Five Reasons Your Financial Advisor Should Review Your Will

Financial advisors can offer a different perspective about the legal terms in estate documents and what they will mean financially for you and those who inherit your assets.

All the events that happen over our lifetime—going to college, getting married, having children, choosing to divorce and deciding when to retire—have consequences for our finances. However, a little less than half of Americans have tied their financial planning into their estate planning: only 46% of individuals have a will that describes how they would like their money and estate handled after death, according to a Gallup News poll.

Baby boomers are expected to transfer an estimated $30 trillion to $68 trillion to their children, grandchildren and other beneficiaries over the next two to three decades. For those who don’t know where to begin in the estate planning process, typically the first step is to seek an estate attorney to work with you on drafting a will or living trust. While the attorney’s job is to ensure the legal aspects of your inheritance wishes are solidified, it’s a good idea to share your estate documents with a financial advisor.

Here are five reasons why:

  1. Your will should align with your financial goals. Your wealth advisor should already have a full-picture view of your personal, family and financial circumstances. Your advisor works with you to ensure that all your assets and liabilities are accounted for and included in your plan. Upon retirement, this plan forms how your assets will be used to support you for the remainder of life. Providing a legacy to heirs or charities is also an important part of financial planning. Advisors make sure your will aligns with your financial goals by discussing your beneficiary designations for retirement accounts and titling of nonretirement accounts. They also review specific dollar bequests versus the allocation of a percent remaining to ensure it meets your wishes. Finally, they are able to help you consider income tax differences for heirs or charities that inherit retirement funds as opposed to residual estate funds.
  2. You don’t want to forget to include any assets in your will. Because your advisor is your go-to person for taking stock of your assets, they will be able to recognize what assets are accounted for through your estate documents. Even if you do have estate documents, the title of an asset may dictate what occurs upon your death. Understanding which document or title supersedes the other upon death may help avoid undesirable results. Advisors work with their clients to create checklists to keep track of all their important documents and accounts. And most importantly, making sure funds flowing to your estate beneficiaries match up with your desires will help prevent family or legal disputes.
  3. Your advisor can help you navigate situations when your family circumstances change. Generally, it’s recommended to revisit your will every three to five years or if there is a major life event such as a marriage, divorce, birth or death in the family. Your advisor acts as a sentinel for your accounts by reminding you what will occur upon your death, ensuring that any life event can be handled either through a change in your will or a change of beneficiary or title. When financial advisors review a prospective client’s estate documents, one of the biggest surprises is often that an ex-spouse is still named in the will or in a retirement account beneficiary designation. Regular reviews of both estate documents and beneficiary designations will help to uncover issues and inconsistencies.
  4. The tax implications of what’s written in your will aren’t always the most efficient. While your CPA serves as a tax resource, financial advisors can identify opportunities for tax efficiency in the process of passing your assets to heirs. For example, including charitable bequests in your will while making family members the designated beneficiaries of a retirement account will almost always result in a greater income tax burden on your heirs. Some very simple changes may save your heirs significant income taxes on funds they inherit.
  5. Speaking with an advisor is a chance to think about your overall legacy. Your legacy is about much more than the assets you leave behind. Working with an advisor is an opportunity to decide which charities you would like to contribute to and whether to make some or all donations during your lifetime or wait until death. Furthermore, advisors can support in creating a legacy letter as a way to share values, beliefs and life lessons to heirs. Legacy letters are notes that better explain the rationale behind your choices in your estate documents and how you wish to be remembered. They are an opportunity to provide more personal context on how you would like your family to carry out your wishes and insights into the values that guide your life. Although these legacy letters may not be legal documents, they provide a more personal way for you to communicate with your heirs.

If you have questions about the benefits of sharing your will, please reach out to your advisor.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. The above is legal information is provided for educational purposes only, individuals should reach out to a qualified legal professional based on their own circumstances. Certain information is based upon third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy or confirmed the adequacy of this article. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Partners®. R-22-4431

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Why Businesses Should be Treated as Investments

A business is typically its owner’s largest and most complex investment. It is also a fundamental piece of their personal retirement plan. But what if the business owner’s perceived value of the company does not reflect its true value? This could derail their personal retirement plan and their future lifestyle.

