Is your advisor prepared for a cyberattack?

Greetings,

Tim Watters of Watters Financial Services, LLC was recently quoted on cyber-security in an article on CNBC.com !

Click on the link below to view the article if you are interested   

Is your advisor prepared for a cyberattack?

Combating Cyber Crime

November, 2015

Cyber security attacks are becoming more and more prevalent. At Watters Financial Services, LLC (WFS) we have experienced fraudulent attempts to gain access to our clients’ assets and private information many times. There are a number of ways in which this can occur. Some of the methods they use are listed below.

·       IRS fraudulent calls

·       Tax Returns filed and refunds taken by scammers

·       Impersonation of the client at a bank to withdraw funds.

·       Phishing attacks to a firm requesting client funds (This actually happened again to one of our clients yesterday)

·       Fraudulent credit cards issued in the client’s name

To combat these security attacks, WFS has instituted office policies and procedures to combat cyber crime.  Some of these policies and procedures include:

·       Clients have a secret password that they use whenever requesting funds.

·       Clients are set up for electronic fund transfers from TD Ameritrade Institutional to their personal checking account.

·       WFS calls clients to verify their identity whenever funds are requested via email.

·       WFS encourages clients to change their passwords on key financial websites every 3 months.

·       WFS uses an encryption software Citrix ShareFile®, when sending and receiving sensitive data and attachments by email. 

·       WFS has a picture of clients on file.

·       WFS encourages clients to switch to email providers other than AOL.

·       WFS uses Orion® as an online portal that allows clients to access their performance securely from anywhere in the world.

·       Client data and paper documents are shredded after the appropriate holding period.

These are just some of the ways that WFS is committed to safeguarding our clients’ assets and private information.

More Information can be found on the Department of Homeland Security’s website at http://www.dhs.gov/stopthinkconnect#

Buy Sell Agreements

Understanding Buy-Sell Agreements

Oct 15, 2015

Watters Financial Services, LLC – October 2015

One of the key areas we focus on at Watters Financial Services, LLC is risk management for small businesses. There is allot at stake for many closely held businesses and smart planning can help mitigate some of the risk. In this recent article from Wealth Management Systems Inc. some of the specifics of Buy-Sell Agreements are outlined. We encourage all businesses to take a look at their relevant risks on at least a yearly basis. We are happy to be of assistance if anyone has any questions regarding this issue.

Business Succession Issues: Understanding Buy-Sell Agreements 

Description: This article examines how buy-sell agreements can provide a viable exit strategy for owners who wish to sell shares in a private business.

 Synopsis: Buy-sell agreements are legal arrangements used to ensure that a closely held business will be able to continue in case of the death, disability, or departure of an owner or partner, as well as other possible triggering events. They spell out how such a situation will be dealt with and set a value on the ownership interests, or a procedure for determining the value at a future time. Buy-sell agreements may be structured as cross purchase, entity purchase, and hybrid purchase plans. Life insurance policies typically provide the source of funds for purchasing shares under a buy-sell agreement. The structure and funding of an agreement depend on such factors as the number of owners involved, the needs of the business, tax effects, and the preferences of those covered by an agreement. Buy-sell agreements have many potential benefits but are complex arrangements that require the input of legal, tax, and insurance professionals. 

Running into financial troubles isn't the only reason that some closely held businesses fail to succeed. Their untimely demise may result from the lack of a formal plan providing for the orderly succession of management and ownership of the business. Such a plan frequently incorporates a buy-sell agreement as the tool for ensuring that the business will continue even after the departure, death, or disability of an owner.

To head off future problems, it pays to understand the uses and structures of these agreements. Although they can be adopted at any time, it is best to decide whether to put a buy-sell agreement in place as early as possible in the life of a business.

Legal Blueprint

A buy-sell agreement is a legal document allowing the remaining owner(s) to acquire the interest of a withdrawing shareholder or partner due to a specified event. The agreement usually restricts an owner's ability to transfer his or her interest and sets out the terms under which another owner or the business entity may acquire the departing owner's interest.

