[caption id="attachment_34407" align="alignright" width="324" caption="George McCuen, Ed Osborn, Ron Wargo and John Whiting "][/caption]

NORTH BAY -- The North Bay Business Journal asked wealth advisers for some advice in the continuing uncertain economic time.

Questions included:

What should clients and potential clients know about today's economic climate in terms of wealth management that differs from six months ago, a year ago and five years ago?

What are the questions clients are asking?

What are things to do and to avoid doing in regards to investment portfolios?

The advisers are presented alphabetically.


Michael Gradl is the senior vice president of Investment Services at Redwood Credit Union. He has more than 20 years’ experience in the financial services industry, and has managed Redwood Credit Union’s Investment programs since 2005.

Mr. Gradl's answers:

1. Those seeking to invest should understand the economic environment is changing constantly, and it plays a role in short-term portfolio performance. It’s important to stay focused on the long-term journey and not be distracted by short-term fluctuations. The U.S. is slowly coming out of the recessionary environment, however, until housing stabilizes and employment improves, we may continue to experience volatility in the capital markets.

This perspective hasn’t changed much from six months ago, however the issues in the Middle East, the significant increase in oil prices over the past year, and the Federal Reserve’s quantitative easing program coming to an end have shaken the confidence of many investors.

Five years ago there was a different economic picture with much leveraging of assets and a more confident outlook on the future of wealth accumulation. Those with a widely diversified investment portfolio weathered the storm much better than those who became overburdened with debt when the housing crisis took hold, which is a good lesson learned.

Finally, the U.S. economy is driven by consumer spending, and consumer spending fell sharply during the recession. Consumers have been reluctant to spend as unemployment remained high, but there are some signs lately that consumer spending is rebounding. This will bode well for further economic recovery.

2. After seeing my investment portfolio diminish during the down economy, how and when can I retire, and what can I expect for a retirement lifestyle? I hear a lot about commodities, gold and hedge funds. Do these things make sense for me to invest in? Gas and food prices have gone up – how does all of this inflation affect me and my savings and investment goals?

At RCU, our CFS Financial Advisors respond to these questions only after listening closely to better understand each individual’s unique financial situation and goals, in order to determine the best solution based on his or her individual circumstances.

3. One of the worst ideas, now or at any time, is to put all your eggs in one basket and/or speculate on areas of investing where you do not have the appropriate knowledge to make sound investment decisions, or don’t have access to a professional who has the expertise to advise you accordingly.

One of the better ideas at this time is to continue to invest in equities in a diversified manner and balance your approach, since “traditional” investments such as CDs, treasuries and money markets will not maintain your buying power (inflation) over a longer-term period.

Also, be sure to work with an investment advisor that you trust—that’s a key principle many people strayed from prior to the recession, and we continue to remind people about the importance of working with a trusted financial partner.


4. At RCU, we help people look at their entire financial picture, not just the immediate desire to make strong returns on their investment portfolios. Although that is also our aim, we take a holistic approach to helping them save money. For instance, we’ll look at their loans and credit cards with other lenders, and often we can help them refinance and save a tremendous amount of money—which helps increase their cash flow so that they can save for their future with confidence. By reviewing their entire financial situation, we can help them save more, manage their funds wisely to reach their financial goals and dreams, and achieve financial wellness and peace of mind.


George McCuen is the founder and president of Napa Wealth Management. He is a Certified Financial Planner and has been working with medical professionals and individual investors since 1987.

Mr. McCuen’s answers:

Six months to a year ago economic news was highlighting the inflation concern in China -- an economy that serves as an indicator of global economic activity. China’s GDP was estimated to grow 9 percent in 2011, their central bank ordered banks to cut back on lending for the sixth time in 2010 and China’s money supply was soaring sprouting concerns that inflation would be difficult to tame.

Our stock market was continuing its rise from the July 2010 low; it dropped 16 percent from the highest point since the 2008 crash hit in April 2010. These developments were illuminating the beginning of a global economic recovery.  The mindset of investors six months to a year ago focused on their imagined concern that the dollar is losing purchasing power and the Fed’s money printing will cause an upward trajectory of debt that will collapse our economy. This couldn’t be further from the truth.

Five years ago, the maxim was “Leverage your way to wealth!” It almost seemed un-American not to be encumbered with at least two mortgages on your home. In 2006 housing prices hit their peak while banks were throwing money at homeowners. Real estate seemed like the only asset class that would not decrease in value, at least not decrease by much and if so, not for long.

