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Business Risk Management

Photo: Loic Leray | Unsplash

Focusing time and resources into developing a strong risk management strategy can help your business prepare for the main risks that can impact its success. There isn’t a singular plan that works for all businesses, but there are a few core components that should be addressed.

Internal Controls

Your business’ strategy should include internal control policies. Internal controls are the processes and documentation used to govern your overall operations. These protocols typically promote transparency, prevent fraud, and ensure business proceedings are compliant. Incorporating internal controls can help you mitigate fraud and set a tone of accountability throughout your organization. Here are a few internal control best practices you may want to consider in your plan:

• Documenting all key business policies and procedures and making them readily accessible to all employees

• Dividing up responsibilities that involve sensitive information, compliance, and audit-related tasks so that a checks and balances system is created

• Establishing anti-fraud controls for quicker detection and prevention of workplace fraud

Cybersecurity

Cyber-related risks have grown these past few years as cybercriminals have become more sophisticated and relentless with their schemes. A solid risk management strategy accounts for the actions your organization will take should a cyber incident occur to minimize its impact as much as possible. This component may include your organization’s documentation on security protocols, business continuity plans, IT recovery plans, and more.

What’s most important is that you work with your IT team to identify potential risks and develop policies around them so your business is prepared to act and secure its systems if a data breach were to happen. The better positioned your teams are to handle a cyberattack, the less havoc such an attack could cause on your data and operations.

Insurance Options

Insurance is specifically designed to help policyholders mitigate risk — no matter the type of coverage. From protecting against physical damage to providing funds to cover a cyberattack, there’s a range of insurance types available for business owners. Regularly review your coverage options to ensure they’re still meeting your needs and that there are no gaps present. Some policies to consider:

• Commercial Property: Covers the physical aspects of your business, such as your office space and the tools used to operate

• General Liability: Covers costs related to claims involving bodily injuries or property damage to others

• Fleet Auto: Provides auto coverage for a vehicle rather than a driver so there’s more flexibility on who can drive company vehicles

• Workers’ Compensation: Offers medical care and cash benefits for employees who become injured or ill due to their work environment

• Directors and Officers (D&O): Commonly covers fees for legal needs, settlements, and financial losses when the business is held liable

• Cyber Liability: Offers financial coverage for businesses that experience a data breach or related cyber incidents

• Business Crime: Provides coverage for losses due to fraud, embezzlement, theft, forgery, or any other business crime

Building Resilience

Perhaps the most vital aspect of your risk management strategy is its ability to build resilience and adapt to new risks. To achieve this, it’s imperative that your strategy outlines actionable steps for each risk you’re aiming to mitigate. Any team members who will need to be involved in action plans should know their role and responsibilities so they can best do their job when it’s needed most.

If a certain risk should become reality for your business, be sure to assess how well your plan worked or where improvements need to be made so you can update your processes effectively and stay agile for the future. The less ambiguity you have within your strategy, the more clarity your team has to protect your business.

Addressing every risk your business will face is an impossible feat, but a comprehensive strategy could make a world of difference. Protect your business from the people and things that can harm it by making risk management a priority.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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News News Feature

Six Tips to Help Preserve and Grow the Value of Your Investments

Counteract the effects of inflation. (Photo: Nataliya Vaitkevich | Pexels)

Inflation has been in the news a lot lately. The high inflation rates of the last couple years have significantly eroded Americans’ purchasing power on a variety of goods and services. While inflation puts a strain on short-term spending and saving, it can be especially detrimental to long-term investment accounts if not properly planned for. Fortunately, a well-built investment portfolio can help counteract the effects of inflation. The following tips can help preserve and grow the value of your investments in the face of inflation.

1. Diversify your investments.

One of the most effective ways to position your portfolio to weather inflation is by investing in a diversified mix of asset types, such as stocks, bonds, real estate, and commodities. Different asset classes tend to perform differently during various stages of the market cycle. By maintaining a diversified portfolio, you reduce the risk of all your investments being impacted in the same manner at the same time.

2. Incorporate stocks.

Historically, equity returns have outperformed inflation over the long term. Investing in a diversified mix of large- and small-cap stocks, both domestic and international, can help provide you with the long-term growth potential you need to offset rising inflation and protect your portfolio’s purchasing power. By owning stocks, you own the companies raising the prices causing inflation.

