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Gratus Capital has been named to  The Forbes ranking of America’s Top 100 Wealth Advisors for the second year in a row. Gratus Capital’s Founder & CEO Hank McLarty is listed 67th out of 100 top-performing peers. The Top 100 Wealth Advisors were selected from nearly 20,000 nominations and over 4,000 candidates invited to complete the Forbes survey.

The Forbes ranking of America’s Top Wealth Advisors was developed by SHOOK Research, a research organization focused on the quality of the advisor. It is based on advisor experience and an algorithm that measures both qualitative benchmarks gleaned through telephone and in-person interviews along with quantitative data. Specific factors that were examined include: revenue trends, assets under management, compliance records, use of team, client retention and best practices in working with clients.

“If we’re going to recommend advisors to the public, we have to make sure every advisor is high quality. When we meet with an advisor for a due diligence meeting, we are thinking to ourselves, “Is this someone we would recommend to a friend or family member?,” said R.J. Shook, president of SHOOK Research, about the ranking process in Forbes Magazine.

The full list of Top 100 Wealth Advisors will be featured in the October 24th print issue of Forbes magazine.

We have built our business by focusing on our clients and providing responsive, thoughtful, accurate wealth management counsel,” said McLarty. “We understand we have an opportunity to play a significant role in helping clients to achieve their dreams and plan for the future, and we make them our mission. We are honored to be recognized by Forbes as a Top Wealth Advisor again this year, as another testament to the value and level of service we provide.”

A boutique wealth management firm focused on serving successful individuals, families, foundations, and endowments, Gratus Capital caters to clients across the nation with a tailored team approach, low client to advisor ratio and fee-based advisory services.

What new financial goals do you have in mind? Contact us to learn how we can help.

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Developed by Shook Research, Forbes ranking based on overall quality of practice and algorithm of qualitative/quantitative data received in nominations from professionals from financial services, banks, brokerages, custodians, insurance, clearing houses and registered investment advisers. Criteria included client retention, industry experience, compliance records, firm nominations, AUM, and revenue generated for firms. Seven years minimum advisors experience. 

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

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Not so long ago, only the ultra-wealthy and large institutions such as banks and public pensions had access to alternative investment opportunities. Today, almost any individual investor has access to these versatile investment tools. However, the key question is, are alternative investments right for you?

Before deciding, let’s take a look at what an alternative investment really is and its potential impact on an individual investor’s financial portfolio.

According to the Huffington Post[i], alternative investments are investments in assets other than stocks, bonds and cash, essentially investments using strategies that go beyond traditional ways of investing. Gratus Capital Chartered Alternative Investment Analyst and Director of Investments Todd Jones, MBA, CAIA agrees.

However, Jones takes the definition a step further.

“At Gratus Capital, to be considered an alternative investment, the investment vehicle must not exhibit a correlation of greater than 0.60 to either the stock or bond markets in any rolling three-year period,” said Jones. “Otherwise, we exclude the investment from our universe of alternative investments when making selections for client portfolios. Alternative investments are meant to provide diversification and a unique income stream return. In fact, we don’t expect alternative investments to outperform the equities or fixed income markets. Instead, our approach is to identify alternative investments that, on average, have returns that are no greater than the equities markets and no lower than the fixed income markets.”

Jones also believes that almost every portfolio should include at least a small amount of alternative investments because of the diversification value typically generated by this asset type.

Legitimacy of Alternative Investments

“There has been a multitude of alternative investments entering the financial marketplace compared to just three years ago,” said Jones. “Individual investors should be very cautious. Roughly 95 percent of alternative investments available today engage in strategies that provide minimal benefit to a portfolio. Far too often the investment doesn’t perform as described, the return is too low, or the fees are too high.”

Types of Alternative Investments

There are many different types of alternative investments. Sang H. Lee of The Street offers the following examples:

  • Venture Capital
  • Private Equity
  • Hedge Funds
  • Real Estate Investment Trust (REITs)
  • Commodities
  • Real Assets: precious metals, rare coins, wine and art

Jones cautions investors who are contemplating alternative investments such as art, rare stamps, or wine, because the values of these assets are mostly driven by personal taste and sentiment. Instead, Jones recommends that investors focus on alternative assets that can be deeply analyzed: specifically, assets that have ample data to forecast valuations and output key metrics and trends.

Today, we’ll discuss three alternative investment strategies:

#1 – Interval Mutual Funds

InvestmentNews offers the following definition: Interval Mutual Funds[ii] are mutual funds that offer daily purchase for investment but liquidity for limited redemptions at specific intervals (usually quarterly). This change to the mutual fund structure creates large advantages: the fund can simultaneously invest in both private and public assets in a structure that has a liquidity feature and a daily net asset value. This allows the sponsor to create a portfolio of investments that may provide higher levels of yield and noncorrelation to equities, but without the illiquidity and lack of price transparency.

#2 – Private Equity

Financial news giant Investopedia provides the following definition: Private Equity[iii] is capital that is not noted on a public exchange. Private Equity is composed of funds and investors that directly invest in private companies or that engage in buyouts of public companies, resulting in the delisting of public equity.

Typically, private equity investments have been limited to large institutional investors or a person or organization that can allocate at least five million dollars to one single idea or asset. However, access to private equity investments is becoming more of a necessity for mass affluent investors, said Jones.

Why?

Recent news coverage of disappointing IPO offerings for private companies such as Blue Apron[iv] and Snapchat[v] is spurring other profitable private companies to remain private, limiting investment opportunities for investors.

