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A Monthly Newsletter Source of Financial Sources • 401k Toolbox’s Manage It For Me® Now Available as a QDIA to Plan Sponsors Using The Guardian Advantage® • Not Feeling Particularly Charitably Inclined? Think Again. • Blowing Your Inheritance Before You Get It • Trading Opportunistically is a Sound Strategy Give Yourself Over TO BOB—Part II • Ask for a Second Opinion on Your Investment Portfolio from a Fee-Only Advisor When You Have Questions. Then Take Responsibility for Making Recommended Changes • How to Evaluate Private Equity for Your Portfolio • HealthView's Financial Illustrations Combined With a Financial Institution's Customized Product Recommendations Can Increase a Prospect's Willingness to Invest for Projected Health Care Expenses 401k Toolbox’s Manage It For Me® Now Available as a QDIA to Plan Sponsors Using The Guardian Advantage® The new acronym in the pension world, QDIA, or Qualified Default Investment Alternative, represents an important step forward for the retirement plan industry: instead of focusing solely on capital preservation, the focus has shifted to include account accumulation. This innovation of the Pension Protection Act of 2006 (PPA) offers parameters that, when met, will provide plan fiduciaries of 401(k) plans protection from liability for investment losses that could result from a default investment fund for participants who do not provide investment direction for their account. PPA allows employers to default participants’ assets into a managed account, lifecycle fund, or a lifestyle fund in order to ensure that plan participants are in a proper asset allocation based on age. In addition, as a QDIA, participants are “glide pathed” to retirement by automatically moving to more conservative portfolios as their needs change with age. Conceptually, a participant would never have to make an investment decision until they hit retirement. However, unlike traditional target-date funds, participants can assess their own total retirement picture by including outside assets in their risk analysis and, if they choose to, they can turn off the glide path feature of their portfolio, giving them even more flexibility in their managed account. “This is an incredible opportunity to positively impact the future retirement of American workers,” says Tim McCabe, Senior Vice President for 401k Toolbox®. “Manage It For Me® answers one of the most difficult decisions participants have to make: “How do I invest my money?” Now through the use of managed accounts, we can give them the advantage of independent professional investment management services that will put them in the proper asset allocation and help them get on track for a successful and secure retirement.” For further information, or to obtain a proposal, email Sales@DistributionPartnersLLC.com or call (877) 791-8900. Not Feeling Particularly Charitably Inclined? Think Again. Resistance to charitable giving is often fueled by lack of information about the possibilities that estate planning can create, rather than because the individual or family is inherently ungenerous. Recently, an advisor met with a George who very clearly stated that he had no desire to be charitable. He held substantial assets, enough that he could give two adult children $4 million each. His current planning, or really lack of planning, created a situation where the IRS would get an additional $4 million in estate taxes. With other assets, this man planned to buy a camp that both he and his sons had attended, now on the market. He wanted this camp to live on forever, and thought that if he bought it and created an endowment that it could last a long time. The camp covered hundreds of acres on a lake including significant waterfront. It is the kind of property that would be commercially developed immediately if it did not remain a camp. The advisor pointed out that with a proper estate planning strategy, nearly ¾ of the estimated estate tax and income tax savings could be used to create a trust to own the camp and a non-profit foundation to run the camp. The man had attended this camp as a child and his sons had both attended. Though the land is valued at $3 million, the negotiated sale price was $1.2 million. After purchase, the property could be transferred to a foundation, generating a $1.2 million income tax deduction that he can use during George’s lifetime to reduce taxes on a large IRA account. As George determines that he wants to fund improvements to the camp, every dollar he puts into this foundation reduces his future estate taxes. It is George’s intention to leave further gifts to support the camp moving forward. Currently, his estate strategy is to leave $4 million for each son, a total of $3 million to buy and refurbish the camp inside the foundation, and only pay the IRS $1 million. The advisor contacted the Nature Conservancy. This organization is skilled in creating trusts and eager to help protect camps and campgrounds from development because they represent large tracts of woodland and lake frontage that the Conservancy wants to keep green and not developed. They provide guidance and legal assistance to that end. In addition, the advisor is recommending that George create a ROTH IRA, even though it will create a large initial tax payment. This step will reduce overall estate tax. George and his adult sons are excited with his strategy for buying the camp and the trust and foundation that will oversee its management. All three men will serve on the Board of Directors of the Trust. Particularly, George is grateful for guidance that has allowed him to pursue his dream of rescuing the camp using dollars that otherwise would have been estate and income tax payments. It turns out that George is, indeed, very charitably inclined. Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' 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, seth.pearson@verizon.net. Blowing Your Inheritance Before You Get It George’s father had suffered a stroke and wasn’t expected to live long. Although George had been named as successor trustee of his father’s living trust, he had never been prepared to handle his father’s financial affairs. He was overwhelmed by the size and complexity of his father’s estate, which included rental property. To minimize the workload, George decided to sell the rental property. The property sold for approximately $10 million, which his father had originally bought for $4 million. As a result, when it was sold the total gain after selling costs was approximately $5.5 million. Not including the state income tax that would be due, $825,000 would be due in federal capital gains tax. While it’s understandable that George would want to reduce his workload, what he apparently didn’t realize is that when his father does pass away, all of the property would receive what is called a step-up in basis. So in this instance, the property would be worth $10 million as part of the estate. Thus, if George waited until his father’s death and then sold the property he would have avoided the capital gains. Although managing his father’s estate was overwhelming, his effort to minimize his work cost $825,000. As if that wasn’t enough, George was about to repeat the same mistake. Following the sale of the rental property, George was now focused on how to invest the cash proceeds from the sale of the property in addition to his father’s investment portfolio consisting of stocks and bonds. The investments included several bonds and 5 stocks. The total value was approximately $2 million. Of this amount the 5 stocks were large U.S. companies and represented approximately $1.5 million. George’s father had bought the stocks over the years, beginning as a young man. Therefore, as with his real estate, the stocks had potential high capital gains. George thought about the stocks a lot. He had done some research on investing and understood the risks associated with concentrated stock positions. Subsequently, he checked the value of each stock 2 and 3 times a day, wondering if he should keep them or sell some or all of the stocks and buy new stocks. He met with a stockbroker who proposed selling the existing bonds and stocks and purchasing several new stocks using the proceeds from the sale of the stock in addition to the cash from the sale of the rental property. Based on George’s concerns he felt the advice made sense. Fortunately, at about the same time, George met with an accountant who referred him to a financial advisor and Certified Financial Planner CFP® . The advisor began by identifying the amount of cash that would be required to pay the capital gains taxes on the real estate that was already sold. George was comfortable making the assumption that based on his father’s health he might not have much longer to live, so the advisor also projected how much estate taxes would be due for capital gains and estate taxes within the next nine months, assuming George’s father passed away immediately. Because of the short-term nature of the cash requirements, George’s advisor said it didn’t make sense to invest the cash in the stock market and risk losing some of the money over such a short period of time. Instead he recommended investing the cash in a mix of short-term funds to maximize the returns and liquidity. After the cash for the taxes was invested, there was still approximately $2 million cash in addition to the stocks and bonds, which George said would not be needed for several years. Assuming a long-term investment horizon, George’s advisor recommended building a diversified portfolio using low cost mutual funds. The advisor understood George’s concern about concentrated stock and prepared an analysis to determine the tax cost of realizing the capital gains immediately rather than waiting until his father passed away. In some instances a case can be made to sell stocks immediately, pay the taxes and reinvest the proceeds in a more diversified portfolio, thus reducing the risk associated with a concentrated stock portfolio. However, this strategy requires a longer time horizon to offset the taxes paid with the appreciation of the new investments. In this instance, given that the stock would receive the step-up in basis when George’s father died, it didn’t make sense to liquidate the stocks. Accordingly, when George’s advisor designed the diversified portfolio, the existing stocks and bonds were used as proxies for the markets they represented. As a result, George has the cash set aside to meet the forecasted tax obligations from the sale of the rental property as well as the potential estate taxes and he has the balance of the estate invested in a diversified portfolio of bonds, stocks, and mutual funds holding different bonds and stocks. Instead of being invested in a concentrated portfolio, through the use of mutual funds George now has a few thousand bonds and stocks in the U.S. and foreign markets, in large and small companies, growth and value stocks, as well as some investments in REITS (real estate investment trusts). George has now resolved his concerns and significantly