Unfortunately, this happens often because businesses are rarely evaluated properly for several reasons:

  • Business owners may not know their company’s true cash return because of tax planning or other techniques that disguise its true performance.
  • Investments in the business are often considered as amounts the owner paid years ago. In addition, most investments are shown at the book value of assets or shareholders’ equity. For a profitable business, this does not consider any intangible assets or goodwill value, which may represent a significant amount of the overall value.
  • Many business owners may not fully understand how to translate their company’s risk into a commensurate rate of return on their investment.
  • When business owners fail to correctly calculate their expected returns and quantify risk, it’s difficult to know the current fair market value of the business. As a result, they may make decisions based on incorrect or incomplete information or miss major opportunities.

The value of a business can also vary depending on its owner’s circumstances and goals. If selling the business to a third party, the owner would expect to receive a maximum purchase price. However, the sale of that same business to a family member or employee might need to be structured so that the company’s cash flow can support the purchase price and make payments to the owner.

Many business owners have heard the rule of thumb that sales of companies are typically three to five times its earnings before interest, taxes, and depreciation (EBITDA), though many don’t investigate why. By taking steps ahead of a potential sale, they may discover the business is actually worth twice its EBITDA or—much better for the owner—seven times its EBITDA. Knowing this can help business owners focus on techniques to boost earnings and reduce risk, which would justify a higher EBITDA multiple.

To create value, business owners should consider the various value drivers of profit margin and asset turnover, shown in the tables below. In addition to focusing on these value drivers, business owners should benchmark their company against similar-sized companies within their industry—as investors do when making investment decisions. Proper comparisons can drastically improve a company’s operations and cash flow.

While many investors have close to instant access to the value of their personal investments, this is not available to most business owners. It takes time to understand the value of a business, what drives and impacts value, and how to enhance it. In addition, too many business owners tend not to treat their business like an investment. For example, if a part of your personal portfolio fails to accomplish what you intended it to do, you’d adjust that investment accordingly. But what if your business isn’t generating an adequate return? Similarly, business owners can explore their options for adjustments that will lead to greater value.

Fortunately, really understanding what your business is worth can be easily accomplished through regular business valuations. Conducting one each year can help identify the true value of the business, track the performance over time, and identify critical factors and techniques that have a direct impact on enhancing its value.

Regular valuations also help a business owner’s financial team—including wealth advisors, accountants, and attorneys—design a streamlined, holistic plan that accurately incorporates their personal and business finances. Of course, planning for the disposition of the business itself will add clarity to their overall roadmap for retirement.

This commentary originally appeared August 17, 2022 on thestreet.com.

About the Author: Chuck Laverty
As Director of Business Solutions at Buckingham Strategic Wealth, Charles “Chuck” Laverty, ASA, CBA, CVA, MAFF, CEPA, works in tandem with the firm’s advisory teams to help business owner clients understand and enhance the value of their business and its role in their holistic financial life plan.

This article is for general information and educational purposes only and is not intended to serve as specific financial, accounting, legal, or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, confirmed the accuracy, or determined the adequacy of this article. R-22-4086

© 2022 Buckingham Strategic Partners®

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How To Start Strategizing for Charitable Giving Season

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As we approach the busy holiday season, now is a great time to start thinking about which charities match your values for end-of-the-year donations. According to Giving USA’s annual report on philanthropy, individuals, bequests, foundations and corporations gave an estimated $484.85 billion to U.S. charities in 2021. This year, charities will likely face more need for financial assistance given the pace of inflation and rising costs.

In addition to choosing charities that match your values, your donations have implications for your tax returns and future investment strategies. Financial advisors have the knowledge to help clients meet their gift-giving goals while also being smart about taxes. Explore four ways you can maximize the financial impact of your monetary donation while honoring your wealth plan with our easy-to-understand infographic.

People often approach legacy planning in a chronological life order, focusing on the accumulation of wealth until retirement. When it comes to charitable giving, it’s best to reassess your values and strategies each year. According to Wealth Advisor Elliot Dole, planning for the long term requires a shift in perspective, but it will build the foundation for setting up the ideal legacy and wealth transfer plan. This is becoming especially important for the baby boomer generation, which is expected to donate an estimated 30% of its wealth to charities over the next 20 years.

As every family has a unique set of circumstances, there is not always a one-size-fits-all solution. It’s important for your advisor to understand your hopes, dreams and goals in order to create a plan that passes on more than money; it should also pass on the values you hold most dear.

Schedule a conversation with your advisor to discuss the right plan for your family.

