Anna-Louise Jackson - September 6, 2019

There are plenty of important questions to ask on your first day of work: Where’s the bathroom? What time can I leave? But only one could help you become a millionaire someday. So move this question to the top of your list: How do I enroll in the 401(k)?

Maryalene LaPonsie - July 26, 2019

Invesco S&P 500 Low Volatility ETF (ticker: SPLV)

Workers younger than 66 lose up to $100,000 in Social Security lifetime benefits on April 29.

Why?  Because the "File and Suspend," Social Security claiming strategy, which allowed a retiree to take benefits off of a spouse’s record while deferring his or her own record, has been eliminated.

I believe this decision was based on one paragraph of the 2015 federal budget proposal. The graph said the budget proposed to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement.”

The veracity of this statement depends on what you mean by the words “upper income.” Means testing to obtain Social Security benefits could have the largest impact on the people who work hardest and provide the most jobs of any sector of the economy: small business owners. And though no one knows assuredly if means testing will become a reality, there’s enough discussion nationwide now that the subject needs to be explored.

In 1934, President Franklin D. Roosevelt addressed the Social Security founding committee and said that, “It takes so very much money to provide even a moderate pension for everybody, that when the funds are raised by taxation only, a ‘means test’ must necessarily be made a condition of the grant of pensions.”

In short, he said taxpayer-paid retirement benefits should go only to those who really need them.

Pundits are already exploring what means testing to obtain Social Security income might look like. Under one recent plan posed by David John of the conservative Heritage Foundation, for the AARP Public Policy Institute, high-income couples or individuals earning more than $55,000 in non-Social Security retirement income would see their monthly benefits reduced. For every $1,000 of income they have over $55,000, their Social Security benefits would be reduced by about 1.8 percent. So, if non-Social Security retirement income equaled $65,000, their benefits would be reduced by 18 percent.

In another means testing scenario posited by John, couples could see reduced benefits if they had non-Social Security income equaling $110,000. They would receive no Social Security benefits if income was over $165,000.

This plan reduces benefits for about 4.5 percent of retirees and eliminates benefits for another 4.5 percent, according to John. Keep in mind that the top 20 percent of wage earners who make more than $134,000 per year pay 84 percent of all U.S. taxes.

Business owners can implement strategies to implement to prevent this loss of future income they have paid for and planned for during their retirement lifetimes.  The number-one strategy that needs to be implemented is a well-designed pension or Defined Benefit plan.

Unlike IRAs and 401(k)s, which allow business owners to invest up to $23,000 annually, these specialized Defined Benefit plans-- if properly structured-- can significantly increase contributions and reduce taxes 50 percent in some cases, a double benefit. Additionally, these unique, fully-insured plans can create guaranteed lifetime income streams of well over $100,000 per year.

In your 30s, contributions can equal over $125,000 per year; in your 40s, nearly $200,000; and in your 50s to 60s, well over $300,000 per year.

An additional benefit is that these plans are creditor-proof from legal liability and bankruptcy. WealthManagement.com has reported that O.J. Simpson, who has a $33 million civil judgment against him and is serving a prison term for armed robbery, still receives hundreds of thousands of dollars per year from his pension or Defined Benefit plan.

The bottom line is, we don’t know if and when means testing will occur. But this has been an option from the day the Social Security program was enacted.

Business owners should be prepared and proactive. The elimination of File and Suspend could be the beginning of means testing for Social Security for those of us younger than 66-- which includes the majority of people in the workforce today.

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David Reyes is founder of Reyes Financial Architecture of La Jolla, a Registered Investment Advisory firm that acts as a fiduciary and specializes in portfolio risk management strategies, retirement income distribution and Social Security planning. He has been named the National Social Security Advisor of the Year, an annual award given to professional advisors who are knowledgeable and passionate advocates for Social Security education.

Means testing to attain Social Security benefits may be on the docket for the future.

Those of us who counsel clients on Social Security understand firsthand the long-term effect of Congress’ recent elimination of the File and Suspend and Restricted Application claim strategies. That change means fewer claim strategies for retirees seeking to maximize Social Security income, effectively cutting $100,000 of lifetime benefits from a married couple’s retirement portfolio.

