Category: Insights

Read all of the insights coming from the experts at confluence financial partners.

  • 5 Key Steps to Help Ensure Your Financial Plan Informs Your Investments

    Investing can be a powerful tool for building wealth and helping to secure financial stability, but to maximize its benefits, it should be aligned with your personal financial goals. A Financial Plan, supported by the professional guidance of a Wealth Management firm, such as Confluence Financial Partners, can help your portfolio reflect your long-term aspirations. Here are a few key steps to help make sure your financial plan drives your investing decisions.

    1. Define Your Financial Goals

    Before diving into investing or reassessing your current investments, it is best to establish clear financial objectives. Are you investing for retirement, a major purchase, or perhaps even leaving a legacy for your children? Whatever your objectives are, you should evaluate your existing investments to ensure they still align. A Certified Financial Planner (CFP) or Financial Advisor can help you set realistic, time-bound goals that serve as a foundation for your investment strategy.

    2. Develop a Financial Plan

    A well-crafted financial plan can serve as the foundation of a successful investment strategy. It starts with a clear understanding of your financial goals, risk tolerance, and time horizon. A comprehensive plan should incorporate key elements such as budgeting, debt management, savings, and insurance to establish a strong financial footing. It should also define both short-term and long-term objectives, providing a structured roadmap for building and preserving wealth. By thoroughly evaluating your current financial situation and anticipating future needs, a strategic plan can empower you to make informed investment decisions that support your overall financial well-being.

    Confluence Financial Partners takes a holistic approach to financial planning and can help provide you with actionable steps to integrate the aspects of your financial life seamlessly. Rather than viewing investments in isolation, Confluence works to align them with cash flow management, tax strategies, estate planning, and risk mitigation to create a cohesive and strategic path toward your goals. This coordinated approach can help maximize wealth accumulation and long-term financial security, give you clarity and confidence in your decisions. With a well-defined plan in place, you can move forward with greater confidence that your financial future is built on a solid, strategic foundation.

    3. Optimize for Tax Efficiency

    An essential component of financial planning is optimizing for tax efficiency. Tax considerations can significantly impact investment returns, and working with a Certified Financial Planner (CFP) or Financial Advisor can help minimize tax burdens through strategies such as tax-loss harvesting, asset location planning, and retirement account maximization. By integrating these tax-efficient approaches, after-tax returns could increase and more of your wealth can be put to work toward your financial future.

    4. Review, Monitor, and Adjust Your Investments Regularly

    Beyond initial planning, continuous review and monitoring of investments can be critical to long-term success. As your life and goals change, your investment strategies should also adapt. Regularly assessing your portfolio in light of your plan can help it remain aligned with your financial objectives. Whether you’re starting fresh or reevaluating existing investments, partnering with a wealth management firm can provide professional oversight, helping to navigate market fluctuations and build a portfolio to help you live the life you want to live. With a proactive approach and professional guidance, you can more confidently pursue financial security and long-term prosperity.

    5. Work with a Wealth Management Firm

    Confluence Financial Partners is committed to a disciplined approach, guided by five key principles, to shape effective investing strategies. We manage investments to achieve individual client goals, not to beat arbitrary benchmarks. Our objective approach combines active and passive strategies, strategic planning, and tax-efficient solutions to help maximize returns and minimize long-term costs.

    The Five Principles of Investing at Confluence Financial Partners

    1. Objective-Based
      We believe clients are best served by focusing on how their investments serve their long-term goals rather than outperforming industry benchmarks.
    2. Unbiased
      We take an unbiased approach in selecting investment types—active or passive—while maintaining transparency and prioritizing objectivity in the decision-making process for a sound investment strategy.
    3. Strategic
      We use a balanced approach that combines strategic planning with carefully selected opportunities to align client investment portfolios with their specific goals.
    4. Tax-Efficient
      For taxable accounts, we believe outcomes should be optimized not just for what the investments return, but for what the investments return after taxes.
    5. Cost-Effective
      We believe optimizing the spend of client investment dollars on investment expenses is a key determinant of long-term success.

