Why It Matters – Issue 1

Welcome to Why It Matters, our quarterly newsletter from PWA Wealth Management. Each edition will address wealth management topics that matter to you. In this issue, we tackle:

  • Our Client-First Portal, a powerful digital tool that enriches our collaboration.
  • How tax reform impacts charitable giving. 
  • Blockchain technology — what it is and how it works.

Before digging in, we wish to thank you for your support and cooperation during the Fidelity conversion! We assure you the temporary hurdles will yield significant long-term benefits. More than a transition from one custodial institution to another, our partnership with Fidelity furnishes access to highly cost-effective securities, greater operational efficiencies, and innovative, interactive technologies that enhance our service to you. The target date for completing the conversion from Pershing to Fidelity is the end of October. Again, thank you for your patience and cooperation.

In our quest to provide unprecedented value, PWA Wealth Management is pleased to introduce our online Client-First Portal. While a more detailed overview will be provided by your PWA Wealth Advisor, following are the highlights of what’s to come:

  • 24/7 access to all of your financial information through one secure, interactive portal. You can sleep better at night by having a comprehensive financial picture—one that monitors  account activity, tracks progress toward goals, and evaluates spending.
  • Interactive online planning enables us to collaborate any time, any place. Real-time, percent-funded analysis forecasts the probability of achieving a goal, while up to three, side-by-side comparisons can help prioritize funding.
  • Cash-flow-based needs analysis lets us run through financial scenarios for retirement, insurance, college planning, income protection, and more.
  • Comprehensive integration of services by other advisors, including accountants, attorneys, and insurance brokers.
  • An online vault allows you to securely share and access files, ranging from insurance policies and wills to birth certificates and passports.
  • 256-bit encryption protects your data—twice the standard of most financial services companies.

Our first article reviews particular impacts on charitable giving resulting from the Tax Cuts and Jobs Act of 2017 (TCJA). Charitable giving is a personal decision: which charity, the amount, and the structure of the gift are all important. The tax benefits are the bonus.

According to the IRS, 30% of taxpayers itemized their deductions in 2017. Due to the increase in the standard deductions for single and married taxpayers, it is estimated that fewer than 10% will itemize in 2018. TJCA raises the deduction for single filers to $12,000 and $24,000 for joint filers. For itemizers, the allowance for state and local tax deductions is limited to $10,000; interest on most home equity lines of credit is no longer deductible; and miscellaneous deductions are eliminated. These changes will force most donors to reexamine whether to use the standard deduction and the impact on their charitable strategies. If you use the standard deduction, your charitable gifts will not be deductible.

If you are using the standard deduction, you still might consider gifting appreciated shares of stock or mutual funds. By gifting appreciated assets held for one year or more, you can avoid paying capital gains taxes. Of course, filers who itemize can deduct the full value of their gifts and avoid a capital gain tax.

Occasionally, we execute what is referred to as a charitable swap: for clients who don’t want to part with a stock that is highly appreciated, we still recommend gifting the appreciated stock and then using cash in the portfolio to purchase the same number of shares.

Again, the tax benefits are realized for both the client and charity, but now, the client has “reset” the cost basis on the stock.

The Qualified Charitable Distribution (QCD) is a strategy used to offset negative effects of the TCJA on charitable giving. Filers turning 70½ in 2018 or older are able to gift up to $100,000 directly to a charity from their IRA.

This strategy has two advantages:

  • First, the distribution is excluded from taxable income as long as the distribution goes directly to the charity. The charity also benefits by receiving the full value of the gift without the deduction of taxes. 
  • Secondly, the QCD will count towards your required minimum distribution for the calander year.

These benefits are realized regardless if the filer itemizes or uses the standard deduction. If you plan on making cash donations, the TCJA allows for continued itemization of these deductions, if possible. You can now deduct up to 60% of your adjusted gross income (AGI) under the new tax law (up from 50%). If cash donations exceed the 60% of AGI limit, the unused deductions can be carried forward for five years.

We understand each client’s situation is different and, just like your financial plan, there is no “one-size-fits-all” gifting strategy. PWA Wealth Management is available to work with you, your accountant, and your charities to develop custom strategies to meet your charitable goals. We are pleased to help!

