There’s an ETF for That — or Not

Morningstar’s annual ETF report finds that as of December 6, 2016, 220 new exchange-traded products (ETP) (inclusive of exchange-traded funds and exchange-traded notes) were launched in the U.S. market in 2016. This places 2016 fourth behind 2007, 2015 and 2011 in terms of total number of new ETP launches in a given calendar year. There are now a total of 1,957 ETPs available to investors.

Since the SPDR S&P 500 ETF (SPY) was launched in 1993, 2,531 ETPs have been brought to market. Nearly 23% of these products have been closed. Generally, as Morningstar’s “Worst of 2016” list indicates, ETPs that perform poorly, fail to gather assets and ultimately close. They tend to be trendy products tied closely to current headlines rather than designed for the long-term.

Morningstar’s pick for 2016’s least successful ETF is the VelocityShares Leveraged Crude Oil ETN, closely followed by the VelocityShares 3x Inverse Crude Oil Fund. These VelocityShares products give you three times the daily movements of the price of oil on the global markets. The first delivers three times the amount that the price changes in the same direction, while the second offers three times the movement in the opposite direction. I’m not sure who would want to introduce three times the volatility.

Morningstar also dissed the Whiskey & Spirits ETF (WSKY). According to ETF Trends, WSKY seeks to reflect the performance of the Spirited Funds/ETFMG Whiskey & Spirits Index, which is comprised of companies that are whiskey and/or spirit distilleries, breweries, and vintners and related luxury goods companies engaged in the sale of whiskey or the production and sale of mixers for use with premium spirits, according to a prospectus sheet.

However, WSKY is not as diversified as it sounds. Not only is this portfolio concentrated on a small component of a much larger business sector, it is highly concentrated within the small realm of alcoholic beverages. That is, a single stock accounts for 23 percent of the portfolio, and its top 10 holdings comprise 79 percent of the total portfolio. What’s more, investors pay up to invest in something trendy; the ETF has a high expense ratio of 75 basis points a year.

The rest of the 2016 worst-performers list features an eclectic mix of funds, several of which are single-country ETFs. The Global X MSCI Nigeria ETF lost 33.3% on a year-to-date basis, the worst performance among any single-country fund.

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Social Security Changes in 2017

Do you know your full retirement age for purposes of determining your Social Security retirement benefits? Full retirement age is the age at which a person first becomes entitled to full (unreduced) retirement benefits. For years, that age was 65. However, that age has been gradually increasing until it reaches 67 for people born in 1960 and later. You can, however, apply for benefits earlier at age 62, although your monthly benefit amount will be reduced nearly 26 percent compared to the benefit for your full retirement age.

Full retirement age is 66 and two months for people born 01/02/1955 through 01/01/1956. And these folks are eligible to receive permanently reduced retirement benefits when they turn 62 in 2017. You can find your full retirement age, along with other important information, on the Social Security Administration’s website.

The Social Security Administration recently shared these changes that are applicable in the year ahead:

  • Social Security’s 60 million beneficiaries will get 0.3 percent more in monthly benefits. Retired workers will see a $5 bump on average to $1,360.
  • The most a worker retiring at full retirement age in 2017 will receive is $2,687 per month, up $48 from 2016.
    The amount of earnings subject to Social Security tax in 2017 will increase to $127,200, up from $118,500 this year. This tax hike will affect about 12 million of the 173 million people paying into the system.
  • In 2017, for every $2 you earn above $16,920, one dollar of benefits will be withheld. In the year you reach your full retirement age, $1 of your benefits will be withheld for every $3 earned above $44,880. Once you reach full retirement age, Social Security will recalculate your benefits to give you credit for those withholdings.
  • Previously, you could use a technique called “file and suspend” to claim your retirement benefit and then suspend it, allowing your spouse to receive benefits based on your record while your benefit continued to accrue. Some people were still able to do this for part of 2016, but no one can use this strategy in 2017.

You can learn more about the important decision of when to claim your Social Security benefit by reading Social Security’s publication, When to Start Receiving Benefits. Or better yet, you should consult your financial advisor if you are approaching the time to make that decision.

