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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 • A Tactically-Managed Core Component Should be at the Heart of All Portfolios. • Consider Impact and Options Before Sale of Highly Appreciated Real Estate, Not After. • Business Continuity Trusts Are A Flexible Option That Can Make Business Succession Planning Work for Multiple Partners. • Transfer on Death (TOD) Accounts Very Useful for Bequests Between Unmarried Partners. • What Japan Knows About Long Term Care Costs that the U.S. is Ignoring. • Why High Net Worth Clients Need Mortgage Planning. • Variety of Options Require Careful Scrutiny for Brokers Considering Career Moves. • What to Expect from a Plan Provider's Relationship Managers. • Managed Account Platforms Offer Advisors Compliance, Marketing Help, and the Ability to Build a Fee-Based Book in Today’s Hyper-Vigilant World.
A Tactically-Managed Core Component Should be at the Heart of All Portfolios. Don Beasley, Portfolio Manager at PMFM, Inc., Athens, Georgia, explains why a tactically-managed core component should be at the heart of a strategic asset allocation in all portfolios. Q: Why consider a tactical asset manager as a core component in
a strategic portfolio? Q: How will market volatility impact your core tactical strategy? Q. Why do you focus on technical rather than fundamental analysis? *Benjamin F. King, Doctoral Dissertation, University of Chicago, 1961-1962, which formed much of the basis for relative strength technical analysis. Q: What kinds of investments do you use to implement this tactical
strategy? Q: Why are ETFs so important to your tactical investing approach? PMFM, Inc., Athens, Georgia, is a registered investment advisory firm offering separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox. PMFM's Toolbox service was recently named "Advice Provider of the Year" by Defined Contribution News, a national trade publication. Principals are Tim Chapman and Don Beasley and they can be reached at 800-222-7636, dbeasley@pmfm.com.
Consider Impact and Options Before Sale of Highly Appreciated Real Estate, Not After. Many families are not exposed to alternative strategies for selling highly appreciated real estate because each of their trusted advisors' limits their advice to specific specialties. This can result in great financial loss to a family's net worth. Options available when a property must be sold can include tax savings, controlling and directing the assets, and enhancing a family's charitable efforts. Take this case study. A successful engineer, Mr. Galvin, with a $7 million portfolio was ready to sell a multi-family rental property for $825,000 using a 1031 exchange into a Tenants-In-Common (TIC) real estate limited partnership found in the Wall Street Journal. He had a stock broker and an attorney, and had been a very successful and smart investor, but knew nothing about his alternatives when it came to real estate. Galvin wanted to rid himself of both the rental manager responsibilities and liability from tenants. Here are five options from his financial advisor that the engineer considered: a charitable remainder trust, a charitable gift annuity, a private annuity, a 1031 exchange to a single family rental property with management, and a 1031 exchange to a TIC. The TIC would get Mr. Galvin out of the rental management business, but came with large, upfront expenses, modest income, a lack of liquidity, and a possibility of investment loss through risk of tenant bankruptcy. Armed with information from his financial advisor, discussed at length, Galvin passed on the TIC, a charitable gift annuity, the private annuity, the 1031 exchange to a single family rental with management, and settled on the charitable remainder trust as best fitting his income and estate planning requirements. Before the sale, Galvin titled the rental property to the charitable remainder trust (CRT). When the sale was completed, he had the entire universe of investment products including REITS if he wants to stick with real estate as part of his asset allocation, at his disposal for investments within the CRT. Lump sum taxes of $160,000 are avoided because the sale of assets will be inside the trust. The CRT throws off 8% income a year, about half is taxable at the capital gains rate upon time of receipt of income, and half is taxed as ordinary income (based on the owner's cost basis.). This is more income than he would have received from the TIC with greater safety assuming he continues doing well in his long term investing practices. He has total control, because he is entirely in charge of this investment. The tax code allows significant tax deductions ($147,000 spread over six years) because the assets are in a charitable remainder trust. In Galvin's and his wife's lifetime, nothing goes to charity. All the income and control is retained for their lifetime. When the Galvin's die, the value of the CRT goes to the Galvin Family Foundation, headed by the Galvins' daughter, which is required to distribute 5% a year or more (in fact, it could be the entire amount) to non-profit organizations in perpetuity. Left in his estate and not titled to a CRT, the rental property would have been assessed a 50% death tax. This planning and the creation of several additional trusts have reduced the daughter's tax liability on the estate from $1.9 million to $1.5 million. In summary, every family has at least six options when selling highly appreciated real estate, including pay the full tax immediately, 1031 to another property or properties, 1031 to a tenants-in-common partnership, charitable gift annuity, charitable remainder trust, and a private annuity. Only an informed family can make the best decision for the option that is best for them. If you have highly appreciated real estate and are interested in selling, find an advisor who can take you through each of the many alternatives to a direct sale, protecting you from unnecessary capital gains that serve only to lower your family's net worth. 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
