Month in Review

• April saw major bond and stock markets decline due to a shifting interest rate outlook, following higher-than-expected inflation data. The S&P 500 had its first 5% or greater drop since October 2023 in April.
• In the equity market – areas with greater sensitivity to high interest rates lagged, such as small cap stocks (-7.04%, Russell 2000 TR Index). Large cap stocks also declined, with value stocks down -4.27% (Russell 1000 Value TR Index) and growth stocks down -4.24% (Russell 1000 Growth TR Index). Emerging market equities bucked the trend and finished in positive territory (+0.45% MSCI Emerging Market NR Index).
• As of April 30^th, investors were no longer pricing a cut to the Fed Fund rate for 2024, leading major bond markets to 2024 lows (-2.53% in April, Bloomberg Barclays Aggregate Bond TR Index).

Looking Beyond Narrow Equity Market Leadership

Large growth companies continue to drive a large portion of the US equity market’s results during the past three and five years – April was no different. The S&P 500 (weighted by the size of the companies in the index) has outperformed the equal-weighted S&P 500 (representing the results of the average company) by an increasingly wide margin over the past 18 to 24 months.

This has been driven by fast-growing technology companies: technology stocks represent roughly 30% of the market-cap weighted S&P 500, compared to 14% weight in the equal-weighted S&P 500. However, it is important to adopt a longer perspective during these unusual periods. Over the past 15- and 20-year periods, as well as since 2003 – the equal weighted S&P 500 index is ahead or in-line with the market cap weighted S&P 500. On a calendar year basis, the equal-weighted S&P 500 has finished ahead 12 out of 21 years through 2023.

Although the market has been very top heavy, with the fast-growing technology companies driving the market, markets are cyclical, and longer-time horizons highlight the balance over time.

Our mission at Confluence Financial Partners is to Maximize Lives and Legacies.

As our industry has evolved, we understand that the role of a wealth management firm has become bigger than simply managing portfolios and building financial plans. While plans and portfolios remain essential, we believe that true wealth lies not only in financial abundance but also in physical and mental well-being. Studies show that individuals who prioritize their health tend to experience enhanced cognitive function, increased productivity, and overall improved quality of life.

In light of this, it is with much enthusiasm that we announce the addition of a dietitian to our team at Confluence, Sarah Rupp, MS, RD, LDN!

Our commitment to associates and clients is to expand beyond the conventional boundaries of wealth management and we believe the addition of Sarah helps us deliver that commitment.

We look forward to sharing Sarah’s knowledge to further Maximize Lives and Legacies.

Great Days Ahead!

Greg Weimer, CEO

Label reading, ingredient decoding, deciphering marketing terminology – all of these aspects individually or combined can create an environment of confusion for shoppers at the grocery store. Amongst product labels, “USDA Organic” is found on many foods and beverages, but what does it really mean? Let’s focus in and unpack this particular label.

What is meant by the label “USDA Organic”?

The United States Department of Agriculture (USDA), is a division within the US government that focuses largely on the country’s safety and efficiency of farming, food and sustainability practices. The USDA Organic label is federally regulated, meaning the product its placed upon has met the standard requirements to earn the status of this particular label (more on this, below). Because this is a regulated label with strict criteria, the consumer can have confidence when they see this symbol on a product that the process in which the ingredients have gone from farm to table has been verified through a system of checks and balances.

• The standards the USDA has set for being labeled organic are the following¹:
  • No synthetic chemicals used on the product (such as pesticides and fertilizers otherwise used in conventional foods to keep bugs and termites away)
  • No genetically modified organisms (GMO’s)
  • No antibiotics or growth hormones given to animals (when the product itself comes from an animal) but rather a focus on their welfare, such as raising animals in natural conditions
  • Sustainable farming practices used to protect the environment currently and long term

These standards are in place to ensure both the consumers and environment are set up for better health outcomes, given how products are grown and processed. More information surrounding these categories can be found on the USDA website.

If a food product does not have this label, the default is known as a conventional food.  A conventionally grown product such as a head of broccoli, for example, could miss the mark for organic in a minimum of one category or at most, all categories. Conventional foods are found in most products in store and have their own system of checks and balances for consumer health, as well.

Whereas conventional foods are still federally monitored for safe limits of pesticides using scientific data and risk assessment on a regular basis, these types of products do not have to meet as rigorous requirements surrounding chemical usage on crops and soil health, for example. Additionally, they may utilize GMO’s, and/or differ in the treatment of animals and farming practices.

