We would like to welcome Ed Barno and Ed Petronio from Salt City Financial Planning. Effective January 2015, after working collaboratively for more than a year, Salt City’s practice was merged into Rockbridge Investment Management. We are excited to have them as part of our team and offer a hearty welcome to the former Salt City clients. You can learn more about them on our Who We Are page. Ed Barno also joined the executive team and is a partner in the firm. Together we look forward to expanding our service to all of our clients.

Ensemble Practice
Over the past few years you may have noticed a change in our culture as we moved from an advisor centric business model to an ensemble practice. This transition is a work in progress, but we firmly believe that this change will improve our service to clients, while allowing for continued growth of the firm. Today, each client works with a mini-team within the firm consisting of two advisors and an operations professional. Clients continue to have access to anyone in the firm including our area-specific experts in financial planning and investment management.

Expanding Roles
We are also committing to expanding the ownership of the firm in an effort to attract and keep the best and the brightest talent in our industry. In January 2015 we welcomed Patrick Rohe as a partner in the firm and as a member of the executive team that now includes Anthony Farella, Craig Buckhout and Ed Barno.

Our focus continues to be on offering the best possible planning and investment experience for clients. We welcome your opinion on our firm’s structure, service, or growth plan. Please email us or call if you would like to offer any feedback. As always, we thank you for your continued confidence.

Ben Franklin once wrote “nothing in this world is certain except death and taxes” and as wealth managers we must help our clients manage investments in light of these certainties. Neither can be avoided, but steps can be taken to help minimize their effect on wealth levels. One way is through the use of asset location strategies.

Asset location strategies involve the use of tax-advantaged accounts (think IRA, Roth IRA, 401(k), 403(b) etc.). These types of accounts can help reduce the “tax drag” of the overall portfolio, without sacrificing proper asset allocation. This is possible because the Internal Revenue Service (IRS) taxes returns of assets differently, and investment assets exhibit dissimilar tax efficiency characteristics.

Stocks and stock funds are generally taxed as a result of capital gains when sold. These capital gain rates are usually preferential when compared to ordinary income tax rates. Dividends from stocks are also taxable, but often receive the same preferential tax treatment as capital gains. Because of lower tax rates and the ability to defer taxes (when they are not sold), most stocks are considered “efficient” from a tax perspective.

On the other hand, bonds and bond funds are primarily taxed as a result of interest payments. These payments typically cannot be deferred and are taxed at ordinary income rates. Municipal bonds can be used to avoid much of this tax burden, but expected returns (even on an after-tax basis) are often lower. As a result, most bonds (other than municipal bonds) are considered “tax-inefficient.”

Take the following hypothetical example: An investor (30% ordinary income tax rate and 15% capital gains rate) has a $1 million brokerage and a $1 million IRA account ($2 million combined). With a targeted 50/50 overall stock/bond allocation, there are two extreme scenarios of how stocks and bonds may be allocated. (Pretend there is 10% capital appreciation in stocks and 10% interest in bonds after one year).

Scenario #1Implement the 50/50 allocation with all stocks in the IRA and all bonds in the brokerage:

After one year the tax could be as follows:

  1. No taxes on the stocks inside the IRA
  2. Bonds would have $30k tax bill ($1mm x 10% interest x 30% income rate)

 Total tax = $30k

Scenario #2Implement the 50/50 allocation with all bonds in the IRA and all stocks in the brokerage:

After one year the tax could be as follows:

  1. No taxes on the bonds inside the IRA
  2. Stocks could have a $15k tax bill ($1mm x 10% gains x 15% capital gains rate)

 Total tax = $15k (but possibly $0 if the stocks are not sold and gains aren’t realized)

Another consideration is when the market goes down, there can be an opportunity for tax-loss harvesting for assets in taxable accounts. This is an opportunity not available inside of IRAs.

Since stocks are historically more volatile than bonds, it makes sense to have them in taxable accounts.

The simplistic example above should help illustrate why the asset allocations inside of different accounts may not match one another. Instead, when appropriate, we overweight tax-inefficient assets (taxable fixed income, REITs) inside of tax-advantaged accounts to increase the expected after-tax return of the overall portfolio.

