongly support a wide range of causes that they’re passionate about--and there is some status assigned to supporting the arts. Giving to human services is a challenge with program effectiveness and real change. While arts received larger portions of giving, a balanced portfolio is generally not advised. Much of the giving research indicates that depth, not width, is advisable for donors. More impact can be achieved, more data evaluated by narrowing focus.

We know from the world of business how critical sustainability is to long-term success. Why should it be any different within the realm of charity? It’s imperative that philanthropists and foundations look critically at the sustainability of the organizations and projects they are funding. Failure to think “sustainably” creates a great risk charitable dollars won’t have as much impact or as lasting an impact as the giver might hope.

Purposeful philanthropy is the art of thoughtfully, intentionally and purposefully integrating the passion, spirit and commitment of philanthropy into the fabric of your family system. When you encourage each member of your family to participate in giving that honors the individual values and interests of your family members, there is an almost inevitable balancing that will occur in the grant-making and giving process.

A good next step for a donor hoping to be more strategic and impactful in giving would be exploring a Community Foundation and books such as, Inspired Legacies by Tracy Gary or Give Smart by Tierney and Fleishman.

Philanthropy is not necessarily about giving away to charities. It is about having impact. It is about the sustainability for your children and grandchildren of the world you live in. It is about the recognition that every dollar you invest is impact investing because it is impacting something.

Conclusion

In Part 2 of this series, we will discuss charitable tools, techniques and philosophies that you can use today to add value to your planned giving goals.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I make a Mega Backdoor Roth IRA Contribution?

The Roth IRA is an excellent retirement savings vehicle because it allows for tax-free earnings.  Unfortunately, there is one disadvantage over the Traditional IRA: it requires you to have a MAGI of $203,000 or lower in order to contribute to a Roth IRA.  For those ineligible to make a Roth IRA contribution but want to put away more for retirement, a mega backdoor contribution is a viable option.  Read below to see if you are eligible to make one.

Have you made a maximum contribution of $19,000 ($25,000 if you are over age 50) to your 401(k) this year?

If you have not yet maxed out your 401(k), it is generally beneficial to do this first before considering a backdoor contribution.  If you have already maxed out your 401(k) contribution, read on.

Will the 401(k) plan allow you to make non-Roth, after-tax contributions?

To answer this question, you will have to read your 401(k)’s Plan Summary Document.  If the plan does not allow for these contributions, you will be ineligible to make a Mega Backdoor Roth IRA contribution.  If your plan allows it, read on.

Is there room in the ACP test for you to make a contribution?                          

This question is complicated, and you will have to consult the plan sponsor to see if there is room for additional non-Roth contributions.  If there is not, you will not be eligible for a backdoor contribution.  If there is, you will be eligible, although there can be some loss of tax benefits.

Mega Backdoor Roth IRA Contributions are extremely complicated and take collaboration with the plan sponsor to complete.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Mega Backdoor Roth IRA contributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Understanding Value Investing

Investors continue to grapple with the concept of “value” in value investing. But for those willing to bear this risk, value stocks have ultimately provided the reward of higher returns. Here’s how to unlock the potential of value stocks.


Key Takeaways:

  • A value stock generally has a low price relative to various measures of a company’s worth, including the company’s book value, sales, earnings and cash flow.

  • Value stocks can be seen as being riskier than growth stocks in regard to both their company-level characteristics and their exposure to economic cycles.

  • For those willing to bear this risk, value stocks have ultimately provided the reward of higher returns.



Keys to unlocking the potential of value stocks. A quant perspective.

Investors continue to grapple with the concept of “value” in value investing. No single unique definition of value exists. Generally speaking, a value stock has a low price relative to various measures of a company’s worth, including the company’s book value, sales, earnings and cash flow. These company attributes tend to correlate with other measures that intuitively seem risky to investors, such as the company’s financial and operating leverage, its profit margins and variability of its financial results. Thus, looking across the cross section of companies one can invest in, value stocks are often seen to reflect concerns about a company’s profitability, stability and survivability. The different value metrics all reflect these concerns to varying degrees.