“Now, quality companies that would typically go public early in their business lifecycle are remaining private much longer,” said Jones. “This is problematic for investors, since it limits investment opportunities, especially ones that substantially help an investor to diversify their portfolio.”

For Example:

Amazon went public in 1997. The company’s valuation at the time was approximately $300 million.  Today, it’s roughly a $300 billion dollar company. However, all the growth that has happened since Amazon’s public offering has led to massive investment opportunity and growth for individual investors, according to Jones.

With many large private companies retaining their private status, financial advisory firms are creating new opportunities for their clients.

“Back in 2013, Gratus Capital began formulating ways to gain access to private investment returns,” said Jones. “We began forming limited partnerships for our accredited investors, in order to gain access to existing private investments. This past June, we raised capital and closed our first fund that focuses on private debt and credit as well as private real estate. Our subsequent funds will more likely have a capital appreciation focus. We see these limited partnerships as a necessary evolution of our services if we’re to help our clients achieve targeted rates of return. Specifically, we’re seeking to access illiquid markets that are private and that generate above-average market returns.”

#3 – Hedge Funds

Hedge funds use pooled funds of underlying securities to earn returns for investors. According to Investopedia[vi], the most cited reason to include them in any portfolio is their ability to reduce risk and add diversification. Also, a hedge fund that provides consistent returns increases the level of portfolio stability when traditional investments are underperforming or, at most, are highly unpredictable.

BarclayHedge[vii] reminds investors that hedge funds are not currently regulated by the U.S. Securities and Exchange Commission (SEC). The financial research firm adds that hedge funds can invest in a wider range of securities than mutual funds can. While many hedge funds do invest in traditional securities, such as stocks and bonds,  they are best known for using more sophisticated (and risky) investments and techniques.

Choose Alternative Investments that Align with Individual Goals

BlackRock[viii] recommends investors choose alternatives that align with their distinctive goals. The investment giant gives four common objectives:

  1. To mitigate the effects of stock market volatility
  2. To lower correlation to traditional stock and bond markets
  3. To invest capital for a longer time frame in exchange for higher return potential
  4. To hedge a portfolio against inflation or rising interest rates

In Closing

At Gratus Capital, we believe that almost every financial portfolio should include some level of alternative investments specifically to sustain diversification and separation from the stock and bond markets.

Alternative investment strategies are not to be taken lightly, particularly when deciding between liquid and illiquid assets. Overall, it’s important to focus on what you’re seeking to achieve within your financial plan and how much risk you’re willing to take.

Alternative investments tend to come with higher risk; however, they can also come with greater than average returns. If you have questions about alternative investments or your overall lifetime financial plan, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

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[i] http://www.huffingtonpost.com/madelaine-dangelo/5-common-alternative-inve_b_14366582.html

[ii] http://www.investmentnews.com/article/20140506/BLOG09/140509948/the-rise-of-interval-funds-mutual-funds-for-alternative-investing

[iii] http://www.investopedia.com/terms/p/privateequity.asp

[iv] http://money.cnn.com/2017/06/28/investing/blue-apron-ipo-price-range-cut/index.html

[v] http://www.cnbc.com/2017/06/26/snap-shares-may-be-unable-able-to-stay-above-ipo-price.html

[vi] http://www.investopedia.com/university/hedge-fund/place-in-portfolio.asp?lgl=rira-baseline-vertical

[vii] https://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/what-is-a-hedge-fund.html

[viii] https://www.blackrock.com/investing/resources/education/alternative-investments-education-center/how-can-i-use-alternative-investments

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It’s expected that in 2017 more than 62 million Americans will receive roughly $955 billion in Social Security benefits.[i] The vast majority of these individuals need this income in order to afford retirement.

In this post, we’re seeking to help individual investors who don’t need Social Security income. Specifically, we want you to better understand how to value Social Security within your overall financial plan.

Medium to High-Net-Worth Individuals

You’ve been contributing to Social Security for many years, and even though you may not need the added income, it’s your right to collect it. Therefore, we’d like to outline some concepts for you to consider when contemplating the overall value and benefits of Social Security and how they factor into your life.

Even though you don’t need the money, there are some legitimate reasons to collect your Social Security benefits early, just as there are key reasons to hold off collecting until you’re age 70. Furthermore, some creative strategies for this excess income could make a tremendous positive impact on another life.

Here are 4 Concepts to Consider:

#1 – Supplement Income During Retirement

“When working with many of our clients, we tend to view Social Security as supplemental income to be used during retirement years,” said Kevin Woods, CFP® and Director of Financial Planning at Gratus Capital. “Even though you may not need Social Security given your sizable retirement savings, it’s important to value the benefits derived from Social Security income.”

For example, Social Security can be used to supplement health care and Medicare costs, provide investment income, pay for unexpected lifestyle needs, and to help with future expenses overall. “Social Security adds value to almost any financial plan, and it’s important to identify how this income will be allocated during your retirement years,” said Woods.

#2 – Redistribute Social Security Income

Let’s say you’ve grown your financial assets to the point that you have no real need to spend your Social Security income, yet you’re still receiving $2,000 a month in benefits. There are many beneficial ways to redistribute this income while helping others and enriching lives at the same time, according to Woods.

He cites the following examples:

  • Grandchild’s college education
  • Adult child’s first home or business
  • Alma mater
  • Irrevocable trust for special needs dependent
  • Loved one’s long-term care
  • Humanitarian and other Charitable Giving Efforts
  • Travel expenses for outreach volunteers

#3 – Reasons to Collect Social Security Early

“While your robust investment portfolio will likely cover your retirement expenses, there are generally three reasons to consider taking Social Security early,” said Woods.

