Wealth Preservation Saboteurs

Posted on April 30, 2013 by

“Get what you can and keep what you have; that’s the way to get rich.”
Scottish Proverb

In a series of earlier posts, I discussed the three planning areas that I believe constitute real wealth management – wealth accumulation, wealth preservation, and wealth distribution. Of those three, I would suggest that wealth preservation is the most important.  As the Scottish saying goes, “make as much as possible and keep as much as possible.  That’s the secret to becoming wealthy.”

Studies are consistently showing that the public wants more information about asset protection and wealth preservation techniques. Estate planning is being replaced by integrated estate planning, which combines estate planning with asset protection strategies.  There are those in the legal community who now suggest that an attorney’s failure to assess a client’s need for asset protection and to discuss asset protection strategies with a client may constitute malpractice.

When I tell people that I am a wealth preservation attorney, I usually get the quizzical look that begs for further explanation.  In my practice, wealth preservation focuses on protecting one’s wealth from loss due to common problems such as unsuitable investments and/or improper portfolio management, taxes and litigation/risk management.

“Don’t confuse brains with a bull market” is a well-known saying on Wall Street. It is very easy to make money in a bull market, as research shows that three out of four stocks follows the general trend of the stock market.  Unfortunately, investors are often lulled into a false sense of security during bull markets, as their advisers point to increased values as evidence of their investment acumen.

A study by the Schwab Institute concluded that 75 percent of the investor portfolios that they studied were unsuitable for the investors based on the investor’s financial goals, need and personal parameters. My experience would suggest that the actual number may be higher than 75 percent, especially when investment fees and adviser fees are considered.

I have written articles and posts on the Active Management Value Ratio (AMVR), a proprietary metric that allows investors to assess the cost efficiency of actively managed mutual funds.  In most cases we find that the cost of the active management component  of actively managed mutual funds far outweighs the incremental return, if any, that the active management component of actively managed mutual funds, often by as much as 300 to 400 percent, or more.

Charles D. Ellis, a highly respected investment professional, has recently suggested that advisory fees are high, very high, in relation to the benefit provided.  Mr. Ellis suggests that the most commonly used fee by investment advisers, a fee based on a client’s assets under management (AUM), is extremely misleading.  By focusing on fees as a percent of actual benefit produced by an adviser, Mr. Ellis suggests that the 1 percent AUM fee is actually more along the lines of 50 percent or more.

Many investors may dismiss a 1 percent AUM fee as trivial, as just 1 percent.  When analyzed in terms of the AMVR and Mr. Ellis’ methodology, the true cost of such fees and expenses becomes clear. The Department of Labor has estimated that over a period of twenty years, each additional 1 percent of investment fees and expenses reduces an investor’s end wealth by 17 percent. Wealth preservation analysis alerts investors to such cost issues and allows them to make changes as needed to prevent loss of wealth due to unnecessarily high investment fees and expenses.

High fees and expenses are not the only wealth preservation issues that investors need to address.  Two common wealth preservation threats are ineffective, or “pseudo,” diversification and a failure to hedge one’s investments against significant losses.  Too many investors think, or are told, that diversification simply involves owning a lot of different types of investments.  That simply is not true.

True, or effective, diversification depends not on the number of investments one owns, but rather how the investments interact with each other in different market conditions.  The idea is to own a combination of investments that react differently in certain circumstances, or, technically speaking, have a low correlation of returns, so that when some investments are down, other investments will help balance out any losses in order to protect against significant losses to the overall investment portfolios.

Effective diversification is one form of hedging, or using techniques to prevent against significant portfolio losses. Other forms of hedging may include the use of options, inverse index funds and other strategies in order to protect against significant losses. Hedging is simply another example of approaching successful wealth management as the management of risk instead of the management of returns.

Taxes are another major issue with regard to wealth preservation.  The Supreme Court has stated that there is nothing legally wrong with arranging one’s affairs so as to minimize the amount of taxes.  Tax planning as it relates to wealth preservation may involve making inter vivos, or living, gifts to others, in order to reduce one’s taxable estate. Other commonly used techniques include creating wills and trusts to address both inter vivos or post-mortem wealth preservation issues.

