INSIGHTS WEALTH MANAGEMENT Debt consolidation How to consolidate your personal debt to rein in finances INTERVIEWED BY JAYNE GEST S ome people are in denial about their personal finances, thinking that they’ll get to it one of these days. “You need to have a lot of discipline around your finances because getting into financial shape is tough,” says Jeanine Fallon, Senior Vice President and Market Executive, First Commonwealth Bank . “It requires focus, planning and a lot of sweat, but the end result is a happier and more fulfilled life.” Smart Business spoke with Fallon about taking control of your debt and spending habits. ® How should you assess your debt situation? Look at your current obligations by gathering monthly statements and listing loans and debt. Think about the creditor and your balances, interest rates and payments. Total all payments and divide your gross income by the debt to find your debt to income ratio. The target should be around 36 percent, but those with high disposable income can go a few percent higher. Then, use your partnership with a lender you trust to create a solid financial plan. It’s also helpful to pull your credit report three times per year from annualcreditreport.com because not all credit reports are free. What are some warning signs your finances are heading out of control? Some warning signs are if you have no emergency fund, typically three to six months of your income, to fall back on; you experience stress when thinking JEANINE FALLON Senior Vice President and Market Executive First Commonwealth Bank (412) 886-2540 JFallon@fcbanking.com SBNONLINE.COM: For a link to a debt consolidation calculator, view this article online at www.sbnonline.com. Insights Wealth Management is brought to you by First Commonwealth Bank about your debt; you don’t know what you owe; and/or you continually charge more on your credit cards than you can pay back. How can a debt consolidation loan help? Consolidation loans don’t reduce your debt but can reduce your payments. You take your debt and consolidate it into one big loan to simplify your payment and tracking. Your banker will help you decide on a secured loan or an unsecured loan, the right term to quickly pay off your debt without creating hardship, and choosing between a term loan or line of credit. Keep the end number in mind, which is what you’re paying back with principal and interest. What are some best practices to help stay debt free? Even if you consolidate your debt, it’s important to take steps to ensure you don’t end up right back in the same financial bind you were in before. Manage your expenses by establishing a budget. Keep a spending diary of every penny you spend for at least a month — similar to a food diary when on a diet. When looking at your funds, break it into percentages: ■ Foundation expenses, such as shelter, groceries and transportation, should be 45 percent of your takehome income. ■ Include 15 percent for fun, vacation, dinner, clothes or whatever your passion is. ■ Typically at least 25 percent is used for taxes. ■ Keep about 15 percent for savings — 10 percent for retirement and 5 percent for emergency or big-ticket items. Then, manage, reduce and eliminate debt. It is important to make wise decisions when assuming new debt by using good debt to improve your net worth. Tie savings and spending plans with what’s important to helping you to live with a purpose. For example, if vacation time away with your extended family is important to you, yet you own a huge, expensive house, your financial obligations may not be in line with your values. Also, prepare for life events by taking a disciplined approach to building up the money you put into your retirement plan as well as your emergency fund. Ultimately, if you don’t change the way that you’re spending money when you experience significant life changes, it can cause hardship in the end. ● © 2013 Smart Business Network Inc. Reprinted from the January 2013 issue of Smart Business Pittsburgh. INSIGHTS WEALTH MANAGEMENT 20/20 foresight How succession planning provides for your business and family’s future INTERVIEWED BY JAYNE GEST E state planning is important for everyone. But in the case of a business owner, not giving serious consideration to what could happen to your business could potentially shut it down entirely, thereby eliminating your family’s income at a time when it is critical. “It’s important that business owners understand that their plan only works the way it’s set up to work if the circumstances that originally determined the nature of the plan remain the same,” says Carly Fagan Neals, J.D., Senior Trust Officer and Vice President at First Commonwealth Advisors. “So if there are changes in the business structure, goals or family structure, they have to be communicated to the adviser — the accountant, the lawyer, whoever put the plan in place. “A business owner has to take an active role in making sure the plan still works because only he or she knows the facts as they are today,” she says. Smart Business spoke with Neals about how a succession plan is thoughtfully created in conjunction with your estate plan and what factors need to be coordinated and reviewed. Is there a good time to begin planning? Every individual should have a will, a financial power of attorney and a health care power of