Today’s economic climate is rough but it is on the mend and I believe that stocks offer investors an attractive return relative to bonds and cash.

Here is one simple case for stocks: when I examine the dividends being paid from the 389 stocks of the S&P 500 that pay dividends, their current yield is 2.22 percent. The yield from the 10-year Treasury note is currently about 3.2 percent.

The dividends from the stocks pay the investor 1 percent less than the Treasury. In other words, you can loan the U.S. Government your money for 10 years and rest assured they will pay you 3.2 percent and all of your principal, and nothing more. If you invest in the 389 S&P 500 dividend paying stocks, you will not only receive your dividends, but you will have ownership in every company in which you hold stock.

I am not suggesting that you invest in the aforementioned stocks, I am simply offering one example to consider when you evaluate where your investment dollars will settle.

Nobody knows where interest rates are headed in the future, but it is reasonable to assume that they are not moving lower over the next 10 years. If you buy bonds at these low interest rates and don’t intend to hold them to maturity when interest rates rise, the bond values will decline. Well selected and researched stocks make for a more sensible long-term investment solution in this environment.

Mistakenly, many investors look at trailing indicators to form their hypothesis regarding the stock market’s direction. One could surmise that since the unemployment rate is high, the economy is weak resulting in a lackluster to declining stock market.

‘Why is the stock market moving higher?’ is the most common question from clients. The short answer is the Fed is buying assets from the Primary Dealer banks in the form of Treasuries. This is money that the Fed hoped would funnel through the banks to consumers and businesses. The banks are buying stocks and other assets because they view the consumer as a higher risk bet than stocks. This increases wealth for those who own stocks (e.g. our pensions hold stocks) so keeping asset prices higher engenders a euphoria that lower prices don’t. This instills confidence in investors and that makes our government and Fed officials happy so they repeat this process -- until the end of June that is.

The worst thing you can do with your investment dollars is buy long-term bonds or bond mutual funds that have a long-term average duration to maturity.

This is not a time to bury your head while waiting for the market to drop before investing. The S&P 500 has gone up approximately 80 percent in the past two years. The easy money was earned from March 2009 until now. But investors must be cautious. When the Feds stop their economic stimulus known as quantitative easing in June, the market could subject investors to some serious volatility.***

Ed Osborn is the co-founder and the chief investment officer of Bingham Osborn Scarborough, a Bay Area-based wealth management firm with offices in Healdsburg. He is also an attorney.

Mr. Osborn said:

First, the estate tax has been lowered significantly and the estate exemption has been increased significantly, making it easier to pass on a greater amount of assets to heirs free of estate tax.

Second, interest rates are at historic lows, and returns on fixed income investments over the next 20 years may be substantially below their long-term historical averages. This results in increasing challenges to more conservative investors who are dependent upon yields on fixed income securities.

Third, in an increasingly globalized world, there is an increased risk of having all of your assets denominated in a single currency, even if it is the U.S. dollar.

Fourth, corporate earnings have recovered rapidly over the past 12 months, far in excess of consensus earnings forecasts of a year ago. The rise in stock values has paralleled this unexpected rise in earnings. This means the stock market may be very vulnerable to any earnings disappointments.

Fifth, the end of federal stimulus spending, combined with an increased desire to cut government spending and limit federal and state deficits, may result in slower economic growth and persistent high unemployment over the next five years or more.

Sixth, fears over the future of the Euro, the U.S. Dollar and other currencies has resulted in a dramatic rise in the price of gold. Over the long term, gold prices tend to rise at the rate of inflation, and the recent dramatic upturn may indicate increased future volatility in precious metals prices (witness the recent rise and decline in silver prices.)

Seventh, large federal deficits and quantitative easing by the Federal Reserve (putting liquidity into the financial system by the Fed purchasing debt obligations in the market) run the risk of long-term inflation and rising interest rates.

The single worst thing investors can do is fail to diversify their investments in an increasingly uncertain world.

The best thing they can do is to build broadly diversified portfolios with costs carefully controlled, and to do so in a patient, disciplined manner which ignores the “hot fads” of the day.

Even though the economy is recovering and unemployment has stabilized or is dropping, there is a sense of fragility in both the financial system and the broad economy. It reflects a rise in uncertainty in the financial world; a sense that there is a broader range of potential outcomes than normal, ranging from out-of-control inflation to deflation and economic contraction.

