About RTJ Financial Management

Rob Jupille, President of RTJ Financial Management, has been assisting individuals and small businesses with their insurance and financial planning needs for the past 20 years. Mr. Jupille started his career as an insurance underwriter with a Fortune 500 company, and was quickly promoted to management, becoming Vice President of Sales and Underwriting. He evolved into advising individuals as a Regional Director of Sales for Foresters, a not-for-profit financial services organization. After 10 years working for others, Mr. Jupille formed RTJ Financial Management in 2000, focused on helping successful individuals achieve their financial dreams. Mr. Jupille graduated in 1989 from the University of California, Santa Barbara with a Bachelor’s Degree in Business/Economics. Mr. Jupille has lectured widely on topics ranging from business formation to effective retirement planning to long-term care insurance at CPA firms, estate planning firms, Fortune 500 companies and non-profit organizations. He has provided financial planning services for, and appeared on, the television show “Pat Croce Moving In”, writes a monthly column for the Santa Monica Daily Press and Below The Line News, and has been featured on both KNX 1070 radio and KCAL 9 News in Los Angeles discussing various financial topics. Mr. Jupille’s electronic newsletter “Money Management for Modern Life”, covers topics as diverse as helping independent contractors manage cash flow, overcoming financial dysfunction, improving credit scores, and the uses of exchange traded funds in a diversified portfolio. When not assisting clients, Mr. Jupille volunteers his time as Vice President of the UCSB Alumni Association Board of Directors, is on the Board of Directors of the Center for Lifelong Learners, and has co-chaired the West Los Angeles Heart Walk for the American Heart Association. He and his wife, Tracie, live in West Los Angeles.

Seasonal Weight Gain

4/52 weeks project 2012The holidays are upon us yet again, a time of year filled with friends, family, celebrations and an abundance of food. The end result? The average American will gain approximately eight pounds between now and New Year’s Day.

Unfortunately, there is another type of weight gain that also happens this time of year, one as difficult to shed as those extra holiday pounds. I’m talking about the additional weight added to our credit card balances as we party our way through the holidays.

We all know that preventing weight gain isn’t exactly rocket science. To keep off the extra pounds, we know we should exercise more and watch what we eat. Financial weight gain is no different – we need to save a little more and spend just a little less.

So how do we prevent added financial “weight” on our credit cards? Like exercise, it’s all about discipline. Some of you may remember the old “Christmas Club” accounts that local banks once offered. The truth is there was nothing magical about these ventures, they were simply forced savings accounts. By saving a little each month, come December you had a lump-sum of money to buy holiday gifts with. A similar approach will help you avoid credit card shock next year. Here it is, in seven and a half* steps.

1. In January, after all the dust has settled, your credit card statements have arrived, and you’ve regained consciousness after the shock of your increased card balances, add up what you spent on gifts, decorations and entertaining.
2. Adjust the number from Step 1 up (or down) based on what you would like to spend next Christmas. This is your target for next year.
3. Divide next year’s target number by 12 to calculate how much you need to set aside each month to reach your target.
4. Establish a separate savings account specifically designated for holiday expenses.
5. If you are an employee, have your human resources department set up a direct deposit for the amount you came up with in Step 3. If you are self employed, simply direct-deposit from your checking account yourself. We find that most people, after a few weeks, don’t notice the money that’s being diverted into the savings account.
6. Now, the tricky part: Stick to your budget you established in Step 2.
7. Pay your credit card bills IN FULL when they arrive in January.
*7½. The added benefit of this approach is: With your seasonal financial weight under control, you can spend more time at the gym.
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Have You Considered Charitable Giving?

Many people, once they’ve reached a point in their lives where their basic financial needs are met, start thinking about giving something back to society. Not only does it feel good to give money to help those that are less fortunate than us, but a gift to charity may also prove to be a smart financial move. When structured properly, some charitable gifting methods offer you excellent tax advantages. Here’s a brief look at some popular options.

Charitable remainder trusts (CRTs). Often, people are hesitant to sell appreciated assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Well, a CRT might just provide a solution.