Business
Continuity Trusts Are A Flexible Option That Can Make Business
Succession Planning Work for Multiple Partners. In one example, three brothers with no assets arrived from England and proceeded to build a company that was recently appraised for $30 million. Unfortunately in rapid succession, each died. They thought their families would be given a fair and equitable split because of the buy/sell they had entered into and adjusted over the years. The buy sell was funded with large life insurance policies on each partner, a wise financial decision. The first widow received the proceeds of a $10 million policy for the husband's one-third interest in the business. The second brother passed away not long after the first. The second brothers estate wound up splitting the $30 million business 50/50 with his remaining brother, giving the second brother's widow $15 million of which $10 million was backed by insured. The business was going to pay the $5 million difference to the spouse of the second brother over five years. This would have been potentially painful for the last brother, now the sole owner, because the required payouts to the second widow would have cramped the business cash flow. When the third brother died six months later, his widow wound up selling the business within one year for $35 million. In addition she received the $10 million insurance policy that had funded her husband's portion of the buy/sell agreement. This "tontine" effect in essence provided the last to die brother's family more than four times more in the final settlement than the first brother. This result has set each family member against the other. A strategy to protect a more appropriate percentage of the "true" value of the business for each family could have been accomplished. In one example, had the brothers chosen a Business Continuity Trust (BCT), attached to a shareholders' agreement, a more appropriate result could have been possible. The brothers could have determined what values they would accept for their families, even without being able to predict who might leave first, die first, or become disabled. Alternative methods and valuation approaches could better reflect the time, effort and sweat equity that the partners contributed to their successful business enterprise. Some partners may want family members to retain a stake in all forward growth of the company. Next time you are approached with a "plain Vanilla" buy/sell agreement to protect your family's legacy, get a second opinion. Proper financial counseling from an expert in flexible solutions to business succession strategies can assure that the intentions of you and your partners are being met. 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.
Transfer on Death (TOD) Accounts Very Useful for Bequests Between Unmarried Partners. When one person in a couple wants a partner to receive the proceeds of an investment account in the event of death, look at transfer on death accounts (TOD). Assume the owner of the assets was not comfortable with the potential gift tax consequences or loss of control that would occur if he were to add his partner to the title and create a joint account. Consider this no-cost solution: title the the account "transfer on death" (TOD). TOD accounts are commonplace in banks and brokerage firms. They are very useful when the account owner wants to retain control of the assets during his/her lifetime but wishes to pass the assets to a person outside of the will. A financial advisor can, in essence, add a beneficiary to a regular account, just as can be done for an IRA. However, since the assets pass outside of the will, the transfer cannot be contested by family members. The TOD account will be treated as part of the decedent's estate and potential estate taxes will be due at the time of the donor's death, but not gift taxes. The beneficiary receives the assets just as they would a bequest at the time of death, and will not be required to pay income taxes upon receipt of the bequest. Once the beneficiary shows proof of death, they will have immediate access to the money. The TOD account will be treated as part of the decedent's estate and potential estate taxes will be due at the time of the donor's death, but not gift taxes. The beneficiary receives the assets just as they would a bequest at the time of death, and will not be required to pay income taxes upon receipt of the bequest. Once the beneficiary shows proof of death, they will have immediate access to the money. TOD eliminates the need to transfer the assets as a gift which may trigger a gift tax depending on whether the giver has used up his/her $1 million exemption. Debra Neiman, CFP®, Neiman & Associates Financial Services, LLC., Watertown, Mass., provides financial planning and investment management services for individuals and families, both traditional and non-traditional. 617-744-1816 deb@neimanonline.com.
