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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
INVESTMENTS AND WEALTH MANAGEMENT Wall Street Does Not Want Investors to Know…. It has become the investment recommendation of the day -- put a portion of your assets in a hedge fund to protect against future market declines. Hedge funds have become popular since the 2000-2003 market downturn. Investment managers want to show their clients and prospects that they have a plan for the next downturn, no matter when it occurs. However, what Wall Street and many investment advisors will tell you, but won't emphasize, is that hedge funds, even good ones, cost 2% a year and the manager takes 20% of the profit. Last year, many hedge funds just about earned their fees, and no more, so any gains were eaten up in hedge fund fees and expenses, while the stock market produced a 10% return. So much for hedge funds that did not work very well in last year's primarily sideways market. Most hedge funds are designed to be market neutral. When the market declines, the best that will happen, is the investor will break even. What good advisors will recommend and something
that investors can do themselves is create their own hedge fund.
It is not rocket science. A portfolio of bonds, real estate and
a stock portfolio of Exchange Traded Funds (ETFs) with stop loss
provisions will do the trick. Stop loss is a mechanism that is
put into place when the ETFs are purchased and they limit the loss
the client will withstand in a down market. For example, Vanguard's
ETF Total Stock Market Index Fund has 3000 companies and includes
large, mid- and small-cap equity investments. It does not track
the S&P 500 that covers only the large cap universe. If an
investor's stop loss is at 5% and the market declines 10%, the
investor would only lose 5% and be sitting safely in cash in a
money market on the sidelines. Pearson Financial Services, Dennis, MA, is the author of "The Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, their families, and his own family. He 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
Considering Offshore Asset Protection Planning? Caution is Key. The complexities of asset protection planning may make it more difficult than most high net worth clients understand. There are numerous opinions on the viability of both domestic and foreign asset protection vehicles. Foreign asset protection trusts or FAPTs were all the rage before the Anderson and more recently the Eulich decisions. In both cases the “Impossibility Defense,” a defense based on a plaintiff’s inability to command the trustee to repatriate assets, was struck down in U.S. court. In both cases, the defendants were charged with contempt and tossed into jail. Now this does not portend the end of FAPT’s. However, it does require that the various promoters of such strategies pull the curtain back and allow the clients to see the very real possibilities of jail time with an improperly prepared asset protection design. It is important to note that an asset protection strategy CAN be incorporated into a well-conceived estate plan. The reality of such protection is that you must explore with your advisor, from the bottom up, the various vehicles that offer shelter to your assets, taking into account the level of the risk you are willing to accept. There are numerous on-shore strategies that might build the kind of protective layer you require. It is not unlike climbing a ladder. You don’t start at the top of the ladder, at the FAPT, when the first few steps up might accomplish the job with a lot less risk. Whether a corporation, a self-settled domestic trust, or intricate offshore planning, you need to be advised of the potential protection that the strategy affords your wealth and, at a higher level, the risk you face from a predatory challenge to your wealth. The worst -case scenario is that the construction -- the very fabric of your plan -- may be unwound by the U.S. Courts. In addition, if improperly prepared, you may find yourself in the untenable position of being whisked off to jail, facing contempt charges. Contrary to popular beliefs, asset protection is alive and well. However, promoters of high risk planning techniques must turn down the hype and pull back the curtain, so you have a clear overview of all the risks before you commit your financial well being to any asset protection strategy. Gary K. Hager, CFP, Founder and President, Integrated Wealth Management, Edison, New Jersey, a full service wealth advisory firm, serves as the primary financial resource for affluent families and closely-held business owners, providing state of the art planning solutions which effectively integrate the disciplines of Wealth Accumulation and Wealth Preservation. Contact: ghager@iwmco.com, 732-510-1611.
ETFs May Lure Investors Into a False Sense of Security About Diversification. ETFs offer investors many benefits, including lower costs, diversification across a specific index, transparency of holdings, and the ability to buy or sell an ETF throughout the day. However, for investors who trade frequently, the transaction costs associated with ETFs can negate the lower operating costs. ETFs like other passively managed index portfolios, can lure investors into a false sense of investment security. A broad market ETF such as the SPDR (ticker SPY) does give index diversification, but that investment does not directly address the far more important decision about asset class allocation. The decision of how to allocate money among stocks, bonds and cash is the key issue an investor must make to reflect their risk tolerance. No one investment is going to properly fill that need. While relatively stable, ETFs are not set in stone. The makeup of an ETF is adjusted at least annually based upon the makeup of the underlying index. An ETF can become heavily weighted towards one economic sector if that sector significantly outperforms the overall market. In the late 1990s, the technology sector doubled its weighting in the S&P 500 to make up over one-third of the index. This bulge in the index and the ETFs that track the S&P 500 had negative consequences for investors once the technology bubble burst. With a heavy weighting to technology, an S&P 500 ETF suffered greater losses than a more balanced account. ETFs can enhance a portfolio with an appropriate asset allocation, but ETFs should not be the only tool an investor uses. Page Four Donald L. McCoy, J.D., CMFC -- 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.
