Author Archive

Are Alternative Investments One of the Keys to Family Office Profitability?

Sunday, January 29th, 2012

If you’re wondering what’s on the minds of affluent candidates for Family Offices, wealth preservation would be priority one. The wealth of such individuals and families is at risk by the up and down gyrations of traditional equity and debt markets.

Essentially, there are a number of economic dimensions that have occurred during the recent volatility in the marketplace that affected the very rich. First, they have lost a portion of their wealth, then they’re confronted by increased taxes, estate law changes, currency devaluation, deflation, inflation, liberal confidentiality rulings, geopolitical upheaval, Wall Street scandals, etc. The list goes on.

In the minds of the ultra-wealthy, safety and capital conservation are first and foremost. So what’s the key to wealth preservation for family offices and their client base in these turbulent times: greater asset diversification through alternative assets..

Moving the portfolio forward is essential for family office wealth creation not only for the present situation of wealthy clients but for the transfer of wealth to their future generations.

More and more, this need for diversification is driving family office fiduciaries to actively seek out alternative investments such as private equity, hedge funds, real estate, and collectables such as art. Navigating sophisticated and complicated, yet rewarding asset classes can be difficult without the right information, advice and tools.

With the increasing complexity of wealth, and the need to coordinate professional activities, the family office has evolved as a central advisory source. In fact, recent research by the Kass Family Group has concluded that out of a pool of affluent clients who resigned from their financial advisors, 40% would prefer to be a member of a family office.

Traditionally, the family office has retained traditional investment managers in mutual funds, separate managed accounts, ETFs, bonds, fixed income assets, administrating the majority of the family office’s portfolio.

However, for most family offices, utilizing traditional investing models is not enough. Not enough for a family office especially the single model to achieve year in and year out profitability.

Many family offices prefer alternative investment managers to head hedge funds, managed futures, private equity and venture capital in order to use multiple types of investment strategies to achieve their returns. Most often lately, alternative investments outperform the equities market, especially in down markets. Other areas of recent interest are timber, water resources and credit (debt).

Hedge funds and private equity firms are often used in family office portfolios with the hope of achieving a good risk adjusted return, or alpha. There are over 15,000 hedge fund and private equity funds in the world and their strategies are diverse and dynamic.

The very same advice family offices echo to their clients of diversifying their assets is similar that firms recognize as being key to their profitability, even their survivability during these rocky economic times. That may very well be true as another Kass study (151 FOs) concluded that 85% of family offices are committed to hedge funds while 50% are in private equity investments, featuring pure alternative asset classes.

“Phased Retirement” Offers Different Financial Options than Traditional Retirement Planning

Thursday, July 21st, 2011

Webster’s Dictionary is always searching America’s Lexicon landscape for words or phases that are becoming popular on their way to becoming permanent.  “Phased retirement” is a term we have seen with more and more usage in recent years brought on by many factors such as a sour economy, longer life spans and members of the baby boomer generation rewriting the book on retirement.

Phased retirement is a catch all term for retiring by gradually decreasing work time instead of abruptly upon reaching retirement age moving to Florida to be full time on the golf course.

Your client’s decision to phase in retirement can be on his/her own terms or by necessity.  That is, more and more retirement age people find themselves in a no choice situation to keep working because simply they can’t afford to retire as soon as they’d hoped.

Others don’t wish to clock from 95 mph to 0 in one stop.  They want to gradually move into full time retirement by continuing to work part time, do volunteer work or tackle hobbies left on the shelve during their full-time working years.

Either way, for advisors, if some of your clients’ are considering a phased retirement you should be ready to brief your clients on some very different financial challenges that usually do not occur with the traditional retirement process.

Sure, the prime financial benefit of a phased retirement is that your client will continue to get a paycheck, which may lessen the need to draw on his or her retirement savings, allowing client money to grow further.

Conversely, when your client reduces work hours and salary, it could have a direct impact on your client’s benefits at his/her company.

Here are a few considerations:

•  Life insurance: May be tied to a multiple of client’s salary

•  Long-term disability insurance: Determine what affect a client who continues working has on this form of insurance

 •  Company health insurance:  Check client’s company health coverage to see if reducing work hours will affect eligibility

•  Social Security: Phased in retirement could reduce benefits if client begins to collect SS before reaching retirement age and continues to work. (Each year before full retirement age is reached, the SS benefit will be reduced by $1 for every $2 your client earns over a set limit, which is $14,160 for this year.  The year when your client reaches retirement age, it’s $1 for every $3 earned to income limit of $37,680 for this year).

