BANKS
EARLY STAGES OF A CRISIS
21ST CENTURY ACCOUNTANT
UNDERSTANDING JARGON
LIFE INSURANCE FOR YOUNG EMPLOYEES
THE U.S. DEBT DOWNGRADE COMPARING MARKET IMPACTS
ADVISORS magazine
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Jeffrey Buchbinder CFA, Lawrence Gillum CFA, Bobby Gaydos, Rene Carlos, Don Steinbrugge CFA, Brian Bontomase
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By Rene Carlos, EA
THE 21ST CENTURY ACCOUNTANT
You get your financial reports from your accountant. You ask him what they mean and they use a bunch of accounting terms you don’t understand. You just pay the invoice for the services because you are busy and you trust your accountant.
The real reason your accountant does not talk to you about your small business is because they are a reactive accountant. He is the quintessential accountant like you see on T.V. and movies. He is your father’s accountant. They are used to taking orders like preparing financial reports or tax returns. They give you too much detail and confuse you even more. They are the 100-meter dash runner in track and field. Unfortunately, there are too many accountants that continue to practice that way. The needs of small business owners have changed since the digital age.
The solution to the issue is working with the proactive accountant or the 21st century accountant. They give you a 30,000-foot view of your business. The 21st century accountant is technology driven but stil has the fundamental foundation of your father’s accountant. They use strategies and put them in place to help your business grow throughout the year. They use the marathon runner approach to business. There are many benefits to
working with the 21st century accountant. The first benefit is communication. They are used to using multiple modes of communication and they can give you a response sooner than later. The reactive accountant will come back with typical responses like “after tax season” or “I am busy” to name some. They think that you want them to drop everything for you. What they don’t get is that you just want a simple update and consistent communication.
Another benefit working with the 21st century accountant is that they are not afraid of risk. They understand that there is an element of risk in everything. They have the experience of working with many types of clients and understand each industry. What works in one industry may not work in another industry. The reactive accountant will use works like “we’ve always done it that way” or “it is a red flag” when in most cases it is not. They are not willing to think outside the box and they will not look for the big savings that the client expects them to get.
ACCOUNTING JARGON
The 21st century accountant is team-oriented vs the jack-ofall-trades methodology. He is the leader of the company and delegates responsibilities to his team. He surrounds himself with a support staff, trusting their expertise which is in the best interest of clients. They collaborate together and use each other’s strengths to keep the clients informed. The reactive accountant wants to be good at many things but usually falls behind. They try to do too much at one time and it causes their productivity to decrease. The best example is the law of diminishing returns. You might know it as too many cooks in the kitchen. The cooks will bump into each other causing frustration and lost productivity. The reactive accountant will do the same thing. He is too busy trying to do everything at once that he provides sub-standard service.
The accounting industry has seen a lot of change over the years. The days of pencil and paper being the modern technology are in the past. Not to say that they are not relevant in today’s world, rather the computer does much of the heavy lifting. It is another tool in the accountant’s tool box. You will still need an experienced professional who can help you manage your small business. Please consider the 21st century accountant. It may just elevate your small business to the next level.
OUT OF THE IVORY TOWER
CURTIS KRIETZBERG
AND INTO THE PILOT’S SEAT
MMarkets have rallied about 15% year-todate, a recession in the United States has not materialized, and the economy continues to improve slowly. The landscape, however, is always changing and at Krietzberg Wealth Management it’s all about navigating through the challenges.
“A financial advisor needs to act like a pilot,” Curtis Krietzberg, CFA, MBA told Advisors Magazine in a recent interview. “There are times that a pilot is going to experience turbulence. There are times when a pilot will experience clear, smooth skies,” he added. “But at the end of the day, it’s the pilot’s job to get all of the passengers safely to where they’re heading.”
Curtis, along with his brother David Krietzberg, CFP®, MBA, CBEC®, founded the New Jerseybased firm in 2005. And while they cannot control the storm and turbulence of markets and economics, they are firmly committed to getting their clients to their destinations. In the area of
personal wealth management, the firm provides investment advice, insurance strategies and lifecycle financial planning. It also specializes in corporate financial solutions, such as company retirement plans, benefits, succession planning and business-exit readiness evaluations.
After graduating college, Curtis joined Merrill Lynch as a securities analyst. It was something he always wanted to be, and he spent about 10 years in such a role. “It was the career I always thought I wanted, but along the way – mid to late-20s – you gain a little perspective, and I realized that Wall Street analysts are in their own ivory towers.”
He was happy to be there, but it also occurred to Curtis that a client’s primary point of contact is the salesperson – and there weren’t too many people in the retail side of investment services that started out as a securities analyst. “I had my MBA at that point, and I thought it would be cool to jump out of my ivory tower, come over to the retail side, and to actually help clients.”
His journey also included a stint in management with Lincoln Financial Advisors,
where he helped other financial planners manage their clients’ assets. “I was essentially a planner’s planner,” Curtis recalled.
After a few years at Lincoln Financial, he had a choice to either continue in management or to start his own business. He didn’t see management as exciting as working directly with people. “I had all the experience that I thought I needed to start my own
practice,” he said. “So, I called up my oldest brother who was also in the industry, and we teamed up – and it has been David and I since August of 2005.”
