Trusts for Pets Come to Ohio

Trusts for pets come to Ohio next year.

As reported here, dogs and cats in Columbus, Oberlin or Piqua no longer will face poverty when their owners predecease them.

For a Hefty Inheritance, Think Thin!

Thin people tend to accumulate more wealth than the obese, this New York Times article reports.

Obesity results in shorter life spans. And “sociologists have long noted that in developed countries, the higher-status people tend to be thin and the lower- status ones are fat.”

Less easy to explain is this finding: “Thin people tend to receive bigger inheritances.”

Do-It-Yourself Hedge Funds

How does a hedge fund that outperforms most but only charges 0.36% a year strike you? As you'll read here, the only catch is the $20 million minimum:

The program, FundCreator , designed by Professor Harry Kat of the Cass Business School at the City of London University with PhD student Helder Palaro, lets investors design futures trading strategies similar to hedge funds called synthetic funds that use 78 futures contracts to imitate various risk-return profiles, the reports said.

Hedge funds typically charge a 2% fee per year, in addition to 20% of profits, and funds of hedge funds add a 1% of assets fee and 10% of profits fee, Financial Times said.

The simulator charges 0.36% a year and a $5,250 set-up charge, the reports said.

The minimum investment is about $20 million, Hedge World reported, due to the large size of most of the contracts. About 10 investors are testing the system.

Professor Kat says that his system outperformed 82% of funds of hedge funds.

A U.S. Bank for Bond, James Bond?

Wasn't that 007 skiing at Aspen? Mr.Bond must have stopped by Denver to consult his confidential banker at American International Depository and Trust.

As reported in the What's Offline column in The New York Times, E. Jerry James has founded what's said to be the first private bank for foreigners in the United States. He created the bank to take advantage of Colorado’s Foreign Capital Depository Act of 2001.

From the point of view of the bank's foreign clients, AID&T will be "off shore":

As a U.S. banking institution, we provide access to investments in various asset classes to international families and businesses. These families and businesses will enjoy the added benefits of confidentiality, asset protection, and tax mitigation as well as trust services and family office services, all in the most politically and economically secure country in the world.

"Tax mitigation." Sure has a nice ring to it!

Why So Many “Emerging Affluents” Never Emerge

Google the news for "ponzi scheme." A whole bunch of items pop up, reporting on Ponzi schemes from hither and yon, each in some stage of investigation, prosecution or recrimination.

Yesterday's New York Times took a long look at the phenomenon. Hard to write much new about the urge to get rich quick and the costly consequences. Still, it's good to be reminded of the basics:

• Ponzi's heirs can tailor a scheme to trap people from any walk of life or education level.

• Many Ponzi schemes are "affinity frauds," perpetrated in clubs, churches or other groups where one "client" will quickly tell friends about the chance for easy money.

• Victims of Ponzi schemes never heard of diversification. If they have a $125,000 inheritance or $575,000 needing investment, it all goes to the scheme. All of it!

Carlo Ponzi, your name will live on until human nature changes.

Thoughts for Thanksgiving

Ben Pease of TD Banknorth appears on the byline of this monthly commentary.

Thanksgiving is quickly approaching. In many homes, it is a time for food, family and football. For turkeys, on the other hand, it's just another attempt to make it through the day. Survival isn't easy for the turkey, regardless of the season. All year, turkeys must avoid more than simply hunters, holidays and carnivores to survive; they have to be smart and keep their cool. One long-held wives' tale about turkeys is that they can actually drown by looking upward too long while it is raining. Or, that they are very prone to sudden heart attacks if startled or overly excited. True or not, life is certainly not easy for the turkey.

Well, some resurrected "turkeys" are beginning to come back to the financial markets. With the Dow Industrial Average breaking through new highs and climbing toward 12,200, many investors are dusting off their overabundance of optimism, dating back to the late 1990s. . . . Could we be heading back toward the "hot sector of the day" on the evening news and investment advice from the local barber? I hope not. Remember, stay smart, keep your wits, and don't drown in the optimism of others by continually looking up.

• • •

We have a meaningful - if not somewhat tormenting - tradition at my home on Thanksgiving Day. As the food hits the table and our stomachs are growling in anticipation, we pause for a few moments to allow each person to declare what they have been thankful for over the past year. Generally, it includes things such as appreciation for family, new children, a promotion or a newfound relationship. I can't remember a time when I've heard someone say they were thankful for the recent bond rally, the FOMC decision, or XYZ finally beating analyst estimates. It is interesting, in this age of long hours and long days; the most valuable things in life are still free. Have a wonderful Thanksgiving. . . .

With the "ownership society" vanishing, can we create a "fiduciary society"?

