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Lower Oil and Gas Prices – How to Maximize Your Upside

By Nick Rossolillo, President, Concinnus Financial

March 10, 2015

I want to say one word to you. Just one word. Are you listening? Plastics.

Thus went the recommendation given to Dustin Hoffman’s character Benjamin Braddock in the 1967 movie The Graduate. Sound advice? Perhaps. Actionable advice? Dubious.

In a world where “advice” is easily obtained but rarely personalized, the real trick becomes how to apply it to your own situation. In a previous article you can find here, I outlined some of the reasons oil and gas has come down so dramatically in price in the last nine months or so. However, the actionable advice part of the post was lacking. This is a follow up to that article on how one might specifically put these lower prices to work for their own situation, whether as a business owner, or as an investor and saver.

Current Prices, Tax Deductions, and Discrepancies Between the Two

At the time of this writing, I filled up the gas tank at just over $2 a gallon. Having a 10 gallon tank in my car, that equated to just over $20. You have, no doubt, been experiencing something very similar, depending on your car (or truck) and which part of the country you are filling up in. It’s a pretty good feeling, since that leaves you a few extra bills in your wallet than it did last year (about a 60% savings in my particular case!).

If you use your car for work or you are self-employed, you probably know that the federal mileage deduction rate for 2015 is set at 57.5 cents per mile*. Let’s assume you get an average of 20 miles per gallon, your vehicle has a 10 gallon tank, and you use that entire tank of gas for business related activities. Your deduction would be $115 dollars, more than likely substantially higher than what you actually paid at the gas station. (Perhaps you do not drive for work, or as a business owner you do not take this deduction but instead write off actual costs of your business vehicle or vehicles. Hang with me, this is still applicable for you. We are all currently saving on our gas budget in some form or fashion.)

What are you doing with that savings? Is it being spent elsewhere, eating out, going on vacation, etc.? Or is it being put to work for you, either helping you catch up on bills or padding your savings account? If you answered yes to the former, here is a way for you to perhaps adjust your budget and start accumulating some extra funds. If you answered yes to the latter, congratulations! Let’s take your planning to the next level.

Ideas to Put That Cash to Work

If you believe that inflation is a real thing and that prices will always tend to go higher over the long-term, you are wise to accept current gas prices as a gift and stow away your savings for later. Here are a few ways you can get a little extra out of that savings:

  1. Increase the amount you are contributing to your retirement accounts. If you haven’t fully taken advantage of what your employer matches, increase your deferral to do so. If you already take advantage of your work-sponsored plan, consider starting a Traditional or Roth IRA. ᶱ
  2. Start a savings account earmarked for future gas consumption. As prices rise again in the future and start to cut into other parts of your budget, you have a cushion to fall back on.
  3. Consider a hedging strategy with what you have already saved. You can purchase oil and gas investments in your retirement savings, which you can assume are for future transportation costs when you retire. If you own a business or are self-employed, you can deposit savings into a business investment account, and hedge for a future increase in business expenses. If prices rise, you are growing current savings to hedge against future cost increases. If prices decline, your hedge is a wash as you continue to save money on your driving expenses.ᶲ

Any strategy you may choose to pursue should begin with a look at your budget as a whole (whether it is a business budget, personal budget, or both). Where is your money going? Is a decrease in spending in one category being allocated somewhere else? Is this re-allocation a necessity? How much are you saving overall? If you use one, consult with your financial professional regarding your budget and any tax strategies or investment strategies you employ as part of your business or personal financial planning. Consider consulting an accountant and/or investment advisor if you are unsure of how to structure any of the strategies just discussed for your business.

Final Thoughts

The drop in fuel costs caught many by surprise. Who would have guessed a year ago we’d see gasoline under $2 a gallon again? Or that we would see news headlines now espousing oil oversupply, after a decade of discussion about energy shortage and unsustainability? At the end of the day, though, treat the current circumstances as an opportunity. Don’t let it slip away, only to be a “remember when…” story recounted at summer barbecues and after-hour work parties. Find a way to put the situation to work and benefit from it down the road!

 

Nick Rossolillo is the president and founder of Concinnus Financial, based in Spokane, WA. He works with individuals and small businesses creating personalized investment portfolios and helping with financial planning. To contact Nick, visit www.concinnusfin.com, email him at nick@concinnityfinancial.com, or call (509) 220-1895.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.

*New Standard Mileage Rates Now Available; Business Rate to Rise in 2015.” IR-2014-114, Dec 10, 2014. www.irs.gov/uac/Newsroom/New-Standard-Mileage-Rates-Now-Available;-Business-Rate-to-Rise-in-2015

ᶱIndividual Retirement Accounts (IRA) offer tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of IRAs. Their tax treatment may change.

ᶲManaged futures are speculative, use significant leverage, may carry substantial charges, and should only be considered suitable for the risk capital portion of an investor’s portfolio.