Real-world example

Consider for example two well-known stocks, Alphabet (Google) and Bank of America. The first is a growth company, with a price-to-book ratio of about 4.1 placing it so that the vast majority of stocks are cheaper. Alphabet has low debt, earnings have been growing nicely for years and there is a consensus that it is a very successful company. B of A is a value company whose price-to-book ratio of about 1.1 makes it cheaper than the vast majority of publicly traded U.S. stocks. It has a large amount of debt, and while its earnings grew nicely through 2007, they have vacillated since. B of A is widely viewed as having made several missteps during the financial crisis of the past several years.

This example illustrates the basic concepts of the risk argument. Certainly Google might be riskier by some metrics; for example, as a newer company some would consider them a greater risk. Nor will B of A necessarily outperform Google going forward. The latter has been a growth stock since inception and has continued to have strong returns. But generally the relationship between risk characteristics and value measures holds across stocks, and generally value stocks have outperformed their growth stock counterparts.

Impact of economic cycle

This value risk also manifests itself over time through exposure to the economic cycle. When times get tough, companies that have greater leverage or lower profitability will tend to suffer the most. The same holds true for smaller stocks. This can be demonstrated by considering returns of the value and size risk premiums during recessions and expansions. Returns for these premiums have been quite strong during expansions, but those returns fall dramatically during recessions. Recessions have been far fewer than expansions, and so these risks have historically paid off over time. And the risks from economic cycles are hard for investors to avoid.

Timing one’s entry and exit from the equity market can be very difficult. Recessions are often labeled as such well after the fact. Bear in mind the joke that “economists have predicted 10 out of the last 5 recessions.” And some of the highest returns to these premiums come right as or after a recession ends, so those trying to time their entry risk missing out on the strongest returns of the recovery. But for some of those willing to bear the risks, the rewards ultimately have followed.

The plot shows rolling 12-month returns to the Fama-French size factor (Small minus Big Company Returns - SMB) and value factor (High Value minus Low Value Companies - HML).

  • When these lines are above zero, small-size company returns beat large-company returns and value-company returns beat growth-company returns. These are superimposed over recessions, shown in gray. Data is from Kenneth French’s and National Bureau of Economic Research’s websites.

Capture-8-15.JPG
  • One can see that during recessions, value and smaller stocks truly show their risk characteristics and tend to lag their growth and larger counterparts. This adverse exposure to the economic cycle is another display of value’s risk characteristics.

  • Conversely, during economic good times value and small stocks recover and out-perform quite nicely. The chart below provides historical averages that offer numerical confirmation of the patterns seen in the plot.

Capture-8-15-2.JPG

Conclusion

Value investing continues to be popular, in part because it has worked well historically. There are a number of good explanations for this. We have focused on the risk explanation and have provided evidence that we find compelling. Value stocks are certainly not a sure thing, and they can disappoint at the worst times economically. But because of this risk, value stocks also can be viewed as ultimately providing the reward of higher returns for those willing to bear that risk.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Eye On Money September/October 2019

We invite you to check out the new issue of Eye On Money! Inside are articles on:                                       

529 education savings plans. Do not miss this one if you want to help your child, grandchild, or other loved one save for college!

Starting a retirement plan for your business. There’s still time to set one up for 2019 if you act soon! Here’s a rundown of the types of retirement plans available to businesses and self-employed individuals.

Social Security retirement benefits. Check out this article for five things you should know about Social Security before you begin receiving retirement benefits.

What to do before and after a disaster strikes your home. These financial tips can help you prepare for a disaster and deal with its aftermath.  

Also in this issue, you can learn about exchange-traded fund (ETFs) and revocable living trusts, take an armchair tour of China’s Sichuan Province, find out about some special exhibitions and events planned for this fall, and test your knowledge of sports venues.

Please let us know if you have questions about anything in Eye On Money.

Eye on Money September/October 2019

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Automatically be Enrolled in Medicare?

The Medicare program can provide healthcare at a much cheaper rate than normal insurance, but if you are continuing working and have employer healthcare past the automatic enrollment period, you may want to delay enrollment.

Have you been receiving Social Security or Railroad Retirement benefits for at least 4 months before age 65?

If you are, you will be automatically enrolled in Medicare Part A when you turn 65.  You will also be enrolled in Part B unless you opt out.  If you have not been receiving Social Security, move on to the next question.