What Japan Knows About Long Term Care Costs that the U.S. is Ignoring. Commentators often describe Social Security reform as the "third rail" of U.S. politics: so dangerous that not even the most respected, seasoned, popular politician will touch it. In fact, the true third rail issue may be long-term care. Despite the fact that the funding of long-term care is as important a topic as social security reform, there's been virtually no debate about the topic. That's not true in every country. Funding long-term care is an area where some other societies outpace the US. Japan, for example, requires worker to pay into a long-term-care funding program. In April 2000, Japan imposed a national LTCI premium tax on all workers age 40+. Like the social security payroll tax in the US, Fifty percent of the cost is paid by the worker, and 50% by the employer. The cost of Japan's LTCI program is projected to rise sharply. That's why the Japanese Ministry of Health, Labour & Welfare has released a proposal to change the program. Among other changes, the reform would drop the age on mandatory enrollment from 40 to 20. Supporters believe this needs to be done right away to avoid the collapse of the system. The problem of funding LTC for aging populations is a challenge as life spans increase around the globe. As U.S. baby boomers hurtle toward retirement, the problem is clear: there is no government program to pay for LTC and less than 10% of boomers and their parents have purchased individual LTCI coverage. Experts report that the U.S. Congress has no appetite for a Medicare-like program that would pay for LTC for all citizens. American baby boomers counting on a government solution need to know there is no plan in the works. Their lifestyle and financial security can only be assured by doing their own personal planning. Whether LTC is paid for by private funds, LTCI or government programs, there is no free long term care available, and in this country, no debate or discussion about a tax to cover these costs. Marilee Driscoll, President, Long Term Care Learning Institute, 508) 641-9393, Plymouth, Mass., www.ltc123.com, author of "The Complete Idiot's Guide to Long Term Care Planning," is the nation's leading consumer authority on strategies to pay for long term care. She is President of the Long Term Care Learning Institute.
Why High Net Worth Clients Need Mortgage Planning It is important for financial advisors to approach their clients' real estate investments (primary, secondary, and investment-grade) as a significant asset that needs managing. Unfortunately, too many advisors look at clients with mortgage-free properties as a "done deal," and pay little attention to the real estate and mortgage side of the clients’ balance sheet as too “unimportant”. If a high net worth client came to an advisor with $3,000,000 of cash that they have hiding under their mattress because they feel “more comfortable” with that money sitting there, no advisor would simply ignore those assets as being too “unimportant” for them to manage. In fact, the advisor would educate the client about inflation and the time value of money and make a strong case for the client to place those funds under management. Yet, when faced with a similar $3,000,000 of real estate equity, many financial advisors who work with high net worth clients simply ignore this wealth as being too “unimportant” to manage. They don’t recognize the importance of educating clients on the effects of inflation, leverage, the time value of money and estate planning issues that impact the clients’ real estate equity. Here are five examples of how advisors can increase their competitive advantage and better serve their high net worth clients by managing real estate equity: 1. Doctors and business owners facing succession issues can transfer and re-allocate real estate assets in order to generate immediate cash, maintain positive cash flow through retirement and make their business easier to sell. 2. Clients with real estate investments can experience much greater tax advantages and double their rates of return by using proper financing strategies. Even as it is unwise and risky for clients to hold a large percentage of their investments in one stock, it is also unwise and risky for clients to hold all their real estate equity in one or two properties. It is a better diversification strategy for clients to have some equity in many properties vs. all their equity in one property. 3. Clients facing divorce issues can use cash-out mortgages to buy out their ex-spouses in lieu of liquidating assets and incurring large tax liabilities. Furthermore, clients can maintain their lifestyle after divorce through the use of certain mortgage planning strategies. 4. Clients who face long term care needs, and clients who can benefit by investing in sophisticated structured life insurance contracts can use reverse mortgages, home equity lines of credit and interest only mortgages as a tool to fund these needs. 5. Charitable Remainder Trusts – clients can transfer their real estate equity to charitable remainder trusts and draw income from the trust to make the mortgage payments and fund a life policy that pays off the mortgage upon their death. Real estate equity is too important a part of net worth for advisors to leave it unattended. Gibran Nicholas is the President and founder of Nicholas & Co. Mortgage Planning Solutions, a mortgage lender and broker based in Ann Arbor, MI. He offers a 90-minute online workshop entitled "Advanced Mortgage Planning for High Net Worth Clients" that discusses these strategies in further detail. He has developed the ARM Planner™ Marketing Kit, and online workshops, to better assist mortgage originators in increasing their profitability with real estate investors and financial advisors. Go to http://www.ARMPlanner.com; Phone: 888-608-9800
Variety of Options Require Careful Scrutiny for Brokers Considering Career Moves. Many wirehouse brokers dream of being on their own, but the hurdles of managing “everything” keep them from investigating alternatives that come close to independence without requiring a second career in broker/dealer management. When you choose to go the independent route, in addition to increased management duties, you get a significantly higher payout, but you are paying your own expenses. By the time you subtract the costs of keeping the doors open, you are not always making more than if you went to a regional or boutique firm that offers higher payouts, more flexibility and autonomy, and greater entrepreneurial spirit. Firms such as Wachovia and Raymond James offer an alternative on the continuum of options, allowing quasi-independence. Wachovia calls this program “Profit Formula,” Raymond James calls it “Advisor Select.” Under both programs, the broker is still a W-2 employee, but the broker/dealer handles human resources, payroll, technology, and administrative support functions associated with operating an independent branch. The broker controls his own profit and loss bottom line. If you are looking for more autonomy, here is the list of questions you can ask to discern whether the alternative route you are considering will get you closer to the ideal working situation -- to the independence you crave. Payout and
Structure
Hybrid Books
Management Mindy Diamond is President of Diamond Consultants, a Chester, New Jersey-based search firm specializing in recruiting wirehouse and regional firm brokers with trailing 12-month's production between $200,000 and $5 million. Her column “Career Moves” appears monthly in Registered Rep Magazine. Her firm assists these financial consultants in evaluating opportunities in the industry and introduces them to other wirehouses, regional firms, banks, or independent broker-dealers. Mindy can be reached at 908-879-1002, or mdiamond@diamondrecruiter.com.