A buy-sell agreement can anticipate situations that could imperil the business or be harmful to owners and key employees. For example, it can be used to prevent unwanted outsiders or heirs from obtaining an ownership interest. It can prevent the continued involvement of retired or inactive shareholders or partners. It can ensure the legal continuation of the entity should an owner become bankrupt or lose a required professional license.

Among its benefits, a buy-sell agreement creates a marketplace for the shares of a closely held business, helps ensure that departing owners will receive adequate compensation, and provides cash to pay estate taxes and settlement costs for surviving heirs, if applicable. In fact, fixing the value of a business or establishing a procedure for valuing it in the future addresses one of the most important issues facing a closely held business. An agreement can also help increase job stability for minority owners and non-owner employees critical to the success of the business.

A buy-sell arrangement can be triggered by a variety of events. In addition to the death, disability, or retirement of an owner, other possible triggers may include an attempt to dissolve the entity, an unsolvable conflict among owners, or an owner's desire to sell his interest.

Possible Structures and Funding

There are generally two basic types of buy-sell agreements:

Cross purchase. Each owner enters into an agreement with every other owner. This approach becomes cumbersome if more than three or four individuals are involved. For example, 64 separate agreements would be required for eight owners.

Entity purchase. The business itself enters into an agreement with each owner and is obligated to buy the shares of a departing owner.

A third type, or so-called Hybrid plan, is essentially a combination of the cross purchase and entity purchase. This approach allows the entity and its owners to delay a purchase decision until a triggering event occurs. The entity typically has the first right of refusal for purchasing the shares of a departing owner.

Life insurance is the most popular funding mechanism for buy-sell agreements. Life insurance is unique in that it creates immediate funding in the event of death, while allowing tax-deferred cash to build up over time. In a cross purchase plan, each owner buys and maintains a policy on every other owner in an amount sufficient to cover the beneficiary's ownership interest. In an entity arrangement, the business purchases the insurance policy on each owner and the business is the beneficiary.

Besides life insurance, other less popular but potentially effective funding mechanisms include cash flow, asset sales, loans, sinking funds, and reserves.

Making Sense of Buy-Sell Agreements

Like all business succession matters, buy-sell agreements are complex and require the assistance of qualified legal, tax, and insurance professionals to ensure proper execution and funding.

Tax and Estate Planning Considerations

Tax consequences are an essential consideration in determining whether to utilize a buy-sell agreement and how to structure one. This process involves evaluating the benefits and drawbacks of each type of arrangement in relation to the specific situation. For example, a cross purchase agreement offers shareholders a stepped-up basis on stock acquired in a buyout, and there are no alternative minimum tax (AMT) consequences if the business has C corporation status.

On the other hand, the cash value of any life insurance owned by the decedent that insures the life of another owner under a buy-sell agreement is included in the decedent's estate, which may affect estate taxes. Secondly, federal law precludes using a buy-sell agreement as a discounted giving technique.

Moreover, buy-sell agreements may be problematic for individuals looking to pass their business on to other family members if the agreement sets a price that is less than the fair market value of a deceased owner's stock. If that were the case, then the entire amount of stock passed on to the surviving spouse would not qualify for the marital deduction. In addition, a child named in a buy-sell agreement who elects not to purchase a deceased parent's shares may subject the surviving parent to gift taxes for the shares the child did not purchase.

An entity purchase plan has tax ramifications for the business itself. While death benefits are received tax free, life insurance cash values and death proceeds may result in corporate AMT. Also, insurance premiums are not a deductible business expense.

As this overview suggests, buy-sell agreements have many potential advantages. Among others, they can reduce conflicts, create a marketplace for shareholdings, and assure customers, suppliers, and employees that the business will continue. However, their complexities must be assessed, and agreements must be carefully crafted to address needs of the business, its owners, and their heirs. Input from qualified insurance, legal, and tax professionals is essential before entering into a buy-sell agreement.

