Tuesday, 20 November 2012 12:13

The golden years

As parents advance in age, it often falls on the shoulders of their children or other family members to begin handling their parents' financial affairs, according to Kurt Marlow, Financial Advisor with FirstMerit Financial Services.  "But this is often easier said than done," says Marlow. "Many seniors don’t like giving up control of their finances. They are not comfortable, for many reasons, divulging the details of their personal finances. However, failing to help elderly parents put their financial house in order leaves family members in a difficult situation when there is an untimely death or disability."

To initiate a conversation about this topic with parents and gain their cooperation, Marlow recommends that adult children begin by expressing their genuine concern and desire to help. A family meeting can sometimes be a helpful forum for this conversation.

"There are many different ways to go about planning a family meeting," says Marlow. "To start, I encourage my clients to meet with me separately beforehand. For example, I will visit with my mature clients privately to discuss their financial situation to make sure I understand the needs and concerns they have. We then set up a separate appointment with the children or a close family member to discuss the parent’s financials and long-term care wishes."

During the family meeting, extensive notes are taken outlining an inventory of the parents' assets. Marlow provides a form for their use; a Family Discussion Checklist, a tool that is unique to FirstMerit. The Family Discussion Checklist is designed to help organize all important financial documents in one place. It details monthly income and expenses, bank statements, investment account statements, insurance policies, long-term care insurance, trusts, loans and mortgage documents. The checklist identifies which financial documents currently exist, where they are located, and which documents are still needed.

After the checklist is complete, Marlow works with the family to analyze the parent's financial situation and see what help may be needed.

"I try to find out what their concerns are, or whether there is a particular piece of the financial puzzle they are concerned with," he says. "The answers vary from family to family based on each person's unique financial situation and goals. For example, we discuss adding a Power of Attorney, or after consulting a tax professional, we may decide to add a trusted family member as a joint owner or other similar arrangements may be a solution. In some instances, beneficiaries may be added to the parent's accounts so that the designation is in place if something unexpected happens to the parent."

"No matter what solutions are decided upon by the family," adds Marlow, "the service that many of our family clients value highly is the convenience and assurance of having a trusted advisor to work alongside them."

The process for connecting generations and coordinating the financial affairs of the older generation can be comprehensive, but at the end of the day, it can be a unifying experience for the entire family when parents have the assurance that their wishes are being followed even after they are gone.

For more information on managing finances for the elderly in your life, contact Kurt Marlow, Financial Advisor, FirstMerit Financial Services Inc., at (708) 529-2158.

Securities offered through FirstMerit Financial Services, Inc. Member FINRA, SIPC; Advisory Services offered through FirstMerit Advisors, Inc.; Insurance products offered through FirstMerit Insurance Agency, Inc., affiliates of FirstMerit Bank, N.A.

Investment and Insurance Products are: • ?Not FDIC Insured ? • May Lose Value • Not Bank Guaranteed ? • Not a Deposit • Not Insured By Any Federal or State Government Agency 

Published in Cleveland
Tuesday, 20 November 2012 12:08

The golden years

As parents advance in age, it often falls on the shoulders of their children or other family members to begin handling their parent's financial affairs, according to Ed Wojciechowski, Financial Advisor with FirstMerit Financial Services.  "But this is often easier said than done," says Wojciechowski. "Many seniors don’t like giving up control of their finances. They are not comfortable, for many reasons, divulging the details of their personal finances. However, failing to help elderly parents put their financial house in order leaves family members in a difficult situation when there is an untimely death or disability."

To initiate a conversation about this topic with parents and gain their cooperation, Wojciechowski recommends that adult children begin by expressing their genuine concern and desire to help. A family meeting can sometimes be a helpful forum for this conversation.

"There are many different ways to go about planning a family meeting," says Wojciechowski. "To start, I encourage my clients to meet with me separately beforehand. For example, I will visit with my mature clients privately to discuss their financial situation to make sure I understand the needs and concerns they have. We then set up a separate appointment with the children or a close family member to discuss the parent’s financials and long-term care wishes."

During the family meeting, extensive notes are taken outlining an inventory of the parents' assets. Wojciechowski provides a form for their use; a Family Discussion Checklist, a tool that is unique to FirstMerit. The Family Discussion Checklist is designed to help organize all important financial documents in one place. It details monthly income and expenses, bank statements, investment account statements, insurance policies, long-term care insurance, trusts, loans and mortgage documents. The checklist identifies which financial documents currently exist, where they are located, and which documents are still needed.

After the checklist is complete, Wojciechowski works with the family to analyze the parent's financial situation and see what help may be needed.

"I try to find out what their concerns are, or whether there is a particular piece of the financial puzzle they are concerned with," he says. "The answers vary from family to family based on each person's unique financial situation and goals. For example, we discuss adding a Power of Attorney, or after consulting a tax professional, we may decide to add a trusted family member as a joint owner or other similar arrangements may be a solution. In some instances, beneficiaries may be added to the parent's accounts so that the designation is in place if something unexpected happens to the parent."