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To Halt or Not to Halt? The Fiduciary Rule Is the Question

At last week’s TD Ameritrade conference, the halls were abuzz with news that an executive order signed by President Trump on February 3, 2017, would halt implementation of the Department of Labor’s fiduciary rule. This became a major topic of discussion at the conference, since eliminating this regulation, scheduled for implementation beginning in April 2017, has been a cherished goal of many large financial firms that are in the business of providing advice to people with IRAs and other retirement investment accounts.20170206 Fiduciary

Simply put, the fiduciary rule would require any financial professional who provides investment or retirement planning advice to people with retirement accounts to be held to the fiduciary standard, which requires such advisors to always act “in the client’s best interest.” That sounds perfectly reasonable, right? Wouldn’t you want anyone who is handling your retirement investments to be required to act in your best interest?

But here’s the rub: Many advisors who work for brokerage firms or insurance companies–the majority of whom are compensated by collecting commissions on the products they sell and charging fees–are not presently required to meet this standard. Instead, the existing standard for such advisors is that the products they recommend for their clients must be “suitable.” This is not the same as requiring that advice always be in the client’s best interest. Perhaps it’s not surprising, then, that when the fiduciary rule was proposed, many segments of the financial industry–including many of the largest firms on Wall Street–complained loudly and bitterly about the extra levels of regulation that would be imposed, the expense of compliance, and even the harm that might be done to smaller investors because of reduced access to professional investment advice.

It is not completely clear that President Trump’s executive order will halt implementation of the fiduciary rule. According to Skip Schweiss, Managing Director for Advisor Advocacy and Industry Affairs for TD Ameritrade Institutional, the order actually calls only for delaying the phased-in implementation of the rule for 180 days, to allow time for further study and “economic and legal analysis” by the Department of Labor. Nevertheless, in the opinion of many observers, the president’s announced goal of rolling back regulation in the financial industry encourages the view of the ultimate demise of the fiduciary rule.

The most important point in all of this–and a point that bears directly on Bernhardt Wealth Management–is that, because we are a Registered Investment Advisory firm, it makes no difference to us whether the rule is implemented or not. Why? Because we have always been and will always be subject to the rule’s requirement to act in our client’s best interest. We think it is vitally important for any investor to work with a fiduciary, and it is absolutely essential to us that we do what is right for our clients 100 percent of the time. We don’t need a government regulation to tell us to do the right thing; it is part of our culture and why we exist to serve our clients.

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Should Market Highs Influence Investment Decisions?

Given recent headlines about indices like the Dow Jones Industrial Average and the S&P 500 Index hitting all-time highs, I thought I would share a piece I received this month from Dimensional Fund Advisors (Dimensional). Dimensional poses this essential question: When markets hit new highs, is that an indication that it’s time for investors to cash out?20170130 MarketHigh

Dimensional’s historical evidence suggests that a market index being at an all-time high should not signal it’s time to sell. For example, returns for the S&P 500 from 1926 through the end of 2016 show the proportion of positive annual returns after a new monthly high is similar to positive returns following any index level. In fact, almost a third of the monthly observations were new closing highs for the index. So, new index highs have historically not been a useful sell signal.

Rather than using past performance to predict future performance, Dimensional stresses that it is more useful for investors to understand what drives stock returns. Here’s their helpful explanation: “One way to compute the current value of an investment is to estimate the future cash flows the investment is expected to deliver and discount them back into today’s dollars. For an investment in a firm’s stock, this type of valuation method allows expectations about a firm’s future profits to be linked to its current stock price through a discount rate. The discount rate equals an investor’s expected return. A simple, but important, insight we glean from this is that the expected return from holding a stock is driven by the price paid for it and what its investors expect to receive.”

This way, fundamentals, not emotions drive your investment decisions.

What is Dimensional’s bottom line to this analysis? “While positive realized returns are never guaranteed, equity investments have positive expected returns regardless of index levels or prior short-term market returns.”

And, given that history shows us that over longer time horizons the odds of realized stock returns being positive increase, it is wise to maintain a long-term investment view.

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Financial Stress Rings in the New Year

A December survey by the National Endowment for Financial Education® (NEFE) finds more than two thirds (68 percent) of U.S. adults will make a financial New Year’s resolution for 2017. Saving money (53 percent) tops the list, followed by managing debt (44 percent). Sadly, one in three (31 percent) rate the current quality of their financial life as worse than they expect it to be and more than three quarters (78 percent) say they wrestle with financial stress.