attorney/living will. As soon as you have assets or children it’s imperative to plan because otherwise your assets don’t get to where they need to go and your heirs don’t necessarily get cared for the way you’d want. For many, this can occur at an early age. What’s involved with establishing long-term goals and determining succession risks? Every person’s long-term goals are different, and they often evolve and 28 Smart Business Pittsburgh | March 2013 CARLY FAGAN NEALS, J.D. Senior Trust Officer, Vice President First Commonwealth Advisors (412) 690-2131 cneals@fcbanking.com WEBSITE: To learn more about succession planning, visit ask4fca.com. Insights Wealth Management is brought to you by First Commonwealth Bank change. So continually question how you can accomplish what you need to, such as passing the business on when you retire or providing for your family in the event of your death or incapacitation. If your long-term goals involve transferring the business to some specific person, constantly re-evaluate whether that person is able and willing. What training and education might be necessary? When do you start transferring the business, and is it in a monetary sense or just voting stock? And if you’re retiring, how and when do you phase yourself out? What are some strategies for success? Ensure there’s sufficient insurance on the owner’s life or the necessary liquidity for all situations, and hands-on training and education for whoever is taking over the business. Also, is a spouse with power of attorney making business decisions? Do you want it to work that way? Be aware of the capabilities and willingness of those you name to have this authority. Estate and succession plans need to work in tandem. For example, company stock may be a very large asset of the estate, but you need to know how that stock will be used to provide the surviving spouse with the necessary cash flow. Does your business successor need a life insurance policy on you to buy the stock so the resulting cash can go into a trust for your spouse? Regularly work with your advisers to analyze the possible tax consequences of any transfer or proposed transfer. You don’t want to trigger a big gain or loss as a result of a transfer without planning for it. Finally, a business succession plan needs to take into account the business’s operating structure. Whether it’s a corporation, LLC or partnership, how will the business run during the period where the transfer is taking place? It can be a matter of signatory authority on bank accounts, being able to order inventory, or having someone authorized to sign for accounts payable or receivable to keep daily operations going. How should you monitor these plans? Any time there’s a change — in business operations, key employees, family dynamics, goals, etc. — communicate it with the people who helped put the plans in place. Even without changes, it doesn’t hurt to talk to your advisers annually, or at minimum every few years. Even though you may not meet with your accountant or lawyer every year, if you’re working with an investment manager or wealth adviser doing regular performance reviews, a good adviser will ask the questions necessary to help determine whether it’s time to go back and get in front of your other advisers including your accountant and/or lawyer. ● INSIGHTS WEALTH MANAGEMENT Protect your money How banks can aid companies in the fight against financial fraud INTERVIEWED BY JAYNE GEST T wo-thirds of businesses experienced some type of attempted or actual payment fraud in 2011, according to recent industry surveys, and more than 25 percent of banks are reporting a rise in attempted fraud incidents. Although not all attempts result in financial loss, when they do it’s typically around $20,000. There’s also reputation risk and extra work when somebody gets account information and starts utilizing it in an inappropriate manner, says Ted Sheerer, Senior Vice President and Group Manager of Cash Management at First Commonwealth Bank. “Companies need to understand the risks and take them seriously,” he says. “It may cost a little bit and make things slightly less convenient, but they need to do everything necessary to protect their financial assets. They need to take proactive steps and not wait until a loss occurs.” Smart Business spoke with Sheerer about guarding against corporate financial fraud. Why has financial fraud increased? Fraud has increased primarily because of technology — from software that makes it easy to create authentic-looking checks to phishing scams, viruses and malware that can compromise a network and PCs. A company’s financial assets could be more vulnerable today than ever. However, there are ways to substantially reduce risk. What are some examples of financial fraud? If a company’s account and routing numbers get compromised, they can become exposed to individuals generating fraudulent checks. Some businesses, through the utilization of Positive Pay, which matches check issue data, including payee line, with items presented to the bank, can catch this TED SHEERER Senior Vice President, Group Manager of Cash Management First Commonwealth Bank (412) 690-2213 tsheerer@fcbanking.com WEBSITE: Protect your business against online fraud with Trusteer Rapport software. Visit fcbanking.com to learn more. Insights Wealth Management is