When it comes to wealth management, investing and financial planning, what's the outlook for 2007? Cincy Business asked several local experts to share their insights in a roundtable format. The contributors are William E. Hesch of Hesch CPAs, LLC; Matt McCormick, portfolio manager, Bahl & Gaynor Investment Counsel; Howard McEwen, branch manager, Makris Financial Group Inc.; Rebecca Pace of Pace Advisors LLC; Nick Sargen, chief investment officer, Fort Washington Investment Advisors; Thomas J. Walsh of Walsh Asset Management, LLC; M. Jay Wertz, portfolio manager, Johnson Investment Counsel Inc.


McCORMICK: In the short to intermediate term, U.S. economic growth will begin to slow as housing's comeback to reality ripples through the economy. This damaging  "multiplier effect" will not happen overnight, as U.S. GDP is not expected to turn negative until the first half of 2007. The continued inverted yield curve further indicates a recession is not unfathomable. However, all is not lost as certain stocks"”especially large, high quality companies like P&G, GE, and J&J"”will probably out perform.

McEWEN: I believe in long-term equity investing. When asked for short-term predictions, I paraphrase an old sage in my business who said, "The short term is unknowable but the long-term is inevitable."

SARGEN: We expect the economy to achieve a "soft landing," in which economic growth moderates to about 2 percent. This is nearly a full percentage point below the long-term trend rate. We believe growth in consumer spending, business investment spending and exports will offset weakness in residential housing and manufacturing. We assess the risk of a recession to be about 20 percent.

WERTZ: We expect a decelerating, though non-recessionary, economy in 2007, with the deflating housing bubble exerting just enough pressure on consumer spending to temper growth and ease inflation concerns. This "soft landing" scenario of moderate growth would likely be received well by the U.S. financial markets.


McCORMICK: Assuming we do not have a geopolitical or financial shock, the Fed will probably hold until the fall. Then they will cut rates as the economy shows definite signs of weakening. As usual, they will probably be too late with their cuts and further extend the economic slowdown.

McEWEN: My best bet would be that things will hold steady. But I also have in the back of my mind that 2008 will be (Federal Reserve Chairman) Bernanke's first presidential election year. If he wants to take any action, he'll do so before then so as not to appear to interfere with that.

SARGEN: The most likely outcome is that the Fed will lower interest rates once it is comfortable that core inflation (which excludes food and energy) is moderating toward 2.0 percent from its current pace of 2.7 percent. We believe the Fed will wait to ease until the second half of the year, when the unemployment rate is likely to be rising.
WERTZ: The Federal Reserve is likely to lower short-term interest rates slightly during the year to ensure a "soft landing" and ensure that consumer retrenchment does not lead to a recession.


McCORMICK: I would be more cautious. As the U.S. economy slows, so will eventually the rest of the world, since we buy most of their goods and much of their returns are now correlated with the U.S. market. It may be a good time to lighten up on China since their infrastructure buildup towards the 2008 Olympics will decline and a slowdown in the U.S. will somewhat cool their red-hot economic growth.

McEWEN: I keep my international allocation the same no matter the year. Proper asset allocation"”not trying to predict the best time"”is the key to successful investing.

SARGEN: International and emerging markets may continue to outperform the U.S. market, but the difference in returns is likely to be smaller than in the past few years. Given the huge run-up that emerging markets have enjoyed in recent years, we would be more cautious in 2007.

WERTZ: A long term, strategic commitment to international markets is appropriate as globalization continues to make world economies more interconnected. However, given that developed markets and emerging markets have significantly outperformed domestic markets over the past five years and no longer appear to be inexpensive, it may be advisable to rebalance portfolios in favor of higher quality, large company domestic stocks.


McCORMICK: Hedge funds may have their purpose for some investors. However, we are usually suspect of any type of investment that is attracting substantial interest from the masses. Investors should make sure they know exactly what they are investing in, who you are investing with, and what risks they are taking with your money. All in all, I would rather invest with P&G"”and sleep at night"”as opposed to waking up and finding out the Thai Baht blew up and cost me over 20 percent.

McEWEN: I don't use them and don't plan on using them. If I can't explain how an investment works to a client in five minutes, I don't use it. Hedge funds fall within that category for my clients.

