July 2017 eNewsletter
Discussing Finances with the Next Generation
Chad Maggard, Principal, Portfolio Manager, Johnson Investment Counsel
“Much unhappiness has come into the world because of bewilderment and things left unsaid.”
Discussing money is not usually an easy or comfortable thing to do; particularly when that discussion is between parents and children. When significant wealth from a family business or parents’ estate is involved, the angst can be even more severe. Family finances can cause anxiety for fear of straining relationships, creating disincentives to work, or trivializing a potential lifetime of effort down to a few numbers on a balance sheet. However, beginning this conversation early, and approaching it honestly, is necessary to pass wealth to the next generation as smoothly as possible while preserving family harmony.
No rule book exists to pinpoint exactly when and how to reveal information about family wealth to children - family dynamics and circumstances are just too vastly different from one family to another. But there are helpful points to consider when talking about family money to make the conversations easier and more productive:
Start Early and Reveal Information Over Time
Depending upon the age of your children, you may be able to educate them over time about financial concepts and family wealth. Opening a savings account with your kids, and encouraging them to save for a goal (that new Nintendo game) can go a long way in instilling an appreciation for the work and delayed gratification required to build wealth. These type of steps can allow for a greater level of trust, giving you the opportunity to share more information as your children mature and demonstrate responsibility and interest (or disinterest) around finances. Building a foundation of core financial concepts early on can sow the seeds for your children's financial responsibility.
As you're sharing information and educating your family, encourage questions and feedback from the outset. Providing straightforward information, open conversation, and explanations behind decisions regarding the family's wealth can go a long way in building trust and a collaborative approach.
Introduce a Third Party
You don’t have to do all the financial education and financial talk at the dinner table. It can be helpful and productive to include your family in meetings with your professional advisors to discuss these topics. Attorneys, CPAs, and financial advisors have these conversations on a regular basis and can be very effective in helping you convey your message and lending an outside perspective.
It can be a little nerve-racking to pass down your hard earned wealth to children that don’t appear to have the same values as you. You don’t want your gift to loved ones to be quickly squandered away. It’s easy to throw around words like “entitled,” “self-centered,” and "unmotivated" to describe in broad strokes the possible target audience of the message you're trying to deliver. Remember, though, that similar descriptions have been used to describe younger generations including Generation X and Baby Boomers. Remove the date from this Time Magazine cover and you may have trouble identifying the group in focus. What is sometimes attributed to inherent generational flaws may be better described as a phase of life that encompasses values and priorities that change as time passes. Be confident with the values you instilled in your children when they were younger, and approach these conversations differently as you notice their values change and mature over time.
Purpose Driven Conversation
Rather than just delivering the general facts and dollar figures involved in the family's wealth, provide historical context and the story of how and why certain financial decisions were made. Share a vision for the years ahead. Describe your hopes for how the inherited wealth will be used and the important purposes it will fulfill. Doing this can help give your family a greater appreciation for the work involved in building that wealth, and encourage buy-in from those involved. Forcing yourself to put this in writing will help articulate a clear message that may otherwise come across as vague to your family.
Estate Plan Structure
A great deal of customization is available to you as you craft or update your estate plan to provide a framework for wealth transfer. If you have specific concerns or goals for when and how your wealth is passed on, discuss these with your professional advisors to determine the best ways to address them. A well-structured estate plan can alleviate current concerns, provide flexibility in wealth distribution, and allow beneficiaries to prove that they are financially responsible over time.
Discussing your family's wealth and plans for the future doesn't have to be an awkward or uncomfortable conversation. Considering the points above can provide more confidence, clarity, and trust as you share this information with your loved ones, hopefully bringing your family closer together.
Chad Maggard is a Portfolio Manager with Johnson Investment Counsel. The views and opinions presented in this article are intended for educational purposes only and should not be construed as a solicitation to effect transactions in securities or the rendering of personalized investment advice. The views and opinions expressed in this article are not intended to be tailored financial advice and may not be suitable for your situation. No person should assume that any advice or strategies presented in this article serves as the receipt of, or a substitute for, personalized individual advice from an investment professional.
While the author has used best efforts in preparing this article, he makes no representations or warranties with respect to the accuracy or completeness of the contents of this article and specifically disclaims any implied warranties of merchantability or fitness for a particular purpose. The author shall not be liable for any loss of profit or any other commercial damages, including, but not limited to, special, incidental, consequential, or other damages.
A Borrower Strategy for a Rising Interest Rate Environment
Lou Fender, Sr. Vice President & Market Manager, Southwest Ohio, WesBanco
Most of us are very familiar with the quote “a picture is worth a thousand words!” The phrase is widely attributed to Frederick Barnard who published a piece on the effectiveness of graphics in advertising back in 1921. A related expression I like to quote, however, is “an example is worth a thousand pictures”.
Are you in the growing camp of business leaders (including economists, Federal Reserve Chair and Board members) who believe we are in for a period of rising interest rates? Despite recent estimates that long-term rates may not increase at the level previously thought, the Federal Reserve expects to deliver two more rate hikes this year. If you are in that group of believers then an “example” of how a privately held business can protect itself in this environment could make sense for your specific application.