To this day, however, Lincoln Financial Advisors serves as Krietzberg Wealth Management’s broker-dealer. “It’s great to have the support of a major, Fortune 500 company right behind us,” Curtis acknowledged. “They
spend an enormous amount of capital to protect our client’s privacy and security.” And in these times when cyberattacks on financial service business are increasing, such a partnership provides peace of mind.
The Krietzberg brothers, in fact, chose the retail side of financial services because they firmly believed it was where they were needed most and could do the best.
“I basically chose this end of the industry because I thought it needed a lot of help; it was broken and it kind of still is – it’s difficult to get good advice,” Curtis noted. “And I saw an opportunity to truly help people, one client at a time.”
At Krietzberg Wealth Management, which has seven staffers in addition to Curtis and David, education is front and center.
“People get a lot of information nowadays,” Curtis explained, adding, “Some of it is accurate, some of it isn’t accurate – and clients want to know how it all applies to them.” He said the firm helps clients determine if information is not only accurate, but if the complete story is being told and what are the implications at a personal level.
Curtis said: “What does it all mean to them? Answering that is really our primary job.”
And his background as a securities analyst helps. Often, clients will ask him his opinion about an article they read. “It could be about anything – inflation, the labor market, wages, energy prices.
NO ONE EVER IS CONFIDENT OR COMFORTABLE OR SECURE IN WHAT THEY HAVE, REGARDLESS OF WHAT THEY HAVE. AND IT’S OUR JOB TO TELL THEM HONESTLY, THAT THEY’RE GOING TO BE OKAY AND HERE’S WHY.
“It’s all about education, communication, objectivity and transparency,” Curtis emphasized. “Those are the core pillars of our firm.”
And those pillars are foundational when it comes to the two main questions asked by Krietzberg’s clients: Am I going to be okay? Will I run out of money?
“And we get those questions at all asset levels,” Curtis said. “Whatever the perception is, it goes all the way up the chain. A client with a million in assets will say, ‘I guess I’m okay with that, but it’s not like I have $2 million – those guys are set.’ But then
“ “ “
we have those with $2 million and they think that’s alright, but they’d like $5 million, or those with $5 million see others with $10 million.”
Curtis observed: “No one ever is confident or comfortable or secure in what they have, regardless of what they have. And it’s our job to tell them honestly, that they’re going to be okay and here’s why. Or, you’re going to be fine, but you might need to change a couple of things.”
He added: “Interest rates, inflation, recessions – those are just some of the things that drive performance, but they are
beyond our control. What we can control is risk. We’ve always had a custom approach given a client’s objectives and a client’s risk tolerance.”
And the advisor/pilot is always prepared to tell clients: “There may be a storm ahead, but we are going to do all we can to go around it.”
For more information, visit: https://www.krietzbergwealth. com
Curtis Krietzberg and David Krietzberg are registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Krietzberg Wealth Management is a marketing name for registered representatives of Lincoln Financial Advisors. CRN-5902712-082323
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cover story
by don steinbrugge
WHY WE MAY BE ONLY IN THE EARLY STAGES OF A BANKING CRISIS
TThe first half of 2023 saw the beginning of a banking crisis that will have repercussions for years to come, which will lead to a period of consolidation within the banking industry as well as a rethink of the role of banks in the US economy. During this period of significant stress, it is important to note that there are vast differences in the quality of banks as well as diverse operating models which will result in broadly varied outcomes. These nuanced differences are not appreciated by most investors and are not reflected in stock prices, making the sector uniquely attractive to long/short equity managers.
The main issue currently plaguing the industry was brought to the forefront of the market’s attention in March. Bank assets and liabilities are at an extreme duration mismatch, where balance sheets are filled with long-duration, low-yielding fixed securities and loans, while liabilities are shorter-term than previously anticipated. As interest rates rose, the value of their assets declined substantially. The issue was even worse than most investors first realized because a large percent of bank assets were classified as “held-to-maturity” and were not marked to market. Balance sheets artificially looked significantly healthier than they actually were.
The problem was compound as some banks had an outsized percentage of their deposits uninsured by the FDIC. These banks, with suspect liquidity, experienced significant deposit outflows, culminating with the headline failures of Silicon Valley Bank, Signature Bank and First Republic Bank. The chart below illustrates the historical nature of the events; even during the Great Financial Crisis of 2008, we didn’t see anywhere near the level of assets at failed institutions.
(Source: S&P Global, Bloomberg)
It was at this point that the Federal Reserve and the Treasury Department did 3 things to alleviate the shortterm liquidity squeeze on the industry. These included an implied FDIC guarantee on all bank deposits to stop runs on the banks, the Fed Bank Term Funding Program (BTFP) was created to assist banks having liquidity issues (but at a high interest rate), and helped arrange weak bank acquisitions by larger banks (potentially costing FDIC tens of billions). These measures effectively stabilized the shortterm liquidity issues within the industry, but only temporarily. Significant issues persist
within the banking sector concerning the quality of their balance sheets, which in many cases have deteriorated further due to rising interest rates and bank’s decreased ability to generate profitability.
