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Frank Talk - 2nd Quarter Newsletter (2017)

Published: 05/12/2017

Table of Contents


Written by: Frank Fantozzi

Happy Spring, Clients and Friends!

The month of May, with its warmer temperatures and riotous blooms, is always a welcome sight throughout N.E. Ohio, and one of the best places to enjoy nature’s bounty is the world-renowned Cleveland Botanical Garden. Later this month, we will host our 9th Annual Cleveland Economic Summit at the Cleveland Botanical Garden - Woodland Hall on Wednesday, May 24, 2017 from 4:00 pm to 6:30 pm. We invite you and your guest(s) to join us for this complimentary, late-afternoon program which will begin with a networking and cocktail reception featuring heavy hors d’oeuvres. Following our program, the Garden will remain open until 9:00 pm, so plan to stroll through, experience, and become inspired by all it offers!

9th Annual Cleveland Economic Summit
Wednesday, May 24, 2017
4:00 pm - 6:00 pm

Cleveland Botanical Garden - Woodland Hall
11030 East Boulevard
Cleveland, OH  44106

Complimentary Parking available onsite at the parking garage (validate parking ticket with the attendant upon arrival).

Join the Conversation #ClevelandEconomicSummit

Join us on social media

Our two distinguished speakers will address the highly-charged political, economic and global environment; how new and anticipated policy decisions and tax law changes may impact your finances and your business; and our outlook for the continued strength of the financial markets. 

  • Emily R. Roland, CIMA®, Head of Investment Research at John Hancock Investments, will discuss the potential impact Trump administration tax and trade policies may have on the U.S. and its trading partners; the domestic and global financial markets; and Ohio residents, businesses, and workers. Ms. Roland leads the investment research function for John Hancock Investments where she and her team are responsible for leveraging capital markets and industry research to help set the firm’s business strategy. Ms. Roland joined the company’s investments division in 2004 after holding positions in product management, marketing, and competitive intelligence over the previous 10 years. Prior to joining John Hancock, she held roles at GMO and the Boston Stock Exchange. She is a Certified Investment Management Analyst designee and holds an MBA from Boston College.
  • Eric Embacher, Visitor Experience Program Manager at Destination Cleveland, will present the organization’s latest findings on the impact of leisure and business travel in stimulating community vitality for Greater Cleveland, including job creation, direct and indirect sales, and tax revenues. Join us to learn about the vital role tourism plays in shaping our local economy and get the inside scoop on new destination developments. Mr. Embacher is the Visitor Experience Program Manager under the Destination Development and Community Affairs department at Destination Cleveland, the region’s convention and visitor’s bureau. Mr. Embacher facilitates the CLE Travelbackers workshop, educating front-line travel and hospitality staff in what it means to give visitors a truly unique, best-in-class, Cleveland experience.

Plan to join us for the 9th Annual Cleveland Economic Summit!
RSVP to reserve seats or a corporate table by May 19, 2017 to or call 440.740.0130 ext. 221.
Space is limited.

2017 Smart Business Events

Smart Business: Smart Women Awards
On April 20, 2017, Planned Financial Services was pleased to participate as a program sponsor for the Northeast Ohio Smart Business magazine’s Smart Women Breakfast in Westlake, OH. As a member of the host committee, Frank Fantozzi was honored to be a presenter during the Smart Women Awards segment of the program. The breakfast combined a live event with digital and print content to address today’s issues facing women in the workplace and recognized the achievements of leading businesswomen, inspiring male advocates, and effective women’s programs. We extend congratulations to all of the 2017 honorees! 

Smart Business
: Family Business Conference and Family Business Achievement Awards
Frank Fantozzi will be a featured speaker at the September 2017 Smart Business magazine Family Business Conference and Family Business Achievement Awards interactive workshop. Fantozzi will participate on a panel of leading industry experts, providing the type of actionable insight necessary to plan for a smooth transition of family businesses. The dynamic line up of panelists will share real life examples of what separates success stories from failures. The networking breakfast and interactive workshop will offer perspectives from both industry experts and actual family business owners to address a myriad of issues and challenges family-owned businesses face.