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The Game Changing Power of Conviction

Maya Angelo famously stated, “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.” While relevant in all areas of our connections with others, I believe this is most true with client-advisor relationships. And I believe that one of the most impactful ways we can achieve a genuine connection with our clients is by having a strong unwavering conviction in the research, solutions and implementation of our wealth strategies. To serve clients in an impactful manner, we can’t just think we are doing the right thing for them, we have to know it in our core.

I have seen the power of conviction transform lives; it’s a true game changer.

In 2002, I was a 22-year-old kid getting my feet wet in the investment business. As an avid outdoorsman, I was thrilled when I was invited on a high-altitude mountain climbing expedition. This incredible trip quickly turned into a life changing nightmare. I tumbled over 4,000 feet down the face of a glacier. My beaten, limp body came to rest just shy of the cliffs hovering almost three miles off the ground. Since the altitude was too high for a standard rescue, I was forced to stay the night until a military helicopter could come to my aid. Suffering from a pulmonary edema and serious head injuries, in a state of disarray I unknowingly removed my gloves throughout the cold darkness. Though I miraculously survived the night, the cost was significant. I lost the majority of my fingers and toes to frostbite. Amazingly, this tragedy was the beginning of my “why” to begin doing what I do.

When I agreed to go on the trip, not only was I looking for adventure, I was searching for answers to my already questioning career. The wealth management firm that I joined right out of college was using predominantly actively managed mutual funds within their clients’ portfolios. We’d buy the funds with the best ten-year numbers … and then watch them underperform for the next decade. I had no conviction in this firm’s methodology and beliefs, it was tough for me to talk to my clients with a clear conscious about our portfolio offerings. But all of that was about to change.

After I was rescued, my journey was a difficult road of recovery plagued with surgeries, amputations and infections. While my wounds healed, I began to read the white papers and research around passive investing. I was enamored with the facts and data. It made sense and I was fascinated with the purpose behind it.

Once I was back on my feet and in the office, I was invited to a Dimensional Fund Advisors (DFA) intro conference in Santa Monica. Those two days would change my life … almost as much as that cold painful night on the mountain.

Over those 48 hours, I was bombarded with regression analysis, betas, coefficients and slopes. While I didn’t fully understand what the heck these DFA guys were talking about, I knew the presenters believed in what they were saying! More than the message they were giving, I loved how they made me feel. Like them, I wanted to live a life of passion fueled by deep conviction.

Following the conference, I introduced myself to Dan Wheeler, the head of Financial Advisor Services at DFA. I told him that I couldn’t go home to the investment world of Wall Street, promised Alpha and big expense ratios that I didn’t believe in. I had three options: work for DFA, find a different advisory firm who implemented with DFA or leave the industry.

Fortunately, Dan and DFA took a chance and offered me a position. Fast forward four months later – I was a terrified, fingerless 25-year-old living in Santa Monica with my dream job. Fueled by my quest for knowledge, I quickly realized that to be able to explain complex investment strategies to my clients, I had to fully understand the “why” behind the “how”. I became dedicated in this lifelong quest.

On an equally important note, before my fateful climb I had the honor of befriending DFA’s Regional Director, Bo Cornell. He saw that I was looking for investment answers, devouring data, searching for truth and questioning the active management concept. The bed of research he shared with me blew me away. The DFA representatives I was introduced to were sensible, smart and most of all passionate. They had a contagious excitement about the research and implementation of their wealth strategies within their portfolios.

As a young man looking for purpose in my career, their conviction was palpable.

Besides being my mentor, Bo was someone whom many of the early Buckingham Founders call a close personal friend, as he initially approved the then start up firm known as BAM. I knew Bo truly cared for me, believed in me and had deep convictions behind the things he was telling me. He wanted the light bulb to go off for me … and boy did it ever. Not only did it cause a shift in the way I looked at the markets, it shifted the way I looked at life.

Thanks to these combined experiences, encounters and fate, my conviction was birthed. I would go on to have a successful career at DFA, eventually becoming a vice president while also managing our internal Client Service team. A key part of this management role was educating new members of our DFA Regional Director team. I was excited to show others the power of truly believing in the firm’s methodology.

As a new member of the Buckingham Strategic Partners team, my conviction is stronger than ever. The evidence-driven philosophy, wealth of resources and deep passion for always doing the right thing runs deep within me and I am thrilled to be home.