"No matter what solutions are decided upon by the family," adds Wojciechowski, "the service that many of our family clients value highly is the convenience and assurance of having a trusted advisor to work alongside them."

The process for connecting generations and coordinating the financial affairs of the older generation can be comprehensive, but at the end of the day, it can be a unifying experience for the entire family when parents have the assurance that their wishes are being followed even after they are gone.

For more information on managing finances for the elderly in your life, contact Ed Wojciechowski, Financial Advisor, FirstMerit Financial Services Inc., at (708) 529-2158.

Securities offered through FirstMerit Financial Services, Inc. Member FINRA, SIPC; Advisory Services offered through FirstMerit Advisors, Inc.; Insurance products offered through FirstMerit Insurance Agency, Inc., affiliates of FirstMerit Bank, N.A.

Investment and Insurance Products are: • ?Not FDIC Insured ? • May Lose Value • Not Bank Guaranteed ? • Not a Deposit • Not Insured By Any Federal or State Government Agency 

Published in Chicago

Employer-sponsored 401(k) plan fees can cut retirement savings by 30 percent over a lifetime, according to Demos, a public policy research group. However, recently enacted disclosure requirements will shine a light on the hidden fees for plan sponsors and participants.

For employers that sponsor retirement plans, there is a fiduciary responsibility.

“You, as a plan sponsor, might be overwhelmed due to lack of expertise and wish to avoid extra time spent thinking about and understanding retirement plan fees,” says Kimberly Flett, CPA, QKA, QPA, director of retirement plan design and administration for SS&G. “However, you are ultimately responsible for adequate disclosures if you are the owner of a company that maintains a qualified plan.”

Smart Business spoke with Flett about how employers can take responsibility as retirement plan sponsors beyond passing along a stack of papers or website addresses to participants.

What are the new fee disclosure requirements for plans?

The Department of Labor was concerned that 401(k) plans with underlying investments of different types and the related providers — investment managers, brokerage houses — that maintain the investment accounts take out revenue from the various funds to pay fees without sharing or disclosing the information to plan participants. The disclosure requirements hold the investment managers accountable and educate participants about the costs in the underlying investments within the retirement plans.

The new fee disclosure requirements have been established for a while, with additional retirement expenses being reported on many retirement plans’ Schedule C as part of Form 5500 reporting to the DOL. They were brought to the forefront more expeditiously because of how the economy plummeted a few years ago. Several interim regulations were passed, with final regulations taking place in 2012.

What does disclosing these fees entail?

There are two parts to the disclosure. Under the first part, the covered service provider that manages your retirement funds was required to begin disclosing to you, as plan sponsor, all the plan costs as of July 1, 2012. These included items such as name and type of investment, performance data, benchmarks, ratios used in calculating expenses and the allocation of all fees — to a third-party administrator, the adviser or licensed dealer, or the company that maintains the fund. The formulas used with those amounts also had to be disclosed.

As of Aug. 30, 2012, the plan sponsors of qualified plans had to start disclosing this information to participants in the plan, explaining what the fees are and how they work. The plan’s statements had to be updated to comply with the regulation.

How much do plan sponsors and their accountants need to understand about the disclosures?

Ultimately, as the plan sponsor, you bear what is called fiduciary responsibility. Therefore, you need to work closely with professionals, advisers and vendors who know how to interpret these disclosures. Take time to read the disclosures and understand how the investment provider is complying. Then make sure your participants are truly being informed and will continue to be so on an ongoing basis.

It’s a good idea, for example, to appoint your HR manager, internal accountant and CFO to an internal 401(k) committee with the responsibility of reviewing the data, educating themselves and then sharing their knowledge with participants. Does this committee have to be experts? No, but they have to make a reasonable effort and know where to go if they don’t have the answers, such as to an attorney familiar with the Employee Retirement Income Security Act of 1974 or a third-party administrator.

Your employees, once they get their third quarter statements, will be coming to you with questions. You need to be able to connect them with the right experts so employees can receive the necessary answers.

If a company’s provider fails to properly disclose its costs, will the company be held accountable?

Failure to comply with the regulation is considered a prohibitive transaction that can be subject to fees and penalty impositions from the DOL. But there are further ramifications beyond the DOL coming after the plan sponsor for improper disclosures.

A participant might leave your company and be unhappy with the funds or platform that you, as the plan sponsor, chose, because he or she lost money. That former employee could seek out the DOL and get an attorney. Then you could have to prove that you took every precaution to ensure the plan ran smoothly and made smart investments. If the plan did not, you might be held accountable.

It’s too soon to say what the short- or long-term ramifications will be, but as a plan sponsor the first thing you need to do is arm yourself with the right expert advisers. Then make inquires to be forearmed; the preparation phase will help curtail a lot of negative fallout that could potentially happen.