The other certainty that Ben Franklin cited is death. Because the IRS also allows a step-up in basis upon death of an investor, the tax liability associated with capital gains may be avoided entirely. For example, if an investor owns a stock with a value of $100,000 (originally bought for $1,000) and dies with the stock in their taxable account, their heirs may never have to pay taxes on the stock appreciation. This is because the IRS allows for the cost basis to be stepped up to current valuation levels and capital gains taxes are never collected. This is an additional reason why it may be advantageous to have appreciable assets inside of taxable accounts and avoid having all your account allocations the same.

When people think seriously about retirement, they often wonder if their savings are going to be sufficient to support their lifestyle in retirement. Few people are able to rely on pensions, and most young people assume Social Security may help their parents, but will be of no value to them. Obviously some things need to be done to fix the Social Security System for the long term, but for those of us approaching retirement in the next ten to fifteen years, Social Security payments will be an important part of the retirement income picture. More important than many people realize.

A recent study from the Center for Retirement Research at Boston College (Brown et al., March 2015) suggests that people find it difficult to value a lifetime income stream, and yet the value of Social Security may be as important, or even more important than savings, in determining financial security in retirement.

The researchers asked people to put a value on a $100 change in their Social Security monthly benefit. Participants were asked, if they could write a check now for an increase of $100/month in their lifetime income, how much would they be willing to pay? Most respondents were only willing to do this when the price was very low. The median price they were willing to pay was $3,000, which could be recovered in the first two and half years of higher payments! By way of reference, the actuarial value reported by the researchers is $16,855. Even more dramatic, to replace $100/month with a 4% withdrawal rate, you would need an investment portfolio of $30,000, but of course your heirs would keep the remaining principal in that scenario.

Helping clients decide how much investment risk is right for them may be the most important thing we do as investment advisors. We can provide advice, but the decision must be the clients’ own if they are going to remain committed in the face of adversity.

That decision can be difficult, but may be made easier when framed properly, or put in an appropriate context. Understanding the value of Social Security may be critical to making good investment decisions, yet this recent study points to how difficult that can be.

As an example, for a typical couple who has accumulated a million dollars by the time they retire, their savings could provide $40,000 per year at a 4% withdrawal rate. If they need $80,000 per year to support themselves in retirement, the $40,000 or so they may get in annual Social Security benefits are in one way equal to the income they may take from their savings (assuming a 4% withdrawal rate).   The payment stream from Social Security is not really worth $1 million, because there is no residual value for heirs, but it is an important part of the retirement portfolio.


  1. Social Security is more valuable than many people think.
  2. The value of Social Security is important in the investment risk decision as the guaranteed stream of income provides stability, which may provide the confidence to take a higher level of investment risk in the rest of the portfolio.
  3. Better investment decisions can be made in a portfolio context, where all sources of wealth and income are taken into consideration.

When thinking about the risk of your investments, be sure to take a step back and look at the whole picture. Maybe you can take more risk than you thought!

Stock Markets
Except for shares of Real Estate Investment Trusts (REITs), Equity Market Returns over Periods Ending 6 30 15which were down more than 10%, equity markets were about flat for the quarter. Results over various periods ending June 30, 2015 are shown in the chart at right. Ten-year returns are generally consistent with what can be expected over the long run. The three- and five-year returns are well into positive territory and, except for emerging markets, are above long-term averages. These periods show a positive environment for equity investments.

Over shorter periods, however, there is significant variability among equity market returns – some positive, others negative. Also, note that different markets are up when others are down. The relative consistency among markets over the longer term, with variability in the short run, is what can be expected from participating in global stock markets.

The Greek default to the International Monetary Fund (IMF) has been in the news. While this precipitated a large one-day drop in market values, the default seemed to have been taken in stride as markets have rebounded some as of this writing. There is no real news in this drama. The difficult trade-offs facing not only Greece but also other European economies are generally well known. It is reasonable to expect volatility in worldwide market prices as these issues are resolved. Attempting to predict the impact ahead of the market is a difficult process – best to let the “wisdom of the crowds,” as reflected in market prices, sort it all out.

Bond Markets
Yields ticked up this quarter – the ten-year Treasury rising to 2.3% from 1.9%. Because bond prices move inversely to yield changes, bond returns were negative – the longer the maturity the greater the loss. While the Fed continues to put off raising interest rates, bond yields seem to anticipate upward movement nonetheless. U.S. Treasury securities are attractive in periods of global uncertainty, which will tend to drive yields down in the short run.