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Eggs in How Many Baskets? Prioritizing Building Wealth While You Build Your Business

Don't have too many eggs in one basket when you're a business owner.

Employees of publicly traded companies are often granted company stock as part of the compensation package. From a portfolio management perspective, holding outsize amounts of stock in the same company that provides income can increase risk. If the business were to become wobbly, not only would the stock decrease in value, but the employee could also potentially find themselves out of a job. Employees who are granted stocks often mitigate this risk by selling some of the company stock and reinvesting it in other assets, to diversify growing wealth away from the source of income.

But what about when you own your business?

The situation becomes more complex. One strategy that’s often followed is to put everything except living expenses back into the business while you are growing it, and then sell part of the business or take on a strategic investor to help you begin to diversify elsewhere. Retirement planning is put on the back burner until the business has grown to a point where the business can be monetized.

We think there is a more thoughtful approach that may work for business owners.

The Key: Diversification

While it may seem like a good idea, relying solely on your business as your source of wealth can expose you to a lot more volatility than you think. Whether it’s saving for a rainy day, or longer-term goals like retirement, if all of your wealth is tied up in your business, your business dictates your moves. Creating and regularly adding to a separate investment portfolio may help diversify your assets.  And if you invest away from areas you are already exposed to in your business, it can be a powerful tool to help you smooth volatility across both your business and life.  For instance, if your business is vulnerable to cyclical sectors, you’ll want to create an investment portfolio that is defensive against those sectors. 

Retirement Savings Tax Advantages

There can be significant tax advantages to setting up the right kind of retirement plan for your business and ensuring that you set aside money to invest as close to the maximum as possible every year. While there are of course upfront fees and ongoing costs associated with formal retirement plans, they also allow you to save in a very tax-advantageous manner. Depending on your situation, a 401(k) plan and a cash balance plan are tools you can use to save and look towards a future income stream you can access without having to sell your business. They can also be a great way to attract and retain talented employees.

How About Timing?

When you’re putting everything back into your business with the idea that you’ll eventually fund your retirement by selling all or part of it, you’re essentially making two bets: That you’ll be able to sell when you are ready and not before, and that when you are ready the market for your business will be at a good point for an exit.  Having to liquidate early because you are no longer able to run the business, or having to sell when either the business is struggling or the market isn’t right, can limit the amount you realize. You only get to sell it once, and your retirement life will be dependent on what you realize. If you’ve planned for a source of retirement income away from your business, you’ll have more flexibility when it comes time to sell.

 The Bottom Line

Even as you’re building your business, it makes sense to think about your personal wealth as a completely different stream of future income. Thinking about diversification across your total asset profile can get you started on a journey to financial independence.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

Selling a Family Business: Preparing for a Transformational Event

Portrait of multigenerational winery owner family standing at wine cellar. Senior winemaker and young sommelier standing at background and holding in hands a glass of red wine while middle age businesswoman looking at camera and smiling. Small business.

It’s generally thought that there are several cycles that reflect where a business is in preparedness for a sale. These capture the economy, the market, and the mindset and planning of the business owners.

From an economic standpoint, the liquidity cycle is the one that matters. This cycle gauges the amount of available liquidity and the current appetite of investors to invest in companies.1 With record amounts of cash sloshing around looking for investments and interest rates continuing to be low, the liquidity cycle is currently at an advantageous point, and looks poised to remain so.2  While getting the right price is clearly a big consideration, there are a lot of other things to think through that are just as important.

From setting a realistic timeline to thinking about the implications of the sale on other family members, to planning for a life after the sale, each stage brings its own challenges. Assembling a team of advisors with specialized knowledge in every area will be critical, and since this will have a major impact on your wealth and your legacy, you’ll need a quarterback that can keep your big picture in focus all the way through.

The Timeline

Starting well before you want to complete a sale can allow for a productive series of negotiations. It gives you time to surface – and mitigate – any issues that come up, which can leave you in a stronger position. It also provides time to ensure that all shareholders and stakeholders such as creditors, vendors, and employees have time to adjust to the changes the sale may bring, which can facilitate a successful transition. Finally, a longer timeline means you can keep growing the business while you give thought to where you want to be after the sale.

