What's the buzz on EFTs?

Inspired by "Before You Drive that Hot EFT" a week ago in the Wall Street Journal, I'm preparing a summary of exchange traded funds for our Wealth Management newsletter. Although the Journal made EFTs sound powerful and dangerous for amateur investors, this June 2007 AAII piece ($) concludes that in an apples-to-apples comparison, the differences between traditional index funds and EFTs are negligible. If that is true, the recent popularity of EFTs may be attributed to successful broker sales pressure rather than inherent investment advantages.

What do you think?

Millionaires and Multimillionaires

Some nine million U.S. households have investable assets of $1 million or more.

About one million households have investable assets of $5 million or more.

For more millionaire data, see this Julie Jason column in The Advocate.

Richistan

What's a Hamptons Chevy?

(Hint: In the Hamptons, the Bentley is an entry-level luxury car.)

Learn more about the folkways of the newly rich. Listen to Robert Frank's NPR interview, promoting his new book, Richistan.

Alternative Investments with Wings

The customer is always right, especially the UHNW customer.

So what do the wealthy want? Their own jet planes, according to this DJ Newswire dispatch:

Large banks - including Bank of America Corp. (BAC), Citigroup Inc. (C), Merrill Lynch & Co. (MER), PNC Financial Services Group Inc. (PNC) and Wachovia Corp. (WB) - have in-house departments dedicated to helping individuals and corporations acquire and finance private jets. UBS AG (UBS) and Guggenheim Partners LLC, a financial-services firm with a wealth-management division, announced in late May their own joint aircraft-financing venture.

Demand for private jets is rising, and financial advisors and private bankers can play a key role connecting their jet-setting clients with colleagues savvy about aviation finance. Manufacturers and firms involved with buying and selling jets also refer interested buyers to banks for financial assistance.

A private jet has got to be a fun investment. Mary Schwartz of Citigroup's Aircraft Finance division says, "People love to talk about their planes."

Tales from the 20th Century: Good Brokers

You'd think this blog was really down on brokers, to look at recent posts. Hardly. The Senior Assistant Blogger's financial career started in a brokerage house.

In the summer of 1949, at age 17, I went to work in the International Department at Kidder Peabody. The department head was a family friend, and his secretary wanted to take the summer off. He invited me to learn the business as his typist, gofer and general assistant.

I learned what multi-tasking really meant that summer. No Internet; no computers. To watch for prices on six different stocks for six different clients, you had to give most of your attention to the ticker while answering the phone and, oh yes, writing a letter to a nice lady in Switzerland, explaining why she couldn't make a profit, after Kidder's commissions, by buying at 40 and selling at 40 5/8.

I also learned what makes a good broker. I don't remember any lectures; just a steady barrage of pointed remarks:

A good broker put his clients' interests first. (There were few her's in those days.)

A good broker recommended the best investments he could.

A good broker never, never churned a client's account.

Kidder's brokers were not expected to adopt this behavior out of the goodness of their hearts. It was a matter of enlightened self-interest.

This behavior, I was taught, would result in a broker gaining more and more clients through word of mouth. The firm would then notice a star in the making and start bestowing bonuses and other rewards. Still more clients would come to him. And that's how good brokers retired rich.

There was a stick to go with the carrots. Wall Street was a smaller world in those days. A broker canned by Kidder for behaving badly was unlikely to be hired by Merrill Lynch.

I've known some good brokers, and I bet there are plenty of them today: men and women who thrive by putting their clients' interests first.

So here's to the good brokers!

And a pox on the sellers of overpriced investment products who prey on elderly, unsuspecting bank customers!

These "Wealth Managers" Cost Citigroup $15 Million

From Citigroup Settles A BellSouth Case in today's Wall Street Journal (subscription):

According to the NASD, in 1994 to 2002, Smith Barney financial advisers in Charlotte, N.C., held more than 40 seminars with BellSouth employees, told them they could afford to retire early by cashing out of and reinvesting their pensions and 401(k)s. The advisers told them to expect 12% annual returns, and that they would be able to withdraw about 9% each year.

The NASD also found the brokers put the employees into investments that exposed them to much greater market risk than they would have faced had they stayed in their employer-sponsored accounts.

Coincidentally, yesterday's WSJ reports on Citigroup's new pilot project for melding the marketing of banking and investment services:

In Boston, Citigroup is overhauling operations and corporate culture in a city where computers don't talk to each other and bankers who have spent years coddling wealthy clients can be reluctant to share them with colleagues. Last fall, Citigroup opened its first retail branches in the city, joining the bank's force of Smith Barney brokers who have been there for some 50 years.

A financial adviser from Citigroup's Smith Barney brokerage unit now sits in each retail branch in Boston. Elsewhere, financial advisers are teaming up with colleagues in other parts of the bank's sprawling network to pitch more products to clients.

