Economic News a Reason for Holiday Cheer!

The media thrives on negative news, especially the financial media. Fortunately, not all of the economic news is doom and gloom. To boost your holiday cheer, here are some fun facts signaling that the economic recovery may be underway.

Pending Home Sales Jump to Nearly Six-Year High

The National Association of Realtors reported that the pending home sales index rose 5.2% in October. Importantly, that number is from when the results of the presidential election were unknown. Pending home sales are defined as a signed sales contract, so actual closing is usually one to two months later.

  • This is the highest level of activity since March 2007.
  • The Midwest led the country with a 15.6% increase.

In further good news, the excess supply of homes that built up before the housing crises has finally thinned out.

  • Previously occupied home sales inventory is at a 10-year low.
  • New home sales inventory is near the lowest level since 1963.

U.S. Business Spending Plans Improve

"Planned U.S. business spending increased in October by the most in five months." [Tweet this]

A major gauge of planned U.S. business spending increased in October by the most in five months. While the growth was modest, it may signal a slow recovery.

  • Orders for non-defense capital goods excluding aircraft rose 1.7%.

Consumer Confidence Hits a Four-Year High

Consumers are growing increasingly optimistic about the job market and economic recovery.

  • The Conference Board Index of Consumer Attitudes rose to 73.7, its highest level since February 2008.

Home Prices Boast Biggest Rise in Over Two Years

A combination of record-low mortgage interest rates, an improving job market, a five-year low in home foreclosures, and a tighter supply of both new and previously owned homes led to home prices posting the biggest percentage gain in more than two years.

  • The closely watched S&P / Case-Shiller Index rose 3.6% in the third quarter.
  • We recently saw the second straight quarter of year-over-year improvement.
  • Single-family home prices rose for the eighth straight month in September, based on an index of 20 major metropolitan areas.

So shake off the doom and gloom and celebrate the holiday cheer. Optimism is an important psychological element in any economic recovery. Now that you know the facts you can do your share and spread the good word. Happy Holidays!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

What It Takes to Join the 1%

How much do you need to make to be in the top 10% earners in the U.S.? What about the top 1%?

The top 1% is a politically vilified group, but they may not be who you think they are. So, who are the 1%? What is the price of membership in this club? Could you be in the top 10%? Finally, do the rich pay their share of taxes?

Who Is In the Top 10%?

"The top 10% had at least $116,623 of adjusted gross income" [Tweet this]

Let's start with the top 10%, because more people belong to that group than you may expect. Based on 2010 income tax returns using adjusted gross income (basically the number at the bottom of page 1 of your Form 1040, before exemptions and deductions):

  • The top 10% had at least $116,623 of adjusted gross income (AGI).
  • The top 10% includes 45% of the total AGI.
  • The top 10% paid 70.6% of the total income tax burden.

The bottom 90% of taxpayers paid less than 30% of the total national income tax.

The bottom 50% of taxpayers paid 2.36% of the total federal income tax revenues.

  • The top 5% had at least $161,579 of AGI.
  • The top 5% includes 34% of the total AGI.
  • The top 5% paid 59.1% of the total income tax burden.

Now, a drum roll for the top 1%:

  • The top 1% had at least $369,691 of AGI.
  • The top 1% includes 19% of the total AGI.
  • The top 1% paid 37.4% of the total income tax burden.

Now you know what it takes to "join the club."

Income equality and tax fairness are challenging dilemmas. Be well informed and draw your own conclusions as the debate continues over the fiscal cliff and other economic policy issues.

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Alzheimer's Disease, Long-Term Care and More: Plan for the Unexpected in November

For you trivia lovers, November is:

  • Alzheimer's Disease Awareness Month
  • Long-Term Care Awareness Month
  • National Family Caregivers Month

Certainly, no one really wants to dwell on Alzheimer's disease, long-term care or family caregiving, especially around the holidays. Unfortunately, while we don't want to think about these topics, we should.