These Include:

  1. Health
  2. Change in investment income
  3. Higher expenses early in retirement

However, there may also be a fourth reason to consider collecting Social Security early.

In a recent Kiplinger article[ii], Financial Advisor and CERTIFIED FINANCIAL PLANNER™ Professional Scott Hanson discusses the concept of “means testing” and suggests that high-income retirees may ultimately receive reduced Social Security benefits.  He writes, “One thing we know is that Social Security, in its current form, cannot continue forever. There simply aren’t going to be enough workers to pay for the benefits of all the projected retirees. Payroll taxes will either have to increase, or benefits will have to be reduced…or a combination of both.”

Hanson reminds us that for roughly its first 45 years, Social Security income was tax-free. However, as the years passed, laws were passed and wealthier individuals’ benefits were taxed.  The tax situation has also been compounded, given federal income tax increases.

Along the same lines, many of Woods’ clients believe that the Social Security system won’t sustain itself and, therefore, choose to collect their benefits as early as possible. Woods agrees that decreasing Social Security benefits for wealthier individuals is a valid concern and that collecting benefits early is a reasonable response relative to your individual goals.

For more information regarding Social Security means testing, read the AARP Public Policy Institute’s Reforming Social Security[iii] special report.

#4 – Reasons to Delay Taking Social Security

According to AARP[iv], the longer you wait to start collecting your Social Security benefits, the higher the amount you’ll receive.  The popular social welfare organization cites the following examples:

If you postpone collecting Social Security until your full retirement age of 66*, your benefit will be 25 percent higher than if you started as early as possible.  However, if you delay collecting beyond your full retirement age, then your benefit will go up eight percent a year until age 70, essentially equating to a 32 percent bonus.

In general, Woods recommends delaying your Social Security benefits until you reach age 70. A key reason is due to a frequent income earning disparity among couples, whereby one spouse has earned significantly more income over the years as compared to the other spouse.  By waiting, you’ll likely leave your surviving spouse in a stronger financial position.

For example, one spouse may be eligible to receive $2,500 per month in Social Security benefits at age 70, while the other spouse may only receive $1,500 per month.  If the greater-earning spouse passes away, the surviving spouse would receive the greater of the two Social Security benefits payouts, i.e., $2,500 rather than $1,500 a month.

Special attention should be given to the status of your health and that of your spouse when determining the best time to start collecting your Social Security benefits, said Woods.

*Your full retirement year is based on the year you were born.  To determine your full retirement year, consult Social Security’s Retirement Planner: Benefits by year of birth[v].

In Closing

Gratus Capital’s financial planning approach addresses complex wealth management issues faced by our clients.  And while many of our clients do not rely on their Social Security benefits to experience a financially fulfilling retirement, we believe that the value of this income should be included within every financial plan.  If you have questions regarding your Social Security benefits or any other financial, estate or trust planning concerns, please do not hesitate to contact us[vi].

Helpful Resources

Obtaining Your Social Security Online Statement[vii]

Social Security Estimator[viii]

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

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[i] https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf

[ii] http://www.kiplinger.com/article/retirement/T051-C032-S014-worried-about-future-social-security-benefit-cuts.html

[iii] http://www.aarp.org/content/dam/aarp/research/public_policy_institute/econ_sec/2012/option-means-test-social-security-benefits-AARP-ppi-econ-sec.pdf

[iv] http://www.aarp.org/work/social-security/info-08-2010/10-things-you-need-to-know-about-social-security.html

[v] https://www.ssa.gov/planners/retire/agereduction.html

[vi] https://www.gratuscapital.com/contact-us/

[vii] https://faq.ssa.gov/link/portal/34011/34019/article/3709/how-can-i-get-a-social-security-statement-that-shows-a-record-of-my-earnings-and-an-estimate-of-my-future-benefits

[viii] https://www.ssa.gov/retire/estimator.html

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Over the years, we’ve received many questions regarding Individual Retirement Accounts (IRAs). Typically, most investors want to know if they should choose a Traditional IRA or a Roth IRA.  However in reality, while there are differences as well as pros and cons for each, the key focus should be on avoiding the most common mistakes pertaining to IRAs in general.

Today, we’ll discuss five of the most common mistakes that we’ve seen.

#1 – Neglecting to Update Beneficiaries

Believe it or not, this is one of the most common mistakes individual investors make when it comes to managing their IRA, said Al Meadows, MBA, CFP® and Wealth Advisor with Gratus Capital.

“If you haven’t assigned a beneficiary for your IRA and do not have a will or trust established when you die, then the distribution of your IRA proceeds will be determined by the probate court,” said Meadows. “Also, many people are surprised to find out that beneficiary designations will override provisions in a will or trust agreement.  Unfortunately, I’ve heard of situations where someone’s hard-earned money went to someone they didn’t want it to go to, such as an ex-spouse still listed as the beneficiary.”

Meadows recommends revisiting your beneficiary designations for all of your investment accounts no less than once a year.  He adds that it’s particularly important to update your beneficiaries when there is a significant change in your life, e.g., divorce, death of a loved one, purchase or sale of a business, etc.

#2 – Roll-Over Mishaps

One of the key reasons an investor transfers their IRA savings is due to a change in employers.  In general, as long as you’re transferring your IRA retirement savings as a “directed distribution,” meaning from one trustee to another, you don’t need to worry about unplanned taxes or early withdrawal penalties.

However, if you request a withdrawal in the form of a check or direct deposit, you have only 60 days to roll this money into an IRA in order to avoid an early withdrawal penalty and additional ordinary income taxes.

