Finding the Right Asset Allocation

Contributed by: Jaclyn Jackson, CAP®

**Register for our LIVE investment event or our investment WEBINAR on Feb. 23!

Most delicious meals start with a great recipe. A recipe tells you what ingredients are needed to make the meal and, importantly, how much of each ingredient is needed to make the meal taste good. Just like we need to know the right mix of ingredients for a tasty meal, we also need to know the asset allocation mix that makes our investment journey palatable.

Determining the Right Mix

Asset allocation is considered one of the most impactful factors in meeting investment goals. It is the foundational mix of asset classes (stocks, bonds, cash, and cash alternatives) used to structure your investment plan; your investment recipe. There are many ways to determine your asset allocation. Asking the following questions will help:

• What are my financial goals?

• When do I need to achieve my financial goals?

• How much money will I be investing now or over time to facilitate my financial goals?

Seasoning to Taste

Now, suppose equity markets were down 20%, and your portfolio was suffering. Would you be tempted to sell your stock positions and purchase bonds instead? Figuring out an asset allocation based on goals, time horizons, and resources is essential but means nothing if you can’t stick with it. A recipe may instruct us to “season to taste” for certain ingredients. In other words, some things are subjective, and our feelings greatly influence whether we have a negative or positive experience. For asset allocation, understanding your risk tolerance helps uncover personal attitudes about your investment strategy during challenging market scenarios. It gives insight into your ability or willingness to lose some or all of your investment in exchange for greater potential returns. When deciding our risks tolerances, we must understand the following: 

• The risks and rewards associated with the investment tools we use.

• How we deal with stress, loss, or unforeseen outcomes

• The risks associated with investing

Following the Recipe

When we follow a recipe closely, our meal usually turns out how we expected. In the same way, committing to your asset allocation increases the likelihood of meeting your investment goals. Understanding your risk tolerances can reveal tendencies to undermine your asset allocation (i.e., selling or buying asset classes when we should not). Fortunately, there are a few strategies you can employ to help stay on track. 

• If you are risk-averse, diversifying your investments between and among asset categories can help improve your returns for the levels of risks taken.

• If you find yourself buying or selling assets at the wrong time, routinely (annually, quarterly, or semi-annually) rebalancing your portfolio will force you to trim from the asset classes that have performed well in the past and purchase investments that have the potential to perform well in the future.

• If you find yourself chasing performance or buying investments when they are expensive, buying investments at a fixed dollar amount over a scheduled time frame, dollar cost averaging, can help you to purchase more shares of an investment when it is down relative to other assets (prices are low) and less shares when it is up relative to other assets (more expensive). Ultimately, this can lower your average share cost over time.

Finding the right asset allocation for you is one of the most important aspects of developing your investment plan. Luckily, understanding investment goals, time horizons, resources, and risk tolerances can help you mix the best recipe of asset categories to make your investment journey deliciously successful.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Dollar-cost averaging does not ensure a profit or protect against loss, investors should consider their financial ability to continue purchases through periods of low price levels.

What Goldman Sachs Thinks About Markets: Conference Key Takeaways

Contributed by: Jaclyn Jackson, CAP®

Due diligence meetings are a core part of the Center’s investment research strategy.  They give us a chance to vet investment strategies for our clients. They also allow us to get data from global financial institutions and industry leaders that most advisors typically don’t have the resources to aggregate themselves. 

This fall, I attended the Professional Investor Forum at the Goldman Sachs Conference Center in New York. The three-day conference highlighted research from the company’s thought leaders about markets and the current economic landscape. 

Here are Goldman’s views on a few questions that have been top of mind for investors.

Q: Are we facing another “Great Recession”?

Investor anxiety is reminiscent of the Great Recession, but the root of market volatility is quite different. Market volatility in 2007-2008 was triggered by unhealthy company fundamentals, particularly in the financial sector. The volatility was micro-driven.

Current market volatility is macro-driven with inflation and fed policy expectations largely dictating the investor experience. Since company fundamentals are relatively healthy, Goldman believes a recession would be shallow – especially compared to the Great Recession.

Q:  What’s going on with equity markets?

Rates and higher bond yields have affected the US equity market. Today, the market trades at around 15 times forward earnings compared to 21 times forward earnings at the beginning of the year. A lot of this compression is coming from high growth companies, particularly “long-duration” tech companies where the valuation of the company is attributable to the earnings that are well into the future. 