Selecting Your Team

Selling a privately held business is a very specialized transaction. Depending on the size and complexity of your business and the market you compete in, you may need to hire an investment banker, business broker, or third-party business appraiser. Besides advising on the value and the sale, they should be able to help you structure the transaction. You likely already have trusted legal counsel, but unless they also have experience in purchase and sale agreements, you may want to engage an additional resource. The same is true for your tax accountant. You’ll need specific expertise on minimizing the tax consequences of monetizing a business.

Gauging the Cycles

We’ve already discussed the liquidity cycle. The other externally focused cycle to think about is the business cycle for your company’s sector. You’ll need to determine the potential for growth and whether the business is well-positioned to take advantage of opportunities as they arise, or if there are headwinds that can be mitigated.

The last cycle to think about is whether you are ready to sell. What will your life look like after the transition? If you’ve been very involved in the business, how will your new life be structured? Will you continue to play a role, or will you cut all ties? How do family stakeholders feel about the change? Even if the other cycles are at strong points – if you’re not ready to sell, it’s better to wait. It can make sense to assemble your team and proceed with information gathering even if you aren’t sure about an eventual sale. Once you have a clear idea of what the company is worth, you may be able to make a more informed decision.

Breathe

You’ve decided to sell, the cycles are lined up and the structure is right. Now what? This is where having a solid plan comes into play. Acquiring potentially life-changing wealth can be disorienting, to say the least. Imposing a period of time to create and assess various plans, get used to your new life, and have time to decompress can help you to avoid mistakes and when you are ready, you’ll have a better idea of what is really important to you. Eventually, you’ll need a good investment plan that protects your capital, provides you with what you want, and allows you to create the legacy you’d like. But initially, it’s important to maintain a flexible investment plan that can change as you explore your new life.

The Bottom Line

Selling a family business can be stressful and complicated. Assembling a strong team that works hand-in-hand with your financial advisor can smooth the road and ensure your new life plans get a good start.

  1. What to Consider When Selling the Family Business. Grimes, McGovern & Associates.
  2. 2021 Global Private Equity Outlook. S&P Global. March 2, 2021.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

Tax & Estate Strategies for Married LGBTQ+ Couples

The 2015 Obergefell v. Hodges Supreme Court decision streamlined tax and estate strategizing for married LGBTQ+ couples. If you are filing a joint tax return for this year or are considering updating your estate strategy, here are some important things to remember.

Keep in mind, this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your tax strategy.

You can file jointly if you were married at any time this year. Whether you married on January 1st, June 8th, or December 31st, you can still file jointly as a married couple. Under federal tax law, your marital status on the final day of a year determines your filing status. This rule also applies to divorcing couples. Now that marriage equality is nationally recognized, filing your state taxes is much easier as well.1

If you are newly married or have not considered filing jointly, remember that most married couples potentially benefit from filing jointly. For instance, if you have or want to have children, you will need to file jointly to qualify for the Child and Dependent Care Tax Credit. Filing jointly also makes you eligible for Lifetime Learning Credits and the American Opportunity Tax Credit.2

You can gift greater amounts to family and friends. Prior to the landmark 2015 Supreme Court ruling, LGBTQ+ spouses were stuck with the individual gift tax exclusion under federal estate tax law. As such, an LGBTQ+ couple could not pair their $15,000-per-person allowances to make a gift of up to $30,000 as a couple to another individual. But today, LGBTQ+ spouses can gift up to $30,000 to as many individuals as they wish per year.3

You can take advantage of portability. Your $11.7 million individual lifetime estate and gift tax exclusion may be adjusted upward for inflation in future years, but it will also be portable. Under the portability rules, when one spouse dies without fully using the lifetime estate and gift tax exclusion, the unused portion is conveyed to the surviving spouse’s estate. To illustrate, if a spouse dies after using only $2.1 million of the $11.7 million lifetime exclusion, the surviving spouse ends up with a $9.6 million lifetime exclusion.3

You have access to the unlimited marital deduction. The unlimited marital deduction is the basic deduction that allows one spouse to pass assets at death to a surviving spouse without incurring the federal estate tax.3

Marriage equality has made things so much simpler. The hassle and extra paperwork that some LGBTQ+ couples previously faced at tax time is now, happily, a thing of the past.

We are monitoring how potential tax legislation working through Congress right now may affect these strategies. Remember to check the tax laws in your state with the help of a tax or financial professional.