    Confluence Financial Partners offers professional guidance in investment planning, risk management, and long-term financial strategy, providing clients with confidence and clarity in their financial journey. By leveraging the knowledge of experienced professionals, we can help develop a structured approach to investing that aligns with your financial aspirations and adapts to changing economic landscapes.

    Final Thoughts

    Investing is more than just buying securities—it’s about strategically growing your wealth in alignment with your personal financial goals. It’s about helping make sure that you aren’t just saving for saving’s sake, but rather you are building wealth while maximizing both your life and legacy. With the guidance of a Certified Financial Planner (CFP) or Financial Advisor, you will have someone to assist you with your investment decision as you work towards the life that you want. Working with Confluence Financial Partners provides access to our dedicated team that offers strategic insight, thoughtful guidance, and tailored solutions which can help turn your financial aspirations into reality.

    Randy Holcombe
    About the Author

    The opportunity to make a positive difference in people’s lives is why Randy chose a career in wealth management. He is passionate about helping his clients achieve their goals and cut through the constant noise of the day-to-day financial markets.

    Grove City, Pittsburgh

    724-458-5233
    randall.holcombe@confluencefp.com
    Email Randy

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    Randy Holcombe

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  • Stock Market Recap – February 2025

    Month in Review

    • After a positive start to 2025, equity markets were choppy in February following mixed economic data and increasing uncertainty.
    • In February, large cap stocks (S&P 500 TR Index) fell -1.30%, dragged slightly lower by large cap growth stocks (-3.59%, Russell 1000 Growth TR Index). Small cap stocks in the US also fell, with the Russell 2000 TR Index declining -5.35% in February.
    • Stock and bond markets were led by core bonds (+2.20%, Bloomberg US Aggregate Bond TR Index), developed international stocks (+1.94%, MSCI EAFE NR Index), and large cap value (+0.41%, Russell 1000 Value TR Index) during the month.

    Broadening Participation in the Bull Market

    With two months in the books, early in 2025 investors have seen signs of broadening participation in the bull market that started in October 2022. From an asset class lens, developed international stocks (MSCI EAFE NR Index) are off to a strong start this year, rising +7.30%, compared to +1.44% for the S&P 500 TR Index. Value stocks are also leading growth stocks in 2025, with the Russell 1000 Value TR Index rising +5.05% versus large cap growth (Russell 1000 Growth TR Index) falling -1.69%.

    Early in the year, investors can also see a shift within the S&P 500 Index itself. After being responsible for over 50% of the calendar year returns in 2024, 2023, and 2022, the so-called “Magnificent 7” stocks are trailing the rest of the index. In 2025, the S&P 500 excluding the Magnificent 7 stocks is up +3.2% YTD, and the average stock in the index is up +2.87% (S&P 500 Equal Weight TR Index), ahead of the overall index. One reason for this shift is the trade-off between the high valuations of the Magnificent 7 and the leveling-off of their earnings growth.

    Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. The top 10 S&P 500 companies are based on the 10 largest index constituents at the beginning of each quarter. As of 2/28/2025, the top 10 companies in the index were AAPL (7.2%), NVDA (6.1%), MSFT (5.9%), AMZN (3.9%), GOOGL/GOOG (3.6%), META (2.9%), BRK.B (1.9%), AVGO (1.8%), TSLA (1.6%), and JPM (1.5%). The remaining stocks represent the rest of the 492 companies in the S&P 500.

    The largest companies in the S&P 500 are still expensive relative to their history at 27.3x forward earnings, even after seeing their valuations fall in 2025. Investors have started the year favoring opportunities with cheaper valuations, a trend that has helped diversified investors. 

    What’s on Deck for January?

    • As of February 28th, 97% of the S&P 500 had reported earnings for 4Q2024. Roughly 75% of the companies beat their earnings estimate and 63% exceeded their revenue estimates. Earnings growth for the quarter was a strong +18.2% year-over-year.
    • Investors will be watching for more certainty around the new trade policies being rolled out by the Trump administration.
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill

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    William Winkeler

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  • Understanding the Role of a Registered Investment Advisor (RIA) and What It Means for You

    When it comes to financial planning and investment management, selecting the right advisor is one of the most critical decisions you can make. One term you may frequently encounter is “RIA,” which stands for Registered Investment Advisor. But what does that really mean, and why is it important for those seeking professional financial guidance?