•  Pension and other retirement benefits:

This is a critical area.  Your client could be vulnerable if his/her company doesn’t subscribe to letting employees receive pension benefits earlier. NOTE:  Federal law allows workers to take pension benefits at age 62.

Typically, pensions are formulated by an employee’s service years and salary during the final days of his/her last days of employment.

You can see, by phasing in retirement, the lower salary could reduce an employee earning additional pension benefits.  It’s important to check this out with your client’s place of employment.

What about your client’s 401K?  Will he or she still be able to participate if working hours are reduced to part-time?

As an advisor, you might have  to be creative in long term prospects of your client considering both the extra income he or she would be receiving as a part-time working employee either at the original company or something unrelated  and the long term effects on clients’ pensions and other savings programs. Using your client’s savings funds to increase their assets value in separate accounts or annuities might be good options as your clients’ age.

As more and more companies consider the value of phased retirement, restrictions will undoubtably loosen up.  After all, not only does this reduce the compensation packages of long-term employees but also company sponsored phased retirement programs can be used to retain skilled older employees who would otherwise retire (especially in sectors where there is a shortage of entry-level job applicants).  This can reduce labor costs or arrange training of replacement employees by older workers.  While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent expect to develop one in the next five years, according to a 2008 survey by Hewitt Associates.

A growing consensus exists that the nature of retirement is changing. No longer do most workers wish to experience a sudden end to work, followed by an equally sudden onset of full-time retirement. Instead, many workers wish to ease in to retirement, transitioning out of the workforce with a reduced workload.

Our advice for financial advisors is to be alert to this accelerated trend of phased retirement and develop asset strategies to accommodate their clients’ needs desiring this retirement lifestyle.


Advisors Be Ready for Increased 401(k) Business Opportunities When New Compliance Regulations Become Law

Saturday, June 25th, 2011

President Harry Truman said it best:  “If you can’t stand the heat, get out of the kitchen.”  That may be the case for numbers of investment plan service providers when participant disclosure rules take effect on Nov 1, 2011.

The rules stem from The Department of Labor’s (DOL) Oct 2010 edict outlining specific disclosures  [408(b)(2)] that must be provided to both new and existing plan participants.

These new regulations pertain to any participant directed individual account plan under the Employee Retirement Income Security Act (ERISA), which covers (e.g. 401(k), 403(k), profit sharing, and money purchase plans.

The new participant disclosure rules are tedious and complex and in spite of a year to prepare is sure to catch some providers such as brokers-dealers, third party administrators and independent record-keepers, and RIAs who specialize in these investment plans flat-footed.

This means advisors who would love to have or expand 401(k) and other plan business will have an opportunity to gain traction in this area providing they are prepared to adhere to the new rules.

Those disclosures will center on general information about the plan eligibility, the administrative expenses necessary to operate the plan, types of expenses that will be charged to a participants’ account, revenue sharing clarification, listed investments under the plan and limitations if any to the plan.  This information will be provided annually.

Quarterly disclosure must include details on all administrative fees, services, commissions and expenses charged to the account in the preceding three-month period.

Not only that, the DOL requires a glossary of financial terms and upon a participant’s request the provider will provide copies of prospectuses, financial statements and other detailed information.

These new rules should improve transparency which historally has been lacking with 401(k) plans and others.  More transparency should help lower the costs for employers and allow businesses to more easily comparison shop.

A 2007 Government Accounting Office (GAO) study found that many participants have no idea how much they pay in fees.  Information they get from their employers was usually sketchy.  In turn, the study found employers too are in the dark not usually receiving complete information from plan providers, especially in the disclosure of fees.

The loss to the worker who pays excess fees can be substantial as the GAO study found that a one percentage point increase in 401(k) fees can cut a plan participants’ saving 17% over 20 years.

Not withstanding, interested advisors in acquiring more 401(k) business should begin now to map out a strategy to be presented to 401(k) prospects, existing clients and plan sponsors.

That means doing your homework with the new regulations, getting in front of these income sources, reviewing all the disclosure requirements especially fees and services, giving a side by side comparison of your service agreement compared to what they have now. Finally, negotiate fees reduction and improve services where prudent.

Advisors can benefit from the new regulations and the sentiment of participants and sponsors.  Approach these prospects and contacts with a clear message that you are offering them a complete 401(k) service with lower fees and improved transparency.