At a meeting to help launch the project, a Citigroup manager noted that Boston was the site of a famous Tea Party. Will this revolutionary heritage help Bostonians deal with in-branch brokers?

Need New Business? Take a Bite of the Apple

We know. You're a meat and potatoes guy. You don't care what your ads and collaterals look like. You think all this image stuff is for wimps. You just want your sales force to bring in the business.

You need visual therapy.

Start with a visit to Fortune's Grouchy Geek. He reminds us that yesterday was the 30th birthday of the Apple II computer.

Perhaps even more important in the long haul, it was the 30th birthday of Apple's "bitten-apple" logo.

The rainbow apple (the 21st-century version is an elegant white) replaced Apple's original logo, which featured Newton sitting under an apple tree. Looked like a 19th century illustration.

Compare and contrast the old and the new:




Looks count. And they count all the more when you're selling something as generic as financial services.

Time to Say Goodbye to the Term "Wealth Management"?

Ask Google to define "wealth management" and you get:

The coordination of a client’s investment, tax and estate plans into a comprehensive plan to achieve their personal goals.

Seems like a wealth manager ought to do a bit of actual management along with the coordination. Otherwise, that definition suggests the term's original, upscale tone.

Not that the original meaning lasted long.

Go to Merrill Lynch's web site and you won't find brokerage services. You'll be offered wealth management.

Looking for Smith Barney's brokers? Try wealth management.

The other day I happened on TD Bank' Financial Group's press release on it's second quarter earnings:

Wealth Management, including the Bank's equity share of TD Ameritrade, produced a very strong quarter with a 30% increase in earnings compared with the second quarter of last year. Domestically, the quarter saw strong growth in client assets across the mutual fund and advice-based businesses. The second quarter also saw good progress in Wealth Management's plan to increase the number of client-facing advisors in its Canadian network.

"Wealth management" sure has come a long way if it now includes online execution of buys and sells for day traders.

But if "wealth management" now means nothing more than personal financial services in general, we need a substitute term.

What's a new way to describe investment and planning services performed for High Net Worth Individuals?

All suggestions gratefully considered.


P.S. Love that phrase "client-facing advisors."

Guess the backward-facing advisors didn't work out.

Aren’t They All “Wealth Managers”?

From the Poll Archive at investmentnews.com:

Fun with tax projections

Earlier JLM noted the just-enacted enlargement of the kiddie tax. Apparently Congress was concerned that substantially appreciated assets would be handed off to the children of the wealthy, who could sell them next year at a 0% tax rate on the gains. The strategy still works well this year, when those kids have a 5% tax rate, but next year would be even better. There's something so compelling about the phrase "totally tax-free gains," isn't there?

The solution wasn't to eliminate the 0% tax rate, it was to extend the kiddie tax all the way up to 24-year-olds, if they are students. So don't be thinking you can avoid high taxes on your capital gains just because you are in grad school! And it doesn't matter whether that stock you own was a gift or if you bought it out of your own babysitting money in high school--when you sell it, use your parents' marginal tax rate to compute your tax liability.

Do the college students that you know own a lot of stocks? Didn't think so. So how much money will this tax change raise? $1.4 billion over the next ten years. That's chump change in the tax revenue arena, but let's think about this for a minute. According to the Joint Tax Committee's estimates (get them here) this change will increase revenue by roughly $150 million a year for the next ten years. That implies college students as a group will be realizing $1 billion per year in long term gains! Seems a little high to me. If the typical sale is 1/3 gain, 2/3 return of basis, that means $3 billion worth of stock sales. Every year. For ten years. Because those students are going to school with $30 billion in their pockets.

I don't think so. Please prove me wrong if you can.

But wait, there's more. Faced with a tripling of their capital gain tax rate next year, college students and their parents will be hearing from their tax advisors that they should sell assets this year, nail down the 5% rate and pay the tax, even if they plan to repurchase the stock to hold for later years. A very large number of shares will be sold based upon this advice, a large number of capital gain realizations will be accelerated, and more tax payments will be pushed into this calendar year.

The total volume of expected tax receipts from the accelerated sales, again according to the Joint Tax Committee?

Zero dollars.

That's the number you necessarily get when you insist that tax changes won't change taxpayer behavior, and tax revenue has to be estimated on static models, not dynamic ones. There has never been a better example of the foolishness of this policy.

One more curious item in the projections. I suspected that these calculations were less about new revenue coming in and more an estimate of revenue losses that theoretically would have occurred if asset shifting became more common, losses that now may be avoided. But if that were true, we would see a big change in the tax revenue model after 2010, when the 0% tax rate expires. That's not the case—in fact, the revenue enhancement is larger in the last five years of the projection window than in the first five!