Litigation/risk management involves proactively addressing potential litigation/risk concerns and planning appropriately, with the stress on proactively. Far too many times I get a call from someone telling me something unfortunate has happened and they need to protect their assets.  Asset protection and wealth preservation cannot be used to defraud others.  Once a potential cause of action has arisen, the courts will strike down and attempt to shelter or hide assets from the injured party.

In some cases, the easiest risk management tool, insurance, may be sufficient to provide the needed protection against losses due to litigation. In some cases, the cost of insurance requires the consideration of other wealth preservation techniques.

Trusts are a common litigation/risk management tool.  The effectiveness of using trusts as a wealth management tool depends on a number of factors, including the proactive establishment of the trust and the extent of control retained by the creator of the trust.

As mentioned before, trusts are basically ineffective as wealth preservation tools if the event creating liability has already occurred.  With regard to retained control over a trust, the rule is basically that the more control that the creator of a trust retains over a trust, the less protection the trust provides. Likewise, the more that the trust provides in terms of personal benefits to the trust creator, the less protection the trust provides.

One common misperception is trusts have to be expensive.  If you want an offshore asset protection trust based in the Cook Islands with all the trust protector provisions and a collapsing bridge trust as an additional level of protection, then yes, that trust is going to be expensive to establish and maintain.  The good news is that most people do not require that level of protection.  In many cases, common trusts such as an intentionally defective grantor trust, an income only trust or family trust provide the needed protection at a much lower initial and annual fee.

Wealth preservation involves a number of interrelated legal areas.  Wealth preservation can provide valuable benefits without being cost prohibitive.  While the benefits of wealth preservation can be significant, it is important that anyone interested in maximizing the potential benefits act proactively by contacting a professional with experience and knowledge in such services.

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Posted in Asset Protection, Investment Fraud, Investment Portfolios, Investor Protection, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement, Retirement Distribution Planning, Retirement Plan Participants, Retirement Planning, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , ,

Three Numbers Every Investor and Fiduciary Should Remember

Posted on April 7, 2013 by

The abundance of investment products and investment information available today can be intimidating and confusing to many investors, both novice and professional.  Over my twenty-plus years as an attorney and investment adviser, I have tried to help others focus on some of the critical information in order to avoid unnecessary investment losses, to help level the playing field against some of the ne’er-do-well that continue to defraud the public and plague the financial services industry.

Speaking with a colleague the other day, he commented on the fact that a lot of the important information we get through trade publications such as InvestmentNews rarely seem to get mentioned in the mainstream media and press.  And when we mention such information to clients, they often comment on how useful such information would have been.

After my conversation with my colleague, I started thinking about some of the “inside” information I have shared with my clients that produced the most reaction and appreciation.  In hindsight, I think five numbers and five fats have stood out the most to me and my clients.  In this post, I will discuss the five numbers.  I will discuss the five facts in my next post.  That being said, the five numbers every investor and fiduciary should know are as follows:

1. “75″ – The number “75″ is actually important for two reasons.  First, a study by Schwab Institutional found that approximately 75% of investor portfolios were poorly structured and unsuitable for their investors given the investors’ financial needs and goals.  I believe that this is primarily a result of the fact that (1) stockbrokers are not required to act in a client’s best interests, and (2) investors are often mislead by portfolios that appear to be diversified because they hold a number of different types of investments, but such portfolios are often not truly, effectively diversified.

The second reason that the number “75″ is important is because research and history have shown that approximately two-third, or 75%, of stocks follow the general trend of the market.  This simply supports the popular Wall Street adage, “[don't] confuse brains with a bull market.”

2. “94″ - While there are many firms and individuals in the financial services industry calling themselves wealth managers, a study by CEG Worldwide, a well-respected financial services consulting firm, concluded that 94% of those calling themselves wealth managers or claiming to provide wealth management services failed to meet the criteria used to qualify as wealth managers.  The criteria that CEG used in their study to determine true wealth management was based primarily on advisers who practiced wealth management as a process as compared to those who simply used “wealth management” as a marketing ploy to push product.  This is the same criteria that investors and fiduciaries should use in choosing a financial advisor to work with.

Secondly, one expert has suggested that this number (OK, actually 93.6, which rounded off is 94), and the study that produced it may have caused more damage to investors than any other number/study.  The number comes from the famous 1986 Brinson, Hood and Beebower (BHB) study that stated that 93.6% of the variation of a portfolio’s returns could be explained by the portfolio’s asset allocation.

