FDIC Changes for Trust Accounts

Effective April 1, 2024, accounts held under the name of a trust will be insured by FDIC for up to $1.25 million, rather than the current $250,000 limit. Revocable trust (which include informal trust accounts such as Pay on Death (POD) or As Trustee For (ATF)) accounts are insured up to $250,000 per beneficiary per FDIC bank.

If we have created several taxable accounts at different FDIC banks, we may be able to consolidate into fewer accounts with higher balances (while retaining FDIC protection) if the trust has more than one beneficiary (to a maximum of 5) after April. We will review this at our meeting(s) if it is relevant to your finances.

Edi Alvarez, CFP®


2024 – Financial Opportunities and Challenges

In 2024 we are expecting recoveries in some real estate categories, a settling of interest rates, and dramatic growth in the AI (Artificial Intelligence) space. It is the latter that could help businesses improve efficiencies and deal with headwinds from labor costs/shortages though it is still at its infancy. In addition, we are seeing growth in capital invested to deal with the expected scarcity in rare earth metals. If we have limited supplies then price volatility will greatly impact data, electronics, alternative energy, and agriculture investment sectors (new sources for these metals are from mining of asteroids and other stellar bodies).

The less predictable potential for volatility, in the USA, will come from our ability to deal with the destabilizing forces all around us from climate change and the election. I suspect that the US consumer will continue to spend through volatility and reward companies that meet the consumer demands (as they did in 2023).

Edi Alvarez, CFP®


Guidance on inherited IRA RMD – IRS Notice 2023-54

The original SECURE Act, signed into law in December 2019, changed many of the long-standing rules governing IRAs and other retirement accounts, and no single measure in the legislation had a more seismic impact on retirement planning. Specifically, the law stipulated that “Non-Eligible Designated Beneficiaries” (i.e., neither surviving spouses or disabled/minor beneficiary) would be required to empty the inherited retirement account by the end of the 10th year after the decedent’s death (and would no longer be able to ‘stretch’ the distributions over their own life expectancy).

While we expected that Non-Eligible Designated Beneficiaries would not be required to take annual distributions in addition to emptying their accounts in the 10-year period, the IRS in February 2022 issued Proposed Regulations that would make a subset of these beneficiaries subject to BOTH the 10-Year Rule and annual Required Minimum Distributions (RMDs). The caveat, however, was that these were merely proposed regulations.

In October 2022 we were informed that there wouldn’t be a penalty if beneficiaries didn’t take a 2022 RMD but by October most had already! Unfortunately, they failed to address the requirements for 2023 and onward.

Finally, this month the IRS released Notice 2023-54, which provides relief once again by eliminating any penalties for failing to take (potential) RMDs for 2023 for these specific beneficiaries. Once again, they punted the RMD decision another year (2024). Keep in mind that these beneficiaries MUST still empty the IRA account by the 10th year.

Although we monitor notices on RMD rules changes and discuss RMD requirements with each of you as needed each year, your engagement in this topic ensures that we understand the relevant regulations for your financial plan.

Edi Alvarez, CFP®


AI and Data Analytics – new SEC rules in 2024

At end of July, the SEC approved a plan that they say will root out conflicts of interest that can arise when financial firms use Artificial Intelligence (AI) to serve clients. They are also improving rules requiring companies to disclose serious cybersecurity incidents within four business days of any significant breach.

I would be more impressed if these were required for all technology firms that handle customer data analytics (not only financial firms).

The SEC asserts that the new regulations will ensure that ‘predictive data analytics is used to optimize services that better serve clients’ and not for the benefit of the financial firm. Banks and brokerage firms are typically using AI for fraud detection and market surveillance, but recently the shift has been made to have AI and analytics as part of trading recommendation, asset management, and lending. This is a huge development with serious implications for consumers. The goal of the new regulation is to ensure that biases are not ingrained in the technology algorithm, particularly since many vendors and consumers accept technology output, as fact, without human verification.

In this vein, The Federal Trade Commission (FTC) has opened an investigation into Microsoft Corp – OpenAI Inc (the creator of ChatGPT) to examine what risks the chatbot poses for consumers . . . these programs are written by humans and can extend biases and discrimination.

The ideal ‘responsible innovation’ in technology is appealing but so is responsible capitalism or governance and we are currently not doing well in any of these areas.

AI has the potential to draw on reams of data to target individual investors and nudge them to alter their behavior on trading, investing, borrowing, or even opening financial accounts for them. Many of the new tools can be transformative in our time, and I would love to use them. Even so, we should be leery about the concentration of this technology and powerful data in the hands of only a few firms which can pose a huge risk for future stability in financial markets.