I encourage you to find your conviction both personally and professionally. Go beyond being just competent, attack new learning opportunities with deep passion and constantly evaluate your beliefs and processes. It will improve your life in ways you cannot even imagine. Lastly, trust is currency in our business. Clients want to know they are in good hands and that someone truly cares about them through thick and thin.

All of us have a story, reason and a why behind what we do each day. While my story may be a little more unique than yours, its power is no different. I hope that by hearing my conviction journey, it helps you think through yours.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Partners®. R-22-4260

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What Should I Be Thinking About When Making a Capital Investment in a Rising Rate Environment?

Whether you want to upgrade to the newest technology, need to replace worn equipment or give your lobby a facelift, what should you consider before making a capital investment in your business? Unlike recent years, business owners now face increasing costs to carry debt. How do you make improvements to your business while still remaining financially solvent? I have outlined five key factors to consider before committing to a capital investment:

Will your current cash flow support new debt? Any recent debt will need to be structured in a way that is not burdensome to cash flow and allows you to obtain advantageous lending terms.

Know your targeted cash reserves. COVID-19 taught many practice owners that navigating business interruptions is a crucial piece of a strong and healthy financial plan. Knowing your targeted cash reserves is critical. It’s important to take into account your current debt picture if you are carrying any loans that should be paid down first. If you do not know your cash reserves target, take a moment to work with a financial service specialist to determine that amount.

Make sure you are getting competitive loan offers. If you decide to move forward with your capital investment project, how do you structure the loan in a rising interest environment? While the banking industry is continuing to offer competitive terms for borrowers, working with multiple banks to secure the best loan is something that should not be skipped. Do not settle for one bank’s offer without checking what competing banks are willing to do for you. Letting banks know they are in a competitive bidding process will help to drive the best possible terms.

Optimize the mix of down payment and amount borrowed. Now that you have spoken to multiple banks about your borrowing needs, how much money do you want to put down for the project? For many years when rates were suppressed, it made good sense to finance as much of the project as possible. Today, that may not always be the case and the impact on cash flow of a new loan should be tested. Financial service professionals can stress test your cash flow, determine the impact to your bottom line and create a financially responsible path to move forward. You do not want to sacrifice retirement savings or necessary cash on hand to complete a project if you do not know how it may impact your business.

Know the short and long-term cash flow impact and profit contribution of each capital investment. In the past, practice owners would make a purchase with the mindset they will refinance the debt later and secure better terms. New equipment purchases were a common item to be bought directly through the seller to secure incentives for the deal. In many cases, the buyer planned to refinance the debt in six to twelve months. This is no longer a guarantee and makes the initial terms of the loan more important.

There is no hard and fast rule for how much money should be put down when securing a loan. The bank will have its requirements, but should you consider putting more dollars down for the project? Or is it more advantageous to elect a different loan that has a higher interest rate, but helps to protect your cash reserves due to a lower capital requirement at the time of the purchase?

Practice improvements are commonly made to increase production, streamline your business operation or to update an office space to create an optimum patient experience. All of these projects can be good investments over the course of your lifetime as a business owner but determining the short and long-term impact on your cash flow and profitability should not be left for chance. Know before you commit your dollars to the project. As you navigate this process, it is important that you have a fiduciary advisor supporting you along the way and not someone who stands to collect a commission for closing the loan.

The practice integration advisors at Buckingham help dentists achieve financial success by incorporating a thought-out and customized approach to managing your practice. We are happy to help you understand how a capital investment in your practice fits into your business and can help support your professional and personal financial plan. Schedule a conversation a conversation with us today!

About the author:
Brian Roemke, Buckingham Strategic Wealth Practice Integration Advisor

As a practice integration advisor, Brian provides comprehensive financial planning services to clients. He appreciates the importance of a well-rounded team working collaboratively to develop, implement and monitor a plan that helps clients achieve their distinct goals.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information may be based upon third party information and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-22-4166

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Why The Location Of Your Investments Matters

Most investors have a process for deciding which investments to buy in their portfolio—with different objectives for building wealth over time. But once you’ve selected your investment mix, have you considered how the account that holds your investments affects what you ultimately earn?

A potential game changer for your expected returns is the amount of tax you’ll need to pay, which may be annually or when you make withdrawals depending on the account type. The type of account also makes a big difference in the amount of tax owed. Thinking about asset location—or being strategic about which account holds each of your investments—can help investors keep more of their income.

