Our economic forecast for 2013 comes down to one simple phrase: "It all hinges on Washington." The President and Congress must decide whether tax rates rise or fall, whether fiscal stimulus or austerity rules the day, and whether the long term budget deficit issues (entitlements) will be addressed. The Federal Reserve has now promised to hold short term rates low until the unemployment rate falls to 6.5 percent, unless they determine inflation is likely to exceed 2.5 percent. Will the Fed's newest $85 billion monthly quantitative easing (bond buying) program continue to suppress longer maturity bond yields in 2013? To paraphrase the European Central Bank's Mario Draghi: "believe us, it'll be enough" to keep the U.S. Treasury 10 year bond yield from rising much in 2013.

We continue to view the Washington glass as "half full," so we expect fiscal cliff compromises will be reached by early 2013. Taxes will be raised on the "rich" (however that is defined) but the impact of tax increases on everyone else will be limited by extending the middle class tax cuts, "patching" the Alternative Minimum Tax, and gradually ending the FICA 2 percent payroll tax holiday. Alas, anyone who has a taxable investment account will pay more taxes through higher capital gains rates and higher tax rates on common stock dividends. Entitlement reform will likely be kicked down the road, but we expect the credit rating agencies will be assuaged by an agreement to create a Congressional commission, lessening the risk of a January ratings downgrade. Likewise, there should be just enough spending cuts to allow a compromise on raising the debt ceiling.

The downside risk from here hinges on Washington: policy errors that take us over the cliff might leave the economy crushed at the bottom of the gorge by another severe recession.

Sounds horrifying, doesn’t it? Well, it is — but we think this worst-case scenario is VERY unlikely. Even if taxes are raised, the increase shouldn't be too stiff and history shows that the impact on spending will be minor. Modestly higher capital gains rates also have a limited impact. Changes to corporate taxes and deductions will be a mix of plusses and minuses, as always. The regulatory burden only goes in one direction — heavier, but who could be surprised by that? Despite volatile gasoline prices, the CPI inflation rate has dropped to roughly 2 percent and that trend should continue in 2013. Energy prices should not rise significantly as increased supply meets very slow demand growth. With regard to consumers, housing activity and prices are on the upswing. In fact, residential construction has been additive to GDP for the past six consecutive quarters! Combined with the doubling of the S&P 500 since 2009 and decline in consumer debt outstanding, household net worth has improved sharply. Continued modest, but steady job growth should result in lower unemployment rates during 2013.

Basically, the economy can do one of three things: improve, stay the same, or get worse. The presence of feedback loops often determines which of these occurs. We began 2012 with a positive feedback loop — rising production of goods and services meant more hours worked, which meant incomes grew, which resulted in greater demand for goods and services, leading to rising production of goods and services! Unfortunately, fears arose during the year that caused great uncertainty for both businesses and consumers. Uncertainty weakens the links of a positive feedback loop and can eventually forge a negative chain. Fortunately, much of the current uncertainty should be alleviated by even a partial resolution of the fiscal cliff/budget deficit issues.

All in all, we expect a slow start to 2013 due to the hangover from Washington's partisan battles and going over the fiscal cliff (fiscal slope?) to some extent. However, as uncertainties are alleviated, we expect GDP growth to re-accelerate toward 2.5 percent+ in the second half.

Bob Leggett, CFA, is the Senior Investment Strategist at FirstMerit Wealth Management Services. Reach him at robert.leggett@firstmerit.com or follow him on Twitter @firstmerit_mkt.

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
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
Tuesday, 23 October 2012 13:34

Fundamentals falter ... But fears fade

Every quarter, FirstMerit sends a newsletter to all its wealth management clients. In the Fall 2012 edition, Bob Leggett, CFA, Senior Investment Strategist, FirstMerit Wealth Management Services, discusses the year-long battle between fears and fundamentals.

Here's an excerpt from the newsletter:

For the past year, we have been harping on the need to downplay fears and focus on fundamentals. Our point was that fundamentals were at least okay and might actually surprise the consensus to the upside. The fears were not unreasonable, but appeared to us to have low probabilities of occurring within our tactical time horizon. Thus, a total focus on the downside risks of fearsome outcomes (such as a U.S. recession, the Fiscal Cliff, the European crisis, or a China hard landing) could — and did — cause many investors to miss the opportunity to participate in a bull market.

Market returns were very good through Q3 and the S&P 500 led the way with a 16.4 percent total return. Midsized and smaller stocks were up about 14 percent and despite U.S. Dollar strength and European leadership's determination to shoot themselves in the foot, EAFE was +10 percent and Emerging Markets +12 percent. Fixed Income returns weren't bad either (although Treasury returns were only low single-digits), as "spread product" such as Corporates (+7.1 percent) and High Yield (+12.1 percent) continued to do well. Somewhat ominously, TIPS did much better than non-inflation protected Treasuries.