1. Internal Revenue Service, October 14, 2020
2. Internal Revenue Service, March 12, 2021
3. Internal Revenue Service, April 12, 2021

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Gas Prices Signal both Post-COVID norm and Inflation

Man's hand holding three hundred US dollars and gas nozzle while pumping gas into parked vehicle

Over Memorial Day weekend, gasoline prices hit the highest for this holiday weekend since 2014.1

With the Colonial Pipeline outage in the rear-view mirror and an ever-increasing number of adults vaccinated, formerly cooped-up motorists made the most of what America has to offer. The average price jumped to $3.04 per gallon ($1.08 higher than last year’s lockdown prices) and oil prices have continued to demonstrate high demand in the week following. The Wall Street Journal noted a two-year peak on June 1, indicating prices exceeding 2019’s records.1,2

It’s not just prices at the pump that are increasing.

Crude oil, as shown in the chart below, is also showing a strong recovery from last year’s lows. This chart dates back to 2003, and shows just how high prices were in the early 2010’s.

Crude oil downtrend has been broken. A new trend higher has begun? Inflationary pressures are mounting.

The rise in prices signal two things:

  1. Inflation is coming back. We discussed this in our report last month titled “The Coming Inflation Wave(s)“.
  2. Post-COVID life is returning. These new peaks are a sure sign that things in America are returning to something like a pre-COVID normal. While there’s still a way to go, these indicators point to something like the world we once knew.

While we’ll all miss the cheaper prices at the gas pump, it stands to reason that as we begin to emerge from this unprecedented period, that there’s a summer out there to be enjoyed. You might be taking advantage of the weather, but we’re still working for you. Let me know if you have any questions about these developments and how they might affect your financial strategy.

1. CNBC.com, May 27, 2021
2. Wall Street Journal, June 1, 2021
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Why We Believe in Active Management

A businessman holding a compass to navigate the business with marketing of icons and business growth graphs, Stock market and data exchange.

In 2019, the amount of money invested in passive funds in the United States surpassed that of active funds for the first time.1 Over the last decade, passive funds have increased assets under management to $11 trillion, from $2 trillion.2 Given the title of this piece, are we saying that all that money is in the wrong place?

Our issue isn’t necessarily with passive funds – we deploy some ETFs in our investment management strategies. Our issue is with the sea-change in portfolio management that the availability of low-cost index-tracking funds has brought about. It’s the prevailing idea that you can create an effective, all-weather asset management strategy by buying a bunch of different funds that represent different asset classes.

The Commodity Trend

Our foundational insight is to turn on its head the belief that asset management has become commoditized. We believe that for much of the asset management industry, investors are the commodity. Most advisors use a one-size-fits-all pie chart strategy. They do a little tweak for your age and how far you are from retirement, and their tools spit out a portfolio recommendation with a bunch of different funds in it. Their theory is that these magical beans funds are going to work together to lower risk and maximize return.

They believe this because they are using data mostly since the early 1980’s to support their recommendation. The problem, as we discussed recently in our “Inflation Waves” report, is that almost every asset class has risen since then.

So they are looking at data that does not include some major market cycles. Specifically the one that we believe we are entering into now…one of rising interest rates and rising inflation.

The words “broadly diversified” have become a mantra, used by large and small firms alike, recommending that investors should be in all asset classes at all times. And meanwhile, broad market indexes like the S&P 500 are only getting more concentrated. It’s hovering around 27% in the IT sector, as defined by GICSs. But if we include companies like Google, Amazon and Facebook, tech exposure is close to half of the index. So, what is that doing to asset allocations?

The notion that diversification is an investment strategy that can replace a disciplined, rules-based investment process is where we draw our line in the sand.

Market Cycles are King

An asset allocation based on age is going to bump up against the realities of the world. Economies and businesses have cycles. Add in the natural human behaviors of fear and greed and you have the market cycle.

And the market cycle doesn’t care how old you are.

If you are lowering your risk during a period when market cycle signals indicate risk is low already and the potential for return is high, you are leaving money on the table. And vice versa.

Diversification Doesn’t Manage Risk

We aren’t suggesting that risk management isn’t necessary…quite the contrary. We believe the management part is important. Volatile markets require a system to manage risk. Being 50 years old or five years away from retirement isn’t a system, it’s a statistic.

Unfortunately, diversification fails exactly when you need it to work. Data shows that asset correlations rise when volatility rises. This means that when markets undergo stress, most assets fall at the same time.

The reported benefits of diversification (having assets that perform differently during different periods) simply isn’t true. In fact, the opposite what happens in the real world.