The gap between shorter-duration stocks and longer-duration stocks has been very significant in terms of the relative performance. This is a tough environment for long-duration stocks because rates will likely stay high. Companies with more nearer-term visibility on their cash flows are likely to do better in this environment. (There are tech companies with more near-term visibility, so no need to dump all tech from your portfolio.)

Inflation clarity is important because that helps us understand the direction of Federal Reserve policy and interest rate policy. Greater investor confidence about corporate earnings might be the impetus for equity volatility to decline - freeing equity prices to move higher.

Equity markets are figured out when inflation is figured out.

Q: How low can equity markets go?

Goldman Sachs expects the inflation rate to lower and for markets to recover in late 2023. This is how they see the timeline unfolding:

• The Fed will be raising rates several more times this year and early part of 2023.

• At the end of the year, the S&P 500 will likely close somewhere between 3,400 and 3,600, modestly down from the current level.

• Markets will be down in the early part of next year until we see inflation data trending lower.

• Equity market moves higher by the end of 2023.

Note, there is a case to be made for a recession. In a recessionary scenario (where the Fed hikes so much that we move into recessionary territory), Goldman believes we could hit a low of around 3,150, which is meaningfully below where we are now.

Q: When will market volatility lighten up?

Goldman Sachs Economics expects the rate of inflation (as measured by core PCE) to decelerate from close to 5 percent to roughly 3 percent. If that actually happens, they believe equity prices will do okay. Nevertheless, that won’t be clear until sometime in the middle of 2023, so uncertainty will probably continue another six months.

Q:  Where should I be invested?

According to Goldman, we’ve move from a “there is no alternative” or TINA environment to a “there are reasonable alternatives” or TARA environment.

If investors wanted yield they would invest in equities, especially US equities. However, chasing yield through equities leaves the door open to greater risk vulnerability. With interest rates on short-term cash positions starting to approach 4 percent, investors can get an attractive rate of return from an income point of view. In the words of David Kostin, Goldman’s Chief US Equity Strategist, “the idea of pure cash returns pushing almost 4 percent and the expectation that the Fed Funds rate will be somewhere between 4.25 and 4.5 percent by the early part of next year, that would suggest that there are reasonable alternatives (to equities), just on the cash positions alone.”

To be clear, this does NOT mean one should sell all of their equities and buy short-term cash positions. Equity positions in your portfolio should generally align with your strategic allocation. This is suggesting that investors don’t have to take unwarranted risks with over-exposure to equity markets to get yield because there are reasonable alternatives (TARA). Short-term cash positions are one example of this. The key here is that now, investors don’t have to over-do-it with risks when looking for yields.

Fed tightening is a big focus, but other parts of financial conditions are tightening too - higher bond yields, wider credit spreads, stronger dollar, lower equity prices. All of these contribute to tightening financial conditions. The type of companies in the equity market that do well in this environment are companies with stronger balance sheets, companies with higher return metrics, return on equity, return on capital, companies with less drawdown in terms of their share prices, more stable growth in terms of different metrics. In short, “quality” companies are likely to help investors in the uncertain environment of tightening financial conditions.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. Performance of hypothetical investments do not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. Illustrations does not include fees and expenses, which would reduce returns.

Part 1: Are International Equities Dead?

Contributed by: Jaclyn Jackson, CAP®

This is part one of a two-part blog series. We'll talk about diversification generally in this blog, then zoom in on international equity diversification during the second part of the series.

Amid geopolitical tension and pandemic backlash, equities have taken a beating; bond prices have fallen as the Fed raises rates, and even cash under the mattress is no match for inflation. Looking at our current market environment, I am reminded of the Motown classic sung by Martha and The Vandellas, "Nowhere to Run." For decades, investment professionals have preached the merits of asset allocation and portfolio diversification, but what do you do when it all stinks?

The answer is simple (but the action is hard): Stay the Course! That advice doesn't feel helpful during market turbulence, but honestly, it's the best advice for long-term investors. Let me explain…

Why Diversification Works

Craig L. Israelsen, Ph.D. and Executive-in-Residence in the Personal Financial Planning Program at Utah Valley, did compelling research around portfolio diversification worth reviewing. He compared five portfolios representing different risk levels and asset allocations over 50-years, from 1970 to 2019. While there is much to glean from his research, let's focus on his comparison of two moderately aggressive portfolios (as they most closely resemble the average investor experience):  

• Traditional “Balanced” Fund: 60% US stock, 40% bond asset allocation

• Seven Asset Diversified Portfolio: 14.3% allocation to seven different asset classes (asset classes included large U.S. stock, small-cap U.S. stock, non-U.S. developed stock, real estate, commodities, U.S. bonds, and cash)

In 2019, a year dominated by the S&P 500, the Traditional "Balanced" Fund (having a larger composition of the S&P 500) predictably outperformed Seven Asset Diversified Portfolio. On the other hand, over the 50-year period, the latter had a similar annualized gross return with a lower standard deviation. An investor with a diversified portfolio experienced comparable returns without taking as much risk.