reduced the risk of his portfolio. Barry Taylor , CFP, is a portfolio manager with Bingham, Osborn & Scarborough LLC (BOS), a San Francisco and Menlo Park, California-based registered investment advisor with approximately $1.5 billion in assets under management. BOS has provided investment management and comprehensive financial planning for individuals and endowments since 1985. All revenues are fee only. Barry's long experience as a retail small business owner informs his commitment to protecting capital and planning for asset growth. Barry Taylor -- barry.taylor@bosinvest.com 415-781-8535. Trading Opportunistically is a Sound Strategy Give Yourself Over TO BOB—Part II Last month (http://www.inkair.com/trends/trends_june07.html) we introduced TO BOB, a real life, real time, market-proven strategy that investors can use to not only improve their results, but also potentially to beat the overwhelming majority of pros on Wall Street. The ‘BOB’ half of the strategy is where an investor uses a simple checklist to research and select Best Of Breed companies. Now we explore ‘TO,’ Trade What do we mean by ‘trading opportunistically?’ We approach this from two angles, fundamental and technical. Markets can be volatile, and even ‘Best of Breed’ stocks are subject to many fundamental conditions and circumstances that will drive prices to temporary extremes. Over short-term periods, the stock market is far from efficient; it’s not even very rational. We see this dynamic every day: stocks showing large moves based on rumors, transitory news stories, false assumptions, upgrades and downgrades; herd thinking causing a move in Company A because of an event in Company B.; perp walks, SEC investigations, new product announcements---the list of price-impacting events is long and colorful. From a technical perspective there also are a number of indicators involving volume, momentum, sentiment or trends that can flash buy or sell signals for varying time frames. In other words, an investor need be at no loss for actionable opportunities to buy or sell—even in the most stable, highest quality Best of Breed companies. Makes sense, right? Unfortunately, what should be simple common sense often runs smack into the disapproving glare of conventional wisdom. ‘Buy and hold’ is spun as the alpha and omega of conventional investment wisdom. And while there is some truth to that advice, the idea that it is the only way for an investor to prosper would come as an eyebrow raising surprise to the trillion dollar hedge fund industry. The fact is, conventional buy and hold advice is driven by the fact that the public hears self-serving ‘advice’ from institutions that are far too large to trade frequently. The amount of stock they have to move and the market impact of those moves make an active trading strategy often prohibitive. The costs of trading (often used to scare off investors) has come down so far that it is eminently possible for an investor to buy or sell $10,000 worth of stock for $10, one tenth of one percent—hardly a trade killer. Given the fact that the individual investor can move at a speed and with a flexibility far greater than institutional investors, and given that costs are really not an issue, we can see that opportunities to take advantage of market moves are something to be welcomed, not ignored. Bear in mind that in most cases the ‘trading opportunistically’ strategy does not involve wholesale changes. The safest and most productive tactic is to make regular ‘tweaks’ to a position, increasing or decreasing positions 10-30% as events dictate. What a reasonably informed and engaged investor may well find, is that this tactic of Trading Opportunistically can not only help to reduce potential risk, it can also enhance potential gains over the traditional buy and hold approach. Robert Markman, -- ortfolio Manager has used this approach to guide the Markman Core Growth Fund (MTRPX) to five star status for the trailing three and five year periods ending 5/21/07. The fund is a dynamic and responsive large cap growth, no-load mutual fund with a portfolio strategy developed to adapt to the changing investment environments Ask for a Second Opinion on Your Investment Portfolio from a Fee-Only Advisor When You Have Questions. Then Take Responsibility for Making Recommended Changes Wall Street has mastered the art of confusion. So much so that most investors have given up on trying to understand their portfolios. But every so often, an article or news broadcast will tweak your interest and make you think that you should pay more attention to the questions you have never had answered to your satisfaction. A fee-only life financial planner can answer your questions, including:
Remember, a true, fee-only financial life planner is dedicated to educating his clients. He has no agenda to push and nothing to sell, and his legal fiduciary responsibility is to represent your best interests. There are no fee-only brokers at any brokerage firm, so changing from one brokerage firm to another does not address the issue of how well you can depend on the advice you are receiving from your broker. A fee-only advisor will address your questions, most providing an analysis in writing that will do one of two things. The analysis will tell you that your current portfolio is well designed, charging appropriate fees, and performing well. Or, the analysis will tell you that you have problem areas in your portfolio that need to be addressed. Keep in mind that knowledge equals responsibility. Ignoring financial realities will not make them go away. When you take the step to get a second opinion on your portfolio, promise yourself to make suggested changes that will support your life-long financial well-being and the financial well being of your family. Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers. How to Evaluate Private Equity for Your Portfolio Private equity firms have played an important role in the financial history of the United States. These firms offer an opportunity for investors to earn significantly higher returns, but increased risk naturally accompanies higher returns. Just as the phrase "hedge fund" can conjure up an image of risk averse investing or wild-eyed leveraged investing -- depending on your perspective -- so can the phrase "private equity firm" conjure up images. For some, it is of stately offices with wizened managers sitting in leather chairs carefully constructing a global portfolio by cutting deals with technology entrepreneurs, sheiks and foreign governments. Like hedge funds, PE firms can run the gamut of size and risk. Most investors are precluded from participating in PE firms by the high entry costs, often an initial investment of $100,000 with more investments expected in the first few years. These investments are illiquid; you cannot call them up and ask for your money back when you feel like it. To do these PE deals properly, the managers must be able to make difficult and potentially long-term investments without having to worry about impatient investors wanting to switch to another investment vehicle or pay for a vacation. An investor may not be able to access their money for several years. Investors will have little or no say in the direction of the PE firm and they will receive an actual return on their investment only after the internal investments are cashed out. Investors in PE firms can lose a lot of money if the deals don't pan out. The PE world has its share of hucksters and con artists, just like the public investing world. There are money managers more interested in risking other people's money than in making prudent investments. People looking to invest in PE firms must look beyond the potential gains to the specific risks related to the proposed investments. Some PE firms focus on start up businesses. These firms are commonly referred to as Venture Capital companies and have a great deal of inherent risk. PE investing is not for the faint of heart or the weak of will and should not be entered into lightly. If you can and do want to invest with a private equity firm, you had better have the money you intend to live on in retirement in a much safer place. PE investing is suitable for investors who can lock up their investments for years at a time and can afford to lose the investments if the deals go bad. If you choose carefully, and luck is on your side and on your private equity manager’s side, you may be rewarded with much higher returns than can be obtained in the public market. 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. pfs@usinternet.com. HealthView's Financial Illustrations Combined With a Financial Institution's Customized Product Recommendations Can Increase a Prospect's Willingness to Invest for Projected Health Care Expenses The complete solution to retirement planning is an investment strategy with appropriate investment product recommendations that help an investor prepare to fund medical costs in retirement. Many advisors use only estimates for the projected medical costs. WorldCare North America's HealthView financial illustrations may be customized to support the recommendation of appropriate investment products or integrated into a proprietary financial planning tool. When a client understands the amount of money they will need to cover their medical costs in retirement, they become open to discussing financial products to get them to the dollars they will need. WorldCare North America's Personal HealthView Report, customized for the financial institution whose advisors use it, provides investors with accurate out-of-pocket medical expense projections based on the investor's current health, lifestyle and medical history. All financial illustrations can be generated with product specific information based on a clients' investment profiles and needs. The financial institution can customize their financial illustrations to include educational information on appropriate investment vehicles (e.g., fixed annuities, index annuities, mutual funds) based on a client's liquidity needs, risk tolerance level and other criteria. In addition, the report can be customized to include specific information about the importance of investing today in order to be prepared for medical costs during retirement. This will help financial advisors uncover additional, investable assets from existing customers and may also be used as a retention and new client generation tool. Ron Mastrogiovanni is the president of WorldCare North America, a provider of medical advisory services including Web-delivered health assessmen programs that offer personalized health risk tools and analyses. The company also offers independent medical consultation services through some of the nation's leading research institutions, including Brigham and Women's Hospital, Dana-Farber Cancer Care, Duke University Health System, Massachusetts General Hospital, and UCLA School of Medicine. WCNA's platform of services is provided to consumers through financial institutions, affinity programs and employers. To reach Ron Mastrogiovanni, call Joanna Flynn, WorldCare North America – 617-250-5167. |