In the face of this punitive new tax, do the estimators really believe that assets will continue to be shifted to the students, and they will continue to sell rather than wait until they are out of school? Apparently so.

Sell People What They Want, or Sell Them What They'll Use?

A generation ago, Merrill Anderson's 401(k) plan offered investment choices limited to a couple of equity funds – one indexed, one managed – a fixed-income fund and a money market account.

In the 21st century, many 401(k) plans offer so many investment choices that employees are said to be too confused to participate.

This proliferation of choices mirrors the growing complexity of the wider world of investing. Where grandpa had dozens of mutual funds to consider, we have thousands and thousands. Separately managed accounts have proliferated. So have exchange traded funds (over 160 new ETFs started trading last year).

Has the proliferation made investors happier or richer? Probably not.

In a recent New Yorker column, James Surowiecki points to a similar trend to unsatisfying complexity on the tech front. Gadgets have to offer all the latest new features or they don't sell. But what buyers want isn't what users want:

The fact that buyers want bells and whistles but users want something clear and simple creates a peculiar problem for companies. A product that doesn’t have enough features may fail to catch our eye in the store. (A cell phone that doesn’t offer a Bluetooth connection, for instance, may be dismissed as underpowered, even though relatively few Americans use Bluetooth headsets.) But a product with too many features is likely to annoy consumers and generate bad word of mouth, as BMW’s original iDrive system did. Intended to give drivers unprecedented control over navigation, temperature, and entertainment through a single device, it was so hard to use that it has been described as “arguably the biggest corporate disaster” since New Coke.

Apple tries to solve the problem, Surowiecki observes, by making complexity user friendly:

This is clearly what Apple believes it will be offering with the iPhone: a device with a remarkable range of features, coupled with an uncluttered touch-screen interface. It won’t be surprising if the iPhone succeeds, but it would be understandable if it failed. The strange truth about feature creep is that even when you give consumers what they want they can still end up hating you for it.

Even the best efforts at simplifying the complex require more than good engineering and design. Most of the employees in Apple stores are in customer support, not sales.

Wachovia Takes Over A. G. Edwards

Wow! Hard on the heels of Bank of America gobbling up U.S. Trust, Wachovia announces the acquisition of St. Louis brokerage A. G. Edwards. The venerable firm will be folded into Wachovia Securities.

A recent Bloomberg report explains why regional brokers like A. G. Edwards were ripe for the picking.

For a healthy dose of comparative statistics on the major wire houses and other data, see Retail Brokerage– Defining the End Game, Wachovia's presentation to investors.

Guess My Favorite Tax Rate

Parents and grandparents old enough to remember when capital gains were taxed at twenty or twenty-five percent should be happy to pay fifteen percent, right?

Wrong!

Compared with zero, a fifteen percent tax bite causes real pain.

And zero is what the federal income tax on long-term gains will be next year, but only for lower-income taxpayers. Before a new tax law expanded the kiddie tax, this Wall Steet Journal article (subscription) reports, that gave some financial advisers a bright idea:

Anticipating this change, some investment advisers had been suggesting that high-income family members consider making gifts of securities that have gone up in value over the years to low-income family members, who could then sell those securities, tax-free, next year. The new law doesn't affect transfers to elderly parents or other relatives.

Typically, such transfers have involved moving appreciated securities to the low tax brackets of college age children who were beyond the range of the kiddie tax. Even this year's five-percent tax rate on capital gain, for low-bracket taxpayers, is less painful than fifteen percent.

But starting next year, most children in college will still be kiddies for tax purposes:

Under current law, investment income above a certain level (generally $1,700 for 2007) for a child 17 years old or younger typically is subject to the parents' tax rates, assuming the parents' rates are higher than the child's. That is still the law for this year. (Before the law was changed last year, the kiddie tax applied only to children younger than 14.)

Under the new law, the age limit will increase starting next year to children who are 18, or under 24 if the child is a full-time student. This expanded provision won't apply to some children with paid jobs. A congressional summary says the expanded provision applies "only to children whose earned income does not exceed one-half of the amount of their support." Even so, this new law "is going to affect a lot of people," warns Ed Slott, a New York CPA.

Trust fund babies need to watch out, the Journal article warns: "Income generated by a trust for which a child is the beneficiary may be subject to the kiddie tax, depending on how the trust was set up."

Vanguard Says It with Pictures

As stock and bond certificates become collectors' items, securities become less tangible, less "real." When stocks and bonds are packaged into mutual funds or ETFs, they seem even further removed from everyday reality.

Wasn't Vanguard smart to use these graphics of everyday objects to create visibility and identity for its new ETFs?

More precisely, wasn't Vanguard's ad agency smart?

Debt: Unspeakable Shame or Worthy of Praise?

"Money is known as 'the last taboo,'” writes Shira Boss in The New York Times. But the taboo described in the article applies mostly to negative money: Debt.