Grounding his research in numbers, Israelsen evaluated a $250,000 initial investment for each portfolio over 26 rolling 25-year periods from 1970 to 2019 and assumed a 5% initial end-of-year withdrawal with a 3% annual cost of living adjustment taken at the end of each year. The Traditional "Balanced" Fund had a median ending balance of $1,234,749 after 25 years compared to the Seven Asset Diversified Portfolio median ending balance of $1,806,565.  

The research illustrates why planners have a high conviction in diversification. The Seven Asset Diversified Portfolio provided risk mitigation (as measured by standard deviation) and supported robust returns even with annual withdrawals.

Stay Tuned

We've discussed the merits of diversification in a general sense. In part two of the series, we'll speak more directly about international equities and explain why we believe it is still a diversifier worth holding.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jaclyn Jackson, CAP®, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.

Why Everybody Is Talking About ESG Investing

Contributed by: Jaclyn Jackson, CAP®

*This blog was originally published on April 8, 2021. For more information on matching your values to your investments, check out The Center Social Strategy.

According to CNBC, almost 1 in 4 dollars is going into Environmental, Social, and Governance (ESG) funds this year.  Even before 2021, the combination of ethical provisions and competitive performance turned many heads towards ESG investments.  I aim to explain what the big fuss is about and why ESG investments are gaining traction.

Investors Are Talking About It

To be clear, the March 2020 downturn was no picnic (for anyone).  However, investors who had stake in environmental, social, and governance (ESG) investments managed the economic downturn with greater resilience.  Leading research firm, Morningstar, reported that during March 2020, “sustainable funds dominated the top quartiles and top halves of their peer groups.  Sixty-six percent of sustainable equity funds ranked in the top halves of their respective categories and more than a third (39%) ranked in their category's best quartile.”  Compared to peers, ESG funds pulled top rankings.

Not only did peer to peer comparisons look good, but index comparisons proved more robust too.  In the same study, Morningstar compared 12 passive ESG funds in the large-blend category to a traditionally passive fund. They reported, “For the year through March 12, all 12 ESG index funds outperformed”. What’s more is that fees were included in this study.  While the ESG passive funds compared were more expensive than the traditional passive fund, they still managed to outperform.  Impressively, the trend held with international and emerging market index comparisons…and everybody is talking about it! 

Including the world’s largest investor/asset manager, BlackRock, who’s CEO challenged corporations to consider the impact of climate change on business models.  In 2020, CEO Larry Fink announced BlackRock would incorporate ESG metrics into 100% of their portfolios.  The asset manager also pledged to produce data and analytics to punctuate why considering climate change should be an investment value. 

Yellen And Powell Are Talking About It

Investors are not the only people concerned.  In wake of recent natural disasters, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell are working to assess the risks climate change poses to the health and resilience of the financial system.  Their consensus implied a concentrated effort to monitor financial institutions and their exposure to extreme weather events.  Leading the charge, Fed Governor Lael Brainard, recently announced the Financial Supervision Climate Committee (FSCC).  Brainard is a proponent of using scenario testing to understand banks’ ability to survive hypothetical climate catastrophes.  The FSCC will focus on developing evaluation processes for climate risks to the financial system.

Why Everybody Is Talking About It

While many people acknowledge the ethical appeal of ESG methodologies, they may not fully appreciate the businesses appeal that underpins stock performance.  Business litigation risk provides a clear example.  The Financial Analyst Journal featured a study that explored the relationship between ESG performance and company litigation risks.  Analyzing US class action lawsuits, researchers found, “a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%”.  The study also asserted that companies with low ESG performance experienced market value losses ($1.14 billion) twice the size of companies with high ESG performance.  Further, the study integrated their findings with a trading strategy and concluded investors benefitted from lower litigation risk.