Furthermore, if you receive a direct withdrawal of your IRA funds, keep in mind that the trustee is required to withhold 20 percent of your total IRA balance.  Why?  Because the IRS assumes that you’re keeping the other 80 percent (not rolling it over into another IRA account) and, therefore, requires the trustee to facilitate the withholding of your savings in order to pay the income taxes on the 80 percent that you retained.

If you do decide to roll over your direct withdrawal of 80 percent into an IRA, you must then come up with the other 20 percent in order to avoid the above penalties.  The trustee can’t distribute this money to you.  Rather, it will be reflected as a credit on your next income tax return, said Meadows.

#3 – Forgetting about Required Minimum Distributions (RMDs)

According to the IRS[i], you can’t keep retirement funds in your account indefinitely. Generally, you have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA or retirement plan account when you reach age 70-1/2.  Roth IRAs do not require withdrawals until after the death of the owner.

To determine your required minimum distribution, the IRS provides several different worksheets[ii].  The IRS adds that you can withdraw more than the minimum required amount.  Your withdrawals will be included in your taxable income, except for any part that was taxed previously or that can be received tax-free, such as qualified distributions from Roth accounts[iii].

“Sometimes investors forget that they have a small IRA tucked away somewhere,” said Meadows. “One time, when a new client came to me with 4+ million in assets, we discovered that he had a $100,000 IRA sitting in a self-directed account that he hadn’t touched in more than 20 years.  Since he was retired, we quickly accounted for his minimum distribution so that he could avoid any further unnecessary penalties.”

#4 – Over-Contributing to an IRA

According to Meadows, there are limitations as to how much you can contribute to a Traditional or Roth IRA each tax year.  Investors under age 50 may contribute up to $5,500 per year. Investors age 50 and older may contribute up to $6,500 each year.  However, how much you can actually contribute is determined by your income.  Also, tax deductions related to these contributions depend on whether or not you or your spouse are covered by an employer-sponsored retirement plan.

If you or your spouse are not covered by an employer-sponsored retirement plan, then refer to this chart to determine your tax deductions and income requirements.  However, if you or your spouse do have an employer-sponsored retirement plan, then refer to this chart instead.[iv]

#5 – Mindset & Emotional Mistakes

There are a handful of other IRA mistakes that Meadows has seen over the years, including mindset or emotional mistakes.

For Example:

  • Not starting soon enough – It’s never too soon to start saving for retirement. The key is to open an account now and set up an automatic deposit.
  • Not taking advantage of the “catch up” contribution – The IRS enables investors to contribute more to their IRAs when they reach age 50, up to $6,500. The extra $1,000 a year can truly make a difference for those reaching retirement said, Meadows.
  • Stopping contributions – Some investors think they have enough money already, so they stop contributing to their IRA. With increasing longevity and inflation, there really isn’t much downside to continuing your contributions, said Meadows.

In Closing

At Gratus Capital, we consider IRAs, 401(k)s and many other retirement savings vehicles to be key tools in building, diversifying and sustaining long-term wealth.  We encourage all individual investors to contribute no less than the amount your employer matches, and ideally more.  If you have questions about your retirement vehicles or other financial questions pertaining to financial, estate, insurance, tax and philanthropic planning or asset management, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

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[i] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

[ii] https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets

[iii] https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

[iv] https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-not-covered-by-a-retirement-plan-at-work

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When one considers Dennis Rodman, what typically comes to mind are his off-court exploits – most notably his trips to the communist state of North Korea[1]. It’s hard to tell what Rodman is bringing to the table during these meetings other than something akin to being a court jester. But in this update, we’ll focus on Rodman’s on-court exploits and what he did for basketball teams he played for during the late 1980s and early 1990s.

What relevance does Dennis Rodman have to an investment portfolio? According to teammates and opponents, Dennis Rodman brought a valuable combination of defense and second-chance opportunities. In our mind, defense and second-chance opportunities in the NBA translate into investment portfolio benefits such as diversification, staying power, and optionality. We’ll discuss each of these concepts below, but the overarching concept is that all portfolios could use more Dennis Rodman.

Diversification

We’ve written about the concept of diversification in recent publications as the S&P 500 has been one of the best-performing equity indices over the last eight years. There was a confluence of factors, to include stable currency, political stability, and savvy corporate management, that contributed to this positive outcome for US equities. Yet, as we sit here at the midyear point in 2017, the winds of change are blowing in favor of companies domiciled outside the United States. Consequently, in many alternative strategies we have implemented in portfolios, the correlation/diversification benefits are starting to become more apparent.

The crux of the argument relating to diversification benefits is seen clearly in the mathematics of a portfolio drawdown. We illustrate this concept below, displaying the return required to get back to even based on various levels of portfolio drawdown.

Essentially, if you can construct a portfolio in a way that reduces the drawdown by owning non-correlated assets, you allow the math to work in your favor.  We believe alternative assets/strategies are an effective way to mitigate portfolio risk.

Staying Power

This concept may be new to many clients but it is one that we’ve been thinking a lot about recently.  Staying power is a behavioral concept that has application to every long-term investment portfolio and refers to the idea that portfolios will either succeed or fail due to investor behavior during stressful market periods.  As we’ve all witnessed over the years, we know people who can’t handle watching their portfolio losing money.  How many people do you know that sold out of all their equity exposure during the financial crisis and haven’t repurchased yet, or they have only recently added it back while equity markets are at all-time highs?