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The “Fiduciary Standard” – What Is It? Why Should We Care?

Nick Rossolillo, President, Concinnus Financial

March 3, 2015

 

On February 23, 2015, President Obama made comments about the “fiduciary standard” while speaking about retirement savings and investments at AARP’s offices in Washington, D.C. The comments were a call on the Department of Labor to draft new laws requiring financial professionals working with retirement assets to put client interests before their own. “Wait,” you may be saying, “How can such a thing be enforced? And how can I tell if my financial professional is working in my best interests?” You are not alone. The debate has been going on for quite some time within the financial industry, and was brought into the public’s awareness especially after the financial crisis.

Why the debate? What is the fiduciary standard? And how can you make informed decisions as an investor and saver?

 

History of the Fiduciary Standard

In the wake of the Great Depression, a slew of new regulations emerged in an attempt to crack down on sales practices in the financial world. Two such acts, which are relevant to our particular discussion, were the Maloney Act of 1938 (an amendment to the Securities Exchange Act of 1934), and the Investment Advisors Act of 1940.

The Maloney Act established the NASD, which has since morphed into what we now call the Financial Industry Regulatory Authority (or FINRA). Among other duties, FINRA regulates broker-dealers, or individuals or companies who charge a commission to clients for selling stocks, bonds, mutual funds, etc.

The Investment Advisors Act of 1940 authorized the Securities and Exchange Commission (or SEC) to regulate investment advisors. An investment advisor charges a fee (either an hourly rate, a flat annual fee, or a percentage fee based on total account value) to clients rather than a commission.

Ok, are you completely bored yet, or are you still with me? What is the debate about exactly?

 

Commissions vs. Fees

In the aftermath of the world’s most recent economic crisis, heated debate has surfaced about the charging of commissions versus the charging of a fee. Many financial professionals who charge a commission (are a broker-dealer and are regulated by FINRA) have to reasonably believe that a recommended investment is “suitable” for the client. In contrast, professionals who charge a fee (are an investment advisor and are regulated by the SEC) are held to the “fiduciary standard.” Basically, the fiduciary standard is this:

  1. Investment advisors must make reasonable investment recommendations independent of outside influences.
  2. They must always place client’s best interests ahead of their own.

This is not to say that professionals who charge a commission do not follow this standard. However, only investment advisors regulated by the SEC are held to this fiduciary standard by law. At this point you are no doubt asking, “How do I know if my advisor is really acting in my best interests? I don’t read minds.”

The most recent proposal, brought up again on the 23rd of February, would enforce a fiduciary standard on all financial professionals handling retirement assets. This would be done by eliminating commissions and only allowing a fee to be charged for the handling of retirement assets. This would, in theory, eliminate conflicts of interest arising from the high commission investment products many financial companies offer.

 

Arguments For and Against Commissions-Based Investing

Those in favor of keeping commission based investments argue a few main points:

  1. Eliminating commissions would reduce the investment options investors have, since some investment types are offered mainly on this basis.
  2. Over the long-term, paying a commission instead of an ongoing fee is cheaper for clients.
  3. Enforcing a fiduciary standard will raise costs for financial firms, which will be passed on to clients in the form of higher fees.

There are a few assumptions this argument is making. First is that some investment vehicles only work if they are high cost on the front end (or that a commission is charged and paid). Second is that once a commission is paid, there are no additional client charges that occur within the investment vehicle. Third, an assumption is made that clients will hold, and be encouraged to hold, investments over the long-term, thus not incurring additional commissions.

 

Arguments For and Against Fee-Based Investing

Those in favor of fee-based standards argue this:

  1. Conflicts of interest arising from investment products being offered with a higher commission are eliminated.
  2. Client and financial professional interests are aligned when the financial professional’s pay is tied to investment performance.
  3. Investment decision making and advice is improved and becomes more objective.

Some of the arguments from the opposite angle arise here as well, specifically the ongoing cost argument. Why would a client interested in buying ‘investment XYZ’ and holding it indefinitely continue paying a fee every year for investment advice they don’t need? Also, a fee-based advisor faces a conflict of interest in that they may not offer other types of products (such as insurance) that is based off of a commission. Obviously, the two sides of the argument are not perfect.

 

What Can You Do?

Until some concrete decisions are made surrounding the debate, you as an investor have some decisions to make. Start by asking yourself a few questions such as this:

‘How knowledgeable and comfortable am I managing my own investments?’

‘What type of investment am I looking to make?’

‘Do I need financial advice outside of the decision making that goes on inside my investment portfolio?’

‘What exactly am I looking for in a financial professional? Is it product driven (i.e. you are investing for a future need, you currently require income, or you need a specific product like insurance) or relationship driven (you need someone who can answer your financial questions and provide education)?’