Points to Remember

1.     A buy-sell agreement spells out what will be done with -- and funds the transfer of -- the ownership interest in a closely held business in the event of the death, disability, or withdrawal of an owner or partner.

2.     A buy-sell agreement can reduce disputes among those involved in a closely held business, as well as ensure the continuity of the business, by providing a fair process that protects departing owners, remaining owners, and the business itself.

3.     A buy-sell agreement may be structured as a cross purchase, entity purchase, or hybrid purchase plan. The choice of structure depends on the number of owners involved, as well as tax, estate planning, and other concerns specific to each situation.

4.     Life insurance is the most popular mechanism for funding a buy-sell agreement. The structure of the agreement determines whether individual owners or the business entity purchase the policies and receive their proceeds.

5.     Legal, tax, estate planning, and insurance professionals familiar with buy-sell agreements need to be consulted before deciding whether to employ an agreement and which structure it should use.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. neither Wealth Management Systems Inc. or Watters Financial Services, LLC  nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. or Watters Financial Services, LLC be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2015 Wealth Management Systems Inc. All rights reserved.

Exchange Traded Funds and Mutual Funds: Two Investment Vehicles – How to decide?

First, let’s start with the basic definition of an Exchange Traded Fund (ETF). “An Exchange Traded Fund is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund, ” according to Investopedia.com.

Second, let’s look at the basic definition of a mutual fund. “A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt,” according to Investor.gov.

A comparison of ETF’s and mutual funds.

ETF’s and mutual funds share more similarities than differences. Both investment vehicles offer diversification. By pooling money together from many investors, ETF’s and mutual funds have greater buying power, enabling them to buy many different securities in large quantities. They gather money from many investors and use it to acquire stocks, bonds, and other assets. Another similarity is transparency. Compared with actively managed funds, most index ETF’s and index mutual funds are extremely transparent. Also, in the United States, all mutual funds, as well as the vast majority of ETF’s, are subject to strict regulation under the Investment Company Act of 1940 and associated Securities and Exchange Commission rules and regulations.

“The tax efficiency of an investment product generally has more to do with how it is managed—index versus active—than whether the product is structured as an ETF or mutual fund,” according to Vanguard.com.

This brings our discussion to that of the differences between ETF’s and mutual funds. The first major difference between ETF’s and mutual funds is trading flexibility. Unlike mutual funds, an ETF trades like common stocks on a stock exchange. This means that ETF’s experience price changes throughout the day as they are bought and sold. On the other hand, an order to buy or sell a mutual fund is executed at the end-of-day price, known as the net asset value. This means that mutual funds experience price changes only at the end of the trading day.

Next, the most prevalent difference between ETF’s and mutual funds is the way costs are charged to the investor. While ETF’s and mutual funds share some common costs, ETF’s have unique costs not associated with mutual funds. The main difference is the Bid and Ask spread. “While trading ETF’s on the secondary market, there is a difference between the price a dealer is willing to pay for the ETF (the “bid”) and the somewhat higher price the dealer will accept to sell the ETF (the “ask”), ” according to advisors.vanguard.com.

“The amount by which the ask price exceeds the bid price is called the “bid-ask spread.” An ETF usually trades as closely to its net asset values, or NAV, as possible. The market provides a lot of liquidity to the system in order to ensure this. However, for some low-volume ETFs, bid-ask spreads may exist and widen. Trading ETFs with large spreads may decrease potential returns since they affect the ETF purchase and sales prices. Investors may also purchase an ETF above its NAV, which essentially means paying a premium for the basket of securities,” according to a recent article on finance.yahoo.com.

In the end, ETF’s and mutual funds may be suitable alternatives to stocks and bonds. Investors need to consider all of the similarities and differences between the two in order to make an informed decision.

 

 

Making Sense of Mutual Fund Lingo

 

                      Making Sense of Mutual Fund Lingo

The jargon of investing may seem designed to confuse, but understanding a few of the terms can help you navigate your way more easily through the maze of financial information.