Debtors are ashamed when they let borrowing get out of control. As one member of Debtors Anonymous puts it: “I felt like I was a bad person, like I’d done something really bad."

Curiously, some accumulators of negative money feel like members of a small, shameful minority. They don't seem to realize that the neighbor with the designer clothes and the new hybrid Lexus is in an even deeper debt hole.

But maybe we should be borrowing more, not less. So argues Ken Fisher in Learning to Love Debt.

Our negative savings rate? A myth created by Monty-Python-style statistics:

The official saving rate data series is broken. If you buy a stock, hold it for a few years and sell it again, increasing your net worth, you haven't officially saved, according to the official saving rate data. Even weirder, Bill Gates got to be the world's richest man by never saving. He built something that was once worthless into a very valuable asset, but technically, he didn't save. Supposedly, even I got on the Forbes 400 by never saving. The data series simply doesn't account for capital gains--one of the major ways that Americans "save."

Do you have a pension fund or does your employer contribute to a retirement account for you? Officially, that's not saving, either. So what's included? To start, distributions from the aforementioned retirement plan are charged against the saving rate. They're not counted as savings going in, but they reduce savings coming out. And then you pay taxes on the payout.

Even worse is something called "owner's imputed rent." This is what government accountants think homeowners should pay themselves to rent the homes they own and occupy. When you own your home outright, your official savings is reduced by this fictitious amount--a sort of depreciation equivalent. And it's not trivial--the imputed rent charge reduces savings by $1 trillion each year. If we did away with this one line item, personal saving would increase dramatically--from negative territory to over 7% of GDP. Suddenly, we're super savers! Nothing's different but the accounting.

Do you know your ’sukuk’ from your ‘murabaha’?

In Malaysia, private-banking teams are hot, hot, hot – subject to virtual kidnapping by rival firms.

Islamic hedge funds have sprung up in London and the U.S.

Better read this Financial Times special report: Islamic Finance.

More on the 3% Question

An article in Worth last year, Sustainable Spending, sheds light on the 3% rule advocated by Tiger 21 (see preceding post) and reports on interesting research by JPMorgan Private Bank.

One finding: "[A}n investor who lives purely off a fixed pool of assets and annually spends just 5 percent of his net wealth has a one-in-three chance of suffering a 20 percent reduction in his real wealth over the course of two decades."

Can Well-To-Do Investors Live on 3%?

Tiger 21, sometimes billed as the investment club for the really wealthy ($10 million minimum) now has three chapters in California and two in Florida.

Coming soon, a new chapter in Dallas.

Back in March, Tiger 21 told The Wall Street Journal that members tried to spend no more than 3% of their investment earnings:

As a general rule, Tiger 21 members say they have learned 3% of assets is the maximum one can spend to live each year before stressing one's portfolio and tilting it toward short-term income over long-term gains.

That 3% figure probably assumes an investment return of 8% or so before expenses and inflation. Pretty realistic.

But are affluent investors really willing to settle for so little?

Like Sherlock Holmes, who was puzzled to learn that the dog did not bark in the night, I'm surprised to have heard no protests of the 3% figure.

Market Hits New Highs! Time for a Sobriety Test?

The Dow and the S&P are setting record highs.

Even NASDAQ is halfway back to its 2000 high of 5100+.

That's not exactly good news for wealth managers who seek new business.

When investing seems easy, investors don't get queasy. Thus they 're less inclined to seek professional help.

Not to worry. On Wall Street every rampage of the bulls is followed, sooner or later, by party time for the bears.

Need a refresher course on those parties? Read a few excerpts from this John Steele Gordon column in the American Heritage archives:

The Great Crash
[W]hile there are now relatively few who personally remember the Crash of ’29, it has become an ineradicable part of the American folk memory. For while it did not cause it, the Crash happened at the very beginning of what soon became the deepest economic depression the modern world has known. By the time the Dow finally hit bottom in 1933, it was barely one-tenth of what it had been less than four years earlier, and virtually where it had been on January 1, 1900. The capital gains of a third of a century had been wiped out.

The forgotten sequel
The bull market of the early 1980s … while it ended in a similar great crash, on October 19, 1987, was followed by something completely different. The Federal Reserve, having learned the lessons of 1929, acted immediately to ensure liquidity in the market, preventing the crash from feeding on itself. As a result, the uproar on Wall Street did not greatly affect the American economy as a whole. Indeed, the market almost immediately began to climb again, and today … the crash of ’87 is hardly remembered at all.

