Marilyn was asked to address the claims of another advisor who insists “[the Certified Financial Planner designation] doesn’t reflect what most people are looking for in a financial advisor“.

Marilyn’s response can be found in the Grand Rapids Business Journal and is copied below:

 Take another look at the CFP designation

In a recent article by Pat Evans (“Some advisors eschew the CFP, April 8), stockbroker Jaime Westenbarger was quoted as saying that he has not earned the Certified Financial Planner certification because “it doesn’t reflect what most people are looking for in a financial advisor.”

I and thousands of other CFP professionals and their clients would respectfully disagree. Many of Mr. Westenbarger’s comments seem out of context and are based on old models.

CFP professionals reflect what people seek in a financial advisor. Consumers want someone who makes sure the many areas of financial life (budgeting, education and retirement planning, tax planning investments and risk management) are coordinated into an overall financial strategy — a strategy based on the client’s needs and goals. People want someone who puts the client’s interest ahead of their own.

Mr. Westenbarger refers to “licensed financial advisors.” There is no such thing. There are licensed stockbrokers and licensed insurance sales people. CFP certification is about financial planning. He said “the CFP designation is sold by a company.” Not true. CFP Board is a 501(c)(3) nonprofit organization whose mission is to benefit the public by upholding CFP certification as the recognized standard of excellence for competent and ethical personal financial planning.

CFP certification is widely respected because of the rigorous education, examination, experience and ethical requirements in place to obtain and maintain the credential. And, yes, given the level of the work and responsibility, a B.A. degree is a prerequisite — that’s not a bad thing, rather a reflection of our high standards. All CFP professionals — regardless of when they became certified — are subject to disciplinary action if they have been found to have been in violation of its Professional Standards of Conduct. CFP Board views its enforcement process as a critical consumer protection.

Financial planning, when done properly, can provide great benefits for consumers; when omitted or done improperly, it can cause great harm. CFP Board is dedicated to financial planning being a recognized and regulated profession — a position that gives the public confidence in the competence and ethics it seeks in financial professionals.

Marilyn Capelli Dimitroff, CFP
President, Capelli Financial Services Inc.
Bloomfield Hills

Taxes detract from investment returns – what you keep is far more important than what you make.  Although true for everyone, this issue is especially applicable to investors in the highest bracket.  Ordinary income rates have increased, the capital gains rate went up by 1/3 and there’s an additional 3.8% tax that applies to investment income in some cases.  Missteps are now more costly.

We invest portfolios with an eye on after-tax returns,  following a few simple rules.  Where ever possible, we avoid short-term capital gains, realize long-term gains sparingly, utilize tax-deferred and tax-free retirement accounts, transfer appreciated holdings rather than cash (in general) when giving to charity, and use tax-free bonds (municipals) as appropriate.

For many investors, municipal bonds are more attractive than corporates and treasuries on an after-tax basis.  We like using ladders of individual bonds in larger portfolios, a practice we employed as appropriate until 2007.  At that time, the financial health of issuers became problematic as did their declining yields; we also became concerned with marketability.  Over the last several years we have chosen to use diverse, low cost bond funds and ETFs – a strategy that has accomplished our stability/income goal.

Our investment team reevaluated the bond ladder strategy this quarter.  We carefully analyzed the individual municipal bond market,  scouring inventories of major dealers nationwide. What we found was limited secondary supply, bonds trading at 15- 20% premiums and low yields (not surprisingly).  With interest income so low, cost becomes a major consideration.  After much analysis, and careful consideration of alternatives (including ETFs and separate account managers), we decided that adding to short-term, high-quality municipal bond funds provides the most potential benefit in this environment.  With national diversification, extremely low internal costs and excellent liquidity, we find Vanguard’s municipal bond funds to be a very efficient way to bring tax-free bond exposure into portfolios.

As always, we want you to know what you own and why you own it.  If you have any questions on this matter, or others,  don’t hesitate to call or email me directly at (Jason@capellifs.com)

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” Will Rogers

Behaviorists have long observed that when tax rates exceed 40%, people focus more on avoiding taxes than earning income. This research influenced Bill Clinton’s 1993 decision to set the top tax bracket at 39.6%.

In 2013 many taxpayers will be paying a top rate well over 40%. While the stated top bracket is 39.6%, surtaxes push it higher. As a result, we are all engaged once again in finding strategies to minimize the tax bill and maximize what we keep to spend and invest.