CRTs are simply tax-exempt trusts. In transferring highly appreciated assets into a CRT, you get: 1) a tax deduction for the present value of your future charitable gift, 2) income payments from the CRT for up to 20 years, and 3) tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift, and you can exclude an otherwise taxable asset from your estate.

How do they work? While you’re alive, once you’ve transferred the assets to the trust, you will receive an annual income from those assets for up to 20 years. After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice.

Charitable lead trusts (CLTs). This is the inverse of a CRT. You transfer assets to the CLT, and it periodically pays a percentage of the value of the trust assets to the charity. At the end of the trust term, your heirs receive the assets within the trust. You don’t get an income tax deduction by creating a CLT, but your charitable donation could markedly reduce your gift or estate tax liability.

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors and the concept has been around since the mid-1800s. Basically, you donate money to a university or charity in exchange for a flow of income. You (and optionally, your spouse) receive lifelong annuity payments. After you pass away, the balance of the money you have donated goes to the charity. You can also claim a charitable deduction on your income tax return in the year you make the gift.

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are unitized and “pooled” with the assets of other donors. So essentially, you are buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment varies from year to year.

Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. Since only interest and dividends are paid out of a pooled income fund, it is possible to shield the whole gain from a highly appreciated stock or piece of property through such a fund. You get an immediate income tax deduction for a portion of the gift, which can be spread over a few consecutive tax years. Also, the balance of the assets left to the charity at your death may be greater than if a charitable gift annuity is used. Another nice option: you can put more assets in the fund over time, whereas a charitable gift annuity is based on one lump sum gift.

Donor advised funds (DAF). A DAF is a variation on the “family foundation” concept. Unlike a private foundation, it is not subject to excise taxes, and it does not require employees and lawyers to implement and administer. You establish a DAF with a lump sum gift to a public charity. The gift becomes property of the charity, which manages the assets. Each year, the charity determines the percentage of the value of the fund which will become available for grants or other programs. You advise the charity how to spend the money. DAF contributions are tax-deductible in the year that they are made. You may avoid capital gains taxes and estate taxes on the gift, and the assets may grow tax-free.

Scholarships. These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and your advisor can work directly with a school to create one.

Life insurance and life estate gifts. Some people have life insurance policies that they may no longer need but may end up increasing the size of their taxable estates. In such cases, a policyholder may elect to donate their policy to charity. By doing this, the donor reduces the size of his or her taxable estate and enjoys a current tax deduction for the amount of the cash value in the policy. The charity can receive a large gift at the donor’s death, or they can tap into the cash value of the policy to meet current needs.

Life estate gifts. This interesting option allows you to gift real estate to a charity, university, or other non-profit and live there the rest of your life. Upon your death, the charity will receive the property. You can take a tax deduction based on the value of property, avoid capital gains tax, and live on the property for the rest of your life.

Give carefully. If you are thinking about making a charitable gift, remember that the amount and availability of any tax deductions will ultimately depend on the kind of assets you contribute, and the variables of your individual tax situation. Remember also that some charitable gifts are irrevocable. Be sure to consult qualified financial, legal and tax advisors for more information before you decide if, when and how to give.

Understanding Your 401(k) Plan’s Costs

Much has been written lately about the importance of understanding how much you’re paying in fees in your 401(k).  Much of this recent interest is the result of a change in regulations that will be coming shortly.  Starting July 16, 2011, Department of Labor regulations will require that plan providers report the direct and indirect costs of the plan to the plan sponsor, generally the employer.  Additionally, on January 1, 2012, all fees, including administrative and investment fees, will have to be fully disclosed to the individual employees.

Why 401(k) Fees are Important

The level of fees can vary from one plan to another, depending on how the plan is structured.  A difference of even 1% per year, seemingly a nominal amount, can make a tremendous difference in how much an employee has available for retirement.