What to Expect from a Plan Provider's Relationship Managers. Here's the question to make certain you ask the sales person who wants your retirement plan business: "Who will be my Relationship Manager and how soon will we meet them?" The relationship manager's job is to create a seamless interface for you with their company, helping you and your participants access the expertise you need at the Plan Provider. They will be instrumental in helping you set up your new plan or convert from a previous provider. Working with a checklist and timeline schedule, and chosen to meet your specific plan's needs, the relationship managers oversee an orderly process that covers every detail of implementation of the plan you have chosen. Often, there is a less formal meeting following the final sales presentation, when the plan sponsor meets with the provider they wish to choose. The purpose is for the plan sponsor to be able to ask follow up, detailed questions. Your goal, as the plan provider, is to outsource as much of the plan administration as possible. Relationship managers quarterback many of the different services that are required to create an excellent retirement plan. If your plan provider is a "bundled" provider, making available, in-house, all of your administration and record keeping, it is the relationship manager who is your ombudsman -- the person at your plan provider who is responsible for the management of your plan. The areas where your relationship manager will take the lead include customization, education and communication, removing the administrative burden, follow up and helping your plan committee manage compliance issues. The relationship managers are problem solvers and question answerers, your first line of support at the plan provider for providing hassle-free services to your employees. They believe that there can never be too many questions. They understand what it take to make your plan effective and efficient for your company and your participants, the end users. ABN AMRO Asset Management has multiple options for 401(k) plan participants who want assistance with how to invest their savings. ABN AMRO Asset Management an enviable and long history in investment management in the U.S. since 1887. Formerly known as Chicago Trust, ABN AMRO Retirement Services has managed retirement assets since 1947 and has been active in the defined contribution business for 21 years. Mark Metz, Director, Sales & Marketing, Retirement Plan Services Group, ABN AMRO - 312-884-2578. Mark.Metz@abnamroUSA.com
Managed Account Platforms Offer Advisors Compliance, Marketing Help, and the Ability to Build a Fee-Based Book in Today’s Hyper-Vigilant World. In an environment that harshly penalizes both the advisors and their institutions for irregularities, selling from a managed account platform provides three key benefits: a source of recurring, fee-based income, compliance assistance, and the ability to build a desirable book for career moves. A broker should, according to recruiters, ideally have a book of business that is close to 40% fee-based, and at a minimum, 30%.* Managed account platforms offering diagnostic and strategy proposal tools can help advisors meet important suitability requirements. When advisors begin the process of evaluating client portfolios to prepare an investment strategy, they can tap into the platform's diagnostic analysis tool. This tool is driven by models and data within the platform, and enables advisors to immediately pinpoint potential issues with their client's portfolio. Client investment strategies are based upon the diagnostic analysis results, and will fit certain parameters designed into the advisor's managed account platform. These parameters were created by the investment expertise of the professionals behind the platform and are appropriate to the stated risk levels and goals of the clients. If clients insist on a non-diversified portfolio, advisors will have easy access to a form stating specifically that the client is overriding the advisor's recommendations. In addition, advisors using managed account platforms will be specifically guided through new client documentation requirements. The process of moving a client from a typical transactional relationship to a fee-based relationship (clearly required for the best career moves) is based on the advisor's ability to consult with clients versus spending an inordinate amount of time on processing paper work. As a result, premiere web-based Managed Account platforms create, store, and retrieve important documents, which both saves advisors time and helps them meet their regulatory requirements. Managed account platforms also help advisors with practice management and marketing. Many advisors fear that new, stricter regulations governing disclosure requirements will translate to less communication with their clients. Managed account platforms can help advisors overcome this hurdle by providing pre-cleared client communications and marketing materials in less time and for little or no cost to the advisors. * Mindy Diamond, Diamond Consulting, Chester, N.J., says that brokers negotiating career moves must have a minimum of a 30% fee-based book, with a preferred 40% fee-based book, to be considered for the best transition packages when moving to a new firm. 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. For more information, call Belen Wieler, Director of Marketing, 617-406-2109.
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