We believe many plan sponsors think they have been paying zero in fees.  Once they find out that’s not true, many sponsors may want to change investment companies immediately.  This provides an opportunity for advisors to “take over” the plans adding major assets to their firm’s asset base.  Don’t miss this opportunity, as there is only an eight-month window.

Putting Client Wealth into One of Uncle Sam’s Best Deals Ever

Friday, October 15th, 2010

What a year!  You are fighting to steer clear your clients of the potholes of Madoff madness, the equities elevator (ups and downs), home foreclosures, job layoffs and a stimulus for everybody it seems but your clients.

Not only that, if you haven’t done so already you may be fighting to protect your client’s biggest check he or she will probably ever receive: Their final lump sum retirement pension.

Your clients have worked long and hard to build wealth in their retirement savings and they want to be double sure you as their advisor preserve those assets if they change jobs or retire.   At this stage of their lives, your clients should not have to lose a large portion of their wealth to excessive taxation.

You should covey to your clients that Uncle Sam is not their friend.  The Uncle is prepared to do taxable damage to your clients’ pension plans unless you show them how to follow concrete steps.  Your challenge as advisor is to turn Uncle Sam from a pension-grabbing tax collector into a benefactor of high proportions.   If your clients’ take your advice–preserving their wealth will be the best deal they will ever receive from the Uncle.

As you know, the IRS at the time of withdrawal and other weak moments is poised to grab 70, 80 or maybe as much of 90 percent of your clients’ retirement funds!

There’s a better way of asset managing retirement money for a lot of your clients than the traditional IRA.  It does not mean the traditional IRA is chopped liver.  In fact, as an advisor you should know that it’s the one of the best tax saving and wealth building vehicles for savers our government has ever put together to help individuals fund their retirement.

However, the Roth IRA instituted in l998 by Congress and introduced by a fellow named Roth (U.S. Senator William V. Roth Jr. of Delaware) is tweaked slightly different than the traditional IRA. It may be best for you to advise your client that the Roth IRA is a better way to go with his or her wealth in most cases.

As you know, A Roth IRA is an individual retirement plan that bears many similarities to the traditional IRA. The big difference in a Roth is that the contributions are never tax deductible, and qualified distributions are tax-free.  In short, a Roth is a tax-free account; no taxes are paid on your earnings, the interest, and dividends—ever. With a Roth, your client pays his or her taxes up front as the money goes in–not at the other end as they take it out.  Of course, there’s no free lunch, as certain requirements have to be met for your client to qualify for a Roth.

Still in effect in 2009, your client can deposit $5000 in a Roth this year and a $1,000 “catch up” contribution for individuals age 50 or over.  Contribution caps have been increasing since 2002.  Be sure you note that next year is the beginning of inflation indexing so your client’s maximum contribution will increase in $500 increments yearly in the foreseeable future.

Also as you are probably aware—for tax years after 2009 all taxpayers can make Roth IRA conversions regardless of income level.. Once your client adjusted gross income reaches $105,000 if he or she is single or $155,000 if married, the amount your client can contribute decreases, reaching zero for those with an AGI of $120,000 (single) or $176,000 (married).  To let you know, the “phase out” range is how much your IRA deduction decreases as you approach maximum AGI.

Your client will love this. Another benefit of the Roth IRA is there are no required minimum distributions imposed on the owner. The owner does not have to take money out of the IRA unless he needs it. His or her Roth can compound undisturbed and be left to the next generation if desired. Beneficiaries, however, are required to take minimum distributions based on their life expectancies.

Most political observers expect taxes to increase, and the President-elect and the majority in Congress have advocated higher taxes on at least some taxpayers. If your client makes the Roth IRA conversion in 2010 he or she will be given the option to pay all the taxes on the conversion in 2010, or average the taxes owed on the conversion over two years, i.e., in 2011 and 2012. However, it is important to be aware that 2010 is the last year for the current low income tax rates. Current law provides for an increase in tax rates in 2011, therefore, if you were to choose to average your client’s tax payments over the two year period in 2011 and 2012, he or she might be hit with higher tax rates. Advise your clients to get their Roth now before taxes increase in 2011.

Have your client look upon a Roth as a savings account.  He or she can pull out contributions anytime they wish.  That’s a huge difference from the traditional IRA and 401K counterparts. Some things to keep in mind, however.  It applies to the money your client puts in, not earning or interest.  For those withdraws, you have to be subject to IRS Qualified Distribution Rule.  Also, watch losses.  Putting $5000 in and losing a portion of its value will prevent your client from pulling out the whole $5000 later.