This normally results in an increase in market volatility, as investors swing back and forth from optimism to pessimism. In this kind of world, there will be a premium on keeping your head on your shoulders, and avoiding either panicking or blindly following the latest craze. It requires a tough patience and discipline and a firm understanding of history and market behavior. This is a time when knowledge will be all important.***

Ronald P. Wargo is a partner in the law firm Friedemann Goldberg in Santa Rosa. He practices in the areas of estate planning, business law, and intellectual property. He is certified as a specialist in estate planning, trust & probate law by the California Board of Legal Specialization of the State Bar of California.

Mr. Wargo’s answers:

Those with significant wealth should understand that the lifetime gift tax and estate tax exemption amount has been increased to $5 million per person, effective Jan. 1, 2011. This increase is only scheduled to last for two years, at which time the exemption drops back to $1 million per person. Congress may permanently increase the exemption amount in 2013, but no one can be truly sure what will occur. This means that clients may have a limited amount of time to use their increased lifetime gift exemptions.

Six months ago, we had no idea what was going to happen with the estate tax. Although clients who died in 2010 paid no estate tax, the $1 million gift and estate tax exemption was scheduled to return in 2011, and we were preparing clients for that possibility, while still holding out hope that Congress would address the issue. It made for a very challenging year.

A year ago, we were dealing with the one year repeal of the estate tax. Most practitioners did not think that repeal would actually occur. As the year progressed, it became evident that Congress would allow at least a one-year appeal.

Five years ago, we were planning for the increased estate tax exemption, which was scheduled to rise to $3.5 million per person in 2009. This increase required a careful review of certain estate plans designed with a lower exemption amount. Clients with generation-skipping transfer tax issues (essentially, transfers to grandchildren) also had to consider the possibility of an outright repeal.

Clients are asking will the estate tax apply to me? How can I protect what I have? Is there anything more I should be doing?

The single worst thing to do would be to follow the crowd and invest in the latest popular thing. Financial advice is easy to obtain, but it is hard to separate the wheat from the chaff.

The best thing a person could do is to talk with a trusted financial planner or other investment adviser.

We are not out of the woods yet, but we do have a breather. There is still plenty of estate and gift tax uncertainty. Some of us fear that the estate tax uncertainty could continue for years, with patches enacted at the last minute every two years, similar to what occurs annually with the Alternative Minimum Tax.

Clients and their advisers must maintain continued vigilance, reviewing and re-reviewing their plans, until Congress reaches a final solution.***

John Whiting is a partner at Moss Adams Wealth Advisors and is a certified financial planner.

Mr. Whiting’s answers:

Throughout time, there have always been economic and political issues that create uncertainty. This period is no different. Successful wealth creation occurs when people keep an eye on their long-term goals and avoid the temptation to act or react, to what's happening today, tomorrow or last month. That said, it's critical that people understand their long-term goals and the degree of risk required of a portfolio to create returns that support their future needs. That should be the focus for people.

People are asking ‘If I sold my business, could I afford the lifestyle I desire?’ As an adviser to business owners, it's critical that they have proper understanding of their business's value and how they can maximize it in advance of a liquidity event. The steps taken one to three years in advance of a sale can mean a significant difference in what they will net from a transaction. Helping business owners with advanced planning, allows them a better chance of achieving a more successful outcome which may mean deriving more value from a sale, reducing the income and estate tax liability though properly designed wealth transfer strategies.

Clients also want to know if their financial plan still on track. The most successful people are the ones that have a clear understanding of their short-term and long-term financial goals. Having a financial plan is the first step. Periodically updating it and monitoring progress toward your goals is critically important. The regular review and tweaking of a person's financial plan helps them know where they stand, keeps them focused on the right things and avoid making decisions that put their plan at risk.

The third thing clients want to know is how the recent tax law changes affect them and are there things they should be doing to take advantage of them.

The tax law changes at the end of last year have created a lot of opportunities for many people. With the recent changes, a window exists that provides the ability for folks who can afford to to move significant amounts of wealth out of their estate and to future generations. Having a clear understanding of how this works and how much wealth to move is where people need to be careful. A thorough assessment is required to ensure the older generation will be left with enough that they won't regret their decision. Having a process for determining how best to move wealth and how much to move is critical to successful wealth transfer and long-term financial security.

People that focus on the rear view mirror when determining their investment strategy rarely have long-term success. Knowing your true tolerance for risk is crucial, as is knowing how much risk you need to take to achieve your goals. Successful investors know what kind of asset allocation they need and are diligent about maintaining it, in up markets and in down markets.

A well thought out personal financial plan is rarely the problem and most always the solution for successful wealth accumulation.