When do you plan to enroll in Medicare?

If you plan to enroll in Medicare when you start collecting Social Security, you will automatically be enrolled in Part A.  If you plan to enroll after age 65 but before claiming Social Security, then you will have to sign up for Medicare.  See “Will I Avoid Medicare Enrollment Penalties?” flowchart.

The rules for Medicare enrollment can be complicated, and there are potential penalties if you enroll too late.  To see more information about automatic enrollment, check out this flowchart.

If you would like to schedule a call to talk about planning strategies that incorporate Medicare, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

IPOs: Profiles Are High. What About Returns?

August 2019

Initial public offerings (IPOs) often attract initial public interest—especially when familiar brands become broadly available to investors for the first time. In recent months, investors have had the opportunity to buy shares of ride‑hailing networks Uber and Lyft, workplace productivity services Zoom and Slack, and other high-profile businesses ranging from Pinterest to Beyond Meat.

Dimensional’s Research team studied the first-year performance of more than 6,000 US IPOs from 1991 to 2018 and found they generally under performed industry benchmarks.

Click here to read more:

IPOs: Profiles are High. What About Returns?

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Robert Merton and the Effect of Time on Portfolio Choice

Finance theorists are, as everybody knows, unworldly people who scarcely tie their shoelaces, still less change a car tire. Robert Merton confounds this stereotype. As he talks amiably at the London office of Dimensional Fund Advisors (he is the firm’s “resident scientist), you sense that here is a man who could fix a flat in no time. He would probably deliver a cheerful lecture on the importance of the correct tire pressure while he was tightening the wheel nuts.

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Robert Merton and the Effect of Time on Portfolio Choice

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I make a Deductible IRA Contribution?

Contributing to a Traditional IRA can allow you to not only put away tax-deferred savings into retirement, but you could also be eligible for a tax deduction in the year of contribution.  Read on to see if you can deduct your Traditional IRA contribution this year.

Do you or your spouse have earned income?                                                           

Earned income means income from wages, salaries, or bonuses.  Examples of unearned income include investment income and inheritances.  If you do not have any earned income for 2018, you will not be able to make an IRA contribution, deductible or not.  If you do have earned income, move on to the next question.

At the end of this year, will you be age 70.5 or older?

If you answered “yes”, you will be ineligible to make a contribution to a Traditional IRA.  However, you may still be able to contribute to a Roth IRA.  Check out our “Can I make a Roth IRA Contribution?” flowchart. If you will be younger than 70.5 at the end of the year, continue reading.

Did you make a full contribution to a Roth IRA?

If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit.  If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years.  Either way, move on to the next question.

Did the divorce occur at least two years ago?

If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits.  If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.

Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Key Questions for the Long-Term Investor

Focusing on what you can control can lead to a better investment experience.

At some point, most investors ask themselves questions like: “Do I have to outsmart the market to be successful?” or “Will a fund with strong past performance do well in the future?” A few key principles can help provide answers and improve the odds of investment success in the long run.

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself some of the questions below. Trying to answer these questions may be intimidating, but know that you’re not alone. Your financial advisor is here to help. While this is not intended to be an exhaustive list it will hopefully shed light on a few key principles, using data and reasoning, that may help improve investors’ odds of investment success in the long run.

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Key Questions for the Long-Term Investor

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Retirement Math: Save Early and Often

Plus sensible catchup strategies if you’re behind

By Robert Pyle

Key Takeaways

  • The money you sock away during the early years of your career will likely grow the most.

  • Do you know your income replacement rate?

  • Don’t get bogged down in the math—keep it simple.

  • Don’t panic if you’re behind in your retirement savings—there are plenty of ways to catch up.

 

A recent Transamerica study found that “running out of money” was the chief retirement concern for almost half of Americans. What’s more, only one-third of American workers (36%) said they were “very confident” about the ability to retire comfortably. Today’s workers change will jobs more often than their parents and grandparents did—and have more temporary disruptions to their retirement savings. But an even bigger hurdle for achieving a worry-free retirement is that people are simply living a lot longer than they used to. It’s not uncommon to have a retirement lasting three decades or longer. That’s a long time to support yourself after leaving the workforce--even before you factor in the ever-rising cost of healthcare and eldercare.