How do you think this will affect the retirement planning industry?

Third-party administrators will be needed more than ever for their expert advice. This disclosure law also brings visibility to the industry, which opens doors for discussion that sets up additional chances for education and awareness about retirement plans.

Despite more costs being in the open, employers should still take a comprehensive approach to retirement planning. Looking at service, benchmarking and longevity, as cheap is not always better. A company might have the highest number of new plans each year because of the low costs, but it also could have low retention rates because of service

issues.

 

Kimberly Flett, CPA, QKA, QPA, is the director of retirement plan design and administration for SS&G. Reach her at (330) 668-9696 or KFlett@SSandG.com.

Insights Accounting & Consulting is brought to you by SS&G

Published in Akron/Canton

Retirement plan participants and sponsors will gain more information about their plans’ fees and expenses when changes from the U.S. Department of Labor require comprehensive disclosure from service providers.

“The outcome of this change is going to be a much more level playing field of service providers and investment companies in terms of how and what they charge,” says Greg McDermott, Executive Vice President, FirstMerit Retirement Plan Services.

About 72 million workers participate in 401(k)-type plans, representing about $3 trillion in investments, according to the U.S. Department of Labor. All will be affected by these disclosure changes.

Currently, neither the plan participants nor the company providing the retirement plan are required by law to be informed of what fees the third-party plan administrator and investment manager charge and what that money covers. In fact, last year’s AARP survey revealed that 71 percent of 401(k) participants said they didn’t think they paid any fees.

McDermott explains that the disclosure mandate was supposed to take effect last summer but the deadline was extended twice to give providers more time to prepare by implementing new software, creating new reporting plans or adjusting their administrative processes. The mandate now takes effect July 1, 2012.

“For many other providers, it will be a dramatic change,” McDermott says. “But for FirstMerit, it’s not a significant change in terms of the way we currently charge for services and our level of disclosure. According to McDermott, FirstMerit already discloses the fees it charges for both its administrative and investment services and will now simply formalize the process to comply with specific aspects of the regulations. “We’re moving forward to meet the deadlines,” McDermott said. “In fact, our relationship managers are getting prepared to communicate the new regulations and what they mean to our clients and prospects.”

What does the change mean to service providers, sponsors and participants?

 

Service providers of retirement plans need to make sure their fees are reasonable, McDermott says. The Department of Labor has reported that the fees will need to meet industry benchmarks but has yet to define those benchmarks. FirstMerit, however, has already proactively compared its fees to available industry data that list average fees for different size retirement plans and found them to be both reasonable and competitive.

McDermott anticipates that review of provider fee information by plan sponsors will become a critical part of their compliance protocol. Although service providers are tasked with developing the required disclosures, plan sponsors face fiduciary liability for ensuring the disclosures are received, reviewing them and making certain their arrangements with providers are reasonable. McDermott recommends that plan sponsors begin a dialogue now with service providers to understand what assistance they will receive from their providers.

With the change, plan sponsors are responsible for seeing that plan participants will receive two categories of information—general information on plan restrictions and an explanation of any fees and expenses for plan administration such as investment advisory, legal, accounting or recordkeeping services. Additionally, the new regulation requires that participants receive information about each designated investment option in a comparative chart. According to McDermott, this may include items such as performance information over one-, five- and 10-year periods, a description of any shareholder-type fees, and the total annual operating expenses of the investment options.

“This will outline for participants the investment fees they pay in both percentages and dollars,” McDermott explains. “It will give them a picture of their retirement plan in hard dollars.”

Service providers, sponsors and participants also should be aware of the timing and impact of the impending regulation. Once the regulation takes effect July 1, 2012, expect changes in the marketplace because, as McDermott explains, more plan sponsors will be inclined to compare their fees to benchmarks, which will make the marketplace more competitive. As a result, some providers may need to align their fees more closely with benchmark levels.

“In the end,” says McDermott, “I think this trend toward transparency will benefit plan sponsors and certainly the participants in the long run because fees and fund expenses will be more competitive across the marketplace.”

What service providers must disclose

While the retirement plan fee disclosure mandate has many nuances, FirstMerit’s Greg McDermott offers

highlights of the information providers are required to share with plan sponsors:

  • Description of the services provided (e.g. record keeper or securities broker).
  • Description of designated investment alternatives available to participants.
  • Consulting fees, actuarial fees, custodial fees and third-party administrative fees.
  • All direct compensation earned by the provider as well as any indirect compensation that may be received. For example, a mutual fund company may pay the provider a small fee to provide its mutual funds.
  • Description of any compensation that will be paid to the service provider, whether it is charged against the plan’s assets or paid directly.
  • Any fees that will be paid upon the termination of the arrangement.
  • Information necessary for the plan to comply with ERISA reporting and disclosure requirements.

