Frisch Financial Blog

Passive vs Active Investment Management

Over the past few decades, there has been an ongoing debate over which investment style works best…active vs. passive management. There are statistics that support both styles. For example, it is believed that passive management may produce better results in a stock market that has more transparency, such as the U.S. stock market vs. the Chinese stock market. Others believe that active managers may produce better results as markets peak and then decline. Costs are obviously a factor, however, there is not as much of a cost difference as there used to be years ago. All that being said, let’s define both investment styles to try to get a better understanding of each.

Passive Investing

Passive investing is an investment strategy that aims to maximize returns over the long run by minimizing transactional costs, tax liability, and management expenses. The belief is that the sum of all of these costs in an active portfolio creates a drag on performance. An example of a passive investment is an S&P 500 index fund which only holds the 500 stocks that comprise the S&P 500. Passive investors do not believe in “timing the market”…they believe in “time in” the market.

Active Investing

Active management is the use of an actual person or team who actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. For example, a fund manager may have extensive experience in a specific sector, potentially resulting in the fund beating benchmark returns. Actively managed funds also have the flexibility to make transactions to offset tax liability, possibly resulting in tax efficiency.

Which is the best strategy?

The answer to this question is quite simple - there is no best strategy. It depends on many different factors, tax strategies, statistics, and beliefs. Here at Frisch Financial, we can help determine which investment style makes the most sense for you. Our specialty is to help customize an investment strategy based on your specific goals and needs. Let’s figure it out together.

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Frisch Financial: Let's Talk About Credit Card Fraud

Today, most people are aware that credit card fraud is a serious concern and that if you are the victim of a scam you can expect countless headaches and many sleepless nights. With the added security offered by the EMV-chip-enabled credit and debit cards, most consumers are sleeping easier. But don’t stop your vigilance now, because, as has happened before, just as soon as the banks upped their technology, so did the scammers.

Carbon Copying

In the past, before the influx of computer technology, scammers would collect discarded carbon copies of transactions, and “mine” the numbers. The “miners” would net between $4 and $12 per number as they sold it to their buyer. Today, it is a very rare occasion to see a credit card carbon, and most consumers are aware of the need to shred any copies generated. So, where have the perpetrators of fraud gone now? Most frauds today occur when the holder of the card, and the card itself are not present or through consumer naivete.

Card and Owner Not Physically Present

  1. Fraudsters will install malware on your computer without your knowledge, generally through an email hack. The malware is designed to collect passwords and financial institution account numbers.
  2. Wait staff swiping cards for legitimate transaction and then swiping a second time into a skimmer which records credit card numbers for “mining” purposes.
  3. Unattended credit card readers; ATM’s, gas pumps, and parking meters, are vulnerable to the installation of remote skimmers which are used to “mine” credit card numbers in large volumes.
  4. Fraudsters will sometimes create fake emergencies to draw cashiers away from their posts. They will then install a remote skimmer that is removed later, after having “mined” credit card information.
  5. Free Wi-Fi sounds good, but can be an avenue for installation of malware or “mining” of bank institution information.

Consumer Naivete

Fraud perpetrators are learning that one of the easiest ways to collect card numbers and security codes is by playing on the emotions of the consumer. Many people are not as vigilant if they trust the caller, are scared, or are excited.

  1. Particularly attractive to those in debt, scammers call the consumer offering to reduce credit card rates. As the call progresses, the offer is made to reduce outstanding debt for a small upfront fee. The FTC has become aware of this practice and it is now against the law to charge an upfront fee.
  2. The Jury Duty Scam feeds on your fear. The caller, representing themselves as an officer of the court, indicates that you have missed jury duty and a warrant has been issued for your arrest. When you respond that you did not receive a notice, the scammer will indicate a need to verify some information to clear you of charges. Feeling fearful, many people share their personal information (birth date, Social Security Numbers), to clear their name. A variation of this scam is the caller indicating that since you have missed jury duty, you owe a fine which you may pay over the phone by providing your credit card information.
  3. The Fraud Department Security Scam is probably the most insidious scam out there and the one most likely to net results. The beauty of this scam, is that the caller provides the consumer with almost all their private information as they verify your identity, the key word here is “almost,” the scammer needs one small piece of information, the security code from your card. The call goes something like this; I’m calling from the Security and Fraud Department of Master Card and your card has been flagged for an unusual purchase. Did you purchase a medical devise from a firm in New York for $487.99. When you answer “No,” the caller indicates that a credit will be issued to your account and goes on to verify your information. The caller provides you with your address, and maybe the last four digits on your card, and gives you a control number for your claim. The caller indicates they need to confirm that you have the card in your possession, and asks you to repeat the numbers on the back of your card. When you read the numbers off to the caller, you have fulfilled their goal, you have provided the 3-digit security pin number from your card.