You or someone you know may have had personal experience with one or more of these issues. These tough situations involve both financial and psychological considerations. Hurricane Sandy should remind us that advance planning is always beneficial and no planning at all leaves people most at risk.

So ask yourself:

  • Have you and your siblings had a discussion about who would help take care of Mom or Dad if they develop Alzheimer's disease?
  • Can you identify the most common early symptoms of Alzheimer's disease?
  • Have you had discussions with your parents about how they would like to be cared for if and when the day comes when they can't live independently?
  • Have you educated yourself about long-term care insurance? Do you know how benefits are triggered, what services are covered and what the costs are?
  • Whether or not you choose to buy insurance, do you know the local care providers that you could call when you need advice?
  • If you have a family member or friend who is a caregiver, is there anything you can do to help?

While we would rather feast on turkey and watch football at Thanksgiving, starting a conversation while the family is together may make you all more thankful in the long run.

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Presidential Election Holds Scant Impact on Private Business Views of 2013

The Cincinnati Enquirer recently published the results of the Deloitte Cincinnati USA 100 Top Privately Held Businesses Survey.

Many positive elements were identified in the survey. Most importantly, sales and employment levels both hit records in 2011, signaling a recovery from the Great Recession.

Private business owners reveal rising optimism for 2013:

  • Nearly 80% expect gross sales/revenues to increase.
  • Nearly 70% expect pre-tax profit to increase.
  • Over 65% expect their number of employees to increase and less than 10% forecast a decrease in the number of employees.

The November election was the focus of specific questions in the survey. The responses show that the election is clearly not a dominant factor in the business outlook.

Owners of the Top 100 businesses were asked to answer "agree," "disagree" or "neither" to the following questions:

  • "In terms of demand for our products, the outcome of the election will have little or no effect." Nearly 60% answered "agreed" or "neither."
  • "Regardless of the winner, the U.S. economy will probably improve after the uncertainty surrounding the election ends." Nearly 70% answered "agreed" or "neither."
  • "Clarity and certainty are more important than which party captures the White House." Nearly 70% answered "agreed" or "neither."
  • "We are putting off significant business decisions until after the election." Only 25% agreed.

This optimism is important because, even though private businesses are not included in public stock market valuations, they are major drivers of employment and economic activity.

The next time you think there isn't any good news in the economy, stop and think again!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

In October, Think Fire Prevention

October is upon us and Fire Prevention Week is October 7 to 13.

Why is a financial planner writing about Fire Prevention Week? Consistent with our theme of "let's manage what we can control, not what we can't control," there are basic preventative steps to take for fire prevention and safety.

"Have Two Ways Out" is the Fire Prevention Week theme for 2012, which should be easy for Cincinnatians to remember with our three-way, four-way and five-way chili! If you accomplish only one thing this year, have two ways out of every room in your house. This may include having a foldable escape ladder for the second floor of your house.

Here are a few other basic fire safety tips:

  • Change your smoke detector batteries when you change your clock for the end of daylight savings time.
  • Replace your smoke detectors when they are 10 years old. The detection sensitivity drops with age, even if they still function.
  • Kitchen fires are a high-risk source in your home. Have a fire extinguisher in your kitchen and know how to use it.
  • Clean your dryer vent at least once a year, all the way from the dryer to the exit source.
  • Have an outside meeting spot for your family, such as the mailbox if it is by the street or a neighbor's tree.
  • If you do only one thing to improve fire safety this year, it will be a step in the right direction. Don't let a fire be an opportunity to test your healthcare power of attorney form or last will and testament. See, there is always a financial planning connection!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

International Investing: The Big Picture

The face of international investing is changing.

There is no connection between where a company is headquartered and where it makes its money.

Using an example cited in The Wall Street Journal, Novartis AG is headquartered in Switzerland and Johnson & Johnson is based in the U.S., but they're both global healthcare companies. Johnson & Johnson generates 52% of its sales outside the United States. Novartis generates 67% of its sales outside the United States.