Measuring Performance              

The NAV -- or net asset value -- of a fund is the price to buy or sell one share of the fund. It is calculated on a regular basis by the fund company using the closing price of each security held in the fund. In some retirement plans, the actual unit value of shares may differ from the NAV.

Capital appreciation (or depreciation) is the difference between the price (NAV) of your shares when you bought them and the current price. While maximizing capital appreciation is the objective of growth funds, money market mutual funds strive to maintain a constant NAV of $1, so they offer no opportunity for capital appreciation.

Yield is the interest earned or income generated by the fund as a percentage of its NAV. Although some equity funds may pay interest, yield is most relevant as a measurement for bond and money market funds that have income as their primary objective.

Total return is calculated as a percentage change in the fund's NAV, plus any other income. It represents the gain -- or loss -- of any fund over time, assuming that all distributions by the fund have been reinvested. It may be useful to compare your fund's total return to an appropriate benchmark index as well as to other mutual funds with similar investment objectives.

Fund Distributions

When the securities in a fund pay interest or dividends, the fund passes them along to its shareholders. In the same way, any capital gains -- or profit -- realized by the sale of a security in the fund are distributed as well. Through your retirement plan, these dividend and capital gains distributions are automatically reinvested in the fund to foster long-term growth. You receive additional shares (or fraction of a share) rather than cash.

Taking the time to decipher the language of investing can be an important step toward taking control of your financial future.

Because of the possibility of human or mechanical error by Watters Financial Services (WFS) or its sources, guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall WFS be liable for any indirect, special or consequential damages in connection with the use of the content.

Interest Rates: What's the Connection to Your Portfolio?

              Interest Rates: What's the Connection to Your Portfolio?

 

When it comes to interest rates, one thing's for certain: What goes down will eventually come up.

The federal funds rate -- the rate on which short-term interest rates are based -- has varied significantly over time. It's a cycle of ups and downs that can affect your personal finances -- your credit card rates, for example. But what about less familiar effects, like those that interest rate changes can have on your investments? Understanding the relationship between bonds, stocks, and interest rates could help you better cope with inevitable changes in our economy and your portfolio.

Bond Market Mechanics

Interest rates often fall in a weak economy and rise as it strengthens. As the economy gathers steam, companies experience higher costs (wages and materials) and they usually borrow money to grow. That's where bond yields and prices enter the equation.

What is yield? It's a measure of a bond's return based on the price the investor paid for it and the interest the bond will pay. Falling interest rates usually result in declining yields. As rates spiral downward, businesses and governments "call" or redeem the existing bonds they've issued that carry higher interest rates, replacing them with new, lower-yielding bonds. Why? To save money. (A homeowner refinances his or her home at a lower mortgage rate for the same reason.)

Interest rate changes affect bond prices in the opposite way. Declining interest rates usually result in rising bond prices and vice versa -- think of it as a seesaw relationship. What causes this change? When interest rates rise, investors flock to new bonds because of their higher yields. Therefore, owners of existing bonds reduce prices in an attempt to attract buyers.

Investors who hold on to bonds until maturity aren't concerned with this seesaw relationship. But bond fund investors may see its effects over time.

Evaluating Equities

Interest rate changes can also affect stocks. For instance, in the short term, the stock market often declines in the midst of rising interest rates because companies must pay more to borrow money for expansion and capital improvements. Increasing rates often impact small companies more than large, well-established firms. That's because they usually have less cash, shorter track records, and other limited resources that put them at higher risk. On the other hand, a drop in interest rates may result in higher stock prices if corporate profits increase.

So why do some stocks increase in value even as interest rates rise, or vice versa? Because industry or company-specific factors -- such as the development of a new product -- can impact stock prices more than rate changes.

Taking Action

Is there anything an investor can do when faced with interest rate uncertainty? You bet. Although you can't change interest rates, you can assemble a portfolio that can potentially ride out the inevitable ups and downs. Risk reduction begins with diversifying your investments in as many ways as possible.