It doesn’t stop with litigation risk.  There are also links between healthy corporate governance and market returns.  As You Sow, a nonprofit promoting corporate responsibility, has been tracking S&P 500 companies with excessively compensated CEOs since 2015.  They collaborated with R. Paul Herman, CEO of HIP Investor Inc., to do performance analysis based on their tracking. Herman determined, “…shareholders could have avoided lagging returns by excluding companies that keep making the list for excessive CEO pay”.  Companies without excessively paid CEOs significantly outperformed companies with excessively paid CEOs.  The former generated 5.6% in annualized returns compared to the latter at 1.5%.  What’s astonishing is that the report noted, “The performance gap due to excessive compensation equates to approximately $223 billion in shareholder value lost.”  How are companies without overpaid CEOs edging out competitors?  Instead of overpaying CEOs, more resources can be dedicated to research and development projects, dividends to shareholders, or equitable pay for employees; things that advantage company profits and support positive investor outcomes.

Are You Talking About It?

There is definitely a case for the merits of ESG investing.  It is no wonder folks are talking about it.  Are you interested in the conversation?  If you’ve followed trends in ESG investing and are considering adapting ESG strategies into your portfolio, The Center is here to help.  Ask your advisor about the Center Social Strategy; they would be happy to talk about it with you.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

The Center Named 2022 Best Place to Work for Financial Advisers by InvestmentNews

Contributed by: Jaclyn Jackson, CAP®

On February 7th, 2022, Center for Financial Planning. Inc. was named a 2022 Best Places to Work for Financial Advisers by InvestmentNews. The Center was chosen as one of this year’s top 75 based on employer and employee surveys delving into everything from company culture, benefits, career paths, and more. InvestmentNews partnered with Best Companies Group, an independent research firm specializing in identifying great places to work, to compile the survey and recognition program.

Winning Culture

Our mission, core values, service values, and company vision are the foundation of Center culture. The Center team is committed to…

• The Financial Planning Process

• Education and Personal Growth

• Being Nice and Kind

• Teamwork and Collaboration

• Energy and Enthusiasm

• Being Real and Down to Earth

We take our work seriously and are enthusiastic about providing excellent service. Yet, we recognize healthy company culture is also fun. We have brought levity to the office with fantasy football competitions, “soup”er Thursday charity drives, company outings like fowling and curling, and peer training through lunch n’ learns. Additionally, we have started stellar committees including our Social, Health & Wellness, Creativity, and new Diversity & Inclusion Committees. Two parts professionalism and exceptional service with one part fun has proven to be our award-winning mix to make The Center a great workplace.

Winning Culture Promotes Winning Service

As rewarding as it is to receive public recognition, our motivation for applying to InvestmentNews’ award has much more to do with offering incomparable service. We wholeheartedly believe that happy employees happily provide great service.  

The InvestmentNews selection process starts with each employee filling out an anonymous survey, rating everything from wages to company benefits. Fortunately, InvestmentNews provides an aggregate of survey results to award candidates. To us, this is the most valuable part of the process; getting critical feedback collected by an independent research firm. In the years since we began applying, The Center has used employee feedback to…

• Add dental and vision insurance

• Revamp parental leave

• Add flexible holiday leave to accommodate multi-cultural practices

• Expand bereavement eligibility

Improving opportunities for employees supports business sustainability. Compared to peers, The Center has a low team turnover. Not only have we been able to retain staff (even through - dare I say the dreaded word - a pandemic), our team has actually grown. A huge benefit of being a “best place to work” is that we are able to attract top-tier talent to the firm. Take it from partner and CERTIFIED FINANCIAL PLANNER™, Lauren Adams, who found The Center years ago while reviewing best places to work lists,

“Our intentional focus on creating a great workplace has allowed us to maintain high team member engagement, keep turnover low, attract top talent to our firm, and collectively strive to live our mission of “improving lives through financial planning done right.”

We have retained seasoned professionals who provide a level of service that only comes with experience. Our success in attracting, training, developing, and maintaining professionals is a sustainable competitive advantage. We know this advantage helps The Center consistently provide top-quality service to our clients.

Please join us in celebrating this prestigious acknowledgment. We are excited and hopeful that fostering a healthy work environment creates a win-win situation for both employees and clients alike! Want to meet our team? Click HERE.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

Any opinions are those of Jaclyn Jackson, CAP®, and not necessarily those of Raymond James.