Read the entire newsletter here: 10629_Fall2012_MM_r4

Bob Leggett, CFA, is the Senior Investment Strategist at FirstMerit Wealth Management Services. Reach him at robert.leggett@firstmerit.com or follow him on Twitter @firstmerit_mkt.

Published in Chicago
Monday, 01 July 2013 16:14

Personal, local service

Investing for the future, planning for retirement, saving for college, paying for healthcare needs. How do you get started? What should you invest in? Will you have enough to retire? Where do you begin?

FirstMerit Financial Services, Inc. is a full-service investment broker dealer in Ohio and Pennsylvania and most recently in Chicago.

FirstMerit Financial Services offers a full range of investment solutions. They’re dedicated to designing the best possible financial plan around your needs. Because when it comes to your financial goals — your goals are their goals.

“In these tough economic times, there have been a lot of changes in the way people handle their financial planning,” says Gregg DiGeronimo, President for FirstMerit Financial Services, Inc. “We’re here to help our clients achieve all of their financial goals — both short-term and long-term.”

Smart Business spoke with DiGeronimo and Patrick B. Murray, Vice President and Regional Financial Services Sales Manager for FirstMerit Financial Services, Inc., about how FirstMerit financial advisers can help you plan for the future and invest wisely and objectively.

What is FirstMerit Financial Services’s main business strategy/objective?

Our main business strategy is to help clients retire comfortably and/or achieve all their long-term financial goals, including planning for college, estate planning, insurance, investments and financial planning.

What is FirstMerit Financial Services doing to be a strong community partner?

We work with the retail, business, mortgage and commercial banking arms of FirstMerit to stay actively involved in our communities. We assist the United Way, Junior Achievement and many other local and national charitable endeavors.

How do FirstMerit Financial Advisors provide personal service?

We stress one-on-one client meetings. We’ll come to you or you can come to us. We want to sit down with you face-to-face to ensure all your financial needs are being met. We focus on the “you first” model — we always put our clients first. Whether it’s long-term goals like college or retirement planning, or just helping newlyweds or a young family plan their household budget, we’re here for you every step of the way, at any stage of life.

Gregg DiGeronimo is the President for FirstMerit Financial Services, Inc. Reach him at (330) 849-8968 or gregg.digeronimo@firstmerit.com.

Patrick B. Murray is a Vice President and Regional Financial Services Sales Manager for FirstMerit Financial Services, Inc. Reach him at (708) 498-2660 or patrick.murray@firstmerit.com.

Published in Chicago
Tuesday, 28 August 2012 16:30

Fiscal cliff fears vs. probabilities

Who's afraid of the fiscal cliff? Apparently just about everybody! In our opinion, this topic is nearly as overplayed as last year's debt ceiling fiasco. People feared the U.S. debt ceiling would not be raised and the government would have to shut down. We disagreed, partly because we are realists and partly because of the "Laws." First, economist Herbert Stein's Law states: "If something cannot go forever, it will stop." I have morphed that into Leggett’s Law: "If something is impossible, it will not occur."

Using our Laws, we determined the U.S. would not shut down its great fiscal machinery that extracts and/or borrows money from some people so it can be given to other people. An actual "debt default" was totally out of the question, but there was still a great fear that we were headed for one.

A similar situation is taking place now, only with a broader topic, the fiscal cliff. It is certainly not impossible for a few people (as in the movie, "Thelma & Louise") or even for a segment of the population (Arctic lemmings) to go over a cliff, but intentionally driving the U.S. economy off a cliff seems, well, impossible.

The fiscal cliff is a mix of expiring tax cuts (Bush tax cuts, Alternative Minimum Tax inflation patch and the payroll tax cut) and spending cuts (the "sequestration" which chops 10 percent from defense and 8 percent from all discretionary spending; Medicare doctor payments; and extended unemployment benefits).

The nonpartisan Congressional Budget Office added fuel to the fire recently with their projection that the fiscal cliff will amount to $487B in 2013, a 3.1 percent GDP reduction. With real GDP currently creeping higher at a 2 percent pace, that reduction would result in negative GDP (a recession). That's worth fearing! But what is the probability of such an outcome?