Keep it simple
You’ve had a successful career. You’re very good at making money. But, you’re probably not an expert in financial planning. Just don’t think you need to do it alone.

When clients ask me how much they should budget for retirement I always tell them to keep it simple. You don’t need to calculate how much your spending on cable TV, cars, groceries and dining out. It’s nice to know that information—and I’m sure you could economize--but all you really need to know is what your (net) paycheck is—i.e. how much are you putting in your bank account every month and then subtract any additional savings from that amount. Example: If your net paycheck is $5,000 per month after 401(k) contributions, that means you’re spending $60,000 per year. If you were saving $400 per month in a taxable account from your net deposit, your spending would be $55,200 per year.    

Example: I recently started working with a new 401(k) plan enrollee. He had a nice military pension and wanted to have $7,000 per month in retirement (i.e. $84,000 per year). I told him he’d need to accumulate 25-times that $84,000 a year in retirement -- $2.1 million—if he expected to have $7,000 per month in his golden years. How did we come up with 25x?  That the reciprocal of 4 percent (.04), the recommended annual drawdown rate for many people.


Just don’t let retirement math overwhelm you. Again, the simpler you keep it, the easier it is to follow. For instance, this back-of-the-napkin estimate can get you pretty far down the road:

      How much do you need in retirement? $7,000

      How much do you expect from Social Security? $3,000

ANSWER: You’ll need $4,000 per month (i.e. $48,000 per year) from sources other than a paycheck and Social Security. Multiply that $48K by 25 and you get $1.2 million. That’s how much you’ll need to accumulate in retirement savings before taxes. This took less than a minute to calculate.

How do I know if I’m saving enough?

A good rule of thumb is to try to save one-sixth of your gross pay (16%) for retirement. I realize that’s tough when you might be savings for your first house and/or still paying off student loans. But look at ways to save. Do you really need the newest iPhone or other tech gadget every year? Could you eat at home more instead of dining out three or four times per week?

Do what you can. Your goal is to replace at least 40 percent of your pre-retirement income. Here are some recommended savings benchmarks:

Source: Dimensional Fund Advisors, How Much Should I Save for Retirement? By Massi De Santis, PhD and Marlena Lee, PhD, June 2013

Source: Dimensional Fund Advisors, How Much Should I Save for Retirement? By Massi De Santis, PhD and Marlena Lee, PhD, June 2013

For example, if you’re 65 and making $100,000 per year, you should have accumulated $1 million in your retirement accounts by now (10x $100K). If so, then you’d realistically be able to withdraw 4 percent of that nest egg every year (i.e. $40,000). The targets above are designed to replace 40 percent of your pre-retirement salary. Hopefully, your Social Security benefits will make up the rest, along with your spouse’s retirement savings and Social Security benefits. If not, you’ll need to set a higher income replacement rate.

See short video for more on income replacement rate https://videos.dimensional.com/share/v/0_r2tsjqhg or click on the video below:

 

According to Dimensional Fund Advisors, if you want to have a 90-percent probability of reaching your retirement goal (say 40 percent replacement of income) you would need to save 19.2% of your income every year if you start saving for retirement at age 35. If can start saving earlier in life--say age 30--you only need to save 15.4% of your income. If you can start at age 25, you only need to save 13.2% of your income.

I realize even 13 percent is a big chunk of your paycheck, especially when you are young. But, the data above shows how powerful compounding can be when it’s working in your favor.

 

Importance of saving early
I can’t stress enough the importance of saving early. Let’s look at three different savings scenarios: 

  1. Start saving $4,500 per year from age 18 - 25 and then no savings afterward.

  2. Start saving $6,000 per year from age 25 - 35 and then no savings afterward.

  3. Start saving $6,000 per year from age 36 – 65 without interruption.

    Assume an 8 percent annual rate of return under each scenario

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Clearly there is a big difference between in accumulated savings between Scenario 2 and Scenario 3. Under Scenario 3, you have $322,000 less in retirement savings with the same $6,000 annual contribution than you did under Scenario 2--even though you saved $120,000 more over your working life. This illustrates the power of compounding. Scenario #1 may not be realistic, but it further emphasizes the power of starting early.