From Jim Webb's Op-Ed in The Wall Street Journal:

When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

From a speech by Vanguard founder John Bogle, accepting a leadership award in Colorado:

[T]he “ownership society”—in which the shares of our corporations were held almost entirely by direct stockholders—gradually lost its heft and its effectiveness. It is not going to return. In its stead, a new “agency society” has developed, with financial intermediaries controlling the overwhelming majority of shares. (Since 1950, institutional ownership has risen from 8 percent of U.S. stocks to 68 percent; individual ownership has dropped from 92 to 32 percent.)

Bogle sees the imperial compensation packages of CEO's (not to mention their back-dated stock options) as symptoms of deep trouble in the investment world.

Fox are roaming the farmyards, and nobody (certainly not shareholders' "agents") guards the chicken coops.

Ideally, the solution might be to go back to direct investments in stocks and bonds for every portfolio over $100,000. Get rid of the passive intermediaries. Not likely.

More likely is increased government regulation, leading us nearer and nearer to state capitalism. (China and Russia will be glad to give us pointers.)

Can't there be a better way? All ideas on how to move from an "agency society" to a "fiduciary society" will be gratefully received.

How much can be earned from collecting state quarters?

Earnings, in this case, means profits by the U.S. Mint from the sale of the state quarters to collectors, that is, the value of currency taken out of circulation less the cost of production. Uncle Sam has "earned" $4 billion to $5 billion so far, the New York Times reports. The program has worked so well that it's being extended to the one dollar coin. By February of 2007 Sacagawea will be joined first by George Washington, then all the rest of the dead Presidents on a schedule that extends to 2016.

I think it's unfortunate that the new Presidential dollars will be no larger that the Sacagawea, which is too close to the quarter in size to be quickly distinguished. On the other hand, I expect better acceptance of Presidential dollars as real money.

I wonder whether any collectors have profited from collecting the state quarters thus far?

The Trust Officer: Most Versatile of Bankers

Google "trust officer" as we did this morning and you'll be directed to What does a Trust Officer do? at the web site of Baylake Bank in Wisconsin.

Pay them a virtual visit. Trust officers in the Green Bay area need all the sympathy they can get after yesterday's game: Patriots 35, Packers zip. Yikes!

Estate Planning for Persons With Less Than $5 Million

Jonathan Blattmachr, Georgiana Slade and Bridget Crawford provide some useful observations and eleven strategies in this downloadable article.

Bulls, Bears . . . and Lame Ducks

From Week in Review in The New York Times:

[T]he political phrase of the moment is actually derived not from the hunt for waterfowl, but for riches. The Oxford English Dictionary — which defines the term as “a disabled person or thing: spec. (Stock Exchange slang): one who cannot meet his financial engagements; a defaulter” — traces its origins to the London stock market in the 18th century, where broke investors were said to waddle out the doors onto Exchange Alley. Horace Walpole, the Gothic author and the fourth Earl of Orford, was so tickled by the expression that in 1761 he made the first known written reference to it, in a letter to Sir Horace Mann that asked, “Do you know what a Bull, and a Bear and Lame Duck are?”

Hedge Funds: Where are the Customers‘ Yachts?

That's the question raised by The Economist in this article.

The editors of The Economist seem to have difficulty believing in Tinker Bell or hedge funds. Still, the article offers useful stats and raises a pertinent question: How long will investors pay alpha prices for beta performance?

Quite a while, probably. The article concludes that hedge funds' boosters and detractors both exaggerate:

Hedge funds are not the panacea for every pension-fund deficit, nor are they the cause of every ill in the financial markets. They are like a fast-growing adolescent, sometimes boisterous, sometimes clumsy but still developing. Where skill does exist, clients will probably find that managers get the bulk of the benefits. But as long as clients blindly believe in that skill, they will pay for the hedge funds' yachts.

For a somewhat more positive take on hedge funds, see this interview with Steven Drobny, President, Drobny Global Advisors.

Drobny believes the astonishing expenses faced by hedge-fund investors pose no problem:

"Investors are allowed to choose what they want and if they don't like something they can vote with their feet."

About that yacht

If you've followed Ben Stein's advice and struck it rich running your own hedge fund, you can pick up the cool old yacht above for a mere 900,000 euros. German-built in the early 1920s, the vessel later served as the official presidential yacht of Generalissimo Franco of Spain.

Fun with numbers

Just back from the New England trust conference, where the keynote speaker made the following observations (numbers are approximate):

100,000,000—number of U.S. households
400,000—number of licensed U.S. financial advisors
250—households per advisor
$150,000—average investable assets of U.S. households (gross wealth divided by households)
$8,100—median investable assets of U.S. households (50% have more, 50% less).
20,000,000—more realistic prospecting base for financial advisors
50—number of actual prospects per advisor

So that's why selling financial services to the high net worth market has gotten so tough!