3. Consider inflation-protected securities.

Consider incorporating an allocation to inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds that change value based on the Consumer Price Index (CPI) that can provide a hedge against inflation. They offer fixed-interest payments that can help your investment keep pace with rising prices.

4. Include an allocation to real assets.

Tangible assets, such as real estate and commodities, have historically helped hedge portfolios against inflation. Real estate investments have the potential to appreciate in value and generate rental income, which can rise with inflation rates. Commodities tend to retain value during inflationary periods.

5. Rebalance regularly.

When planning for inflation, it’s important to regularly rebalance your investment portfolio. Rebalancing is the process of selling off outperforming assets in order to invest in lower-performing assets. While this practice may seem counterintuitive, it helps prevent your allocation from drifting too far from your target investment ranges. Adding to a lower-performing asset can be difficult, but it’s important to remember the reasons it’s in the portfolio in the first place. This practice helps offset inflation because it prevents one asset type from dominating your portfolio and throwing off your risk exposure.

6. Review your portfolio.

Periods of high inflation often coincide with challenging market conditions. Economic factors are constantly changing and evolving, so it’s important to regularly review your investment portfolio. This practice will ensure your portfolio continues to align with your goals and remains positioned to weather the prevailing economic landscape.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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News News Feature

Facts and Feelings: Roth vs. Traditional IRAs

Photo: Towfiqu barbhuiya | Unsplash

The choice between a Roth and a traditional retirement account is one of the most common dilemmas in financial planning. As you probably know, both types of accounts grow tax-deferred. The difference is that contributions to traditional IRAs or 401(k)s may reduce your income tax due today. For Roth accounts there’s no upfront tax benefit, but then withdrawals in retirement are generally tax-exempt.

The typical “correct” answer is that the decision between a traditional and a Roth IRA comes down to the relationship between your tax rate now and your tax rate in retirement. This seems counterintuitive, as it feels like paying taxes on the large eventual balance you’ll have in your retirement account would be much worse than paying a little bit of tax now on today’s smaller contributions. The math does work, however, because the assumption is that you’ll have less to invest in your Roth because you have to pay taxes before you can invest.

Here’s a hypothetical example: Imagine a world where everyone pays a flat 20 percent income tax rate, now and forever, and your investments today will exactly double between now and retirement.

If you have $5,000 of income today that you want to invest in a traditional IRA, you’ll invest all $5,000 today, and it will double. If you pull that money out at retirement, you’ll start with $10,000, but after 20 percent in taxes you’ll end up with a net of $8,000 available to you.

If you have $5,000 of income today that you want to invest in a Roth account, you’ll get no tax benefit today. That means you only have $4,000 to start with after paying the 20 percent tax this year. If you withdraw these funds upon retirement, your money will have doubled and you’ll have $8,000 tax-exempt, which is exactly the same outcome as the traditional IRA example above.

You can see that if you think your tax bracket will end up higher in retirement, you’d lean toward a Roth. If you’re expecting a lower tax rate in retirement, you’d likely prefer a traditional contribution.

The math above is accurate, but for most people that’s not how it works. Very few people think in terms of allocating a certain amount of income to investment and netting out the taxes as necessary (as shown above). A more common plan would be to simply pick a dollar amount, then choose between a traditional IRA or a Roth. All else equal, putting $5,000 (or any fixed amount) in a Roth is likely going to result in more money for you in retirement than putting the same amount into a traditional IRA. That’s because these two hypothetical accounts funded identically will end up with the exact same balance at retirement, but tax would be due on the traditional IRA (while the Roth money would be available to you tax-exempt).

If you made a traditional contribution with the $5,000, you wouldn’t be thinking that you should invest the extra tax savings from funding your traditional IRA — you’d probably splurge on something with your slightly larger tax return next year. If you funded the Roth with $5,000, you’d likely eat out a little less over the year (or otherwise tighten your belt) to make up the difference (probably without noticing), functionally giving up a little consumption today to avoid taxes in the future.

Ultimately, the decision to fund a Roth is a little bit like a choice to prepay taxes. A Roth might be the “wrong” choice if you end up with very low taxable income in retirement, but on the other hand, I don’t know anyone who has ever had big tax problems in retirement from overfunding their Roth! A Roth might not be the optimal financial choice, but, depending on your situation, there can be intangibles (such as peace of mind) that can eclipse the hard numbers on paper.

