Tuesday, July 31, 2012

The Upside of High Income Tax Rates

Basically, an income tax can be designed in a couple of ways.

1. Low rates, perhaps a flat tax, levied on a wide tax base. Few if any deductions. (Why should Uncle  Sam try to control the way you spend, invest or donate your income?) Most proponents of federal-income-tax reform lean toward this model. Realists try not to laugh..

2. High rates, made bearable by plentiful deductions. The wicked tax rates of half a century ago did not apply to interest payments, medical expenses, state and local tax payments, any purchase of goods or services that could conceivably be called a business expense, etc., etc.

The current revenue code, beloved by no one, could be termed a rag-tag compromise – "moderate" income-tax rates paired with limited deductions that sometimes phase out or vanish, depending on the level or nature of a taxpayer's income.

If a simple, low-rate, federal income tax is politically impossible, should we go back to high rates? In his Sunday New York Times op-ed, Yale economist Robert Shiller runs the idea up the flagpole.

During World War II, Shiller points out, the top income tax rate soared to 94 percent. Rates remained high after the war but did not seriously hamper the post-war boom. And people seemed to get along better back then. (Little Orphan Annie liked Daddy Warbucks). High tax rates and an ample charitable deduction eased class envy and promoted generosity, in Shiller's view.

Think we could recreate the spirit of the 1948-1963 era? In those kind and generous times, Republicans were happy to vote for a massive national infrastructure project – the interstate highway system.

The good old days
Shiller's theme, promoting philanthropy through taxation, reminded me of "Art and Taxes," an article by Jerome Rubin in the December, 1966 issue of Horizon. A sister publication of American Heritage, Horizon was hard-bound, lavishly illustrated and covered the wold of culture.

High tax rates paired with a charitable deduction don't merely encourage generosity, the article points out. They make generosity profitable. "Such titans as Morgan, Altman and Frick could afford to be generous to the nation's museums. With a proper regard for the Collector of Internal Revenue, today's wealth cannot afford not to be."

Rubin offers an example:

Thursday, July 26, 2012

What's Past Is . . . Prologue?

Enough of the Mad Men era. Let's move on to the advertising archives of 1982.
You know about the Great Bull Market that began thirty years ago. 1982, what a great time to invest!

Now turn your Hindsight Device  to "Off."

in 1982 the stock market had been declared dead and a recession had begun. To survive hard times, U.S. Trust expanded its banking operations. The strategy may have helped in the short run, but the future belonged to megabanks. Even The Bank of New York, a moderately-sized commercial bank founded by Alexander Hamilton, ended up merging with Mellon Bank. U.S. Trust became a wealth-management arm of Bank of America.

The greatest megabank was created by Sandy Weill. In 1998 Weill merged Travellers, which owned Salomon Smith Barney, with Citibank to form Citigroup. At that time Citigroup ranked as the largest financial services company in the world.

Citigroup barely survived the Great Recession. Now retired, Sandy Weill astonished the financial world this week by admitting megabanks were a mistake. We probably ought to bring back the Glass-Steagall era, Weill told CNBC, once again separating investment banks from commercial banks that hold federally-insured deposits. Wow!

Thursday, July 19, 2012

One Picture is Worth . . .

Great illustration on the cover of Bloomberg Businessweek.


The cover story is one that wealth managers and their clients will be chatting about: Does more economic pain produce quicker gain?

Wednesday, July 18, 2012

Presidential Tax Returns

H/T to Glenn Kessler, The Fact Checker at The Washington Post, for calling attention to the treasure trove of presidential income-tax returns at the Tax History Project. Browse returns as far back as FDR.

Roosevelt, 1913, Assistant Secretary of the Navy
The Roosevelt archive goes all the way back to 1913. With his first return FDR enclosed a letter from The Bank Of California, noting the  deductibility of a state tax paid by the bank on behalf of its shareholders.

Tuesday, July 17, 2012

An IPO Shakes the Money Tree

Gaining private banking and wealth management relationships with the very rich, even the young very rich, is a challenge. Once in a while, though, fate lends a hand. Morgan Stanley's misfortunes in taking Facebook public, Felix Salmon suggests, turned out to be First Republic's good luck.

Photo: Noah Berger/Bloomberg
Mark Zuckerberg's newly refinanced residence is an Old Money (1903) home.

Sunday, July 15, 2012

Evolution of the Woman Investor

Bache & Co. ad from 1966:


Give the copywriter credit for taking the woman investor seriously. Take points off for the "women's intuition" jibe.