The study did not say that asset allocation explained 93.6% of the portfolio’s actual returns, but rather the variation of the portfolio’s returns.  Nevertheless, dishonest brokers and advisers misrepresented, and still do misrepresent,  the BHB study’s findings to convince investors to choose an asset allocation and rigidly adhere to it, despite the proven cyclical nature of the markets.  This is the mantra of the” buy and hold” approach to investing, an approach that some have suggested is better described as the “buy, hold and regret” approach to investing.  Just ask investors how well that worked during the 2000-2002 and 2008 bear markets.

Unfortunately, given the current budget issues that exist at the time I write this post, static asset allocators may soon get yet another costly education.  Dr. William Sharpe, a Nobel laureate for his work in the area of investment management, now stresses the need to be proactive and adjust portfolio allocations when changes in the economy and/or the market dictate such moves.

3. Zero – This number represents the number of variable annuities (VA) and equity indexed annuities (EIA) an investor should own.  As a former compliance officer and a current securities attorney I have heard all the convoluted and conniving justifications for these atrocities.  I have written posts and articles warning investors about these products.  While there may be a few limited instances where they may make sense, such as wealth preservation for high net worth investors, the way they are marketed to the masses is extremely questionable.

One Wall Street Journal article reported that variable annuity salesmen were told to treat potential annuity clients as “blind twelve-year-old,” and to “put a pitchfork in their chests,” and provide questionable responses to potential client’s questions.  VA salesmen and VA advertisements often tout that by purchasing a VA the investor will never run out of money.

What is often not made clear that in order to guarantee that lifetime stream of money, you give up all rights to the money invested in the VA.  Once you annuitize your VA, the balance goes to the insurance company once you die, not to your heirs.  In most cases the insurance company offers various choices for payout, such as joint survivor and a guaranteed period, but these options generally result in lower periodic payouts and, in  some cases, additional fees.

One of the most onerous aspects of VAs is the excesssive fees that most VAs charge, especially with regard to the so-called death benefit.  VAs typically guarantee that in the event the VA owner dies with out having annuitized the VA, the owner’s heirs will receive either the accumulated value of the VA at the time of the owner’s death or the amount of the owner’s actual investment in the VA, whichever is greater.  So the VA issuer is only insuring the amount that the VA owner actually puts in the VA.

Meanwhile, the insurance company assesses the VA’s annual death benefit fee not on the basis of their actual legal obligation, which is the amount of the VA owner’s actual investment, but rather on the accumulated value of the VA.  One study estimated that the actual expense of the annual was approximately 0.10-0.12, but that the insurance companies often charged approximately 1.50%, or approximately fifteen times the estimated value, resulting in a nice windfall for the insurance company.  The additional fee also cost a VA investor by reducing this investment return.

EIAs are also problematic.  EIAs are generally sold with the pitch that investors can earn the same return that the stock market does, with the guarantee that even if the market is down, the EIA investor is guaranteed a minimum return.  What many investors are told is that the potential return is usually capped at a relatively low number, say 10%, and then  is reduced even more by a “participation rate,” usually an additional 2-3% reduction.  In short, the EIA investor is looking at annual rate of between 2-7%.  If the market is up 20% or more for the year, just who is getting the benefit of the excess over the investor’s return?

There may be other significant numbers that I have omitted.  However, investors and fiduciaries that remember these numbers and the reasons for their significance will be in a better position to protect both their financial security and/or their clients’ financial  security.

Posted in Asset Protection, Investment Fraud, Investment Portfolios, Investor Protection, Portfolio Construction, portfolio planning, Retirement, Retirement Plan Participants, Retirement Planning, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , ,

REAL Wealth Management – Wrap-Up

Posted on March 24, 2013 by

Over the past four weeks, I have written posts to discuss what I perceive to be the three true areas of comprehensive wealth management – accumulation, preservation/protection and distribution/transfer. While many financial professionals may claim to be wealth managers, a study by CEG Worldwide concluded that only 6 percent of those who claimed to be wealth managers actually qualified as true wealth managers, with the remaining 94 percent simply being product salesmen.  CEG’s primary criteria focused on “wealth managers” who addressed all aspects of wealth management and those who employed a  “process” approach to wealth management rather than a “product” approach.