You and your advisor are fortunate to have taxable, traditional and Roth options available. Together you can combine the facts with your personality to make the decision that allows you to feel confident — and stay invested — on the path toward a secure financial future.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Letter From The Editor Opinion

Mismanagement, Fraud, or Forgiveness

Photo: Alexander Grey | Unsplash

Last Friday, in a 6-3 vote, the Supreme Court shot down President Biden’s student debt forgiveness plan, which would have reduced or canceled federal student loan debt for millions of borrowers. Payments and interest have been paused since March 2020 as part of Covid-19 emergency relief. According to studentaid.gov, after the hiatus, interest will start accruing again this September, with payments becoming due the following month. Some people are very upset about this ruling. Others were very upset about the possibility of folks having their loans forgiven.

A few years ago, I proudly exited college with a hard-earned journalism degree and a shiny new debt of nearly $26,000. Welcome to adulthood, you’re starting off in the negative, good luck! I worked service and retail jobs until I landed an internship here at the Flyer my senior year, and even then, held two jobs for a while just to be able to pay bills and buy groceries. There wasn’t much left over for savings. When the loan came due, I applied for a brief deferment, and later income-driven repayment. The interest really got me. I was getting nowhere for a long time. I bemoaned how dumb it was to have taken the max loans each semester. But at the time, I was stoked to receive a “refund” check after tuition was covered. Silly me didn’t ask questions, didn’t speak to financial aid counselors to fully understand what I was getting into — which wound up covering college expenses and additional money to help me get by, but with a good $7,000 in interest piled on over time.

No one is to blame but me, but what does society expect of 18-year-olds, fresh out of their parents’ homes, who have no clue what they’re doing? Making a laughable income with mounting new responsibilities at every turn. Taking out loans and cashing the refunds and having a big ol’ time until graduation when reality hits.

Of course I understand that when you’ve agreed to take out a loan, you commit to repaying it. You can’t have your mortgage or car note forgiven. But — hear me out — student loans are a sham. Furthering education should be affordable. Walking out with $25k+ in debt — because you must have a degree to pursue just about any career — is total horse shit. I can’t imagine how much it must sting for those with six-figure loans. Bless you, and I’m sorry, and I hope your income reflects that value.

The goal of the debt relief program was to assist low- to middle-income debtors — $10,000 in federal student loan debt would be canceled for borrowers making below $125,000 or households with less than $250,000 income per year. An additional $10,000 would be forgiven for Pell Grant recipients, who historically have a greater need.

Thankfully, I’ve paid most of my student loan debt. Would I like to have the rest dismissed? Absolutely. Would I be upset that this happened after I’ve doled out over $30,000? I mean, it sucks, but I’d still be supportive of offering relief to those who need it. College tuition and textbook costs increase year over year. The cost of living continues to increase, too. Why not give people attempting to better themselves a little break?

Are we as upset about bank bailouts? Three banks failed earlier this year, and the United States Federal Reserve loaned more than $300 billion to the “cash-short” institutions through its ​emergency Bank Term Funding Program (BTFP) in March. Forbes reported in March that “many experts note the Treasury Department’s plan to save depositors doesn’t constitute a bailout because it draws from insurance funds paid by banks — and not taxpayer dollars — others worry the implications could ultimately fall to consumers through economic consequences like inflation.” Last week, Cointelegraph reported that the reserve’s “bailouts” reached a new weekly high of $103 billion for the week ending June 28th, according to data from the Federal Reserve Bank of St. Louis.

What about the more than $200 billion in pandemic business loans that appear to have been fraudulent? The U.S. Small Business Administration, in its “COVID-19 Pandemic EIDL and PPP Loan Fraud Landscape” report, said of the $1.2 trillion given in COVID-19 Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP) funds, at least 17 percent went to “potentially fraudulent actors” in the “rush to swiftly disburse” funds. New studies show this could have been a driver in inflation, particularly in the housing market. About $742 billion in PPP loans were forgiven.

So we’ve got corporations, big banks, scammers, and regular people seeking financial relief and assistance. Are we mad at the kids who took out loans to attend college because the world told them they had to? The big banks whose expertise is finance but can’t seem to manage their own accounts? The scammers who got billions in free government money?

There’s mismanagement, fraud, or forgiveness. And a whole lot of moolah tangled up between. It’s pretty clear who could use the help. It’s the average hard-working American. The “consumer” struggling to live amid inflation. Maybe one day, someone will vote and act in our favor.