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This Way is Frontier Wealth Management's Quarterly Newsletter.
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A LOOK AT THE U.S. ECONOMY ENTERING THE FALL
Frontier is a private, family-owned wealth advisory firm that collaborates
and advocates for you. We strive to leverage our in-house expertise
to develop and implement a unique path, empowering you
with confidence throughout your financial journey.
TRANSPARENTClear, Open, Accountable
We are authentic in our approach; you will always know
the what, why and how.
ADVOCATESBelievers, Supporters,
Champions
We strive to understand your financial goals and personal aspirations, enabling us to
become your trusted advisors.
ENGAGEDConnected, Collaborative,
Committed
We are here to serve you. Together, our success is based
on clear, open and honest communication.
RESOURCEFULCompetent, Innovative,
Imaginative
Through collaboration, we leverage our in-house expertise to develop a unique path toward
your financial success.
ON THE ECONOMIC FRONTIER: A LOOK AT THE U.S. ECONOMY ENTERING THE FALLAt Frontier, we know you trust us to keep an eye on macroeconomic trends and gauge how they might impact your investments. Therefore, we offer a brief look at the U.S. economy and investment markets in order to keep you informed.
8 NEWS & NOTESWe have several new faces in our offices. Meet our new Team members.
ON THE COVER
Q3 2015
DEPARTMENTS
4
FROM THE BENCH: BUSINESS ENTITIES AND ASSOCIATED TAX IMPLICATIONSWhat to consider when forming a company.
13
4
CLIENT EXPERIENCEWe will be updating our website and joining the social media realm. Be sure to follow us for updates.
13
8
NEWS YOU CAN USENews, numbers, trends and statistics revolved around today's economic environment.
12
13
A LOOK AT THE U.S. ECONOMY ENTERING THE FALL
At Frontier, we know everyone doesn’t have time to keep
an eye on macroeconomic trends and gauge how they
might impact their investments. Therefore, we offer the
following look at the U.S. economy and investment markets in order
to keep you informed about the most important trends that could
affect your finances and portfolio.
Q3 2015 | 5
GDP AND THE STOCK MARKETThe U.S. economy followed up a lackluster first
quarter of the year with a strong second quarter, at
least measured by gross domestic product (GDP).
U.S. GDP increased at an annual rate of 3.7 percent
in the second quarter, compared to falling by 0.2
percent in the first quarter. Overall, GDP growth for
the first half of 2015 was 2.2 percent.
In reality, the U.S. economy probably didn’t
perform as poorly as the GDP numbers would
indicate in the first quarter, and it probably didn’t
perform as well as the numbers would indicate
in the second quarter. In fact, many economists
attribute the strong second quarter to a rebound
from the weak first quarter.
While GDP has been strong since the
first quarter, unfortunately the stock market’s
performance hasn’t. The recently concluded third
quarter was the worst performing quarter for the
major stock market indices since 2011. It was also
the third straight losing quarter for the Dow — the
longest losing streak since the Great Recession and
only the third such streak in nearly 40 years.
On the positive side, the fourth quarter has
typically been strong for the stock market, so
there’s potentially reason for optimism for the rest
of this year. Also, since 1952 the months of August
through October have been the worst months of
the year for the stock market, while the months of
November through January have been the best.
As for GDP, most economists expect the U.S.
economy to cool down slightly throughout the rest
of this year. Kiplinger forecasts a 2.7 percent GDP
growth rate for the second half of 2015 and a 2.5
percent growth rate for the full year. This would
be slightly better than last year’s growth rate of
2.4 percent.
THE CHINA SWOON AND ITS IMPACTThe big economic news of the summer was China’s
swoon and the resulting stock market pullback that
occurred. China’s stock market began falling in late
June and early July as it became apparent that its
once red-hot economy was cooling considerably,
pulling other world stock market indices down with
it. Here, the Dow Jones Industrial Average dropped
from 18,144 early in the summer on June 23 to 15,666
late in the summer on Aug.25, a 14 percent decrease.
Meanwhile, the S&P 500 fell from 2,124 on June 23
to 1,868 on Aug. 25, a 12 percent decrease.