There are 3 ways to evaluate bank risk, which each have vastly different time periods.
1. Liquidity, which we have addressed above.
2. Solvency, assets verse liabilities, higher rates will continue to be a headwind on capital levels and the industry is ill prepared for any adverse credit events.
3. Profitability
In examining the solvency of much of the banking industry, the duration mismatch of assets and liabilities has not gone away. Some banks have sold some of their long duration securities at losses to reduce their interest rate risk, but most of their assets are loans. With very few people paying off their mortgages or refinancing their maturing CRE debt, the average duration has been lengthening considerably due to the low rates prevalent at origination. At the same time, the industry is experiencing the largest contraction in deposits in over 50 years.
(Source: S&P Global, Bloomberg)
As concerns about bank runs spread across the industry, many banks repositioned their balance sheets to improve their liquidity profile. Notably, many of these actions have lowered capital levels and resulted in larger cash balances. Most importantly, competition for liquidity from other banks, money market funds or broader fixed income alternatives has forced banks to continue to pay up for liquidity. To put the competitive rate environment in perspective, recent available market rates include:
• Federal Home Loan Bank (FHLB): 5.50%
• Money Market Funds (MMF): 5.00%
• Fed Bank Term Funding Program (BTFP): 5.47%
• Fed Discount Window (DW): 5.25%
• Average US Certificates of Deposit (CD): 4.75%
• Average US Bank Deposit Rates: 0.54%
At the same time, the average securities yield of banks’ portfolios is approximately 2.75%.
Unfortunately for the banking industry, depositors have awoken to the new reality that their excess cash balances can generate returns - resulting in a drastic remix out of non-interest bearing accounts into higher yielding alternatives, which may permanently change the industry.
Over the past 50 years, banks had become much less reliant on Certificates of Deposits (“CD”), to fund their balance sheet, yet this trend is beginning to reverse. A reversal which would have a drastic long-term impact on run-rate earnings.
Non-interest bearing (NIB) deposits currently represent 24% of total deposits, down from a cycle peak of 28%. The average percentage of deposits that were non-interest bearing since 2011 is ~24%, signaling
a return to pre-pandemic levels. However, a look at the pre-ZIRP (Pre-Great Financial Crisis environment) sheds some light on what the future might hold and brings with it, questions about the duration expectations of bank liabilities. With data going back to 1984, the average percentage of NIB deposits to total deposits between 1984 and 2007 was 15%.
The sensitivity table below depicts what would happen to industry earnings if noninterestbearing deposits continue to contract and are replaced with higher cost funding sources. For dramatic effect, if the industry were to revert to the pre-GFC average noninterest bearing deposit mix of 15% and is replaced with current market rates, industry earnings would decline by ~20%. This re-mix of liabilities will continue to pressure the industry’s earnings while current sell-side estimates misrepresent this reality.
Higher rates aren’t just impacting the liability/deposit side of bank balance sheets but the asset side as well. When interest rates go up, the market value of fixed income securities and loans decline. In addition, there are significant credit issues facing the industry at a time when the industry lacks adequate loss absorption buffers (reserves, capital and profits) should credit materially deteriorate.
The biggest area of concern for most investors centers around Commercial Real Estate, especially office and retail properties in central business districts.
Commercial office real estate is being devastated by the
shift to remote work where leasing activity in the 1st quarter dropped for the third straight quarter, sinking 42% below pre-pandemic levels. Large vacancy rates are reducing cash flows at a time when many loans will have to be renewed at substantially higher rates. Some industry experts are forecasting a 30% to 40% loss in value of commercial office real estate in many of the central business districts, which will result in many borrowers choosing to hand the keys to the bank rather than doing a ‘cash-in’ refinancing.
As stress in the commercial real estate pipeline continues to build, it will take time before losses show up on bank balance
sheets. The uncertainty around the frequency and severity of CRE losses is cutting off access to credit to all but the highest quality borrowers, which will have a more immediate impact on aggregate economic activity over the next 12 months.
It is important to differentiate between banks whose CRE exposures are genuinely at risk of incurring losses, while considering an investment in those companies whose headline CRE exposures might appear unfavorable, but whose actual risk profile is much lower than headlines suggest. Interestingly, despite outsized commercial real estate exposure, many small banks’ office exposure will have low charge-off rates as they are typically located outside of the major metropolitan areas. Additionally, small banks are typically more conservative in their underwriting, demanding more upfront equity and personal guarantees.
One area of the bank loan market that has yet to garner much attention is the traditional commercial and industrial (C&I) space. Commercial loans typically carry a variable interest rate and are underwritten based on the underlying cash flows of the organization, or they are collateralized by equipment value. With each passing month, commercial borrowers face incremental pressure as their interest expense increases while the current disinflationary real estate environment pressures margins and collateral values. Most commercial loans have been underwritten in an environment where companies’ income statements were
incredibly healthy due to lower expense bases and higher fiscal support in the form of COVID relief. Most notably, we simply haven’t experienced a proper business cycle since the Great Financial Crisis and most business owners, similar to most investors, lack the knowledge to adapt to the realities of a
slowing economy. According to Epiq Bankruptcy, U.S. Chapter 11 bankruptcy filings have increased 68% in the first half of 2023 compared to a year earlier. The Bloomberg data below depicts the yearover-year change in bankruptcy filings for large and middle market enterprises, which shows
a drastic increase in the first half of 2023. Recent data on the consumer shows an incredibly liquid and, for now, resilient US consumer which has supported economic activity in the first half of the year. With interest rates set to be higher for a while, small business default rates should continue to move higher.