Leveling the Playing Field Among Accounts

If you have ever received a Form 1099 from the IRS for investment gains or losses, or if you’ve paid income taxes after taking money from your retirement account, you know that Uncle Sam is your investment partner. Just like you, the government wants these accounts to grow because bigger returns generally mean more tax dollars to collect.

From a tax perspective, taxable brokerage accounts, traditional individual retirement accounts (IRAs) and Roth IRAs are not created equal. To level the playing field, it’s important to consider the after-tax expected return of any investment—the amount we keep. Knowing how an investment is taxed within different types of accounts is critical in determining where to own each of your investments.

Non-Qualified Accounts (Taxable)

  • In taxable accounts, such as a brokerage or joint account, you pay taxes each year you receive dividends and interest payments or when you sell investments for more than you paid for them.
  • Qualified dividends and the capital gains on investments held for at least one year are generally taxed at a preferential rate. This is also known as the capital gains rate, and it is either 0%, 15% or 20% depending on your income bracket.
  • Interest income—such as from bonds—and gains from selling investments held for less than one year are taxed at the ordinary income rate, which ranges from 10% to 37% depending on your income level. So, if you don’t plan to hold your investments for very long in a taxable account, you could wind up paying much more in taxes than if you held them for at least one year.
  • The government bears some of the risk of each investment since it receives a portion of the income in taxes (unless your tax rate is 0%).

Traditional IRAs (Tax-Deferred)

  • Traditional IRAs are tax deferred—there is no immediate tax consequence when you buy or sell investments within the account or when you receive dividends or interest payments.
  • Although you have the benefit of only paying income taxes when taking funds out, you do so at ordinary income tax rates.
  • A good way to think about your traditional IRA is to imagine it is split into two identically invested accounts: one owned by you and the other by the government (the portion of which would equal your tax rate). You’ll receive all of the income from your portion, but you also take on all the risk. Likewise, the government will receive all of the income from its portion and take on all the risk.

Roth IRAs (Tax-Deferred)

  • In Roth IRAs, you make contributions with after-tax dollars, and you don’t pay income taxes on any earnings or when taking funds out as long as you meet certain conditions.
  • Therefore, you can expect to receive all of the income from your returns on investments in these accounts. However, this also means you bear all of the risk on the entire balance.

Deciding Which Accounts Should Own What Is a Game of Prioritization

When making investment decisions, the first step is to decide what type of investments will meet your personal goals—the accounts you already have should not dictate those decisions. Only after deciding on your overall allocation target can you review your existing accounts to determine the optimal location for each of your investments.

When considering location, it’s helpful to view all of your accounts as one household portfolio, rather than separately. Although exchanging investments between accounts may lead to differing returns in one account compared with another, the goal is to create more after-tax wealth overall through tax efficiency.

To make the most of tax treatments, it’s generally favorable for most investors to prioritize tax-inefficient investments in IRAs, either traditional or Roth. As you move these investments to tax-deferred IRAs, you’ll have room in your taxable accounts to take advantage of the preferential rates for tax-efficient investments. Some examples below illustrate how to think about these decisions.

When deciding whether to place your investments in a taxable account or IRA, it’s also important to give the greatest consideration to those investments with higher expected returns—and therefore generally higher risk. For example, it may seem like simple logic to hold investments with the highest expected returns in a Roth IRA because your income won’t be taxed. However, you aren’t always better off taking all the investment risk.

Additionally, there are some instances when the placement of your investments requires more consideration, such as if you anticipate using any of your traditional IRA funds for future qualified charitable distributions because there could be greater tax advantages in doing so. Ultimately, deciding which account should own which investment will depend on each investor’s circumstances. Working with a financial advisor can help you navigate your specific case and help you set up a plan to maximize your after-tax returns.

If you are not currently working with a financial advisor, Buckingham would love to help you reach your wealth goals. Please visit our website for more information or connect with us for a short introductory conversation.

About the author:

As a wealth advisor, Patrick Kuster believes a financial plan is only as good as its implementation, and seeing the plan through is one of the most rewarding parts of his job. He loves helping clients solve their financial puzzle, pulling apart plans and discovering concepts that question industry norms. He also likes educating clients and providing them insight that keeps them on track toward achieving their financial goals.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. R-22-4212

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Economic Brief: All Eyes On Inflation For The Remainder Of 2022

Larry Swedroe economic brief all eyes on inflation

While there’s always uncertainty in the outlook for the economy and financial markets, a confluence of events has pushed the level of uncertainty to high levels, namely the Federal Reserve’s battle against inflation, Russia’s invasion of Ukraine and ongoing supply chain struggles. The markets have already priced in these risks, explaining why stocks and bonds have performed poorly this year.