Most U.S. companies make the majority of their profits on foreign soil. According to Ned Davis Research, as of December 31, 2011, 52.6% of pretax profits for companies in the Standard & Poor's 500 index came from outside the U.S.

Of the roughly 14,000 companies that went public over the past decade, more than 90% of them are outside the United States.

Conclusion: We live in an increasingly global world where one cannot be insulated from international economic events. The best growth opportunities exist on a truly global basis. As with all investment themes, a long-term perspective and patience is required for success.

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

How Does Your 401(k) Compare?

Do you ever wonder how the balance in your 401(k) and how much you are contributing to your retirement accounts compares to the rest of the working world?

According to Fidelity Investments, the nation's largest 401(k) administrator:

  • The average balance among its nearly 12 million shareholders was $72,800 at the end of June 2012.
  • The average employee contribution for the latest quarter was $1,660, up $30.
  • The average employer contribution was $950, also up $30.
  • The average employee contribution in Fidelity-administered 401(k) plans has remained steady at around 8% of annual pay for the past three years.

In the latest quarter, about twice as many participants increased their contributions as decreased them.

Over the past 10 years, about two thirds of annual increases in 401(k) account balances have come from workers' contributions and company matches, with one third the result of investment returns.

What the moral of the story?

The amount you contribute matters more than the investment returns.

Your contribution probably needs to be larger than the percentage matched by your employer.

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Tax Talk, Trash Talk: Facts About the Top Taxpayers

As the Presidential election heats up, it is important to separate the facts from the fiction. Not all top taxpayers are employers or billionaires. Both political parties are guilty of skewing the facts.

By definition, the top 2% of U.S. taxpayers are individuals with taxable income of more than $200,000 a year and married couples with taxable income of more than $250,000 a year.

According to Bloomberg News, the top 2% of taxpayers are:

  • Two-earner professional couples living on the East and West Coasts.
  • Doctors, lawyers, engineers and Wall Street executives.
  • Most are not employers.

According to 2005 income tax data:

  • Engineers, architects and information technology workers make up 9.6% of the top 5% of taxpayers.
  • Over 75% of the high-income households were dual-income households with both spouses working.

A 2011 Treasury Department analysis found that, depending on the definition of small business:

  • Only about one-third of small business income is subject to the top two income tax rates.
  • Among taxpayers subject to the top two income tax rates, only 25% are small business owners and employers.

As always, learn the facts before you cast your vote.

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Communicating Financial Values

Summer time, with family vacations and kids home from school, can provide a special opportunity to pass on financial values from generation to generation and encourage children to develop their own financial values and priorities.

Depending on your stage of life and the ages of your children or grandchildren, consider discussing the following with your family this summer:

  • Your early childhood experiences and the role that money played in your family life
  • Your experience when you started making your own saving and spending decisions
  • Financial lessons you learned in your high school and college days
  • Financial mistakes you made along the way and what you learned from them
  • The role of education in preparing one for more than just a job

Remember that the most effective communication is not lecturing, but rather telling stories in a personal, meaningful way that is not condescending. We are all tired of hearing the "I grew up in the depression" stories (don't blame me for being born at the wrong time), but stories and lessons about simplicity and frugality are important to convey.

You should recognize that it is a different world today and that we live in the digital era where financial transactions are processed differently (young people write few, if any, checks by hand), but the principles of earning an income, spending wisely, making charitable gifts, and saving and investing for personal goals are important fundamental values that transcend generations.

Enjoy these final days of summer!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Personal vs. Web-Based Financial Advice

Technology is a wonderful thing. It has dramatically improved our access to information. But is it a double-edged sword? Is information the same as advice? Can the web be a substitute for, or a supplement to, personal advice?

Ask yourself the following:

  • Would you see a doctor for medical advice or do a web search?
  • Would you consult an architect to design your house or pick a blueprint from a website?
  • Would you consult an accountant for a tax question or rely on the IRS website?