While there are many issues, let’s explore the new 3.8% “NIIT” (Net Investment Income Tax)since this surtax is influenced by the investments you own. Here’s the scoop:

Individuals will owe the tax if they have Net Investment Income and also have Modified Adjusted Gross Income or MAGI (the bottom line on Page 1 of your tax return) over the following thresholds:

Filing Status Threshold Amount
Married filing jointly: $250,000
Married filing separately: $125,000
Single: $200,000
Estates and trusts: (generally) $11,650

What is included in Net Investment Income? Interest, dividends, capital gains, rental and royalty income, non-qualified annuity income, income from financial/commodity trading businesses and passive activity income to the taxpayer. Some depreciation and depletion can offset the income.

Among income not included in Net Investment Income are salary, bonus, IRA distributions, self-employment earnings, pension income, social security income and the sale of shares owned in “pass through” business in which you are active.

If you are subject to this tax, you must make payments quarterly to cover your liability. You can be penalized for waiting until you file your return to pay the surtax.

Even if you are not subject to this surtax now, be aware that the Threshold is NOT indexed for inflation – meaning that more and more folks will be subject to the new tax over time.

So what strategies might offer help? Things that reduce MAGI. Here are some potential initial considerations:

•  Using more tax-free instead of taxable bonds
•  Using tax-deferred annuities to leap-frog high earning years
•  Using life insurance where appropriate
•  Making Roth conversions or using Roth IRAs or 401(k)s

Other ideas may have value but have greater complexity and more limited use. Examples include using rental real estate that can be depreciated, using Master Limited Partnerships, leveraged REITs, using oil and gas investments with depletion and intangible drilling, choosing appropriate accounting years where possible, using non-qualified deferred compensation plans, creating Charitable Remainder Trusts and utilizing installment sales.

Each of these strategies has risks/downsides as well as benefits; and their use depends on your own complete financial picture over a multi-year period. And while reducing tax liability is important, taking extraordinary risks to avoid a 3.8% penalty doesn’t make sense.

There are many new and thorny issues. Know that we’re working on all of these concerns. Understanding the implications of the new rules and developing well thought out strategies will take some time. The tax software folks tell us no computer tools are expected until about midyear. This surtax is only one of many changes. Each of the new rules adds complexity to the approach. You can see the importance of planning in identifying useful strategies and appropriate investments. We encourage you to update your financial strategy with us this year to ensure that you are making good choices and that your investments are aligned with your financial needs. The best way to keep more of your money is to make sure that the many areas of your financial life are coordinated into an overall financial strategy.

Please make sure we receive a copy of your 2012 federal and state income tax returns.

We’re pleased to introduce Joe Kettinger to you. Joe joined the Capelli team in February as Investment Associate and has already made contributions. Joe graduated with Honors from Grand Valley State University with a double-major in Finance and Economics. Following graduation, he worked in commercial banking at Bank of America. Joe is a level one candidate in the Chartered Financial Analyst (CFA) program. We are delighted to have him on board.

Portfolio reports are included for your review. Please note some column changes – a result of coordinating our reporting with Schwab’s new cost basis tracking. Descriptions are at page bottom.

 — “Why 2012 Was the Best Year Ever,” The London Spectator, December 15, 2012

2012 certainly didn’t feel like the “greatest year”. For all twelve months we were deluged with stories of impending calamities: a collapse in Europe and evaporation of Greece, runaway US debt and deficit spending, a divisive election in the US and looming return to recession, the Asian slow down, the dysfunction in DC, the Fed, Superstorm Sandy, and on and on. Pundits continually predicted a collapse in market prices any-minute-now. Stories about “The Death of Equities” picked up in frequency as the year progressed. We had clocks on our TV screens marking the seconds until we plunged off the Fiscal Cliff.

And yet….Oh my! In 2012, and even in December, the stock price of the majority of businesses in the world increased. The market value of global equities rose by $6.5 trillion last year per the MSCI All-Country World Index (MXWD). Wall Street, the big banks and media sources got it wrong. Investors spent much of the year waiting for one disaster after another that didn’t occur.

Does this situation hold lessons for us? Yes – but let’s make sure that we identify the right ones. There is no real lesson in the disparity between predictions and results. It is, in fact, the exception when the two are aligned. Did we learn that the seriousness of the issues was overblown, less dangerous than predicted? Not necessarily. The problems were there and, for the most part, are still unsolved. But the framing has changed on many of them and a form for potential solutions – or at least progress – has begun to be discerned.