Let's start with equities. Consider investing across different sectors, because no one knows which of today's industries will fuel the next expansion. Also be aware that some sectors -- such as energy -- are more economically sensitive than others, which can lead to increased volatility. Additionally, consider stocks or stock mutual funds that invest in different market caps and have different investing styles, such as both value and growth investing.

On to fixed-income investments. Do your bond funds hold bonds of different maturities -- short- and long-term -- and types, such as government and corporate? Different types of bonds react in their own way to interest rate changes. Long-term bonds, for instance, are more sensitive to rate changes than short-term bonds.

Interest rates will always fluctuate in response to economic conditions. Rather than trying to guess the Federal Reserve's next move, why not concentrate on creating a portfolio that will serve your needs well -- no matter which way rates go?

Because of the possibility of human or mechanical error by Watters Financial Services (WFS) or its sources, guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall WFS be liable for any indirect, special or consequential damages in connection with the use of the content.

 

Ways to Protect Yourself from Identity Theft

Ways to Protect Yourself from Identity Theft

 

Over the past year, I have had a number of clients have Identity theft incidents. Clients have had collection agencies contact them about  outstanding  balances on cards they never took out or cash withdrawn from their bank accounts. A few even had their tax files and  refunds taken from them.

 This is a time for all of us to be more proactive in protecting ourselves. Here are a few important safeguards I recommend.

1. Get your free credit report every year from the 3 major ratings agencies (Equifax, TransUnion, and Experian).  We can request this for you. Contact my office if you would like us to do so.

 2. Update your email password and avoid AOL, Yahoo and Hotmail. According to the FBI, 70% of the e-mail hacking incidents have happened to people who had AOL e-mail accounts.

 3. On a Quarterly basis, change your passwords for all sensitive financial sites. It is far less work to change passwords every three months than to go through an identity theft incident.

 4. Do not use the same password for all websites. Use a firewall and have up to date virus software on your computers.

 5. Do not give out your credit card to anyone to use. Write "see ID" on back of your credit cards. This way they have to verify your identity in order to use the card.

6. Make sure your home wifi network uses a password. Update it periodically.

7. Backup your data daily. Consider using an external hard drive and/or offsite data storage.

Identity Theft is becoming a big issue and it requires all of us to be more careful and proactive. Hopefully, the recommendations I have suggested will help you avoid being a victim of Identity Theft.

Are your beneficiary assignments undermining your Will?

Are your beneficiary assignments undermining your Will?

 I find that clients neglect to review their beneficiary assignments and often a deceased parent (or a former wife) is named. While this may be your intent, poorly thought out beneficiary assignments can screw up allot of good planning.

Many people create a well-thought-out estate plan which includes the BIG 4 estate planning documents (Last Will and Testament, Durable Power of Attorney, Health Care Proxy and Living Will) and then they ignore their beneficiary assignments. Why is this a problem? Because the beneficiary assignment may for example:

·       Give money to a minor directly when the Will paid intended to pay the money out to a trust

·       Give the money to a disabled family member when the Will would have paid it out to a Special Needs Trust

·       Give the money to someone who is not the intended beneficiary

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

The best feature of beneficiary assignments is that they can quickly send out the money to the right party. Also, a spousal beneficiary of an IRA account may continue to enjoy tax deferral for years to come.  A non spousal beneficiary may continue to enjoy tax deferral for years to come but is required to take out a modest amount each year as a Required Minimum Distribution.

The "fatal flaw" of beneficiary-designated assets is that because they are not considered probate assets, they pass "under the radar screen" and trump the directions spelled out in a will. This all too often leads to unintended consequences -- individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

Not naming a Beneficiary is a NO NO!

Not naming beneficiaries or failing to update forms if a beneficiary dies can create a mess. For example, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred. This not only would generate a tax bill for the children, it would also prevent them from stretching IRA distributions out over their lifetime.

Planning Priorities

Given these very real consequences, it is important to work with an attorney to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.

Also, I recommend reviewing my client’s beneficiary designations on a regular basis -- at least two years -- and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.