While you could rely on the web for any of the above, should you?

We live in a complicated world, but we are fortunate to have experienced, knowledgeable professionals in many specialties. The web can supplement, but not replace, personalized professional financial advice.

At Berno Financial Management, our goal is to give you the advice that you need, tailored to your specific situation, or to refer you to a specialist when needed and then coordinate implementation of that advice.

Personal, professional advice should always put your interests first. Can you trust the web for that?

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Inflation: What Difference Does a Few Pounds Make?

Inflation is a major threat to retirees and a risk to long-term investors of any age. What difference does inflation make?

  • A 3% inflation rate will cause prices to double in 24 years or by the time a 65-year-old reaches age 89.
  • A 4% inflation rate will cause prices to double in 18 years or by the time a 65-year-old reaches age 83.

Put another way, inflation will cut your standard in living in half over either of those time periods. Ouch!

On a more personal level, gaining three pounds a year may not seem like much, but 10 years later you are 30 pounds heavier. Has anyone read that America has an obesity problem?

Who hasn't had grandpa tell them that when he was growing up, movies were a quarter and a candy bar was a nickel? Who remembers buying a Volkswagen Beetle for $3,000?

Since 1913, inflation has averaged just over 3%. At its ugliest, it ranged from 10% to 13% a year in 1979, 1980 and 1981.

Understand and remember the importance of inflation. It is significant in the long run. Like 30 pounds ago!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP®is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Sell in May and Go Away? Not So Fast!

There is a famous old saying that essentially goes, "October is one of the worst months for stock market investors. The others are January, February, March, April, May, June, July, August, September, November and December." So much for market forecasting!

Another popular stock market quote is, "Sell in May and go away," implying that May and the rest of the summer are bad investing months and stock traders are better off spending the season at the beach. While there is a historical pattern that six-month returns from May 1 to October 31 are lower than six month returns from November 1 to April 30, a more detailed review of monthly returns proves that investment return patterns cannot be simplified so easily.

What are the worst investing months of the year? Historically, since 1926, the only month with an average return of a loss is September.

Lowest return months:
-0.72% September
+0.21% October
+0.46% February
+0.53% May
Highest return months:
+1.73% December
+1.52% July
+1.50% November
+1.48% January

As you can see, there is no clear seasonal pattern. Furthermore, remember that these are long-term averages. Who is to say that 2012 and 2013 will be the same?

Clearly, there are many factors that contribute to short-term performance in the stock market. Seasonality is not one that I would bet your portfolio on! Investing is a contrarian process that takes discipline. There is no single easy formula for success.

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP®is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Disability: Who, Me?

What do you think about when it comes to the month of May? If you answered the Kentucky Derby, Mother’s Day and Memorial Day weekend, you’ve probably hit the most popular themes. The fact that May is Disability Awareness Month probably does not come to mind, because people do not like to think about disability. Disability is something that happens to someone else.

Real stories are the best way to bring attention to disability. Three people I know immediately come to mind when I think about disability, two who have permanent disabilities and one whose disability was temporary. The first suffered brain damage from anesthesia during a relatively routine surgical procedure (proving that there is no such thing as a "routine" surgery). He has short-term memory loss and is not able to keep a job. The second became permanently paralyzed in a skiing accident. The third suffered severe depression that prevented him from working; fortunately, treatment was successful and he is back at work again after one year of unemployment.

What happened to these individuals could easily happen to you or someone in your family. So what can you do to deal with the possibility of disability? One step is to purchase insurance. Yet many people don't think about the importance of having disability coverage. Even those individuals who would never drive their car without having auto insurance or take the risk of going without health insurance may not have adequate disability protection.

I don't know anyone who likes insurance, but it's a necessary evil. Some types of insurance are required by different authorities―we take for granted the need to have car insurance (since it's required by state law), homeowners insurance (since the mortgage lender requires it) and health insurance (because the federal government will soon require all Americans to have it). When it comes to disability insurance, people who have employer group life and disability coverage may think they are "already covered," but chances are they haven't considered whether their group coverage meets their actual needs.