brought to you by First Commonwealth Bank with no financial loss. The bank alerts the business regarding items that do not match, and offers the opportunity to pay or return those checks. Unfortunately, many others wait until they experience a loss before taking steps to implement Positive Pay. A more current example is corporate account takeover, where a company’s network or specific PCs get infected with a virus or malware, somebody obtains access to the system and then performs keystroke logging. The fraudster can then sometimes capture the necessary credentials to get into the business’s online banking. How should fraud education be handled? You can educate employees, especially those conducting company financial transactions, by using the knowledge of your IT staff. If you don’t have an in-house IT staff or want to supplement this education, work with your bank to see if it offers any security or fraud seminars. You also can find local and regional fraud awareness seminars through professional organizations. How can you prevent or mitigate fraud? To minimize the potential of check fraud, companies can incorporate security features into their check stock, store checks and digital signatures in a secure environment, segregate financial duties, reconcile accounts regularly, and utilize Positive Pay with payee line protection. If something doesn’t match, the bank alerts the business customer who decides to pay or return it. With increased electronic fraud, which includes Automated Clearing House (ACH) transactions and wire transfers, it’s important to have ACH block and filter. This stops unauthorized transactions from hitting accounts. Companies should also ask if their bank offers malware detection and/or account takeover detection software. This is sometimes provided for free. Some other preventative measures are to: ■ Understand procedures around user authentication and limit users to those who absolutely need access. ■ Establish dual verification for any outbound electronic transactions. ■ Have dedicated PCs used only for online banking services. ■ Change passwords regularly, don’t share or write down logins, and routinely update anti-virus and malware protection software. What’s the priority with fraud prevention? The priorities should be Positive Pay, ACH block and filter, and then everything the organization can do to protect its network. Many businesses don’t take the necessary preventative steps. Only when companies seriously understand the risks can they partner with their bank to combat financial fraud. ● © 2013 Smart Business Network Inc. Reprinted from the April 2013 issue of Smart Business Pittsburgh. INSIGHTS WEALTH MANAGEMENT Health savings accounts How HSAs allow you to take control of health care costs and planning INTERVIEWED BY JAYNE GEST H ealth savings accounts (HSAs) are a savings vehicle increasingly being used to offset health care costs and improve awareness when utilizing health care simply because there is additional skin in the game. Further, HSAs provide potential savings and accumulation of assets that work well with long-term financial planning. “HSAs encourage us to be better consumers, plan ahead and consider the ramifications of health care, as it applies to your long-term financial plan,” says Michael Bartolini, President and CEO of First Commonwealth Insurance Agency. “It might be a very good opportunity to save more tax-deferred and tax-free money, depending on your situation,” says Nancy Kunz, Lead Financial Planner at First Commonwealth Financial Advisors. Smart Business spoke with Bartolini and Kunz about how health savings accounts operate and where they fit in with your financial planning. How does an HSA work in conjunction with your health insurance? Many people are going to a high-deductible health care plan that has premium savings as a result of the larger upfront deductible. The idea is to shift those premium savings to an HSA, which can be used to pay for unreimbursed medical expenses on a pre-tax basis. The list of applicable expenses is long and includes dental, vision, long-term care insurance premiums, home improvements for medically necessary conditions, etc. An HSA does not have to be provided by an employer; it can be set up on an individual basis. You also are able to accumulate funds year after year, with the idea of using those dollars against future medical expenses. MICHAEL BARTOLINI President, CEO First Commonwealth Insurance Agency (724) 349-6028 michael.bartolini@fcfins.com NANCY KUNZ, CFP®, ChFC®, CLU® Lead Financial Planner First Commonwealth Financial Advisors (412) 562-3232 nkunz@fcbanking.com FOLLOW UP: To learn more, call (855) ASK-4-FCA, or visit ask4fca.com. Insights Wealth Management is brought to you by First Commonwealth Bank The current annual contribution limits, which tend to increase, are $6,450 for a family or $3,250 for an individual. If you are over the age of 50, you are able to contribute an additional $1,000. How does this differ from a flexible spending account? Typically provided by employers, a flexible spending account (FSA) works on a pre-tax basis for many of the same unreimbursed medical expenses, but the money does not roll over to the following year. If the monies that are in the FSA are not spent by the end of the calendar year, they are lost. Unlike an HSA, all monies