(Source: S&P Global, Bloomberg)
While there are many banks that have outsized CRE exposures, regulatory controls have limited the percentage of a bank’s capital that can be exposed to CRE. However, there are no limits to a bank’s exposure to commercial credit. Many regional banks that are in the news for CRE risks have only 20% of their loan book in CRE with more than 50% of their loan book in commercial lending. For example, KeyCorp (NYSE:KEY), a $197bn asset bank based in the Midwest which has been in the news recently on liquidity
and other concerns – not commercial lending related. The company has 14% of its loans in Commercial Real Estate while 54% of its loans are in commercial lending. Similarly, Regions Financial (NYSE:RF), a $150bn bank based in Alabama, has not been in the news often because its liquidity and capital position has been perceived as stable and thus has significantly outperformed the benchmark. Its CRE and Multi-Family loan book makes up 12% of total loans – with commercial loans at 53% of loans.
Summary
Unless interest rates drop dramatically, the banking crisis will lead to a high level of bank failures and consolidation within the banking industry over time. However, there are substantial value disparities between individual banks that are not understood by most investors and have not been reflected in stock price. Some banks will excel, including those with diversified business models that take advantage of market dislocation to gain market share or have superior credit profiles.
HOW THIS U.S. DEBT DOWNGRADE IS DIFFERENT FROM 2011
By Jeffrey Buchbinder, CFA, Chief Equity Strategist & Lawrence Gillum, CFA, Chief Fixed Income Strategist
It’s different this time. The four (or five) most dangerous words in investing. We’ll take the risk and use those words here as we break down the recent decision by credit rating agency Fitch to downgrade U.S. government debt to its second-highest rating, AA+ (note that several countries in Europe, including Denmark, Germany, Netherlands, and Switzerland enjoy AAA ratings, as do Johnson and Johnson (JNJ) and Microsoft (MSFT)). We compare the potential market impact of this decision to what markets experienced in 2011 when S&P issued its U.S. debt downgrade.
WHAT FITCH WAS THINKING
On August 1, one of the three main credit rating agencies, Fitch, downgraded U.S. government debt to its second-highest rating, AA+. The agency cited “the expected fiscal deterioration over the next three years, a high and growing general debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades” as reasons for the downgrade. The move was not a surprise after the rating agency warned in June that a downgrade was an option even after the debt ceiling resolution and, frankly, had been warning of a downgrade for years.
The move stirred up memories of the last downgrade of the U.S. government’s credit rating from Standard & Poor’s (S&P) back in 2011 (note that rating agency Moody’s still has the U.S. at Aaa, while S&P remains at AA+. As shown in Figure 1, the stock market sold off sharply in August 2011 on the S&P move. In fact, with a 19%-plus peak-to-trough decline in the S&P 500 that summer through early fall, the long 2010s bull market from 2009
to 2020 almost came to an end prematurely based on closing prices—though some investors considered 2011 a separate bear market.
Understandably, some investors got nervous this time with the Fitch news that markets might repeat that 2011 descent. While it’s dangerous in this business to think it’s different this time, below we discuss why it is. Not only that, the market reaction has been much more subdued since the announcement—the S&P 500 fell about 2% during the three days following the news when many were calling for a pullback before the Fitch move.
BOND MARKET MAKES MORE NOISE
While the stock market’s reaction to the Fitch news was well contained, the bond market has made a bit more noise. As you can see in Figure 2, since Fitch issued a negative outlook for U.S. credit in May, the 10-year yield has steadily marched higher, from 3.74% to 4.15%. Some of that move was driven by the market assigning a higher probability of a soft landing for the U.S. econ-
omy as inflation has fallen and heavy issuance of U.S. Treasuries by the federal government. But the 15 basis point (bps) move in yields from August 1 through August 3 clearly points to the impact of the Fitch decision and increased attention that news brought to the challenging task of putting the U.S. fiscal house in order.
While not necessarily wrong in its assessment, the rating downgrade itself will likely not have any material, sustained impact on U.S. government debt or markets broadly. The U.S. remains the safe haven during times of market stress and the downgrade will likely not change that, despite the jump in yields following the news.
WHY THIS ISN’T 2011
This all begs the question, what is different this time? One reason is we’ve been here before, which should limit any ripple effects in terms of further market reaction. S&P arguably carries more weight than Fitch and already made this move 12 years ago. Back then, S&P noted the downgrade “reflects our opinion that the … plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”
While that development came as an initial surprise to markets back then, stocks recovered in short order with the S&P 500 Index rebounding and finishing up the year more than 12% off those lows before gaining another 12% during the first quarter of 2012. While LPL Research believes stocks are due for a 5-10% pullback at some point between now
and year-end, we do not think the market has to go through a sharp correction again that we experienced in 2011.