It’s a win-win situation. If your client converts to a Roth and then decides he or she wants to go back to a traditional IRA, you can do what’s called an IRA recharacterization. Also, unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRS for 5 years before tax-free withdrawals are permitted.  On these types of things, the advisor can steer the client in the right direction to avoid potholes on the Roth conversion.

A Roth is a really good deal for the Gen X and Gen Y group.  It gives them years and years to accumulate tax- free earnings.  Actually, anyone under 50 should get into a Roth as their primary retirement vehicle.  For boomer plus people and probably the majority of your client base, a Roth will be good for them too based on their planning needs.  Remember, most  graying geezers clients have long-lasting genes.  With the longevity bonus, most boomers will receive—they will have maybe 20 years more of living give or take to build upon their nest egg.  And don’t forget about those grandchildren your client could leave his or her legacy to. That’s your clue to present an estate-planning package to your client.    When all the facts are in, advising your client to put his or her wealth into a Roth IRA is the best advice you can give because it’s the best investment vehicle Uncle Sam has ever brought to the table.

Phased Retirement: The New Way to Retire in 2010

Sunday, September 19th, 2010

“Phased retirement” is a term we have seen with more usage in recent years brought on by many factors such as a sour economy, longer life spans and members of the baby boomer generation rewriting the book on retirement.

Phased retirement is a catch term for retiring by gradually decreasing work time instead of abruptly upon reaching retirement age and moving to Florida to be full time on the golf course.

Your decision to phase retirement can be on your terms or by necessity.  By necessity means many retirement-age people find themselves in a no choice situation to keep working because simply they can’t afford to retire as soon as they’d hoped.

Others don’t wish to clock from 95 mph to 0 in one stop.  They want to gradually move into full time retirement by continuing to work part time, do volunteer work or tackle hobbies left on the shelve during their full-time working years.

Either way, if you are considering a phased retirement you should be ready to face different financial challenges that usually do not occur with the traditional retirement process.

Sure, the prime financial benefit of a phased retirement is that you will continue to get a paycheck, which may lessen your need to draw upon your retirement savings, allowing your money to grow further.

Conversely, if you are a business owner or work for a company reducing work hours and salary could have a direct impact on your benefits.

Here are a few considerations:

•  Life insurance: May be tied to a multiple of your compensation

•  Long-term disability insurance: What affect will your continued employment have on this form of insurance?

•   Personal or company health insurance: Will reducing work hours affect your eligibility?

•  Social Security: Phased in retirement could reduce benefits if you begin to collect SS before reaching retirement age and continue to work.

•  Pension and other retirement benefits:

Typically, pensions are formulated by an employee’s service years and salary during the final days of his/her last days of employment.

You can see, by phasing in retirement, the lower salary could reduce an employee’s earning additional pension benefits.  It’s important to check this out with your place of employment.

What about your 401K?  Will you still be able to participate if working hours are reduced to part-time?

You need to investigate the difference between working part-time at your original company and the long-term effects on your pensions and other savings programs.  For instance, if you continue to work, using your savings funds to increase your assets value in separate managed accounts might be good options, as you get older.

As more and more companies consider the value of phased retirement, restrictions will undoubtably loosen up. While currently only 5 percent of midsize and large companies offer a formal phased retirement program, nearly 60 percent are expected to develop one in the next five years, according to a 2008 survey by Hewitt Associates.

A growing consensus exists that the nature of retirement is changing. No longer do most business owners or workers wish to experience a sudden end to work, followed by an equally sudden onset of full-time retirement. Instead, many self employed and company-employed workers wish to ease in to retirement, transitioning out of the workforce gradually with a reduced workload.

Advisors Think Multi-Family Office as Better Business Building Strategy

Tuesday, November 24th, 2009

More than 70 percent of advisors are investigating the possibility a setting up the multi family office model as a better way of expanding their ultra-affluent business during this rocky economic climate, according to a recent research study.

In 2004, only 48 per cent of advisors were considering such a move as found by Rothstein Kass Family Office Group in New York and multiple locations with their 2009 study entitled “The Multifamily Office Solution.”

The findings suggest that the multifamily office concept, growing in prominence and profitability represents both exceptional value for wealth management firms and clients alike.   These firms are discovering that the MFO structure provides an extraordinary platform for client service, better positioning these firms to attract assets from ultra wealthy families. More than 3500 financial firms nationally call themselves family offices at present, according to the Family Office Exchange.