It is important that we not provide our private data to technology or analytics software that is not yet fully tested and regulated from unregulated companies. We need to continue to demand that regulations be developed to ensure the safety of our data and particularly add controls for how for-profit firms can use our data. I am particularly concerned when I see errors in financial software output that are accepted as correct because they are software generated.

Edi Alvarez, CFP®


US credit downgrade by Fitch

As you have no doubt heard, Fitch downgraded US credit to double A plus from triple A. Many reasons have been given for their decision though I think only one is at the core of the downgrade — “the increasing failure of politicians to tackle pressing reforms” and demonstrate a stable process for making long-term country-wide financial decisions. I can’t argue with that . . . the debt ceiling crisis demonstrated that our politicians are disinterested in an orderly financial decision process.

A bit of history to provide perspective on these credit rating companies:
Fitch Ratings Inc., Moody’s, and Standard & Poor’s are the “Big Three” credit rating agencies nationally recognized to evaluate financial products/companies by the Securities and Exchange Commission (SEC) since 1975.

In 2011, the S&P Global Rating was the first to drop US credit to double A. The market mostly ignored this downgrade since this is the same credit rating company that continued to sustain a AAA rating for Lehmann Brothers even as LB filed for bankruptcy. Making matters worse, when the dust settled, this credit agency was found to have benefited from providing high credit ratings to packaged subprime mortgages (i.e., those with no-job, no income) that were then sold to unwary investors.

Moody’s is the remaining credit agency that still believes that the US will pay off its bills and deserves the AAA rating.

Though the remaining countries with triple A credit ratings from all three agencies have stable financial process around debt management many of them have high national debt levels. The countries are Germany, Denmark, Netherlands, Sweden, Norway, Luxemburg, Singapore, and Australia.

What does this downgrade mean? For now, not too much since the US dollar remains the go-to currency and US Treasuries are still considered the risk-free asset to have, particularly during a crisis. Unfortunately, this downgrade does mean that the debt service payments will increase and erode faith in the US dollar.

To resolve this issue, the US needs to deal with long-term fiscal issues in an organized and responsible manner.

What does this mean for your portfolio? Not much in the short-term. It does though remind us to maintain a globally allocated portfolio.

Edi Alvarez, CFP®


Silicon Valley Bank (SVB) failure and the FDIC

As many of you are aware, the FDIC placed a California bank (SVB) under receivership. The FDIC took this action to protect depositors in the face of unsustainable withdrawals (a “run on the bank”). SVB is a regional bank best known for supporting new venture businesses (in technology and biotechnology) and with assets worldwide. An additional small regional bank located in New York (Signature Bank or SBNY) was also placed into FDIC receivership just two days later.

What happened? SVB sold assets (long term bonds) at a significant loss just to cover deposit outflows which triggered more outflows.

What impact does an FDIC takeover have on your deposited money? None, if the account is FDIC insured and the balance is under $250K, though there may be a delay to access this cash. This is why we recommend that you retain an emergency account in an FDIC savings account at a separate bank.

In this case, the Federal government also stepped in and guaranteed all deposits to ensure accounts were made whole. The timing was particularly important since mid-month liquidity was needed to make business payroll and loan payments. Except in the Venture Capital space, SVB and SBNY are not household names, so why was prompt action required? The concern was that fear would spread to other institutions even though most other financial institutions are well capitalized, highly liquid, diversified, and risk compliant. In fact, we did see contagion to banks like First Republic Bank (FRB—which, incidentally, is popular with several of our clients) which had to obtain additional liquidity from the Federal Reserve and JP Morgan. In our view this failure was isolated and is nothing like the 2008 bank crisis. It was a result of regulatory exemptions (approved by the US Senate which was extensively lobbied by the CEO of SVB) and poor Risk Management at SVB.

As a consequence, the regulatory environment will likely tighten for regional banks and the Federal government will expect a fixed Balance Sheet within a year. In the meantime, the Justice Department has already launched an inquiry into the collapse of SVB and the actions of its executives who sold bank shares just prior to the collapse.

What long-term and short-term impact will this collapse have on your portfolio? We do not expect any long-term negative effects. In the short-term, we are expecting more volatility and a delayed recovery for technology, financial services, and fixed income sectors. It is also worth noting that this crisis affords a long-term opportunity to buy into this downturn ahead of the recovery.