The survey also finds that nearly half (48 percent) of Americans admit that they are living paycheck to paycheck. More women than men live paycheck to paycheck: 51 percent versus 45 percent. The main reasons people believe they are living paycheck to paycheck are due to credit card debt (24 percent), employment struggles (22 percent), and mortgage/rent payments (18 percent). Americans cited the most significant financial setbacks they experienced in 2016 as transportation issues (23 percent), housing repairs/maintenance (20 percent), and medical care for an injury/illness (18 percent).

NEFE found higher income provides little protection. While 85 percent of adults earning under $50,000 per year report being stressed, the percentages didn’t improve much for people earning $50,000 to $74,900 (80 percent are stressed) and $75,000 to $99,999 (79 percent).

NEFE offers the following advice for those hoping to improve their financial lives:

Get debt under control. Set a goal to reduce your debt load next year by 5 to 10 percent. That might mean reducing impulse shopping. Six in 10 people admit they purchase on impulse and 80 percent of those regret purchases afterwards. When you face temptation, walk away for at least 30 minutes and see if you still want it and it’s a good idea.

Start saving now and do so often. Common advice tells us we should have six to nine months of income set aside in an emergency fund. Again, set a goal–start with as little as $500. Of course, more is better, but by starting small you gain a sense of security, a sense of goal achievement, and you reduce stress.

Shop for better services. Where can you come up with $500 for an emergency fund? Make a game out of shopping providers to find the best value in the services you use. How long has it been since you shopped your insurance policies? Any chance you can save money on your cell phone plan, internet or utilities?

Understand what’s behind your financial decisions. Ever wonder why you feel good about spending money on vacations, but avoid saving for retirement? Why you buy new golf clubs, but procrastinate when it comes to giving your kids an allowance? The answer may lie in your unique life values and how they influence your financial decision making. Consider taking the LifeValues Quiz and answer the 20 questions noted at this website.

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Are You Better Off Than You Were Four Years Ago?

Are you better off than you were four years ago? Ronald Reagan closed his 1980 debate with Jimmy Carter with that very question. At the time, Reagan’s rhetorical question was a knockout punch that secured his victory in the presidential election and cemented his legacy as the Great Communicator.

Less than a week to President-elect Trump’s inauguration, headlines suggest that the country is under great stress and coping with 20170117 GrandCanyonuncertainty. After a hotly contested presidential contest, allegations have surfaced that the Russian government might have influenced the election’s outcome. Yet, despite this unsettling news, the economic news has been broadly positive post-election. And as the market has advanced, we have also seen steady gains in the labor market. Yet, surveys continue to reveal that most Americans are concerned that, big picture, progress stuck in low gear.

Information on the website “Our World in Data” refutes those negative views. There, you will find five charts that convey a much more positive view of our world’s progress. For instance, today more people live a in democratically free society versus a closed totalitarian society. And only about 10 percent of the world’s citizens live in extreme poverty compared to 75% in 1950. Also, in 1800, roughly 10 percent of the population could read. Today, that percentage has increased to about 80 percent.

I encourage you to read more to gain some important perspective and encouragement at a time when our nation seems divided and short-sighted. As it is with investing, adopting a rational, long-term view and focusing on the positives can help us avoid emotional decision-making and best position ourselves as well as our families and communities for success.

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Solon Vlasto Named Newest Partner at BWM

McLean, VA (January 12, 2017) – Bernhardt Wealth Management, a fee-only independent investment advisory firm located in McLean, VA, today announced that Solon Vlasto, CFP®, CDFA™ has become a partner. The ownership became official on January 1, 2017.vlastosolon-photo

Vlasto is a CERTIFIED FINANCIAL PLANNER (CFP®) and Certified Divorce Financial Analyst (CDFATM) professional with nearly 25 years of financial services experience. In his new role as partner, Vlasto will be involved in all aspects of the business including development and execution of all strategic initiatives, new business, and staffing. In addition, he will continue providing wealth management services including retirement planning and analysis, implementing estate planning and tax strategies, reviewing protection planning matters, structuring philanthropic planning and investment planning matters to help clients reach their goals. “Partial ownership in such a well-respected firm is a genuine privilege,” said Vlasto. “Bernhardt Wealth Management’s independent structure, world-class investment platform and fiduciary responsibility differentiate it from most financial firms. I am delighted to team up with individuals who share my deep commitment to clients and disciplined investment philosophy. Our conflict-free investment offering and personalized service approach is befitting the sophisticated community we serve in the D.C. area.”