Investment News “2021 Top 75 Best Places to Work for Financial Advisers”. The Best Places to Work for Financial Advisers program is a national program managed by Best Companies Group. The survey and recognition program are dedicated to identifying and recognizing the best employers in the financial advice/wealth management industry. The final list is based on the following criteria: must be a registered investment adviser (RIA), affiliated with an independent broker-dealer (IBD), or a hybrid doing business through an RIA and must be in business for a minimum of one year and must have a minimum of 15 full-time/part-time employees. The assessment process is compiled in a two part process based on the findings of the employer benefits & policies questionnaire and the employee engagement & satisfaction survey. The results are analyzed and categorized according to 8 Core Focus Areas: Leadership and Planning, Corporate Culture and Communications, Role Satisfaction, Work Environment, Relationship with Supervisor, Training, Development and Resources, Pay and Benefits and Overall Engagement. Best Companies Group will survey up to 400 randomly selected employees in a company depending on company size. The two data sets are combined and analyzed to determine the rankings. The award is not representative of any one client's experience, is not an endorsement, and is not indicative of an advisor's future performance. Neither Raymond James nor any of its Financial Advisors pay a fee in exchange for this award. Investment News and/or Best Companies Group is not affiliated with Raymond James.

How to Pick a Charity…During a Pandemic Part 3: Resources

While vetting a charity can be challenging in any environment, vetting a charity without interacting in person can be especially challenging. In this three-part blog series, I hope to share a few tips to help you pick and support amazing charities from the comfort of your home. 

Participate in The Center's Annual Toys for Tots Drive! Donate by December 17th.

Learn how The Center gives back throughout the year. 

Contributed by: Jaclyn Jackson, CAP®

Last time, we learned how to determine whether a nonprofit stuck to its mission with program indicators. However, what if you are pressed for time or lack the CPA relationships to help you through financial analysis? Well, you're in luck because there is help readily available at your fingertips, and I am going to show you where to look online. 

Helpful Vetting Resources

• GuideStar provides information on a charity's income, spending, mission, and executive salaries. They hold records for 1.8 million nonprofits registered with the Internal Revenue Service. Free parts of the website provide access to each organization's Form 990, the primary IRS filing document for nonprofits. Premium services offer more financial analysis.

• BBB Wise Giving Alliance produces reports about national charities, evaluating them against comprehensive Standards for Charity Accountability, and publishes a magazine, the Wise Giving Guide, three times a year.

• Charity Navigator applies analysis to each of its charities to come up with its star ratings (with four stars as the highest rank). The site focuses on financial health, accountability, and transparency.

• Charity Watch rates 600 charities with a grading system from A to F — and takes a watchdog approach towards exposing nonprofit abuses.

Pro Tip: If you decide to use a vetting site of your choice, look for sites that don't charge charities to be reviewed. his helps mitigate biased evaluation from vetting sites.

You made it to the end of the series! Hopefully, you feel empowered to choose an incredible nonprofit to support this year and that you had just as much fun reading the series as I had writing it. If you are interested in adding philanthropy to your financial plan, we have strategies to share with you. Feel free to email your Center planner with questions or contact@centerfinplan.com if you are new to The Center (we welcome you!).

Reminder: If you plan on donating this year, don't forget tax-advantaged opportunities extended to donors through the CARES Act:

• In addition to the standard deduction, non-itemizers can take an above-the-line deduction for $300 of charitable contributions per person. Joint filers can deduct up to $600. Additionally, itemizers can now deduct donations up to 100% of their AGI.

Are you working on your year-end tax planning? Check this out! Have questions? Don't hesitate to reach out: contact@centerfinplan.com.

Make sure to check out part one of this blog series here, and part two of this blog series here!

Jaclyn Jackson, CAP® is a Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

How to Pick a Charity…During a Pandemic Part 2: Commitment to the Mission

While vetting a charity can be challenging in any environment, vetting a charity without interacting in person can be especially challenging. In this three-part blog series, I hope to share a few tips to help you pick and support amazing charities from the comfort of your home. 

Participate in The Center's Annual Toys for Tots Drive! Donate by December 17th.

Learn how The Center gives back throughout the year. 

Contributed by: Jaclyn Jackson, CAP®

In part one of our "How to Pick a Charity...During a Pandemic" blog series, we discussed key documents to help identify a great nonprofit. In part two of our series, I'll show you how to determine whether money donated to nonprofits goes towards their programs & initiatives. 