It is very close to impossible to imagine that none of the fiscal cliff issues will be addressed, either in a lame duck post-election session, or retrospectively by the President and Congress, whoever they may be. In fact, several of the fiscal cliff issues are perennials. AMT, Medicare payments and tax increases threaten the economy year after year — much like the dreaded debt ceiling. Somehow, the cliff dive is averted each time. To quote Sherlock Holmes, "When you have eliminated the impossible, whatever remains, however improbable, must be the truth." So, however improbable it may seem that our politicians will act like grownups who care about our country's future, in the end they will (as always) be forced to act.

Does that mean we are home free? Alas, no. We believe the unrelenting barrage of negative campaign ads and the real uncertainty as to exactly which fiscal cliff issues will be avoided (and when) are a major factor in the 2012 economic slowdown. Since businesses and consumers are uncertain, they are slowing their spending and investment, which has caused a minor negative feedback loop and dropped GDP into its current 2 percent stall speed growth rate.

Nonetheless, despite the distressingly slow pace, both business and consumer spending are growing at a rate that more than offsets government spending cuts. Some key sectors such as housing and energy production are improving, but that's not enough to reaccelerate the economy. What we need is a resolution to the fiscal cliff fears. Before the election is highly unlikely, but soon thereafter looks highly probable to us.

Our plan is to step away from the fears and concentrate on the impact of the probable fiscal cliff resolution. Coupling that with a very friendly Federal Reserve (QE3 anyone?) and a more-friendly European Central Bank, we expect economic expansion into 2013. With the Market Meter at +2, we remain fully invested in client equity accounts, but with a modestly defensive tilt to our tactical asset allocation recommendations.

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.

Bob Leggett, CFA, is the Senior Investment Strategist at FirstMerit Wealth Management Services. Reach him at robert.leggett@firstmerit.com.

Published in Chicago

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says Mona Sarkar, J.D. MTax, a Vice President, Client Advisor and Wealth Team Manager for FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Sarkar about how to prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries, or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’ I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney to find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

Mona Sarkar, J.D. MTax, is a Vice President, Client Advisor and Wealth Team Manager for FirstMerit Bank. Reach her at 1-888-384-6388 or Mona.Sarkar@firstmerit.com.

Published in Chicago

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
Monday, 26 March 2012 13:31

Doing business in China

Historically known as a country for low-cost manufacturing and a restricted currency, China now provides a wealth of opportunities for foreign businesses, says Alfred Ho, Vice President and Global Financial Institutions Manager at FirstMerit Bank.

However, any business that has ever ventured onto unfamiliar turf understands that turning opportunity into success comes with challenges. Overcoming barriers inherent in such a move requires foresight, planning and, notably, well-informed advisors who already know the terrain.

Ho explains that FirstMerit has dedicated itself to helping clients grasp the ins and outs of doing business in China. With an eye to the future, FirstMerit has been actively engaged in bolstering its credibility in China, staying abreast of the country’s rapidly changing market, and learning firsthand from its clients who have established long-term operations there.

As one of the first regional banks to have a renminbi, or yuan, (China’s currency) account with a large indigenous Chinese bank, FirstMerit’s International team has enjoyed a longstanding relationship with the country’s financial institutions and businesses.

To foster this relationship and lay the groundwork for new opportunities for its clients, FirstMerit Corporation Chairman, President and CEO Paul Greig and David Goodall, Executive Vice President of Commercial Banking, recently travelled to Beijing, Shanghai and Hong Kong, where they met with senior officials at various Chinese banks and worked to set up dialogues and relationships.

FirstMerit believes that having such infrastructure in place is crucial to paving the way for assisting its clients looking to expand into China.

FirstMerit executives also spent time visiting the Chinese operations of some of its clients, gathering insights that will ultimately smooth the process for others planning to do business in or with the second-largest economy after the United States. Ho, who worked with the Hong Kong government as a senior information officer for 10 years, shares some important things to consider:

Chinese workforce. Given China’s population of 1.3 billion, or nearly 20 percent of the world’s population, the labor force is abundant. However, employers in China are facing rising wages and keen competitions for skilled workers. Many find that it is getting more difficult to retain good workers who tend to have little loyalty and would leave on a dime, Ho explains.

However, employment laws recently became stricter in an attempt to eradicate unfair employment practices and to give workers more benefits and protection. Due to changing employment environment and demands from workers, wages have increased by as much as 20 percent or more in coastal regions.

Non-native workforce. A foreign company can bring its own employees to work and live in China with proper permits. Ho says that foreign companies should consider bringing employees who are open minded because the culture is much different than American culture. He advises an American living in China to have a basic understanding of the language and customs and be adventurous about various types of food, as food is a culture among Chinese and they are proud of their own local cuisine. One of the easiest ways to insult a Chinese person is to insult his or her food, he says, and it should be avoided.