you plan to contribute to the FSA throughout the year are available as soon as you sign up, whereas only the actual contributions are available in an HSA. How does an HSA help you better manage health care expenses? When something hits your pocket or you have a new cost, it causes you to be more responsible and a better consumer. If you have to pay $2,000 first with the highdeductible health plan, you’re going to be more mindful of where you go for health care expenses, including which hospital or provider you choose for a procedure. The economics of health care don’t follow traditional economics where you choose wisely based on price points and/or quality. What one provider may charge for an MRI versus what another provider charges could be very different, but you’re not likely to care if it’s a $10 or $15 copay. We don’t have the mindset that even if insurance companies are paying, so are we — one way or another. HSAs and high-deductible health plans with their greater level of upfront deductible pushes consumers to exert more energy to pick up the phone and find out what a procedure costs. In addition, many health insurance carrier websites are starting to populate this kind of transparent data to show provider price points. How does an HSA fit into your overall financial plan? An HSA can act as another retirement vehicle, especially if you start young enough to accumulate funds without having to — or choosing not to — use those dollars against medical expenses. Once you’ve reached age 65, HSA funds can be used without penalty for any purpose. An HSA also will follow you wherever you go; it’s not tied to an employer. Many people have reached their maximum on 401(k) or IRA contributions, so depending on your age and health needs, this may be an option to look at seriously for tax benefits and long-range financial planning. ● © 2013 Smart Business Network Inc. Reprinted from the May 2013 issue of Smart Business Pittsburgh. INSIGHTS WEALTH MANAGEMENT Demystifying trusts How to tailor trusts to meet your needs and care for beneficiaries INTERVIEWED BY JAYNE GEST W hether you are looking to manage your own assets, control how your assets are distributed after your death, plan for incapacity or enable your business to continue uninterrupted should something happen to you, trusts can help you accomplish your estate planning goals. By establishing a trust, you ensure that the assets gathered during your life will not disappear because of the inexperience or inability of beneficiaries. A byproduct of that is the peace of mind that comes from knowing your loved ones will continue to be financially protected. “One of the benefits of a trust is that it’s established based on the unique needs and objectives of the individual and the individual’s family, and tailored to meet those needs,” says Susan L. Nelson, CTFA, Senior Trust Executive and Senior Vice President at First Commonwealth Advisors. Smart Business spoke with Nelson about the benefits and management of trusts. What are the different types of trusts? There are many types of trusts, the most basic being the revocable and irrevocable. The type of trust you use will depend on what you are trying to accomplish. A revocable trust, often referred to as a living trust, allows the individual establishing the trust to remain in control of the assets and allows them to change the beneficiary, the trustee, the trust terms and even end the trust. The grantor can use the trust for investment management, bill paying, tax planning and avoidance of probate. It can continue on in the event of incapacity, providing seamless financial management for the grantor, and can continue on after death for the benefit of others. Once the grantor dies, the trust becomes irrevocable. An irrevocable trust is where the grantor SUSAN L. NELSON, CTFA Senior Trust Executive, Senior Vice President First Commonwealth Advisors (724) 832-6062 snelson@fcbanking.com FOLLOW UP: To learn more, call (855) ASK-4-FCA, or visit ask4fca.com. Insights Wealth Management is brought to you by First Commonwealth Bank gives complete control to an independent trustee who manages the assets for the grantor and beneficiaries. You cannot easily change or revoke this type of trust. It’s frequently used to minimize potential estate taxes by reducing the taxable estate of the grantor because the assets transferred to this trust, plus any future appreciation, are removed from the grantor’s gross estate. Additionally, property transferred through an irrevocable trust will avoid probate and may be protected from future creditors. What are the benefits of trusts? Some benefits are: ■ Continuous financial management in the event of incapacity. ■ Professional investment management. ■ Financial privacy — a trust isn’t public like a will. ■ Probate avoidance with no lapse in asset protection and investments — probate can take a year or more, depending on the complexity. ■ Asset management for inheritances. ■ Creditor protection for heirs. If a beneficiary is going through bankruptcy, money in the trust cannot be touched. Trusts can provide lifetime financial protection for a surviving spouse or disabled child, an inheritance for children from an earlier marriage, can minimize estate taxes and provide a future legacy for charity. Trusts can be used in order to protect, preserve and