Also bear in mind that many professionals have a foot on both sides of the line. As an example, they may offer fee-based investment management but also offer insurance products that pay them a commission. When consulting a financial professional, make sure you know exactly what you are getting from them and how they are going to be paid.

Simply put, do your own homework! Make sure you understand costs, the nature of the costs you are being charged, and what you are getting in return.

 

Nick Rossolillo is the president and founder of Concinnus Financial, based in Spokane, WA. He works with individuals and small businesses creating personalized investment portfolios and helping with financial planning. To contact Nick, visit www.concinnusfin.com, email him at nick@concinnityfinancial.com, or call (509) 220-1895.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing in securities is subject to risk and may involve loss of principal.

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What’s Next for Oil and Gas Prices?

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Over the past couple of months, it seems that my engagement in small talk has been revolving around cheap gas prices. In fact, it seems that I cannot escape the discussion, be it at work, running errands, watching the news, etc. (I realize by writing this post, I am contributing to my problem.) No doubt your experience has been the same. Perhaps you have heard comments like this:

“Can you believe gas is under $2 a gallon again?”

“I filled up my SUV for $25 last week!”

“I’ve been thinking about buying a new SUV myself.”

“My family is planning a cross country road trip this spring break in our new SUV we just purchased.”

Such conversations have typically ended on a comment like, “I wonder how long it will last.” In light of such comments, I wanted to take a moment to re-hash how we got here, some possible expectations going forward, and actions we as consumers and investors can take. (If you are not interested in analysis, skip to the last heading for the short version!)

Oil Supply and Demand

Let’s begin with June of 2014, when oil prices last peaked at over $110 a barrel here in the US. Since then, prices have been down as much as 60%, and the price of gas has followed suit. What is the reason for this dramatic drop?

In simple terms, the price of oil is very sensitive to changes in supply and demand. If you recall from your incredibly interesting and engaging economics professor’s lectures, an increase in supply of ‘product x’ will decrease the price, and a decrease in demand of ‘product x’ will also decrease the price. This relationship between supply and demand is especially dramatic with oil; small changes in supply and demand can have great impacts on price.

An increase in US oil production, a surprise announcement from OPEC in November that they would not cut their production, and an apparent global slowdown in demand have all contributed to the precipitous fall of oil and gas prices since last summer. It seems, then, that the real driver behind the recent fall is a price war. In other words, businesses are vying for dominance in a smaller global market and attempting to push competitors out of the business. Simple enough right?

 So… What’s Next?

It can be quite difficult to forecast, in the near term, where commodity prices are headed. As a result, a slew of opinions have surfaced stating that oil is headed as low as $20 a barrel, and others just as adamantly declaring it’s going back up to $100 a barrel. This article is not an attempt to add my voice to the chorus, but what is one to believe at this current juncture?

Let’s consider a few current assumptions:

  1. According to a November report from Citi’s Ed Morse*, around half of the worldwide drilling projects are losing money at the time of this writing. At the very least, margins are quite tight for many drilling projects. Furthermore, any continued drop in price is likely to push more companies towards operating losses and thus cutting production.
  2. Oil consumption has been on the rise for a long time. The last 30 years have seen increases in consumption coming largely from the developing world (think China, India, Brazil, Russia, etc). Any disruption in demand from developing countries caused by political and economic issues will likely be short-term. The growth in demand from these regions will no doubt pick up again. Even if demand were to begin to taper, the world is unlikely to cure its dependence on fossil fuels overnight.
  3. On the other hand, oil prices have been historically quite volatile, with dramatic swings in price that are seemingly unrelated to actual events. Basically, extremes in either direction are often followed by an extreme move the opposite direction. Expect more volatility going forward.

With the unpredictability of oil prices in mind, it seems reasonable to say that even if we see some extra drop in the near future, it is likely to snap back quite quickly. In other words, this is a roller coaster. Surprises will abound. Am I being sufficiently obscure?

Actions We Can Take As Consumers and Investors

The point is this: while it feels uncustomarily good to fill up at the gas station right now, do not be lulled into a false sense of security. The prudent and wise will assume cost savings at the pump to be a short-term bonus, and will use the opportunity to strengthen personal savings and budgets. Others will no doubt get stung when the trend eventually reverses or normalizes, as they take the opportunity to add to their monthly obligations. Come out of this glut stronger than when you entered it.

As an investor, consider putting some money to work in the energy sector. Markets tend to overreact to these little events, leaving plenty of opportunities for those able to keep their wits about them. Make sure to do your due diligence and also consult with your investment advisor when making decisions on this.

Enough said for now on this topic. Enjoy your next visit to your local gas pump!

 

*Udland, Myles. (2014, November 28). Here Are the Breakeven Oil Prices For Every Drilling Project In the World. Retrieved from http://www.businessinsider.com/citi-breakeven-oil-production-prices-2014-11