Want to participate? Learn more at Family Business Conference & Awards

Market and Economic Update

**As expected earlier this month, the House of Representatives narrowly approved legislation to replace most of the Affordable Care Act (ACA), also known as “Obamacare.” The bill passed 217-213, with 20 Republicans voting against and zero Democrats supporting it. Despite the House vote, the legislation still faces a tough task in the Senate, where several Republicans have already expressed concerns about some of its major provisions. As a reminder, Senate Republicans hold a 52-48 majority, so they cannot afford to lose more than two votes supporting the bill. Given the divisive climate, many fiscal legislators consider this vote as critical for their mid-term 2018 prospects.

In summary, the bill reduces federal spending on healthcare by about $1 trillion over 10 years, cuts taxes by roughly $900 billion over the next decade, and attempts to stabilize the individual market for health insurance by separating people with pre-existing conditions into higher risk pools. The most controversial aspect of the legislation allows states to opt out of essential health benefit requirements and community rating regulations, which currently do not allow insurers to price based on demographic factors.

As states decide what to do, we may have a better handle on how Senators may vote. Too many amendments would result in reconciliation between House and Senate bills, which could bring the Freedom Caucus back into play. Therefore, it is important to remind investors that this is merely the first of several steps necessary for the Trump Administration to fulfill its pledge to repeal and replace ACA.

We expect a long, and drawn out, process, particularly since the $900 billion tax cut in the AHCA would prove to be the critical down payment for tax reform. Indeed, a delay in AHCA could push tax reform back to the fall, aka, fiscal 2018.

Without making normative judgements on the bill, the AHCA does cut the capital gains tax, which has historically been a market positive, also favoring small caps relative to large caps. The $1 trillion reduction in federal spending on healthcare will likely pressure biotechnology, healthcare distributors, and pharmaceuticals, while having less of an impact on managed healthcare, healthcare services, and healthcare suppliers. We remain favorable on the healthcare sector, however, as headline risks may be already priced in and the combination of valuation and demographics remain compelling.

Commodity weakness

Turning to the financial markets, we saw some weakness in commodities in early May with price declines likely due to a combination of:

  • a fading Chinese stimulus plan
  • associated inventories in China
  • the reality of Trump plans for infrastructure no longer priced in as 2017 manifestation.

It’s important to note that supply worries are much easier to offset than demand phenomenon. Though China has seen less stimulus from Beijing and a reduction in credit growth, aggressive monetary tightening is unlikely. Global Purchasing Managers’ Index’s (PMIs) remain solid and the Organization of Economic Cooperation and Development’s Leading Economic Indicators (LEIs) have been trending upward, too.

“It’s different this time” – the U.S., not Saudi Arabia, is now the world’s swing producer and although OPEC has largely held on production cuts, U.S. rig counts are up. Perhaps this is why positive EPS at major oil companies were met with a yawn. The market is telling U.S. producers to slow down! And as the supply-demand cycle persists, consumption may increase (auto sales, too) as gasoline prices follow.

We remain neutral on energy space as supply-demand adjustments still point toward a range of $50-$55/barrel for oil as OPEC cuts likely persist. We also remain balanced on precious vs. industrial metals as global investors digest the potential of a delayed Trump infrastructure plan with Chinese inventories and improving global data.

Job growth rebounds

The job market received some good news the first week of May, after March 2017 jobs number came in below expectations. The U.S. economy created 211,000 jobs in April, rebounding sharply from a downwardly revised 79,000 in March and ahead of consensus estimates. The unemployment rate ticked down to 4.4% versus expectations of an increase to 4.6%, helped by a decline in the participation rate. Wage growth climbed 0.3%, in line with expectations, and stands at 2.5% year over year, signaling that wage pressures remain contained despite an improving labor market. We believe the overall jobs picture will likely keep the Federal Reserve (Fed) on track for two more rate hikes in 2017. 

Closing Remarks

As summer approaches, a period when some of the largest corrections have taken place in recent years, we remain keenly vigilant and aware of key events that could move markets, even as the overall economic and market backdrop remains largely positive. We continue to adjust portfolio asset allocations in response to market activity to ensure our clients’ allocations are aligned with their stated investment objectives. Our state-of-the-art Riskalyze® software, which works in conjunction with our advanced trading platform, enhances our ability to tactically manage client investments. It is designed to assist with measuring both client risk tolerance, and the risk of any given portfolio to align specific investments with client objectives. 

