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Fiduciary Rule Protecting Investors is Dead

Here's a proposition to you -- how would you like to work with a financial advisor who doesn't have to work in your best interest, and is able to increase his or her profitability by steering you towards retirement investment products that have hidden payments to the advisor, contain fees that are concealed from you, and under-perform other less expensive choices?

No? How about a relationship in which your financial advisor is legally required to act in your best interest, has to fully disclose how he or she is being compensated, and must place your interests before their own?

This last choice recently suffered a slow and painful death under the Trump administration. It is called the Fiduciary Rule, which was approved under Obama, and was supposed to be implemented in April 2017. It demanded that retirement advisors act in the best interests of their clients, and put their clients' interests above their own. It left no room for advisors to conceal conflicts of interest, and stated that all fees and commissions for retirement plans and retirement planning advice be clearly disclosed in dollar form to clients.

Wall Street banks and brokerage firms fought it from the beginning, because it limited commissions and protected consumers from high-risk investment products. They longed for the good old days, which the Council of Economic Advisors (CEA) described as "A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments -- with high costs and low returns -- instead of recommending quality investments." ¹ The CEA report found that the abuses cost working and middle-class families $17 billion per year in losses.

In a height of cynicism, the Wall Street firms argued that the Fiduciary Rule would prevent brokers and annuity agents from giving advice to their clients, at the same time maintaining that the same brokers and annuity agents are actually salespeople who are not obligated to have a relationship of trust with their clients.

One of the first things that Trump did after taking office was to call the Fiduciary Rule into question, and delay its implementation for 180 days, giving Wall Street additional time to wield its wealth and power to lobby Congress. Then in June, a U.S. District Court threw out the Fiduciary Rule. The Consumer Federation of America called it "a terrible day for retirement savers."

What can you do now to protect yourself? First, sort through all the alphabet soup. There are many designations used by financial salespeople that sound impressive, like financial consultant, wealth manager, vice president, financial planner, financial advisor, and many more. Some designations only require that the salesperson sit though a one-day course. Check out a potential advisor's background, and find out what their credentials mean.

A Certified Financial Planner™ has to serve as a fiduciary when doing financial planning in order to maintain the certification. A CPA is also required to act as a fiduciary to retain the license. A firm that is a Registered Investment Advisor (RIA) must also act as a fiduciary.

Even if an advisor is a fiduciary, it makes a difference where they work. The firm that the fiduciary works for may restrict what investments he or she can pick from. An independent Registered Investment Advisor can choose from the whole universe of investment products, including low-cost mutual funds and exchange-traded funds. However, fiduciaries who work for some brokerage firms or banks must select their recommendations from house funds or lucrative mutual fund partners that are more profitable to the firm.

Don't be afraid to ask a lot of questions. If what the salesperson is pushing sounds too good to be true, it very often is. Ask how much the advisor gets paid, how they get paid, and what the various fees mean. Ask if he or she is legally obligated to act in your best interest, as a fiduciary. And then ask them to put it in writing.

¹ Forbes 7/20/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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New Tax Rules Affect Parents

The Tax Cuts and Jobs Act of 2017 went into effect on January 1, 2018 and started the year off with a bang.  Most notably, the tax reform act imposed a new cap on state and local tax deductions at $10,000 for married filing jointly couples and $5,000 for single filers.  In other words, if you’re single and the sum of your property, state and local taxes exceeded $5,000 during the year (which is easily achievable in California due to high property values), too bad – you don’t get to deduct all the expenses you paid!  Corporations received a huge tax break due to the lowering of the top tax bracket from 35% down to 21%, mostly on the backs of the Middle Class.  The threshold for itemizing taxes went up, and many expenses that qualified for a tax deduction in prior years were eliminated or phased-out, making taxes “simpler” but also resulting in a larger expense, for many. 

 

529 Flexibility

However, one positive outcome of the Tax Cuts and Jobs Act (TCJA) is new flexibility created around 529 College Savings Plans.  A 529 plan is an education savings vehicle that functions much like a Roth IRA.  You put after-tax money into the account, and the growth on the investment is tax-free if the money is utilized for qualified education expenses.  Qualified expenses include tuition, room and board, books and supplies, to name a few. 