This time is also different because the European debt crisis was raging in 2011 when many thought the Eurozone might break apart, an event that could have been extremely disruptive to global markets (remember when the financial industry was so focused on Greece?). That risk is well behind us.
We’re also battling inflation in the U.S. now, which is pushing interest rates higher following the most aggressive Federal Reserve (Fed) rate hiking cycle in decades. In 2011, the Fed held its target interest rate at zero and was doing quantitative easing (buying bonds) in the aftermath of the Great Financial Crisis (GFC) of 2008-2009. The Fed’s
balance sheet expanded in 2011, while it’s contracting this year. Investors’ psyche was also quite fragile coming out of that period as the GFC memories were still fresh, another big difference between then and now.
WHAT THE FUTURE MIGHT HOLD
While Fitch’s opinion in and of itself doesn’t matter all that much in the grand scheme of things, one potential reason why it could matter to investors is likely only administrative. The U.S. is officially split-rated, so accounts that have minimum AAA-rating requirements may have to change account documentation, but it will not likely result in forced selling. That said, continued fiscal expansion/deficits could result in additional downgrades from rating agencies. So, until the U.S.
government gets its fiscal house in order, we’re likely going to see additional downgrades.
The Fitch downgrade highlighted more than just the expanding deficit, with a targeted focus on the political backdrop, which it characterized as mired in paralyzing internecine politics. To be sure, the inability of both sides of the aisle to quell deficit spending has been a longstanding concern for Main Street, USA. The ramifications of allowing the debt to expand ultimately, unfortunately, include the need to raise taxes across the board and impair consumers’ discretionary income. Considering consumers are responsible for approximately 68% of the country’s GDP, higher taxes could certainly jeopardize economic growth in the future.
Another primary concern is the potential rise in interest rates
that would be required to attract buyers, including foreign buyers, into the U.S. Treasury market to help service the country’s debt. The U.S. has been fortunate that low interest rates have keep interest costs manageable in recent years (Figure 3), but this luck may run out. Interest costs to the federal government were just 2.3% of nominal GDP in the latest quarter, below levels observed in recent decades. Note that Treasury Secretary Janet Yellen has referenced 3% as a dangerous number in the past. Perhaps a better way to assess the situation is to compare net interest costs to tax revenue, as Dan Clifton, policy strategist at Strategas, has done. That figure is currently at 13% and rising, the highest level in more than 20 years, and comes at a time when the cost of debt for the U.S. government is still about half of what it was 20 years ago (3% vs. 6%). As the effective cost of U.S. debt rises—though hopefully slowly as government tax receipts grow alongside a growing economy and appreciating investments— the debt burden will become
more painful. This means spending cuts are eventually coming, along with tax increases. The question is when and how much. Allowing the deficit to expand at the current pace would bring into question the ability of the government to fund the benefit programs that the average citizen has paid into during their working years. Projections by the non-partisan Congressional Budget Office (CBO) for the next 10 years reveal just how dramatically the deficit could rise if the U.S. remains on its current path of, dare we say, fiscal profligacy (Figure 4). If tax revenues continue to trail government outlays, the deficit as a percent of GDP could jump another 2 points over the next 10 years at a time when the debt could be as expensive to service as its been in several decades.
INVESTMENT CONCLUSION
We all know the U.S. has a debt problem. We didn’t need Fitch to tell us that. But what Fitch did, and S&P before them, was shine a light on the need for us to contain spending to help
get the U.S. on a more sustainable path. This problem doesn’t have to be fixed right now, but the longer we wait, the more difficult the problem becomes to manage.
In terms of investment implications, we may see the 10-year Treasury yield above what we deem as fair value in the near term despite cooling inflation, before eventually settling back down in the mid-to-high threes if our forecast is right. A Fed pause is increasingly likely in September, which should help send rates down and prop up core bond returns.
LPL Research continues to like high quality fixed income here despite upward pressure on rates recently. We think core bond sectors (U.S. Treasuries, agency mortgage-backed securities (MBS), and short-maturity investment grade corporates) are currently more attractive than plus sectors (highyield bonds and non-U.S. sectors) with the exception of preferred securities, which look attractive after having sold off due to stresses in the banking system.
On the equity side, we do not expect the U.S. debt situation to cause the type of market volatility experienced in 2011. But LPL Research believes stocks have moved a bit past what is justified by fundamentals in the short term and a 5-10% pullback is overdue.
Overall, LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends a neutral tactical allocation to equities, with a modest overweight to fixed income funded from cash. Within equities, the STAAC recommends being neutral on style, favors developed international equities over emerging markets and large caps over small, and maintains the industrials sector as its top overall sector pick.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. As interest rates rise, the price of the preferred falls (and vice versa). They may be subject to a call feature with changing interest rates or credit ratings. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio. Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. The prices of small cap stocks are generally more volatile than large cap stocks. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
LPL Financial does not provide investment banking services and does not engage in initial public offerings or merger and acquisition activities.