On A Mission 

We understand a nonprofit is on a mission when they dedicate the majority of their resources toward implementing the programs that support the communities they aim to serve. While we generally assume the best of charities, sometimes a tiny voice in our minds ponders if our contribution actually helps people in need. Do our donations really support service programs? If you've ever heard that small voice, this number (with the help of your Certified Public Accountant, or CPA), can give you insight about a nonprofit's program spending habits:

The Program Expense Percentage, also known as The Program Efficiency Ratio, divides the organization's program expenses by the organization's total expenses. (Your CPA can use the charity's Form 990 to calculate this percentage.) 

While the program expense percentage varies by service provided and operating expenses needed to provide the service, experts recommend the percentage be at least 65%. In other words, 65% or more of the charity's resources (as evaluated by expenses) should be used for programming. If you can find two to three years of 990 forms for a nonprofit, you can determine spending trends. Charities that consistently underspend on their programs and services do not have as strong an impact on their charitable missions. 

Before we chop off any heads, it is also important to understand the nonprofit's program "stage".  For example, if the program is new or is trying to expand, more than ordinary operational expenses (staff hires, technology, etc.) may be required to catapult programming. Having data is great, but pairing data with accurate analysis is better.  Talk to the nonprofit about discrepancies, so your analysis is accurate.

Pro Tip: Pay attention to whether the charity practices "joint cost allocation". Joint cost allocation lumps fundraising with the charity's program expenses. This tactic blurs the line between resources spent on solicitation and service programs. If you bump into this practice, get clear about the type of charity you want to support. It may be appropriate for lobbying or public awareness organizations to use joint cost allocation, but you may not be able to deduct your donation to those types of organizations. On the other hand, joint cost allocation may be a red flag for service-based nonprofits.

Phone a Friend

I want to emphasize, rely on your support team to do the math for you. A CPA can help you crunch numbers as well as compare 990s to annual reports and financial statements. This is especially helpful if any of the documents are vague or missing information. If you need your gifting efforts to consider your tax or estate planning needs, ask your financial planner (that is why we are here!) for help.

Reminder: If you plan on donating this year, don't forget tax-advantaged opportunities extended to donors through the CARES Act:

• In addition to the standard deduction, non-itemizers can take an above-the-line deduction for $300 of charitable contributions per person. Joint filers can deduct up to $600. Additionally, itemizers can now deduct donations up to 100% of their AGI.

Are you working on your year-end tax planning? Check this out! Have questions? Don't hesitate to reach out: contact@centerfinplan.com.

Make sure to check out part one of this blog series here!

Jaclyn Jackson, CAP® is a Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

How to Pick a Charity…During a Pandemic Part 1: Important Documents

While vetting a charity can be challenging in any environment, vetting a charity without interacting in person can be especially challenging. In this three-part blog series, I hope to share a few tips to help you pick and support amazing charities from the comfort of your home. 

Participate in The Center's Annual Toys for Tots Drive! Donate by December 17th.

Learn how The Center gives back throughout the year. 

Contributed by: Jaclyn Jackson, CAP®

Answering the Call 

According to a study done by the Urban Institute, nonprofits need our support more than ever. The study revealed 4 in 10 small charities experienced a dip in donations amid pandemic and economic concerns. Likewise, 29% of large nonprofits faced the same fate. The timing couldn't be worse as the demand for services provided by nonprofits has increased.

Luckily for nonprofits, the gifting season is here, and people across the nation open their hearts and pockets to wonderful nonprofits. Chances are, if you're reading this blog series, you're probably one of those soft-hearted individuals.

Let the Vetting Process Begin: Important Documents

You want to give wisely, and I want to support your efforts. Let's get started! In part one of this series, I'll outline the documents you'll need to assess a nonprofit. These documents are usually available on a nonprofit's website. However, you may have to do a little digging. Utilize navigation menus commonly found at the bottom of website homepages; go to the "about" page to find leads; use site search fields to search for reports by name.

1. Form 1023 - Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code: This tells you the organization is, in fact, a 501(c)(3) nonprofit. Aside from religious institutions (which have a different tax identification code), individuals most commonly support 501 (c)(3)s charities. Sometimes, nonprofits will provide their Employer Identification Number (EIN) instead of this form. You can use the number to confirm 501(c)(3) status on the IRS website.

2. Annual Report: Use this holy grail document to gain a comprehensive view of the nonprofit you're considering. Annual reports generally contain a charity's mission statement and focus, projects initiated (fundraising events, volunteer efforts, community programs), financial information, potential donors, and an account of significant contributions.

3. Form 990 - Return of Organization Exempt From Income Tax Form: Similar to how individuals tell the IRS about their financial activity, Form 990 provides the government and the public with a snapshot of the charity's activities for that year.