Your Return on Life® is always our top priority and we remain committed to providing you with the education, advice, and insight required to retain a long-term perspective and focus on your individual goals. If you need additional help or someone you know needs our advice, remember, we’re only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with the guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.

Real People. Real Answers.

Health, Happiness, and Good Fortune,

Frank Fantozzi
President & Founder

ESOPs Offer a Tax-Efficient Exit Strategy for Business Owners

Written by: Jeremy Bok

Do you own a closely held company? Are you approaching retirement age? If so, you may be struggling to balance conflicting goals for your business. An employee stock ownership plan (ESOP) may help.

A look at the problem

Business owners often need to tap at least some of the value of their business to fund their retirement. At the same time, they may wish to preserve their company for their children, employees and community.

Further complicating matters is that there can be tax advantages to transferring ownership to the next generation as early as possible. Yet owners aren’t always prepared to walk away from their company when it makes the best sense from a tax perspective.

Possible solution

Enter the ESOP. This tool can provide a tax-efficient exit strategy that allows you to remain in control until you’re fully ready to retire. A note of caution: ESOPs are available only to corporations. So if your business is organized as a sole proprietorship, partnership or limited liability company (LLC), you’ll have to convert it into corporate form (a potentially complicated proposition) to take advantage of this strategy.

An ESOP is a type of qualified retirement plan. But instead of investing in publicly traded stocks, bonds and mutual funds, an ESOP is designed to invest primarily in your company’s stock. Like other qualified plans, it’s subject to rules and restrictions, including contribution limits and coverage requirements. Unlike other plans, however, ESOPs must obtain annual independent appraisals of their stock.

When employees become eligible for benefits, they receive the vested portion of their ESOP account balance in the form of stock or cash. If your company is closely held, employees who receive stock must be given a “put option” — the right to sell the stock back to the company during specified time windows at fair market value.

Count the benefits

The advantages for owners are significant. By selling some of your company stock to an ESOP, you achieve greater liquidity, diversification and financial security. What’s more, if your company is a C corporation and the ESOP acquires at least 30% of its stock, you can defer any taxable capital gains on the sale by reinvesting the proceeds in certain qualified securities.

Giving up ownership, however, doesn’t mean giving up control — at least not right away. You can continue to serve as your company’s CEO and, as a trustee of the ESOP trust, vote on most corporate decisions.

ESOPs also make sense from an estate planning perspective. Selling shares to your company’s plan provides you with liquid assets to distribute to children or other family members who aren’t involved in the business. At the same time, you can hold on to enough stock to transfer control of the business to those who are involved.

Business boon

By tying the value of the ESOP to your company’s stock, you give employees a powerful incentive to work hard for the business’s future. Company contributions to the ESOP that are used to acquire your stock are tax-deductible, and the company can even borrow the funds it needs — essentially allowing it to deduct both interest and principal payments on the loan.

If your company is structured as an S corporation, the ESOP’s allocable share of its income is exempt from federal income taxes. (A similar exemption is available in most states.) This means that an S corporation owned 100% by an ESOP can avoid federal income taxes — and often state income taxes — altogether. However, keep in mind that S corporation ESOPs present certain tax disadvantages as well, such as preventing owners from deferring gains on shares sold to the ESOP.

Consider the costs

Despite the benefits, ESOP costs can add up — including the expense of annual appraisals, stock repurchase obligations, loan payments and qualified plan administration. Weigh such costs with your advisors before adopting this strategy. In addition, tax reform could potentially affect ESOP and estate planning strategies. So be sure to consult your tax advisor. 

Sidebar: Family comes first in a family business

If you plan to leave your business to your children, it’s important to take steps to prevent succession struggles. What would happen, for example, if you had two children and one was eager to sell and the other wanted to keep the business in the family? Such conflicts can erupt into open combat between heirs and even destroy a company.

Write a succession plan that addresses what will happen should you die, become incapacitated or retire. Answer questions now about future ownership and any potential sale so that your heirs won’t have to make important decisions during a traumatic time. If one of your children is interested in running the business, provide him or her with the capital — for example, a life insurance policy — to buy out other heirs.