In the next edition of Why It Matters, we will discuss the use of Donor Advised Funds as another strategy for charitable giving under the Tax Cuts and Jobs Act of 2017.

Clients are asking about blockchain, so it matters! If you have additional questions after reading this essay, please call us. We are happy to discuss it further.

In January 2009, an alternative currency was introduced: bitcoin. Transacted through the Internet, bitcoin was not issued or backed by any central authority, prompting the question: how can it be trusted? The answer is through blockchain technology, which enables you to tamper-proof a system. Making a system foolproof has broad applications beyond cryptocurrency, which is why there’s a buzz about blockchain and its related investment opportunities. Before investing in a new technology—in anything, for that matter —we urge you to follow the advice of legendary Fidelity investor, Peter Lynch:

 

To know what blockchain is—and how it works—you need to understand the terms tokenization, distributed ledger, and smart contracts. Let’s turn to Italy and the treasures that are housed in its cities for an example.

Visit Italy any time of year and you’ll find yourself standing in lines for hours with fellow tourists from across the world, waiting to see a statue, a painting, a monument from another age. Imagine the ticket revenue that is generated from these cultural gems! The Italian government knows very well the full value, as it is the sole beneficiary—not the city where an artifact originated. As a result, a long-standing feud exists between Italy’s central government and the cities that claim ownership. It would seem one solution for this impassioned conflict, at least from the perspective of Italy’s cities, might be a revenue-sharing agreement, whereby ticket-sale proceeds could be divided among the “interested parties.” Therein lies the problem that blockchain technology seeks to address: who, or what, is to be trusted to keep the ledger?

Let’s start with a building block of blockchain technology: tokenization.

Tokenization

Broadly speaking, tokenization is the process of converting an asset into a token that can be moved, recorded, or stored on a blockchain system. With blockchain, nearly anything can be tokenized, including priceless fine art.

There’s only one authentic statue of Michelangelo’s David and you have to go to the Galleria dell’Accademia in Florence to see it. Commissioned by city officials, Michelangelo (a native of Florence) completed the sculpture in 1504 as a symbol of Florence’s defiance against its enemies. Today, its enemies include the Italian government, recipient of all ticket sales.

While replicas of all shapes and sizes exist, Michelangelo’s David is one-of-a-kind and can only be bought or sold as a whole. Tokenization, however, enables the one-and-only sculpture to be parceled out into digital shares (“David coin”). The token representing the true David is encrypted with a unique digital signature, which can be broken down into sub-tokens that are also digitally signed. In this way, shares of a unique piece of art can be sold to the general public. In our example, each buyer of a David token doesn’t purchase a copy of the David, they actually own a part of the masterpiece! In turn, the buyer can hold or sell their token of the original David as they please.

The same ownership tug-of-war applies to other cultural artifacts, including the Colosseum and the Roman Forum. Located in the heart of Rome and visited by millions of people annually, the city bears the weight of tourism without the bounty of ticket revenue. Tokenization of these assets would also yield shared ownership. The central government, the city government—and any other party with sufficient cash—could own an actual piece of history.

Distributed Ledger

Ledgers, the foundation of accounting, are older than ancient Rome itself—and so is “cooking the books.” In the 1980s, paper ledgers were replaced by computer-based files that still required manual updates (“data entry”). Today’s computing power, along with breakthroughs in cryptography and the development of highly sophisticated algorithms, permit the creation of a distributed ledger.

Simply stated, a distributed ledger is a file that is held and updated independently by each participant (“node”) in a large network. Void of any central authority, each node processes every transaction independently and comes to its own conclusion regarding legitimacy. Then, the entire network votes on those conclusions to ensure the majority agrees. Upon consensus, the distributed ledger is updated, and each node maintains an identical copy of the ledger.

Returning to our example of Italy and its numerous treasures, it’s fair to say that neither government (central or city) trusts the other to give them their full cut of the ticket revenue. With blockchain, “David coin” ownership would be recorded in a distributed ledger (read: there is no central authority!), thereby eliminating the need to trust the other owners.