Although I have discussed wealth management in terms of three areas, hopefully the posts have shown that there is actually a lot of overlap between the three areas, showing that proper wealth management is an extremely integrated process.  Wealth management is also an ongoing process, as laws and regulations involving wealth management are subject to change.

The key to effective accumulation is to protect against unnecessary and significant losses, in other words risk management. Losses can come from various areas, including changes in the stock market, taxes, liability issues and effective wealth distribution planning.  Each of these areas should be addressed through strategies such as constructing and maintaining an effectively diversified investment portfolio, proper tax planning, insurance, and regular review of one’s estate planning documents and retirement plan beneficiary forms.

The key to effective wealth preservation and protection is to be proactive.  As I mentioned in my earlier post, many of the wealth preservation/protection techniques often used are basically ineffective once the threatening event has occurred. The other factor often overlooked by those expressing an interest in wealth preservation/protection is that the level of protection provided by wealth preservation/protection strategies is directly related to the amount of control given up by the party seek the preservation/protection. In other words, generally speaking, you can’t have your cake, i.e., complete control over your assets, and eat it too, i.e., be able to protect those assets from everyone.

Many people incorrectly think they cannot afford wealth management. Fortunately, some of the most effective wealth management techniques are inexpensive, such as annual gifting and proper completion of retirement plan beneficiary forms.  While there are those who might like to brag about having an off-shore trust in the Cook Islands or the Isle of Man, very few people need that level of wealth preservation and protection.

Again, in most cases the key to effective wealth management is to be proactive and consult with professionals  who are both knowledgeable and experienced in such matters.  Note I said professionals, not professional.  In wealth management, there is truly strength in numbers.  Given the areas that are involved in true wealth management, a good wealth management team will usually include, at a minimum, an estate planning expert, a tax expert, an investment adviser, and a wealth preservation/protection attorney.

Hopefully this series has been of some benefit to readers. I have received a number of complimentary e-mails, which I truly appreciate.

Take care.

Posted in Asset Protection, Investment Fraud, Investment Portfolios, Investor Protection, Portfolio Construction, portfolio planning, Retirement, Retirement Distribution Planning, Retirement Plan Participants, Retirement Planning, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , , ,

REAL Wealth Management – Wealth Distributions and Transfers

Posted on March 17, 2013 by

This week, we address what I consider to be the third aspect of a genuine wealth management program -distributions and transfers of one’s assets.  Distribution encompasses both transfers made while one is living, inter vivos transfers, and transfers made after one’s death, testamentary or postmortem transfers.

Distribution planning generally focuses on deciding how to allocate one’s assets to achieve one’s personal goals while minimizing the impact of taxes (i.e., income tax, gift tax, estate tax, alternative minimum tax, etc.) and other financial issues, both during one’s lifetime and after one’s death.  I have already written several posts and white papers that cover some of these issues, so I will simply use this post to provide a general overview of some common issues.

As always, the information provided here is general in nature and is not intended to provide advice for any specific individual.  If you need specific advice or assistance, you should contact an attorney or other professional who is experienced and knowledgeable in such matters.

Two of most common distribution mistakes people make is failing to properly complete the beneficiary forms associated with their retirement plans so as to maximize such assets, and failing to review their beneficiary forms to ensure that they still reflect their wishes. By carefully considering who to designate as their beneficiaries and properly completing the beneficiary form to ensure the most effective distribution of the assets in their plan, the plan owner can effectively “stretch” the lifetime of the assets to benefit more than just the beneficiaries they designate.  For those who have a large balance in their pension account, it may be better to have a custom beneficiary form drafted to ensure the maximum benefit and protection for the assets within their personal account.

Another consideration regarding beneficiary forms has to do with the consolidation that has taken place within the banking and investment industries.  It is not uncommon for people to contact a bank or broker-dealer after the death of a loved one and request a distribution of a loved one’s IRA account, only to be told that the bank or broker-dealer cannot find the beneficiary form for the account.  In such instances the bank or broker-dealer will enforce the default distribution provision on the account, which are generally not in the best interests of the deceased’s heirs and usually result in a heavier tax impact and thus, a significant reduction in the amount of assets going to the heirs. Loss of beneficiary forms can also occur in connection with 401(k), 403(b) and 457(b).