All this being said, if a portfolio contains assets/strategies that are zigging when the market is zagging, an investor’s ability to remain invested in the “riskier” portion of their portfolio goes up dramatically.  This staying power could be seen in the win/loss record of almost every team Dennis Rodman was on over his career, due to the fact that Rodman was a master at keeping his teams in the game with both tenacious defense and rebounding.  These two traits took the pressure off the superstars that surrounded Rodman.  We believe that a properly diversified allocation to alternative assets/strategies has the potential to reduce pressure on the more volatile segments of a portfolio (typically equities) over a full market cycle.

Optionality

Finally, we believe that all portfolios should be constructed with a degree of optionality.  Optionality is the flexibility a portfolio has to make changes or adjustments during significant stress periods in the financial markets.  The way in which most portfolios possess optionality is via a cash position.  Cash is said to have a high degree of optionality because the “price” of cash does not fluctuate and is readily accessible to redeploy in the event opportunities arise on very short notice.

Optionality is an important characteristic to have in a portfolio primarily because it allows investment decisions to be made without external influences.  For example, we believe investors like Warren Buffett and Seth Klarman have enjoyed success partly due to the fact that their portfolios carry a significant amount of cash (optionality) at almost every point in time.  In the case of Seth Klarman (via his investment vehicle Baupost LLC) the average level of cash over the last 30yrs has been 20%.  In the case of Buffett (via his investment vehicle Berkshire Hathaway) that cash level has been even higher!  The point in mentioning these levels is that both Klarman and Buffett have been able to succeed because they are almost always investing in opportunities based on merit.  Further, when they are making investments, they do not need to sell something to free up capital.  In this way, they are making only one difficult decision (what to buy) and not two (what to buy and what to sell).  Optionality is something investors should consider, as we currently find many equity and fixed income markets at extended valuation levels.

In summary, every team needs a Dennis Rodman, just as every portfolio could benefit from alternative holdings that generate a return that is different from traditional stocks and bonds.  While the benefits described (diversification, staying power, optionality) above may not be intuitive in the midst of an eight-year bull market, these benefits are invaluable during periods of significant market distress.  To that end, even though we have no way of knowing when the next significant downturn will come in the financial markets, that doesn’t mean we shouldn’t begin preparing for the next occurrence.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

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[1] In fairness, I cannot claim credit for the idea of correlating Dennis Rodman with alternative strategies.  That idea came from Chris Cole of Artemis Capital.  On the Artemis Capital website under “Market Views,” you’ll find a very interesting publication entitled “Dennis Rodman and the Art of Portfolio Optimization.”

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Most financial advisors advocate maximizing employer-sponsored 401(k) accounts or municipal 403(b)s. Generally, we agree. However, you could be missing out on tax savings if you aren’t careful.

Before going any further, let’s be clear on what we mean by tax efficient. According to Wikipedia, a financial process is said to be tax efficient[1] if it is taxed at a lower rate than an alternative financial process that achieves the same end.

The collaborative encyclopedia offers two tax efficient examples:

#1 – Passing one’s assets on to one’s heirs using a Grantor Retained Annuity Trust, for example, is potentially more tax efficient than simply letting the heirs inherit the assets.

#2 – An exchange-traded fund (ETF) that follows the S&P 500 Index generates fewer “taxable events” than a mutual fund that follows the same index.

Another Viewpoint

Financial educational portal The Balance[2] uses the term tax diversification and offers the following definition: Tax diversification is a financial term that refers to the allocation of investment dollars to more than one account type.

The Balance clarifies the term further by adding, “Tax diversification is similar to asset location (not to be confused with asset allocation), which refers to spreading investment dollars among various account types (the location of the investment assets) and choosing the best investment types that work best in those accounts.”

Tax Efficient or Tax Diversification

For the purposes of this post, we’ll use the two terms interchangeably, since they both seek the same end result. To help you more effectively evaluate tax efficient strategies, we asked Gratus Capital Director of Financial Planning Kevin Woods, CFP® for some advice.

Lack of Tax Diversification Negatively Impacts Retirement

“One of the reasons tax diversification is important for investment portfolios is due to the need to minimize paying taxes during retirement,” says Woods. “Keep in mind that if you place all of your money in tax-deferred investment vehicles, such as a 401(k) or Individual Retirement Account (IRA), you could end up paying more in taxes as compared to if you’d placed some money in taxable accounts today.”

Avoidable Yet Common Mistake

According to Woods, there are many people who only save for retirement using a traditional tax-deferred retirement account, such as an IRA, and never accumulate savings through an additional investment brokerage account.

“Placing all your money in tax-deferred retirement accounts imposes a built-in liability,” says Woods. “Essentially, a percentage of your retirement savings must go towards paying taxes.”

On the flip side is someone who invests in both traditional tax-deferred retirement accounts as well as other investments through a brokerage account. The investor who only saved using an IRA has to pay ordinary income tax on all of their withdrawals during retirement. Not true for an individual who saved using both an IRA and an investment brokerage account. This investor has a more tax efficient retirement portfolio, since he or she has saved their money in different types of investment accounts that have varying tax implications.

For example, the investor now has the ability to withdraw 50 percent from their IRA and the balance of what they need from a brokerage account and only pay taxes on what they withdrew from their IRA.

Detailed Scenario:

The White Coat Investor[3] provides a detailed example of two retired physicians who each draw $100,000 for the year from their financial savings vehicles. One physician placed all his money in a tax-deferred IRA account, and the other used a mix of tax-deferred and taxed accounts. Ultimately, the physician who used both tax-deferred and taxed accounts ends up paying less in taxes. The end result of the example is: One doctor pays an overall tax rate of 12.5 percent, while the tax-diversified doctor pays 1.9 percent.  

4 Different Tax Planning Investment Accounts

To build a tax-efficient investment portfolio, it’s important to distinguish among the four different types of investment accounts used for tax diversification, says Woods.