Want to learn more about the changes or investment accounts in general? Contact Greg McDermott, Executive Vice President, FirstMerit Retirement Plan Services, at gregory.mcdermott@firstmerit.com.

The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.

Published in Chicago
Thursday, 17 May 2012 14:05

Making sense of an uncertain environment

 

Greg McDermott, the President of FirstMerit Insurance Group, discusses retirement planning with Smart Business.

How has the economy affected future retirees?

The prospect of enjoying the Golden Years may seem more like fools gold to many Americans who have seen their retirement savings dwindle during the recent economic downturn. One of the immediate impacts of the downturn was the reduction or elimination of employer contributions to qualified retirement plans. In addition, a significant number of individuals lost their jobs and have had to tap into retirement savings in order to sustain them during this difficult economic period.

Perhaps the most significant barrier to the goal of retirement has been the loss in account values suffered by most retirement plan participants over the past few years due to market volatility and dramatic declines in stock values. The psychological fallout from the market meltdown has made many employees nearing retirement more risk averse and conservative in their investment selections, which may limit the future performance of their accounts.

All of these factors have combined to create a material reduction in retirement savings.

Many future retirees are worried about the future of Social Security.  Where do you see Social Security heading?

The future viability of Social Security is certainly a looming issue and one that has challenged our government for decades, but with little action. I think we are nearing a time in which changes are going to need to be made in order to sustain the system for future generations. Since the Social Security system was put in place in 1935, the average life expectancies of retiring workers have increased dramatically, which means benefits are being paid for many more years than originally anticipated.

Another startling statistic is that in 1950, for every Social Security beneficiary, there were 16 active workers helping to fund the system. Today, there are three workers for every beneficiary, and that ratio will be two workers for every beneficiary by 2050.

The logical conclusion from this is that the age to qualify for Social Security will need to be increased materially in the future. It is also likely that there will be a form of “means testing” so that higher income earners may receive fewer Social Security benefits. Lastly, there is considerable discussion today surrounding converting our current “defined benefit” approach to Social Security to a defined contribution approach for younger employees in the work force in order to limit the continued growth in the benefit liability.

There is a general awareness by our government of the added burden on future retirees to create additional personal retirement savings. The advent of the Roth IRA is a good example of the government’s desire to create incentives for individuals to build their retirement savings on a tax-favored basis and create greater financial independence from government programs.

Anything else interesting or timely regarding retirement planning?

In late 2010, as part of the financial service reform legislation, Congress focused on creating greater transparency in fees and expenses charged within qualified retirement plans. Beginning in 2012, plan sponsors and participants will be told — in dollars and cents — exactly how much they pay each quarter for the management of their 401(k) plan. Most participants believe they pay nothing.

Investment fees, recordkeeping and administrative fees will be published in the one document most participants actually open and read — their participant statements. As participants begin to compare these fees and expenses, there will likely be questions raised concerning the value of services provided. This will be especially true when selecting investment fund alternatives. While many 401(k) providers have been very disciplined and transparent in their pricing for services, those providers that have been more aggressive in their fees and expense charges and have not been transparent in disclosure will be at a distinct competitive disadvantage. Many industry analysts are predicting that this new disclosure will likely produce a tipping point, resulting in reduced fees and expenses by many service providers, accompanied by greater accountability by plan providers.

As an example of the impact of fees and expenses, a 1 percent annual reduction in expenses at the participant account level over a working career could result in an increase in the account value at retirement of as much as 25 percent. While plan participants will now have a greater awareness of the expenses being charged to their account, plan providers will have an enhanced responsibility to assure the reasonableness of the fees and expenses being charged to the retirement plans they sponsor.

Reach Greg McDermott at gregory.mcdermott@firstmerit.com.

The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.

Published in Chicago

Successful retirement plan financial management requires careful coordination on the part of the employer. Without the knowledge to properly manage the plan, plan sponsors could face serious repercussions, says Gary Gausman, a senior consulting actuary at Towers Watson.

“For plan sponsors to manage their programs, there are four main areas to focus on — benefits policy, funding policy, investment policy and accounting policy,” says Gausman. “There are a number of things you can do in each area, and there is a lot of interaction between them that you need to be aware of.”

Smart Business spoke with Gausman about the keys to successful retirement plan financial management.

What do plan sponsors need to know about their benefits policy?

Look at the plan design to determine benefits that are going to be earned in the future and how you are going to deliver those. Also, look at your exit strategy for legacy liability. Employees have already earned benefits for service rendered to date, and there’s liability associated with those that you need to deal with. With legacy liability, there are former employees who are retired and are currently receiving benefits, those who have terminated employment and are not earning additional benefits but are entitled to benefits in the future, and active employees.

Retirees are receiving a monthly benefit and there’s not a lot the employer can do because benefits have already been earned and are being received. But you can mitigate the risks associated with retirees by purchasing an annuity contract from an insurance company to take that liability off your hands.

