Investment advisory firms often default to fixed income instruments, including government or corporate bonds and band funds, as an alternative for clients that have a low tolerance for risks.

Central State Financial LTD will recommend fixed income investment assets to serve the same purpose, but the instruments that we identify will also have a significant potential for regular income and growth that can fuel the expansion of a client’s portfolio.

The markets for fixed income instruments react differently to both internal and external economic forces than equity markets. Our advisors, who are all drawn from an experienced group of bond fund managers, analysts, and bond traders, utilize specialized proprietary research tools to monitor those movements and to identify the optimal blend of individual bonds, fixed income funds, and other specialty assets  that can deliver enhanced value and steady income into a client’s portfolio.  

Bonds are the predominant fixed income investment asset, but fixed income instruments can come in many forms:

  • Bond exchange-traded funds (ETFs) or mutual funds
  • Short-term bonds, which have maturities of three years or less
  • Preferred stock, which, although technically an equity investment, has hybrid characteristics of both stocks and bonds
  • Leveraged bond funds
  • Municipal bonds
  • General corporate bonds
  • Government bonds and treasury bills

Our fixed income analysts adopt an identical approach to these investments as our equity analysts do to stocks and other equity securities. That is, rather than applying a common data-driven or fundamental research approach to every fixed income asset, they fine-tune their research to reflect the specific instruments that might be appropriate for a client’s portfolio. This process delivers the most objective information to the client with multiple fixed income options that can deliver value, income, and long-term growth.

Tax Considerations for Fixed Income Investment Assets

An overriding consideration for every fixed-income asset is the tax treatment of the growth and income associated with those instruments.  As with all other aspects of the development of an intelligent wealth management plan, the minimization of taxable income is only one of several factors that our wealth advisors will consider. Many investors and their advisors err on the side of placing too much emphasis on tax reduction. Rather than considering these instruments in a vacuum, our advisors look at the bigger picture to determine if taxable or non-taxable fixed income assets will serve the greater purposes of the plan.

A client’s overall wealth management plan might present situations in which income from taxable fixed income investments can be offset by other portfolio components. Central State Financial LTD wealth advisors work closely with our fixed income research analysts to understand how interest rate trends, economic cycles, market disruptions, and national bank policy announcements will alter the growth and performance of a client’s total portfolio. They drill down to the next level of sector and industry evaluations and the fundamental financial characteristics of the issuer of a fixed income instrument. This process inevitably produces a slate of fixed income investments that have high current yields backed by strong credit ratings, and  that show a strong potential for growth that can serve the client’s goals.

If the asset fits the client’s plan, our advisors will often recommend matching it with offsetting out or call options, and then adjusting other aspects of the client’s portfolio such that the overall tax effects on portfolio holdings is minimized. The client continues to receive the long-term benefit of growth with near-term income and lower tax erosion of overall portfolio value.

This result is further supported by our ability to identify and recommend fixed income assets reflecting income that is at odds with the face value of the instrument.  Our bond analysts have developed a unique ability to uncover these inefficiencies in fixed income investments before the broader market discounts them. Our structural and fundamental analysis thus creates a portfolio with a fixed income component that consistently outperforms investment recommendations that are limited to credit analysis.

The taxable fixed income recommendations that our analysts and advisors develop are best suited for wealth management plans that call for reduced volatility and enhanced yield. Many other wealth advisor firms continue to rely on research and analysis that predates the 2008 bond market meltdown. Central State Financial LTD has shifted the focus to a more fundamental approach, particularly where asset- or mortgage-backed fixed income instruments are under consideration. As with all other recommendations that come out of Central State Financial LTD research protocols, we reject emotional decisions and instead favor objective data and direct expert analysis. We remain attuned to adverse changes in credit ratings and instill sufficient flexibility into a portfolio plan to allow our clients to move into other fixed income opportunities as they arise.  Most importantly where taxable instruments are included in our recommendations, we develop structures and processes to capture capital gains with little or no erosion by taxes.

A tax advantaged or tax efficient fixed income instrument is superficially appealing, but will benefit an investor only if the investor’s personal wealth management plan is consistent with the benefits offered by those instruments. Too many wealth advisors channel their clients into these instruments with little or no consideration of the investor’s greater plan. Central State Financial LTD wealth management consultants look first at a client’s goals, and only then recommend tax advantaged instruments if they are wholly consistent with those goals.

Central State Financial LTD research process first identifies the tax advantaged instruments that fit a client’s plan. We compare the growth and income profiles of those instruments against each other and with other fixed income assets to select the optimal alternatives. No well-structured wealth management plan is designed to be static, and accordingly we review maturities, record distribution dates, and yields to develop a strategy for buying, holding, and selling those instruments, for swapping out of instruments that are underperforming vis-à-vis certain benchmark targets. Last, we determine if the instruments would best be held in a general portfolio or a Roth or other IRA plan. Our advisors also examine prospects for combining tax advantaged instruments with a client’s charitable giving plan or philanthropic goals.

We look at tax advantaged instruments over the entire strategic arc of a client’s wealth management plan. This fosters regular review of results and adjustments to portfolio allocations as market circumstances and the client’s own position undergo changes. With the correct structures and implementations, we see clients savings tens or hundreds of thousands of dollars that might otherwise be lost through tax erosion.

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Chicago, IL 60606

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