President and Chief Executive Officer Gordon J. Bernhardt said, “Solon has a heart to provide top notch service to clients while delivering superior advice across the wealth management spectrum. He is a great leader, outstanding individual and well-respected throughout the financial services industry. I am certain he will continue to serve the firm and our clients with distinction.”

“Solon’s wide-ranging experience and impressive ability to nurture long-term relationships with individuals and entrepreneurs help substantiate our standing as one of Washington D.C.’s top wealth management firms,” said Principal Tim S. Koehl, CFP®. “He has a proven track record of outstanding client service.”

The new ownership arrangement also serves as an update to the firm’s formalized contingency plan. “We regularly remind our clients to prepare for the unexpected. As fiduciaries, we have a responsibility to our clients to make sure this practice remains an ongoing business serving their best interests, even if something unforeseen should happen to me or one of our partners,” explained Bernhardt.

Vlasto, who has known Gordon Bernhardt for nearly two decades, joined Bernhardt Wealth Management in 2014. He served as Senior Financial Advisor and Chief Compliance Officer after working at another private wealth management firm located in Columbia, MD. Prior to that, he worked for more than 21 years at TD Ameritrade where he served as Branch Manager in Reston, VA. Vlasto earned an Executive Certificate in Financial Planning from Georgetown University. He also holds a Certified Divorce Financial Analyst ™ designation and received a Bachelor of Fine Arts degree from the University of Connecticut. He served two years on the Board of Directors for the Financial Planning Association of the National Capital Area as co-chair of the Pro Bono Committee and has long been involved with pro bono financial planning efforts and local volunteerism for many organizations.

Bernhardt Wealth Management’s advisory business has a demonstrated record of excellence and performance, recently being named among the country’s Top Registered Investment Advisory Firms by Financial Advisor magazine’s RIA Ranking of 2016 and Northern Virginia Magazine’s annual Top Financial Professionals list of 2016.

About Bernhardt Wealth Management
Bernhardt Wealth Management was established in 1994 by Gordon J. Bernhardt, CPA, PFS, CFP®, AIF®. The firm provides financial planning and wealth management services to affluent individuals, families and business-owners throughout the Washington, D.C. area. The Bernhardt team is focused on providing high-quality service and independent financial advice to help clients make informed decisions about their money. For more information, visit BernhardtWealth.com.

Disclosure Statement: Past results are not indicative of future results. Bernhardt Wealth Management, Inc. (BWM) is a registered investment advisor with the Securities & Exchange Commission. BWM may only transact business or render personalized investment advice in those states and international jurisdictions where we are registered/filed notice or otherwise excluded or exempted from registration requirements. Any communications with prospective clients residing in states or international jurisdictions where BWM and its advisory affiliates are not registered or licensed shall be limited so as not to trigger registration or licensing requirements.

Media Contact:
Karen Embry, Impact Communications
913-649-5009
karenembry@impactcommunications.org

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The IRS’ Top 400

The recent presidential campaign featured quite a bit of debate on taxes, focusing especially on whether top earners were paying their fair share. Last month, the Internal Revenue Service (IRS) published what it says will be its final report on the taxes paid by the 400 taxpayers with the highest adjusted gross income (AGI). The IRS has been keeping data on the top 400 back to 1992.

According to the IRS, our nation’s top earners paid an average effective federal income tax rate of 23.13% on AGI averaging $318 million in 2014 (the most current year studied). That’s an increase over their effective tax rate of 16.72% on average AGI of $336 million in 2012. Remember, though, that in 2012 the highest tax rate for long term capital gains was just 15%. In 2013, that rate jumped to 23.8% for many taxpayers, thanks to a 20% top rate on long-term capital gains and the additional 3.8% Medicare surcharge imposed by Obamacare.

How might those percentages change? President-elect Donald Trump and the Republican Congress have pledged to repeal Obamacare’s 3.8% surcharge, which would reduce the top long-term capital gains rate to 20%. And, as reported in a pre-election Forbes article, top earners will get a tax break from the Trump administration. Drawing on data from the Tax Policy Institute, Forbes reported that under the Trump tax plan, members of the 1% would receive an average $214,690 tax cut in 2017, boosting their after-tax income by 13.5%.