Edi Alvarez, CFP®


SECURE Act 2.0

The first “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) was passed December 2019 eliminating the ‘stretch IRA’ for non-spouse and changing the RMD (Required Minimum Distribution) age to 72. These were changes that impacted everyone across the board. With the Secure Act 2.0, congress appears to be reversing its prior leanings and instead allowing Roth conversions. The reversal towards ‘Rothification’ (encouraging ROTH savings/conversions) appears to be with the goal of increasing tax revenues today. It is fair to say that no single provision made by the SECURE Act 2.0 appears to have the same impact across so many as the elimination of the stretch, which now requires many inherited distributions to complete within 10 years, rather than spreading distributions over the entire beneficiary’s lifetime. Even so, 2.0 has so many more detailed provisions that it will impact most in some way. It is already evident that implementation will take more effort than the first SECURE Act.

Some of the new provisions included in SECURE Act 2.0 will be implemented over the next two years and require preparation in 2023. We will explore the provisions that may be relevant to your specific situation during our meetings this year. Let us know if you have any questions.

Edi Alvarez, CFP®


Perspective on Inflation, Recession, Stagflation, Deflation

To date, we’ve all seen price increases (inflation) and also shrinkflation (smaller content of a product for the same price) but so far no hyperinflation. As consumers and investors, we participate in this process but seldom acknowledge the interplay. For example, when we decide to spend freely at this point in the economic cycle, we are contributing to inflation but not spending at all can contribute towards deflation.

To me, recessions are a natural cleansing mechanism for the economy. Over the course of economic expansions, companies become flush with excess. Meaning that their processes loosen, they hire too many people, they accumulate too much inventory. Recessions are a business cycle’s ‘diet plan’ for companies that need to shed excess but do so reluctantly – with negative growth. Recessions are never fun (the pain will certainly be felt more by those without adequate resources or with less certain employment), but historically they tend to be short-term interruptions between economic expansions. It is accepted that the greater long-term risk to the economy is not recession, but stagflation (slow growth, increased unemployment, and inflation) or even deflation (drop in demand for goods).

Despite headlines to the contrary the ‘tightening’ of monetary policy by the Federal Reserve is essential to economic recovery, which means raising interest rates have to be tolerated to slow down inflation and hopefully without dramatic increase in unemployment.  With that, it is “quite likely” that the unemployment rate will rise “a fair bit” from  where it is now, at 3.6%. If it rises more than a ‘fair bit,’ we could see a period of stagflation.

You’ll likely see headlines through the next months about the last time the US experienced stagflation. Briefly, in the 1970s the onset of stagflation was blamed on the US Federal Reserve’s unsustainable economic policy during the boom years of the late ‘50s and ‘60s. At the time, the Fed moved to keep unemployment low and to boost overall business demand. However, the unnaturally low unemployment during the decade triggered something called a wage-price spiral and hyperinflation. The impact of inflation on our economy will depend on the differential between the inflation rate and wage growth. This is what the Fed is trying to control as it maneuvers for a ‘soft landing’. The higher the unemployment, the greater potential for stagflation.

Stagflation may happen if a recession sets in before inflation has gone down low enough. For example, if unemployment were to go up to about 5% and consumer price index inflation was also above 5%, then that would be a kind of stagflation, though nothing like the degree experienced in the ‘70s. In the near term, we expect the labor market will more likely just cool, resulting in fewer vacancies rather than unemployment. It is likely that we will enter a recession this year and/or in 2023 but hopefully not stagflation. Much depends on how the economy and businesses react to Fed rate hikes.

Before focusing on the unknown future, we should remind ourselves that in the last 20 years, we’ve seen declining interest rates and low inflation, which in turn caused a seemingly never-ending increase in housing prices. This put extra money into our pockets and drove prices of all assets up, which in turn boosted consumer confidence, as people felt wealthier and were encouraged to spend. In addition, during the last 20-plus years every time the economy stumbled, the Fed worked to bail it out – by lowering interest rates, injecting the market with liquidity. This caused the economy and equity market to recover quickly and without much pain. The pain we were spared was stored, metaphorically speaking, in a pain jar (represented in part as increased debt, income discrepancies) awaiting the next crisis. Today, to prevent inflation turning into hyperinflation, the Fed has no choice but to raise interest rates. We expect that this process will take time and likely be cyclical since the Fed only controls a couple of components. Consumers, by their purchases, will play a role in which companies survive this market cycle. The larger goal is for the business cycle to trim inefficient businesses while avoiding hyperinflation, stagflation, and deflation.

Though price drops are considered a good thing—at least when it comes to your favorite shopping destinations – price drops across the entire economy, however, is called deflation, and that’s a whole other ballgame. Large scale deflation can be really bad news.