transfer wealth for the benefit of individuals, families and organizations. While trusts can be used for myriad circumstances, they are not for everyone. Discuss the advantages and benefits of a trust for your situation with a financial adviser. How should a trust be managed? Every trust is based on your needs and objectives. When setting up the trust, determine what you’re trying to accomplish so you and your financial adviser can decide how to reach those objectives. One of the first things looked at are tax implications and how to reduce pain points. Providing for future beneficiaries should also be examined. After the trust is established, you’ll need to meet periodically to discuss the investment portfolio and life changes to be certain the trust still meets your needs. Why choose a professional trustee? Institutional fiduciaries are pros at what they do, have professionals on staff with years of experience, and are on the cutting edge of regulatory and tax law changes. They may be the best option for reliability, experience, responsiveness, neutrality and arms-length objectivity with beneficiaries, objective investment guidance, convenience and consistency over time. An institutional fiduciary doesn’t age or die. ● © 2013 Smart Business Network Inc. Reprinted from the June 2013 issue of Smart Business Pittsburgh. INSIGHTS WEALTH MANAGEMENT Diversifying your life How to construct passive portfolios to offset large wealth concentrations B usiness owners and corporate executives tend to overinvest in their businesses, often ending up with a large portion of their wealth at risk to the fortunes of one company. However difficult, these owners need to diversify their financial assets to better survive periods of stress. The rules of prudent investing tell us that any more than 10 percent of one’s wealth invested in any one company is too much. “Diversifying is not natural to individuals so closely connected to one business, but it can be a serious risk to their underlying wealth and the financial health of their entire family,” says Nina M. Baranchuk, CFA, Senior Vice President and Chief Investment Officer at First Commonwealth Advisors. Smart Business spoke with Baranchuk about how to structure portfolios to diversify or offset these concentrated risks. Why do corporate executives or business owners need to diversify? Even regular employees get a company paycheck and buy company stock in the 401(k) or the employee stock purchase plan, so the concentration risks for all employees can be severe. Senior executives often accumulate additional large holdings of company stock and options as part of their compensation. A business owner’s company may also be a disproportionately large part of his or her portfolio as well. An owner bears the risk of the entity and any economic, competitive or regulatory forces that might impact it. Like putting all your chips on red, there are serious consequences to holding so much ‘concentrated’ wealth if things don’t go well. In addition, these holdings can be illiquid — there is no easy exit under times of stress. NINA M. BARANCHUK, CFA Senior Vice President, Chief Investment Officer First Commonwealth Advisors (412) 690-4596 nbaranchuk@fcbanking.com FOLLOW UP: To learn more, call (855) ASK-4-FCA, or visit ask4fca.com. Insights Wealth Management is brought to you by First Commonwealth Bank How should business owners construct their passive investment portfolios? In some cases, it may not be possible to diversify much. If an owner can take cash out of the business, he or she should work with a qualified portfolio adviser to ensure that all of his or her passive investments are built to complement or offset the risk. A qualified adviser can craft a portfolio that helps to mitigate your specific concentration risks and manage your overall exposures. For example, a local Pittsburgh businessperson might be concentrated in a steel or metal fabrication business. So, he or she would share exposure to the fates of this or other industries as well their end markets in the U.S. or overseas. He or she also may have significant risks to things like geography, interest rates, significant product input costs, etc. You can easily have issues of exposure based on subtle or indirect connections. Some risks to a firm are really in your supply chain or the financial health of a customer’s industry. Maybe you have one or two dominant clients that represent a large percentage of your revenue stream. Geographical risks loom large for some companies as well. A portfolio built to offset these risks might exclude many other holdings in the industrial arena and overinvest in industries that often do well when industrials/metals do not — think consumer-purchase staples like food and household products or utilities. What’s another example of offsetting your risk? One family we worked with had made its wealth in the real estate business — owning everything from apartment complexes to high-rises. Our analytic work found that two good offsets for these holdings were private equity and financial stocks. Thus invested, whatever happens to interest rates, private equity and financials will react in opposition to the direction of real estate, counteracting one of its most impactful environmental factors. What should executives consider? While many executives have limited