So what’s going on in China and why does
it have such a big economic impact all over the
world? First, China is the world’s second largest
economy, so its economic impact tends to affect the
world economy. And for the past quarter century,
China’s economic growth has been robust, soaring
at or near double digits almost every year. But
China’s growth is starting to slow down. It topped
10 percent in 2010 but fell to just 7.4 percent last
year, the lowest level in 25 years. And in the second
quarter of this year, it fell to 7 percent. Although
these appear relatively strong compared to the rest
of the world, they mark a significant slowdown
6 | Q3 2015 FRONTIER WEALTH MANAGEMENT
in China. In fact, the Chinese government says 7
percent is the minimum level of growth necessary
to maintain a steady level of employment for its
growing population of 1.35 billion people.
Among the current concerns about China
are a severe housing slump and a slowdown in
manufacturing activity, which recently fell to a
15-month low. This affected commodity prices
like gold, copper and silver, as China is the world’s
largest consumer of industrial metals. Amid all
the hand-wringing over China, though, it’s worth
noting that the Chinese stock market is extremely
volatile: The 30 percent drop in the Shanghai
Composite Index over the summer followed a 150
percent rise, so a correction wasn’t unexpected.
In fact, this is a good reminder of the importance
of putting the recent pullback in U.S. stock markets
in perspective. Though it’s true that major market
indices have experienced a pullback since early
summer, this comes in the midst of one of the third
longest running bull market in the past 80 years
— over six years and counting. In comparison, the
average bull market lasts only about three and a
half years.
FED STANDS PAT ON INTEREST RATESLast month, the Federal Reserve (the Fed) answered
the question that economists and investors had
been wondering about all summer long. At the
Federal Open Market Committee (FOMC) meeting
on Sept. 17, the Fed decided not to raise interest
rates from the near-zero level they have been for
nearly seven years.
As recently as early summer, many economists
were fairly certain that the Fed would raise interest
rates in September. But the summer swoon seems
to have prompted the Fed to hold off on a rate
hike until early 2016. Specifically, it cited risks
from abroad and downward pressure on inflation
resulting from a high dollar and low commodities
as the main reasons not to raise rates now.
One Federal Reserve Bank president said the
decision to stand pat on interest rates was a “close
call.” He believes that the arguments for and against
an interest rate hike are about balanced now. The
U.S. economy is strengthening, he noted, but global
economic developments like China’s slowdown
continue to pose risks, as does the downward pressure
on inflation. He believes the next appropriate step is
to gradually raise rates, starting either later this year
or early next year, as the U.S. economy nears full
employment and inflation gradually rises toward the
Fed’s target of 2 percent.
OTHER KEY ECONOMIC INDICATORSHere is a brief look at a few other key economic
indicators and statistics:
UNEMPLOYMENT: The latest numbers indicate
that the employment situation in the U.S. continues
to improve gradually. In August, the unemployment
rate dropped to 5.1 percent, which the Fed considers
to be consistent with full employment. However,
the number of new jobs created in August fell
Q3 2015 | 7
to 173,000 from 245,000 in June and July. One
reason some economists cite for this drop is a large
number of layoffs in the manufacturing and mining
industries, which are feeling the effects of lower energy
and commodity prices and slow growth in China and
other emerging markets.
Getting a full view of the employment picture,
however, requires looking beyond just the broad
unemployment rate. For example, a large number
of people have left the labor force altogether by
retiring or no longer looking for a job — they are
no longer counted as unemployed. Conversely, the
number of people entering the labor force has been
declining since 2013. Both of these factors bring the
unemployment rate down. In addition, there are
many people working part-time who are counted as
being employed but would rather find a full-time job.
INFLATION: The Consumer Price Index for All
Urban Consumers (CPI-U) decreased in August by 0.1
percent on a seasonally adjusted basis after climbing
by 0.1 percent in July, according to the U.S. Bureau
of Labor Statistics. Meanwhile, the core U.S. inflation
rate increased by 1.8 percent on an annual basis in
August, nearing the Fed’s target of 2 percent.
Digging deeper into the inflation statistics, food
prices are up 1.6 percent over the past year, while
energy prices are down 15 percent and gasoline
prices are down 23 percent. Prices for medical care
rose 3.4 percent, 3.1 percent for shelter and 2.1
percent for transportation over the past year.
HOUSING: After three months of gains, sales of
existing homes dropped in August by 4.8 percent to
5.31 million, according to the National Association
of Realtors. The drop came despite slowing growth
in home prices and a relatively high percentage
share of first-time buyers (32 percent).