For those who have terminated employment who have not yet started their benefits  but are entitled to future benefits, consider offering them the benefit in one lump sum payment. If someone is 45 and entitled to $1,500 a month starting at age 65, perhaps that person would rather get a lump sum now equal to the value of those payments. That removes some employer risk. Annuity benefits are payable until the person dies, which might not be for decades. But if you pay a lump sum equal to the actuarial value of the payments, you are done.

With active employees, look at plan design. Traditional plans are final average pay plans, where if you work for a company for 30 years, you get, for example, 1.5 percent of your final average pay per year, or 45 percent of your final average pay, starting at age 65. The risk to the employer is that the benefit is indexed to what the employee earned, for example, in the last five years before retirement, which could spike dramatically in an inflationary period. As a result, many employers have shifted to a career average approach, in which benefits are instead based on what the employee earned ratably over his or her career.

How can employers address funding policies?

To maintain the tax-qualified status of plans, employers must satisfy various rules, including putting in a certain amount of money every year. Historically, some have put in the bare minimum, but in 2006, new rules said that, in addition to satisfying minimum funding requirements, you also have to maintain a certain funded ratio, which is the assets of the plan divided by liability, to continue to operate the plan according to all of its intentions and be able to take advantage of funding exemptions. For example, if a plan allows lump sums, it must maintain an 80 percent funded ratio in order to be able to pay out lump sums

If a company is just trying to satisfy the minimum funding rules while maintain that 80 percent ratio, additional volatility in the contribution amount could ensue. Companies could instead consider a more generous funding pattern to develop a cushion so that in lean years, when plan assets may have dropped and business results aren’t up to expectations, you can draw on that excess. This funding policy could involve, for example, contributing a certain percentage of pay each year.

In the 1990s, when things were going well, some companies took their eye off the ball. They didn’t have to make minimum contributions because their assets were doing so well, and in many cases, that has come back to bite them, as they haven’t built up the excess they now would like to have.

How can investment policies impact employers?

For years, employers chased returns and forgot about liabilities in the plan and how those would play out over time. In the last 10 years, that strategy has not worked well, as the stock market has been very erratic. As a result, when liabilities increase, assets may decrease, creating an even wider gap. Employers are taking a more focused look at investments, trying to better match assets and liabilities so that if liabilities increase, assets increase, as well, and the gap will not change as much. With the transition to cash balance type plans that allow employees to take lump sums at termination, you need to make sure you have the liquidity to pay those out. And to do that, employers need to look at investments in a different light and better align them with their liabilities.

How do accounting policies play into the mix?

When implementing pension plans, companies made certain elections, and they are mostly tied to those. If you change your accounting policies or methods, it must be to a ‘preferred’ method. For example, many companies chose smoothing in their accounting policies. Depending on the methods chosen, this could mean that if assets tanked last year, they would not have to recognize the full decrease in one year, but rather could spread it out over up to five years. That’s been fine, but the trend in accounting is toward ‘mark to market’ accounting, which eliminates smoothing. The auditor wants to know exactly what your assets and liabilities are based on current market conditions, i.e., current interest rate market and current asset markets. This can have implications for a company’s investment policy and funding policy, for example. By understanding each of these areas and how they work together, companies can position themselves for successful retirement plan financial management and minimize their risks.

Gary Gausman is a senior consulting actuary at Towers Watson. Reach him at (818) 623-4763 or Gary.Gausman@towerswatson.com.

Insights Human Capital Solutions is brought to you by Towers Watson

Published in Los Angeles

As a family business owner, you may dream of one day handing your company over to the next generation. But have you considered the role that your management team will play in the transition?

“There can be no successful transition if the success of the business is not maintained,” says Ricci M. Victorio, CSP, managing partner at Mosaic Family Business Center. “A key element is making sure that you have secured the talent that has made your business thrive. It’s not just the family that is vital to an organization’s success. You have to retain your key managers, the talented people who really make your business work.”

Smart Business spoke with Victorio about how to involve your management team in the transition of leadership.

What role should the management team play in a successful transition?

Your management team needs to be able to run your business if you are no longer there, for whatever reason, while the next generation is maturing and learning about the business. You have to consider the gap that exists between the current owners and the next generation.

The first step in the process of passing the business along is to lock in a vision of what you see for the business’s future, then communicate that to the executive managers so that everyone who makes that business successful can be enrolled in the vision. The managers then see that, yes, ownership is thinking about their future and that there is a place for them. This is a significant step toward retaining the key managers that are such an important asset to your business’s success. You don’t want them departing at your retirement, leaving the next generation starting from scratch.

What challenges does senior management face when a leader departs?

Many owners are hierarchical in the way they manage, in which case senior managers learn to respond to the owner telling them what to do. But then what happens when the owner is no longer there? Managers won’t feel comfortable turning to the 30-year-old son, who’s never been in charge of the business, to now make those decisions.

