Firstrust Financial Resources CEO Adam Sherman says investors should be aware of likely changes in tax law, and make adjustments in their portfolios as necessary. He shares his views on master limited partnerships, as well as the consumer and housing sectors.
Kate Stalter: Today, I'm pleased to welcome Adam Sherman, CEO of Firstrust Financial Resources.
Adam, I know you have a number of factors that you recognize, where investors should pay attention to, with tax cuts in the US set to expire at the end of this year. I want to focus mainly on the investment aspects, but the financial planning is huge, as well. So let's start out with that for a moment. Should people be reevaluating their financial plans in light of what might be coming down the road?
Adam Sherman: I think people always have to be cognizant of pending legislation or taxes that could impact their overall plan, so I think it is important to meet with your advisor prior to Q4.
It doesn't look like there's going to be any kind of legislation passed prior to the election. And to the extent that there's a lame duck congress after the election, there's a lot of issues to be dealt with, so most of the people are betting on something happening in 2013. But I think you need to be aware of all of the issues surrounding this tax law and getting with your advisor sometime in the fourth quarter.
Kate Stalter: There are a few bullet points that you've highlighted, that you believe people should make sure they attend to. What are those?
Adam Sherman: Well, I think they have to take a look, No. 1, at their overall estate plan. I think this is the most important situation right now.
Over the last couple of years, if you had a net worth in the $5 million to $7 million range, you were excluded from potential estate tax or any kind of inheritance issues. Now, if the Bush tax cuts go out of play on January 1, the new law is going to bring the unlimited marital deduction down to $1 million per spouse. So now all of a sudden, the $1 million or $2 million estate begins to be impacted, where in the past three to four years, that person really did not have a concern. I view that as the primary issue that's out there.
Additionally, when you're looking just at your investment portfolio, I think you want to take a look at those portfolios that are heavy with capital gains and dividend income. Right now, the scheduled law is to bring up cap gains and dividends in excess of 28%, where now they're at 15%. So if you're income is heavily dependent on dividends from different stocks or interest from other related strategies or products, I think you really need to look closely at the impact of those.
Kate Stalter: Let's talk a little bit more on that particular point. What are some specific areas of investment, maybe some specific sectors or sub-sectors, that people really should comb their portfolios, and see whether those might be hit?
Adam Sherman: Let me first start off, I think that there's going to be greater value in tax-deferred or tax-free products. I think municipal bonds will receive a favorable move up as tax rates go up, so I think you'll see some increased demand there.
I think other tax-deferred strategies…annuities will benefit from potential tax law that will increase rates. I think some of the higher dividend-paying stocks potentially could take a hit as income is paid out from these various strategies.
Kate Stalter: One area that I talk to a lot of people about in the last few months is MLPs. Those have become very popular. Talk a little bit about that, and then maybe any other area that has become popular, whether those could be of concern?
Adam Sherman: Well, I think the Master Limited Partnerships continue to do OK, as most of them are operating in the exploratory area of energy. And I think the energy sector in general is one that continues to have a lot of money and investors, a lot of money thrown at that industry, as we're trying to become more and more independent here in the United States from an energy perspective.
I think that some of the products like private debt, that might invest in that space and don't need K1's, which tend to be problematic for the average investor as far as tax returns, are going to be more and more in vogue.
The private debt marketplace is an area where consistent yields have been found over the last 24 to 36 months, so I think everyone is now chasing yield. We know it's not happening in the traditional banking sector, with CDs and money markets, so people are trying to go out and find better yielding products, which has helped out the demand for MLPs and other instruments in the private debt sector.
Kate Stalter: I want to switch gears and ask for your forecast on some of these growth sectors. Consumer has been a hot one in the past couple of years. Tech always tends to rotate in and out. What are you seeing in some of these areas?
Adam Sherman: I think consumer, in my opinion, is a little worn out right now. I think they've gotten a little bit of a favorable move in the last 30 days as oil prices have come down, and you can make a case that there's some more disposable income out there.
I think the key driver to this economy in 2013 and beyond is going to be the return of the real estate/homebuilding marketplace. If that market can continue to show some strength and some firmness, that will lead us to much greater employment. That sector has been in the doldrums now for five to six years, depending on what part of the country you're dealing with, so I think that is the sector that's going to lead this country for better economic times.
Kate Stalter: Let's just sum up today very briefly. If you had any final words of advice for our readers today just in looking over their portfolios going into the second half of the year now, what would you suggest they do?
Adam Sherman: Well, No. 1, I would suggest that they work with their advisor. There's a lot of moving parts right now. I think you want to continue to be as informed as possible. It's a real fluid economy right now. There's a lot of uneasiness overseas, which is causing some disturbance here. We've got a major election coming in five months.
With that being said, there are some unique opportunities in this country, and as I just said, the real estate problems that we've had, if the trend continues on an uptick that we saw yesterday with some improved housing starts, that is going to be a real jolt-an area that we have not seen any improvement in the last five to seven years to this overall economy.
I'm actually optimistic. I think the election is going to be a bunch of noise, but I think both of the people that are running know where we have to go. It's just a matter of how and when we're going to get there.