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Don't miss this month's timely story ideas, direct dial phone numbers, and E-mail addresses of these accessible experts! INVESTMENTS AND WEALTH MANAGEMENT • Gift
to a Conservation Trust Can Enhance a • Asset
Allocation Simply Does Not Mean the Same Thing • Merging
Equity and Mutual Fund Portfolios at Retirement? • Investors Should Ask Advisors Hard “End of First Quarter” Questions This Year. • Where’s
Waldo? … Finding Your True Portfolio Costs • Job Transfer in Your Future? Make Sure You Check Out the State Tax and Cost of Living Differences Before Agreeing to a Salary. • A “Mortgage
Reduction Investment Account” May Be Better • Consider
Availability of In-Depth Education and Training • Media:
Sign Up for Free Subscription to In-Depth, Financial Education
Resources. INVESTMENTS AND WEALTH MANAGEMENT Gift to a
Conservation Trust Can Enhance a The family owns a modest house on five acres next to five acres of ocean front land that abuts the house. The two separate pieces of property have been in the family for years, the second lot purchased as an investment. The rapidly appreciating undeveloped property, now worth $2 million, has huge real estate taxes, too high for the family to pay easily. They have two options: 1. Sell the undeveloped five acres in a straight real estate sale. Create a tax event ($2 million x 20% cap gains tax for a $400,000 payment to the IRS. 2. Sell the undeveloped five acres to their town, a land bank or a conservation trust for fair market value. Assume that the sale
nets the family $2 million. They can then rollover the $2 million
into a 1031 exchange (through a qualified intermediary) to acquire
income-producing real estate, an exchange allowed by the IRS 1031
code. Assuming a conservative return of 3% from their income-producing
property, they will see a boost of $60,000 a year in their own income
that can be used to help pay real estate taxes on their primary residence
or for any other purpose. Equally important, they will see a drop
in their property taxes. 1. There is no cap gains tax on a sale to a land bank or conservation trust – it is deferred for the life of the property owners, and deferred at their death. 2. Their primary residence is much more valuable because it is located next to land which can never be developed in any way. 3. They have saved $400,000 in cap gains, assets that are now part of a rental property that is contributing both income and appreciation to the family’s bottom line. A 6% appreciation of the $400,000 savings would mean $800,000 more to the net worth of the family within 10 years. 4. The family received neighborly good will for protecting the neighborhood against development. 5. When the heirs inherit the property, the $400,000 in saved cap gains from the original exchange effectively becomes a tax -free loan from the IRS and is forgiven at death. The family also has the option of taking a cash-out mortgage on the exchange income producing property, still with no cap gains tax, to use for diversified investing. Pearson Financial Services, Dennis, MA offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP 800-385-7925
Asset Allocation
Simply Does Not Mean the Same Thing Talking about active asset allocation for retail mutual fund clients is viewed as heretical because of accepted studies that say active managers can't beat the market. An advisor advocating a balanced mutual fund portfolio of 50% in stocks and 50% in bonds is never held to the standard of being required to beat the market. The critics further advocate buy and hold rather than tactical asset allocation. Yet sophisticated, wealthy clients use active management for protection of capital through conservatively managed, low volatility hedge funds and are perceived to be very savvy. Some would even say any type of active management is market timing but that approach casts a wide net that captures the likes of Warren Buffet, who recently reported that he's holding billions in cash because he can't find any stocks of value to buy. Holding cash instead of stocks? To many "efficient market" theorists, that is market timing. The goal of tactical asset allocation is to limit downside volatility.
The use of Exchange Traded Funds (ETFs) in mutual funds has improved
active asset allocation dramatically. Advisors moving between ETFs
have the options of changing sector allocations rapidly. They are
being paid for their judgement of which ETFs to hold and for how
long. The goal is not to beat the market, but to get a reasonable
return with lower volatility. Over time, if active ETF portfolio
managers limit the downside volatility, they may beat the market. Look for an advisor using an ETF strategy who has the time, energy and inclination to determine which asset classes are really doing well and which are not doing well. This active asset allocation with ETFs brings conservative, wealth preservation hedge fund techniques to the retail mutual fund investor. PMFM, Inc. principals are Tim Chapman and Don Beasley,
with offices just outside Athens, Georgia. Jud Doherty, CFA,
manages the marketing and distribution of 401k Toolbox, a service
that provides discretionary management as part of its advice
product. PMFM provides money management services for its own
clients, for the asset held by plan participants in their 401(k)
plans, as well as for the clients of other asset managers. The
firm has always offered a tactical asset allocation strategy
and has a lengthy
Merging Equity
and Mutual Fund Portfolios at Retirement? Going into retirement requires a detailed analysis of your goals and dreams, understanding where you stand financially, figuring out long-and short-term objectives, calculating how much money you will need in retirement, and creating a strategy to accomplish the goals. A major issue for many couples facing retirement is portfolio rebalancing when one partner has held a portfolio entirely in stocks and the other entirely in mutual funds. The issue that crops up, almost always, is whether the equity assets are replicated inside the mutual fund portfolio and whether any duplication creates overweighting in some investment sectors. The second issue to address is whether the risk levels are appropriate for the risk tolerance of the merged portfolio at a time when protecting capital is paramount. Very often, successful stocks are heavily weighted in mutual fund portfolios. After all, everyone is reaching for performance. This also produces a great deal of duplication within individual mutual fund portfolios, even though were purchased for purposes of diversification. Your job and that of your advisor is to drill down into the mutual fund portfolio contents and make changes where stock duplication throws the risk tolerance out of balance as the couple looks at retirement income needs. The advisory interview and due diligence process on the existing portfolio will result in a more efficient and balanced portfolio to meet the couple’s financial needs going forward. Donald W. Nicholson, Donald W. Nicholson & Associates, Ltd., Wilmington, Delaware, is a fee-based financial planning firm serving the retirement and wealth management needs of professionals and business owners for almost 30 years. His son, Donald W. Nicholson, Jr., is a partner in the business. Contact them at 302-529-1500. E-mail dwnicholson@unitedplanners.com -- http://www.nicholson-associates.com.