These include:

Taxed-Deferred (Pre-Taxed) – such as a 401(k) or 403(b). These vehicles are considered qualified investment accounts and have several benefits. Investopedia provides a simple explanation to help differentiate between qualified and non-qualified[4] investment accounts.

Why are tax-deferred accounts so popular? Woods isolates three key benefits:

“First, tax-deferred accounts enable you to lower the amount of income you pay taxes on now, increasing your take-home pay,” says Woods. “Second, since you’re deferring taxes until you withdraw funds during retirement, your investments grow tax-free during the years you’re making contributions. Finally, most retired investors are in a lower tax bracket as compared to when they were working, lowering their tax obligations when they begin withdrawing.”

After-Tax – such as a Roth IRA, Roth 401(k) or Variable Annuity. There are no upfront tax deductions when you contribute to these retirement accounts; however, you pay no taxes on withdrawals during retirement, and investment growth is tax-free.

“As a rule-of-thumb, if you’re age 55 or younger, a Roth 401(k) or Roth IRA makes sense to the extent that you’re not in the highest tax bracket,” says Woods. “Roths generally make more sense when you have more time to invest before retiring and you’re in a lower tax bracket.”

Taxable – such as stocks, mutual funds, bonds, CDs and money markets. Contributing to these taxable accounts means that you pay taxes each year on the dividends, interest and realized capital gains, rather than when you withdraw these funds during retirement.

Tax-Advantaged – such as municipal bonds or life insurance. These financial vehicles typically include a mix of tax-deductible, tax-deferred, and tax-free as well as other tax benefits.

Possible Diversification Strategies

“There are a number of strategies you can use with your portfolio management to strive for tax efficiency,” says Woods. “One approach is to have all your income-producing investments in your retirement account, thereby not requiring you to pay taxes on your interest each year. What’s more, you can also put all your stocks in taxable accounts, helping to provide a preferred lower tax rate on your dividends and long-term capital gains.”

In Closing

While saving for retirement may seem like a straightforward process, complexities arise when it comes to tax liabilities. “There are a myriad of variables to consider when trying to lower your tax liability both for today and during retirement,” says Woods. “I encourage all individual investors to seek the help of both a CPA and a financial advisor.”

Why both?

Because a CPA is an expert in tax laws and the tax preparation process, whereas a financial advisor is an expert at looking at an individual’s overall financial life. The latter includes financial and estate planning, as well as risk and investment management. Investors need both advocates to help ensure a tax efficient financial portfolio, says Woods.

Woods’ number one recommendation for investors, “Have more than just an employer-sponsored retirement account,” says Woods. “If that’s all you have, then it’s likely your portfolio is not tax efficient.”

At Gratus Capital, our team is made up of CPAs, MBAs and Certified Financial Planners. We believe that it takes a well-diversified skill set and team approach to ultimately guide individuals to financial freedom while lowering their tax burden. If you have questions regarding tax diversification or any other financial concerns, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.

[1] https://en.wikipedia.org/wiki/Tax_efficiency

[2] https://www.thebalance.com/tax-diversification-with-investing-2466705

[3] https://www.whitecoatinvestor.com/taxes/tax-diversification-2/

[4] http://www.investopedia.com/ask/answers/206.asp

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If you’re seeking to change a life or make a positive impact in your community, preparing a charitable giving plan is an essential first step in helping you to achieve your goals.

This guide outlines seven steps to take in order to maximize the positive impact of your hard-earned money.

Discover:

  • Key elements to consider when compiling or updating your list of organizations that receive your donations.
  • Specific tax-advantaged financial vehicles that help maximize tax deductions related to charitable giving.
  • The one giving strategy that needs to occur in order to achieve and sustain the greatest positive impact of your charitable efforts.

Learn how to make a real impact within your community.

Click here to download the guide.

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Do you dream of owning a ski, beach or lake house? Well, you’re not alone. In fact, according to leading statistics company Statista, roughly 2.1 million people last year said they plan to buy a second home within the next 12 months1.

If a special hideaway is on your wish list, then planning ahead is highly recommended in order to remain financially sound. To help you make an informed purchasing decision, we asked Gratus Capital Director of Financial Planning Kevin Woods, CFP® for some advice. [This is really strong, considering our disclosures.  How about – To help you get started, we asked Gratus Capital Director of Financial Planning Kevin Woods, CFP® for his thoughts on making a detailed plan, first.]

What follows are six key considerations Woods encourages you to ponder before signing on the dotted line for a second home.

#1 – Estimate Real & Unexpected Costs

The very first consideration for buying a second home is to ask yourself if you can actually afford it, says Woods.

There are many people that think they’ll buy their second home, rent it and make money, or make enough from rental income to substantially subsidize their bills,” says Woods. “Unfortunately, a great deal of the time this doesn’t turn out to be true. Generally, it’s because many home buyers underestimate the actual carrying costs of owning a second home, above and beyond a second mortgage, property taxes and insurance.”

These Additional Second Home Expenses May Include:

  • Utilities
  • General maintenance & repairs
  • Security system
  • Mowing & lawn services
  • House cleaning services
  • Internet & cable
  • Water & sewer
  • Trash & recycling removal
  • Seasonal maintenance for heating, cooling, hot tub/spa, fireplace, gutters, septic pumping, pesticide spraying, etc.
  • Opening and closing of pool, spa and irrigation system
  • Long-term maintenance for exterior painting, driveway sealing, roof and appliance replacements
  • Travel expenses to reach second home
  • Insurance riders, e.g., snowmobiles, pool, speedboat, etc.
  • Flood insurance
  • Property manager

Hidden Expenses

Remember to account for association fees, such as condo fees, says Woods. Additionally, watch out for an association’s periodic assessments.