In summary, organic verified products have tighter regulations when it comes to how a food is grown and processed, and also how animals are fed and raised. Common concerns from consumers regarding conventional foods vs. organic surround long term pesticide intake risk on human health, animal welfare, and the question of varying levels of nutrient composition. Given the increased cost of production to farm organically, organic products most often have a higher price tag than their conventional counterparts. Many believe there are benefits to choosing organic, but it may not be necessary or realistic to consume all or even most food intake organic, depending on food budget and/or availability of items where someone lives and shops on a regular basis.

When it comes to a measurable benefit to human health, choosing organic foods vs. conventional, the scientific evidence is not definitive, although observational studies point to better health outcomes over time for organic consumption vs. conventional². Like any decision in the adult world, the type of food you purchase requires taking inventory of what you value, prefer, and can afford.

As the end of the year approaches, it’s an opportune time for clients to utilize strategies that align charitable goals with their financial objectives. In this article, we will explore various charitable planning opportunities and strategies to leverage to help our clients optimize their giving while improving their overall financial situation.

Tax Efficient Charitable Giving Opportunities

One of the primary incentives for charitable giving is the potential to reduce taxable income. However, timing and method play a crucial role in maximizing these benefits. Below are several techniques to consider as part of year-end planning:

Donating Appreciated Securities: Instead of giving cash, clients can donate appreciated stocks, bonds, or mutual funds directly to a charity. This strategy offers two key benefits:

• Avoiding Capital Gains Tax: Donors avoid paying capital gains tax on the appreciation of the asset.
• Maximized Tax Deduction: They receive a charitable deduction for the fair market value of the donated securities, provided they’ve held the asset for more than one year.
• Watch Your Limits: The IRS places limits on the amount clients can deduct for charitable contributions. For cash donations, the limit is typically 60% of AGI, while donations of appreciated assets are limited to 30% of AGI. If the total contributions exceed these limits, the excess can be carried forward for up to five years.
• Helps Portfolios: This strategy is particularly useful in bull markets, where many clients may have appreciated assets they would otherwise sell to rebalance their portfolios.

Qualified Charitable Distributions (QCDs): Clients aged 70½ or older can make a QCD of up to $105,000 annually (indexed annually to inflation) directly from their IRA to a qualified charity. QCDs offer several advantages:

• Satisfies Required Minimum Distributions (RMDs): For clients who have reached their required beginning date, QCDs can reduce taxable income by offsetting RMDs.  However you need to be careful to make QCDs first, before taking any other income yourself.  The first dollars out of a qualified account are the RMD dollars; if you take your RMD first and then try to make a QCD later, it won’t count.

• Tax-Free Distribution: Unlike regular withdrawals, the QCD is excluded from the client’s taxable income, offering a substantial benefit for those who don’t itemize deductions, which can help clients stay within lower tax brackets or avoid Medicare premium increases.
• This strategy is particularly advantageous for clients who may no longer need the full amount of their RMD for living expenses but are still required to take it.

Consider a Multi-generational Advisory Relationship

Over 50% of our clients are multigenerational, meaning we have family members in more than one generation who we are serving. Often children are clients with their parents from a young age, but as they become adults, they become more independent and establish their own relationship with us as their advisor. Another common situation is when clients refer their parents to us, forming a multigenerational relationship from the other direction. Still another way this happens is when adult children establish a relationship with us as their parents (who are clients already) age and it becomes even more important to all be on the same page.

Even if you are not a Confluence client, we would encourage you to find an advisor and a firm that is making multi-generational wealth considerations a priority. Your advisor should help you bridge the gap between the wealth that you’ve built and the next generation for whom you hope that wealth will be a blessing. We have shepherded many families through this difficult period already, and the whole process is undoubtedly much easier if the parents and the children share the same advisor.

Take Another Look at Your Estate Plan

When was the last time you had your estate plan reviewed? If you are like most Americans, it’s probably been a few years. The typical estate plan is adequate for only a certain season of life, and it will need to be redone as children get older and circumstances change. Like a financial plan or an investment portfolio, an estate plan should be periodically updated as goals change. An estate plan update is almost always needed after a major life event such as a birth, a death, or a change in marital status.

Sometimes an estate plan can be as simple as a pair of wills and power of attorney documents. More often, however, trusts should be involved and more careful consideration should be taken to help ensure that wishes are carried out. For example, what would happen in the event of a death or divorce of a child? If protections aren’t built into the estate plan, it’s possible that a parent’s wealth ends up with a child’s ex-spouse instead of the grandchildren. That is an avoidable scenario, but it’s important to ask the right questions and think critically about the key factors that will cause the plan to either be successful or not.

We don’t have attorneys at Confluence, but we do have a robust process for reviewing your existing estate plan so that you understand your current situation. Once we learn where you are today, we can help educate you so that you are prepared when you speak to your attorney about updates. We work closely with our clients throughout the whole process and are there to help in every way we can.