The true need for disability insurance is frequently overlooked or ignored for two reasons. First is the "it won't happen to me" syndrome and second is the cost. Disability insurance is expensive because the risk or probability of disability is great and the benefits or insurance claims payments can be substantial.

According to the Council for Disability Awareness (citing 2009 data from Northwestern Mutual), here is the percentage of people who indicated they "would feel devastated" in a potential situation and have purchased a related insurance product for protection:

  • 88% have car insurance in case of a traffic accident.
  • 73% have homeowners insurance in case their house burns down.
  • 23% have purchased insurance to cover a cancelled vacation.
  • 19% have credit card fraud insurance.
  • 10% have purchased disability insurance.

Over twice as many people buy vacation cancellation insurance compared to disability insurance. That's a fascinating statement of our priorities!

In the "it won't happen to me" category, disability insurance is not just for the blue collar laborer. According to the Council for Disability Awareness 2011 Long-term Disability Claims Review, the following issues are the leading cause of over 70% of new disability claims:

  • 27.5% Musculoskeletal/connective tissue disorders
  • 14.6% Cancer
  • 10.3% Injuries and poisoning
  • 9.1% Cardiovascular/circulatory disorders

These issues are not limited to factory assembly line workers and ditch diggers!

People fear dying, but disability is a greater risk. For people earning over $70,000 per year, the percent greater chance of becoming disabled for more than one year versus dying in the next 12 months, based on age, is:

  • At age 30, 93% greater chance of becoming disabled
  • At age 40, 123% greater chance of becoming disabled
  • At age 50, 166% greater chance of becoming disabled
  • At age 60, 259% greater chance of becoming disabled* *According to the Society of Actuaries Individual Disability Morbidity Tables, Accident and Sickness combined.

For a few percentage points of your annual income, you can buy individual disability insurance that will cover you no matter how many times you change jobs in the years ahead. None of us is getting any younger, so the time to act is today. We will be happy to assist you in protecting your lifestyle by planning for the unexpected. As always, our goal is helping you achieve financial peace of mind.

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP®is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Why Passive Investing Makes Sense

The debate about active versus passive management is endless in investment management circles, but here are a few simple facts in favor of passive management.

  1. Missing opportunity? Strong performance among a few stocks accounts for much of the market’s return each year. There is no evidence that active managers can identify these stocks in advance and attempting to pick them may result in missed opportunities.For all U.S. stocks from 1926 thru 2011, the compound average annual return was 9.6%.If you didn't own the top 10% best stocks each year, your return was 6.2%. A huge difference!If you didn't own the top 25% best stocks each year, your return was -0.7%. Ouch!
  2. The majority of active public equity funds do not beat their respective index. According to Standard & Poor's, the following percentage of actively managed funds did not beat their respective index for the five-year period ending December 2011:
    • 62% U.S. large-cap funds
    • 80% U.S. mid-cap funds
    • 73% U.S. small-cap funds
    • 63% Global funds
    • 78% International funds
    • 26% International small fund
    • 83% Emerging markets funds
    • Superior performance is not persistent. Of the top 25% U.S. stock funds from 2002 to 2006, for the following five-year period from 2007 to 2011:
    • Only 8% remained in the top 25%.
    • Only 18% remained in the top 50%.
    • 21% fell to the third quartile of performers (51% to 75% range)
    • 46% fell to the bottom 25% of performers.
    • 15% didn’t survive (the fund was merged or closed)

Passively managed funds have a very high relative predictability to match their benchmarks and not underperform.

These few simple facts lead to a successful long-term investment strategy.

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP®is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Tax Fairness Isn't Simple

There is no better time than an election year to "spin" some income tax statistics. Getting the facts from reliable sources will help you decide which candidates are telling the truth and hopefully help you decide how to cast your vote.

Who are these "1%" people anyway? What percentile do I fall in?