I believe the Congressional decision to eliminate these strategies was based on one paragraph of the 2015 federal budget proposal, which aimed to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement.” The truthfulness of this statement depends on what you mean by the words “upper income.” Means testing to obtain Social Security benefits could have the largest impact on the people who work hardest of any sector of the economy: middle-class professionals and small business owners. And, though no one knows definitively whether means testing will become a reality, there’s enough discussion nationwide now that the subject needs to be explored.

In 1934, President Franklin D. Roosevelt addressed the Social Security founding committee and said it “takes so very much money to provide even a moderate pension for everybody, that when the funds are raised by taxation only, a ‘means test’ must necessarily be made a condition of the grant of pensions.” In short, he said taxpayer-paid retirement benefits should go only to those who really need them.

I beg to differ. Retirees of all income levels have already paid for these options. The middle class used these claiming strategies and is the one class who needs them most. Plus, even if every Social Security beneficiary took advantage of these so-called “aggressive” claiming strategies, it would affect our federal budget by less than one-quarter of 1 percent.

According to the Natixis Retirement Savings Study, baby boomers aged 51 to 69 have saved only 20 percent of the funds they need to retire. This means a married couple has saved an average of $185,000 when spouses will need at least $1 million to carry them through the next 30 years. Thirty percent of Americans from the ages of 65 to 69 are still in the workforce, according to the U.S. Census Bureau, which likely means Medicare and Social Security are not covering basic living expenses for our older population.

Baby boomers are part of the “Sandwich Generation,” too. They still support millennial children, whose college costs rose more than 1,000 percent since 1980 and who are faced with a difficult job market. On the other end, boomers also often support aging parents with long-term health care costs or daily expenses. Twenty-one percent of U.S. seniors over age 75 still carry a mortgage, compared to 6 percent back in 1989. And after these fiscal responsibilities are over, boomers will need to take care of themselves.

Pundits are already exploring what Social Security means testing might look like. Under one recent plan posed in 2012 by David John, then of the conservative Heritage Foundation, high-income couples or individuals earning more than $55,000 in non-Social Security retirement income would see monthly benefits reduced. For every $1,000 of income they have over $55,000, Social Security benefits would be reduced by about 1.8 percent. So, if non-Social Security retirement income equaled $65,000, benefits would be reduced by 18 percent. In another means testing scenario posited by John, couples could see reduced benefits if they had non-Social Security income equaling $110,000. They would receive no Social Security benefits if outside income was over $165,000.

Don’t forget that by 2033, the Social Security program will be underfunded. If no action is taken before then, Social Security beneficiaries will take a 23 percent benefit cut. For some retirees, 85 percent of those benefits are already taxable. The Society of Actuaries reports that only half of Americans meet with a financial advisor. Those without a professional to guide them into retirement will either have to become experts on investing and tax law or watch in dismay as their nest eggs shrink over time.

The bottom line is, we don’t know if and when means testing will occur. But this has obviously been an option from the day the Social Security program was enacted. Don’t allow your clients to feel like the last one standing at musical chairs. Keep counseling them to earn, save, protect assets and invest.

David Reyes is founder of Reyes Financial Architecture of La Jolla, Calif.

Peer-to-peer lending isn’t as “alternative” as it used to be, and that’s been a boon to funds such as Direct Lending Investments, which specializes in buying high-interest, short-term small-business loans.

The downtown L.A. hedge fund last week made a three-year, $250 million commitment to provide capital for loans made through lending site Biz2Credit. The deal is Direct Lending’s largest commitment to date, and the latest sign of the firm’s growth.

Since launching in 2012, Direct Lending has grown to manage 2,000 loans, and it now has assets under management of $115 million – up from just $14 million a year ago. As new money comes in and loans turn over and self-liquidate, the firm is picking up loans at a rate of $25 million to $30 million a month.

President Brendan Ross declined to disclose Direct Lending’s return rate, but said a fund with a similar portfolio in the same asset class would generate annual returns of around 11 percent to 13 percent.