There are plenty of other issues to address in your succession plan. But for a family-owned business, family really should come first.

Portfolio Diversification: Too Much of a Good Thing?

Written by: Elisabeth Plax

Diversification is a critical concept when assembling a risk-conscious investment portfolio. If you own a variety of investments — including several different types of investments — poor performance from one or more of them is less likely to depress the value of the entire portfolio.

So it’s tempting to conclude that, if diversification is a good thing, a lot of diversification is even better. Not so. Owning too many investments or spreading assets across too many asset classes can work against you.

Reducing losses

Diversification is designed to reduce the impact of losses that you might experience when certain asset classes, particular market sectors or even the general market is struggling. While some investments or asset classes lag, others may perform well — or, at least, not as badly. Thus, diversification helps reduce the overall volatility of your portfolio.

Although diversification helps manage risk, it will never keep your portfolio fully protected from losses. For example, in times of financial crisis many investments or asset classes move in tandem and punish even well-diversified portfolios.

Encouraging mediocrity

Although the risks of underdiversification are relatively clear, the negative implications of too much diversification may initially be harder to see. But there are several reasons why owning too many investments or investment types can work against your portfolio:

Complexity. The more investments you have in your portfolio, the harder it can be to keep track of all of them. It’s more challenging to monitor each investment’s performance and understand when something fundamental has changed with individual stocks or mutual funds. Consequently, you may not know when it’s prudent to rebalance your portfolio or change your investment strategy to remain on target toward long-term financial goals.

Portfolio overlap. Another potential risk of overdiversification is holding overlapping securities. The more individual investments you own, the greater the likelihood that you may not be as diversified as you think. For example, if you have two small-company growth mutual funds in your portfolio, the odds are good that they hold some of the same stocks. Not only does this mean that you’re duplicating investment costs, but also that you’re getting greater exposure to certain stocks than you intended. Bigger positions can seem like an advantage if those stocks are doing well — but not if they stumble and make your portfolio more volatile.

Dilution. Research has shown that, at a certain level of diversification, investment portfolios tend to produce consistently mediocre returns. This happens because, when you have a large number of holdings, the returns of high-flyers become diluted by the average-to-poor returns of the portfolio’s remaining investments.

To review, a portfolio of two stocks is less risky than a single-stock portfolio because performance problems with one security can be offset by the other security’s higher returns. But the opposite is also true. If a single stock performs well, a less-robust second stock can limit overall portfolio returns. The challenge for investors is to limit risk while encouraging returns. So while diversification is an essential investment tool, you need to use it wisely.

Optimal number and type

Recognizing when you might have reached the point of overdiversification isn’t always easy. That’s where financial professionals come in. Your advisor can help you determine an appropriate number and type of investments so that diversification strategies support — not undermine — your financial objectives. But as always, note that no investment strategy, including diversification, can guarantee gains or prevent losses.

When One Trustee Isn't Enough, Consider Appointing a Trust Protector

Written by: Cynthia Yang

Irrevocable trusts can allow for the smooth, tax-advantaged transfer of wealth to family members. But there’s a drawback: When you set up an irrevocable trust, you must relinquish control of the assets placed in it. What you can control is who will eventually oversee distribution of assets after your death.

However, sometimes — particularly when the trust creator isn’t completely confident that the trustee will carry out his or her wishes — one trustee isn’t enough. That’s when you might want to consider appointing a trust protector.

Board/CEO relationship

A trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.

There’s virtually no limit to the powers you can confer on a trust protector. For example, you can enable a trust protector to:

  • Replace a trustee,
  • Appoint a successor trustee or successor trust protector,
  • Approve or veto investment or beneficiary distribution decisions, and
  • Resolve disputes between trustees and beneficiaries.

A word of warning: Although it may be tempting to provide a protector with a broad range of powers, this can hamper the original trustee’s ability to manage the trust efficiently. Keep in mind that the idea is to protect the integrity of the trust, not to appoint a co-trustee.

