The Neglected Partof Your Net Worth

According to the US Federal Reserve, US households hold $114 trillion in assets and $16 trillion in debt. Of this $130 trillion in total items to manage on our balance sheets, cars account for roughly 5%, bank deposits 10%, and houses 20%. Of the 65% remaining, 10% resides in closely held businesses, 20% in employer-based retirement plans (pen-sions and 401[k]), 20% in direct stock holdings and mutual funds, 10% in mortgages, and the remainder in credit cards, student loans and other smaller ledger categories. Therefore, of the total, only 20% of US household balance sheets are available for management by non-institutional asset managers. Relegated to only the liquid assets, tradi-tional asset managers only really impact 20% of a client’s balance sheet. This leaves 80% unattended. Even if W&A had historic long-term investment returns managing this 20%, without cooperation from the other 80%, clients’ overall financial health may suffer. For W&A to truly perform and provide value for our clients, we must engage the entire balance sheet. Recognizing this, we changed our service model 25 years ago from just managing our client’s investable assets, to managing our client’s net worth. As we draw closer to the end of this economic and bull market cycle, here is what we are telling our clients to do with the other 80%:

THE STRATEGISTSUMMER 2018

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Traditional asset managers only really impact 20% of a client’s balance sheet. This leaves 80% unattended.

David Waddell, CFP® PRESIDENT & CEO

Senior Investment Strategist

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$ 1 1 4 T R I LLI ON A S S ET S

$ 1 6 T R I LLI ON LI A B I LIT I E S

MUTUAL FUND HOLDINGS

20% YOUR HOUSEIf you square-footage and inflation-ad-just residential real estate prices across the US, housing values haven’t risen much in the last 100 years. Therefore, the calculation on how much house you can afford should rely entirely on the carrying cost of holding that real estate as a use asset rather than as an investment asset. However, residential real estate prices have appreciated off the February 2012 lows by 47% and stand 6% above their pre-crisis highs hit in June of 2006. This late in the economic cycle, if you plan to sell your home within the next 36 months, con-sider contacting your realtor. For those contemplating purchasing a property, consider holding your powder dry un-til the economy recesses. Not only will you have more homes to choose from, they will trade at a discount. 20% YOUR CORPORATE RETIREMENT PLAN The most attractive feature of corpo-rate retirement plans is not the tax de-ferral, but the forced savings discipline it imposes upon its owner. Unfortu-nately, many participants over-trade their plan assets or vary their contri-butions. Resist this temptation as your automated and consistent savings will take advantage of market declines, unlocking the benefits of dollar cost averaging over time. Most plans offer target date retirement funds now, and that’s not a bad way to invest if you do not have a professional advisor mak-ing specific holdings recommenda-tions. In short, participate in full, stick with your deferrals, and do not try to time markets.

10% YOUR CLOSELY HELD BUSINESSPeople do not pay nearly as much attention to the valuation changes in their closely held businesses because their prices do not post in the Wall Street Journal. In truth, the value of your closely held business swings

more widely than the publicly traded entities given its illiquidity (if there are no buyers, the value is zero). Over the past five years, global private eq-uity funds have raised over $3 trillion. Under pressure to put this money to work, private equity funds have been paying record multiples for closely held businesses, raising exit prices for everyone. Simply put, if you plan to sell your business within the next 5-7 years, do it now.

10% YOUR MORTGAGEMortgage rates have only risen slight-ly off the generational lows reached in November of 2012. Right now, the average 30-year fixed mortgage rate in the US is 4.42%. There are many reasons to utilize mortgages, from in-vestment opportunities to cash flow to liquidity needs. I am not fond of the typical investment case, based on the idea that your house will appreciate greater than 4.42% a year after expens-es. Historically, on average, this hasn’t happened. Sometimes with disparities between market returns and mortgage rates, there are potential arbitrage op-portunities for a client with liquidity. For the vast majority of Americans, however, a mortgage allows the pur-chase of a large asset with a monthly payment that fits into the current cash flow available to the buyer. As inter-est rates fluctuate, cash flow increases, or situational wealth occurs (bonuses or gifts), you have an opportunity to rethink the mortgage in your world. Therefore, this 10% should be dis-cussed with your wealth strategist reg-ularly as part of your overall financial plan – no “one size fits all” here.

10% YOUR DEPOSITSIn our experience, people in their earnings years tend to hold too much cash. You should retain a balance to service your bills and cover the un-expected, but more than 3-6 months expenses can cost you. Inflation may only be 2% currently but the average interest rate across savings, checking

and short-term CD’s is 1% meaning you are actually losing 1% annually on your cash balances. You can do better. If you are retired and in the withdrawal phase, you should work with your professional advisor to develop an appropriate cush-ion against downside volatility.