According to the Tax Foundation and based on 2009 income tax returns, taxpayers were categorized according to their federal tax return Adjusted Gross Income (AGI) as follows:

  • Top 1%: $344,000+
  • Top 5%: $172,000+
  • Top 10%: $112,000+
  • Top 25%: $66,000+
  • Top 50%: $32,000+

What proportion of total personal income taxes does each group pay?

  • The top 1% of taxpayers pay about 37% of the total of all personal income taxes.
  • The top 5% pay almost 60%.
  • The top 10% pay about 70%.
  • The top 25% pay about 87%.
  • The top 50% pay about 98%.
  • The bottom 50% pay about 2%.

Nonetheless, no matter how you spin it, our tax system is relatively proportional and somewhat progressive (progressive in that higher income people pay a higher percentage of their income in taxes).

According to the Institute on Taxation and Economic Policy, the share of total taxes paid (including federal, state and local taxes, sales taxes, and excise taxes) roughly matches the share of total income for each income group.

For instance:

  • The lowest income group paid 2.1% of taxes and earned 3.4% of total income.
  • The top 1% income group paid about 22% of total taxes and earned 21% of total income.

Clearly, there are many different ways to analyze tax policies and spin the statistics. One thing is for sure; it isn't as simple and clear cut as the politicians want to make it sound. Know the facts and vote accordingly!

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP®is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Do Your Friends A Favor: Show Them There's a Better Way!

Help your friends understand the difference between a broker and an independent advisor.

On March 14, the New York Times published an Opinion-Editorial by Greg Smith, a Goldman Sachs Executive Director. In the piece, Smith explained that he was resigning from the one of the world's largest and most important investment banks due to the conflict between the best interests of the clients and the culture of Goldman Sachs.

While your friend's individual broker may be an honest and ethical person, most investors do not realize or understand the conflict of interest that a broker faces. (Brokers include representatives of the major brokerage firms as well as anyone whose business card or letterhead says "Investments offered thru XYZ Securities.")

Bob Veres is a journalist who has decades of experience covering the personal financial planning industry. He is an independent journalist and well-respected authority on the industry.

Veres recently published the following article for independent advisors on the conflicts that brokers face, particularly in compensation plans, which I share with you verbatim per his suggestion.

My only request is that you consider forwarding it to a friend who you know uses a broker and would be better served by an independent, fee-only firm like ours that acts in a fiduciary capacity in the best interest of you, our valued client.

The Difference Between a Broker and an Independent Advisor By Bob Veres

The financial advisory profession has recently created two pretty good videos that illustrate the conflicts of the agency/brokerage/wirehouse advice model. One, produced by Hightower Securities (which actively recruits brokerage teams) compares brokers to butchers and fiduciaries to dieticians; the one sells you a choice cut of meat, the latter sells advice on a healthy diet. Don't ever ask the butcher if you really need a juicy pork chop in your diet. (You can find the video here)

The other video was produced by Greenspring, which is a fee-compensated advisory firm I probably should be familiar with, but am not. The video explains certain conflicts built into the brokerage compensation model, and why they provide incentives for a broker to make recommendations that may not be in the customer's best interests. You can find the video here, and tables showing various brokerage compensation structures (fascinating reading in their own right) can be found here. Be sure to scroll to the bottom, where the magazine provides the actual payout grids, plus interesting tidbits like the fact that Merrill brokers won't get paid for advising any accounts under $250,000 in size unless at least 80% of their accounts are that large or larger, at which point they can be compensated for servicing customers who bring in those measly $100,000 accounts.

You also see the quota system on sales: Morgan Stanley brokers who have been with the firm for nine or more years have to produce at least $300,000 in sales or they're put on probation. A company spokesperson says that the firm's previous $250,000 quota was lower than the industry average, so the firm decided to come inline with everybody else.