Natural Gas Well Royalties Are An Opportunity, Not just a Windfall. Numerous North Dallas residents who own land
where natural gas wells are currently being drilled in the Barnett
Shale may want to look at their overall financial plan before spending
the royalties.
Remember, when you look at gas royalties as an opportunity, not a windfall, you are taking a serious step to improving your family's financial security going forward. Grunden Financial Advisory, Inc., Denton, TX, is a full service investment management and financial planning firm specializing in offering financial strategies that support a high net family's meaningful life and generational influence. Ricky Grunden, CFP, 940.591.9007 or e-mail at rgrunden@grunden.com.
Important Documents You Need Immediately When Your Loved One Becomes Seriously Ill or Dies. The important papers you need immediately when a loved one must seek long term care or dies are not, contrary to what most personal finance writers suggest, wills and trusts. The important documents are those that help you, as the care giver, do the four following things:
Wills and trusts are important, but are preceded by a need for documents we don't think about often and whose absence can create chaos and dramatically derail the emotional recovery period after a loved one dies. Mark Kaizerman, CPA, CFP, is the author of “Beneficiary Directory: Your Personal System to Organize Your Important Documents and Guide Your Beneficiaries. www.beneficiarydirectory.com, a new book that offers a broadened concept of client fact-finding during the initial discovery process, He can be reached at 508-647-0830 x 13, or for a copy of the book, contact the author at mark@beneficiarydirectory.com.
What Kind of ARM is Advisable in a Rising Interest Rate Environment? For homeowners and home buyers choosing adjustable rate mortgages (ARMs) in today’s interest rate environment, the type of ARM that is chosen can make a world of difference. Here is a brief overview of the benefits and drawbacks of the most common types of ARMs in today’s marketplace: Interest Only LIBOR ARMs.
The payments and interest rates on these types of loans fluctuate
either monthly or every 6 months based on the London Interbank
Offered Rate (LIBOR) index. The LIBOR changes whenever the Fed
changes their Federal Funds Rate. LIBOR ARMs have been a great
strategy over the last several years as homeowners with LIBOR ARMs
have been paying ridiculously low monthly payments while their
interest rates have fluctuated between 2.5% and 3.5%. However,
as the Fed has begun increasing short term interest rates, the
interest rates on LIBOR ARMs have risen to the 4% – 4.5%
range. Therefore, this would probably be a good time for homeowners
with LIBOR ARMs to take their profits off the table and refinance
into a more stable strategy. Deferred Interest Option ARM, The interest rates on these loans fluctuate monthly based on the 12 Month Treasury Average, which is a 12 month rolling average of the yields on one year US Treasury Securities, which is a more stable index than the LIBOR index. The notable feature of these loans however is the “deferred interest” feature. This allows the homeowner to make minimum payments that are often not enough to cover the interest that is due on the loan, resulting in deferred interest being added to the mortgage balance. For example, assuming a 4.5% interest rate, a homeowner with a $300,000 mortgage would have four payment options: 1. 15 year amortized payment @ $2,295 – the loan would be paid off in
15 years While these types of loans can be very dangerous for undisciplined or over-leveraged homeowners, deferred interest ARMs work very well for financially sophisticated clients who have properties that are very likely to increase in value over the next few years. This is because deferred interest Option ARMs enable homeowners to allow their real estate to increase in value while they divert their cash flow into more productive investments, resulting in greater tax benefits and financial arbitrage opportunities. Hybrid ARMs – 5, 7 or 10 yr ARMs, With a hybrid ARM, the interest rate and the monthly payments remain fixed and constant throughout the initial fixed period, often 5, 7 or 10 years. The monthly payments can be either interest only or based on a 30 year amortization (as though you are paying the loan off over 30 years), while the interest rate is only locked in for the initial fixed period of 5, 7 or 10 years. The major advantage to hybrid ARMs is the lower interest rate (and therefore the lower monthly payment) when compared to a 30 yr fixed rate mortgage. In today’s interest rate environment, hybrid ARMs can make the most sense for many homeowners because they provide the comfort of the interest rate being locked for 5, 7 or 10 years; at which time most homeowners will be ready to move or refinance into a different strategy. Remember, according the Mortgage Bankers Association (MBA), most Americans refinance every 4-5 years; and according to the National Association of Realtors (NAR), most Americans move every 7 years. Therefore, homeowners would do well to evaluate their mortgage options before arbitrarily jumping into a 15 or 30 year fixed rate mortgage. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a private mortgage brokerage and mortgage planning firm that specializes in helping affluent families manage the equity in their home, vacation homes and investment properties to enhance wealth. Gibran has created the ARM Planner education and marketing program to help loan originators across the country integrate financial planning concepts into the mortgage process. Gibran has also created Wealth Equity, a 7 hour DVD course for consumers. gibran@nicholascity.com,734-531-0180