While inflation means your dollar doesn’t stretch as far, it also reduces the value of debt, so borrowers keep borrowing and debtors keep paying their bills and the economy continues to grow. Modest inflation is a normal part of the economic cycle—the economy typically experiences inflation of 1% to 3% per year—and a small amount is generally viewed as a sign of healthy economic growth. You might have heard that 2% is the Fed’s target inflation rate.

Inflation is also something consumers with assets/resources can protect themselves against, to some extent. Investing in equity markets, for instance, grows your earnings faster than inflation, helping you retain and grow your purchasing power. Protecting yourself against deflation is trickier because debt becomes more expensive, leading people and businesses to avoid new debt. They instead payoff increasingly pricey variable rate debts from prior purchases and avoid new purchases, decreasing growth.

During periods of deflation, the best place for people to hold money is generally in cash investments, which don’t earn much. Other types of investments, like stocks, corporate bonds, and real estate investments, become riskier when there’s deflation because businesses (even businesses with good market performance but with high debt) can face very difficult times or fail entirely.

Overall, in the USA we’ve primarily experienced inflation, not deflation.

As consumers and investors, we don’t control these market components, so what might we do? We focus on what we can control and work to feed the economy while trimming our excess spending.

This is actually a really good time to revisit your financial fundamentals. Do you still have a reasonable emergency fund? Are you spending consciously and aligned with your values and budget? This is certainly a time to re-examine any adjustable-rate debt and determine how to best lock them in. It is also a great time to examine your career and ensure you are professionally valued and not likely in any potential layoff pool. Most importantly, this is a time to get comfortable with what you value and control.

Do not let fear derail what you do. Instead prepare your finances to take advantage of whatever situation presents itself.

Edi Alvarez, CFP®


Gamification of Trading

The suicide of a 20-year-old experimenting with trading on the Robinhood platform
has many calling for new regulations on trading. I think new regulations on the “Robo”
interfaces are required but not on trading. Robo platforms, like Robinhood, provide a
software interface that makes trading more like a game.

Brokerage firms have been on a serious race to engage directly with the young and the
inexperienced. Robinhood, E-Trade, TD Ameritrade, Charles Schwab, Interactive
Brokers, Fidelity, Merrill Lynch, and many others have all embraced commission-free
and zero-minimum balance trading on platforms that focus only on the upside
of trading.
These platforms are more reminiscent of an animated game than a
serious financial transaction. Even those who have managed to make a little money on
day trading often fail to understand that there are tax consequences. They usually
reach out for assistance when they receive from these brokerage firms an unexpected
1099 with a large tax liability.

It is clear that what we need is more clarity on what is a game and what has real life

Edi Alvarez, CFP®


The American Rescue Plan of 2021: Highlights

The details of the American Rescue Plan 2021 are still being processed BUT we know
that it doesn’t include RMD relief for 2021 nor increased minimum wage. It does
provide both 2020 and 2021 tax filing items. Below, I’ve outlined those that I found
most significant so far.

  1. “Stimulus Checks” For individuals: $1,400 per eligible individual for
    all dependents with stricter phaseout that start at $75K for individuals and at
    $150K for those married filing jointly (MFJ). File early if your 2019 tax filing
    does not qualify you for this stimulus.
  2. Expansion of Child Tax Credit: It provides an increased amount of child
    tax credit for those under $150K (MFJ) AND an increase to $400K (MFJ) in
    earnings for the base credits. In 2021 there should be an opportunity to
    receive more child tax credits for up to $400K.
  3. Extension of Unemployment Compensation: An additional weekly
    $300 Unemployment benefit was added, and coverage was extended until
    September 6th, 2021.
  4. 2020 Tax-free Unemployment Insurance income: For those receiving
    Unemployment Insurance in 2020, up to $10,200 of those earnings will be
  5. Increased Premium Credit Assistance: Healthcare premium assistance
    extended from 2020 through 2021 with higher earnings.
  6. Tax Credit for Employers to cover COBRA for 3 months: Any
    employee involuntarily laid off will have free full COBRA coverage for 3
    months by the employer who will receive credits for paying their COBRA.
  7. Tax-free student loan forgiveness for the future – if a student loan is
    forgiven by 2025, it will be tax-free.

It will take time to distill what will be relevant for 2021 taxes particularly since we are
all still trying to understand and work through CARES 2020 tax rules and implications
for 2020. For now, it makes sense to slow down the 2020 tax filing and
ensure that your CPA is aware of all of the CARES 2020 and TARP 2021
rules before filing – luckily, we all now have until May 17th.

Edi Alvarez, CFP®