ability to divest their options or stock, they should certainly not invest their 401(k) in the company stock or buy additional shares. Remember that the executives at Enron and WorldCom went down together, along with their options, pensions, paychecks and other compensation. In this world of heightened competitive and financial risks, no business is immune from potentially negative outcomes. We urge our clients to make sure they have done everything possible to ensure their family’s financial health by planning for worst-case scenarios. ● © 2013 Smart Business Network Inc. Reprinted from the July 2013 issue of Smart Business Pittsburgh. INSIGHTS WEALTH MANAGEMENT Women business owners Business development in a male dominated energy industry INTERVIEWED BY JAYNE GEST N etworking is key to growth when it comes to business development. Women business owners, however, face unique challenges, especially in a rapidly growing, male-dominated energy industry. In a recent survey conducted by First Commonwealth Bank® and Campos Inc. of 125 local women-led businesses, more than 47 percent of respondents said business development was their greatest need. “Based on this percentage, it shows that there is a significant opportunity for women to better understand how to network and successfully grow their businesses through these unique relationships,” says Megan A. White, Vice President and Regional Manager at First Commonwealth Bank. Smart Business spoke with White about how women in business, particularly within the energy industry, can tackle business development. What challenges do women face with developing their businesses? In the same Campos survey, 67 percent of respondents said they seek business advice and guidance from peers and colleagues. However, the challenge for many women is that they do not know who to network with for business advice beyond their peers and colleagues, and sometimes need help getting outside of their industry. When they expand to other industries, such as education, finance or government, it helps them build a solid network and creates many opportunities for developing their business. How can women build networks that become their center of influence? One way to create a networking system to benefit your business is to reach out to business professionals — your banker, attorney and accountant — who each have MEGAN A. WHITE Vice President, Regional Manager First Commonwealth Bank (724) 836-6694 mwhite@fcbanking.com FOLLOW UP: Call (800) 711-BANK (2265) or visit fcbanking.com/womenfirst for resources specific to women in business, local events and more. Insights Wealth Management is brought to you by First Commonwealth Bank networks that you can plug into. People often have tunnel vision, thinking a banker only does loans and deposits, but a good banker who wants to see your business grow and succeed can help with all your business needs, and connects you to community leaders or business owners. A banker, along with the network of other professionals, can open doors, make introductions and be your strongest advocate. With the energy industry’s growth, what’s important for women to understand about business development in this arena? According to Rigzone, which provides oil and gas industry news and information, in the first quarter of this year, more women than men entered the oil and gas industry. Locally, many women operate in leadership positions within the manufacturing and service industries related to oil and gas. People may think of the energy industry as male-dominated, but it’s an avenue for women to build leadership roles and own companies within the industry. Like many, when I first started to develop contacts within the energy industry, as a woman I thought there might be hurdles to overcome. However, in general, everybody within the industry is very welcoming, which helps you learn the network, and a lot of women already operate within the space. Women shouldn’t hold back, assuming they may have a hard time, when they actually have a skewed perception of the industry. It’s also short-sighted to assume their company may not tie into the energy industry because they’re just thinking of the wells, pads and drilling. That’s not really looking at what the industry can do, or what your business can do for the industry. Is there still a ‘boy’s club’ mentality in the energy industry? Not as much. We do have a lot of room to grow, quite frankly, but there are women’s organizations that help with that. For example, the Women’s Energy Network, which was primarily Texas-oriented, formed an Appalachia chapter in 2011 that focuses on Pennsylvania, Ohio and West Virginia. Women in the energy industry are being proactive. They want to get together to form a team and network within themselves, as well as being able to work together to become an industry force. Business is still very much relationship driven. Yes, you need to have a competitive product and know what you’re doing in your industry. But in order to grow with other companies in your market area, it’s important to understand what each industry is doing and how you can work with others, or create something that makes your market stronger. ● © 2013 Smart Business Network Inc. Reprinted from the November 2013 issue of Smart Business Pittsburgh.
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