Investor Determination Drives Advisory Firm to Investigate Tactical Asset Allocation. Doug Blankenship, a CFP from Cambridge Legacy Group (CLG) in Dallas, Texas was in for a surprise two years ago when he met a prospective client, a former Delta pilot. The pilot, we’ll call him John Jones, was not willing to diversify his managed account portfolio away from PMFM, Inc., a Georgia financial advisory firm whose tactical asset allocation investment philosophy had protected his assets during the tech wreck and ensuing market downturn from 2000 to 2003. Blankenship and CLG had already begun to investigate tactical asset allocation when it looked as if a secular bear market was on the way in 2000. However, during the raging bull market of the 90’s, there was not much information on this investment style, as the performance of tactical asset allocation strategies often lags major market indexes during upswings. PMFM generated positive returns for John Jones’ account in all three years of the bear market, ensuring his ability to retire on time, unlike many of his colleagues who were not as fortunate. Blankenship and his colleagues were not sure they would be willing to take on a client who had all the earmarks of a do-it-yourselfer. After all, CLG did not recommend that a client have any more than 15% of a client’s net worth with any one manager and this client wanted to leave about a third of his portfolio with PMFM. But in deference to the prospective client’s need for additional investment assistance and his unwillingness to diversify the PMFM portion of his portfolio. Ben Carroll, president of CLG, with Blankenship, began a comprehensive, year-long study of the company, it’s principals, and its investment philosophy. “We take product recommendations very seriously. Our investment judgment is the basis of the trust our clients give us. A client wedded to a previous investment decision is not new. The tenacity of this client was unusual and we felt we should do our homework to have confidence that we were giving our client the best advice possible,” says Carroll. What they discovered in PMFM, Inc., was a firm whose approach to tactical asset allocation worked and whose performance, in good and bad markets over eight years, was solid. It took Blankenship and CLG about a year to implement their client’s full financial plan. At that time, their investigation of PMFM had convinced them that PMFM could make a compelling case for managing a significant portion of a client’s assets as a core holding. CLG met with PMFM principals and supported their development of a Fund of Funds using primarily exchange traded funds (ETFs), that could be available to all of their clients as a stable, core portfolio holding. In effect, PMFM’s family of funds, launched in 2002, can now bring individual clients of CLG the investment management flexibility that makes hedge funds so popular with the wealthy. The PMFM family of three publicly traded mutual funds now includes the PMFM Tactical Preservation Portfolio Trust, the PMFM Managed Portfolio Trust, and the PMFM Tactical Opportunities Portfolio Trust. These trusts are available to individual investors and recommended by brokers like Blankenship and others at CLG, as a core and conservative portion of individual portfolios. In the Trusts, PMFM applies the same tactical asset allocation strategies that distinguish their management style for separate account portfolios, using ETFs as an integral part of their tactical asset allocation strategy. The Trusts focus on concentration in asset classes that are performing well, and avoid asset classes out of favor. The ETFs make trading in and out of a sector seamless, convenient, and offers liquidity that is simply not available in other vehicles like mutual funds. Mutual fund prospectuses literally tie the hands of the fund portfolio manager who must limit investing to the asset classes approved by the SEC when the fund was established. If small cap is hot, but a value fund prospectus directs its managers to stay in value, the value manager must adhere to the prospectus' guidelines. Hedge fund managers have more flexibility but their funds are available only to accredited investors ($250,000 annual income or $1 million net worth excluding home and autos), and the minimum investment can be $1 million or more. On the other hand, an initial investment in PMFM's ETF portfolios can be as little as $1000. The PMFM family of funds brings the same kind of flexibility allowed in most hedge funds right down to the individual investor level. It doesn't matter which asset classes are doing well - growth, value, large cap, or small cap - ETFs allow the managers at PMFM to keep the portfolio concentrated in the asset classes that are performing well, and avoid asset classes out of favor. Hedge funds usually charge 100 basis points plus 20% of all profits. For a 20% gain, a total of 500 basis points is being paid to management. For the PMFM Trusts, the average investor is paying expenses at about 180 basis points. No matter how well PMFM Trusts perform, the expense ratio does not change. The structure of the Trusts also requires adherence to strict SEC investment rules that protect investors, while the hedge fund industry still successfully skirts scrutiny by the regulatory bodies. Blankenship says that when PMFM lags the market during an upswing, it is far less of a problem for his clients than when assets decline in a down market. “We are very careful to explain how tactical asset allocation works when we recommend PMFM to new clients,” he says. Blankenship agrees that finding an investment manager to recommend to clients through a prospective client is not the usual path, but he is pleased that John Jones stuck to his guns and that CLG now has access to a proven tactical asset allocation investment management style through the PMFM family of funds. Ben Carroll, President, and Doug Blankenship, CFP, Cambridge Legacy Group, Dallas, Texas, doug@clgsite.com, or (972) 267-818. PMFM, Inc. manages $761 million as of December 31, 2004 for client in all 50 states. providing money management services for its own clients, as well as for the clients of other asset managers. PMFM does not seek to beat the markets, but rather seeks to add safety and reduce volatility in client accounts through tactical asset allocation. Jud Doherty at jud.doherty@pmfm.com, 800-222-7636.