    Understanding an RIA

    An RIA is a firm or individual registered with the Securities and Exchange Commission (SEC) or a state regulatory agency, depending on the assets under management. RIAs provide financial advice and investment management services while adhering to strict regulatory requirements designed to protect investors.

    At Confluence Financial Partners, being a Registered Investment Advisory means that we are committed to transparency, personalized service, and, most importantly, acting in our clients’ best interests.

    The Fiduciary Standard: Acting in Your Best Interest

    One of the most significant distinctions of an RIA is the fiduciary duty it upholds. As fiduciaries, RIAs are legally and ethically required to prioritize their clients’ financial well-being above all else. This obligation includes:

    • Providing objective advice
    • Fully disclosing any potential conflicts of interest
    • Ensuring recommendations align with each client’s financial goals

    At Confluence, our fiduciary responsibility guides financial strategies and tailors them to your unique situation, helping you pursue goals with confidence.

    What to Expect When Working with a Registered Investment Advisor

    Choosing to work with a Registered Investment Advisor like Confluence Financial Partners provides several opportunities:

    • Personalized Wealth Management: We take the time to understand your specific needs and aspirations, crafting customized financial plans and investment strategies.
    • Transparent Fee Structure: Our compensation model is designed to align with your success, with no hidden commissions or incentives.
    • Objective Advice: As fiduciaries, we are committed to offering independent, research-driven financial guidance that is in your best interest.
    • Regulatory Oversight: With strict SEC or state regulations in place, RIAs are held to high standards of accountability and client care.

    What This Means for Confluence Clients

    For clients of Confluence Financial Partners, our status as a Registered Investment Advisor represents a commitment: our commitment to act with integrity, to provide prudent guidance, and to help you achieve financial confidence. We embrace our fiduciary duty because we believe that trust is the foundation of every successful financial relationship. Whether you’re planning for retirement, growing your wealth, or navigating complex financial decisions, you deserve an advisor who is not only experienced but also required to put your best interests first.

    Take the Next Step with an RIA You Can Trust

    If you’re looking for a financial partner who prioritizes your goals and well-being, we invite you to start a conversation with Confluence Financial Partners. Let’s work together to build a strategy that aligns with your vision for the future.

    Gregory Weimer
    About the Author

    Gregory developed a passion for the financial services industry early in life, drawn to the meaningful impact investing and thoughtful financial planning can have on people’s lives.

    McMurray

    724-271-8801
    gregory.weimer@confluencefp.com
    Email Greg

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    Gregory Weimer

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  • Stock Market Recap: January 2025

    Month in Review

    • Markets started off 2025 on a positive note, led by a broader set of equity markets. For the month, developed international (MSCI EAFE NR USD) returned +5.26% and large cap value (Russell 1000 Value TR Index) returned +4.68%, leading all markets.
    • There were pockets of volatility during the month, caused by developments in artificial intelligence and changing trade policies.
    • Overall, diversified investors enjoyed January. Participation in the market broadened: the average stock (Equal-Weight S&P 500 TR Index) finished January +3.50%, ahead of market cap weighted index’s 2.78% return (S&P 500 TR Index). Large cap value finished +4.68% (Russell 1000 Value TR Index), ahead of large cap growth’s +1.98% return (Russell 1000 Growth TR Index).

    Stocks are Rarely Average

    Last year marked the second consecutive year the S&P 500 returned over 25%, making it only the fifth time since 1926 that the index has produced consecutive results of that magnitude. While there have been positive developments in 2025, the fact still remains that the S&P 500 is very concentrated in the top 10 companies, which have pushed the S&P 500’s valuation to above-average levels. How should investors think about this data?

    History is a great starting point, with over 100 years of various market conditions, recessions, and geopolitical headlines. History shows that stocks typically have “better-than-average” and “great” years in clusters, much like the S&P 500 has experienced recently. Since 1926, the S&P 500 has averaged 10.4% per year; during that period, it has only posted calendar year returns around the average (8% to 12%) in 6 years. This shows that over longer periods, fundamentals drive stock prices, not year-to-year price fluctuations- the benefit of being a long-term investor.