The terrible slow motion crash
[I]f you look at a chart of the Dow Jones from the mid-sixties to the early eighties, its apparent stagnation was, in some ways, only apparent.…

Lurking within it, hidden by inflation, was one of the worst bear markets in Wall Street history. By the fall of 1973 the “three I’s”—inflation, interest rates, and impeachment—were increasingly worrisome. When the oil embargo caused long lines at gas stations, the market, dropping day by day rather than all at once, lost fully 20 percent of its value between October 26 and December 12.

The next year was even worse. While the gross national product declined by 2 percent in a modest recession, inflation roared ahead at 12 percent. People abandoned the stock market in droves. Thirty percent of American families owned stock in 1970, while only 21 percent did in 1973. New forms of investment, such as money market funds, attracted investors away from Wall Street. With ever-rising interest rates, they were paying 8 to 9 percent, compounded daily, and were much safer than stocks.

As a result stocks sank another 24 percent in 1974. In two years the market capitalization of New York Stock Exchange issues lost almost 50 percent of its value. But had it not been for the galloping inflation those years (around 12 percent in 1973 and 1974) the damage would have been far worse: a drop of more than two-thirds. Not as bad as 1929–33, but still, by a wide margin, the second worse bear market of the twentieth century.

A moderate bear market should be good for the wealth management business. A crash of 1973-74 proportions is another story.

Following that "second worst bear market" we heard bank after bank telling of trust or investment customers who swore they would never buy stocks again. Never!

Even in the mid-1980's, some trust officers felt the crash was still too painful a subject to mention in public.

Wooing the Wealthy with Family Histories

History (see post below) has more marketing sizzle for wealth managers than you might think. The Saturday Wall Street Journal (Rupert Murdoch's favorite publication) tells how Well Fargo's company historian became a valued marketing tool for the Private Bank:

Private banking, long the bailiwick of trust banks or blue-blood institutions like J.P. Morgan Chase & Co., has recently become a fiercer battleground. Trillions of dollars in personal fortunes are expected to be transferred in the next 50 years as baby boomers pass their wealth to the next generation.

Competitors are going to extremes to win the right to manage these funds. U.S. Trust has treated current and prospective clients to events with Colin Powell and Rudolph Giuliani, and last month the New York-based wealth-management firm invited 50 guests to a dinner and concert by the Chamber Music Society of Lincoln Center. Chicago-based Northern Trust Corp. has entertained big clients at spring training baseball games and has organized displays of its clients' art work.

Wells Fargo deploys Dr. [Andy] Anderson. The fourth-largest U.S. bank by market value, it ranked 12th among U.S. wealth managers in 2006, according to Barron's, with $125 billion in private assets under management. The bank's wealth-management businesses -- including investments, brokerage and private banking for clients with at least $1 million in balances at Wells Fargo -- contribute 16% of its profit. Wells Fargo wants to boost that to 25%.

Dr. Anderson, 60 years old, has a Ph.D. in history from Ohio State. After joining Wells Fargo in 1977, he helped organize the archives of the bank, which was founded in 1852 to offer mail delivery, transportation and banking in the burgeoning West. Dr. Anderson also helped create several of the bank's nine Wells Fargo museums.

In February 2003, Dr. Anderson gave a presentation on the company's history to 200 wealthy bank clients at a ski competition in Colorado. Afterward, audience members asked the historian how to research their own families.

Dr. Anderson concluded that rich families were hungry for details of their history -- often not so they could brag, but to impress upon their descendants that family wealth often came with sacrifice: "They want to hear about how hard it was."

Soon the bank began asking regional wealth managers to identify current and prospective clients to invite to family-heritage gatherings.

Sic Transit Gloria History

Gray and raining at Ragged Neck this morning, which may explain why all the news at hand sounds bad:

Not ready for prime time. The New York Times reports that three-quarters of high school students who take a full set of college-prep courses in English, math, science and social studies still enter college ill-prepared for their first-year courses.

Historically illiterate. Another Times story tells us that 53% of high-school seniors lack a rudimentary knowledge of their nation's history. And that's the good news. Five years ago the figure was 57%!

American Heritage folds. The Forbes family bought this once-great publication and probably kept it going longer than was prudent. As you'll read here, this year they tried to sell it. No takers.

American Heritage was founded in 1954 by James Parton, Oliver Jensen and Joseph J. Thorndike Jr., refugees from Life, who from the beginning broke most of the rules of magazine publishing. They determined not to accept ads, for example — on the ground that there was a “basic incompatibility between the tones of the voice of history and of advertising” — and instead charged a yearly subscription of $10, a figure so steep at the time that readers were allowed to pay it in installments. They also published in clothbound, hardback volumes with full-color paintings mounted on the front.

The format was an instant hit with readers, who instead of tossing back issues often shelved them in their bookcases, but it initially confounded the United States Post Office, which decreed that American Heritage could use neither the book rate nor the periodical one. That ruling was eventually overturned, but not until the magazine had almost bankrupted itself by paying for parcel post.