SARGEN: Hedge funds are suitable alternative investments for high net-worth clients with significant assets who understand the risks (including lack of transparency and limitations about withdrawals), as well as high management fees. For most qualified investors, we would recommend "fund of fund" vehicles to achieve diversification, while recognizing that they entail paying double fees.

WERTZ: The term "hedge funds" is somewhat of a misnomer because there are so many different funds in both the equity and fixed income space. While such funds have many theoretical benefits (reduced volatility, potentially higher returns), it is crucial to understand the history of the hedge fund manager, its investment strategy and, in particular, the fund's fee structure.


McCORMICK: I would not expect any major tax changes in 2007. House Democrats may pass some tax bills to appease their base. These bills will probably die in the Senate or be vetoed by President Bush. However, we will probably see the minimum wage increase and interest rates for student loans decrease.

McEWEN: I don't expect the Democrats to raise taxes. If they simply do nothing, the Bush tax cuts go away after 2010. Why should they take the heat for raising them? I don't expect much else from them either. It's hard to get things done with such a thin margin of control and a presidential election in two years.

HESCH: The estate tax repeal that President Bush has sought over the past two years is dead. Congress needs to reach a compromise as to how much each person can leave estate tax free to their heirs. Currently, the $2 million lifetime exemption increases to $3.5 million in 2009, with the estate tax being repealed in 2010 and then being reinstated at $1 million in 2011. Recent congressional activity indicates that we expect them to compromise in the $3 million to $3.5 million range for 2009 and the future.

PACE: On the tax front I hope we will see Congress taking a more responsible approach. Dealing with the deficit will require some painful choices. I hope the tax code will be restructured to recognize the needs of working families and benefits of small business growth. And by small business I mean local, family businesses. The theory that tax cuts for big companies and the wealthy will lead to economic growth that benefits everyone can't be reconciled with the huge and growing gap in net worth and income between the wealthy and working families.

SARGEN: We think it is highly unlikely major tax law changes will be enacted in 2007 due to political gridlock. The outcome of the presidential election in 2008, however, will be key to determining whether tax cuts enacted by the Bush Administration will expire in 2010. The alternative minimum tax is likely to be scrutinized, but any changes would be part of more comprehensive legislation in the future. The Democrats will press for an increase in the minimum wage, which is likely to pass. They may attempt to impose a windfall tax on oil, which is unlikely to pass.

WERTZ: While the Democratic-controlled Congress has a different tax platform than the current administration, we do not expect significant changes in tax laws affecting investments in 2007"”particularly with 2008 being a Presidential election year. It appears likely that Congress will act to raise the Alternative Minimum Tax exemption again this year to spare many Americans from significantly higher income taxes.


McCORMICK: The real estate market is in the end stages of traditional bubble burst. Here in the Midwest, we did not see the huge speculation that Florida and the coasts saw, and our homes did appreciate"”but not wildly. Housing here is slow and it is a great time for a buyer, not a seller. People have always speculated, whether it be with tulips, technology stocks or, more recently, real estate. The real estate slowdown is yet another great example why investors should diversify their assets.

McEWEN: I'm not concerned about real estate as an investment, but how people may have leveraged their homes too much. Things like massive home equity loans and interest-only mortgages scare me.

SARGEN: By now, most investors are well aware of the risks in real estate in general and specifically in residential housing, especially for second homes along the two coasts. The broader issue is whether the weakness in residential housing will spread to other sectors of the economy. We believe the economy will avoid recession, but can't rule it out completely. Consequently, our advice to investors is to pursue less aggressive strategies in the coming year. Thus, while REITs have continued to perform very well, we are cautious at this time.

WERTZ: While continued weakness in real estate prices is likely to slow the economy in 2007, such moderation in prices may make a Qualified Personal Residence Trust (QPRT) a more attractive estate-planning technique. This is due to the fact that a residence must be appraised for gift tax purposes when funding a QPRT, and a lower appraised value makes this technique more attractive.