MIT 23, YALE 22.9

MIT scored a return on its endowment that edged even Yale for the twelve months ending last June. So reports the NY Sun here.

Seth Alexander, a former member of David Swensen's team at Yale, now manages MIT's endowment. Another ex-Swensenite serves as Princeton's wealth manager.

As long as Swensen and his acolytes can produce outsize returns, hedge funds seem destined to remain in style.

Hopes for resolution on estate taxes dim

As the lame duck session gets underway, attention has turned to the expired "tax extenders" legislation (including the R&D tax credit and the itemized deduction of state sales taxes). That legislation is presently included in the "trifecta bill" with a number of changes to the estate tax and an increase in the minimum wage. Action isn't expected before December. Though the trifecta bill may not be dead, it's on life support. According to Tax Analysts ($):

[Retiring Ways and Means Chairman] Thomas suggested that any efforts to move estate tax reform this year have finally been put to bed, telling reporters that the rush to wrap up work this year will likely prevent any further debate on the estate tax.

Without completely dismissing the possibility of his chamber once again taking up the trifecta bill this year, Senate Majority Leader William H. Frist, R-Tenn., told reporters earlier in the day it is "most likely" that Congress will act only on the tax extenders during the lame-duck session.

Wasn't it Senator Frist who proclaimed last August that the Senate would never consider the extenders apart from estate tax reform? Yes, it was.

Thoughts for a Taxpayers' Day

Does your local chapter of Save Our Tax Cuts need a little inspiration? Try this from Good joke: Murphy's Lesser Known Laws:

A fine is a tax for doing wrong. A tax is a fine for doing well.

If any chapter members are tempted to perform criminal acts in order to achieve deeper cuts in their taxes, you might call their attention to this law:

When you go into court, you are putting yourself into the hands of 12 people who weren't smart enough to get out of jury duty.

* * *

This month the Lame-Duck Congress goes on a Wild Goose Chase, as one pundit put it. Estate-tax reform is expected to be among the geese that get away. Meantime, here's a paradox to ponder:

If Congress, via the federal estate tax, insists on limiting the assets we can pass to our children and grandchildren, why doesn't Congress limit the liabilities we can pass to them, via federal deficits?

For the sake of our descendants, shouldn't we should replace the federal "death tax" with a federal debt tax?

Rumsfeld Out. Estate-Tax Reform In?

By winning control of the House of Representatives (and possibly the Senate), the Democrats sent at least one senior citizen, Don Rumsfeld, into retirement. Have they also brightened the prospects for estate-tax reform? That's the view offered in this USA Today article:

Repeal of the estate tax, a top priority of the Bush administration, doesn't stand a chance with Democrats in control of the House. But the prospects for legislation that would limit the tax to the super-wealthy are much improved, tax analysts say.

Less than 2% of taxpayers pay estate taxes. But for those who are affected, the tax rates are steep: up to 46% on estates that exceed $2 million. Under current law, the amount of assets exempt from estate tax will rise until 2010, when the estate tax will disappear.

Unless Congress acts, though, the estate tax will rise from the grave in 2011, the exemption will drop to $1 million, and the top rate will hit 60%. (This has led some financial planners to dub the 2001 statute the "Throw Momma From the Train Act," because heirs stand to gain the most if their benefactors die in 2010.)

While Democrats have opposed full repeal of the estate tax, many support increasing the exemption amount, says Clint Stretch, managing principal of tax policy at Deloitte Tax in Washington. Rep. Charles Rangel, the New York Democrat who's expected to chair the House Ways and Means Committee, favored estate tax reform as far back as 2001, Stretch notes. "Clearly, he would be supportive of a significant increase in the exemption amount."

Winning Trust

I'm back from the Pennsylvania Bankers Trust and Wealth Management conference, held once again in lovely Hershey, PA. Learned a bit more about Milton Hershey and his trusts, perhaps enough to generate a newsletter article for next year.

We premiered a new product, Winning Trust, for raising awareness of the trust department and encouraging referrals of trust prospects within the bank. We first introduced a video training product called Winning Trust nearly 20 years ago, and it was a sensation in its day. The new product is deliverable via computer, as a standalone narrated movie or unnarrated PowerPoint slides.

The reaction from the PA bankers was good, though we had hoped for more. Perhaps people are just harder to impress these days.

A demo of the presentation will likely be posted shortly on the Merrill Anderson web site. I'll add a link for it when it's ready.

What Happens After a Bank Rips Off Your Grandmother?

A bank annuity salesperson snatches most of Grandmother's money, creating a "disaster" for grandma. Things couldn't get worse, right?

Wrong. Another bank annuity salesperson tries to rip off Mother!