Direct Lending backs loans made through several online lenders. The hedge fund provides the capital while lenders handle underwriting and loan servicing. That’s also how Direct Lending’s deal with Biz2Credit, a New York firm, will work.

Ross, whose firm has previously funded loans through Biz2Credit, said the new deal creates a more direct line for his company – and his investors – to access top-quality loans. Biz2Credit’s track record of $1.2 billion in small-business funding and its default rate of 0.7 percent also made the partnership an obvious play.

Loan sizes will range from $25,000 to $500,000 for terms of six to 24 months. More than $60 million of Direct Lending’s capital has already been distributed across 700 to 800 loans, according to Biz2Credit President Ramit Arora.

Peer-to-peer lending has now become standard practice for investors looking to diversify their business portfolios, even though returns have fallen over the past few years.

But the once revolutionary online financial service is still a relatively safe bet that offers solid returns, Ross said.

“Peer-to-peer lending is nothing more than lending money and getting repaid,” Arora said. “It’s the oldest asset class, and it’s finally replacing overvalued stocks and low performing bonds.”

Handoff

Lending platforms such as Prosper Marketplace Inc. and Lending Club Corp., which priced its initial public offering last month at $15 a share and raised $870 million, hit their stride during the economic downturn of the late 2000s when banks were forced to tighten credit terms. Borrowers, specifically small-business owners, turned to lending sites for short-term loans despite staggering interest rates that could be upwards of 40 percent.

What made peer-to-peer lending attractive for borrowers, though, was the offer of quick cash. Biz2Credit’s Arora said his company could process loans of up to $100,000 in just 48 hours, shaving off the days or weeks needed to wait for a bank loan approval.

And for investors, such as retired venture capitalist Brett Byers, such loans offer higher returns at lower risks than bonds and stocks.

Byers currently purchases loans through Direct Lending, Lending Club, Prosper as well as niche platforms StreetShares, Open Capital Exchange and ApplePie Capital. At one point, Byers said, he was Prosper’s largest investor, putting in $6 million to purchase loans through the San Francisco company’s website.

“I was in early to get higher returns,” he said. “But the returns have come down as peer-to-peer lending moves into the mainstream.”

Banks are starting to loosen their credit policies, and a growing number of peer-to-peer loan providers are competing to buy a limited supply of loans. Lending sites have been forced to drop their interest rates – meaning lower returns for investors – as they try to attract more borrowers. Byers said his average annual return rates have fallen from 20 percent in 2009 to around 12 percent today.

But those double-digit returns are still pretty attractive for investors given the high price of stocks and the low yield of bonds.

David Reyes, founder of San Diego wealth management firm Reyes Financial Architecture, said he wouldn’t be alarmed if 30 percent of a client’s portfolio was dedicated to peer-to-peer loans, as those are not subject to the same interest rate or inflation risk that comes with bonds.

“People are scared of both the stock market and the bond market,” he said. “It fills the void where I feel we can help to protect and diversify the portfolio, have yield and find an option that’s not correlative to the stock market.”

While peer-to-peer lending is still tiny compared with the lending business done by commercial banks, Direct Lending’s Ross said peer-to-peer lending will soon become synonymous with private credit, making it a core part of even a conservative portfolio.

“We didn’t even use the phrase ‘private credit’ 10 years ago,” he said. “It’s really peer-to-peer lending that’s putting it on the map.”

David Reyes II recently hit two Amazon.com best-seller lists with the new business book, “SuccessOnomics.”

San Diego, CA – October 13, 2014 – David Reyes II is the Founder and Chief Financial Architect of Reyes Financial Architecture, Inc., a Registered Investment Advisory Firm. David recently joined a select group of the world’s leading experts, to co-author the book titled, SuccessOnomics: Learn The Secrets Of Success In The New Economy From Today’s Leading Entrepreneurs and Professionals. The book was released on September 18, 2014 by CelebrityPress™ – a leading business book publisher.