Investors
Should Ask Advisors Hard “End of First Quarter” Portfolio performance always generates phone calls from clients to financial advisors. This month, the questions about first quarter 2004 reflect a new, deeper understanding of the impact U.S. politics, foreign policy, budget deficits, and personal debt have on the investor’s personal portfolio. As well, investors are more aware of the impact current economic issues will have on future generations, their children and grandchildren. When investors see lower portfolio results than last year, they ask hard questions. Well-managed portfolios are up slightly for first quarter. The market is off slightly. But investors who have not lost their short-term memories of what happened in 2000 and the following two years have become more critical, and more questioning. Headlines on the volatility in the market have unnerved some investors. Advisors are finding their clients are more serious, better informed about issues that can impact their portfolios, and looking for ways to protect those portfolios. But the questions, true to human nature, remain -- “Why aren’t we making any money?” Advisors must be available and willing to discuss this with investors. There are no easy answers, only hard questions. In the asking and answering of the questions, comes a depth of relationship between advisor and client. Do not hesitate to ask questions about your portfolio. After all, it’s your money. Henry I. Montgomery, CFP -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. pfshim@usinternet.com.
Where’s
Waldo? … Finding Your True Portfolio Costs Investors have a new question to add to the due diligence agenda in vetting potential financial advisors and the underlying firms in which they do business — one that has a direct and strong bearing on the integrity of investment advice… It came to light recently that one of the nation’s largest distributor of mutual funds, or what you may more commonly know as a brokerage firm, pocketed $180 million in 2002-2003 from a line item called “revenue-sharing payments.” A tidy sum to be sure. What is this lucrative item? Turns out that revenue-sharing payments are payments made by mutual fund companies to brokerage firms that favor the companies’ funds in recommending investment selections for investors. Also turns out, according to an SEC survey released in January of this year, that 13 of 15 brokerage firms reviewed favored “revenue-shared” mutual funds in selecting funds for individual investors. Though rife with potential conflicts of interest, there is nothing illegal about a revenue sharing arrangement on its face; indeed, it happens across a broad range of industries and businesses. What is instructive to learn vis-à-vis our large fund distributor is that its revenue-sharing arrangements were not disclosed to individual investors even as their portfolios were populated with preferential funds. Viewed another way, the $180 million in revenue sharing payments posed a $72 invisible tax on each of the 2.5 million individual investors served by the firm and provided a theoretical $18,000 windfall for each of the firm’s 10,000 employees. What’s wrong with this picture?! As you sit down with your broker for a first quarter state-of-the-state review of your portfolio, take the opportunity to explore where his or her allegiance resides with respect to revenue-sharing arrangements. The results promise to be informative. Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com.
Job Transfer
in Your Future? Make Sure You Check Out the State Tax A job hunter
in Tennessee was considering a transfer move to California. He
did some cost of living and state tax research to ensure that any
salary offer would be adequate for an employee moving from a state
with no income tax and a low cost of living to a state with a high
income tax and a much higher cost of living. After returning from his interview, his prospective supervisor asked what he would need for salary in order to make the move and accept the offer. He told the prospective supervisor that he would need a 20% increase based on his hard data and research. He got it. PaycheckCity.com offers unequalled employee self-service tools for paycheck management. The FREE PERSONAL FINANCE CALCULATORS at this site are used by individuals and organizations of every size to quickly and accurately answer paycheck-related questions and to compute paychecks under a variety of circumstances. More than 1.5 million page views take place each month on the PaycheckCity.com site and visitors stay an average of 10 minutes each. It is the most visited site for payroll-related support on the Internet. Contact Jon Bohnert, jon@symmetry.com, 480-596-1500 x. 103.