 

Previously, the earmarked 529 savings was meant for higher education costs such as university or trade school expenses.  Under the new law, you can now draw annually up to $10,000 per child, tax-free, to pay kindergarten through 12th grade tuition at a public, private or religious school[i].  Given the new benefit, many parents and grandparents are interested in starting the tax-free savings plans as soon as a child is born rather than waiting until traditional college planning has begun.

 

The Tax Cuts and Jobs Act is a federal law, but not all states and educational institutions sponsoring 529s have been able to adopt the new flexibility standards allowing distributions for K-12 education.  In California, legislative change is still pending, therefore, it is important to check with your CPA and 529 sponsor prior to making any withdrawals, so as not to trigger a 10% early withdrawal penalty unexpectedly. 

 

Like many other tax benefits that disappeared, the TCJA rules eliminated tax deductions for interest paid on home equity loans or home equity lines of credit.  For those in a pinch to put their kids through college, the equity loans were an appealing option because the interest paid was tax deductible.  With the removal of any benefits to carry equity loans, many parents are turning towards saving early to stretch hard-earned dollars.

 

Student Loan Interest Deduction Saved

The new law leaves the student loan interest deduction unchanged at $2,500.  However, as mentioned, the threshold to qualify for itemization is higher.  Also, when student loans are cancelled due to death or disability, they are now tax-exempt[ii]

 

Alimony Taxation Changes

New divorcees (divorced post-2018) are also affected significantly under the new TCJA rules.  Under the new laws, alimony is no longer considered taxable income to the recipient[iii], essentially lowering their taxable income and possibly making it easier for the family to qualify for needs-based financial aid.

 

While the new tax laws were supposed to make taxes simpler, change always seems complicated.  The finance industry is scrambling to learn and be complaint with the new rules before the 2018 tax filing season rolls around.  There is still time to initiate planning this year that could reap tax benefits or avoid tax pitfalls.  Consult your CPA or Certified Financial Planner™ before the year is over to make sure you’re on track and taking advantage of available options. 

 This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.irs.gov/newsroom/529-plans-questions-and-answers

[ii] https://www.studentdebtrelief.us/news/discharging-student-loans-no-longer-taxable-income/

[iii] https://www.marketwatch.com/story/new-tax-law-eliminates-alimony-deductions-but-not-for-everybody-2018-01-23

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What to do in this record bull market

This week capped the longest bull market in the history of the Standard and Poors 500 Index. Technically, a bull market is the period that starts at the bottom of the previous bear market (a drop of at least 20%) and continues moving up without a new bear market drop of 20%. In the current case, the bull market has gone for 3,453 days.¹

In that span of time, the S&P 500, not counting dividends, grew by an impressive 321%. It's not the strongest rally in history (from October 1990 through March 2000 the market gained 417%), but it's still very respectable.²

The lowest previous point in the market was March 9, 2009, the end of the Great Recession, so-called because it was the worst recession since the Great Depression. It may seem distant now, but at the time, the future of the U.S. economic system was in doubt. Two of the major brokerage houses, Bear Stearns and Lehman Brothers, went under. Merrill Lynch was forced into a sale. Hundreds of thousands of Americans lost their homes and savings.

In the depths of the recession, no one would have guessed that this tragedy would be followed by a buoyant period in which U.S. stocks would quadruple in value. Tech companies, like Apple, Amazon, and Google parent Alphabet, have led the charge, becoming dominant business powerhouses. One of the current largest players in technology, Facebook, didn't even enter the market until 2012.³

On the other hand, the news on the political front is not very comforting. Trump's former campaign manager, Paul Manafort, was convicted by a jury on eight charges. His personal attorney, Michael Cohen, pled guilty on eight criminal charges, including campaign finance violations. Allen Pecker, publisher of the National Enquirer, under protection of immunity, corroborated that Trump knew about the hush-money payments. Finally, the Trump Organization's financial gatekeeper, Allen Weisselberg, has also been granted immunity in testimony before a federal grand jury. By all accounts, Weisselberg "knows where all the bodies are buried."⁴ All this is happening just a few months before the midterm elections. Midterms often upset the balance of power in government and damage a sitting President. This election could be monumental, and could cause additional volatility in the stock market.