Bottom line, owners of retirement plans should review their beneficiary forms regularly in order to verify that the custodian of a plan has the owner’s beneficiary form on file and that it accurately reflects the account owner’s wishes.  There are numerous cases where the retirement account owner has divorced and remarried, but failed to change the beneficiary forms on his retirement account(s). The Supreme Court has ruled that even though it would make sense that the deceased would want to leave his retirement account assets to his current wife, the terms set out in a retirement account beneficiary form control distributions from said retirement account, regardless of what is stated in the deceased’s will.

Inter Vivos Distribution Planning
A common misconception about wealth distribution planning is that it has to be complicated. A common, yet simple, inter vivos wealth transfer strategy is the use of the annual gift tax exclusion amount.  This exclusion allows an individual to give a certain amount each yer to as many recipients as they wish without triggering any federal gift tax. The annual gift tax exclusion amount for 2013 is $14,000. 

Married couples can maximize the benefits of the annual gift tax exclusion by each making a qualifying gift. That means for 2013, a couple with three children could give each child $28.000 annually, effectively reducing the size of a taxable estate if that is a goal. 

Anyone contemplating lifetime transfers of their assets need to carefully review their personal financial situation to make sure that they can truly afford to make such transfer.  People should be careful not to “let the tax tail wag the wealth management dog.”

Another common inter vivos strategy is the use of trusts.  Some of the common inter vivos trusts include family trusts, intentionally defective grantor trust (IDGT), income-only trusts and special needs trusts.

- Family trust are typically drafted in such a way as to remove the trust’s assets from the grantor’s estates (usually a husband and a wife), but provide for ongoing management of the trust’s assets.
- An IDGT trusts are drafted so that the trust’s assets are removed from the grantor’s estate, but drafted in such a way that the grantor, not the trust, is liable for any annual income tax owed by the trust, allowing the grantor to pay such taxes and to allow the trust’s asset to benefit from compound growth.
- Income-only trust are drafted in such as way as to remove the trust’s assets from the grantor’s estate, but to provide income to the grantor on an ongoing basis. These trusts are often used in an attempt to qualify for benefit programs such as Medicaid.
- Special needs trusts (SNTs) are established to provide financial aid to injured or otherwise challenged individuals.  SNTs must be carefully drafted in order to preserve the beneficiary’s right to important government benefits.

As we mentioned in our previous post, the effectiveness of a trust in providing wealth management advantages is based largely on the amount of control retained by the person establishing the trust, the grantor..  The more control the grantor, the less protection provided. 

Testamentary or postmortem distribution planning
Testamentary planning basically refers to estate planning and specific distributions instructions provided in one’s will.  A common tax strategy is to add testamentary trust provisions within a will that will allow one’s heirs’ to possibly have access to such assets in certain circumstances if the trustee assents to such access, yet still provide tax benefits for the deceased’s estate.

A common trust strategy used with married couples is the so-called “A-B Trust” plan. In this strategy, the will directs that the executor fund one trust, the so-called “bypass trust,” with the so-called estate tax exclusion amount and place any remaining assets in a trust that qualifies for the unlimited marital deduction. The applicable estate tax exclusion amount for 2013 is $5,250,000 and is subject to adjustment annual based on inflation. 

Assuming the marital trust is set-up properly, the use of the marital trust defers any potential taxation of the marital trust’s assets until the death of the surviving spouse, with any tax being based on any asset remaining in the trust. The terms of the “bypass trust” usually provide for distribution of the trust’s assets upon the death of the surviving spouse in accordance with whatever terms are provided, with the distribution of the trust’s principal being tax-free.

The “A-B Trust” strategy is just one testamentary distribution strategy that can be used to both achieve one’s goals while minimizing the impact of taxes. The appropriate strategy for an individual will depend on their specific situation, goals and concerns. That is why anyone considering distribution planning should only do so after consulting with an attorney or other appropriate professional who is both experienced and knowledgeable in such matters.

When large estates are involved, postmortem distribution planning may help resolve issues that were not contemplated when the decedent originally drafted their will. Beneficiaries of large estates may find that distributions to them under a will may not be needed or may produce unwanted tax implications.

In such cases, a beneficiary may choose to disclaim the distribution.  If a beneficiary disclaims a distribution under a will, the beneficiary does not get to designate someone to receive the disclaimed distribution. The disclaimed distribution is treated as if it were never made and is distributed in accordance with instructions in the will.