    In addition to understanding historical trends, investors should recognize the broadening out in the current bull market. In January, the S&P 500’s Technology sector was the only sector to fall during the month; the average stock also finished ahead of the index. Investors should view developments such as these favorably as the current bull market continues ahead.

    Source: Morningstar as of 12/31/24. U.S. stocks are represented by the S&P 500 Index from 3/4/57 to 12/31/24 and the IA SBBI U.S. Lrg Stock Tr USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period.

    What’s on Deck for February?

    • Earnings season for the fourth quarter of 2024 will continue. As of February 2nd, 32% of S&P 500 companies have reported, with 74% beating earnings estimates and 62% beating revenue estimates.
    • The new Administration will continue to roll-out new policies, in addition to Congress working on budget and tax legislation.

    William Winkeler

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    William Winkeler

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  • Market Pulse: Quarter 4, 2024

    We are excited to share the inaugural version of Confluence Financial Partner’s Market Pulse: A Quarterly Review of Investment Trends and Insights. We aim to succinctly recap key investment trends and events on a quarterly basis, while providing insightful and actionable outlooks for the coming months. 

    Q4 2024 Insights: Three Key Takeaways

    Policy Shift: 2024 saw the Federal Reserve shift gears and lower interest rates, ending the rate hiking cycle that began in June 2022 and featured 9 rate hikes.

    Mega Leadership: Mega cap stocks, the largest companies in the US, pulled the S&P 500 to a second consecutive +25% annual gain, outpacing smaller stocks, international stocks, and bonds.

    High Concentration: The mega cap leadership resulted in a very narrow market by historical standards: the top 10 stocks in the S&P 500 represent over 38% of the index (highest in over 40 years).

    Download the Full Report
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill

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    William Winkeler

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  • Smart Tax Strategies to Keep More of Your Income in 2025

    As we enter the new year, don’t wait to implement tax strategies that could improve your financial situation. For investors, smart tax strategies can mean keeping more of what you earn and maximizing the value of your portfolio. Here are some key approaches to consider as you plan for 2025:

    1. Maximize Tax-Advantaged Accounts*

    Contributing to tax-advantaged accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs) can reduce your taxable income. For 2025, the 401(k) contribution limit is $23,500 for those under 50, with an additional $7,500 catch-up contribution for those 50 and older. A new provision allows individuals aged 60 to 63 to make an enhanced catch-up contribution of $3,750 in addition to the traditional catch-up contribution, providing a significant opportunity to boost retirement savings during those critical pre-retirement years.

    Traditional IRAs also allow for tax-deferred growth, and contributions may be deductible depending on your income and retirement plan coverage.

    Roth accounts, while funded with after-tax dollars, offer tax-free withdrawals in retirement—a great option if you expect to be in a higher tax bracket later.

    2. Utilize Qualified Charitable Distributions (QCDs)**

    If you’re 70½ or older, a Qualified Charitable Distribution (QCD) allows you to donate up to $108,000 directly from your IRA to a qualified charity. This strategy not only satisfies your Required Minimum Distribution (RMD) but also reduces your taxable income. By directing funds straight to the charity, you avoid having the distribution counted as part of your Adjusted Gross Income (AGI), which can help minimize taxes on Social Security benefits or Medicare premiums. This approach is particularly advantageous for retirees who wish to support charitable causes while managing their tax liabilities efficiently.

    3. Gift Appreciated Securities

    Instead of donating cash or selling investments to give proceeds, consider gifting appreciated stocks or mutual fund shares directly to family members or charities. By gifting to family members in lower tax brackets, they may pay significantly lower taxes on the capital gains, or possibly none at all, depending on their income level. For charitable donations, you can deduct the fair market value of the securities while avoiding the capital gains tax you’d incur if you sold them. This dual benefit maximizes the impact of your gift while offering meaningful tax savings. It’s a smart way to reduce the tax burden on highly appreciated assets.