Bonus Documents

If you're thinking about giving a larger-than-normal contribution or becoming a long-term donor, inquire about the following policy documents. These items are not always on websites, so you may need to make an email request or call the nonprofit. 

• Code of Ethics or a Statement of Values: Company guidelines to help employees, volunteers, and board members make ethical choices and create accountability for those choices.

• Whistleblower Protection Policies: This shows a charity is open to hearing concerns or complaints about its practices by demonstrating that it values transparency and accountability practices.

• Governance Policies for nonprofit boards, internal controls, and conflict of interest policies help to ensure ethical leadership practices.

We've covered key documents to help you pick a great nonprofit. In part two of our series, I'll show you how to determine whether money donated to nonprofits actually goes towards programs & initiatives. 

Reminder: If you plan on donating this year, don't forget tax-advantaged opportunities extended to donors through the CARES Act:

• In addition to the standard deduction, non-itemizers can take an above-the-line deduction for $300 of charitable contributions per person. Joint filers can deduct up to $600. Additionally, itemizers can now deduct donations up to 100% of their AGI.

Are you working on your year-end tax planning? Check this out! Have questions? Don't hesitate to reach out: contact@centerfinplan.com.

Jaclyn Jackson, CAP® is a Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

The Center Social Strategy: How We Construct Values-Based Portfolios

Contributed by: Jaclyn Jackson, CAP®

In honor of Earth Day, we’ve used the last couple of weeks to highlight environmental, social, and governance (ESG) investing.  We began by explaining why ESG investing has grown in popularity.  Then, we explored the variety of approaches used to support values-based investing.  This week, we’ll cap our blog series with a Q&A style discussion about how The Center designs social strategies.

What are the first steps of building a values‐based investment strategy?

Construction fundamentals form the foundation of any investment strategy. First, we assure that asset allocation aligns with investment time horizons and investment goals. Even the most conservative research attributes 40% of investment performance to asset allocation. Liberal evaluations attribute as much as 90% of performance to asset allocation. Another fundamental philosophy applied to the construction process is being fee sensitive. The reality is that investment costs add up and the compounding effect of those costs diminish returns. Therefore, considering the costs of values‐based funds is a vital part of developing social strategies. In short, values‐based investing adds layers to the construction process, but it certainly does not change the foundational layers of that process.

What’s the difference between ESG Investing and Socially Responsible Investing (SRI)?

A: In the past when investment managers tackled values‐based investing, many used Socially Responsible Investing (SRI) methods. SRI takes a hard stance on eliminating industries from one’s investment strategy that do not match their ethics. However, there are consequences for taking such a black and white investment approach. Research has shown that completely eliminating industries from investment strategies undermines diversification and ultimately, erodes longevity. We strive to set clients up for the best possible outcomes (from a financial and values alignment perspective in this instance). For that reason, we prefer ESG investing; it has a values‐driven agenda, but doesn’t compromise performance (because investors can maintain diversification). At the end of the day, we want you to both uphold your values AND be able to retire. Our goal is to provide strategies that include longevity and diversification while protecting your values.

How we sift the wheat from the shaft when it comes to choosing ESG funds?

ESG investing is gaining popularity. As a result, we are seeing more and more ESG funds on the market. On one hand, it helps value‐aligned investors with diversification. On the other hand, it can set the stage for trendy, superficial products that don’t truly meet the needs of values‐aligned investors. To combat this, we make an effort to work with companies that have a reputation for walking the walk. Companies like Parnassus Investments, PAX World Funds, and Calvert Research & Management are companies that have demonstrated a longstanding commitment to values‐based investing. They actively engage with companies to improve behavior. Pax, for example, uses its shareholder voting power to advocate for better company governance.

How are ESG product inconsistencies navigated during the strategy construction process?

When faced with complex decisions, we ultimately consider what brings the most value to clients.  Last week we learned, all ESG funds aren’t created equal.  Values-based funds can excel by some measures, but fail by others.  It’s a tough negotiation to build a strategy and as a result, there is some give and take involved.  When faced with complexity, we launch internal research initiatives to identify best practices.  Ultimately, data dictates what we believe is the right thing to do for the overall strategy.

Admittedly, we’ve only scratched the surface of how The Center develops social strategies.  Luckily, the conversation doesn’t have to end.  We are happy to chat more about our process and support you in integrating values into your investment plan.  We hope you enjoyed our ESG blog series and have a Happy Earth Day!