Rules Are Good

So if passive investing is not the way to go, and broad diversification isn’t all that great, what can you do?

First, we must recognize that investing is inherently emotional. We spend a lot of time with our clients to ensure that their emotions will not impinge on their investment plans. The best thing a client can say to us is that they don’t worry about the money we manage for them, and we strive for that with every client. 

We do the same thing with the money we invest. We are tactical investors that follow a rules-based process in each of our portfolios. Simply put, we look at the underlying trends and momentum in the markets to determine good and bad environments. And then we make adjustments to our client portfolios, daily, weekly, monthly – whenever we identify either an opportunity to exploit or a risk to avoid.

That might mean we are broadly exposed to different asset classes; it might mean we are relatively concentrated in our exposures. We just don’t believe that identifying asset classes and then keeping exposure to them through every environment is a successful strategy.

The goal of our process is to participate in up markets and mitigate risk in down markets. Said a different way, our goal is to do more of what’s working and less of what’s not.

Passive management cannot do that. It can only allow you to participate in up markets while also participating fully in every down market.

Ultimately, a passive investment strategy works in up markets. But that is only part of the market cycle. When the down market comes, your (or your advisor’s) emotions take control. That’s when mistakes happen.

The answer is simply to develop, test and implement a rules-based process.

If you can prove a process works in different environments, and stick to that process, then you can have confidence that your system will work during all parts of the market cycle.

That is active management. And that is what we believe works.

  1. Lowery, Annie. Could Index Funds Be ‘Worse Than Marxism’? The Atlantic. April 5, 2021.
  2. Ibid.

Make Your Kids Money-Smart

With the end of school approaching (this week for us in Austin), parents may be thinking about ways to keep them busy. Most people with children have well thought out estate plans on how wealth is passed to the next generation.

But what about passing down knowledge of how to properly handle funds responsibly?

It’s not about how much money you have to pass on to your kids – it’s about passing on money-smarts. Teaching your kids sound financial knowledge can help them make smart financial decisions now, and in the future.

Just like with everything you teach them, there are key concepts and topics that create a foundation they can grow from.

Understanding the Basics

Recent research shows that most of our money habits are developed by the age of seven.1 Yes, you heard that right, seven. But there are a lot of ways that parents can influence those habits, both by addressing them directly and by simply including children in day-to-day financial decisions and processes. Learning how to wait while saving to afford something they want; understanding the concept of ‘future;’ dealing with delayed gratification; and avoiding impulsive, irreversible decisions are all solid money management techniques that set everyone up to be successful.

To get started, one topic to talk about is the difference between needs and wants. An effective way to do this is by:

  1. Simply sitting down with them, grabbing a pen and paper, and having them write down different things they would like to spend money on, and then simply categorizing each item as a need or a want. This exercise can help them visualize the difference between the two and learn to make the distinctions in day-to-day life. 
  2. Once you have a working list of things the child both needs and wants – you can ask them to prioritize the list by how much they want each item and how much it costs – and then develop a savings plan with some very concrete goals and timelines.

Another concept that can be taught early on is opportunity cost. One of the best times to let kids see opportunity cost in action is at a store.

There are a few lessons that can be taught when kids are asking for a toy or piece of candy.

  1. First, it can be helpful to ask them whether that toy they desperately desire is a need or want.
  2. After that, explaining that if they get what they want right now, they will have to delay getting something else they want on their list is a prime example of opportunity cost.

The Necessity of Budgeting

Following the basics conversation, one of the first pieces in building a strong financial foundation is establishing a budget. In Debt.com’s annual budgeting survey, 98% of respondents agreed that everyone needs a budget – but only 80% of respondents actually have one. And this is the highest percentage in the three years of the survey – it’s usually closer to 70%.2 The purpose of budgeting is to help reduce overspending, but it doesn’t stop there.

By implementing a “save, spend, give” system, kids are shown different uses of money rather than just spending. Setting up a save, spend, give system can be as simple as labeling three jars or envelopes to act as their piggy banks. Every time they receive money whether it be an allowance or a gift, there’s a specified percentage that goes to each of the three categories.

Once they’re old enough to have bank accounts, this same process can also be followed through the use of automated transfers. Typically, banks are able to open accounts for minors once they have reached the age of thirteen as long as a parent or legal guardian signs as a co-owner of the account.