    4. Be Strategic with Municipal Bonds

    Municipal bonds, often referred to as “munis,” offer a reliable source of tax-free interest income at the federal level. If you purchase bonds issued by your home state, you may also avoid state and local taxes. For high-income earners, the tax-equivalent yield of municipal bonds can be more attractive than taxable bonds, especially if you’re in the highest federal income tax brackets. Additionally, municipal bonds are generally considered lower-risk investments, providing steady income without increasing your taxable income—a win-win for those seeking both stability and tax efficiency. Whether you should own taxable or tax-free bonds, however, is unique to each individual and should be analyzed as such.

    5. Stay Informed on Tax Law Changes*

    Tax laws are dynamic, and staying informed helps ensures you’re prepared to adapt your strategy to new opportunities or avoid pitfalls. The individual tax cuts introduced under the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025 unless new legislation extends them. This includes potential increases in individual income tax rates, a reduction in the standard deduction, and a lower threshold for estate tax exemptions, which may revert to pre-2018 levels—around $7 million per individual instead of the current $14 million. By monitoring legislation, you can adjust your portfolio and tax strategies proactively.

    Take Action Now

    The key to effective tax planning is proactive management. By leveraging these strategies, you may be able to reduce your tax bill and keep more of your income in 2025. Don’t wait until the end of the year to start planning! Schedule a consultation with one of our experienced wealth managers today to discuss personalized strategies that align with your financial goals.

    Sources:

    *https://www.morningstar.com/personal-finance/your-tax-fact-sheet-calendar

    **https://www.schwab.com/learn/story/reducing-rmds-with-qcds#:~:text=What%20are%20the%20QCD%20limits,charitable%20gift%20annuity%20(CGA).

    Confluence Financial Partners does not provide tax advice. You should consult your own tax advisors before engaging in any transaction.

    Gregory Weimer
    About the Author

    Gregory developed a passion for the financial services industry early in life, drawn to the meaningful impact investing and thoughtful financial planning can have on people’s lives.

    McMurray

    724-271-8801
    gregory.weimer@confluencefp.com
    Email Greg

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    Gregory Weimer

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  • Protect Your Legacy – Review and Understand Your Beneficiary Designations Today

    When it comes to estate planning, your beneficiary designations are one of the most critical yet often overlooked components. These designations determine how your assets—such as retirement accounts, life insurance policies, and annuities—are distributed upon your passing. Beneficiary designations often supersede other estate documents, making it essential to ensure they are accurate and up to date.

    Understanding the Key Difference: Per Capita vs. Per Stirpes
    When naming individual beneficiaries, two terms that frequently come up in this context are “per stirpes” and “per capita”. While these terms may seem similar, they represent very different ways of dividing an inheritance among your heirs.

    What is “Per Stirpes”?
    The term per stirpes translates to “by branch” and refers to dividing an estate among the branches of a family. This method ensures that if an heir predeceases you, their share will be passed on to their descendants. In other words, per stirpes keeps the inheritance within a specific family line.

    Example: If you have three children, but one of them passes away before you, the deceased child’s share would be divided equally among their children (your grandchildren). The remaining two children would each receive their full share, and the deceased child’s share would be inherited by their descendants.

    What is “Per Capita”?
    Per capita, on the other hand, translates to “by head.” This distribution method divides the estate equally among all living heirs, regardless of their family branch. If one of your heirs passes away before you, their share does not get passed on to their descendants. Instead, the estate is divided equally among the remaining living heirs.

    Example: If you have four children, but one predeceases you, the remaining three children would share the full estate equally. The children of the deceased heir would not receive anything, as the division happens equally among the surviving heirs.

    While the difference between these two options may seem subtle, the impact on your loved ones can be significant. Choosing the wrong option—or failing to clarify your preference—could lead to unintended consequences, disputes among heirs, or even legal challenges.

    Why Review Your Beneficiary Designations Now?
    Life rarely stands still. Over time, your family dynamic and financial situation can shift. Perhaps you’ve welcomed new children or grandchildren, experienced a marriage or divorce, or lost a loved one. Each of these changes could alter how you want your assets to be distributed.

    Outdated or incorrect beneficiary designations can result in assets being distributed contrary to your intentions. For example:

    • A former spouse could unintentionally remain the beneficiary of a retirement account. If there is a per stirpes designation, any new children of the ex-spouse could stand to inherit a portion of the assets, in addition to your own.
    • A child or grandchild born after you last updated your beneficiary designations could be left out entirely when using a per capita designation.