PACE: Several of the tax acts in recent years made changes in long-term care insurance. New products are not on the market yet, but I expect them to be popular. Partnership plans that allow an individual to protect personal assets from long-term care "spend-down" rules are very promising. Carriers are struggling with these policies, however, as elder services, regulations and Medicaid benefits differ greatly from state to state. A policy designed to meet the needs of residents of one state would not be appropriate if they relocate to another state. New laws have enhanced policies that combine long-term care insurance with life insurance. These popular policies guarantee that someone will get a benefit from the premiums paid. Older policies, however, made a small taxable distribution to cover the cost of the long-term care insurance. New policies, when they become available, will not have a taxable component. Sometime soon we should see long-term care policies combined with annuities. Some people point to Health Savings Accounts (HSAs) as a way to deal with medical expenses in retirement. These accounts are not likely to have a sizable impact, however. In order to open a HSA you must first have a high-deductible health insurance policy. Most people choose a high-deductible policy because of the low premiums. They generally cannot afford to fund a HSA. If the account is funded, however, and the owner is healthy enough to allow the account to grow tax-deferred, it should grow into a nest egg that can be tapped after retirement when healthcare spending increases.

SARGEN: Traditionally, investors have used insurance policies to buy protection against death and to include these policies in estate planning strategies because of tax benefits. Given the propensity for people to live longer today, there is now growing interest in "longevity insurance" that provides protection for individuals who are concerned they may outlive their retirement savings.

WERTZ: From an income protection standpoint, maintaining adequate life insurance trust remains a perennial important issue for many people. Since it appears likely that the estate tax will continue to exist for higher net-worth clients, an Irrevocable Life Insurance Trust (ILIT) remains an effective planning tool for those with estate tax liabilities.


HESCH: Clients need to adopt a sense of urgency in getting their financial and estate plans set up properly. They need to be proactive regarding their wealth management and the overall allocation of asset classes in all of their investments, including their IRAs, and 401ks and pension plans. Also, they need to make sure that their asset ownership and beneficiary designations allow their estate plan documents to work for them so that their assets end up being distributed to their heirs as they had planned in their estate documents.

McCORMICK: Determine your "needs" from your "wants." Establish a long-term plan. Hire great people to help you implement. Remember: It is your money, and do not let anyone force you into any investment you are not comfortable with or do not understand.

McEWEN: As always, invest regularly and for the long-term. Six months is not the long-term. Neither is five years.
PACE: When it comes to any kind of financial services the best advice I can give anyone is to ask for the details about how their advisor is compensated. You need to be sure that the advisor's interests are aligned with yours. An advisor who is paid for a transaction can be expected to advise you to make a transaction. Advisors who are paid to manage a portfolio may feel the need to "do something" to earn their  keep. An advisor who is paid for advice may advise you to do nothing, if that is in your best interest.

Registered Investment Advisors have a responsibility to provide advice with their clients' best interests in mind. Always ask to see their Disclosure Document (ADV) before you do business with any investment advisor. Ask about compensation for the initial service and for on-going maintenance services. Also ask about surrender or deferred charges. Unfortunately industry terminology is very confusing. Commission/transaction-based means the compensation is dependent on a sale and paid by the advisors' employers or the companies they represent. Fee-only means the compensation is paid by the client: sometimes for advice, sometimes for a service. Fee-based means the compensation is likely to involve both advice (for a fee) and a transaction (the implementation).

My second piece of advice is related to the first. Watch your costs. Costs involve more than the initial transaction cost, particularly with a mutual fund or an annuity. A small reduction in cost when invested wisely can result in a large amount in retirement.

SARGEN: First, be diversified. While the fastest way to make money is to have highly concentrated positions, it's also the quickest way to squander your wealth. Second, don't chase performance. That is, investments that have yielded the best results in the past often deliver sub-par returns in the future. For example, the best strategy in the past 3-4 years has been for investors to take considerable credit risk in their stock and bond portfolios. Looking to 2007 and beyond, however, investors are not adequately compensated for taking these risks today.

WALSH: Review your portfolio and make sure you are properly diversified based on your goals. Remember that having many funds does not necessarily mean you are well diversified; having the right combination of funds in the right proportions makes you well diversified.

WERTZ: Given the stock market's strong rise over the past four years, it is important to maintain a longer-term focus and to rebalance your portfolio to ensure that you are not unduly exposed to areas of the market that appear to be richly valued: Real Estate Investment Trusts (REITs), smaller cap value stocks, and junk bonds. Higher-quality blue chip stocks are particularly attractive now, and should shine when the economy and corporate profit growth moderate. As always, it is vital to have an integrated wealth management plan in place that addresses all of your investment, tax, insurance and estate planning goals.