Top Risks

We believe the two biggest risks to the economy are the war in Ukraine dragging on and inflation running hotter than markets expect. In addition, the effects of reduced fiscal stimulus, significantly tighter monetary policy and the stronger U.S. dollar are likely to result in slower economic growth, with in our opinion, the chance of recession in the next 12 months increasing to 30%-50%.

Sources of Stability

Although GDP growth is expected to slow, the unemployment rate should stay low through 2023 at around 3.6%. Monetary policy is still loose, with negative real rates of interest; there is still some fiscal stimulus; and both corporate and consumer balance sheets remain strong.

In The Spotlight

As the year began, many pinned their hopes on the economy shaking off the worst impacts from the COVID-19 pandemic—with expectations that reopening economies would ease supply chains and inflation. However, by midyear, it became clear that the ramifications aren’t abating as quickly as anticipated. In June, the consumer price index rose 9.1%, the fastest pace since 1981. Gasoline, housing prices and food were the largest contributors to this increase. The core index, which excludes food and energy, only fell slightly in June to 5.9% from 6.0% in May and well above where it was last June at 4.5%.

The Fed has responded to the sharp rise in inflation by hiking interest rates, though the June numbers may mean that the bank will speed up the pace of increases. Both stocks and bonds tend to perform poorly during high inflation regimes, like the one we are experiencing now. As such, financial plans should consider that there might be a negative impact on future economic growth, leading to lower equity returns.

consumer price index chart

Monetary Policy

The Fed has a difficult task in fighting inflation. The risk that the Fed is behind in tightening policy enough to slow inflation is growing, which could lead to the bank raising rates higher than the market expects. The Fed will also begin reducing its balance sheet by almost $100 billion a month in September, an unprecedented amount that could push rates higher than currently priced into the market—a negative for both stocks and bonds.

War in Ukraine

Economic sanctions on Russia have created further supply and inflation problems. Global supply chains rely on Russia for its oil and gas, wheat, and semiconductor exports. Russia is the main supplier of gas to several European countries, with Germany and Italy at greatest risk if Russia cuts off gas shipments to them. This would have a significantly negative impact on their economies, almost certainly producing a recession with global implications.

Supply Chains

The pandemic disrupted supply chains, leading to inflationary pressures. This has implications for markets because the globalization of supply chains had a deflationary impact on prices. Innovations like just-in-time inventory management—which provides the minimum amount of inventory to meet demand—led to improved productivity, profits and economic growth. Supply chains have yet to recover, which could lead to more onshoring, resulting in higher prices for consumers and lower corporate profits.

Labor Market

The tight labor market is contributing to inflation and could pressure corporate profits. The U.S.’s strong economic recovery since the pandemic downturn contributed to a tight labor market: almost two jobs are posted for every unemployed person, and the unemployment rate is down to 3.6%. Many workers also retired early during the pandemic, raising pressures on wages. The move to onshore jobs will add further tightness to the labor market, and higher wages could squeeze corporate profit margins.

Strength of U.S. Dollar

The stronger dollar has negative implications for global economic growth. As the Fed has raised interest rates faster than other central banks, the dollar has strengthened against other currencies. A stronger dollar makes U.S. exports more expensive for foreign buyers. Corporate profits may also take a hit because the stronger dollar weakens the earnings of U.S. multinationals. That could lead to lower earnings forecasts and lower price-to-earnings (P/E) ratios.

Consumer Confidence

There has been a sharp drop in consumer confidence. The Conference Board’s expectations index—based on consumers’ short-term outlook for income, business and labor market conditions—fell to 66.4 in June, the lowest level since March 2013, from 73.7 in May, signaling increased risk of a recession. The University of Michigan consumer sentiment index also reached a record low of 50.0 in June. Lower consumer confidence could slow spending and economic growth.

Housing Costs

Housing costs, especially rents, keep rising. Housing represents about one-third of the CPI, and because of the way it is calculated, it works with a significant lag. Rents have been rising sharply and will likely continue to do so as housing supply is limited, and labor markets are strong. That will create upward pressure on rents and the CPI. Higher rents also could create a substantial burden on budgets and reduce consumer spending.

key economic indicators

Investment Planning Implications

Investors dislike uncertainty—when the risk of a negative outcome increases, they demand larger risk premiums, driving P/Es down. Although this means companies are expected to have lower earnings, lower stock valuations may provide opportunities for patient investors.