You have to create a learning curve and find ways to develop the management team so that the company won’t be crippled when the owner is to longer there to make those key decisions, and the next generation is not completely ready to take the reigns. With the proper planning, key managers will know their expanded roles and who should be making the decisions once the owner departs, letting everyone feel reassured that the company can keep going.

How can a coach help facilitate the process?

A coach can spend time with the management team while the owner is still there, and alongside the next generation that is being groomed, to teach them to work together as a leadership team. This process also gives everyone the opportunity to clarify the core values of the organization and get comfortable in the kinds of decisions they’ll need to make based on those values.

In many companies, managers have a close working relationship with the owner, but may not have that relationship with one another. A coach can help unbind them so tightly from the owner and get them to start working together as a collaborative team.

The coach also works with the owner and managers to develop a charter. Here, the owner can define the vision of the succession plan, the agenda for regular team meetings and the objectives of what everyone is going to hold each other accountable for during the process. Part of this process involves identifying areas that managers will be taking over, but where they may be struggling. Some examples include communication, problem-solving, mentoring, how to deal with controlling personalities, conflict resolution and how to better conduct employee review sessions to create a dialogue between the manager and direct reports.

By addressing these issues before management takes on new roles and responsibilities, a coach can make a difference in the quality of the business environment, morale and, ultimately, bottom line profitability.

What are the dangers of failing to plan for a transition?

A drop in productivity is inevitable if you haven’t planned for that transition. If the person at the helm isn’t prepared for his or her new role, employees will become confused about who is really in charge. When people aren’t sure about whom to talk to about the important decisions, soon, someone with a higher pay grade will take over to tell them what to do. But employees won’t necessarily trust that person.

In this kind of confusion and unclear leadership structure, it’s inevitable that conflict will ensue and key people will leave the company. To avoid that, you have to identify and prepare new leadership, and get everyone used to the transition before it happens.

By empowering your leadership team as a group, you’re not putting all of your hopes on one person, because that could create resentment throughout the rest of the group, as well as stress for that one person. Instead, you’re enlisting a collaborative team that can check on each other and hold each other accountable. That way, if one person gets sick or leaves the company, the business will not fall apart. And generally, you won’t have to worry as much about people leaving when you enroll them at this level of leadership.

Who doesn’t want to be acknowledged and empowered and really feel that they are making a difference at work? That is really what this process is about.

Ricci M. Victorio, CSP, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952.

Published in Northern California

While managing investments is part of financial planning, it is far from the only thing you need to be thinking about. Factors such as risk management through insurance, optimizing your employee benefits and minimizing your taxes also come in to play, as do retirement planning, estate planning and debt management, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.

“Too often, people put all of their efforts into their investments when they should be spending more time on other parts of their financial picture,” he says.

Smart Business spoke with Boone about how financial planning goes far beyond investments, what you need to be thinking about in your approach and how an experienced adviser can help you meet your goals.

How does retirement planning factor in to the big picture of financial planning?

The biggest question many people have is whether they have enough money to retire, and, if not, what sum do they need and what steps can they take to get there. To help answer those questions, your adviser should collect your balance sheet information (which is a list of everything you own and everything you owe) and your personal income statement (how much you make and where it comes from, your taxes, the payments to your retirement and savings accounts, your regular payments and everything else you spend money on). You’ll also need to inform your adviser about any expectations you have for inheritances or future income sources as well as changes you expect in the future in your income or expenses. Your adviser needs to know as much about your money as possible.

To assess how much money is enough to support your lifestyle for your remaining years, a good adviser will then make an attempt to project your cash inflows and outflows for every year for as long as you might live. This projection will tell you if your plans will work (i.e., you won’t run out of money before you die). If not, you should test various assumptions to determine what you need to do differently in order to get it to work: stay employed longer, save more money, spend less in retirement, or get more aggressive with your investments to help boost returns.

Knowledge is empowering. With your financial projections and knowing what you need to do to make things work, you can confidently modify how you do things so that you can achieve your retirement goal.

How important is estate and philanthropic planning?

You don’t have to be rich to need an estate plan. Documenting your wishes can be one of the most loving acts you can do, because, without guidance, your loved ones will have to pick up the pieces, which very often leads to arguments, hurt feelings and worse. Whatever level of your wealth, having a will or trust will provide important guidance that your family members want from you about your assets. You also will need powers of attorney for health care and for financial matters, so that if you are incapacitated, people you trust can make decisions within the parameters you set. For most parents, the first criterion after providing for the spouse is deciding how much is enough for the kids upon your death. Beyond that, it is possible for many of us to do important good for our communities and the causes we believe in, both by giving while we are alive and by leaving a portion of our estate to charity after death. There are planned giving techniques that have specific tax aspects that bring benefits to the donor, to the charity and often to the family.