If you're an investor, it would be natural to feel some unease sitting at the top of the market. Does this mean it's going to be all downhill from here? Is it time to get out of the market? In reality, the length of a market upturn is not a good indicator for a market downturn. Better warning signs are declining corporate profits and revenue, high inflation, and a struggling economy. None of this is occurring right now, and few economists expect a recession soon.

Nevertheless, if you're a cautious investor, you might be feeling that you want to hedge your bets. If you are, it's generally better to make small, gradual and reversible steps in your investment strategy rather than large, dramatic ones that you might regret later.

For example, if you're approaching retirement, you might want to increase the proportion of fixed income (bonds) in your asset allocation. This tends to create more stability in your investment, and enhance downside protection.

If you have some extra cash that you're hesitating to put into the market, but you have a remaining mortgage balance, you might want to utilize the cash to pay down your mortgage. You'll save on mortgage interest at zero risk.

You might use Dollar Cost Averaging, an investing strategy that is very effective when the market is volatile. Instead of investing a large, lump sum all at once, break it up into smaller pieces and invest it in equal amounts gradually: monthly, quarterly or semi-annually. If the market is down, your money will buy more shares. If the market is up, you will be buying fewer shares. Statistically, this will give you a better rate of return.

Whatever you decide to do, it's wise to get professional advice. Talk to your estate planning attorney, CPA, or Certified Financial Planner™ for a second opinion on whether your strategy is appropriate for your circumstances and goals.

¹ Business Insider 8/2018

² Bloomberg.com 8/23/2018

³ Wall Street Journal 8/22/2018

⁴ Chicago Tribune 8/22/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Capital Gain Tax Change Looms

Earlier this month, President Trump announced that he and US Treasurer, Steven Mnuchin, were determining if they had authority to unilaterally pass a massive and permanent new tax cut related to capital gains.  While the 2017 Tax Reform Act was spun as a “tax cut for the middle class,” this new proposed tax cut clearly benefits the wealthiest in America.  In fact, according to the Wharton School of Business, over 63%[i] of the new proposed tax cut would benefit just one tenth of one percent of the richest families in America.   

Under current law, when you buy a stock or mutual fund, the price you pay today is marked as your cost basis or taxable basis.  The price you sell that holding for in the future is the market value.  The difference between the market value (what you sold the investment for) and the cost basis (what you bought the investment at) is the capital gain, subject to taxation at both the Federal and State levels.  President Trump’s new capital gains tax proposal would increase the base purchase price (basis) every year by an inflation factor.  This would inherently decrease the gain, and related capital gains tax.  

As an example, say you purchase a stock for $10,000 in 1990.  It’s grown in value and if you sold it in the market today, you would receive $25,000 for that same stock, resulting in a gain of $15,000.  Under the current tax laws, a California resident might be subject to a tax expense of $3,750 (Federal capital gains tax rate of 15% + estimated CA tax rate of 10%).  However, under the new proposed tax law, the basis of $10,000 would get marked up every year since the time of purchase for inflation.  If we used the CPI index as the inflation factor[ii], the adjusted basis would be closer to $20,000.  The resulting gain after inflation would be reduced to $5,000 instead of the original $15,000 gain and the tax might be closer to $1,300; a tax savings of $2,450 or a 65%.  According to the Wharton Budget Model, if the capital gains tax change is pushed through, the tax reform would cost the US more than $100 billion in tax revenue over the next 10 years and the top 1% of US earners would take 86% of the benefit[iii].

Democrats are already pledging to fight the measure due to the bias of the capital gains tax bill to benefit the wealthy and the consequential strain on the national budget.  Normally changes to the tax code go through Congress, but President Trump knows his tax cut proposal would die there.  As such, he and Treasurer Mnuchin are investigating whether the office of the Treasurer has the authority to make this tax change unilaterally.  The last time changes to the capital gains taxes were considered was under President George H. W. Bush in 1992[iv].  However, at that time, it was determined that the US Treasury office did NOT have the authority to make changes on its own.  Therefore, if President Trump proceeds to circumvent congress and push his tax cut through, his bill will definitely face legal challenges. 

Noise regarding the capital gains tax-cut has quieted for now.  However, if the tax cut is pushed through, even for a short window of time, the change will unleash a wave of volatility in the stock market.  People who have long held stock positions fraught with unrealized gain may sell large stakes of ownership to take advantage of what is sure to be a limited tax-savings opportunity. 