Teaching kids about how to create a budget and the importance of budgeting will not only give them a head start, but also helps them develop a habit they’ll hopefully have for the rest of their life.

From Budgeting to Saving… And Understanding Interest

To show children the positive side of interest, rewarding them for saving can help incentivize good budgeting habits. One way to do this is by giving them a small “bonus” every time they put money towards their savings account. Another way to educate them about interest is to ask them if they would rather have $1 million or a penny that doubles every day for one month. Chances are, they will select the $1 million. Now you get to show them the power of compound interest. By taking that penny and doubling it every day for thirty days, the ending balance ends up being north of $5 million.3

Day 10.01
Day 105.12
Day 205,242.88
Day 305,368,709.12

One way to show the negative side of interest may be for the parent to act as their kid’s lender if they don’t have enough money for something. By charging them a little interest, they can begin to see that it’s more expensive to buy something if they don’t have the money for it rather than waiting until they have enough saved.

Diving Deeper into Credit – Building It and Keeping Score

When it comes to credit, getting an early head start on building a credit score can not only make adult life a little bit easier, but also iterates the importance of being smart with money. Building a credit score while being young is advantageous and having an existing credit score when entering adulthood can show its benefits immediately. Whether they’re buying their first car or applying for an apartment, a good credit score can save time as well as money.

One way to enable kids to start building their credit score is through a secured credit card. This allows them to start using it for purchases but rather than running up balances they can’t pay off, they’re only able to spend what’s on the card. Another option that allows for a little more parental oversight is adding them as an authorized user on a parents’ credit card.

A great way to teach the implications of a credit score is to sign up for a free credit service, such as Credit Karma or one offered by your bank. Pulling up your own credit score and walking kids through the different factors that make up the score will give perspective on how much it matters to keep credit balances low and maintain a good payment history. To go a step further, show them the total cost of buying a home or a car with slightly different interest rates. Since personal finance topics start to become intertwined the further you go, this is another opportunity to touch on interest with them as well as the importance and benefits of having good credit.

Creating Commitment with Investing

There are a few ways to get kids involved with investing. A fun way to encourage them to learn about investing is by letting them play the stock market game. There are many different websites and apps that can be used, but kids are given the ability to select stocks in a hypothetical account and can manage their own portfolio. The SIFMA Foundation has a great version that you can find at https://www.stockmarketgame.org/

A real-world option is to open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (UGMA/UTMA) account. These are custodial accounts that are designed for college savings and can be opened in a minor’s name. This allows both kids and parents to save money and invest while still giving parents control over the account until the child reaches majority age. Both types of accounts can be opened at a bank or a brokerage firm.

The Takeaway

Teaching kids about money is an important role of a parent. Just like teaching anything, it takes time and patience. But the knowledge and lessons they learn will stick with them throughout their whole life. It can tough to educate about personal finance and if there’s anything we can do to make the conversations and lessons easier, we’re here to help.

1. Financial Capability of Children, Young People and their Parents in the UK 2016. The Money Advice Service. March, 2017.

2. Debt.com 2020 Budgeting Survey.

3. Calculation by Seven Group.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

Baseball’s $300+ Million Players

The San Diego Padres signed infielder Fernando Tatis, Jr., to a 14-year, $340 million contract roughly one year after the Los Angeles Dodgers inked outfielder Mookie Betts to a 12-year, $365 million deal. That brings the total to 8 baseball players who have signed long-term, $300+ million contracts.1

From an estate strategy perspective, you might be surprised to hear that these baseball stars may face similar issues as other Americans as they prepare for the future.2

To begin with, all 8 will need to understand that the estate and gift tax exemptions are $11.7 million per person. But those exemptions are set to expire and revert back to $5 million in 2026. While those current limits only address a fraction of their net worth, they can start to explore other choices for the balance.

Remember, this letter is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your legal professional before modifying your estate strategy. Also, some estate strategies involve the use of trusts, which have a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

All 8 also should consider who they should name as their health care decision-maker and financial power of attorney. They also may want to consider estate strategies that involve life insurance. All 8 are relatively young, which may work to their advantage as they consider the role life insurance can play.

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

While these 8 and many other professional athletes have signed “generational” contracts, it’s not unlike windfalls generated when selling a business or compensation packages for key executives.

Please let us know if there’s a big change in your financial situation. We’d welcome the chance to hear the story.

  1. CBSSports.com, April 1, 2021
  2. WealthManagement.com, April 21, 2021