10% YOUR OTHER STUFFThis bucket contains the value of your car and the debt associated. Planners differ on how to approach automo-biles. I look at cars as use assets and therefore tend to lease mine…which reduces my monthly payments and helps me avoid paying sales tax which bites hard in Tennessee. I also like to trade out my cars every 3 years. The longer you plan to have the car, the more attractive buying becomes as you will eventually own it free and clear.This bucket also contains credit card debt. Get rid of it. If you would rejoice with 15-20% investment returns, why would you keep paying 15-20% interest on your credit card balances? Pay off your balances and use a card that re-quires monthly payoffs (like an Amer-ican Express). Building up miles and having detailed expense accounting makes sense, paying anything higher than 5% on credit card debt does not …if you can avoid it.

BOTTOM LINE: While people closely monitor (some obsessively) their liquid investment accounts, these only account for 20% of your net worth, on average. You should definitely have an investment strategy (or strategist like W&A) but do not neglect crafting strategies (or working with strategists like W&A) for the other 80%. Remember, the point of the exercise is not to “beat the mar-ket”, but to maximize your net worth!

Sources: US Federal Reserve, Case-Shiller, Dealogic, Bankrate

BUY-SELL AGREEMENT: The buy-sell agreement is the busi-

ness version of a combined prenuptial agreement and last will and

testament. This document comes into play when an owner leaves.

If the departure is for a new opportunity, it works as a prenup

and spells out buyout and non-compete provisions. In the case of

retirement, disability, or death, it acts as a will to determine the

amount and timing of payments to the former owner and allow for

an orderly transition of ownership to the next generation inside

the organization.

Buy-sell agreements are often ignored or poorly drafted because

they are expensive and require prospective partners to shift their

focus from the big bright future to what could go wrong. Spending

too much of your time in the beginning focusing on attorneys and

worst-case scenarios can certainly rain on any business-startup pa-

rade. However, working through these issues early instead of when

emotions are high, and an unexpected event is in process, could

mean the difference between the continued success of a business

and its downfall.

Buy-sell agreements require a valuation metric, which estimates

what the business is worth, and a funding mechanism, which pro-

vides the cash flow for the business to change hands. A good buy-

sell agreement uses realistic assumptions, is reviewed by an inde-

pendent party periodically, and is priced so remaining owners can

payout the former owner (or family) while the business continues

to operate. The agreement should be funded with life insurance,

or payment terms should be long enough to ensure the business is

able to operate after the loss of the key member (but short enough

that the former owner is confident of being paid).

OPERATING AGREEMENT: An operating agreement outlines

what is usually not needed within a family: who has control, who

protects the rights of the minority owner members, and who al-

locates the profits. The operating agreement can strengthen the

buy-sell agreement by restricting transfer of ownership.

BUDGET: We encourage every Waddell & Associates client fam-

ily to develop a budget. Even if their balance sheet is ample and

their cash flow is plentiful! Why? Data. Accountability. Family

goal setting and achieving. The list goes on and on. Every business

should have one as well, even if cash flow is plentiful and growth

is expected to continue for many years. Unfortunately, like many

families, many businesses do not have a budget. Annual budgets

set funding targets for key initiatives and help gauge success. The

budget process is also a good time to review that adequate liquidity

is in place through lines of credit and reserves. As we approach

the ten-year mark on this economic expansion, the budget process

should also review current debt levels and assess whether it’s time

to delever a bit. Remember, even if you decide to reduce levels of

debt, consider leaving the lines of credit open so that you retain

access to the capital if it is required during tougher times.

Small Business SurvivalBusinesses are like families. Most begin their journey filled with excitement and a

grand vision of the future. However, over time, the real-world sets in and so do the real issues,

such as retirement, disability, death, or divorce. Likewise, business owners must someday retire,

are sometimes blindsided with horrible disabling health events or even death, and business

partners do on occasion enter disagreements that end in the dissolution of the partnership. Es-

tablishing ground rules prior to starting a business is essential to working through these difficult

issues over the life of a business.

SUMMARY: Your business is often the most valuable asset on your balance sheet, has a greater impact on your net worth, and has an even

greater impact on your goals than do your liquid investments. You, your family, and business partners need to be protected in the event of

your death, disability, or “business divorce”. If you already have a buy-sell agreement, operating agreement, and budget in place – Congrat-

ulations! But be sure they are reviewed and updated at least annually. If you do not have these items in place, call us and we can help you develop your

strategy before visiting with your attorney. And remember, when choosing your attorney – cheap agreements lead to expensive problems!