These days, women investors have become role models. See Warren Buffett invests like a girl
The look of that Bache ad is 1950's stodgy by the Mad Men standards of 1966. Compare my favorite 1966 Schweppes ad, where the distinguished Commander Whitehead, president of Schweppes USA, hits the beach.

Brother, Can You Spare $10 Million?

Bloomberg seems worried: Rich Passing Up $10 million Opportunity to Gift Tax-Free. According to one survey of CPAs, fewer than 10 percent of people with $10 million or more have used any of their federal gift tax exemption or plan to do so.

As the Bloomberg report indicates, the generous gift-tax exemption now available can be helpful to owners of exceptionally valuable family businesses. Otherwise, the aversion to massive gifting is understandable. Folks with $20 million or $30 million could see their net worth plummet if the Great Global Deleveraging ends badly; they don't feel they have a lot of wealth to spare. As Bloomberg notes, those with $100 million or more are likelier candidates for gifting.

Billionaires are the best bet. My State, New Hampshire, is among those seeking to attract their trust business. Glad to learn that one NH trust company has picked up six billionaire clients in the last couple of years.

Last year Mary Rowland reported on New Hampshire trusts, as well as family-office developments,  in Keeping Family Trust.

Friday, July 13, 2012

How to beat the stock market!

It's a truism that if you miss the five best days of the year in the stock market, you'll get mediocre returns.  We write about this regularly. Because one can't know when the five best days are, one needs to stay invested all the time. It's a great anti-timing argument.

But what if you knew with some confidence when the best days would be?

According to a staff report at the New York Federal Reserve Bank, most of increase in the S&P 500 since 1994 has occurred on the days just before the announcements of the Federal Open Market Committee!  Taking out the three day window before the announcements leaves the index essentially flat for the past 17 years (the data ends in 2011).

Interestingly, the nature of the FOMC announcement didn't matter.

I haven't finished reading the paper for their attempted explanation of the phenomenon, but the topic will be in the next issue of our Investment and Trust Newsletter.

Thursday, July 12, 2012

Gunpowder … Inheritance … Shots Fired


An elderly woman. Two children with whom she was not close. A nephew who steps in to help his aunt in her final years. Her revised will, leaving him a third of her $12 million. A drive-by shooting with apparently murderous intent.

As if we needed reminding, inheritance can be an explosive subject.

Update: July 12: a more detailed account of the feud.

Wednesday, July 11, 2012

Think Generations, Not Gender

On his latest radio show Ric Edelman remarked that women are taking greater responsibility for family investments. A generation ago, many wives managed daily family finances while their husbands toyed with the brokerage account. Today, much investing is done through 401(k)s and other retirement plans. Increasingly, it seems, the wife who monitors the family bank accounts keeps an eye on the family  retirement accounts as well.

Nevertheless, male wealth managers continue to wonder: What do women really want? Schwab seeks to provide guidance with a survey of "high net worth women," but note the quotes. Average investable assets for the women surveyed was only $1.3 million, making it unlikely that most qualified as high net worth. Half had no investment account. Four in ten had no credit card of their own.

For a meatier survey, see US Trust's 2012 Insights on Wealth and Worth. The study probes wealth-related attitudes by generation – pre-boomer, boomer and under 50. Boomers, it turns out, have relatively less interest in keeping wealth in the family. Under-50's are more likely to turn to private banks or trust companies for investment guidance.

Saturday, July 07, 2012

“My Trust Fund”

Ever heard of a yacht named "My Brokerage Account"? Not likely. See Fred Schwed's Where Are the Customers' Yachts?

Now check out the name of the superyacht berthed at Wentworth marina, just a few miles from this blog's Northern office:


"My Trust Fund"was purchased by a couple (Canadian, you think?) at last fall's Monaco yacht show. You can admire her photo gallery here.


Friday, July 06, 2012

Could Women Have Saved Lehman Brothers?

Picture a group of top-notch trust officers. Estimate how much they make in a year.  Compare your estimate with the annual fortunes – typically between $10 million and $20 million – received by the top 50 employees of Lehman Brothers before it collapsed. (The top 50 were subordinate to Lehman's corporate officers, whose presumably higher earnings went on public record.)

"The one thing which is most startling about this list," Felix Salmon observes, "is the number of women on it: exactly zero. One can’t help but suspect that the all-male culture at the upper reaches of Lehman was a corrosive and damaging thing, which in some way helped lead to the bank’s demise."

Woman are thought to be more prudent investors, on average, than men. Would a healthy infusion of female managing directors help Wall Street manage its greed?

If so, help may be on the way. Watch for alumnae of Westover School.

Tuesday, July 03, 2012

Wealth management pays off!

To the tune of $118 billion, says the American Banker.

Time for some more wealth management newsletters?