Examples Could Include: A one-time $1,500 fee assigned to each condo owner for a new roof, a $5,000 fee for a town-mandated water system upgrade, or a $7,500 assessment post-hurricane damage, and so forth.

Woods also reminds us to look out for individual state property taxes, since some can be significantly higher than what you’re currently used to with your primary home.

Woods recommends that once you’ve isolated all of your variable expenses, double them for the first 10 years of ownership. If you can afford your second home after doubling all monthly variable expenses, then more than likely you can actually afford it. “Keep in mind that at any moment you could lose your job,” says Woods. “If this were to happen to you, do you have enough buffer to continue affording your second home?”

Bankrate® provides a simple home loan calculator that you can use to generate a quick snapshot in qualifying for your second home.

#2 – Identify Usage:  Renting, Personal Use or Both

It’s important to decide if you’ll use your second home for personal leisure, as a rental or both. The key reason to make this determination before purchasing a second home is due to tax ramifications.

For Example:

According to Investopedia, as long as you use the property as a second home and not a rental, you can deduct mortgage interest and property taxes the same way you would for your primary home. You can rent your property for 14 days or less each year without needing to report this as income to the IRS.

However, the financial education portal adds that when you rent out your second home for 15 days or more and either use it for less than 14 days or 10 percent of the number of days the home was rented, it’s now considered a rental property, and you must report all rental income to the IRS. Of course, you’ll be able to deduct a portion or all of your rental expenses, including mortgage interest, property taxes, insurance premiums, fees paid to property managers, etc.

TurboTax provides some detailed scenarios of renting versus personal use and the respective tax ramifications here.

Also, keep in mind that the market fluctuates. A property that is easily rented today may take weeks or maybe even months to rent a few years from now. “We simply don’t know what the real estate market will demand from year to year,” says Woods.

#3 – Titling Your Second Home

If you’re renting your second home, Woods suggests forming a Limited Liability Company (LLC) for the property, helping to protect your personal assets if your rental business is sued. For investors owning a property outside of their resident state, Woods suggests that you title your second home within a revocable trust, helping your loved ones avoid probate should anything happen to you.

#4 – Manage Borrowing Requests & Minimize Resentment

According to Woods, often when you purchase a second home, you’ll start hearing from long-lost relatives and friends asking to stay over or even borrow your second home outright.

Therefore, it’s important to plan ahead and set limits. The first question to ask yourself is, will I allow others to use my property? If so, who and for how long and how often? If you do allow others to use your second home, it’s important to establish rules, such as no smoking or pets, or no one under the age of 21 without an older adult.

“The most important thing to keep in mind is that your vacation home is yours,” says Woods. “You’ve worked hard and have been financially responsible, enabling you to purchase a second home in the first place. And while it’s nice to have guests or to do a favor for someone who needs an affordable vacation alternative, you do not owe anyone a place to stay. Nor do you need to provide an excuse as to why they’re not allowed to use your second home. You’ll enjoy your hideaway more when you manage your expectations, not others’.”

Real Simple provides some great examples of guilt-free strategies for saying no to various types of requests from friends and family members. All of us at Gratus Capital especially enjoyed the first strategy, “Saying no for the sake of your wallet.”

#5 – Estimate Time & Pressures

The concept of buying a second home is exciting, says Woods. Yet many buyers forget to take a step back and realistically consider exactly how much time they actually have to use their second home.

“I’ve seen second homes work out well for families that have very young children,” says Woods. “However, when kids enter middle school their activities become more of a commitment, to the point that they may be penalized if they miss a game or practice. Your 9-year-old may love skiing or camping now, but as he ages, he may lose interest and resist the idea of driving to the mountains. Ask yourself if you’re prepared to manage such situations.”

Also, it’s important to ask yourself if you’ll feel pressured to use your second home every time you vacation versus taking a different vacation, given that you’re paying a substantial amount of money to maintain your second home. Woods says that vacation home owners often feel a pressure to vacation at their second home. This travel limitation can ultimately lead to resentment.

#6 – Maintain Formal Co-Ownership Agreements with Friends & Family

If you’re considering co-owning a second home with a close friend or family member, Woods suggests that you have a clear agreement before signing on the dotted line. “Keep in mind that people’s lives change, and not everyone is successful at projecting their future goals,” says Woods.

“For example, someone may decide they want out of the house because they need the money to help pay for their child’s college education.

It’s important to discuss the nitty-gritty when creating your co-ownership agreement. In fact, if any member of the two parties starts to get agitated with developing an agreement, this could be a sign that you may not want to get into business with this individual. If you’re unable to have ongoing, open and difficult conversations with your co-owners, then the partnership will likely fail.”

At a minimum, Woods suggests that you include the following in your agreement:

  • A list of shared expenses and distribution of expenses.
  • Facilitation of repairs.
  • Usage scheduling, who can use the house and when, including key vacation periods?
  • Guests, who, how many and how frequently?
  • House restrictions, e.g., no smoking, no pets, no adult children without parent present, etc.
  • Buy-sell agreement. The latter would allow you to take out life insurance on the co-owner, enabling you to buy his or her share of the property in the event of their death. Otherwise, you could end up sharing your second home with your best friend’s adult children who may not like your established rules.