The following are three documents that every business should develop as part of their plan for SUCCESS:

Perry Green, CPA/PFS, CFP®, CFA®SENIOR VICE PRESIDENT,

Senior Wealth Strategist

Study Your Cell Phone Service OptionsDiscuss international roaming rates with your carrier and find alternate options to use with Wi-Fi like Skype and WhatsApp

Select Travel-Friendly Credit CardsMany credit cards charge 2 to 4 percent for charges made outside the United States

Shop Your Exchange RatesIn some countries it is best to leave the airport and go to a popular commercial area to find the best rates

Store Important DocumentsOnline encrypted “safety deposit box-es”, like our eMoney Vault, can provide online access to important documents like travel insurance, copies of passports, and powers of attorney for both you and your trusted individuals back at home

SOURCES: FORBES, NERDWALLET

· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·Financial To-Do’s Before Traveling Abroad

· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·

· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·Financial To-Do’s Before Traveling Abroad

· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·4SPOUSAL SOCIAL SECURITY BENEFITS:

Years That Matter· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·

1 YE ARthe amount of continuous

marriage required before a person is eligible to receive spousal

Social Security benefits

· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·

2 YE ARSthe amount of time you

must be divorced from an ex-spouse before you are eligible to receive ex-spousal benefits without

your ex-spouse also receiving a benefit

· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·

10 YE ARSthe amount of time you must have been married to your

ex-spouse in order to be eligible for ex-spousal benefits

Kathy Williams, CFP®, CDFA®SENIOR VICE PRESIDENT

Senior Wealth Strategist NATIONAL SOCIAL SECURITY ADVISOR

CERTIFICATE HOLDER

Source: ssa.gov

- Will they know where to find your original last will and testament? Will they have access? - Will they have the funds available immediately to pay for your funeral services?- Will they have contact information for your business associates and friends?- Will they know what you own and what you owe? - Will they have access to your important information and documents?- Will anyone try and take advantage of their emotional state? - Who will they lean on to help them make wise decisions? - Will their living arrangements change?- Will their monthly income flow change?

Will Your Family Feel Loss… or Lost?

Recently I sat down at the computer to plan our family’s next Fourth of July celebration. I closed my eyes to recall images of celebrations past and a scene from my early childhood appeared. A neighborhood kid, little Mikey, had discarded a bright and blazing sparkler in our family’s bag of unused fireworks. The result: absolute chaos and panic, followed by hours of ribbing and laughter. Other happy moments quickly shuffled through my mind: grill-master successes (and fail-ures), pool parties, potato salad, citronella candles, and then suddenly… baked beans. I realized in that moment that there had always been one constant among all the Independence Day celebrations of my past: my father’s baked beans.

This year will be the first year that those baked beans aren’t front and center on the table in a blue cornflower Corning Ware dish. My father passed away a few months ago and that recipe passed away with him. Even though I watched him make that dish dozens of times, I never wrote down how. I could guess, but it will never be exactly right. That knowl-

edge was his and his alone and now I must also mourn the loss of the family tradition of those baked beans.

We were given the gift of time with his passing because as his illness progressed, his business details were recorded and archived. Only the typical details of an estate were left to manage. I am incredibly grateful these days that in my quiet moments I am free to dwell on a small detail like a family recipe. I can calmly deal with the feeling of loss. 

I know from other family experiences with death, and from working with my clients over the years, that we are not al-ways given the gift of time. A quick look at the CDC website reveals that three of the top five leading causes of death in the United States are heart disease, stroke, and unintentional injuries. These three rarely offer us the gift of time to plan for the loss of our loved one. Sudden events that lead to the loss of a close family member often force grief to take a back seat while we deal with a feeling of being lost.

Teresa Bailey, CFP®, CDFA®Wealth & Development Strategist

What about your family?Take a moment now and close your eyes. Imagine your own family receiving the call that something has happened to you. Think of all that you know that will have departed along with you. Consider all that you do every day that will no longer be done by you.

In thinking through the answers to the questions, would your family be free to feel the loss, or would they be utterly lost without you? Would they be gathered around the kitchen table sharing memories of you, or digging through stacks of papers, tired and frustrated, resentful of the long list of confusion ahead? With so many tools and resources available for you to have the questions answered for them, is there any reason why they should be left to feel lost?

Please contact us to obtain a copy of our Form ADV disclosure document. Contact Tee Meeks, CCO at tee@waddellandassociates.com for further inquiries regarding the information provided in this newsletter. Disclaimer: This newsletter represents the opinions of W&A and our associates and is for informational purposes only. It is not intended to be construed as tax or legal advice by the recipient. Data reported in this newsletter has been compiled from various sources which are provided after each article. Past returns of investments are no guarantee of future results. www.waddellandassociates.com | phone 901.767.9187 | toll 800.527.7263 | fax 901.767.0056