However, year–over–year sales rose in August
for the 11th consecutive month and are 6.2 percent
higher than they were one year ago, when at 5
million. In addition, the median existing home
price rose year-over-year for the 42nd consecutive
month in August — it now stands at $228,700, up
4.7 percent from last August when it was $218,400.
ENERGY: As noted above, energy prices remain low,
including gasoline. Low gas prices act almost like a tax
cut by putting more money in consumers’ pockets.
Having more disposable spending on everyday items
helps boost consumer spending and economic growth.
The U.S. Energy Information Administration predicts
the national average price for a gallon of regular
gasoline will fall further to $2.11 during the fourth
quarter and average $2.38 per gallon in 2016. Low gas
prices are obviously good news for consumers, but bad
news for oil and gas industries.
DON’T PANIC OVER MARKET CORRECTIONSWe realize the stock market correction that occurred
over the summer made it difficult for some investors
to sleep well at night. However, such corrections
are a normal and even healthy part of the markets
and investing. If you have any questions about your
portfolio in light of today’s volatile markets, please
don’t hesitate to give us a call. u
8 | Q3 2015 FRONTIER WEALTH MANAGEMENT
By Mark Howe, CFP®
Senior Financial Planner
Many business entities
exist in today’s
business world.
These include a Sole Proprietor, Limited Liability
Company (LLC), Limited Partnership (LP), “C”
Corporation and “S” Corporation. When it comes
to forming a business entity, several variables will
from the bench.
BUSINESS ENTITIES AND ASSOCIATED TAX IMPLICATIONS WHAT TO CONSIDER WHEN FORMING A COMPANY
influence the decision. Two of the most common
and important factors among business owners are
the layer of asset protection and tax ramifications.
It is important to discuss the appropriate business
entity for your particular situation with both a
CPA and business attorney. This is applicable not
only at the formation of the business, but also
with current business operations. Doing so can
help save taxes both now and in the future, while
also mitigating liability exposure.
Q3 2015 | 9
SHOULD YOU INCORPORATE?Business owners sometimes may not understand
all of the business entity options, but generally
all business owners want to maximize their
asset protection layers while taking into
account the cost and value of the layer of
protection. Therefore, one of the first items to
address is what type of entity would provide
appropriate liability protection. Generally, this
is initially fulfilled by incorporating to form a
corporation, LLC or LP. Corporations, LLCs
and LPs protect against personal liability from
business lawsuits by separating personal assets
from business assets. The difference in liability
protection is that a corporation’s shares could
be seized (giving up partial control of the
corporation), but an LLC or LP would not give
business management control to a creditor (a
creditor could only obtain a charging order
against an LLC or LP, which would enable a
creditor to receive dividends and/or income
that the business owner would have received if
management decided to make a distribution).
Note, LLC and LP asset protection laws vary
by state (Nevada, South Dakota and Wyoming
generally have better asset protection laws).
Yet, it is possible for a business operating in one
state (e.g., Kansas) to register in another state
(e.g., Nevada) and consequently be governed
by Nevada state laws.
Both an LLC and LP are similar in that each
provides personal asset protection from the
business. The primary difference is LLC owner(s)/
member(s) are not protected from the liability
of another owner(s)/member(s). However, LPs
do provide such liability protection from other
partners. As a result, LPs are very popular among
professionals, such as accountants or attorneys,
in order to protect one partner from being jointly
liable with another partner.
Finally, if you are the only owner of your
business and you elect to not incorporate, you
are, by default, a sole proprietor. As a result, you
would be subject to unlimited personal liability,
including business debts and obligations.
WHICH TYPE OF CORPORATION SHOULD BE ELECTED?Essentially, there are two types of corporations
– “C” Corporations and “S” Corporations.
Two of the most common
and important factors among
business owners are the
layer of asset protection and
tax ramifications. It is important to discuss the
appropriate business entity for your particular
situation with both a CPA and business attorney.
This is applicable not only at the formation of
the business, but also with current business
operations. Doing so can help
save taxes both now and in the
future, while also mitigating
liability exposure.
10 | Q3 2015 FRONTIER WEALTH MANAGEMENT
Both “S” Corporations and “C” Corporations
are entitled to limited liability. Although
certain specific requirements must be met
to elect “S” Corporation status, the primary
difference between a “C” Corporation and an “S”
Corporation is taxes. “C” Corporations pay taxes
on income at the entity/company level, as high
as a 35 percent top tax rate (this is currently
one of the hot tax items being discussed in
Washington, D.C., as tax inversion has become
more common among large “C” Corporations).