The rise of family offices has always been client-driven from John D. Rockerfeller on (he set up the first one).  The current economic situation in many instances has created a disconnect between high net worth clients and wealth management professionals.  The chaos in the financial services marketplace has ignited an array of dissatisfied clients looking for a better way to manage huge assets and their legacy of family fortunes.

As proof, more than 100 very affluent investors who moved their assets from one financial provider to another in the previous four months cited the multifamily office as the provider of choice (40%) over an independent advisor (26%), a bank (30%), a wire house advisor (10%) and clients managing wealth themselves (9.1%)–(other was 5%) in a Rothstein Kass study in Jan 2009.

This study made the point that all advisors should heed the fact that multifamily offices offered these investors’ stability, service and solutions that was lacking in their previous financial relationships. In short, high net worth clients are leaving big firms (i.e. large banks and brokerages houses) for more service-orientated objective “boutique” firms such as family offices.

The asset management portion of the family office, of course, remains the most lucrative for wealth management firms, but multifamily offices tend to be involved extensively in many aspects of their clients’ lives—from estate planning to lifestyle concerns.

This is one of the main reasons the very affluent are seeking not only successful management of their assets but want to get comfortable with a firm and its principles that offer multiple ways of dealing with their wealth such as administrative and lifestyle services.

What follows is a few of the services offered by an established family office even though a definition of the concept is yet to be clearly defined and no full blueprint is adaptable for all wealth management firms. Most services offered by the family office falls into three categories: financial, administrative and lifestyle.

Typical services offered:

Asset management. For all wealthy families, Job #1 for a multi-family office is to manage the wealth effectively; Managing wealth on a large scale and over the course of many decades of an ultra-wealthy client is probably the most challenging issue a family office will face.

Direct investing. Many families made their money through operating a business, real estate development, or venture investing. The family office uses it skills to increase the family’s wealth through direct investments in similar enterprises.

Accounting and reporting. If family members are to have any confidence in the management of the family’s wealth, the family office will have to provide timely and accurate accounting, tax reporting and performance reporting.

Coordinated estate, tax, trust and insurance planning. Given the complex nature of the U.S. tax code, the confiscatory level of estate and gift taxation, the fiduciary responsibilities associated with complex trust planning, and the litigious nature of American society, families who neglect to coordinate their activities in these areas will find their wealth rapidly hemorrhaging.

Philanthropy. Philanthropy plays an important role in the lives of most members of wealthy families. But if charitable giving is to prove fulfilling and a method of binding the family together across generations, it will have to be pursued professionally, proactively and with a focus on issues that resonate with family members.

Management of a closely held business. Many families not only possess great liquid wealth, but also control an operating business. A family office can provide an ideal forum for discussing how such a business will be managed and governed, for dealing with issues posed by the fact that some family members work in the business and some don’t, thinking about capitalizing and recapitalizing the business, and so on.

Intergenerational conflict. It is a rare family, wealthy or otherwise, that doesn’t experience intergenerational conflict at some point. For wealthy families, such conflicts can lead at best to unwanted publicity and at worst to deep emotional trauma and dissipation of the asset base.

Education of younger generations. A great challenge for wealthy families is raising children to be productive adults, fully capable of stewarding the family’s wealth in their turn. A family office can play a highly positive role in helping educate younger generations about their future responsibilities and in offering opportunities to gain hands-on experience in dealing with those responsibilities.

“Concierge” services. This phrase refers to a variety of services typically needed by wealthy families, and may include bill-paying, making travel arrangements property management, oversight of aircraft operations, and so on.

No doubt, a wealth management firm considering the building of the family office concept would have to make a good judgment call to be able to provide these type of services within its business model.  The multifamily office, of course, offers economics of scale not found in the single family office (i.e. Rockefeller) which an individual family would have to have upwards of $250 million in investable assets to make it cost effective for the firm to maintain such an array of services.

The multifamily office, on the other hand, reduces the maintance costs across a wide spectrum increasing the market for such services in the $25 to$50 million per family assets. This would increase the opportunities for a wealth management firm to capture assets from a larger pool of candidates.

In addition, the significance of “outsourcing” increases the opportunity for wealth management firms to expand the multi-family office concept.  Services such as bill paying, tax services even concierge services are low margin and a number of multifamily offices partition these out to a third-party provider.