Exercise of discretion

Trust protectors offer many benefits. For example, a protector with the power to remove and replace the trustee can do so if the trustee develops a conflict of interest or fails to manage the trust assets in the beneficiaries’ best interests. A protector with the power to modify the trust’s terms can correct mistakes in the trust document or clarify ambiguous language. Or, a protector with the power to change the way trust assets are distributed if necessary to achieve your original objectives can help ensure your loved ones are provided for in the way you would have desired.

Suppose, for example, that your trust provides that assets will be distributed to your son after he graduates from college and is gainfully employed. After college, however, your son decides to spend two years in the Peace Corps. If that doesn’t meet the trust’s strict definition of “gainfully employed,” yet your son did well academically and has demonstrated an ability to manage money responsibly, the trust could authorize the protector to modify the trust to allow for early distributions.

Wise choice

Choosing the right trust protector is critical. Given the power he or she has over your family’s wealth, you’ll want to choose someone whom you trust and who’s qualified to make investment and other financial decisions. Many people appoint a trusted advisor — such as an accountant, attorney or investment advisor — who may not be able or willing to serve as trustee but who can provide an extra layer of protection by monitoring the trustee’s performance.

Appointing a family member as protector is also possible, but it can be risky. If the protector is a beneficiary or has the power to direct the trust assets to him- or herself (or for his or her benefit), this power could be treated as a general power of appointment, potentially triggering negative tax consequences.

Powers and duties

If you decide you’d like to have a trust protector, ask your attorney to draw up documents that clearly define this individual’s role and authority. Your attorney will be able to explain a protector’s customary powers and duties, but you should also bring up specific scenarios that you want to protect against.

What to do if You Inherit an IRA

Written by: Frank Fantozzi

If you inherit an IRA, you have several options for handling the funds — depending on your relationship with the original accountholder. But be careful before you take any action: Tax consequences vary dramatically. Here’s a simple summary.

Spousal benefits

A popular option for individuals who inherit an IRA from their spouse is to roll it over into a new or existing IRA in their own name. The advantage of this approach is that you don’t need to start taking required minimum distributions (RMDs) until after you reach age 70½. The downside, if applicable, is that, if you choose to withdraw funds before age 59½, you’ll generally owe a 10% penalty in addition to any applicable income taxes.

If your goal is to maximize tax deferral, rolling the IRA into one in your name is your best bet. But if you think you may need to access some or all of the funds before you turn 59½, other strategies allow you to avoid the 10% penalty. For example, you can withdraw the funds as a lump sum or over five years (if the accountholder was under age 70½), paying applicable taxes (but not penalties) as distributions are made. You can also transfer the funds into an inherited IRA, which allows some continued tax deferral but also the ability to take penalty-free distributions before age 59½.

Nonspousal options

If you inherit an IRA from someone who isn’t your spouse, you can’t roll it over into an IRA in your name. However, you can withdraw the funds as a lump sum or within five years (if the original accountholder was under age 70½), paying any applicable taxes (but no penalties) as distributions are made.

Another, often better, option is to transfer the funds into an inherited IRA for your benefit, but in the original accountholder’s name. An inherited IRA doesn’t delay RMDs until you reach age 70½, but it does allow you to stretch them over a long period of time. The start date for RMDs and length of the distribution period depend on the original accountholder’s age at the time of death. If the accountholder was under 70½, RMDs must begin by December 31 of the year following that person’s death and distributions are spread over your life expectancy.

If the original accountholder was 70½ or older, you have until December 31 of the year following the accountholder’s death to begin taking RMDs — with one exception: If the accountholder didn’t take an RMD in the year of his or her death, you must take one by the end of that year. In either case, distributions are spread over your life expectancy or the original accountholder’s life expectancy, whichever is longer.

Rules are complex

The rules surrounding inherited IRAs are complex. So if you have any questions — particularly when it comes to taking RMDs — consult your tax and financial advisors.

**IMPORTANT DISCLOSURES Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Research source: LPL Financial, May 2017. Investment advice offered through Planned Financial Services, a Registered Investment Advisor Securities offered through LPL Financial, Member FINRA/SIPC Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor. Other advisory services offered through Planned Financial Services, a registered investment advisor. 401(K) Prosperity and Planned Financial Services are separate entities from LPL Financial. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Planned Financial Services is a separate entity and not affiliated with Smart Business magazine. A portion of this material has been prepared for the representatives’ use.

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