    Without a clear understanding of per capita versus per stirpes, your heirs may not receive the inheritance you intended for them.

    Which Method Should You Choose?
    Choosing between per stirpes and per capita depends on your family dynamics and the goals you have for your estate. Here are a few considerations:

    Per Stirpes: This method is often ideal for families with multiple generations or if you want to ensure that your descendants (grandchildren, for example) are taken care of. If your family includes children and grandchildren, per stirpes guarantees that each branch of your family is represented.

    Per Capita: This method works best for families where you want an equal division of assets among the surviving heirs. It’s particularly useful if you prefer to ensure that all living heirs receive an equal share, regardless of how many generations are involved or descendants of a particular family line there are.

    How Confluence Financial Partners Can Help
    Your Wealth Manager can help you gather all your account and policy documents, check the names of the beneficiaries listed, the percentages assigned to each, and whether the designation is per capita or per stirpes. Furthermore, we can prepare a report summarizing the disposition of your estate to make sure it aligns with your wishes.

    Ready to Make Changes?
    Estate planning is complex, and small details can make a big difference. You may need to consult with your existing attorney to update your plan or your wealth manager can make an introduction to a qualified professional to draft a new one. Our team is here to help you navigate these decisions and help ensure your legacy is preserved. Call us today to schedule a personalized beneficiary review. Let’s work together to help ensure your estate plan reflects your current wishes and protects your family’s future. Don’t leave it to chance—act now to avoid unintended surprises tomorrow. Your peace of mind is worth it, and your loved ones will thank you.

    Chuck Zuzak
    About the Author

    Chuck joins Confluence Financial Partners with 13 years of experience in the financial services industry, most recently as Director of Financial Planning at JFS Wealth Advisors. At a fundamental level, Chuck’s passion for financial planning stems from the desire to help clients connect their personal values and purpose with their financial resources.

    Pittsburgh

    412-391-0377
    chuck.zuzak@confluencefp.com
    Email Chuck Zuzak

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    Chuck Zuzak

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  • Stock Market Recap: November 2024

    Month in Review

    • Markets rallied sharply in November following the US elections, with US small cap stocks leading all markets higher at +10.97% for the month (Russell 2000 TR Index). This represents the first all-time high for small caps in three years.
    • US large cap stocks also participated, with the S&P 500 TR Index rising +5.87% in November. The gains for large cap growth and large cap value were about even for the month.
    • The strength of the US dollar weighed on international stocks, which fell slightly during the month (-0.57%, MSCI EAFE NR USD Index). After interest rates initially rose sharply, longer-term rates ultimately fell in November, resulting in a +1.06% gain for the bond market (Bloomberg Barclays Aggregate Bond TR Index).



    Heading into 2025

    This year has been another strong year for equity markets, particularly US large-cap stocks. For example, the S&P 500 has made over 50 all-time highs in 2024, which is on pace for the fifth most in a calendar year since 1957. Through the end of November, it was also the strongest election year since 1936 for the S&P 500. What do investors have to look to as we head into 2025?

    In the very near-term, investors have the month of December. Going back to 1928, the S&P 500 has had a positive return 74% of all Decembers, the highest positive return rate of any month. The average monthly return of +1.3% in December is the second-best month of the calendar year, on average.

    There are also historical trends around US election cycles to consider. Since 1926, the S&P 500 has averaged +10.7% during the year after Presidential elections, slightly higher than the +10.4% for any given year. This trend largely reflects the ability for new administrations to enact legislative change prior to mid-term election years, which have historically had below-average results.

    Morningstar as of 10/31/24.  Stock market represented by the S&P 500 Index from 1/1/70 to 10/31/24 and  IA SBBI U.S. large cap stocks index from 1/1/26 to 1/1/70. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in the index.

    What’s on Deck for December?