Communicate, Communicate, Communicate

The primary reason that the wealth transfer could go poorly for the majority of families is a lack of communication. An inheritance can be a difficult subject to broach, especially for the first time. As a result, many families put these conversations off until it is too late. Don’t let that be your family.

We find that most families assume that their children will handle the inheritance with ease, but that isn’t always the case. We’ve seen many situations in which the heirs were paralyzed by their newfound wealth and the responsibility that comes along with it. They don’t feel prepared to handle the wealth, and so it wears on them. Rather than enjoying the legacy that their parents worked so hard to build, they instead live in fear of losing it all. Fortunately, this can be remedied by simple and consistent communication. Imagine if those same heirs had been let in on the family wealth along the way. Imagine if they knew how the accounts and estate plan were structured. Most importantly, imagine if they understood their parent’s dreams and wishes around the wealth. Imagine they understood the values and expectations that go along with the wealth being transferred.

One question we often ask our clients is this: Will your children still speak to each other after you are gone? Many clients take this for granted, but an estate plan that has not been communicated will inevitably lead to disagreements and fraught relationships. This is especially true in unique situations where the split is not even amongst the heirs, but money can cause even the most reasonable people to turn their backs on each other. Thankfully, again the odds of this happening can be greatly reduced with solid and consistent communication on the part of the wealth creators. Don’t leave ambiguities that can be interpreted. Make your wishes known and take the (sometimes) uncomfortable step of starting a pattern of communication.

Have a Family Meeting

One concrete way to start or solidify communication around the great wealth transfer is to have a family meeting. Ideally, this would lead to a regular cadence of meetings, but the first one is usually the hardest. These meetings can take many different forms, but they are typically initiated by the wealth creators of the family and include the adult children in the upcoming generation. Many families want to communicate better about important topics like their estate plan, financial expectations, and charitable goals, but they don’t know where to start. That’s where a family meeting can be a great opportunity to open important lines of communication.

At Confluence, facilitating these family meetings is one of the most important things that we do. We regularly sit down with our client families at our office or their homes to help get everyone on the same page. We don’t believe this type of meeting should be only done in an emergency after a terminal diagnosis, although that may sometimes be necessary. Rather, we think it is essential to start thinking about this now, before there is a crisis of any kind. Communication around wealth transfer that is done while the whole family is focused and not in crisis is ideal because it prepares the family to be ready if or when the crisis does arrive.

Conclusion

The largest wealth transfer that the world has ever seen is coming. For many, it has already started. That transfer is going to go well for some families, but very poorly for many. At Confluence, we’ve made the next generation a priority, right down to the way we have structured our firm. Many advisors work as lone wolves, with no real succession plan or assurance of what will happen to the families they serve once the advisor retires. At Confluence, we are building a firm so that we can help not only our current clients, but their children and grandchildren as well. We work in teams, and we have advisors who are in their 70s all the way down to their 20s. We’ve made significant investments in growing the next generation of advisors so that our clients’ children and grandchildren can be confident in the Confluence of the future.

As you read this today, we implore you to start thinking about what your next step may be towards making sure that your financial legacy is secure. Perhaps you need to have your estate plan reviewed, or you should make that call to your attorney that you’ve been putting off. Maybe you’ve been meaning to ask your advisor about a family meeting or considering introducing your parents or children to your financial team. Whatever the next step is for you on this journey, we ask you to take it. Your family will be grateful that you did.

You can do well by doing some good!  Not only can giving to a charity make a positive impact, it can provide an opportunity for some tax benefits too. If you are a high-income earner or a retiree who plans on writing checks to your favorite charities, then you may benefit from these three wealth and tax planning tips you can take advantage of in the future.

Donor Advised Funds (DAFs)

• An immediate tax deduction can be taken for the amount donated in the year the contribution is made to the DAF.  Then, you as the donor advisor to the DAF decide which 501(c)(3) organizations (e.g., religious organization, college, hospital/clinic, community center, etc.) receive grants from the fund at any time in the future.  DAFs are a great vehicle to us if you have a big cash flow year and you know you want to make a large deductible contribution, but you aren’t sure to which organizations yet. A DAF allows you to get the deduction today and decide which charities will be ultimate beneficiaries at a later date.

• If a client contributes long-term appreciated securities to their DAF, they can avoid capital gains tax on the appreciated portion and receive an immediate charitable tax deduction for the full market value of the gift.

• Assets donated during the life of the client are no longer part of the client’s estate, and therefore, are not subject to probate or estate taxes. The DAF can also be named as a beneficiary to an IRA, a charitable remainder trust, or other asset.

• Unlike private foundations, there are no start-up costs, no tax on the fund’s investment income, no individual payout requirement, and all record keeping services are included.