ADVISOR
FEATURE BY JOE INNACE
SO MUCH MORE THAN MONEY MANAGEMENT
By Joe Innace
THE EVOLUTION OF BLUE LINE WEALTH MANAGEMENT
Brentwood, Long Island-based Blue Line Wealth Management is a niche financial services firm working mostly with law enforcement and their families. However, since its inception, the three-partner practice has expanded its business – by leveraging the talents and experience of two partners in particular –Jeffrey Greco and Sean Carey – to provide full-service advice to municipal and county employees.
“We mainly serve the rank-and-file union members of municipalities and counties,” Greco told Advisors Magazine in a recent interview. “These are hard-working, family people, the backbone of America in many ways,” he added.
For both Greco and Carey, it was natural to gravitate toward a client base typified by having good jobs, steady incomes, and excellent employment benefits. “We both come from families of civil servants and that’s how we understand the lives they’re living because we grew up that way,” Carey said.
Greco joined as a partner shortly after the company’s start, bringing 30 years of experience in the field of financial planning, wealth management, insurance, and retirement planning. He began his career as an independent insurance agent and stockbroker and then became affiliated with American Express.
“I was with AMEX initially as a financial advisor and then as a district manager and field vice president, over some 16 years,” he recalled. But he wanted to be an independent advisor and became the owner of JB Greco and Associates LLC, allowing him to partner up with Blue Line and other firms.
“My life’s work has been to help business owner’s, unions, municipalities and professional associations by developing and providing group benefit solutions, pensions, trusts, and insurance products to meet their current and future financial needs,” he said.
He explained that these are clients, for the most part, who live on a household budget, have children, own a home, and are
GRECO AND CAREY ARE FOCUSED ON THE FIVE PILLARS OF FINANCIAL PLANNING: INCOME AND EXPENSES (CASH FLOW), PROTECTION PLANNING (ALL INSURANCES, EMPLOYEE BENEFITS), TAX PLANNING,
RETIREMENT PLANNING AND ESTATE PLANNING.
JEFFREY
B. GRECO & SEAN T. CAREY
concerned about financing college. “These are the people looking for the most advice,” Greco said, “So, we get into discussing everything from debt planning, saving for college, retirement planning and more.”
As such, it’s not just about portfolios. Greco and Carey are focused on the five pillars of financial planning: income and expenses (cash flow), protection planning (all insurances, employee benefits), tax planning, retirement planning and estate planning.
“Working with clients, we address all five of those,” Greco insists. “We are not just a money management firm.”
He adds: “If you have a sound, comprehensive financial plan, you also need to have discipline and time. And time and discipline are two vital things we tend to discuss with our clients.”
Greco’s areas of specialty are investments, retirement plans, life insurance, group benefits, healthcare consulting and estate planning.
Greco’s credentials include Chartered Life Underwriter (CLU), Chartered
Financial Consultant (ChFC) Registered Health Underwriter (RHU), Certified in Long Term Care (CLTC), Registered Employee Benefit Consultant (REBC), and Certified Fund Specialist (CFS). He holds Series 7 and 63 licenses and offers financial planning and securities through LPL Financial.
Carey was a senior business consultant at Ernst and Young (EY) responsible for conducting risk assessments for many institutional clients. He is now a partner at Blue Line and holds the Series 7, 63, and 66 licenses with LPL Financial as well as life, accident, and health insurance licenses.
In addition to serving municipal and county workers, the firm’s client base also includes educators. “We’re very familiar with the many challenges teachers and staff members face such as lesson planning, childcare and the overall running of a household,” Carey said.
Similar to the full services available to municipal workers, a customized financial consultation for teachers,
Jeffrey B. Greco, Partner of Blue Line Wealth Management
Sean T. Carey, Partner of Blue Line Wealth Management
for example, might include an in-depth review, pension analysis, 403(b) planning, Roth and traditional IRAs, tax-managed accounts, estate planning, life insurance, and full step-by-step assistance with 403(b) account opening paperwork completion and submission.
Carey, meanwhile, can especially relate to a younger generation of first-time investors, which is another area of growth for the firm.
“We take pride in educating the younger generation on the powerful benefits of compound interest and the importance of getting started early with a dynamic financial strategy,” he said.
To help young investors get started on their financial journey, Blue Line offers, for example:
• No required minimum investment
• Personalized investment plans based on individual risk tolerance
• A mobile app for realtime monitoring of account performance
• Lifelong financial planning assistance
Blue Line’s third partner is Scott Frayler, who founded the firm to provide specialized financial services to those working in law enforcement. That remains a central piece of Blue Line Wealth Management’s business, as the name still implies. Greco and Carey, however, have widened that original niche to effectively include all other -- non-police -municipal and county workers.
The three partners all provide financial planning and securities through LPL Financial, and the Blue Line Wealth Management website includes the latest research reports, podcasts and
other market thought leadership from LPL.
According to the United States Census Bureau Annual Survey of Public Employment & Payroll (ASPEP), education and police protection consistently rank among the top four job categories across the nation. But other municipal and local employment categories— from fire protection to highway/ infrastructure workers, to county parks and recreation personnel and more, all share a bond for uniquely tailored financial services.
Workers in such roles also tend to share good experiences with colleagues -- and referrals are fueling Blue Line’s ever-growing client base. “It’s imperative to
always do the right thing for our clients,” Greco emphasizes.