    • The Federal Reserve will announce any changes to policy on December 18th. As of December 2nd, the market is pricing a 65% chance of a 0.25% reduction in the Federal Funds Rate.
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    November 2024 – Market RecapDownload

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    William Winkeler

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  • Maximizing Your Equity Compensation: Understanding RSUs and ISO

    Many companies offer equity compensation programs to attract, motivate, and retain top talent while conserving cash and aligning the interests of the employees and shareholders. While these incentive programs provide a great benefit, they must be carefully managed to avoid upsetting your financial strategy or posing a significant tax burden. Below we discuss two of the most common stock option plans that we help our clients understand and maximize.

    RSU – Restricted Stock Units

    As an employee, you may receive a Restricted Stock Unit (RSU) grant as part of your annual performance assessment or generally as part of your overall compensation package. The majority of RSUs have a vesting schedule, so you don’t receive the full value from the outset (Your employer wants to schedule vesting over a period, rather than all at once, to retain your services!). For example, if your company grants you 400 RSUs, you’ll probably get 100 shares to vest each year (typically on a quarterly schedule) until you vest all 400 shares, at which time you may receive a new grant.

    RSUs give you an interest in the company but no actual value until they are vested. Upon vesting, the Fair Market Value (FMV) of the shares is considered income. You will then have the right to sell the vested shares and receive the cash proceeds or hold the shares for a longer period.

    Regarding Taxes

    Your income will include the FMV of the shares as they vest. You can sell your vested shares and convert them to cash. Alternatively, you may keep the shares, but any gains made after the vesting date would be taxed as capital gains when you sell. If you hold shares and they drop in value, you might be faced with selling those shares at a loss, while paying tax on vesting date FMV you never actually received.

    Your employer typically handles your tax withholding at the vesting date by selling enough shares on your behalf to cover the estimated tax liability and distributing the remainder to you. The IRS requires a statutory 22% withholding rate. Because your vested RSUs influence your taxable income, and effective tax bracket, your employer’s tax withholding rate may not be enough.

    Strategy

    RSUs accrue over time and, if held, can lead to a significantly consolidated position in one firm. An experienced executive might start with 100 shares vested, then 200, then 300, and so on. Suddenly, they discover that a sizable chunk of their holdings, perhaps also a significant percentage of their net worth, consists of company stock.

    Accumulation of company stock can lead to more than just lack of portfolio diversification. Generally, having a sizable stock position in the same company that also pays your salary isn’t advisable. If that organization, for a myriad of reasons, experiences a downturn this could have a double-whammy effect.

    As a result, it may be advisable to sell all RSUs as they vest. There should be no additional taxes owed, because your costs basis will be the FMV at which you received the stock. In fact, keeping RSUs as they vest is the exact same thing as taking each cash bonus and investing it 100% in your company stock. If you wouldn’t do that, you shouldn’t hold all of your RSUs. By converting the shares to cash you will be better able to manage taxes due and invest proceeds in a more diverse manner. This should provide you with greater and more predictable long-term success.

    ISO – Incentive Stock Options

    Incentive Stock Options (ISO) are issued by public companies or private companies planning to go public in the future. They are most typically offered to executives and highly valued employees and are designed to encourage these employees to stay with the company over the long term.

    An ISO provides an ‘option’ to purchase shares in a company at a set price, called the ‘strike price’, for a specified period. Like RSUs, ISOs are typically subject to a vesting schedule that could be several years. As the ISOs vest, you can exercise them at the strike price stated in the grant. Employees may have 10 years to exercise their options before they expire. Once you exercise vested shares, you now own the shares at the strike price. You may hold them or sell them immediately, but there are several things to consider.

    Regarding Taxes

    When you exercise your ISOs, you don’t receive any proceeds, as the exercise is only the purchase of the stock. To qualify for the most favorable tax strategy, ISOs need to be held for 2 years from grant date and 1 year after exercise, allowing for Long Term Capital Gains (LTCG) treatment at sale. Pursuing this strategy, however, can trigger what is known as Alternative Minimum Tax, or AMT.

    This tax liability is created by the spread, or difference between, the Fair Market Value (FMV) and the Strike price you were granted. This is often referred to as the ‘Bargain Element’, and if large enough, will create AMT. This can be very complex and confusing as many employees are unaware of this and are caught off guard by their sometimes-significant tax liability due to AMT. We help our clients understand the AMT involved with their ISO strategy, and the ways that they can use any excess AMT payments as credits against future taxes in years where they aren’t subject to AMT.