As the Greenspring video makes clear, the system is most conflict-ridden when an advisor is close to reaching a higher payout level―when, say, the Merrill Lynch advisor has made $280,000 in commissionable transactions or brought in asset management dollars that generate this level of total compensation (gross dealer concessions) as of mid-December. At that production level, he stands to make 35% of the total, which comes to $98,000, while the firm takes the rest for overhead, expenses and those amazing executive bonus pools. But if that broker can get another sale, or bring in more assets to generate $20,000 more in gross production/sales, it would bring him up to the $300,000 threshold. At that level, he'll earn 38% on the total amount for the year, plus a potential long-term productivity bonus of 2.5%. That $20,000 sale could mean an increase in yearly compensation of $23,500. Do you think that broker isn't calling his customers in the latter half of December looking for something―anything―they might be willing to buy?

You can see a more straightforward conflict of interest in the Walls Fargo Advisors payout grid, where brokers, agents and financial advisors are paid additional bonus percentages if they can sell certain noninvestment products―which are coyly not named directly, but appear to be related to gathering assets the firm will manage (Net Asset Flow Award = 2.5% in additional payout) or getting customers to take out loans (Lending and Banking Award = .5%-1.5% depending on production). The customer may not need to refinance a home mortgage through Wells Fargo, but if it means an additional payout that raises the broker's entire compensation structure, hey, why not give it a pitch?

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Do You Have Too Much in International Stocks?

The financial press has jumped on the bandwagon yelling, "Sell, sell, sell!" for international stocks, especially in Europe. So our clients ask:

  • How much should I have invested internationally?
  • How about Europe?
  • How does Berno Financial Management decide how much to invest internationally?
  • What do other large advisors do?

At Berno Financial Management, we use a multi-asset class strategy for broad diversification. A truly global stock portfolio would be invested about 45% in U.S. stocks and about 55% in international stocks, including about 23% in Europe. Few U.S. investors have that much in international stocks, primarily due to currency and political risk. Our current model portfolio asset allocation includes 30% of the stock portfolio being invested in international stocks. This is our subjective target based on a balancing act to achieve optimum returns within a reasonable risk level. Our core international stock funds have slightly less than 45% of their assets invested in Europe, so a typical client's European investments are about 10% to 15% of their total stock investments (and even less of their total portfolio when including bonds and cash).

What do the big boys do? We cite two examples.

First is TIAA-CREF, which is a large private pension plan available primarily to employees of non-profit groups like universities and hospitals. Being academically minded, they have the best of resources available to them. The CREF Fund (College Retirement Equities Fund), which has about $100 billion in assets and is one of the largest private pension funds in the country, is invested 70% in U.S. stocks and 30% in international stocks. For the record, and this is the truth, we discovered this after we had set our model allocation. We are not copycats!

Second is The Vanguard Group, one of the largest providers of mutual funds for retirement plans. Their Target Date Retirement Funds and Lifestrategy Funds are very popular in 401(k)s and IRAs and have about $118 billion in assets. Their stock allocation likewise is 70% U.S. stocks and 30% international. They actually just increased the international allocation to 30% within the past few years, so we were ahead of them!

So rest easy and sleep well. Broad diversification is your friend. Remember a few years ago when investors were questioning Real Estate Investment Trusts (REITs)? They have turned out to be among the best asset classes after many investors bailed out.

If over $200 billion in assets at two of the largest retirement plan providers in the country have 30% of stocks in international investments, we think you can rest assured that this is a reasonable strategy for you as well!

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Invest In Stocks and Get A Pay Raise!

How would you like a 15% pay raise? Where? Bonds? No. Stocks? Yes!

The dollar amount of dividend payments underlying the Standard & Poor's 500 stock index is projected to increase 15% this year, according to estimates by Howard Silverblatt, senior index analyst at S&P, and reported by Smart Money.

The news could be even better. If technology companies such as Google, Amazon.com, eBay and Dell initiate dividend payments, following Apple's recent announcement to start a dividend, then your pay raise could be even higher. In 2011, there were 22 companies that announced new dividend payments. Nonetheless, only 397 companies in the S&P 500 now pay dividends, versus an average since 1980 of 413 companies. As further reason for optimism, dividend payments as a percentage of company profits are now about 30% versus a historical average of 52%.