This story, told by Jeff D. Opdyke in his Sunday Journal column, is so sad, and so maddening, that we'll show it to you in full:

More than a year ago, I wrote about my grandmother buying an annuity from a local banker, noting that I viewed the transaction as a financial disaster. This banker persuaded my grandmother to lock up two-thirds of her liquid assets in an annuity.

Based on the contract details, the banker was clearly clueless. My grandmother had one request -- that the proceeds not go in a lump sum to her daughter -- and the banker told her that would be no problem. He was wrong: The contract specifically notes that the beneficiary, my mom, would receive a lump-sum payment upon my grandmother's death.

I told my grandmother that I wanted to help her try to nullify the contract, but she demurred. She has been dealing with this bank branch since the 1970s and didn't want to raise a stink. So I held my tongue.

However, something good arose from this sorry mess. As I wrote in that column, it's incumbent upon us to watch out for our parents and aging relatives when it comes to their big financial transactions. You must talk to them, tell them not to feel pressured by anyone and encourage them to call you before acting on any investment solicitation, particularly for an annuity.

And I'm happy to say my mom did just that.

She heard me talking to my grandmother, and she listened when I gave her the same message. A few months ago she received a large insurance settlement for a back injury, and when she deposited the check, the bank immediately sat her down with an in-house investment peddler who tried to persuade her to put the entire sum (essentially 100% of her liquid assets) into a variable annuity. It would have basically locked up her money for about a decade.

Mom called me from the banker's desk to tell me about what sounded like a great deal to her. I told her the risks and that in her situation it was a terrible idea. She hung up, but then called back when the banker's spiel continued. She put the banker on the phone, and I told him to back down because this annuity was entirely inappropriate for my mom's situation.

He lost the sale.

Just to be clear: I think that for certain people certain annuities can be great tools for retirement-income planning. I expect to use annuities in my retirement to create a pension-like stream of permanent income my wife and I can never outlive.

But that doesn't mean they're right for everyone, and the worst situation is when you find a parent has been sold an annuity that mangles her finances and leaves her feeling insecure.

Grandma's disaster is, of course, banking's disaster. People don't distinguish between bankers and in-bank brokers/insurance agents who sell on commission.

The salesperson with the fiduciary instincts of a mosquito, the stern loan officer and the nice lady in the trust department are equally "bankers" in the public's eyes.

Contest: In 300 words or less, discuss whether selling expensive, inappropriate deferred annuities to credulous senior citizens is in the best interests of a bank and promotes the bank's long-term success.

Prize for the best entry will depend on the quality of thought and expression.

A little repentance wouldn't hurt, either.

Direct Mail, Then and Now

1905: Almost-instant messaging
Came across an odd news item from Norwalk, CT the other day. The Norwalk museum had received the gift of a locally-made product from the early years of the 20th century, a Postal Typewriter.

A what? A Postal Typewriter. For its day, it was leading edge technology:

“In the early 1900s, when the phone was not ubiquitous and telegraphs were inconveniently located outside the home, the mail, or the post, was convenient because messages were delivered three times a day. . . . With a Postal Typewriter, people could write a quick letter -- a post card -- and have it delivered by the day's end. . . .”

The Postal Typewriter didn't last. Telephones, an even more quick and convenient form of communication, made same-day messaging old hat.

It's an old story. New technology drives out the old. Or does it? Often new technology develops problems of its own.

In its heyday, the mid-20th century, telephone service was so universl and reliable you could call the White House and speak with a member of the staff. You could call company presidents and arrange appointments, usually via their secretaries but sometimes with the chief honcho himself.

Today, the wired, household telephone is old tech. Outgoing calls get tangled in a jungle of phone trees. Incoming calls are generally an annoyance.

2006: There's no comparison
How did most communication media turn into such a pain? E-mail comes in a hopeless flood. TV commercials beg to be zapped. And those phone calls.

As a result, The New York Times reports, good old direct mail is making a comeback.

"I would rather get a catalogue over a call during dinner 10 times over,” [Ginger] Stickel, a mother of two young children in Greenwich, Conn., said. “I always open those letters, and sometimes they’re useful.”

Remember when the Internet and online marketing were going to spell the end of the direct mail business? Well, it hasn’t exactly worked out that way.

Turns out that even junk mail is easier to sort through and jettison than e-mail spam. And higher-class direct mail (dare we mention the classy financial newsletters prepared by The Merrill Anderson Co.?) can seem almost luxurious.

“As the world becomes more digital, there is a need for tangible experiences,” says Rob Bagot, executive creative director at McCann Worldgroup San Francisco. “And there’s nothing like a piece of paper.”

Annuities Explained

Perhaps you're a wealth manager who doesn't use the A-word much. But a client wants a briefing. What to do? You might just print out Mark Trumbull's helpful layperson's guide from The Christian Science Monitor.