Silver lining. Undereducated high-schoolers and anyone curious about our nation's past can access fifty years of American Heritage articles on the magazine's web site.

Try searching for writings on Wall Street. You'll find a treasure trove of articles, by John Steele Gordon and others:

Learn why, over the years, trading stocks has been like football.

Read a John Steele Gordon column with this irresistible lead:

“As long as there have been bankers and brokers,
there have been people asking what would happen
if they had to earn an honest living.”

Did you know that New York City suffered its first terrorist attack more than eighty years before 9/11?

Mr. Buffett, Meet Mr. Rockefeller

$16,200 per square inch

At Sotheby's Tuesday evening, David Rockefeller's prize Rothko, “White Center (Yellow, Pink and Lavender on Rose),” sold for $72,480,000.

That's major money! The previous auction record for a Rothko painting, set a couple of years ago at Christie's, was $22.4 million.

The undisclosed buyer got a lot for his millions. The painting is over seven feet tall and almost five feet wide. Price per square inch: about $16,200.

David Rockefeller made a handsome profit. Reportedly he purchased the Rothko for less than $10,000 back in 1960.

Mr. Rockefeller doesn't get the entire $72,480,000. A bit more than 12% goes to Sotheby's as a buyer's commission. Also, costs of insurance and other art-related incidentals have to be considered when determining his actual profit.

OK, let's round Mr. Rockefeller's cost basis up to $10,000 and suppose he nets, after expenses and before taxes, about $60,000,000.

On those assumptions, Mr. Rockefeller's art investment has produced an annualized compound return of about 20.3%.

That's a long-term record right up there in Warren Buffett territory. (From 1965 through 2006, Warren Buffet's Berkshire-Hathaway has produced an annualized return of 21.4%.)

Now we know why art is called the beautiful asset.

Taps for Fee-Based Brokerage Accounts?

As mentioned here last month, public sentiment seems to favor the notion that brokers should offer clients who set up fee-based accounts the same sort of unbiased advice expected from registered investment advisers.

The SEC exempted brokers from anything so "fiduciary." But a U.S. court of appeals, at the urging of the Financial Planning Association, struck down that exemption.

Now, as Reuters reports, the SEC had announced it will not challenge the court decision.

Or, as the NY Post puts it, SEC DISSES $300B IN FEE-BASED STREET BIZ.

Will brokers try to adapt to the F-word? Probably not, according to the press reports. Instead, clients with fee-based accounts will be offered regular brokerage accounts.

Indexing the Booming Art Market

This year's marketing award for the most irresistable subject line on a commercial e-mail, financial services division, goes to:

Beautiful Asset Advisors

The message turns out to be from Jianping Mei and Michael Moses, professors at NYU's Stern School of Business and notable believers in art as an investment asset.

The e-mail announces their revamped web site, www.artasanasset.com, where they hope to make a little money from their proprietary data base of art prices recorded at auctions.

By the professors' reckoning, art outperformed stocks in the late 20th -century boom. Stocks have beaten art since, but in the very long run, Mei and Moses figure, fine art has outperformed bonds or gold.

The article from which this Financial Times graphic was taken is posted here.

See also Artful Investor in Business Week.

Personal note: The art market is unquestionably booming. Nevertheless, I'd rather be an executor selling than a hedge fund manager buying.

Mrs. Watson's Meticulous Will

Remember A tricky estate planning case, in which Olive Watson's adoptive daughter (and former lesbian lover) sought a share of the fortune left by Olive's father, Thomas J. Watson, Jr.?

Olive's mother, also named Olive, died at age 86, leaving the largest estate, over $126 million, to pay Connecticut probate fees last year.

Mrs. Watson made a new will, running more than 30 pages, shortly before her death. As described in the Hartford Courant, it's the work of a woman who clearly tried to leave no loose ends.

Specific pieces of jewelry were labelled for her granddaughters.

Mrs. Watson's six children will share summer usage of the 300-acre Watson compound on North Haven island in Maine:

[T]ime slots "shall be allocated on a rotating basis an equal period of use of such main residence during such period," Watson's will states.

What's more, "There should be at least a day or two between each such allocated period to permit the house to be cleaned and put in order for use during the next period."

Thomas J. Watson III, her oldest son, gets his choice of her cars, though she deemed the choice a formality: "I expect that my son will select my Mercedes sport coupe."

Summer of 1909, by Frank W. Benson, was painted at North Haven

Costly Glitch For 401(k) Heirs

Children and other beneficiaries who inherit 401(k) plan assets now may move the money into IRAs and spread withdrawals over their life expectancies, just as surviving spouses have been able to do.

But it's not that simple, according to this Business Week story.

Can Americans Learn to Save?

Back in the 20th century, investment gurus pointed out that most Americans want to be poor. (Why else would they have failed to save a nickel?)