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All investments are subject to risk, including loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does not ensure a profit or protect against a loss. It is important to review the investment objectives, risk tolerance, tax objectives and liquidity needs before choosing an investment style or manager. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, utilizing an SRI investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Raymond James is not affiliated with and does not endorse the opinions or services of Parnassus Investments, PAX World Funds, and Calvert Research & Management.

ESG Investing: Why Everybody Is Talking About It

Contributed by: Jaclyn Jackson, CAP®

According to CNBC, almost 1 in 4 dollars is going into Environmental, Social, and Governance (ESG) funds this year.  Even before 2021, the combination of ethical provisions and competitive performance turned many heads towards ESG investments.  I aim to explain what the big fuss is about and why ESG investments are gaining traction.

Investors Are Talking About It

To be clear, the March 2020 downturn was no picnic (for anyone).  However, investors who had stake in environmental, social, and governance (ESG) investments managed the economic downturn with greater resilience.  Leading research firm, Morningstar, reported that during March 2020, “sustainable funds dominated the top quartiles and top halves of their peer groups.  Sixty-six percent of sustainable equity funds ranked in the top halves of their respective categories and more than a third (39%) ranked in their category's best quartile.”  Compared to peers, ESG funds pulled top rankings.

Not only did peer to peer comparisons look good, but index comparisons proved more robust too.  In the same study, Morningstar compared 12 passive ESG funds in the large-blend category to a traditionally passive fund. They reported, “For the year through March 12, all 12 ESG index funds outperformed”. What’s more is that fees were included in this study.  While the ESG passive funds compared were more expensive than the traditional passive fund, they still managed to outperform.  Impressively, the trend held with international and emerging market index comparisons…and everybody is talking about it! 

Including the world’s largest investor/asset manager, BlackRock, who’s CEO challenged corporations to consider the impact of climate change on business models.  In 2020, CEO Larry Fink announced BlackRock would incorporate ESG metrics into 100% of their portfolios.  The asset manager also pledged to produce data and analytics to punctuate why considering climate change should be an investment value. 

Yellen And Powell Are Talking About It

Investors are not the only people concerned.  In wake of recent natural disasters, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell are working to assess the risks climate change poses to the health and resilience of the financial system.  Their consensus implied a concentrated effort to monitor financial institutions and their exposure to extreme weather events.  Leading the charge, Fed Governor Lael Brainard, recently announced the Financial Supervision Climate Committee (FSCC).  Brainard is a proponent of using scenario testing to understand banks’ ability to survive hypothetical climate catastrophes.  The FSCC will focus on developing evaluation processes for climate risks to the financial system.

Why Everybody Is Talking About It

While many people acknowledge the ethical appeal of ESG methodologies, they may not fully appreciate the businesses appeal that underpins stock performance.  Business litigation risk provides a clear example.  The Financial Analyst Journal featured a study that explored the relationship between ESG performance and company litigation risks.  Analyzing US class action lawsuits, researchers found, “a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%”.  The study also asserted that companies with low ESG performance experienced market value losses ($1.14 billion) twice the size of companies with high ESG performance.  Further, the study integrated their findings with a trading strategy and concluded investors benefitted from lower litigation risk.

It doesn’t stop with litigation risk.  There are also links between healthy corporate governance and market returns.  As You Sow, a nonprofit promoting corporate responsibility, has been tracking S&P 500 companies with excessively compensated CEOs since 2015.  They collaborated with R. Paul Herman, CEO of HIP Investor Inc., to do performance analysis based on their tracking. Herman determined, “…shareholders could have avoided lagging returns by excluding companies that keep making the list for excessive CEO pay”.  Companies without excessively paid CEOs significantly outperformed companies with excessively paid CEOs.  The former generated 5.6% in annualized returns compared to the latter at 1.5%.  What’s astonishing is that the report noted, “The performance gap due to excessive compensation equates to approximately $223 billion in shareholder value lost.”  How are companies without overpaid CEOs edging out competitors?  Instead of overpaying CEOs, more resources can be dedicated to research and development projects, dividends to shareholders, or equitable pay for employees; things that advantage company profits and support positive investor outcomes.

Are You Talking About It?

There is definitely a case for the merits of ESG investing.  It is no wonder folks are talking about it.  Are you interested in the conversation?  If you’ve followed trends in ESG investing and are considering adapting ESG strategies into your portfolio, The Center is here to help.  Ask your advisor about the Center Social Strategy; they would be happy to talk about it with you.

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Jaclyn Jackson, CAP® is a Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.