These corporations determine their taxable
income, pay corporate income taxes and then
distribute the remaining earnings as dividends
to the owners/shareholders. These dividends
are then taxable to the owners of the corporation
(while not deductible to the corporation itself).
Therefore, “C” Corporations are commonly
referred to as being “double taxed,” initially
at the corporate level and then again at the
shareholder level. Once incorporated, a company
is “C” Corporation unless it elects to file for “S”
Corporation status.
“S” Corporations, once electing “S”
Corporation status and meeting “S” Corporation
requirements, have income, capital gains and
losses, deductions, and credits passed through
to its owners/shareholders, much like how a sole
proprietor or partnership would be taxed. The
income from an “S” Corporation is taxed only to
the shareholders and is generally not subject to
corporate income tax.
The most common forms of businesses are: • Sole Proprietorships• Partnerships (LP)• Corporations ("C" Corporation and "S" Corporation)• Limited Liability Companies (LLC)
The type of business entity you choose will depend on: • Liability • Taxation • Record Keeping
SOLE PROPRIETORSHIPA sole proprietorship is the most common form of business organization. Sole proprietors can operate any kind of business. It must be a business, not an investment or hobby.
• Shop or retail trade business• Large company with employees• Home based business• One person consulting firm
PARTNERSHIPA partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
CORPORATIONSA corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership. Corporations are formed under the laws of each state and are subject to corporate income tax at them federal and generally at the state level.
When you form a corporation, you create a separate tax-paying entity. Unlike Sole Proprietors and Partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.
The Subchapter S corporation is a variation of the standard corporation. The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. The rules for Subchapter S corporations are found in Subchapter S of Chapter 1 of the Internal Revenue Code.
LIMITED LIABILITY COMPANYA Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members.
— Information from www.IRS.gov
BUSINESS ENTITIES AT A GLANCE
Q3 2015 | 11
Shareholders/owners who are also employees
of an “S” Corporation receive W-2 income for
their services, and, as a result, pay payroll taxes
(Social Security and Medicare taxes) on this
income. However, when shareholders of an “S”
Corporation receive dividends from the business,
the dividends are not subject to payroll taxes. This
tax treatment is why many employee-business
owners of “S” Corporations pay themselves a
relatively low W-2 salary and, consequently,
distribute larger corporate dividends. Note, the
IRS requires reasonable compensation (W-2
income) to be paid in such circumstances.
In summary, the difference between a
“C” Corporation and an “S” Corporation is
purely the manner in which the two entities
are taxed. From a business law and asset
protection perspective, “C” Corporations and
“S” Corporations are identical.
CAN YOU HAVE THE BEST OF BOTH WORLDS?Though many variables should be considered
when forming a business, many business owners
place asset liability protection and taxes as some
of the top priorities. Therefore, the next logical
step is to determine how a business owner can
have personal liability protection and receive
the greatest tax benefit. Because there are so
many business entities, many business owners
are unaware that a company can be established
as one type of entity while choosing to be taxed
in a more favorable manner. For example, many
small business owners frequently elect to form
an LLC or LP for the personal liability protection
(in addition to being relatively easy to form such
business structures). In addition, a business can
then elect to be taxed as an “S” Corporation for
the tax benefits (avoiding the “double taxation”).
Therefore, the small business owner would
have created personal liability protection, while
potentially creating a more tax-efficient entity.
Furthermore, many states offer state
income tax advantages on dividends paid by
“S” Corporations. For example, the State of
Kansas no longer taxes distributions of profits
from an “S” Corporation (assuming reasonable
compensation is paid to the owner). And as a
result, many companies currently in Kansas are
now either electing “S” Corporation status, or
“S” Corporations are moving from a neighboring
state (i.e., Missouri) to Kansas, simply for the
state income tax advantages.
The many nuances and details involved in the
different business entities can be complicated.
Factors to consider when forming or changing
business entities involve many variables, and
generally only two of those variables have been
discussed in this article. It is critical to obtain
expert advice when deciding which entity to
choose or whether to change current business
entities. Therefore, discussing all variables of
your particular situation with both a CPA and
business attorney is recommended. u
12 | Q3 2015 FRONTIER WEALTH MANAGEMENT
The third quarter was the worst quarter for the S&P since 2011 — in fact, so far this year the stock market has a 0.92 correlation with 2011’s; a remarkably similar pattern. Were the similarity to persist, it would bode well for the fourth quarter this year. In 2011, the S&P was up a robust 6%.