    Another option for ISOs is to do a “cashless exercise,” which means you never actually purchase the stock at the strike price, but rather you are simply paid out the spread between the strike price and the current FMV. This is a good choice if you don’t want to worry about AMT, or if you don’t have the cash necessary to buy the shares at the strike price. However, this strategy will cause the spread to be taxed at ordinary income rates instead of capital gains rates, and it effectively forgoes the potential tax benefits offered by ISOs.

    Strategy

    We generally recommend exercising options as soon as they vest and holding for long term capital gains treatment. Your specific strategy may vary based on your goals, but reducing what could be a concentrated position, and reinvesting the proceeds in a more diverse portfolio can lead to more predictable long-term outcomes.

    The Bottom Line:

    The most common misconceptions about equity incentive programs relate to taxation and vesting.

    • RSU: Taxed immediately upon vesting using the FMV of the vested shares, usually vest over a period of years, and you can sell them as they vest. No tax benefit to holding after they vest.
    • ISO: Subject to vesting schedules, may create AMT liability when exercised and held, and must be held for 2 years from grant and 1 year from exercise to apply LTCG. Typically expire after 10 years.

    If your employer offers these unique and valuable benefits, don’t let the financial planning overwhelm you.  Act today and consult with an experienced financial planner and a tax professional to develop a solid strategy for maximizing your wealth. If we can help you in any way, please don’t hesitate to contact us.

    Nathan Garcia
    About the Author

    Nathan Garcia, CFP® has been serving individuals, families, and organizations as a financial advisor and planner since 2001. With a deep understanding of the meaningful, positive impact that quality advice can have, Nathan is committed to helping clients achieve clarity and confidence in their financial futures.

    Pittsburgh

    724-719-6600
    nathan.garcia@confluencefp.com
    Email Nathan

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    Nathan Garcia

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  • Stock Market Recap: October 2024

    Month in Review

    • October was a challenging month for stock and bond markets as bond yields rose sharply during the month. All major markets finished the month lower, with international equities and interest rate sensitive equities falling the most.
    • The S&P 500 finished October down slightly at -0.91% (S&P 500 TR Index), marking the first time in five months that the index has declined.
    • The yield of the 10-year US Treasury rose to +4.28% in October (+0.54% increase for the month), which weighed on bond market returns: the Bloomberg Barclays US Aggregate Bond Index fell -2.48% in October.

    Why are Bond Yields Rising After the Fed Rate Cut?

    The Federal Reserve began its interest rate cutting cycle in September, reducing the Federal Funds target rate by 0.50%. Historically, the start of an interest rate reduction policy has been associated with a decline in bond yields. Why is this? Typically, the Federal Reserve reduces interest rates to help support a slowing economy, whether its slowing due to changes in the business cycle, or an external event.

    This year has been an exception, compared to the seven easing cycles since 1989 (before 1989 Federal Reserve did not officially target interest rate changes). Since the September 18th rate cut, the 10-year Treasury yield has increased nearly 0.60%, the largest increase at this stage compared to the previous seven cycles. It is worth noting that 50-days after the first rate cut, during the previous seven cycles, the 10-year yield was either the same, or lower, than the start.

    What could be driving bond yields higher during the present cycle? It is likely the fact that inflation is declining, while the economy and jobs markets are still growing (at a slowing rate), similar to the 1995 soft landing outcome. Alternatively, it could be a sign that investors are concerned about the lack of any clear plan to address the US government’s fiscal situation. Measuring outstanding debt relative to annual economic growth, the United States has a debt-to-GDP ratio of 123%- meaning more debt outstanding than the rate of economic growth in a given year.

    Source: Yardeni Research, LSEG Datastream

    What’s on Deck for November?

    • US Election Day is on November 5th, which will be a closely followed affair.
    • Earnings season is well underway for the Third Quarter of 2024. Consensus estimates for year/year earnings growth for the S&P 500 was +4.3% for the quarter.
    William Winkeler
    About the Author

    Bill has more than 15 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

    Pittsburgh

    724-719-6600
    bill.winkeler@confluencefp.com
    Email Bill
    October 2024 RecapDownload

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    William Winkeler

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