On the day of release, SuccessOnomics reached best-seller status in two Amazon.com categories – reaching as high as #2 in the “Direct Marketing” category. The book also reached #7 in the “Marketing and Small Business” category. David Reyes contributed a chapter titled, “The Ultimate Retirement Blueprint – The 7 Secrets to a Stress-Free Retirement.”

David Reyes II specializes in working with successful families and business owners by helping them achieve their personal and financial goals. As a fiduciary, David takes his role as an advisor personally and passionately. He is an expert in tax reduction strategies, asset protection, retirement and generational wealth planning. David works in collaboration with leading CPA’s, attorneys and financial advisors to ensure that all planning is not only implemented but also integrated. This collaborative team approach ensures the highest probability of success.

Reyes Financial Architecture’s mission statement reads, “Reyes Financial Architecture is a positive influence in the lives of our clients by optimizing their assets and empowering their true wealth. Our unique strategies and referable service, instill confidence and clarity in our clients’ future.” SuccessOnomics: Learn The Secrets Of Success In The New Economy From Today’s Leading Entrepreneurs and Professionals features an inspiring collection of stories that discuss today’s leading strategies, tactics and stories to help people thrive in today’s economy. The authors come from an eclectic mix of expertise with financial, marketing, business, teaching, and leadership and mindset-coaching backgrounds.

SuccessOnomics: Learn The Secrets Of Success In The New Economy From Today’s Leading Entrepreneurs and Professionals features an inspiring collection of stories that discuss today’s leading strategies, tactics and stories to help people thrive in today’s economy. The authors come from an eclectic mix of expertise with financial, marketing, business, teaching, and leadership and mindset-coaching backgrounds.

The Celebrity Experts^® in this book are successful in different areas, but they all exhibit the components of success: perseverance, passion, planning, risk-taking with a willingness to fail, decision-making and, maybe the most important of all, they take action. The authors in this book share their success methodology and mindset. This allows the reader to understand not merely how they think, but, more importantly, how these Celebrity Experts^® can guide and coach them to a mastery of SuccessOnomics™ in their own lives.

After such a successful release, David Reyes II will be recognized by The National Academy of Best-Selling Authors™, an organization that honors authors from many of the leading independent best-seller lists.

Click HERE to order a copy of SuccessOnomics: Learn The Secrets Of Success In The New Economy From Today’s Leading Entrepreneurs and Professionals.

The royalties from this project will be given to Entrepreneurs International Foundation, a not-for-profit organization dedicated to creating unique launch campaigns to raise money and awareness for charitable causes.

More About David Reyes II:

David has been an advisor for over twenty years and holds multiple licenses and registrations in the fields of investment, real estate and insurance. He has been featured in many magazines and publications including Kiplinger’s Personal Finance and has co-authored two books on estate and retirement planning. Currently David is working on a new book, The Ultimate Retirement Blueprint, the 7 Secrets to a Stress- free Retirement. He also is the host of The Retirement Architect radio show heard every Sunday morning at 9:00 on KFMB AM 760 in San Diego and is the financial expert on the weekly television show, The American Dream.

David graduated from UCLA’s Personal Financial Planning program (Distinguished) and from the Wharton Business School’s Retirement Income Planning certification program.

David and his family live in San Diego, CA, where he is an active member of his church and an avid tennis player.

One direct lending fund returned 12.7% last year;
seen as alternative to measly returns on bonds.

As traditional bond funds scramble to navigate around the threat of rising interest rates, a growing number of investors and financial advisers are tapping into private credit markets, thanks to an expanding network of entry points.

“It's a great concept, but it's definitely a matter doing enough due diligence to make sure you like the company you're doing business with,” said David Reyes, founder of Financial Architecture, a financial advisory firm that has been allocating client assets to the private credit markets for nearly a year.

When stacked against traditional bond funds that carry both inflation and interest rate risks, Mr. Reyes described the private credit markets as a “no-brainer, because it's a natural to take money out of bond funds and replace that allocation with this kind of investment.”

What investors and advisers like Mr. Reyes are tapping into is a growing niche of the so-called peer-to-peer lending market, which is expanding by filling gaps ignored by traditional banking systems.