Here are some of the important messages to take away:

• The issues that are most widely debated, the ones that everyone knows and writes about, are less likely to impact future market behavior than the ones that take us by surprise. Widely publicized worries are generally already reflected in current market valuations. World markets are quite efficient in that regard.
• People solve problems. The history of mankind is the history of discovery, of overcoming obstacles and of creating innovative solutions. The process of obtaining results may not be smooth or elegant or pleasing but it is effective. A bet against this history is a bad bet.
• Knowing events that will occur does not ensure knowing how markets will react. If, on December 1, 2012, we knew that on December 31st no deal for fixing the Fiscal Cliff had been signed, would we have expected the Dow Jones Industrials to be higher at month end or to rise 166 points on the last day?
• Stock markets are companies, not governments. Companies will adapt to whatever schemes governments invent to raise revenues. Businesses will seek ways to efficiently generate good income and profits. The global companies of the 21st century manage world systems to improve bottom lines. The opening news quote is correct: companies today are more profitable, more efficient and more productive than any time in history.

Let’s celebrate what we human beings have accomplished and appreciate the potential for continuing breakthroughs. While it’s an enormous challenge to dampen the din of the crisis-du-jour message – as determined by media sources – it is easier if we put these crises in the context of a multi-decade investing horizon.

We cannot tell you where the value of businesses will close at the end of 2013 but we do know that holding a broadly diversified portfolio with low costs – and rebalancing appropriately – provides an outstanding risk-adjusted opportunity to benefit from world progress and fund your lifetime needs.

All of us at Capelli Financial Services, Inc. wish you a peaceful, healthy and prosperous New Year. Please give us a call if you have any questions or comments.

Regarding the cliff, a concerned client emailed this question this morning:

“Should we be out of the market right now and sitting on cash until this blows over?”

Here is my answer:

No.  There is no doubt that things are on edge because of the situation in DC.  However, here’s why we don’t want to sell out:

1.   Everybody knows about it.  Probably no investor on the planet is unaware of the fiscal cliff and all the issues.  The markets are factoring that into pricing.  The things that really wallop (highly technical term!) prices are things that come out of the blue as a surprise.  That said, when we actually get closer to midnight 12/31 without consensus, we would expect a decline.  Personally that’s what I believe will happen.

2.   Even if we knew exactly how the events will unfold, we cannot reliably predict how the markets will react.  Having done this a long time, this is a lesson learned from experience.  There are many examples of times when, if you knew the coming events, you would have sold – and you would have misread the market reaction.

3.  There are two decisions involved.  If we decide to sell, we will need to decide when to get back in.  Once there is a whisper of resolution, markets could climb rapidly and you could buy in higher than you sold.  Once it blows over, it’s too late.  And there are costs to sell and to buy.

4.  You have a widely diversified portfolio.  A portion is in core equity right now – low cost, broadly diversified, world companies.  You also have an allocation to “opportunity” – gold, energy, real estate, etc.  The remainder of the portfolio is designed for stability.

5.  These portfolios are for your future.  Today’s prices are not your prices.  The S&P is below where it was 13 years ago so we are in a long, go-nowhere market that has experienced two >50% declines since 2000. A better place for us as investors right now.  I’m much less worried today than I was in 1999.  Over your lifetime, values should be significantly higher.  Realistically, you should hope that markets don’t rise until you take distributions!  Note: we have already accrued anticipated near-term distributions in cash.

6.  We will come to some resolution in early 2013.  My guess is that waiting until tax rates have risen will give the legislators and Obama the ability to say “See, we lowered taxes”.  It releases Republicans from the Grover Norquist pledges and enables everybody to claim a victory.  It forces spending cuts that can then be selectively restored.  Convoluted?  Of course.  Once we have clarity, even though everyone will have things they don’t like, we can move forward.

Accelerate Capital Gains in 2012?

This communication discusses the issue of recognizing long term capital gains. For many years the tax on profit from investment assets held for a year or longer has been subject to a maximum federal tax rate of 15%. Beginning in 2013, for married couples with taxable income of $250,000 or above ($200,000 for singles) realized long term capital gains, to the extent they exceed the limits above, will incur an additional 3.8% surtax. In addition, if the fiscal cliff rates take effect or if President Obama’s proposal is accepted, the long term capital gains tax rate will rise to 20% from the current 15%.