For example, when it comes to retirement planning and more, Greco says the firm helps clients “understand what it is they need to do to get to the point where they want to be.” Carey adds: “Whatever their goals, we help them get there, managing expectations as we work to make it all happen.” Greco says that usually means some adjusting along the way. “And that’s when and where the discussions take place around what’s realistic and doable— always with the client’s primary goals in mind.”
For more information on Blue Line Wealth Management, visit:
bluelinewealthmanagement.com
By Brian Bontomase
THE TRIATHLON OF LIFE UNITY AND OVERCOMING ADVERSITIES
Embracing the Motto
“Leave No Man Behind “
Imagine a race like no other—the Triathlon of Life. A journey of endurance, unity, and triumph. Our victories and adversities are shared chapters in a story of collective resilience. Guided by the motto ‘No Man Left Behind,’ we discover that success is not a solo pursuit; it’s about uplifting one another.
We find ourselves running together, stride by stride, with countless fellow participants. Creating an extraordinary symphony, transcending borders, cultures, and backgrounds. A leadership about synchronizing our
steps, supporting, and lifting one another as we navigate the ups and downs of our shared journey.
Embarking on a race of unparalleled proportions! A journey demanding unwavering strength, resilience, and determination where the gold medal at the finish line is not the ultimate reward. The true essence lies in bringing others alongside us, ensuring that no one is left behind, defining the very purpose and significance of this grand race.
The pursuit of success takes on a profound dimension. We come to understand that success is a collective triumph. We celebrate
not only our personal victories but also each other’s accomplishments. We recognize that their success is intrinsically linked to our own. Together, we cross the finish line, hearts ablaze with a sense of accomplishment and gratitude.
In the face of adversity, the strength of our unity truly shines. When one among us stumbles, when circumstances threaten to overpower, we stand united with unwavering determination. No challenge is insurmountable, no adversity too daunting. Our journey transforms into a testament to the indomitable strength and resilience of the human spirit, inspiring hope even in the darkest moments.
A powerful principle: ‘No Man Left Behind.’ This rallying cry, reminiscent of the ethos of the heroic Seal Team 6, encapsulates our unwavering commitment to
unity and support. We pledge to uplift and empower one another, understanding that shared victories and triumphs are amplified through collective effort. We refuse to abandon our companions. Instead, we extend compassion and strength to those who falter. Together, we surmount challenges that once seemed insurmountable, forging an unbreakable bond that transcends boundaries.
Let’s treasure our victories, learn from adversities, drawing inspiration from the unity and resilience that define our journey. Let the motto ‘No Man Left Behind’ illuminate our path, motivating us to overcome any obstacle that lies ahead.
This journey invites us to embody the essence of humanity: the power of unity, compassion, and collective triumph. As our footsteps echo through the corridors of history, may we stand as a testament to the unyielding spirit of humanity.
In this extraordinary race, diverse individuals from around the globe converge sharing purpose. Their
stories weave together, creating a narrative of determination, resilience, and unwavering support. A beacon of hope—a reminder of what’s possible when we cast aside differences and work towards a common goal.
As we navigate life’s challenges, moments arise that test our limits where our unity shines.
Once insurmountable adversities are no longer solitary burdens but shared challenges. When one faces hardship, the collective rallies, offering solace, encouragement, and the reminder that they’re not alone. Sharing each other’s burdens forming a network of support that transcends time and distance.
Success is no longer a personal achievement but a collective experience. It’s about crossing the finish line with others.
Reflecting on this remarkable race, the power to effect change resides within us all. The Triathlon of Life encourages us not only to seek personal glory but to extend a hand to those who need it most. By
embracing the motto ‘No Man Left Behind,’ we commit to nurturing a world where compassion, unity, and support reign supreme.
In conclusion, embrace the profound lessons of the Triathlon of Life. Celebrate all your victories, while fostering unity and compassion. Let’s rewrite the narrative of our world, replacing division with harmony. We’re not alone; we’re a global community, bound by a common purpose and fueled by an unwavering belief in the transformative power of unity.
So, lace up your shoes, take a deep breath, and join us in the journey of the Triathlon of Life.
Let’s make a lasting unforgettable impact!
The world anticipates our united strides, our collective strength, and our unwavering commitment to a brighter tomorrow. Let’s embark on this extraordinary race, hand in hand, and create a legacy that inspires generations to come.
Godspeed on your journey, Brian Bontomase
By BoBBy Gaydos, Founder oF Pandella
Why Individual Life Insurance Is a Smart Investment for Young Employees
For many people, the Covid-19 pandemic left a deep impression of just how uncertain and fragile life can be. So much so that according to one 2023 study, 39 percent of consumers said that they intend to purchase life insurance coverage within the next year. While that might not be too surprising, what is surprising is that this intent to buy was particularly high among Gen Z adults and millennials, 44 and 50 percent respectively.
What makes this surprising is that for the last 20 years, the number of young adults purchasing life insurance has been in decline. Now that those tables appear to be turning, I feel that this is a good time to further impress on people why having a life insurance policy is
so important. It’s not just about having financial protection, it’s also about investing in yourself. And for young adults, that investment can really pay off in more ways than one.