“We are targeting a market that was underserved by banks and was being overcharged by other alternative lending options,” said Ethan Senturia, chief executive of Dealstruck Inc., one of the growing list of no-balance-sheet lending companies that rely on outside investors to capitalize and hold the loan portfolios.

That's where the investment opportunity comes in.

Companies like Dealstruck are handLing the upfront and operational lending issues for loans of between $50,000 and $250,000 — taken mostly by small businesses — which are capitalized by outside investors for minimums starting at $5,000.

Even though the minimums are sometimes low, this is still considered a private investment arena, and investors must meet the same net-worth standards required of hedge fund investors.

Mr. Senturia, whose firm recently made its 100th loan after less than a year of actively lending, said firms like his are taking market share from the $10 billion cash advance industry, and from the $125 billion factoring market, in which companies finance the sale of their own products.

The loans, which typically have durations of less than two years, come with interest rates of between 15% and 36%.

“Our rates are higher than those charged by banks, but they are much, much lower than the alternatives, which can sometimes mean rates in the triple digits,” Mr. Senturia said.

Brendan Ross, president and portfolio manager at Direct Lending Investments, launched a hedge fund in November 2012 for the specific purpose of investing in this category of small private loans.

The $55 million Direct Lending Income Fund, which has a $100,000 investment minimum and currently holds 1,700 loans, generated a 12.7% return after fees and expenses last year. And the fund is currently up 6.7% through July.

That compares to a 2% decline by the Barclays U.S. Aggregate Bond Index last year, and a 3.7% gain this year through July.

“All I do is buy and hold loans of between six and 18 months in duration that are amortizing daily,” Mr. Ross said. “The whole idea is to focus on the part of the credit market where borrowers are paying the most interest.”

While the loan rates, which represent income to investors, sound high, the reality is less sensational because the loans are often paid off early, and they are structured like a home mortgage where the interest is constantly being applied to a shrinking principal.

For example, a $100,000 one-year loan at a 20% interest rate will cost the borrower $10,000, or 10%, if all payments are made on schedule.

Eric Thurber, one of the founders of Three Bridge Wealth Advisors, uses Mr. Ross' hedge fund for his clientele, which is made up of wealthy families.

“It's a relatively new investment for us,” he said. “But we are allocating to less traditional fixed income than we have in the past, and about half of our client portfolios are allocated to alternative and illiquid investments.”

While liquidity is usually an issue with private investments, the short duration of the loans and the fact the portfolio is turning over at a 20% monthly rate makes liquidity less of an issue, according to Mr. Ross, who provides his 85 investors with liquidity on 35 days' notice.

The default risks are similar to those faced by any lending institution. But because the loans are set to fixed rates and are held to maturity, the portfolio is uniquely shielded from interest rate and inflation-related risks.

Mr. Ross said the category has a 7% annualized default rate, and that his portfolio's break-even point would kick in if the default rate got above 22%.

“Our average borrower has been in business for 12 years, at an average age of 51, and has an average credit score of 680, with business revenues of between half a million and $55 million,” he said. “That's the sweet spot we're dealing with — the same group of businesses that was once being served by community banks.”

“Rule number one: never lose money. Rule number two: never forget rule number one.”

Warren Buffett may or may not have had taxes in mind when he uttered this quotable phrase, but proactive tax planning is one of the most important things a financial advisor can do to help clients follow Mr. Buffett’s number-one rule. When advising high-net-worth clients with robust retirement assets of at least $1 million or more, it’s more important to focus on protecting wealth from losses – including substantial expenses like taxes –than chasing returns.

High-net-worth clients, particularly those approaching retirement, have “already won the game.” They have successfully built sufficient wealth to maintain their standards of living and achieve their financial goals. Taxes can be the single biggest investment expense they will ever face. What else is going to cost 40% or 50% of their income every single year? Understanding how to navigate the tax landscape – and being perceived by clients as an expert in this area – is a differentiator for any advisory firm. Advisors who do not educate clients on managing taxes, or find a qualified partner to fulfill this role, should expect to lose business to one that does.