A “Mortgage
Reduction Investment Account” May Be Better
Than Paying Off Your Mortgage. The only way to become truly debt free is to have no need or dependence on debt. For example, a senior citizen who owns a home with no mortgage may have no debt; but if they also do not have enough cash flow to fund their living expenses and achieve their goals in life without dipping into credit cards or their home equity, they are not debt free. They are not debt free because they are not free from the burden of having credit card debt or the burden of worrying about money. The conventional wisdom tells homeowners to become house rich and cash poor by working hard to pay off their mortgage by making extra principal payments. Rather than paying off their mortgage, consumers may be better able to achieve their goals by refinancing to an interest-only mortgage at or before retirement. This allows the consumer to make interest-only payments, diverting the freed up cash flow into an investment account that yields more than the after-tax cost of the mortgage (often which in in the 2.5% - 3.5% range.) The investment account can be called a “mortgage reduction account” and the funds could be used to pay off the mortgage at some point in the future if the need arises to do so. This strategy also allows the client to maintain liquidity in case of emergencies and accumulate greater wealth than if they were to follow the traditional route of making extra principal payments on the loan. The old conventions about mortgages must be examined carefully by the investor and their financial advisor. The equity and debt in your real estate are for many the most significant asset or liability they have and can be managed with creativity even into retirement. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a full service mortgage lender and broker in Ann Arbor, MI. Phone: 888-608-9800 Email: Gibran@NicholasCity.com Web Site: NicholasCity.com
Civil Marriage For Same Sex Couples Still Requires Defensive Financial Planning. Regardless of what states do to give same-sex couples the right to marry, as Massachusetts’ Supreme Judicial Court ruled in November of 2004, existing federal and state laws currently restrict access to the full spectrum of marital benefits. Same sex couples in Massachusetts who marry are insured the right to make medical decisions on behalf of an ill spouse, access to hospitalized spouses, the right to determine final burial instructions, and access to approximately 300 state provided marital benefits. However, proposed federal and Massachusetts state constitutional amendments may potentially strip away or redefine marriages as civil unions. As a result, same sex couples who marry must still review and update their current financial and legal plans to ensure that they are properly protected and create strategies to compensate for gaps in coverage due to continuing inequities. Existing Federal and State laws, which recognize only the union
of a man and a women as legal spouses, restrict access to the full
spectrum of approximately 1,400 marital benefits. The federal Defense
of Marriage Act (DOMA) currently prevents access to approximately
1,100 federal rights and benefits, while state DOMA-like laws restrict
portability across state lines by refusing to recognize the marriages.
DOMA’s create a parallel system of benefits due to differences
in eligibility for certain benefits and different tax treatment. Same sex couples need to review their current financial and legal plans to ensure that there are no gaps in their protections due to limitations in actual benefits. They must factor in the different availability of coverage and tax treatment for various transactions, and update insurance coverage for lost retirement benefits. Same-sex couples will continue to require additional estate planning documents as a back up when traveling and as a safety net against any future changes in federal and/or state law. Susan Burns, CFP®, Principal of Snug Harbor Financial Planning, Inc. in Marshfield, MA, provides creative solutions to complex financial problems for women business owners and lesbians through long-term comprehensive financial planning relationships. She can be reached at 781-834-4099 or snughbrfin@aol.com.
Consider Availability of In-Depth Education and Training When Choosing a Separate Account Platform. Separate account programs manage risk by bringing together different investment managers who can focus on performance for specific allocations in a diversified portfolio for a client. Simply introducing a separate account platform does not mean that a broker will embrace the shift from transaction-based to fee-based business immediately. There are several requirements to successfully integrate a separate accounts platform at an institution: 1. Initial and ongoing corporate buy-in at the top level of the
organization introducing separate accounts, requiring accountability
and commitment to the product line A good managed account platform will provide sales educators who know and teach the sales techniques of a process-based solution. Superior training from a managed account platform provider offers the following:
o clear, easy to understand "how to" details -- filling
out forms, keeping records · Hands-on sessions with brokers, either presented by the
separate account provider, or in concert with the institution's training
department. Impediments to sales of separate accounts can be overcome by senior management support, together with creative, thorough training of brokers jointly by the institution, the separate account platform provider, and the separate account managers. Successful programs also establish a level playing field for fee-based sales through favorable compensation plans for their sales teams. The fee-based business model is rapidly becoming a “way of life” for brokers, as it delivers a defensible solution for most clients’ financial needs, compared to transaction-based business, which in many cases does not. To reach Brian Carroll, Head of Separate Accounts, FundQuest, Boston, call Sarah Anderson at 617-526-7391. FundQuest is the leading provider of customized Web-based managed account platforms for financial institutions interested in moving their representatives from commission-based to fee-based product sales. Sarah_Anderson@fundquest.com.
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