Qualified Charitable Distributions (QCDs)

• A QCD allows individuals who are 70.5 years of age or older to donate up to $105,000 per year per individual to one or more charities directly from a Traditional IRA (For 2024, QCD limit increased to $105,000 from $100,000 in 2023). The charity must be a 501(c)(3) organization. Private foundations or donor advised funds are not eligible to receive QCDs.  

• QCDs count toward your required minimum distribution (RMD) amount. (Inherited IRAs also qualify for QCD provided you meet the age requirement.)

• QCDs are non-taxable distributions and not included in your adjusted gross income (AGI).  This is important because regular charitable contributions do not lower AGI.  Lowering AGI can have a number of benefits, including bringing down Medicare Part-B premiums, qualifying for certain deductions, and lowering the taxable portion of Social Security.

• Keeping your taxable income lower can help avoid elevating to the next federal tax bracket or potentially provide opportunities for other tax planning considerations.

Donate appreciated investments.

• Look at your portfolio as an opportunity toward donating long-term appreciated securities (e.g., stocks, mutual funds, bonds). 

• Capital gains are eliminated when you contribute long-term appreciated assets directly to a charity (via the charity’s trustee or custodian) instead of selling the assets and donating the after-tax proceeds.

• The charity can then sell the assets and pay no tax on the appreciated gains because of their tax-exempt status.

In Summary

Act today and consult your fiduciary wealth manager and tax professional to develop a plan to best align with your goals and charitable endeavors. You have an opportunity to make a positive IMPACT on charities both today and tomorrow while also receiving some tax benefits along the way. Please do not hesitate to contact us if you have any questions or if we can help in any way.    

About the Author

Known for his professionalism and calming demeanor, Zac is focused on helping his clients reach their financial goals through comprehensive financial planning and unbiased guidance.  Zac and his team support and care for…

Sewickley

724-719-6609

zac.saunders@confluencefp.com

Email Zac

Heading into 2023, the Investment Advisory Committee believes we are beginning to return to a more historically normal, rational economic environment.

The Committee has identified four key themes for 2023 and the years ahead:

1. Fundamentals Matter Again:

• From 2009 to 2021, expansive government and monetary policies kept interest rates and inflation near record lows.
• This environment favored US and growth stocks, whose stock prices are driven primarily by future growth prospects, as opposed to things like profitability and earnings.
• The unwinding of these accommodative policies is leading us back to an environment where strong company fundamentals will likely again be vital when building investment portfolios.

by Jackson Elizondo

Working with a Registered Investment Advisor (RIA) is desirable for high-net-worth individuals, families, and institutions for the personal, unbiased, and tailored advice to their unique financial situation. They have a fiduciary duty to act in your best interest while providing comprehensive financial services to meet your goals.

What is an RIA? 

A Registered Investment Advisor is a firm registered with the Securities and Exchange Commission (SEC) that provides clients with financial advice. A team of advisors will often employ their expertise for customized guidance with the freedom to choose from a wide range of investment options for tailored advice for you.

What is the benefit of working with a Registered Investment Advisor?

1. A legal obligation to act in your best interest

The fiduciary standard of an RIA has a “fundamental obligation” to work in the best interests of its advisory clients. Recommendations will be made in good faith, based on your needs, and allow a direct line of communication if there is a need for clarification or change.

2. Providing more than just investment advice

Financial professional teams within an RIA firm are often skilled in disciplines beyond just portfolio management. They include retirement, estate, charitable legacy, tax, insurance, education planning for you and your family, and corporate services, including employee benefits. These teams will work hand-in-hand with an established financial network to develop investment strategies considering tailored solutions for your unique financial situation.

3. Transparent & available public records

Each RIA must file and publicly post a Form ADV that offers a comprehensive view of the organization. A Form ADV offers objective and transparent information, including conflicts of interests, compensation, disciplinary filings, education, and the firm’s key personnel.

4. Straightforward fee-based compensation

Many RIA’s offer financial advice and planning for a fee based on a percentage of your assets under management. This service creates a mutual benefit of a transparent fee structure that aligns the clients’ best interests with those of the RIA.

5. Professional Education

Many wealth management teams will usually include highly experienced financial professionals with prestigious designations. These teams often bolster professional training and certifications such as the Certified Financial Planner® (CFP®) designation, Accredited Asset Management Specialists® (AAMS®), Certified Public Accountant (CPA) or Accredited Investment Fiduciary® (AIF®) and commit themselves to continuous education on your behalf.

Consider a Registered Investment Advisor at Confluence Financial Partners

Simple, straightforward, and non-biased assistance with your comprehensive financial plan aligns with the priorities of an RIA. If you are looking for wealth management advice at a concierge level of service, Confluence Financial Partners, may be the team of financial professionals for you.

Please contact a member of the Kimmich Team if you’re interested in having a discussion.