Unfortunately, the Tax Reform Act of 2017 and the newly proposed capital gains tax cut benefit the ultra-wealthy at the detriment of valuable government programs like Medicare, Medicaid and Social Security.  The gap between the rich and the poor is widening and the middle class is shrinking.  The President’s divisive behavior continues to pit people against each other rather than bring them together.  Only time will tell where this newest idea settles. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 


[i] https://www.usatoday.com/story/opinion/2018/08/08/trump-capital-gains-tax-plan-helps-rich-hurts-america-column/916377002/

[ii] https://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/

[iii] https://www.usatoday.com/story/opinion/2018/08/08/trump-capital-gains-tax-plan-helps-rich-hurts-america-column/916377002/

[iv] https://www.nytimes.com/2018/07/30/us/politics/trump-tax-cuts-rich.html

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Growth for Whom?

This week, President Trump was forced to back off on his aggressive trade war, defend himself against recorded audio discussing a payoff to a Playboy model, and fret over the Trump Organization financial chief, Allen Weisselberg, testifying before a federal grand jury. Understandably, Trump has seized on relatively good news that U.S. economic growth hit 4.1% in the second quarter of 2018. Nevertheless, 40 million Americans live in poverty, and remain without healthcare coverage¹. It begs the question, "Who is the growth benefiting?"

The apparently good numbers come in the wake of a massive tax cut from 35% down to 21% that Trump gave corporations at the beginning of the year. Although previous administrations have used economic stimulus in order to avoid recessions, Trump's gift came at a bullish period of economic expansion, falling unemployment and rising home values. Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget, calls it a "temporary sugar-high" that has long-term negative consequences because it pushes the federal deficit to over $1 trillion.² 

The biggest beneficiaries of this largesse have been corporate executives. Corporate profits after taxes are at the highest level ever seen in this country.² Earlier this year, the United Nations Human Rights Council reported that the top 1% of the U.S. population owns 38.6% of the total wealth in the country, and that "the U.S. already leads the developed world in income and wealth inequality." ³

Only a trickle has gone towards employee raises or bonuses. $800 billion is going towards stock buybacks to boost share prices and dividends. Stock shareholders have benefited, but 84% of all stocks are owned by the wealthiest 10% of households. 40% of Americans (125 million people) have hardly any investments at all.⁴

Trump’s trade war has also created an artificial spike in growth. In anticipation of U.S. tariffs and retaliatory tariffs being implemented, foreign companies have been stockpiling goods and raw materials in order to buy before prices jump. This has temporarily boosted U.S. exports.

A 10% tariff on $400 billion of imports is $40 billion that goes into the U.S. Treasury, a welcome pay increase for the government. But who pays for the trade tariffs? For American consumers, the trade war is a new financial hit, because it raises prices. The import tax on automobiles would raise the cost of a Toyota Corolla, Honda CRV or Ford F150 by about $1,000 due to the tariffs on car parts manufactured outside the U.S. It would add about $5,000 to the cost of imported cars.⁵

In addition, General Motors estimates that because of the proposed tariffs, they would have to eliminate 195,000 jobs over the next three years. With retaliatory tariffs, these job losses could increase to 624,000.⁶

It appears that “growth” means even more wealth to a small number of already-wealthy Americans. For the vast majority of the population, it means paying more for food, housing, clothing and healthcare, including the possibility of losing their jobs.

Although Trump characterizes the quarterly number as “an economic turnaround of HISTORIC proportions,” it is actually more modest and fleeting. During the Obama administration, the economy exceeded 4.1% four times.⁷ And because of the unusual confluence of events that created last quarter’s surge, it’s likely the economy will soon return to the average 2 to 2.5% rate that we’ve experienced since 2009.

 

¹ Bloomberg 4/3/2018

² New York Times 7/25/2018

³ Los Angeles Times 6/6/2018

⁴ CNN Money, 2/16/2018

⁵ CBS News 7/2/2018

⁶ CNBC 7/3/2018

⁷ New York Times 7/27/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS

2019 SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 4, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*Not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 11, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.,

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 13, 2019

9:00 a.m. - 11:00 a.m.

Kondo Wealth Advisors Pasadena Office (tentative)

300 N. Lake Ave. Suite 920

Pasadena, CA  91101

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 20, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 7, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 14, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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