Retirement savings catchup strategies

There are a wide variety of reasons that people don’t start saving for retirement until later in life. The reasons are too complex to go into in this article, but it’s never too late to play catchup. The simplest way to catch up is to max out your 401(k) by socking away $19,000 a year ($25,000 annually if you’re over age 50). Then set up an an IRA or Roth IRA for yourself (and your spouse) and make the maximum $6,000 annual contribution to each IRA ($7,000 each if you are over 50).

Your IRA contribution may not be deductible. But a non-deductible IRA will still grow tax deferred and you will pay tax on the gain only when you take it out of the IRA. Just note that with a nondeductible IRA, you aren’t allowed to deduct your contribution from your income taxes like you can with a traditional IRA.

Maxing out your 401(k) and contributing to an IRA could give you $31,000 to $39,000 per year. And, you can still contribute to a taxable account as well. The taxable account will grow partially tax deferred. You pay tax on the dividends and capital gains each year, but not on the price appreciation of the securities. Only when you sell the assets do you pay gains on the price appreciation of the securities.

The key to making any retirement strategy work is having an “automatic savings” plan in place. I can’t stress the importance of automating your retirement savings – i.e. automatic paycheck deduction—so you don’t have to think about it and so you can’t procrastinate.

Just make sure you don’t over-save. The risk with over-savings is that you don’t have enough ready cash available for your rainy-day emergency fund. We recommend having three to six months’ worth of living expenses on hand for your emergency fund—six to twelve months’ worth if you’re self-employed.

“Retirement age” likely to get pushed out

As record numbers of Boomers reach retirement age every day—and strain the Social Security system--policymakers continue to suggest raising the minimum age to receive full benefits. The minimum age is currently 66 years and 2 months for people born in 1955, and it will gradually rise to 67 for those born in 1960 or later. There’s a strong likelihood that the minimum age to draw full benefits will be pushed out to 70 by the time today’s young people reach retirement age. These changes are based on both increasing life expectancy and the government’s chronic mismanagement of the Social Security program. 

Bottom line: if you’re going to retire early, (say age 60), you’re going to be responsible for funding your own retirement longer--until your Social Security benefits kick in. By the way, the longer you can delay taking Social Security benefits the better. Did you know your benefit amount goes up by 8 percent a year for every year you wait between age 62 and age 70?


You don’t always get to decide when to stop working
Clients who are behind in their retirement savings tell me they’ll just keep working until they’re 70. Great, but you don’t always control that decision. Health complications can come out of left field at any time as you get older and sometimes your employer has the final say on when you stop working—not you. One of my clients who was intent on working till age 70 was forced into retirement at 67. Another who planned to work until 70-plus got an early buyout package at age 60. You need to be prepared for these scenarios. If you haven’t saved enough for retirement you have to keep your skills current and be prepared to switch careers late in life.

Conclusion

When it comes to saving for retirement, the variables are many and the math can be complex. If you take nothing else away from this article, start saving as early as you can and make your savings plan as simple and automatic as possible. If you or someone close to you has concerns about your retirement savings plan, please don’t hesitate to contact me.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.


Can I make a Backdoor Roth IRA Contribution?

The Roth IRA has one big advantage over the Traditional IRA: earnings are tax-free.  Unfortunately, there is one disadvantage over the Traditional IRA: it requires you to have a MAGI of $203,000 or lower in order to contribute to a Roth IRA.  There are some situations in which it makes sense to contribute to a Traditional IRA, and then immediately roll it over to a Roth IRA.  This is called a Backdoor Roth IRA Contribution.

Is your MAGI greater than $203,000 (married) or $137,000 (single)?

If your MAGI is lower than the amounts detailed above, you are able to contribute directly to a Roth IRA.  See the “Can I Contribute to my Roth IRA?” flowchart. If you are over the income limit, move on.

At the end of this year, will you be age 70.5 or older?

If you answered “yes”, you will be ineligible to make a contribution to a Backdoor Roth IRA Contribution.  If you are younger than 70.5 at the end of this year, move on to the next question.

Do you have an existing pre-tax Traditional, SEP, or Simple IRA?