In the early 21st century, only about half of all workers participate in formal retirement plans. To encourage greater coverage, a coalition of business, employer and retiree groups, the Conversation on Coverage, has come up with a bundle of ideas. They include

an annuity plan: The Guaranteed Account Plan (GAP)

a simplified defined benefit plan: The Plain Old Pension Plan (POPP)

a new, portable reitrement account: The Retirement Investment Account (RIA)

a multi-employer small business plan: The Model T Plan

See the group's report: Covering the Uncovered.

Why Trust and Investment Pros Should Raise Their Fees

The way the New Rich spend is "reprehensible," says money manager Steve Leuthold.

Nonsense, retorts Floyd Norris($) in today's New York Times.

When, for example, a table of bon vivants at a chic New York nightclub runs up a liquor bill of from $3,000 to $12,000 per night, that's not wretched excess. They're merely spreading their wealth:

Mr. Leuthold is an old friend of mine, and I am surprised he does not understand and applaud the economic function of such things. It is a classic example of private enterprise stepping in to fill a void left when the government no longer fills a role it once did.

That role is income redistribution.

Half a century ago, when Dwight D. Eisenhower was in the White House, personal income tax rates ranged up to 91 percent on income of more than $400,000. The rate for those who made more than $100,000 a year was 75 percent.

Adjusted for inflation, that would be equivalent to around $3 million now for the 91 percent rate, and $730,000 for the 75 percent rate. The current top rate is 35 percent.

The high tax rates of generations past were often avoided or dodged through shelters, Norris concedes. Still, he sees in high rates "a certain egalitarian spirit . . . a reaction to the excesses of the very wealthy ‘robber barons’ of the late 19th century."

Those days are gone, and it may be that they cannot come back, even if the political will arrives to bring them back.

* * *

But whether or not the government can redistribute the money, the private economy will try to do it. The wealthy are persuaded that they simply must be in hedge funds and private equity funds — and should pay a fee to a bank for getting them into such funds. That is on top of the high fees charged by the funds themselves. The investments may or may not do well, but those collecting the fees are sure to prosper.

Wealth managers of the world, unite! Raise your fees and perform a public service!

How Posh Hotel Sizes Up Guests

Any wealth-management team as attentive to its clients as the Peninsula Beverly Hills hotel is to its guests should be in good shape.

Wall Street Journal readers (and online subscribers) should check out the story.

Lessons include:

These days, good form dictates that only billionaires walk around dressed like the millionaire next door.

See that woman with good jewels but poor clothes? She may have recently inherited money.

The Queen's Own Trust Officer?

Coutts is reputed to be the bank of the British Royal Family. We happened on the Coutts Woman magazine earlier this year, when telling you the remarkable story of Harriot Mellon.

When we checked back with the online magazine, we came across this profile of Steve Harvey, who heads Coutts' trust department. It's a nice little feature, whether or not Steve does business with Her Majesty.

Here's to the Queen — and Other Fiduciaries

From England the U.S. inherited the concept of trusts and trusteeship. Trustees are fiduciaries, required to put the interests of the people they serve ahead of their own.

Being a fiduciary is hard, Even if you're a royal fiduciary.

For proof, look the lives of Elizabeth II, who recently visited Jamestown, Virginia, for the first time in fifty years, and her father, George VI.

Elizabeth must have been about 11 when her shy father learned that his life as minor royalty had been shattered by his older brother.

As the old Calypso ditty reported, "It was love, love, love alone/That caused King Edward to leave the throne."

Taking over for his abdicating brother Edward, George VI reigned during the horrors of World War II and presided over the dissolution of the British Empire. (He was the last Emperor of India.)

Not long after the war, Elizabeth had to follow in his footsteps, giving up any semblance of a normal "country gentry" life. She became a symbolic fiduciary for her people, and along the way she endured some "horrible years."

On Wall Street, being a fiduciary is so hard that brokers don't want to try it. Yesterday's Wall street Journal (subscription) explained:

What kind of legal protection should investors get when seeking advice from securities brokers? That issue is at the core of a controversy involving fee-based brokerage accounts -- where investors had an estimated $277 billion at year end.

The Securities and Exchange Commission last year put a new rule in place that had the effect of encouraging the use of fee-based accounts.


The SEC was aiming to reduce stock brokers' incentive to make unnecessary trades to generate commissions, so the commission said that stockbrokers overseeing fee-based accounts were now exempt from a "fiduciary duty" to clients when providing "incidental" advice tied to buying and selling securities. A fiduciary duty requires acting at all times in a client's best interest.

In a nutshell, that means brokers could give clients advice with less worry about later tangling with them in litigation.