Empirical evidence demonstrates that buying stocks when investor sentiment is negative has led to much higher returns than when investor sentiment is positive. The logic is simple: negative sentiment leads to low prices, large risk premiums and high expected returns. Returns are likely to be poor only if predictions turn out to be worse than expected.

Unfortunately, since not even good forecasters can tell us what is going to happen, the best you can do is make sure your plan anticipates negative shocks appearing regularly and addresses risks you are most concerned about, reducing them to an acceptable level.

Investors should always build the risk of an unexpected “black swan” event into their plans.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.

© 2022 Buckingham Wealth Partners. Buckingham Strategic Wealth, LLC, & Buckingham Strategic Partners, LLC (Collectively, Buckingham Wealth Partners). R-22-4113

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The “4 Rs” of Behavior Finance

In his book, “Thinking, Fast and Slow” , psychologist Daniel Kahneman examines the two brain systems that drive the way we think while also shining light on the common biases that impact decision making. As it turns out, our brains are hard-wired to make fast, intuitive and emotional decisions shaped by our own biases and generalizations. These mental glitches, Kahneman proposed, make us feel like we are using good judgement even though the results of these impulsive decisions often get us into trouble. Without pausing to engage the rational area of the brain when faced with a big decision, especially financial ones, you risk causing more harm than good.

High levels of uncertainty about the economy, rising inflation, global supply chain disruption, soaring gas prices and expectations of increased market volatility can stoke fear in the minds of investors planning their financial futures. This may even cause some to consider sidestepping the risk of loss by making an impulsive change to their investment strategy. Building off Kahneman’s work and behavioral economics, strategies have been developed to help investors make better decisions during periods of instability.

A methodical framework for decision making can assist in slowing down responses, hopefully reducing the likelihood that emotions and irrational thinking will get in the way. The Kaplan Behavioral Financial Advisor (BFA) course has broken this process down into “The 4 Rs”:

R #1: Recognize the Situation

When you become overwhelmed, pause and take a moment to verbalize what you are feeling. Describe the reasons for these emotions and identify the actions you are considering. Think about any previous experiences that may be shaping your perception, such as the 2008 market crash. Try to assess whether you are in a clear state of mind and if your decision could derail a well-designed financial plan.

R #2: Reflect on Your Values

Do your best to zoom out your perspective and verbalize the big picture as well as your desired long-term financial outcomes. Consider if any biases are shaping your worldview and if those biases are potentially clouding your decision-making ability.

R#3: Reframe Your Viewpoint

Describe how this potential decision relates to your values, goals and moral principles. Bring the focus back to the long-term view and concentrate on what truly impacts the likelihood of success for your financial plan. Identify any instances where a market pullback creates opportunity such as investing cash reserves to “buy low”.

Think about how similar instances in market history played out:

  • Did markets recover?
  • Have you previously made a decision with your investments that didn’t pan out?
  • Is market volatility expected when invested for the long-term?
  • What would be the impact on your values and goals if you made this decision?

R#4: Respond Purposefully

Make an educated decision based on the overall picture, not the immediacy of a market drop or a perception that you know something about the market others do not. Seek counsel from your trusted financial advisor on the best decision for your situation.

The “4 Rs” approach is designed to help you make decisions that are emotionally reflective rather than emotionally reflexive. Remember, think SLOWLY! If you have questions about your portfolio, speak with your advisor about your concerns.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this information. ©2022, Buckingham Strategic Partners. R-22-4070

About the author: As a divisional manager, Sean Brooks enjoys working with advisors in every area of their practice, from helping solve investment problems to sharing ways to run more efficient practices and build stronger client relationships. Prior to joining Buckingham, Sean was with AssetMark in a business development role, and he also worked as a banker and financial representative with JPMorgan Chase in Arizona and Illinois. Sean also spent time working as an estate planning consultant helping families avoid probate. He attended Loyola University of Chicago and earned a business degree in economics.

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Summer, Sun and Scams: Protect your Vacation from Fraud

The summer months kick off many seasons of happiness – the end of the school season for kids, BBQ season, baseball season (this is a happier time for some fans more than others) and vacation season. Over the next few months, millions of Americans will hit the road or take to the skies in search of fun, adventure, relaxation and quality family time.