Middle class difference. China’s middle class, which numbers approximately 300 million, differs from the American middle class, Ho explains. China’s middle class is growing exponentially because income is increasing substantially. Many middle-class families have become seemingly “rich” overnight, Ho explains, and as a result, they spend it readily.

They also typically do not have confidence in Chinese brands (remember the baby milk powder contamination scare?) and seek to achieve status through western brands. Many would pay a premium for western goods like Gucci purses and Apple products or General Motors or BMW automobiles as opposed to local brands, Ho says. These products both represent status and quality.

The growing middle class presents an excellent opportunity for U.S. businesses to sell to this population – as much if not more than selling to the entire United States, Ho explains.

Hong Kong vs. China. Know the history. Hong Kong was under British rule for approximately 150 years until China resumed control in 1997. Even though Hong Kong falls under Chinese rule, it still operates on a “one-country, two-systems” concept. While China is a communist country, Hong Kong remains primarily capitalistic and has its own currency and legal and judicial systems, Ho explains. However, Hong Kong is slowly becoming more like China, and in time, Ho says, it will be fully assimilated into the Chinese system.

At this point, while Hong Kong is now part of China, it currently operates quite differently. Many companies conduct business in mainland China but have their headquarters or family located in Hong Kong because it is more similar to the United States, Ho says.

Currency. Historically, the renminbi was restricted, although its value was pegged to the U.S. dollar. This has changed over the years and the renminbi is now pegged to a “basket of currencies” instead. In the past, the renminbi’s value has been a point of contention because many argued that the restrictions kept the renminbi’s value low, giving Chinese exporters an unfair advantage, Ho explains. However, in the last 18 months, China has relaxed the restrictions so that foreign entities, under limited and changing restrictions, can do business in the renminbi. Non-China entities are also now allowed to open a bank account in Chinese currency, thus somewhat mitigating the “unfair advantage,” he says.

Taxes. China no longer offers many tax incentives because it doesn’t see the need given the huge marketplace it offers, Ho says. Corporate income tax for both foreign and domestic companies is of the same percentage, unless the company falls under the “hi-tech” category which will have a more favorable tax rate. In addition, companies face other taxes in China, such as withholding tax, value-added tax, consumption tax, customs duty, etc. It’s recommended that companies considering doing business in China consult a tax professional who is knowledgeable about China taxes to truly understand how this will affect them.

These insights into doing business in China offer only a glimpse of what companies should know before taking any steps to enter the market. Companies need to have an understanding of what they want to accomplish, Ho explains. The process may take some time because many questions must be answered – Does your company want to set up a location in China or operate from the United States? Will your company buy the materials it needs to make its product in China or import them? Will you hire employees within China or bring existing key employees from the United States?

Ho says that the worst thing a company can do is enter the Chinese market and wait to make decisions until it arrives in the country.

U.S. companies should partner with a trusted advisor, such as a banking professional, to help them narrow their goals before entering the market. It might make sense, although not always, for a business to partner with a Chinese company to learn the ropes and ease into the market. In fact, this used to be the only way foreign companies could enter the country, but China now allows wholly foreign-owned enterprises.

Partnering with an advisor such as FirstMerit also allows a business to make trusted connections within the country. Ho knows the pitfalls of not doing so, citing a business that trusted the wrong person in China and ended up in an industrial park completely inappropriate for that company and lost business and eventually had to close the facility.

“We are always willing to advise and consult with our clients and prospects so we can deliver our expertise and experience to help them do business the right way,” Ho says. “We’ve spent time there and have real-world experience to help our customers.”

For more information on doing business in China, contact Alfred Ho at alfred.ho@firstmerit.com or 330-996-8011.

FirstMerit International Services

Trade Finance

  • Export Business Support
  • Confirmation of Foreign Bank Letters of Credit
  • Cash Flow of Future Payments (B/A Financing)
  • Import Business Support
  • Letters of Credit
  • Collection Processing
  • B/A Finance
  • Standby Letters of Credit to support export sales & import purchases
  • Ex-Im Bank and SBA Working Capital Loan

Guarantee Program

  • FirstMerit is a Delegated Lender

International Treasury

  • Complete suite of foreign exchange transaction and hedging services
  • Outbound and inbound global funds transfers in US dollars or any unrestricted currency
  • Multi-currency account services in all major currencies
  • Foreign cash business trips
  • Foreign check processing

Other Services

  • Introduction to Foreign Banks
  • Foreign Business Advisory
  • FirstMerit is one of the only banks in the United States that has advisory services to assist in setting up foreign operations

Published in Chicago
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