— CHARLES SCHWAB
BANK $1 MILLION (IT'S EASIER THAN YOU THINK)
DESPITE ALL THE BAD NEWS ...
news you can use.
Households' leverage has fallen by more than 30% since the 2009 peak.
The economy has
been growing and jobs
have been expanding
for more than six years.
30-year fixed mortgage rates are 3.84%, only 40 bps higher than their all-time lows of 2012.
Housing starts (new privately owned houses) have increased by an annualized 15% rate for the past six years.
The private sector has
created more than 4
million net new
jobs since 2007.
The dollar is still one of
the world's strongest
currencies.
FOURTH QUARTER COMEBACK?
Inflation has averaged only
2% for the past 10 years.
When it comes to saving for retirement, most Americans don't even know how behind they are. What's more, research shows that savings trends are getting worse, despite a decades-long push to enroll workers in 401(k)s and other employer plans.
One of the problems is obviously procrastination — it's hard to resist the immediate gratification you get from spending. The other, less obvious hurdle involves financial literacy. Most people don't grasp the power of compound savings. A team of researchers found that the majority of
people believe that savings grow in a straight line. Only 22 percent understand that the growth is exponential. As your savings compound, you earn interest on interest, so your money grows faster and faster.
What that means is that while
it can take a long time to save your first $1 million, it's a lot quicker to get to $2 million. If more Americans understood that — and acted on it — there would be good reason to be optimistic about retirement.
— Money.com, October 2015
$2 million
$1.5 million
$1 million
$500,000
Age 20 61 71
THE MILLION-DOLLAR EFFECT OF COMPOUND INTEREST
Time to $1 million: 31 years
Time to $2 million: 10 years
Q3 2015 | 13
news & notes.
AROUND THE FRONTIER OFFICES
F rontier has added several new faces to our
team! In our Wichita office, Melissa Cropp,
has joined us as the Front Office Administrator.
Melissa has a background in administration
and management, and brings her passion for
interacting with clients, staff and the public to
create team-focused environments.
In our Denver office, we’ve welcomed
Marissa MacDonald as the Front Office
Administrator and Shannon Nielsen as a
Client Service Specialist. As the Front Office
Administrator, Marissa is the first person to
greet clients in the Denver office. After working
in hotels during college, she gained several
years of experience in the hospitality industry
and developed a genuine passion for working
with people. Shannon has more than 10 years’
experience in the investment management
client experience.
WEBSITE UPDATES
W ithin the next couple of months,
Frontier's website will undergo some
updates to content, graphics and navigation.
Frontier will also be launching a new weekly
blog, in addition to joining the social media
Melissa Reglein
(Kansas City)
Marissa MacDonald
(Denver)
Melissa Cropp
(Wichita)
Shannon Nielsen(Denver)
industry. Prior to joining Frontier, Shannon
worked for two Registered Investment Advisory
firms in the San Francisco Bay area.
Melissa Reglein, Integration and Support
Specialist, joins us from Phoenix, Arizona,
and will be traveling to all the offices on a
regular basis, guiding newly hired advisors and
staff through their transition process. Prior
to joining Frontier, Melissa was Integration
Specialist with Wells Fargo Advisors for
nine years.
To learn more about Melissa, Marissa,
Shannon and Melissa, please check out their
biographies at www.Frontierwealth.com. u
@frontier_wealth
linkedin.com/company/ frontier-wealth-management
facebook.com/frontierwealthmanagement
realm. Be sure to follow us on Twitter, Facebook
and LinkedIn for company updates, articles of
interest and more. u
The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's
("Frontier") investment advisory services and general economic conditions are as of September 30, 2015. This information should
not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector
or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible
for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information.
Nothing in this newsletter is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice.
This information is subject to change without notice and should not be construed as a recommendation or investment advice. You
should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.
KANSAS CITY 4435 Main Street, Suite 1100Kansas City, MO 64111815.753.5100
ALBANY515-B1 N. Westover BoulevardAlbany, GA 31707229.888.5346
DENVER10375 Park Meadows Drive, Suite 500 Lone Tree, CO 80124303.770.0154
ST. LOUIS11975 Westline Industrial DriveSt. Louis MO 63146314.762.6800
WICHITA1625 N. Waterfront Parkway, Suite 150Wichita, KS 67206316.689.8333