As an example, take an employee that has 35 years left until retirement with a current $25,000 401(k) balance.  If the employee earn 8% per year over the full 35 years, here’s the difference in account balance at retire using a .5% fee versus a 1.5% fee:

Original Amount            Ending Value @ .5%   Ending Value @ 1.5%

$25,000                                  $314,000                 $227,000

As you can see, an increase in costs of 1% per year will reduce the amount available in retirement by $87,000 or 28%.

Types of Fees in a 401(k)

  •  Plan Administration Fees:  these will include record keeping, accounting, legal and trustees.
  •  Investment Fees:  these fees will include the management fees for the mutual funds in the plan and 12b-1 fees, which are used to pay for advertising and broker commissions.  Often times your fund returns are stated NET of the fees charged so they may be hard to determine.
  • Insurance Charges:  if your plan has at its core an annuity, there will be an additional charge for the cost of the insurance guarantees.
  •  Target Date Funds:  these funds, while convenient, often are a single fund made of up several underlying funds.  The result is that the Target Date Fund may have investment fees in addition to the investment fees attached to the underlying funds.

When you originally signed up for your 401(k) you were handed a lot of paperwork, including paperwork that spells out your plan’s costs.  If you can’t find the paperwork, you can find more information in the following places:

  • Summary Plan Description:   this document was given to you when you originally enrolled in the plan and then every 5 years thereafter.  It  may tell you if administrative expenses are paid by the employer or employee and how they’re allocated among participants.  If you don’t have the original, just ask your plan administrator for a copy.
  • Your account statement:  it may show plan administrative expenses allocated to your account.
  • Form 5500:  Every 401(k) plan must file a Form 5500 with the government.  This document will show liabilities, expenses and income for the plan as a whole, but it won’t show what was deducted from your specific account.  This can be accessed at sites like http://www.freeerisa.com.

Five Questions to Ask Yourself Regarding Fees

  1. Do I have all the available documentation about the investment choices in my plan as well as all the fees charged to my plan?
  2. Do I use most or all of the optional services offered by my plan such as loans, insurance, etc.?
  3. If administrative services are paid separately from investment management fees, are they paid for by my plan (me), the employer or both?
  4. Do any of the investment options include sales charges, loads or commissions?
  5. Do any of the investment options include any fees related to specific investments such as 12-b1 fees, insurance charges or surrender charges, and what do they cover?

At the end of the day, your employer is providing you a tremendous benefit by offering a 401(k) plan for its employees, but it is YOUR responsibility to fully understand your plan so that you can make the best decision for your individual circumstances.

Take Advantage of the Homebuyer Credit Before It Expires

 

In an attempt to jump start the real estate market, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009, which was extended earlier this year.

 What Is It?

 Here are some highlights of the legislation as it stands now: 

  • A “first time home buyer” tax credit of up to $8,000.
  • A “repeat home buyer” tax credit of up to $6,500.
  • If the home was purchased in 2009 or later, the credit does not have to be “repaid”.
  • The credit is “refundable”, meaning that even if you don’t owe taxes, you can still claim the credit.

 Who Qualifies?

 To qualify as a New Home Buyer you must have not owned a home in the past 3 years.  To qualify as a Long Time Resident, you must have owned a home as your primary residence for 5 consecutive years out of the last 8 years.

 The Fine Print 

As with any government program, there’s always fine print: 

  • Both credits come with income limitations.  The credit begins to phase out if your Modified Adjusted Gross Income (MAGI) is $125,000 for single tax payers and $245,000 for married taxpayers filing jointly.  You become completely ineligible if your MAGI exceeds $145,000 and $245,000 respectively.
  • The credit is not an automatic $8,000 or $6,500 but is actually 10% of the sales price up to a maximum of $8,000 or $6,500.
  • Homes over $800,000 do not qualify.
  • You can’t claim the credit if you’re being claimed as a dependent on somebody else’s tax return or if you’re under the age of 18.

 Why Act Now? 

  • It’s a TAX CREDIT, not a tax deduction.  This means that it will offset your tax liability dollar-for-dollar.
  • It’s highly likely that the government WON’T extend this legislation further.
  • Many real estate markets have become affordable, but they won’t stay that way.  Most experts feel that the real estate markets in many areas are at or near bottom.