What is the role of savings, budgeting, cash flow management and debt management in financial planning?

Usually, the biggest factor under your control as to whether or not your retirement plans will work is your level of spending. You can’t control the markets and most people don’t have much control over their income. But, you are fully in charge of how you spend your money.

On the surface, how much you save is determined by how much of your income you spend. Instead of waiting to find out how much is left, good savers decide up front how much they want to save and automatically put it away before they start spending.

With debt management, the more debt you take on, the less flexibility you will have to make choices in the future. Under the right circumstances, using debt can be very beneficial, but borrowing too much or borrowing in the wrong way or for the wrong purpose can ruin a person’s life.

An adviser can help you think through these issues, based on what you want in the future, and help you implement good practices so you can be more in control of your finances, and your life.

What should people look for in a financial adviser?

When you are seeking a new adviser or have an existing one, you have a right to know about things that affect you — for example how much he or she will be paid if you buy a product that is being recommended. I believe clients are best served by advisers who are independent and thus avoid the conflicts of interest inherent when they have products to sell while at the same time offering advice.  Do not hesitate to ask hard questions for your own information, but also as a test to assess whether the kinds of answers you get are ones with which you feel comfortable. The openness with which questions are answered can be key to ongoing trust.

You want an adviser experienced in your kinds of financial challenges and opportunities. Just because they’ve been around for a while doesn’t make them good at what you need. Relevant experience, education and training are critical.

Finally, and perhaps most importantly, you want an adviser who listens well. You are going to be talking about some very personal issues; you want them to pay attention, absorb it and learn from what you are telling them. They have to understand you before they can determine what the best advice is for you.

Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or norm@mosaicfp.com.

Published in Northern California

When people talk about financial planning, they often think first about their investments. But there is much more to consider when planning your financial future, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.

“Investments are important, but investments on their own leave the picture short,” says Boone. “The biggest mistake people make is they don’t start with the big picture.”

Smart Business spoke with Boone about how risk management, tax planning and employee benefits fit into the big picture of financial planning, and what you should do now to ensure that you don’t outlive your money.

How does risk management play into the big picture?

Risk management for almost everyone should include consideration of possible insurance needs for life, disability, medical, homeowners’, auto, umbrella, liability and long-term care insurance. For many professionals, it can also include errors and omissions insurance, directors’ and officers’ insurance, business interruption and similar coverages.

Homeowners’ insurance is something that virtually all homeowners have, but, too often, it’s not given much attention. People buy a house, they get insurance and 10 years later, most still have the same contract. But a lot of things have probably changed, and the coverage is no longer applicable. It’s important to keep it current and relevant.

If someone has accumulated wealth over the years, he or she should seek out an insurance company that is experienced in handling the issues of wealth, like having multiple homes, or unique aspects such as insuring antiques or an art collection. Insurance needs change as circumstances change and all too often people fail to keep coverages current.

Part of the problem with insurance is that it’s complex and hard to understand. It can be critical to have someone you trust and who can help you stay on top of these issues and, if needed, advocate for you.

 

What do people need to think about in the realm of employee benefits?

Employee benefits vary widely from one company to another. The higher up you get on the company ladder, usually the more benefits you have available. While companies generally make a good effort to educate you, executives are often so busy they don’t take the time to understand their choices and they often fail to take full advantage. Whether it is making sure that you are fully getting the 401(k) employer match, determining if and how much to participate in deferred comp, or utilizing the stock option programs, it’s important to not only make the right initial choices, but also to monitor the program so that you make sure you maximize your personal benefits. Many people don’t have the time or interest to do this for themselves.

Many seniors may have moved on from their companies, but they still have decisions to make about government benefit programs, like Social Security and Medicare and how to effectively withdraw money from their IRA. Making optimal choices involves a number of complex considerations. Having an experienced adviser can provide important help with those decisions.

How does tax planning fit into the big picture?

Taxes have an impact on almost all financial decisions. It becomes especially intricate when you own a business or two, you have rental properties, you have timing decisions about stock options or income recognition, or you are considering moving money from an IRA to a Roth IRA, as just a few examples. Taxes impact investment decisions, not just whether to own muni bonds, but in other areas, like how to allocate each asset type among your taxable or tax-deferred accounts, since those choices can have important tax implications. Similarly, when you are withdrawing money, which account should it come from?

CPAs are good at preparing tax returns, but not every CPA is well informed about each client’s overall circumstances and not every CPA is good about planning ahead for such decisions. We believe that financial advisers who offer financial planning as a central service are often best positioned to help with the kinds of decisions identified here.

How important are investment management and investment strategies to overall financial planning?