How life insurance lost – and regained – its luster
Before getting to why life insurance is a good investment at an early age, it’s worth examining the factors that have shaped public perceptions of life insurance. Historically, individual policies have had a strong appeal, but that appeal began to taper off in the 1990s due to two key factors.
The first factor was that, beginning in the early 1990s, a number of life carriers began advocating the concept of “buy term and invest the difference.”
In plain speak, this means buying term life insurance and investing the difference between that amount and what permanent life insurance would have cost in something with a higher rate of return.
On the face of it, there’s nothing groundbreaking about this concept. Buying term life insurance and investing the difference is what life carriers have always done when they issue a permanent life policy to an insured person. The carriers are essentially buying a term policy for that person and channeling the excess funds into an account that grows tax-deferred. After about 11 years, this process makes the policy self-sustaining for the rest of the policyholder’s life.
The problem was that many
people didn’t have the discipline to invest the difference. They would sign up for term policies but fail to consistently invest the difference each month. This meant they missed out on creating a sizable savings account for themselves. Then, once their term policy ran out, they were left with nothing. Many people experienced this exact scenario in the late ‘90s or early 2000s, and it soured their perception of life insurance.
The other thing that happened was that, during this time, prevailing low-interest rates influenced investment choices. For example, life insurance had relatively moderate returns due to low-interest rates. By contrast, the stock market promised much higher returns for the same level of investment, making it a far more competitive choice for investors. As a consequence, life insurance became less popular as an investment vehicle.
However, the tide is now turning as we transition beyond the era of low-interest rates. It’s likely that we will never see interest rates that low again in our lifetime. Instead, we’re going to see what might be considered more normal rates of 6 or 7 percent, if not more than that. This means that life insurance is going to increasingly look like a good investment by comparison. You can already see this happening with annuity sales, which have increased by 12 percent year-overyear due to their attractive interest rates.
The same will happen with life insurance, which not only now has high returns but also makes for a stable investment because the industry is so highly regulated. In my view, those factors, plus any health concerns that young adults may feel after the pandemic, will lead to a huge surge in life insurance purchases over the coming years.
The power of early investment
While there are a lot of good reasons for purchasing an individual life insurance policy at a young age, the three big ones are lower premiums, compounding interest, and tax-deferred growth. Let’s take a closer look at each one of these in turn.
The first, lower premiums, becomes obvious once you understand how premiums are set. When purchasing a life insurance policy, whether it’s a 10-, 20-, 30year term, or a whole life insurance plan, the insured person pays premiums at the issue age for the duration of the policy. This means that people who buy whole life policies at age 30 will continue to pay the same premiums even when they reach their 60s. That’s a huge advantage compared to buying a policy at age 60 when the premiums will be substantially higher.
The second, compounding interest, derives from the cash value mechanism in permanent life insurance policies. All permanent insurance policies accrue cash value: a portion of each premium payment goes into the policy’s cash value account. Over time, this cash value account grows with compounding interest and the earlier someone acquires a policy, the more time compounding interest has to work its magic. I can’t really overstate how powerful this is. I’d even say the difference between compounding interest for 10 versus 30 years can mean 50 times the ultimate payout.
Lastly, you’ve got tax-deferred growth. In general, the cash value in a permanent insurance policy grows on a tax-deferred basis, meaning you won’t have to pay taxes on the interest or dividends it earns. This allows the insured person’s money to grow much faster than with a taxable
investment with a similar interest rate. However, in some cases, taxes may apply to withdrawals and policy surrenders.
The trick to avoiding any taxes is to ensure any proceeds gained from a withdrawal or policy surrender do not exceed your total premium payments. Anything above that will be taxable as ordinary income. But if you play your cards right and never withdraw more than your premium amount, you will have a tax-deferred savings account that can be used to cover medical expenses, a downpayment on a home, or anything else you desire. Combined, these advantages make life insurance a great investment for young adults. But to really enjoy all these benefits, your chosen policy needs to be permanent life insurance with a cash value mechanism. Moreover, while the advantages of lower premiums, compounding interest, and tax-deferred growth are substantial, there’s also the death benefit. This means that even if you don’t live to enjoy the accumulated value of your policy, your beneficiaries will still receive a payout.
Final thoughts
As the tides shift again toward life insurance, it’s clear that this once-overlooked benefit is undergoing a renaissance. The historical decline in life insurance usage, largely driven by lowinterest rates and a focus on immediate gains, is now giving way to a more forward-looking approach by younger generations. With the advantages of highinterest returns, affordable premiums, compounding interest, and tax-deferred growth, life insurance has become a smart investment for young adults.
Productivity
Recent studies all point to one conclusion that impacts employers across the U.S.: The majority of employees worry more about their finances, now more than ever. That stress makes them less productive today, and every day. In fact, 15.3 hours of productivity and engagement are lost by each financially-stressed employee each week. And that affects the bottom line.
The Harmonize™ Retirement Planning Program partners with Vanguard® to customize retirement plans to fit the needs of each individual at every level. To find out more, contact Pat Harmon at harmonizefinancial.com.
The sooner you start, the sooner your workforce gets more productive.