Distributions are often used when the distribution will result in other family members who are also beneficiaries under the will receiving the disclaimed assets.  Disclaimers, when done properly, can be a very effective tax planning and wealth management strategy.

The strategies discussed herein are only a general overview of some common wealth management strategies for wealth distribution and transfers.  Anyone considering engaging in wealth distribution and transfer strategies should only do after consulting with an attorney or other professional experienced and knowledgeable in such matters. This is definitely not an area for do-it-yourselfers!

Notice: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Posted in Asset Protection, Retirement, Retirement Distribution Planning, Retirement Planning, Wealth Distribution, Wealth Management, Wealth Preservation | Tagged , , , , , ,

REAL Wealth Management – Preservation

Posted on March 9, 2013 by

When I tell people that I am a wealth preservation attorney, I often get the obligatory inquisitive look, followed by “what’s that” question. In my law practice, wealth preservation law covers several areas of the law, primarily wealth management, tax planning, estate planning, and asset protection. The primary focus is to address each of these areas, analyze a client’s current situation, and reduce or eliminate any unnecessary exposure to actual or potential losses

With regard to wealth management, I analyze a clients’ current investment portfolio in overall suitability and efficiency, in terms of both cost and risk management.  I draw heavily on over twenty years of experience in the area of quality of financial advice.

I addressed my basic methodology in last week’s post.  I use four proprietary metrics, three of which are proprietary – the Active Management Value Ratio, the Active Management Fee Equivalent, the Fiduciary Compliance Ratio, and a stress test.  Relying on these metrics, we often find situations where clients are paying fees that are often 300-400 higher than necessary to get similar, or better, performance from less expensive investment options

We also analyze a client’s investment and financial situation in terms of the client’s overall financial needs and plans.  As an example, variable annuities can basically destroy a client’s estate plan is the client annuitizes the annuity prior to his/her death by removing the asset from the estate plan.  A variable annuity can also have serious implications for those who need Medicaid later in life.  These are all issues which should really be considered prior to investing, but definitely analyzed at some point in case steps should be considered to minimize any potential damage.

Tax planning is an obvious part of wealth management.  As legendary jurist Judge Learned Hand stated, there is nothing wrong or illegal with arranging one’s affairs so as to minimize taxes.  Losses due to taxes obviously reduce wealth and can significantly reduce one’s estate. Tax laws can impact investment choices, e.g., Traditional IRAs vs Roth IRAs, tax deferred investments options vs. non-tax deferred investment options.  Tax laws can impact estate plans e.g., estate equalization strategies, marital property considerations, disclaimer strategies. With the constant change in tax laws, it is critical that clients utilize all possible resources,  including tax attorneys and CPAs, in order to keep their comprehensive wealth management up-to-date with regard to tax planning.

Estate planning focuses on the efficient distribution of one’s estate.  Efficient distribution focuses on both ensuring that the deceased’s last wishes are honored, but also that the estate is not greatly reduced due to the impact of taxes. We will discuss estate planning more in next week’s post on distribution. For now, let’s just say that there are a number of strategies, including estate equalization, trusts and qualified disclaimers that can be used as part of an effective wealth management process.

Finally, studies consistently show that the public wants to know about asset protection strategies, particularly the use of asset protection trusts.  There are basically two types of asset protection trust – domestic asset protection trust (DAPTs) and foreign asset protection trusts (FAPTs).  The most popular domestic jurisdictions are currently Nevada, Delaware, Alaska and South Dakota.  Popular foreign jurisdictions include the Cook Islands, Nevis, Isle of Man and the Cayman Islands.

In choosing a jurisdiction for an asset protection trust, there are several things to consider. First and foremost, the asset protection laws differ from jurisdiction to jurisdiction.  Two of the most important legal issues to consider are the statute of limitations (SLs)/contestability provisions and the exceptions from protection.  The optimum situation is a jurisdiction with short SL/contestability periods and as few exceptions as possible.  With DAPTs, there is also the issue of whether the DAPT state will honor and enforce a judgement from another state due the “full faith and credit” provision of the U.S. Constitution.