If you answered “no”, you will be able to do a Backdoor Roth IRA Contribution.  If you do already have an existing pre-tax account, you will still be able to do a Backdoor Contribution, but you may be subject to aggregation and pro-rata rules.

Backdoor Roth IRA Contributions can have severe tax and penalty implications if they are not done correctly. Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Roth IRA contributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Second Generation Owners Are Often Different from Founders

Smart business families recognize this and adjust their vision accordingly

Key Takeaways:

  • Founding business owners and their children often have differing management styles, communication styles and expectations.

  • Founders appreciate directness and simple solutions.

  • Founders’ children often need more sophisticated solutions in which emotional considerations are as important as the financial ones.


Most business owners I know fall into one of two camps—first generation business owners or later generation business owners. Business families and their advisors who don’t take the time to understand the differing management styles, communication styles and expectations often run into trouble down the road.

Starting a business is incredibly demanding

Starting a business is hard work. Many founders work for years—and against all odds—to create a business that succeeds. Ask any successful business owner who has been around for a decade or two—they’ve experienced countless ups and downs. Often the downs have put the owners on the brink of losing their business. But they never give up!

To make it through the challenging times, entrepreneurs have to be very tough and resilient. They will tell you exactly what they think. They don’t pull punches and expect you to do the same.


First-generation business owners have a thick skin

The good part about first-generation business owners is that you can say almost anything to them as long as you do so with respect. But you’d better be direct and avoid legalese, MBA-speak and fancy marketing terms. If you don’t, you probably won’t be taken seriously.

Second and third generation owners tend to take a more nuanced view of the business. They’re more open to outside ideas than founders tend to be. However, Next Gen owners often make the mistake of thinking that founders will take their advice and implement it without knowing how the advice fits in with the business’s long-term or even short-term goals. If you don’t spend time understanding what drives founders, there’s a good chance they’ll just ignore you or cut you off mid-sentence.

Sure, many founders are gruff. But don’t walk on eggshells around them. To gain the trust of founders, you must get right to the point. If you’re able to do this, working with founders becomes much easier and more enjoyable.

First generation owners aren’t only tough at the workplace

The drive, resiliency and thick skin that it takes to start and build a business is one of brutal honesty. If you’re not brutally honest with yourself, it’s too easy to find excuses for things not working out.

In my experience, first-generation business owners aren’t only tough at work; they’re very tough at home. First-generation owners tend to be tough on their children. Tough love rather than unconditional love is more often their style. The children of business founders often feel they are under the thumb of their parents. This is especially true if children of founders decide to join their parents in the family business.

Second-generation owners are a different story
For their first 25 or 30 years of life, founders’ children will tell you they heard nothing but criticism from parents who had no patience for their mistakes and no tolerance for excuses. There’s something to be said about the value of tough love when so much of parenting today borders on coddling and “helicoptering.” But, this often leaves founders’ children feeling inadequate, with a strong need to prove themselves.

When founders’ children finally get a chance to run the family business, they often have no patience for founders and other advisors telling them where they’re wrong. Instead, they expect their employees, customers, clients and advisors to tell them how wonderful they are and how brilliant their ideas are.

A successful relationship with second-generation owners often means being a cheerleader instead of a true thinking partner. Although second-generation owners start their business careers with a huge advantage over where their parents started, they often struggle to maintain its success, much less take it to the next level. Without accepting honest feedback, it’s just too easy for second-generation owners to take the company in directions that hurt more than help.


The conundrum of second-generation owners

On the flip side, working with second-generation owners can be fun if they’re willing to be coached. You need to feed them ideas in the form of questions and let them adapt your ideas as your own if needed. Don’t force your ideas down their throats, or you’ll just get pushback.


Well-educated second-generation owners may want to use advisors and consultants with prestigious academic degrees and career credentials—people that founders would never consider bringing in. On the surface, it may seem like second generation owners are injecting unnecessary complexity into the business, but it’s best to let NextGen figure that out on their own. As a founder, you can suggest some ways in which simpler is usually better, but don’t try to override the process.

Being blunt with second and third generation owners generally won’t work. You must remember where they came from. It’s not necessarily coddling, but you have to be open to the possibility that there could be a better way of doing things.