Here are some additional highlights from the IRS report highlighted in the Wall Street Journal article, The Really Rich Got Richer, According to IRS’s Top 400:

  • Between 1992 and 2014, 4,585 different taxpayers made the top 400 earners list, and 3,262 of that group appeared for just one year.
  • The minimum income needed to make the IRS’ 2014 list was $126.8 million.
  • Total income reported on the top 400 individual tax returns rose 20% in 2014 over the previous year.
  • Out of nearly 150 million tax returns in 2014, this group of 400 earned 1.3% of all income and accounted for 10% of all capital gains.
  • The top 400 paid 2.13% of all individual income taxes paid, their highest share since 1992.
  • The top 400 claimed 6.9% of all deductions for charitable contributions.

Going forward, instead of reporting on the top 400, the IRS said that it will focus on the top 0.001% earners. In terms of 2014 numbers, that would have meant reporting on 1,396 taxpayers.

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Read “Rejection Proof”

This holiday season my firm distributed its nineteenth annual holiday book–Rejection Proof: How I Beat Fear and Became Invincible Through 100 Days of Rejection–to clients. I had an opportunity to listen to the author Jia Jiang speak in 2014. As an entrepreneur and app developer, Jiang’s confidence had been rocked when he was turned down by an investor. To conquer his fear of rejection, every day for 100 days, he challenged his fear of “no” by asking a stranger to say “yes” to an outside-the-box request. For example, he asked a stranger to borrow $100 (no), a homeowner if he could play soccer in his yard (yes), pleaded for a haircut at Petco (no) and asked a Krispy Kreme employee to make doughnuts in the colors and shape of Olympic rings (yes). That doughnut interaction went viral.20170103-rejectionproof

Jiang’s book chronicles the simple power lessons he learned during those 100 days. In fact, he closes each chapter with a summation of key points and actionable advice to inspire readers. Rather than turn and run from the “no” as he did after asking to borrow $100, Jiang insists it is better to engage with the person rejecting you and seek to understand their point of view. Above all, don’t take the “no” personally because it reflects only the opinion of the rejecter and is heavily influenced by historical, cultural and psychological factors.

He also insists that “every rejection has a number.” That is, a no could eventually turn into a yes. Also, simply asking “why” after you are rejected can sustain the conversation in a useful way and help you gain some information that could get you to “yes.” For example, in his 15-minute TED talk, Jiang describes asking a stranger if he could plant a flower in his backyard. The man says, “No,” but his answer to Jiang’s “Why” is illuminating. It turns out the man has a dog who digs up everything in his backyard. In fact, the man suggests Jiang ask his neighbor who loves flowers and she agrees. This illustrates Jiang’s belief that collaboration leads to success. As the TED promo reads, “Jiang desensitized himself to the pain and shame that rejection often brings and, in the process, discovered that simply asking for what you want can open up possibilities where you expect to find dead ends.”

Let’s all incorporate a little bit of that into 2017. Ask yourself: What would you do if you knew you would not fail? That question gets to our core goals and big dreams, but for many of us it also will illuminate the extent that fear of rejection and failure play a part in our decision-making.

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BWM 2016 Holiday Traditions

The Holidays are a time of tradition and giving. For 14 consecutive years, we have offered to make contributions to charities in honor of our clients instead of sending gift baskets during the Holiday Season. The response from our clients has been overwhelmingly positive, and we appreciate participating in the spirit of giving — which is part of what the holidays are all about.

At Bernhardt Wealth Management, we embrace our responsibility to giving back to our community. Therefore, we are proud to have contributed $8,730 to 38 local and national charities and $25,270 to the following five local charities in honor of our clients:

CollegeTracks

Homes for Our Troops

PRS/CrisisLink

ServiceSource

YouthQuest Foundation

The response we get from each charity is that we are “part of a compassionate community” and “we are grateful for your generosity and hope you take great pride in the important difference that your gift makes.”

Without our clients, we would not be able to help the charities that our clients identified. And just as important, we thank our clients for allowing us to serve them. Thank you!

May your new year be blessed with peace, love, and joy and may 2017 be a prosperous year for you!

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