If you fall into the affected group, your first reaction may be to sell all holdings with long term capital gains now and the buy them back immediately. You would then hold the same portfolio but you will have reset (raised) the basis of your assets. You would create a larger tax bill for 2012 but the profits would be taxed at 15%, not at 18.8% or 23.8% – a savings indeed. Don’t forget that when you recognize capital gains you also must pay any applicable state and local income taxes as well.

Problems with “Gain Harvesting”

For low turnover portfolios it doesn’t work. You will deplete your holdings by the amount of the additional taxes due, ending with fewer shares. So a smaller pool will be available for future growth. For most of us, the longer you keep the money from the government, the more wealth you build.

• You will pay tax all at once rather than  spreading the liability over your lifetime. Most folks sell investments when they need to use the proceeds – a process that occurs slowly over  time, distributing the tax bill over multiple future years. Yes, the tax rate after 2012 is higher but more money is working, capital-gains-tax-deferred.
• The market is volatile. It is impossible to know the optimal time to make the sales. Ideally, you want to choose a day when prices are down in order to minimize your gain and to repurchase at a lower price. But no one can predict market swings.
• It is almost assured that tax schemes and rates will continue to change over your lifetime, perhaps creating lower capital gains taxes or eliminating them in the future.

Factors to Consider

Charitable commitments: If you intend to make charitable contributions with long-term capital gain property in the coming years, you have less exposure to higher tax rates. Don’t sell assets you intend to donate.

Loss Carry Forward: What remains of your loss carry-forward? Whether you sell this year or next is immaterial if your unrealized gains are fewer than your carry-forward.

Your age: The current tax code allows heirs to “step-up” the cost basis of inherited investments to the fair market value on the date of death. There’s no guarantee that this provision will survive a tax overhaul. However, for investors who are older or in poor health, harvesting gains now may eliminate the advantage of a step up in basis.

How long you plan to hold an asset:  A core holding that you will retain indefinitely is probably not a good candidate for immediate sale. Your time horizon is a major driver of your decision.

Your future tax bracket:If you will earn less in coming years or at retirement, you may escape the income tax brackets subject to these higher rates.

Actions to Consider:

• Taking capital gains this year if you have a committed future outlay that will require raising cash in the near term. For example, if you will fund college expenses or remodel your home, selling assets this year is attractive.
• Selling an asset that you hold at a gain and that is not a good long term choice. We can review with you assets held outside of portfolios we manage.
• Rebalancing taxable portfolios before year end, recognizing gains at today’s lower rate.

At Capelli Financial Services, Inc., we will be rebalancing portfolios as appropriate before year end. And for clients subject to the higher taxes going forward, we will be reviewing whether taking additional action makes sense.

Please call us to discuss your personal situation.

We all want to minimize our tax bill. While tax strategies are important and always a consideration, they are not the primary driver of investment decisions. Sound investment strategies depend on a coordinated analysis of your goals and needs, overall position, resources, tolerance for risk, view of markets and other factors.

The election season is behind us. We’re ready for Starbucks holiday cups and Jimmy Stewart. But before we pour the eggnog, we have a bigger problem to deal with.

President Obama won another term as our 44th president. With a few new players, Republicans maintained control of the House of Representatives and Democrats kept control of the Senate, leaving the door open for political gridlock. Equity markets sold off Wednesday and Thursday – perhaps due to concerns about the looming “Fiscal Cliff”, or maybe for another reason. The true driver(s) of short-term market movements are impossible to corral.

Addressing the so called “Fiscal Cliff”, a term coined by Federal Reserve Chairman Ben Bernanke, is likely to be top of mind when lawmakers return to work next week. If they can’t find common ground before the year-end, the federal government will automatically cut spending and increase taxes. Ordinary income, capital gain, estate and payroll taxes would increase. Tax credits and itemized deductions would be reduced.

The Tax Policy Center estimates that households earning between $100,000 and $200,000 would pay, on average, an extra $6,400 in federal taxes. Those earning between $500,000 and $1,000,000 would pay on average an additional $34,600 per year.

There is no question that reducing consumer spending power and cutting defense contracts would be a set back to the economy. A weaker business climate would exacerbate the big problem facing the U.S. and other developed world economies: the increasing level of government debt.