Conclusion

One final caveat—generalizations are often wrong. I’ve encountered more than a few (first-generation) founders who are open to new ideas, outside expertise and a more collaborative work environment. Likewise, I’ve worked with many founders’ children who are gruff, relentless and think only one ways of doing things—their way—is right. Be aware of generational predispositions and try to leverage the strengths of each generation’s work habits and management style. Your customers and clients will thank you, and family gatherings around the dinner table will be a lot less stressful.

Feel free to contact me any time if your family or a close friend or relative’s family is considering a leadership change in the family business.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Identifying Your Property/Casualty Insurance Gaps

Standard insurance policies cannot adequately address complex needs. Here are 5 key questions that can reveal critical coverage gaps.

Key Takeaways:

  • Standard insurance policies may not adequately address your complex needs.

  • Disconnected polices from multiple companies are potentially dangerous.

  • If you have a custom home, an active lifestyle, luxurious possessions, domestic help, a public profile and young drivers in your family, get your comprehensive personal insurance reviewed on a regular basis.

From a consumer's vantage point, insurance is typically viewed as a necessary evil. Because standard insurance carriers commoditize their offerings through their advertising campaigns, it’s tempting to think that the simple act of buying insurance equates to being adequately protected—a belief that can prove perilous.

Much like seeking out a specialist for a particular medical issue, you should consult an independent insurance agent who focuses exclusively on successful professionals, business owners and other affluent people. If you’re not sure where to find a great agent, or not sure if your longtime agent has all the expertise that you need, ask your wealth advisor for assistance.

A good insurance pro should be asking you "trigger" questions that point to potential vulnerabilities in your insurance coverage. Here are five of the most useful:

1. Do you have enough personal excess liability insurance?
If a lawsuit puts your personal assets at risk, the last thing anyone wants to worry about is running out of insurance. Most standard excess liability (umbrella) policies cap out at $5 million, a figure that might not be sufficient considering your net worth. Don’t worry. It can be surprisingly affordable to obtain higher coverage limits, but this sort of solution can be accessed only through the independent specialist channel. Limits of up to $100 million are available on a single policy to address allegations of property damage or bodily injury.

2. Are your insurance programs complicated and disorganized?
You acquire assets over many years, so it's not uncommon to insure them in different ways. A summer residence, for example, may be insured with a different agent and carrier than a home in the suburbs. Fine art may be insured independently from cars. Whatever the combination, the end result is fragmented. This can create dangerous insurance gaps and makes coverage more difficult and expensive to manage. Don't wait until claim time to find out what is—and is not—protected!

3. Is your home properly insured and protected?
If you had to rebuild your home(s) in today's market, would you have enough homeowners' insurance to cover the expense sufficiently? Many properties are insured based on values that are vastly underestimated, especially those that have undergone extensive home improvements and renovations. For those living in wildfire- or hurricane-prone areas, value-added services also are available to maximize safety and preparedness.

4. Do you employ private staff?
It's not uncommon for nannies, housekeepers, private assistants, gardeners and others to take their employers to court. Employment Practices Liability Insurance (EPLI) responds to allegations of sexual harassment, wrongful termination and discrimination. However, this coverage is not included in a standard excess liability policy. In addition to more precise coverage, carriers that specialize in safeguarding HNW people may offer services to proactively manage risk, such as complimentary background checks on prospective or existing private staff.

5. Are you involved with charities or foundations?
Not-for-profit organizations typically operate on tight budgets and carry a minimal amount of liability insurance for their board members. If you or your spouse sits on the boards of not-for-profit organizations, you should look for additional individual protection on top of existing board coverage. Again, this sort of coverage will not be included in a standard excess (umbrella) policy.


A good independent insurance advisor will conduct annual lifestyle reviews to identify circumstances that usually are excluded from standard policies. If you haven't had such a review within the last three years, now would be a very good time to do so.

Conclusion

Property/casualty insurance and personal risk exposure are complex areas for successful people who have more assets than the average American has--and therefore much more to lose. Because so many wealthy people are not receiving counsel about their insurance-buying choices, you can raise questions with your advisor to help them spot potential gaps in your coverage and give you significantly greater peace of mind.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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