Investments are really important, of course, but it’s a mistake to start by worrying about what investments you are going to buy when the big picture is much more important. For example, how much of your portfolio do you want exposed to the risk of stocks, or to the lower income but typically lower volatility of bonds, or the time-consuming demands of owning real estate? How much cash should you keep on hand? How should ‘alternatives’ fit into the mix? Do you want to do the investing yourself or hire someone who presumably has that expertise? Do you want to invest in individual stocks and bonds or do mutual funds or exchange traded funds suit you better? Do you think the prospects for growth are better in the U.S. or overseas, and what does that suggest about your geographic allocation? Finally, it’s important for you to assess whether you are trying to beat the market (an ideal goal, but one which many argue is highly unlikely), or are you willing to just get market rates and returns and keep expenses (the one thing you can control) as low as possible?

Many investors hire more than one manager to help them with the management of their assets. One of the problems that often arises in this situation is ‘overlap’ — when two or more managers are investing in the same things at the same time, undoing the very diversification that you were trying to gain. When they are buying or selling the same security at different times, potential tax benefits can also be lost. It’s critical that there be one party responsible for oversight to help you avoid the problems of managing multiple managers. Having an investment policy statement that sets out your expectations and the different roles for each manager and how those will be coordinated can be extraordinarily helpful.

Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or norm@mosaicfp.com.

Published in Northern California

Alot of business owners avoid the topic of business succession planning. They’re happy doing what they’re doing and life is good.

But what if something happens? What if the owner has a significant health event or dies? What if the family takes over when that was not the owner’s intention at all?

There can be a lot of strife and unnecessary financial loss without a plan in place. The owner knows the business better than anyone and should be the one who decides how to maximize its value after he or she is gone.

Many owners reason that they don’t have the time to develop a plan. However, it can be done in manageable steps.

“You can at least get started on defining your goals and then, through regularly scheduled meetings, craft the plan over the course of several years if need be,” says Chuck Kegler, director, Kegler, Brown, Hill & Ritter.

Smart Business asked Kegler for guidance on how owners can best navigate this process.

What is the starting point for business succession planning?

First you must come to the point of acceptance that you’re not going to be around forever, and that developing a plan is in your family’s best interests. Then you need to define your goals. There is no cookie cutter way to develop a plan. Goals, families and finances are all different, so therefore, each plan is different.

Also, there may be conflict among the goals — everyone wants to have their cake and eat it too, but that’s not always going to be the case. Owners can get very overwhelmed with the goal identification process. Anything their adviser can do to simplify the process — such as breaking down the goals into several categories — and keep the owner focused will help move the process along.

What happens after the goals have been identified?

The next step is to have a business valuation conducted by a third-party firm. How much is the business actually worth? Most owners don’t really know. Interview two or three investment bankers (brokers) and ask how they would go about selling your business. What do they think it’s worth? Brokers and investment bankers will often provide valuation estimates for no charge in hopes of being engaged to sell the business. Once you have a sense of a range of values you can work on the exit model — will you sell to an independent party, to family members or employees, or transfer the company to the next generation? How will your decision impact all of your other goals?

What are some of the most common roadblocks the owner will face during this process, and how does he or she overcome them?

The roadblocks will depend on the road taken. Even if you think it’s relatively straightforward (e.g., I’m transferring the business to my son), there are still many decisions to be made. Will this decision create conflict among the other siblings? How much money will they get, even those who don’t work in the business? Will any of this be gifted? Will your son pay you? How will your health care needs be provided for? What if you become disabled? Based on your goals and future needs, how much money will you actually need? Do you still want capital to invest in other opportunities in the future? Do you need some degree of certainty in terms of a guaranteed future income stream, such as an annuity? How would that decision impact your children at the time of your death? The answers to these questions may require you to refine your goals.

Owners who want to sell have other issues to consider. Unless an owner has health problems, is overly stressed, or just wants to get rid of the business, it may be decided that he or she ‘can’t afford’ to sell. Perhaps the proceeds from the sale will not enable the owner to maintain the lifestyle to which he or she is accustomed. On the other hand, if the most important goal is, ‘I need more time for my personal life,’ the owner might come to the conclusion that, ‘yes, this will be a different life than I am used to, but I can do this.’

What are some key considerations for structuring a plan that minimizes exposure to taxation?

There are two primary taxes to think about. First, if you’re selling, how do you minimize the income tax side? The goal is to pay one level of tax at the capital gains tax rate. Next, there are the gift and estate taxes. The $5 million ($10 million for married couples) exemption has been extended through 2011 and 2012, so many owners think the financial pressure involved with making estate planning decisions is off. However, that’s temporary — we don’t know what’s going to happen Jan. 1, 2013. Even the least informed members of Congress understand that we have a significant deficit and that an easy way to reduce some of that deficit is to go back to the $1 million/55 percent exemption. If this happens, it will once again change the estate planning ball game.

Chuck KEgler is a director, as well as chair of the business and tax and estate planning areas, at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5446 or ckegler@keglerbrown.com.

Published in Columbus
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