While tax planning should be a top priority throughout the course of the year, there are important opportunities for you to consider at year end. Now is the time to reduce your clients’ current tax obligations and develop a strategy for managing taxes over the next 12 months to protect more of the financial assets they worked so hard to achieve.

The Benefits of Tax-Deferral: One way to reduce tax expenses is to achieve more “tax diversification”—diversifying between different tax rates, different types of taxes, and when to pay them. Managing clients’ portfolios within a tax-deferred vehicle like a qualified plan or a low-cost variable annuity is a simple solution. Many advisors labor under the misconception that the cost of variable annuities is too high. But today there are low-cost, no-load VAs designed specifically to provide clients with more tax deferral—without commissions, excessive asset-based fees and complicated insurance guarantees. The fees for today’s low-cost VAs are a very small price to pay when compared with the tax savings and additional accumulation achieved over many years of tax-deferred compounding.

Asset Location for Tactical and Alternative Strategies: It is critical to preserve wealth by avoiding market losses. Consider that an investor who makes only 30 percent of the S&P 500’s total market gains—but can avoid all of the losses—will still outperform the market overall.

Advisors can actively manage clients’ assets to protect against market downturns through a process we call unconstrained investing.  Aim to invest at least one third of clients’ portfolios in tactically managed assets uncorrelated to the traditional stock and bond markets. Seek alternative investments that can mitigate down-market risks and also generate alpha. While finding managers who can do both are rare—it is well worth the added due diligence.

But tactical management and alternative strategies can be tax-inefficient due to high turnover and short term capital gains.  So “locate” these strategies in a tax-deferred vehicle, to preserve all of the upside without any tax drag. Asset location lets you manage the way you want, protect wealth, make more money—and you don’t kill your client with taxes.

Taking advantage of tax-deferred investing vehicles and using asset location to optimize tactical management and alternative strategies are two of the most important steps advisors can take to manage taxes and preserve wealth. Other tax considerations that are relevant to high-net-worth, especially at year end, include the following:

• Health Care Surtax: Be especially proactive this year. It’s the number-one new challenge. High-net-worth clients—or anybody earning over $200,000 a year—is subject to the surtax. And the costs add up. As an example, if a client lives in the state of California, which has the second highest capital gains tax rate in the world, when including the surtax of 3.8% you could actually pay an effective combined state and federal capital gains tax rate of 33%. Using tax deferral for capital gains is a meaningful way to mitigate this issue, as long as it’s a low-cost, no-load tax-deferred vehicle.
• Tax-Loss Harvesting: Leverage tax-loss harvesting to achieve tax alpha, especially at year-end.  This is another approach to offset capital gains and preserve wealth, effectively increasing the rate of return on a portfolio between one and four percent.
• Roth Conversions: Resist the temptation to do a Roth conversion before retirement. It could cause “bracket creep” by moving clients into a higher tax bracket. A Roth IRA can be an important tax-free source of income for clients in later years—and they can save more on taxes by waiting until retirement to do conversions, when they will most likely be in a lower bracket.
• Defined Benefit & Pension Plans: Many high-net-worth clients built their wealth through a successful business. And one of the best tax planning solutions for business owners at closely-held companies is creating a good pension plan. You help clients put away hundreds of thousands of dollars, reduce taxes, and fund retirement—all in one vehicle. And it is asset-protected—protected from any personal liability—which is particularly beneficial to clients in high-risk professions.The competition for high-net-worth clients continues to increase. And to win this business, it is more important than ever to differentiate yourself from the pack. Demonstrating your expertise in tax planning—and putting it to work to protect clients’ wealth from the single biggest expense they can face—should be a top priority all year long, and especially at year-end. Using simple effective tools like tax deferral and low-cost no-load VAs can help clients achieve tax-diversification, optimize the performance of tactical and alternative strategies, and mitigate the impact of capital gains. Your clients may not be as flush with cash—or as eager to pay taxes—as Warren Buffet, but they will certainly appreciate your dedication and expertise to help them follow his number one rule.