Unfortunately, summer is a very profitable time for scammers and fraudsters looking to flip your summer holiday. While you’re booking airline tickets for your family, they are booking your hard-earned money into their bank account. Your trip can go from a fun-filled journey to a disastrous Griswold vacation in a blink of an eye.

According to a report published by the Federal Trade Commission, an astounding $92 million dollars were lost to vacation and travel fraud since the start of the COVID-19 pandemic. A majority of this amount stolen from Americans came from refunds and cancellations scams. From January 1, 2020 to June 15, 2022, U.S. consumers filed 58,580 reports centering around vacation and travel fraud. This amount is second only to online shopping fraud of 68,322 complaints.

The good news is you’re already equipped with the tools you need to prevent having your vacation ruined by fraud. The following tips won’t create shorter lines for the amusement park, keep bears away from your camper or stop your kids from asking “Are we there yet?”, but they can stop a criminal from gaining access to your dollars and sensitive information.

Copycat Airline Web Sites

When researching the best flight prices online, you see a great deal of significant savings with a major commercial airline. After booking the flight online or through the phone number listed, you receive a confirmation email that is missing a crucial piece of information – your pre-paid airline tickets.

In some cases, when you do receive your tickets, you will also receive a message that they are not valid due to a price increase. In order for your tickets to be finalized, you are forced to pay the additional charge. This tactic is something no legitimate company would ever do.

In either scenario, when you reach out to the airline, you discover your ticket was never booked or the flight doesn’t even exist.

To protect yourself:

  • Be cautious of third-party websites. These can appear to be legitimate when they are not. Go to www.BBB.org for reviews and see if the company has an actual physical address.
  • Double check the URL of the site before entering any information. Make sure the link is secure and starts with https:// with a lock icon on the purchase page.
  • Make all online purchases with a credit card as those charges can be disputed and you will be issued a refund.

Fake Apps

Every day, millions of people download legitimate apps from reputable companies. Scammers take advantage of the belief that a valid company is behind the software and create bogus apps that are focused on vacation and travel. They are designed to impersonate a genuine app, such for VRBO or Airbnb, and look almost undistinguishable from the real one.

Before downloading ANY app:

  • Be aware that while a fake app might have an identical logo to the real company, often the name or description will include a spelling error or typo, including the name of the app itself or developer.
  • Look at the number of downloads. For example, the real Airbnb app has been downloaded over a 100 million times. A fake app will have nothing close to that number – maybe just a few hundred.
  • Check out the reviews. Does it have more two-star than five-star ratings? If it is a fake app, there’s a great chance someone will leave a review warning others.
  • Review the permissions the app is requesting. Is it asking for authorization to things that seem unusual for a travel booking app, such as access to your calling history, microphone, camera, etc.

Other Tips

  • Before signing or paying for a trip, ask for a copy of the cancellation and refund policies. Any refusal or reluctance by the company to share these in advance means you should walk away.
  • Any travel or vacation package that asks you to pay with wire transfers, cryptocurrency or gift cards is a major red flag. If you use these forms of payment to secure your package, you will have no way to get your money back if there is an issue.
  • Just like other scams, if a vacation deal or rental property is not legit, the fraudster will try to rush you into making a decision. If you have time to think through what you’re signing up for, you’ll realize it is fake.
  • One of your best tools as always is your gut instincts. If you believe a travel or vacation offer seems to be good to be true or doesn’t make sense, it isn’t the real deal.

Scammers can quickly turn your dream vacation into your worst nightmare. By following these guidelines, you can protect your money – and your sanity. Remember, if it’s too good to be true, it probably is. If you want to learn more about preventing identity theft, protecting yourself from fraudulent activity and next steps if you are a victim, check out this recent Buckingham article.

With all of that in mind, enjoy this wonderful time of the year. Safe travels!

About the author: As the Managing Director of Strategic Initiatives at Buckingham Wealth Partners, Jared Hoffman is energized by the ever-changing challenges and opportunities he and his team face as they work to be a resource for departments throughout the organization. Jared helps advance the strategic plan by collaborating on internal and external technology rollouts, improving internal best practices through training and development opportunities and acting as a resource for projects and initiatives of all sizes to improve the overall client experience.

The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Partners®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. IRN-22-3989

© 2022 Buckingham Strategic Partners®

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