Most consumers are aware that they need to screen their account statement for fraudulent charges, and that hasn’t changed. In 2015 the implementation of EMV chips slowed unauthorized withdrawals and charges on existing accounts from $14 billion to $12 billion. EMV chips, named after their creators, Europay, MasterCard, and Visa, create a unique transaction code when used which makes collecting credit card numbers less lucrative for scammers. Fraud perpetrators are turning more-and-more to identity theft as it becomes more lucrative. In 2015 new account fraud increased from $2 billion to $3 billion.

Your partners at Frisch Financial are always working diligently to ensure the financial safety of you and your family. Should you ever have a concern or suspect that your personal information may have been compromised, please contact us so that we may assist you.

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Is Early Retirement Right for You?

Retiring early is a big decision that must be carefully considered. There are many advantages and disadvantages associated with early retirement. Our team at Frisch Financial offers retirement planning and investment planning to help you decide if early retirement is right for you.

There are many advantages associated with early retirement that you need to consider. Some of these advantages include the following:

  • Dissatisfaction with Your Job – If you currently are dissatisfied with your job, early retirement can give you the opportunity to pursue a more satisfying career or hobby. Retiring early can help you find a job that makes you excited to go to work on Monday morning.
  • Freedom to Explore – A major benefit of retiring early is the freedom. You will not be held to the rigid 9 am to 5 pm job and the 24/7 digital connection, giving you the freedom to explore the world, pursue your interests or get a new job that you love.
  • Health Benefits – Sedentary jobs can lead to an increased risk of illnesses such as diabetes or heart disease. Thus, retiring early could be beneficial to your health.
  • Caring for Family – Retiring early also gives you the opportunity to care for your ailing loved ones. Sometimes it can be more cost-effective to retire early so you can care for your family members instead of hiring full-time help which can be expensive.
  • Retirement is Fun – Early retirement gives you the chance to do anything that you want. You can go on vacation, spend time with family and friends, or enjoy the luxuries that you have missed during your working years.

There are also many disadvantages that can be associated with early retirement that should be considered. Some of these disadvantages include the following:

  • Not Enough Savings – Early retirement means that you will need to live on your savings for many more years than if you were to retire later. It is important that you factor in your current living expenses to determine how much money you will need to save.
  • Loss of Benefits – One main downside to retiring early is that you will lose your employee benefits. If you claim social security benefits before your full retirement age, you will receive a decreased amount of Social Security benefits each month. Additionally, you could possibly lose access to the health insurance plan offered by your employer. You may need to find a private health insurance company to cover your medical benefits.
  • Detrimental to Your Health – Contrary to popular belief, early retirement can also be detrimental to your health. Many retirees live a more sedentary lifestyle because they do not have somewhere to get up and go to each day. Additionally, your physical and mental health can decrease when you are not exposed to the daily work stress.
  • Changes to Relationships – Retiring early can change your relationship with your spouse and your friends. If you and your spouse do not retire together, it could potentially cause some tension in your relationship. Additionally, you could lose the socialization factor that occurs naturally at work, which could lead to a decrease in your mental and social health.
  • Difficult to Return to Work – If you decide that early retirement is not for you after you have already retired, it can be difficult to return to your previous job or another job. Generally, it can take over a year for job seekers over 55 years old to find another job. Also, if you do find a job, it most likely will not pay as well or provide benefits or perks as good as your old job.
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Tips for Preparing Your 2016 Taxes

As the tax deadline is approaching, what can you do now to help save taxes for 2016?

Even though we are now in 2017, as you are preparing to file your 2016 taxes, there are a few strategies you can still utilize.

Contribute to a Retirement Account:

If you or your spouse worked in 2016, you may be able to contribute to an IRA or a Roth IRA by April 18, 2017. You can contribute up to the greater of your 2016 earnings for yourself and your spouse or $5,500 if you are under age 50 and $6,500 if you are age 50 or over as of 12/31/2016. Whether this contribution is deductible depends upon your income and if you or your spouse is eligible for a retirement plan through your employers. If you cannot make a Roth IRA contribution or a deductible IRA contribution, you may be eligible for a non-deductible IRA contribution.

If you are self-employed, you may be able to contribute to a SEP (Simplified Employment Pension Plan). You have until the due date of your tax return, including extensions, to open and fund a SEP for the prior tax year. For example, if you are a calendar year filer, and extend, you have until October 16, 2017.

Education Credits and Deductions:

If you contributed to a 529 plan in 2016, you may be able to take a deduction on your state tax return. 34 states currently offer a tax credit or deduction for 529 contributions. For example, NYS allows a deduction for up to $10,000 per married couple and $5,000 for single filers who make contributions to a NY approved 529 plan.