The Rothstein Klass survey of multifamily offices even though receiptants of the survey responded that their main emphasis of importance was “doing a better job for families” (94.2%), all wealth management firms are in the business of making a profit.  So being “more profitable” ranked second as the motivation factor to create a MFO (85.9%).

The MFO is profitable.   The average annual revenue of the 103 investment advisory firms that identified themselves in the Rothstein Kass research study as multifamily offices averaged annual revenue of $8.2 million.  The annual cost of administrative/lifestyle services borne by these firms was $1.9 million leaving average annual profits of $6.3 million.

While that seems substantial, remember at least 80 per cent of revenues are asset-based fees calculated as client’s assets under management.  At least 10 per cent of total revenues are “cost centers” treated as loss leaders in order to offer the client a full smoresborad of services to retain and attract new business.  Thus, the promise of high profitability has led many firms to expand their services to attract high-net-worth segments.

Considering the establishment of a MFO within your present business model is a difficult decision and should be debated at length among principals.  However, keep in mind, what ultra -wealthy clients are asking for–no demanding—in today’s climate of economic instability should make such a weighty decision easier.

Advisors: Don’t Ignore “Collectibles” in Clients’ Estate Planning Process

Wednesday, October 14th, 2009

Most advisors are comfortable with equities, real estate and other traditional assets in putting together an estate plan for their clients.  However, when it comes to a client’s art collection, antiques or even a toy train collection, most advisors put such items in the personal property area or ignore it all together.

Not a good idea as a clients’ collection of fine art could be worth a sufficient portion of the entire estate.  This is especially a fact with very high net worth clients whose discretionary income more often than not may have been invested in a lifetime of collecting classic cars or an extensive accumulation of vintige wines.

The issue isfurthur compounded because the collector client usually don’t discuss their collections with their advisors and their advisors easily overlook this subject entirely.  Even though, in families with net woth in excess of $10 mllion routinely collect something of value estimated to average 10 percent of total wealth, according to Randy Fox , founding principle of inKnowVision, LLC, a national consulting and marketing firm that develops wealth management strategies for high net worth clients.

The simple answer for advisors is planning for your client’s collection of whatever is as important as planning for his or her other wealth.  In fact, all assets of wealth must be processed together in order for your client to have an orderly transition of legacy for succeeding generations.

If not, a lifetime of collecting can disappear overnight on the passing on of wealth to the next generation.  Children can fight over portions of a collection; the collection can be decimated by forced liquidations to pay estate taxes or auction fees of collectibles can take huge bites of income and fractionize value.

Not only that, the impulse to resell or claim collectibles by the next generation can lead to tax fraud.

Thus, planning  is essential to prevent the issues of collectibles from surfacing by the advisor being comfortable about talking with the client about the subject. Even putting emphasis on the client’s collection to have a distinction of becoming an art succession advisor.  There are a few of these specialist around who press the client about the importance of the collection, its history, meaning to the client personally and where the collection stands with his estate sucession plan.

Collections of a serious nature need to be catalogued, evaluated appraised , ranked and authenticated.  Furthur, discussions with client and advisor should relove around tax implications if donating or selling portions of the collection might be good strategy to avoid capital gains ( 28% for collectibles( before the client’s passing.

Are baby boomers getting more attention than they deserve?

Wednesday, July 15th, 2009

Before I answer the question, here are some facts on the biggest population bubble in our nation’s history:

Fact #1:  Estimated number of baby boomers born between the years 1946 to 1964, is 78.2 million

Fact#2:  Almost 8,000 people are turning age 60 each day, according to projections

Fact#3:  Fifty-nine million boomers will be living in 2030, according to projections. During that decade year, boomers would be between ages 66 and 84—54.9 per cent would be female.

If you put the facts together—it means a big bunch of people will be receiving discounts on a Denny’s Grand Slam breakfast and will be around to eat it for a long time in the foreseeable future.

The long awaited milestone of this important demographic group is now with us, not going to go away, and in spite of the hype all around about the boomers, they will have significant implications on our economy and investment markets for the next 20 years and beyond.

So the answer to the headline, in my opinion, the more boomer attention received the better.  Bring on the hype if it helps rivet the attention of the investment community especially the independent financial advisor. This BB phenomenon is going to have important consequences for your asset management business.   In case you need a kick in the pants, remember this–another fact: 43 million of American’s 100 million households will enter retirement over the next 20 years.

As you know, clients who are retired with portfolios supporting them have different financial advice needs than younger clients who are working and saving for their future.