But would it impact equity markets?

While everyone likes lower taxes, tax rates are not directly correlated with market returns. Let’s remember that the S&P 500 returned 18.2% compound annual return in the 1990s even though higher tax rates were in place. And the tax cuts that began in 2001 did not result in positive market returns; the S&P 500 is currently below where it was at the turn of the century. We see that financial markets rapidly disseminate information into prices. The possibility of higher taxes, reduced government spending and a 2013 recession have been widely discussed during 2012 – and yet equities have, so far, posted double digit gains in nearly every asset class this year.

We don’t know how this situation will play out. We hope that our politicians can work together and make compromises to tackle the big issues. There is no certainty. But either way, people around the world will need food, shelter and goods. They will want products and services. They will long for better lives ahead and demand innovations. Companies provide these things.

The investment thesis behind employing a diversified portfolio of stocks and bonds isn’t dependent on an undivided and harmonious Congress. You own stocks because the private sector has demonstrated an ability to earn positive return on capital, irrespective of the economic challenges du jour. Obstacles to economic progress come and go. This problem will be solved. Others will surface. The only certainty is always uncertainty.

We expect to see increased volatility in equity markets as lawmakers work toward a solution. But we don’t see it as motivation to alter your investment strategy – a strategy that is designed to provide a lifetime of financial wellbeing. Please don’t hesitate to call us if you have any questions.

Check out the article here: http://www.cnbc.com/id/49255945

Enjoy!

The problems in Greece are broadcast regularly. Tuesday the morning news showed throngs of people squeezed into a square in Athens awaiting a talk by German Chancellor, Angela Merkel. There was fear that the crowd would riot. It didn’t. Given all the negative news about Greece, the country seems doomed. Greek stocks must be a disaster!

But no. The Greek stock market returned over 11% through the third quarter in 2012, beating the returns of many traditional European countries like France (6.2%), Sweden (8%), Switzerland (9.4%) and the UK (3%).

Every Spring, members of the financial media rebroadcast the slogan “Sell in May and go away”. The assumption is that the stock market will decline until the Fall and investors may as well cash out and go sailing. 

Not in 2012. Since mid-May through the end of the third quarter the S&P 500 Index rose 8%. The stock market has been positive for this time period in three of the last four years.

Apple stock is the best place to invest this year.

Well, to the end of the third quarter, Apple stock was up 65% counting the dividend paid this summer. Not bad! But the less sexy housing stocks Pulte and KB Home realized gains of 146% and 116% respectively. Apple was 16th in performance of all S&P 500 stocks through September 30th.

We are facing many big issues – the election, unrest in the Mideast, the gridlock in Washington…. Each of these challenges has a variety of outcomes. While the presidential election, for example, could go one of two ways, the congressional power situation has many possible outcomes. Firms dealing with political speculation are now looking at a whole set of potential combinations and handicapping the probability of each. Then they are going a step farther and making conjectures on what legislation will result in each scenario.

The problem is, even if they were correct on each of their predictions, we wouldn’t KNOW how the markets would react.

After the November 6th election it’s likely that we’ll have some clarity about specific actions to consider before year end. Certainly we will have a better idea of the direction of change and will be communicating our thoughts to you.

Still, it’s important to remember that the way things play out is always dependent on events that have not yet occurred and are unknowable. It’s this fact that makes effective diversification so important. We are not willing to take big bets with our resources or yours on one particular outcome. We want to hold assets that don’t all act the same way when exposed to the same risks or events.

Diversification means that your investment portfolio results will never match the returns of the very best performing asset class. But it also means that you won’t be devastated by fully experiencing the worst.

We do actually have a crystal ball in our office.  Unfortunately the only interesting feature it displays is bubbles.

In the last quarter, Capelli Financial Services, Inc. has been in the news frequently:

• We were featured in the Wall Street Journal in August for our work in the lump sum pension area and our investment approach.
• Jason Close, CFA, CFP® was the expert and the new dad in a September USA Today article on financial advice for parents (note that his wife, Jackie, and new daughter, Violet, have a role too!).
• Evelyn MacIntyre, CFP® was honored in the Journal for Financial Planning for her Leadership in Action award, recognizing her service to the profession and influence in government affairs.

Enjoy these crisper autumn days.  Please don’t hesitate to contact us if you have any questions.