In Closing

“I’m all for individuals and families purchasing a second home,” says Woods. “I, too, value quality time and relaxation with my family. Still, it’s imperative that you consider both the financial and emotional factors associated with owning a second home. If you can afford it, that’s terrific. However, do you have the patience to manage it, including enforcing boundaries regarding friends wanting to use your special hideaway? Owning a second home, even if you have the money, isn’t for everyone.”

At Gratus Capital, we take our clients’ lifetime goals very seriously. This includes their desire to secure a second home, whether it be for a personal escape or as another form of income. However, the purchase of a second home has both short and long-term ramifications on your financial well-being. It’s important to weigh the purchase of a second home within your overall financial plan, particularly tax and estate implications.

If you have questions regarding the purchasing of a second home or any other question pertaining to your overall financial health, including taxes and estate planning, as well as investment and wealth management, please contact us. In delivering financial advisory services, we aim to be your collaborative partner and dedicated advocate.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.
[1]  https://www.statista.com/statistics/228870/people-living-in-households-that-plan-to-buy-a-second-home-usa/
[2] http://www.bankrate.com/calculators/home-equity/loan-pre-qualification-calculator.aspx
[3] http://www.investopedia.com/articles/personal-finance/013014/tax-breaks-secondhome-owners.asp
[4] https://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Buying-a-Second-Home/INF12015.html
[5] https://howtostartanllc.com/what-is-an-llc
[6] https://www.realsimple.com/work-life/10-guilt-free-strategies-for-saying-no

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This quarter we asked Gratus Capital Director of Investments Todd Jones to weigh in on the current financial environment to learn more about critical market trends.

Here’s what Todd is talking about this summer:

With equity markets at new all-time highs, where is Gratus now looking for different equity allocations?

Certainly, we’re being a little more cautious with our equity investments, while remaining at our targets. The reason we’ve been giving more caution to this side of the portfolio is due to elevated valuations. Specifically, equity markets are experiencing valuation levels that haven’t been seen in a number of years.

Furthermore, the number of bargains available to equity investors is among the lowest we’ve witnessed at any point in this recovery cycle. It’s important to recognize this, since as value investors, we consider price an important factor in all of our positions when determining what investments to add to or remove from a portfolio.

For the past 12 months, we’ve been focusing on developed international markets, such as Continental Europe, because we continue to see select opportunities available in these markets. However, this is not the case for other developed areas of the world, including Australia and Japan. In our view, these areas are more risky than Europe because of their proximity to China.

Emerging market stocks and bonds have been performing well. Is this an area Gratus is considering for portfolios?

We’re still considering these allocations both on the equity and fixed income sides. However, Gratus has yet to make any investments in emerging markets. This is primarily because of the substantial liquidity risks that are evident in most of these markets. As an example, on May 17, 2017, the Brazilian stock market was down approximately 18 percent. This one-day price plunge highlights the hidden risks in emerging market equities. Unfortunately, many investors aren’t paying attention to this rapid movement.

On the emerging market bond side, this asset class looks unattractive. Yields on emerging market bonds relative to U.S. Treasury bonds are nearing all-time lows since the 2008 global financial crisis. We believe this represents a negatively skewed risk-return tradeoff.

Technology stocks have been drawing a lot of news attention and seem to be up almost every day. Is this something we should be concerned with?

There certainly have been a number of publications correlating where technology stocks are today versus a similar high valuation situation in 2000, when there was a tech bubble. However, this time around in 2017, technology segments within the equity markets appear far less risky than in 1999 and 2000.

There are two reasons why:

#1 – The tech-knowledge economy is becoming larger, certainly larger than in 1999.

#2 – Technology companies are generating substantial earnings. Therefore, given that these companies are generating far-superior earnings as compared to 1999, the valuations are much more believable and reasonable.

Are there any portfolio changes Gratus is making now?

There are a number of things that we’re doing and have been doing throughout 2017. I’d like to highlight three:

#1 – Similar to the first quarter in 2016, we rebalanced all of our accounts this year, but for different reasons. Last year, equity markets had sold off dramatically. Therefore, we rebalanced in order to add to our equity positions. This year, we rebalanced all of our accounts in order to reduce equity positions, because prices have moved up substantially as compared to last year.

#2 – We are increasing cash positions where available. Overall, we haven’t held much cash in our accounts through this recovery. Still, we believe cash will create potential opportunities within portfolios in the near future.

#3 – We are continuing to transition some of our equity and alternative positions from passive indexes to active strategies. Given the deluge of money being invested in passive strategies, we believe active strategies will have better potential to outperform than they have at any point in the last 10 years. We discussed this active management approach in our June Market Insights, Investing In An Era Where Price Is Irrelevant.

Authored By:

Gratus Capital is an SEC registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of July 2017, and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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We are pleased to announce that Wayne Holbrook has joined the Gratus team as our Chief Operating Officer.  Wayne is responsible for collaborating with the Executive team to develop and measure team structures, create operational efficiencies, and innovate policies and procedures to align with the firm’s vision.

Prior to joining Gratus, Wayne was the Chief Operating Officer / Chief Compliance Officer for Cornerstone Investment Partners and was responsible for operations, trading, finance, human resources, compliance and technology. Before that, he was a Global Partner with Invesco, where he was responsible for operations, trading and technology for the North American Institutional Group. Wayne earned his Masters of Business Administration from the J. Mack Robinson College of Business at Georgia State University, and he earned his Bachelor of Arts degree in Economics from the University of Illinois at Chicago.

Please join me in welcoming Wayne to the Gratus family.

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Gratus Capital, LLC
3350 Riverwood Pkwy, Suite 1550
Atlanta, GA 30339
Phone: (404) 961-6000
Toll Free: 1 (888) 707-0773
Fax: (404) 961-6020