I have a lot of people contact me and say they are going to be sued, so they need an asset protection trust…now!  Then I explain a couple of things of things about asset protection trusts, such as (1) asset protection trusts cannot be used to perpetuate fraud; (2) the earlier an asset protection trust is created, the greater the protection; and (3) the effectiveness of an asset protection trust is inversely related to the amount of rights and powers retained by the trust’s grantor. In many cases, it is too late to create an effective asset protection trust, as the event creating the liability has already occurred.

The key to effective wealth preservation is not to view wealth preservation in isolation, but rather as part of a comprehensive wealth management plan.  Wealth preservation involves various aspects of the law, including tax planning, estate planning, and asset protection. The key is to also create a strong team of professional experienced in these areas and work towards the client’ goals and needs.

Posted in Asset Protection, Investment Fraud, Investment Portfolios, Investor Protection, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement Planning, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , ,

Dividend Investing vs. Variable Annuities

Posted on March 7, 2013 by

Excellent analysis of problems with variable annuities from the “Seeking Alpha” web site . Only thing missing is discussion of the use of inverse pricing on VA’s annual fees, producing windfall for VA issuer at expense of VA owner.

“Seeking Alpha Retirement Portfolio – Dividend Investing vs. Annuity Purchasing” http://bit.ly/VLswFM

Posted in Investment Portfolios, Investor Protection, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement Plan Participants, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , ,

REAL Wealth Management – Accumulation

Posted on March 2, 2013 by

As promised, over the next four weeks I will discuss what I believe are the three aspects of real wealth management – accumulation, protection/preservation and distribution.  Most of the posts and white papers on this site deal with the accumulation phase.

Rather than repeat such information, I will just recommend that readers review the post and white papers that are relevant to their situation. In particular, I recommend that readers read the white papers on variable annuities, faux financial planning and the Active Management Value Ratio.

Two of the most important factors in the accumulation phase are controlling costs and risk management. The Department of Labor has estimated that each 1 percent of fees and expenses reduces an investor’s end return by approximately 17 percent over a twenty year period.

The average annual expense ratio for variable annuities is approximately 2 percent. Add in another 1 percent for the annual expense fee for the sub-accounts within the annuity, and an investor is looking at a 51 percent reduction in their end return at the end of twenty years.  If a financial adviser is charging another 1 percent for managing the variable annuity, the variable annuity owner is looking at a 68 percent, or over a two-thirds, reduction in their end return.  Bet your financial adviser did not explain those numbers to you.

But even smaller fees can have a decided impact on an investor’s return.  When we perform an audit for an investor or a pension plan, we use three different metrics : the Active Management Value Ratio, the Active Management Fee Equivalent, the Fiduciary Compliance Ratio and a proprietary stress test.

We have publicly shared the calculation process for the Active Management Value ratio, which allows an investor to evaluate the cost efficiency of an actively managed investment. Based upon our own experience, very few actively managed investments can justify their fees, as they fail to outperform less expensive passively managed investments.

Investors often overlook the impact of risk on an investment’s performance.  One of the best known risk management formulas is the Sharpe ratio, named after its creator, Nobel Prize winner Dr. William F. Sharpe.  The Sharpe ratio uses an investment’s return and standard deviation numbers to calculate an investment’s risk adjusted performance.

Another area that deserves mention is the use of misleading marketing schemes within the financial services industry.  Ads touting “we’re number 1″ are common in financial publications. What investors need to realize is that such claims are generally based on relative returns. Therefore, if Fund A only lost 20 percent while Fund B lost 22%…Fund A is number 1! At the same time, a 20 percent loss is a 20 percent loss, when the original idea was to grow one’s wealth. When the market does recover, an investor suffering the 20 percent loss will have to use some of the recovery to make up for such losses.

Smart investors know that the real secret to successful wealth management is risk management. The most common form of risk management is efficient asset allocation/diversification.  By creating a portfolio with investments that behave differently in different market environments, an investor can provide upside potential for their investment portfolio while also providing downside protection against market downturns.  While it is true that such an approach often prevents huge annual returns, it also prevents against huge investment losses.  By preventing huge investment losses, an investor’s portfolio can benefit from the magic of compounding returns.

Successful investing does not have to be that hard. History has shown that 75 percent of stocks follow the overall trend of the stock market, whether the trend is up or down.  So despite what your financial adviser may claim about being a market guru, just remember the popular (or unpopular) Wall Street adage – “Don’t confuse brains with a bull market.”

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