Brokerage Firms Continue to Improve Product Offerings for the Ultra High Net Worth Client. The top wirehouses continue to up the ante in the quality of products and services they are willing to develop and launch aimed at helping their brokers compete for the business of the ultra high net worth clients (Ultras). This trend is an obvious move on the part of the wirehouses to provide platforms that support the needs of the most sought after clients -- those who have $5 million or more in investable assets. The advent of new wirehouse product platforms combined with lucrative changes in payout programs, offer great opportunity to brokers who focus primarily on meeting the financial needs of Ultras. As the largest firms realize the holes in their product and service platforms, they are working to compete by providing Ultra services: Full and Integrated Estate Planning Services Ultra brokers must be able to muster a team of capable and experienced professionals who can understand and solve the issues around legacy planning, trusts, estate taxes, business sales, business succession, risk management and insurance planning. Ultras will need those services as a part of their package from the brokerage firm to whom they trust their considerable assets. The team’s accessibility and appearance with the broker from these ancillary areas of the firm can help brokers close the sale with the Ultra client. Sophisticated Credit and Lending Services In recognition of the fact that credit and lending
services are an important need for the Ultras, brokerage firms have
had to step up their platform in these areas and increase Alternative Investments Ultras are likely to invest a portion of their
available assets in products that carry a higher risk. At some firms,
brokers in their retail divisions do not have access to these more Brokerage firms have made providing services to the "ideal" Ultra clients a high priority. Brokers who are interested in this market must evaluate carefully whether their firms can support the demands Ultra clients place on brokers. Mindy Diamond is President of Diamond
Consultants, Chester, New Jersey, a search firm specializing in recruiting
wirehouse and regional firm brokers with trailing 12-month's production
Avoid Financial Planning Blunders with Your Unmarried Clients. Financial planning strategies for unmarried straight, gay or lesbian couples are more complex than for married couples with traditional legal protections. More than 1,000 laws applicable to married couples are not available to singles. Non-traditional couples must resort to contract law because they cannot rely on family law. Here is a list of issues where an advisor of unmarried clients can prevent blunders and serve clients well, or at worst, be open to charges of malpractice.
Jill D. Hollander, Financial Connections, Inc., 510-849-4667, jdhollander@financialconnections.com. Jill is conference chair of the upcoming PridePlanners April, 2005 national conference. See Below.
MEDIA ALERT: April 28-30, 2005, PridePlanners Conference -- Navigating Through New Landscapes: "Financial Planning for Nontraditional Clients in Changing Times, at the Wyndham Palm Springs Hotel, California. PridePlanners will hold its 2005 national conference for financial advisors serving the unmarried singles, couples, gay and lesbian markets. “Unmarrieds represent 42% of the workforce and 40% of homebuyers. Financial advisors should to be up to date on the strategies for serving this large market whose needs require complex and rigorous legal and financial solutions,” says Jill D. Hollander, Conference Chair. For updates on Conference, or to register online, go to http://www.prideplanners.com.
Five Steps to Find Out Whether Your Competitors Have Profitable Web Sites. You can compare your competitors success at selling products on active web sites using reasonable marketing channels paying a cost per click (CPC) to your own site.
Ross and Amy Lasley, KISS Computing, Eastham, Mass. 508-255-9550 x402, ross@kisscomputing.com, providing full service web consulting on retainer.
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