Your managing of portfolios after cash withdrawals begin makes these portfolios far more vulnerable to short-term economic and market swings than a client whose portfolio has 20 years to build assets. Exactly the situation we are going through now.

Let’s face it. Our industry has been overly focused on asset accumulation and portfolio performance. It’s unprepared to handle the huge distribution of assets coming sooner than realized.

This new decompression of switching from accumulating assets to helping clients stabilize those assets into income to last the rest of their lives will be catching some advisors flat- footed unless they prepare now.

There’s a whole group of issues on the stage: longevity, inflation, taxes, monthly income plans, philanthropic efforts and second job entry, healthcare and long-term care costs, estate planning, inheritance, life long learning, Social Security benefits, care giving for parents and children, liquidity, investment guarantees, retirement security and the seesaw of market performance.

Let’s just take just one issue, “retirement security.”  Compared to 2007, baby boomers confidence in their long-term retirement resources has fallen in the dunk tank.

In 2007, Watson Wyatt Worldwide, a global consulting firm focused on human capital and financial management, surveyed boomers about their retirement plans, 63 percent felt very confident about having enough resources to live comfortably five years into retirement.

The latest survey by the consulting company shows that confidence has dropped to 44 percent. Further the survey shows that 32 percent of boomers have no confidence at all about their retirement security over a 25 year period—most of whom according to life expectancy tables will live that long.

A more recent survey conducted by the Employee Benefit Research Institute (EBRI) has posted a new low in confidence about having a financially secure retirement.  Only 20% now say they are very confident about having enough to live on comfortably in their retirement years, down from 41% in 2007 (lowest since survey has been conducted since l993).

Need I mention further the “lost confidence,” market instability and Wall Street scandals (i.e. Madoff) have influenced the role of the affluent client’s primary financial advisor and how recent events have affected the confidence, trust, and reliability of his or her advice.

Due to these recent events, investors are disenchanted with advisors because I suspect part of this issue is that many advisors have been more interested in gathering assets than managing them.

As we are talking about the baby boomer generation here, the challenge for wealth advisors is simply this: You will have to work with your boomer clients to have an asset allocation strategy that fine tunes withdrawals to maintain sufficient income throughout their lives.

This calls for Human Relations 101.  You have to reassure your boomer clients even more so than those who still are working and have a longer investment horizon.  Getting specific:  why not offer a complimentary service to clients/prospects entitled “Are You Making Enough for Life”?  Since the drop of 2008 and the mini recovery of 2009—will your client/prospect run out of money based on pre-2008 withdrawals done by you or another advisor?

Since there’s a good chance your boomer clients will make it to the IRS life expectancy tables, withdrawals may be too high compared to post 2008 retirement balances.  You can be a hero if you catch this now before it’s too late to reassess your clients and prospects.  Extend this service to your newsletter and seminars.

Focus on income solutions for your boomer clients rather than specific investment products. With this approach, you as an independent advisor can develop realistic income strategies that can move boomer clients successfully through their retirement years. This approach will attract more rollover boomers to your practice.

More information on these similar topics can be found on our web site:

High Taxes, Record Losses for Mutual Fund Investors Ignoring Book’s Good Advice During Last Three Tax Seasons

Sunday, June 28th, 2009

First the insult: In 2008 the stock market including mutual funds has logged its worst performance since Herbert Hoover was president.  The DOW is down 36.2 % for 2008 the biggest drop since l931.  During the height of the Great Depression stocks were reeling at 40.9 %.

According to investment researcher Morningstar, Inc, “Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have generated positive returns during the past 12 months.”

And Lipper has reported that of the 78 mutual fund categories tracked by the fund research company, only one is in the black. The rest are down 30%, 40% or more.

Next the injury: in addition to devastating 2008 performance losses in mutual funds, those fund owners that carry capital gains distributions will have to pay as much as 15% tax.

This is called the January surprise and has occurred every year for taxable mutual fund investors since the 2000-2002 downturn.  In fact, in 2007, a new high capital gains watermark was set: more than $24 billion was collected by the IRS–the highest tax shocker in stock market history.

Figures this year have yet to be fully complied but 2008 is expected to create huge capital gains distributions for investors. Lipper, said.  And making matter worse, the tax-loss carry-forwards that many funds had from the 2000-2002 market downturn were used up during 2003-2006.  So funds generally don’t have stockpiled losses to offset any of this year’s realized gains.

As senior analyst Tom Roseen of Lipper has said, “The tax holiday is over.”