But the Denver-based Financial Planning Association, which represents independent broker-dealers and registered investment advisers, cried foul. The FPA argued that stockbrokers were raking in the same fees as financial advisers for similar advisory work -- without having to meet the stiff legal standard they do.

In March, a federal appeals court struck down the SEC rule. The court said that the SEC lacked authority to create the rule to exempt certain broker-dealers from registering under the Investment Advisers Act of 1940. If the SEC doesn't file for a re-hearing, the ruling will go into effect on May 21.

What do you think? Should brokers be held to fiduciary standards even though, officially, they give only "incidental" advice?

"More than 90% of investors surveyed believe that the same investor protection rules should apply to both stockbrokers and financial planners when they offer the same kind of investment advice services," according to a study co-sponsored by a group representing registered advisers.

The survey also found that "fewer than one out of three U.S. investors correctly understand that the 'primary service' provided by stockbrokers is the buying and selling of stocks, mutual funds, bonds, etc. -- not investment advice."

How Offshore Tax Havens Beat IRS Audits

More middle-class taxpayers face IRS audits:

Since 2000, the tax authorities at the IRS have nearly tripled audits of tax returns filed by people making $25,000 to $100,000. Audits of these middle-class taxpayers rose to nearly 436,000 last year from about 147,000 returns in 2000. For these 61 million individuals and married couples, nearly half of all taxpayers, the odds of being audited rose from one in 377 to one in 140.

High-income taxpayers also face more audits:

Audits of those earning $1million or more increased by 33 percent from 2005 to 2006, the IRS reported. And audits of individuals making more than $100,000 jumped about 18 percent from 219,208 in 2005 to 257,851 in 2006 - the highest number in more than a decade and more than double the amount conducted in 2001, the agency said.

One problem: According to this New York Times dispatch, the really big fish are escaping, thanks to offshore tax havens.

The Internal Revenue Service is curtailing audits of many people who use offshore tax havens, even when agents see signs of tax evasion, because agents fear they cannot meet a three-year deadline for finishing an examination, Congressional investigators have found.

In a report to be released on Thursday, the Government Accountability Office found that I.R.S. agents are so hobbled by “dilatory tactics” by offshore taxpayers and other problems that it takes almost two and a half years to complete a typical audit.

Many I.R.S. agents told the G.A.O., the investigative arm of Congress, that the “safest way” was often to stop an audit prematurely and sometimes to refrain from starting one in the first place.

The I.R.S. reported that almost $300 billion in investment and business income was moved out of the United States in 2003. Analysts at the Joint Committee on Taxation have estimated that the annual outflow has shot to more than $400 billion since then.

Which tax havens might appeal to your clients? To cite only two out of many:

Andorra

Lots of fresh, mountain air, and there ought to be good skiing.

Isle of ManDo business in the City Thursday morning. Stop by your very private Isle of Man bank in the afternoon. Have dinner in Scotland and be ready for an early outing on the links Friday morning.

Thanks to Wikipedia Commons for the maps.

Deathbed Confession

Don't have time to read the print edition of The New Yorker, much less browse the magazine's web site.

Turns out the site now features animated versions of assorted New Yorker cartoons. Here's one vaguely related to wealth management.

The best animated cartoons seem to feature cats and dogs. The critters, not the stocks.

Estate Tax Scams

In today's Wall Street Journal (subscribers only), a retired estate tax auditor, Lorraine F. New, recalls the devious efforts made to avoid tax.

Turning one-night stands into "marriages" in order to claim the marital deduction is one popular dodge.

And then there are gifts:

Shrinking the taxable estate by making gifts to family is a tried-and-true method for estate planning. But the unscrupulous can exploit it.

The federal gift tax exemption allows a person to give away a lifetime total of up to $1 million to friends, relatives or others without paying federal tax. One may also give away an unlimited number of annual gifts of $12,000 to any number of individuals without eating into the $1 million gift exclusion.

One case -- still waiting to be resolved when Ms. New left the IRS -- involved a man with power of attorney for his seriously ill aunt. On a Friday, he wrote a slew of checks in her name to relatives and even family members of his attorney. The woman died that Sunday. On Monday, her nephew appeared at her credit union to transfer $100,000 into her checking account to cover the checks. When questioned, he told the teller his aunt was still alive.

The teller, on lunch break, spotted an obituary of the woman and stopped the check.

Law Day

The online WSJ law blog reminds us that today is Law Day.

As the law blog posts notes, Law Day was created in 1958 (presumably to distract the populace from labor agitators celebrating May Day, parading around the maypole and drinking who knows what).

Law Day was indeed a bigger deal in the 1960's. Bank trust departments ran Law Day ads, seeking to curry favor with lawyers from whom they hoped to receive referrals.

In time, alas, Law Day turned into to Lawyer's Day. As a comment on the law blog notes, now it's an occasion for the Practicing Law Institute to hold a book sale.