Smart Contracts

Along with tokenization and a distributed ledger, blockchain uses smart contracts to execute the rules of engagement. Back to our example, central and city governments would share ticket revenue according to specific instructions and stipulations. When buying a ticket to see the David, the money is automatically converted into “David coin.” The smart contract knows what each party owns, and executes the terms and conditions of a revenue-sharing agreement. There is no outside means to corrupt this process.

The conflict between central and city governments could be eliminated, knowing there was zero potential to be exploited by the other party.

In sum, blockchain takes advantage of modern computing and encryption to guarantee that decentralized ledgers can work without any trust required, and without any central governing authority (a bank or other intermediary) footing the bill. 

Are you are still wondering why it matters and why so many people are rushing to invest in it? First, put aside what blockchain isn’t. Blockchain is not a technology that is going to replace all existing databases. If you have a centralized database for a business or organization and you trust everyone who has access to that database, there is no benefit to blockchain. Blockchain enables peer-to-peer-trust in places where it was not previously available.

There is one widespread use of blockchain at the moment: cryptocurrency. With over 1600 different currencies in the market, it seems everyone is trying to get rich by making their own coin. The reality is that having ICOs (initial coin offerings) is a great way for entrepreneurs to raise money quickly without going through traditional methods and regulations. People who think the company is going to do well can buy into the coin instead of the stock in the hopes that the value of the coin will go up as more people use it. The downside for investors is the lack of regulation surrounding these coins, which leads to a lack of information, transparency, and trust.

No one is using blockchain in business applications yet, but there is plenty taking place around it:

  • Hardware: The bottom layer for blockchain applications is hardware. Blockchain requires massive amounts of processing power and certain companies are starting to market their chips for this purpose. There are no dominant players, but some major examples include Nvidia, AMD, and Hisilicon. 

 

  • Software: One layer up is the software side. Ethereum is a relatively well-used platform for creating blockchain applications, but it is far from dominant and there are no developer-friendly platforms yet. 

 

  • Middleware: The companies mentioned so far may create the underlying hardware and software used by future applications, but once those applications become a reality there will be a huge opportunity for “middleware.” Companies will start providing services such as setting up distributed computation and storage, engineering developer tools, and ensuring the use of modern cybersecurity techniques.

 

  • Applications: The top layer is the application layer. Businesses will start investing in research to find new ways of using the technology and consultants will promise solutions. IBM is an example of a company seeking to be a major player in the application layer. Advertising themselves as having “the world’s most advanced blockchain expertise,” IBM has a website dedicated to all its ideas for using blockchain to simplify business transactions. Other big players who are researching ways of entering the space include Amazon, Intel, and Microsoft.

With so much that is continuing to develop, our approach at PWA Wealth Management is to continue to study this technology. If and when investing in blockchain makes good business sense, we will do what we always do: Scrutinize the investment opportunity by applying fundamental and technical analysis.

Please join us in congratulating Michael Divens who was recently awarded the Chartered Financial Analyst (CFA) designation. An affirmation of capability in securities analysis and portfolio management, the process for achieving this credential is lengthy and rigorous. Mike passed each of three sections of the CFA exam on his first try. With his extensive work experience and schooling, he was readily awarded the designation.

Mike chairs PWA Wealth Management’s Investment Committee, which comprises other professionals, including Certified Financial Planners (CFPs) and an Accredited Investment Fiduciary (AIF). Individually and collectively we are equipped to address all aspects of financial, tax, insurance, retirement, and estate planning. Further, our credentials include a Chartered Life Underwriter (CLU), the premier designation for insurance professionals.

One of the “Ten Most Wanted” designations in the investment industry is Certified Professional Plan Consultant (PPC), specializing in assisting businesses with retirement planning, including 401(k) plans and ERISA requirements for employer-sponsored retirement plans. PWA Wealth Management is proud to include this credential within our team’s roster, equipping us to assist business leaders—start-up, private, and public.

While industry credentials may sound like “alphabet soup,” you can be assured PWA Wealth Management is highly skilled and highly qualified in providing comprehensive wealth management solutions. Further, when you work with one of us, you work with all of us.

For additional information about all of our Wealth Advisors and their professional credentials, please visit the “About Us” section of our website at pwausa.com. 

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