If your business has a future fixed rate financing on the horizon (i.e.: constructing a new facility for expansion or relocation, purchase of new equipment, or an acquisition) you are likely weighing whether to protect yourself from interest rate risk. However, you would like to “float” or remain variable due to the current lower end of the yield curve or not being fully borrowed completely on the future project until conclusion.
You can achieve this protection by using what is known as a forward starting SWAP (pay-fixed). An interest rate SWAP is a binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal (usually at least $1 million notional amount). The forward swap is a hedge (think of it as an insurance policy) against the change in both treasury rates and SWAP spreads and is quoted as a forward rate. The forward starting costs nothing up front to enter into, and the cost of the financing is built into your future rate. Also, because the yield curve is relatively flat the premium spread (the increased number of basis points for fixing at a future date versus fixing with certainty today) for the forward SWAP is thinner than historical forward starting swap spreads.
Let’s do an illustration. Say you are building a $5 million building which will be occupied in one year. We will further assume that your bank’s fixed rate quote via an interest rate SWAP today (10 year term and 20 year amortization) would be 4.86 percent. However, your variable interest rate is 3.627 percent, and recall that not all of your $4 million (80 percent of the building cost) loan amount will be outstanding on day one. Proceeds of the real estate loan will be drawn down over the next 12 months as work in the construction process is completed and affidavits for payments are submitted.
With the use of the forward starting SWAP, given today’s interest rate environment, this could add 13 basis points to the ultimate fixed rate selected for a rate of 4.99 percent. By utilizing the forward starting SWAP you would know with certainty that one year from today, regardless of how much interest rates move up over the construction phase, your rate is fixed for the ten year term. Furthermore, you can continue to borrow at their LIBOR based rate of 3.627 percent (or their relative spread should LIBOR move up as projected) initially, thereby keeping interest costs to a minimum.
Understand that your SWAP will either be an asset to you (SWAPS rates have risen), or a liability to you (SWAP rates have fallen) at the time of your future financing event. If for any reason your project is delayed, your fixed rate would simply become an effective hedge until the date of your actual funding completion date. Generally, though if there is great uncertainty around your expected future closing date the forward starting SWAP will still provide you with the best flexibility to align settlement and funding dates.
Ultimately, your future fixed rate financing may not be complicated, but your views on interest rates should drive your decision to use this method. Used in this example a company can protect themselves in a rising interest rate environment as well as retain the benefits of remaining variable for the contracted period of time.
Threat Prevention is No Longer Enough to Protect Your Business
Louie Hollmeyer, Director of Marketing, ATC
Content provided by Louie Hollmeyer, ATC, and curated by Masergy, an ATC service provider.
The world of cyber security is an asymmetric battleground. The attack surface is growing as a result of the growing number of connected devices, malicious apps, the Internet of Things (for instance smart refrigerators, coffee makers and other devices), cloud services and the digitization of business functions.
Keeping the bad guys out is no longer an option. It’s time for organizations to turn to rapid detection and response.
By 2020, 60 percent of enterprise IT security budgets will be allocated to managed detection and response (MDR). That’s up from less than 30 percent in 2016, according to Gartner.
Companies are planning to spend more on MDR because attackers are getting in and the goal is to catch them before they can do much damage. The average dwell time, the days between when a compromise is detected and then mitigated, is around 200 days. And close to 70 percent of breaches are discovered by third parties.
The long tail impact of cyber breaches are many. Once inside a company’s network, hackers can gain persistence by installing backdoor and rootkits across several systems. From there, they can expand access across internal resources and eventually exfiltrate data.
Attack delivery tends to happen quickly in the cyber kill chain, which includes reconnaissance, weaponization, delivery, exploit, installation, command and action. Kudos to businesses whose security prevention tools catch such incursions in any of these stages and stop it cold. But security experts agree that prevention alone isn’t enough to keep businesses safe.
Businesses Should Recalibrate
Businesses that take prevention efforts without corresponding detection can never be sure that the most critical issues have been addressed. A rebalancing exercise is needed. Detection and response capabilities will typically pay significant dividends in terms of identifying and neutralizing an active threat before it has a chance to do significant damage. And, make no mistake – a determined attacker will eventually get into your network.
Organizations are increasingly focusing on detection and response because taking a preventive approach has not been successful in blocking malicious attacks, said Elizabeth Kim, Senior Research Analyst at Gartner. “We strongly advise businesses to balance their spending to include both.”
During the command and control phase of the kill chain, malware is installed and covert network channels are established to evade detection. The software roams the network looking for targets from which to exfiltrate data or to find even more targets. This period presents an opportunity for rapid detection and response to shut these activities down.
Hire the Experts
Staffing shortages take part of the blame for businesses not being able to detect and react to threats in a timely manner. Security spending will increasingly focus on services in the face of growing threats.
It’s especially challenging for mid-sized organizations to put the people, processes and technology in place for rapid detection. Managed security providers (MSPS) are a viable alternative for resource-constrained organizations. MSPs can scale quickly and provide 24/7 monitoring. They also have the personnel and expertise to analyze threat behaviors and advise IT departments on the most effective remediation efforts.
No business is immune to cyber-attacks, neither large or small. Make sure you’re adequately protected from attacks above and beyond threat prevention.