If you, your spouse or a dependent was enrolled in college in 2016, you may qualify for certain college credits or deductions. There are currently 2 education credits that may be available: the American Opportunity Credit and the Lifetime Learning Credit. Some additional federal deductions are the Tuition and Fees Deduction, Student Loan Interest Deduction and the Business Deduction for Work-Related Education.

Charitable Contributions:

If you itemize your deductions and you made charitable contributions in 2016, be sure to include those amounts on your tax return. Be sure to add up the amounts of both cash and non-cash contributions (i.e., clothing, household items, food, etc) which are in “good used condition or better”. For non-cash gifts over $500, you must file Form 8283, which asks for information regarding each non-cash gift. For most gifts over $5,000, an appraisal is required.

Cost Basis on Capital Gains:

Over the last several years, the IRS has added improved reporting on mutual fund and investment gains and losses. When sold, the cost basis for securities purchased in the last few years is now included in the Form 1099 from the Custodian. For securities that you’ve owned for many years, the cost basis information may not be on Form 1099. Be sure you include your reinvested dividends when you report that transaction on your tax return. For example, ABC Mutual Fund that was purchase in 2003 for $10,000 may have reinvested dividends of $4,000 over the years, thereby increasing the cost basis to $14,000, NOT $10,000.

Remember to Include All of your Payments:

Tax payments include withholding, estimated payments, extension payment, prior tax year’s overpayment if it was applied to the next tax year, excess social security tax withholding and certain refundable credits (i.e., earned income credit and child tax credit). There may also be some non-refundable credits (i.e., residential energy credits and the retirement savings contribution credit).

Educator Expenses:

If you are an eligible educator, the Educator Expense Deduction allows for up to $250 of out-of-pocket, unreimbursed expenses to be deducted on your tax return. This is an “above-the-line” deduction which has the benefit of reducing your AGI (Adjusted Gross Income). This can be beneficial as “AGI” is used for the calculation of other deductions and credits.

Tax laws are consistently changing. In addition to our year-round tax planning, we work with a number of highly qualified accountants who can assist you, if you wish. Utilizing a good tax accountant can help you save both money and time. If you have not already started gathering your tax documents, we recommend you do so as soon as possible, as for most the tax deadline is April 18, 2017.

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Types of CEO and Executive Compensation

There are several types of compensation that CEOs and executives can receive from their company. Frisch Financial provides financial planning and wealth management services for CEOs and executives to help you better understand the different CEO and executive compensation options.

  • Base Salaries – In today’s world, most CEOs and executives receive a base salary. Base salaries as well as performance based compensation are awarded to the CEO or executive regardless of whether the company does well or does badly. While total compensation can be in the millions, many companies limit the base salary to the federal tax-deductible limit of one million dollars and compensate the CEO or executive through other compensation means.
  • Bonuses – Bonuses are used as a way to measure and reward CEOs or executives for good company performances. Providing bonuses based on the performance of the company and the performance of the CEO and executive encourage hard work as an incentive. The performance can be based on profits, equity return, share price appreciation, or revenue growth. Generally, a board of directors judges the effectiveness of the CEO or executive to determine the percentage of the bonus.
  • Stock Options and Restricted Stock – Stock options are another way to compensate CEOs or executives by linking shareholders’ and executives’ financial interests together. There are a few different types of stock options available. Restricted stock is stock that cannot be sold until specific conditions are met and it has the same value as the market price of the stock. This can allow companies to add performance type features, such as earnings per share or internal financial targets, to the conditions of the stock. Stock ownership allows CEOs and executives to own stock shares instead of stock options. Owning stock shares allows CEOs and executives to act more like owners, thus they have more incentive to take part in the company.
  • Benefits – Generally, the benefits offered to CEOs executives are enhanced versions of the benefits offered to the rest of the company employees. This includes medical insurance, life insurance, pension plans, vacation days, holidays, and sick days. The enhanced versions could include extra levels of life insurance, fully paid medical insurance, stock purchase plans or long-term stock based plans. CEOs and executives are also typically able to participate in specific retirement plans, such as nonqualified deferred compensation plans and supplemental employee retirement plans (SERPs). These plans allow CEOs and executives to save a portion of their income until a certain date.
  • Perks – Perks, or perquisites, are additional incentives given to CEOs or executives as a form of compensation. These perks can vary from company to company, but can include exclusive club memberships, convenient parking, company vehicles, use of company planes or other incentives to maximize the CEOs and executives time. Some companies provide financial planning and wealth management services, similar to the services offered by Frisch Financial, to their CEOs and executives as an added perk. These perks are used to demonstrate the value of the CEO or executive to the company.
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