Banks could be another source of positive surprises. Many banks cut their dividends in the global financial crises but have started to restore cash payments to shareholders. Financial companies comprised 29% of the dividends paid in 2007, fell to a low of 9% in 2010 and are up to 13% now. There is more room for dividend growth from banks.

Not only do stocks that increase their dividends give you a pay raise, they also provide better long-term total return according to a study by Columbia University professor Doron Nissim that was published in the Journal of Finance in 2001.

The recent stock dividend yield on the S&P 500 is just over 2%, which is very competitive with interest rates on bonds, but dividends can grow whereas bond interest payments are usually fixed.

Investing in stocks for income is only suitable for long-term investors and investors must be willing to tolerate the price volatility that comes with stocks. Money that may be needed within five years or so should be kept in bonds and cash equivalents.

So consider looking at stock investments in a different way and enjoy pay raises dividend income increases along the way!

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Investing in Tax-Exempt Municipal Bonds: Is It Right for You?

Income tax season is a good time to ask the question, "Should I be investing in tax-exempt municipal bond funds? And if I am, is it the right thing to do?"

Your decision-making process should address the following points:

  1. Consider your total portfolio stock/bond/cash allocation first. Your asset allocation will have the biggest impact on your investment return over time.
  2. Are your bond investments in a tax-deferred retirement account like a 401(k) or IRA or a taxable account like a single or joint account? Tax-exempt municipal bond funds should only be used in a taxable account.
  3. What is your "marginal income tax bracket" for federal and state income taxes? This is different than the "effective" income tax rate displayed by income tax software programs or simple calculations of your income tax divided by your income. The "marginal" income tax rate is the tax rate that would be applied to an additional dollar of income. It is outlined in the income tax tables available on paper income tax returns or the IRS or state income tax websites. For example, the federal marginal income tax rate increases from 15% to 25% at a taxable income (after deductions and exemptions) of $70,700 in 2012 for married couples filing jointly and $35,350 for single taxpayers.
  4. What is the "Taxable Equivalent Yield," or TEY, of the tax-exempt municipal bond fund? This represents the interest rate you would have to earn in a comparable taxable investment. If the TEY is higher, go for tax exempts. Before doing this calculation, be sure you are comparing funds of comparable maturity range and credit quality. A short-term, high-quality fund will have a lower interest rate than a longer term, low-quality fund. Make sure you are comparing apples to apples. Also, be sure you are using a fund’s "SEC Yield" when comparing funds, so that the yield is calculated in an identical manner. Believe it or not, there is more than one way to calculate a "yield." If only life could be simpler!
  5. The formula for the Taxable Equivalent Yield is the tax-exempt yield divided by (1 minus marginal income tax rate). For example, John and Susie Smith have a taxable income of $50,000 and therefore are in the 15% federal marginal income tax bracket. They are comparing two intermediate-term, high-quality bond funds. One is invested in tax-exempt bonds with an SEC yield of 1.87% and the other is invested in taxable bonds with an SEC yield of 2.83%. The TEY of the tax-exempt fund is 1.87% divided by (1-0.15) which equals 2.2%. Since this is less than the taxable yield of 2.83%, John and Susie are better off in the taxable bond fund.
  6. Before investing or making any changes, consider whether you think your income will go up or down in the current year or future years. Also, if you are switching from an existing fund, beware if your current fund has a capital gain. Many funds have capital gains since interest rates have been declining for several years.

In closing, your decision about investing in tax-exempt municipal bonds should be reviewed annually. The current low interest rate environment and low tax bracket environment makes taxable bonds more appealing, but interest rates and income tax rates are always subject to change. This is a simple process to follow to be sure your money is invested most productively.

About Bruce J. Berno, CFP®

Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.