Thus negative returns plus capital gains distributions calls for a more tax-efficient strategy or else investors can be expected to be hammered every tax season.  Don’t expect any relief from the new administration especially for high-income investors as President Obama has promised a higher tax rate on capital gains.

Overlooked factor in wealth creation over time, and the managed accounts continues to prove its viability as a tax-efficient and transparent investment vehicle.

Since substandard performance has descended upon us and recent tax-break laws will sunset in 2010, it would be prudent for taxable mutual fund investors to keep an eye on one of the main drags on their performance: taxes.

Over the past 20 years, the average investor in a taxable stock fund gave up the equivalent of between 17 percent and 44 percent of their returns to taxes, Lipper found. In 2006, the tax bite amounted to a hefty 1.3 percent of assets, which surpasses the average stock fund expense ratio of 1.2 percent.

“With the tax loss carry forwards disappearing, the tax bite on returns is likely to shot back up to rates of 2 percent or more,” says Roseen. “And now this year will give us mediocre returns plus a huge tax bill which should be of concern to investors.”

Don Wilkinson, wealth manager out of Newport Beach, CA and author of the book entitled Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative has urged mutual fund investors to stop the bleeding since 2006 and his widely acclaimed book endorsed by such fiialial superstars as Bernie Fisher of Fisther Investments again this year recommends to mutual fund investors  put their wealth in a better place like separately managed accounts.

“Tax prone mutual funds are the worst place to put your wealth, “ said Wilkinson.

While an investor can’t avoid paying Uncle Sam in 2008, wealth manager Wilkinson says–” a great way to decrease one’s tax liability for 2008 and future years is to get out of mutual funds and into managed accounts.

Many investors are getting the message as sales of his book have skyrocketed since the economy has plunshed and more savvy investors are departing mutual funds in droves for more tax friendly havens like ETF, Index funds and managed accounts.

In fact, “no mutual funds” investors have increased to 16% from 6% in just two years (2006-08).  According to a new study by Mass-based Cogent Research, it was found that established mutual funds investors presently retain an average of 40% of their portfolios in funds, down from 53% in 2006.

In total, mutual fund assets at $10.6 trillion on September 30 are down 8.7% from $11.6 trillion at the end of August.  Stock and bond funds posted net outflows of $63 billion in September, up dramatically from $12.1 billion in August, according to the Investment Company Institute in Washington.

“The economic downturn is accelerating a continuing move from mutual funds to alternative products, said Christy White, a principal at Cogent.  “This is a perfect storm going on.”

In addition, mutual funds are plummeting each year with capital gain taxes shrinking their return on investment (ROI).

As a case in point, taxes took the largest bite ever out of taxable mutual funds in 2007.  It set a new watermark.  For the 2007 tax year, more than $24 billion—the highest capital gains tax shocker billed by the IRS in stock market history stunned mutual funds holders, according to Lipper, Inc, a fund research company.

Thus, buy and hold mutual fund investors incurring huge mutual funds losses has prompted them to take fund assets and plow them into CDs, Exchange Traded Funds (ETFs), annuities and the new bright star in the alternative investment horizon: the Unified Managed Account (UMA). Like other managed account strategies like the Separately Managed Account (SMA), the UMA rewards the knowledgeable investor with asset customization, professional money management and, most important: reduced tax liability.

SMAs and UMA’s are asset management building portfolio strategies managed by independent money managers under an asset based fee structure offered by financial advisors and other financial agencies.

The UMA is particulary attractive as an alternative investment over mutual funds because it underscores one of the most important in demand characteristic of the human psyche: simplicity.

The UMA is a fully integrated asset management system providing comprehensive investment management in a single account.  It removes the need for more than one account and combines all the assets into one account with a single registration.

Best of all, the UMA possessing all the positive aspects of the traditional SMA, can also encompress most other alternative asset management vehicles (e.g.: stocks, bonds, ETFs and more) in a client’s portfolio.

Again, the portfolio is arranged simply as one single account.

Don Wilkinson, owner of a wealth management firm in Newport Beach, CA—DFW & ASSOCIATES, can find all the details about UMAs and SMAs in a book.  The book entitled: “Stop Wasting Your Wealth in Mutual Funds…Separately Managed Accounts—The Smart Alternative” can be found on Wilkinson’s web site: and ordered at a reduced rate.  Visitors to the web site can also obtain a complimentary revealing report entitled “Building Wealth with Separately Managed Accounts.”  Wilkinson’s book can also be ordered on (