 Conclusion 

As a Wealth Manager, I would never encourage a client to buy a home simply because of a tax credit.  If however, you’re already looking for a home, have found one that you can afford, and plan to stay in the home for more than a couple of years, now is a great time to buy.

As with any large purchase, always check with your CPA, realtor and other financial professionals before entering into a contract.

What Is Fiduciary Responsibility and Why Should It Be Important To You?

 

Lost in the shuffle of President Obama’s recently proposed regulatory overhaul is the proposal to hold all brokers to the same fiduciary standard as registered investment advisors.

First, a little background.  A quick check of Wikipedia finds this definition of fiduciary duty as ‘… the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the ‘principal’): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.  The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust’.

Under current regulations, registered investment advisors, like our firm, are required to accept fiduciary responsibility in all our actions.  Brokers, like those found in most of the large brokerage firms aren’t held to the same high standard.  The only requirement they have is to recommend investments that are ‘suitable’ for the client. 

Sounds like the same thing, right?  While the difference in responsibility between the Investment Advisor and Broker might seem like semantics, it can mean a real difference in practice.  

For example, your advisor at XYZ Brokerage has determined, correctly, that a mutual fund that invests in Large Cap companies is a suitable investment given your risk tolerance, age and circumstances.  Among her many fund choices, your advisor at XYZ has available to her Fund A and Fund B.  Fund A is a proprietary fund run by the firm and Fund B is a fund run by an independent mutual fund company and both have similar performance results.  Fund A, though successful and clearly suitable, carries a higher expense ratio and higher turnover than Fund B but also pays the advisor more.  Both of the funds are ‘suitable’ for your portfolio and the advisor would be well within the rules to recommend Fund A over Fund B.  

If your advisor worked for a Registered Investment Advisor (RIA), they would have a fiduciary responsibility to recommend a fund that is not only suitable, but that is in your overall best interest.  That means that despite the fact that they would make more money recommending Fund A, they are obligated to recommend Fund B since it carries lower overall expenses.

If adopted, this proposal could fundamentally change the way the brokerage business operates.  Firms would be required to change their compensation structure to de-emphasize proprietary products and would most likely cause them to reduce expenses and improve the performance of those same proprietary products in order to make them more compatible with the fiduciary standard.  The result would be better protection for the consumer, something the Obama administration is pushing aggressively for as part of this overhaul.

This article was written to illustrate one aspect of President Obama’s regulatory overhaul proposal and to highlight some of the differences between advisors that work for Investment Advisors and those that work for brokerage firms.   It is in no way intended to imply that advisors at the brokerage firms are anything but ethical.  I truly believe that the vast majority of people in the financial services industry, whether they are technically subject to fiduciary responsibility or not, act in the best interest of their clients on a day in and day out basis.

If you’d like more information on fiduciary responsibility or if you’d like to schedule a portfolio review to ensure that your current advisor is adhering to the standard, drop us an email at info@rtjfinancial.com or call our office at (310) 587-3370.

Health Insurers Are Shooting Themselves In The Foot

 

If the large health insurers are trying to improve the chances of nationalized health care, they’re doing a fine job.  Tesitfying before Congress, the heads of Wellpoint, United Health and Assurant when asked if they would stop rescinding policies unless they could determine the misrepresentation was intentional, replied ‘No.’

As a wealth manager, I spend more time than I care to calculate dealing with health insurance issues for my small business clients.  Premiums continue to increase while coverage is decreased and deductibles/co-pays rise.  Add to this the chance that , when the coverage is needed most, namely in the case of serious illness, the policy could be rescinded due to a simple oversight and it’s no wonder there’s animosity toward the carriers.

There are legitimate cases where an applicant fails to disclose health issues that would impact the pricing or acceptability of the policy.  Instead of looking for ways to avoid paying claims through use of recission, the insurers should limit their recissions to cases where:

  1. The applicant clearly knew about the condition and concealed it from the insurer.
  2. The insurer would not have issued the policy had they known the information.
  3. The unreported information is directly related to the illness the policyholder is currently being treated for.

In all other cases, the insurers should be allowed to deduct the additional premium they WOULD HAVE received had they known about the undisclosed condition but should be required to pay the claim as indicated in their contract.

By taking a short-term profit view and using technicalities to avoid paying claims, they simply shooting themselves in the foot.  This type of bad ‘corporate behavior’ is making it easier and easier for the public to decide that a government-run, single-payer system is preferable to the shenanigans of a for-profit system.

Is Traditional Buy and Hold Investing Dead?

 

The last 18 months in the financial markets have been described as a once-in-a-lifetime event.  With financial and credit markets in turmoil, it seems that most investment portfolios, from individual 401(k)’s to large endowments suffered staggering losses.  The result is that many advisors are now rethinking their investment philosophy.

Most mainstream investment theory has traditionally fallen into two distinct camps.   Those that advocate a buy-and-hold strategy with periodic rebalancing of a diversified portfolio and those that espouse active trading based on short-term technical indicators. 

Traditional Buy and Hold

Those that adopt this philosophy feel that over the long term, nobody can accurately predict the short-term movements of the markets and therefore cannot outperform the overall market.  They argue that in order to maximize long-term results and reduce volatility, the best approach is to build a portfolio made up of numerous asset classes like stocks, bonds, real estate and private equity.  The thought is that the different asset classes are not closely correlated, meaning that they don’t all go up or down at the same time.  While one asset class (i.e. large cap stocks) may be dropping, another portion of the portfolio (bonds or commodities) should be rising.  By periodically rebalancing back to the original allocation, as different asset classes over or under perform in the short term the overall volatility of the portfolio should be reduced and returns increased.

This latest bear market however, has seriously put to doubt the basic tenets of the buy-and-hold strategy.  In 2008, while we saw some asset classes rise quickly for a short time (oil and commodities) eventually almost every asset class, except Treasury bonds and cash, showed negative results, decimating even the most diversified portfolios.  Markets like the one we’ve seen recently add credence to those that favor active trading.

Active Trading

Active traders feel that by analyzing price patterns, they can capitalize on short term inefficiencies and broader movements in the financial markets, both up and down, to maximize returns over the long run.  These traders are not concerned with which asset class they are trading, or whether that asset is trending up or down.  Their approach is to get in and out of markets quickly, taking small profits as they go.

2008 was a potentially great year for active traders since there were large movements in numerous asset classes like stocks, bonds and commodities.  By being able to profit from both up and down markets, some active traders were incredibly successful.

A Hybrid Model

After the last bear market, many advisors, including our firm, moved to a hybrid model, calling it things like ‘Buy & Hold with a Tactical Overlay’ (quite a mouthful) or ‘Core and Explore’.  No matter what they call it, these advisors are using the same methodology.  In this approach, they build the core portfolio across numerous asset classes just like the traditional buy-and-hold philosophy, periodically re-balancing to maintain the original asset allocation.  For the balance of the portfolio they will use a limited form of active trading, taking advantage of shorter-term trends in the market to over or under-weight certain asset classes based on their judgment of their relative value.  This allows them to reap the benefits of long-term investing while taking advantage of very real, short-term circumstances.

Which Approach is Right for You?

Like any long race, there are many ways to reach your destination and as a result, there is likely no single right approach to investing.  The important thing to remember is that it’s the end result that’s important, not how you got there.  Your choice of advisor and approach should come down how well the advisor articulates their particular philosophy to what you’re comfortable with that approach.  The best thing you can do is to ask your advisor what their investment philosophy is and whether or not it suits your personality.  The most important thing is that you understand how they do things and that you have a plan in place that you can stick to, even in challenging markets.

Next Steps

If you’d like to learn more about how RTJ Financial Management builds its portfolios and the investment approach we take, simply drop us an email at info@rtjfinancial.com with ‘Portfolio Review’ in the subject line, and we’ll schedule a free, no-obligation one hour portfolio review with you.