[T]rusts are no longer the province of the very rich. They have morphed over the years into useful and straightforward vehicles to protect assets in life from creditors and lawsuits and to pass them to heirs on your own terms.
Try the following thought experiment, suggested by the mathematician John Allen Paulos, in his book “Innumeracy”: Without doing the calculation, guess how long a million seconds is. Now try to guess the same for a billion seconds. Ready? A million seconds is less than twelve days; a billion is almost thirty-two years.
As watchers of the Australian Open tennis know, January 26 is Australia Day. (At this writing, it's already January 27th down under; the celebrants are presumably back at work.) Seemed like a good time to visit the Aussie version of Yahoo finance, from whence comes this column by stockbroker Marcus Padley, calling for a new sort of risk ratings:CEOs don't understand their own companies, so how can an analyst with limited time and selective exposure to the company do any better.
The last year has taught us that we will never know everything about some companies let alone be able to predict their futures. It has also made it clear that we have been making a heck of a lot of more assumptions and taking a heck of a lot more risk in the investment game than we knew.
We complain that the broker research has served us badly, especially in the last year, but as unimaginable disasters unfold it is becoming clear why. Because researchers have no chance. Large complex companies don't even know what they're doing so no manner of "in depth" research is ever going to be better than a best guess. The inadequacy of research is excusable because it is understandable and inevitable. What has cost us is our assumption that some of it is more credible than it is.
What we need is a Research Risk Rating (RRR) for each stock. An investment bank for instance would have a "High" RRR. It is almost impossible to know what they are doing.
Photo via Wikimedia Commons
This recession is not a failure of market economics. It is a reassertion of market economics after a decade in which we paid ourselves more than we were producing, and funded it precariously and temporarily by complicated credit instruments that it took a while for the market to rumble. Now a prosperity that always baffled ordinary citizens has collapsed. The collapse of confidence is not irrational; it's the correction to a long run of irrational confidence. All that stuff about the emerging Asian giants wasn't just phrasemaking for party conference speeches. It was true. We're falling behind. We face a mountain of debt: the difference between the life we are able to sustain and the life we were enjoying.
Figuratively speaking, mighty Wall Street is disappearing. Today Merrill Lynch moved another step closer to the history books with the resignation of its ex-CEO from BofA. A year ago, NYSE Euronext's acquisition of The American Stock Exchange removed another segment of Wall Street history – a reminder of the days when much of The Street's business was conducted…in the street.
How will private-banking and brokerage-account customers be affected?For a preview of what could lie ahead, The New York Times suggests, we should keep an eye on financial developments in the U.K.
That depends on whether the government takes a short- or long-term view. If it intends to be a long-term owner, then it will probably sell off the brokerage, investment-banking and other auxiliary operations as nonessential to the core banking business. If, however, the government sees its step as a short-term fix to shore up the system temporarily, then it may hang on to such operations.
What other products and services might be affected?
If the government takes over a bank, management will be under even more pressure to cut costs. Expect more branch closings and poorer customer service. "Think of the bank as the DMV of the future, run by government employees who have little upward mobility," says [Dave Kaytes, managing director at Novantas].
[S]harply lower prices, combined with rock-bottom interest rates, make this an unusually attractive time for many people to transfer wealth to the next generation.Wealth-holders considering GRATs may want to get a move on. Reform is in the air. In the current Estate Planning Studies, Louis A. Mezzullo writes: "Future legislation…could require that the minimum value of the remainder interest in a GRAT must be at least 10% of the fair market value of the transferred assets."
Among the tax-smart strategies advisers are recommending are low-interest loans to other family members and "grantor-retained annuity trusts," or GRATs -- which are designed to transfer assets to family members while minimizing gift and estate taxes. These and other interest-rate sensitive techniques are likely to look even more attractive next month, thanks to even lower rates.
However, pre-retirees who had done more planning reported worse losses, on average, than those who hadn’t planned. Retirement planning strategies encourage investors to diversify beyond safe vehicles such as bonds and CDs. Respondents who had planned were less conservative, in general than those who didn’t. Before the meltdown, this strategy was much more beneficial according to Consumer Reports’ 2007 Retirement Survey. But it proved punishing during the unusually severe market downturn of recent months.What's more, those who used financial planners did no better than those who managed on their own.
My experience has taught me to not commit any figures to scrutiny when, as in this case, it can be construed as ‘bible’ and subject to criticism. In this present instance, quite severely. I explained how the profit and loss can be computed from the records you now hold in your possession that Bernard L. Madoff and I supplied.Despite this gross irregularity, the investigation essentially petered out and a settlement was reached. Avellino went back to funneling money to Madoff, according the Times. Interesting conincidence: Avellino's lawyer in 1992 was Ira Sorkin, Madoff's lawyer today.
Citigroup is spinning off its full-service brokerage, Smith Barney, into a joint venture with Morgan Stanley. Sounds fairly straightforward. Yet as this post on Seeking Alpha suggests, the line between private banker and full-service broker isn't exactly clear:Citi’s private bank (focused on people with net worth of $10 million and up) and brokers who are housed within Citibank branches will not be part of the joint venture. Morgan Stanley’s (MS) franchise focusing on high net worth individuals, analogous to the Citi Private Bank, will indeed be part of the joint venture.* * *Citi…complicates its own dismantling with respect to the Smith Barney transaction because, well, it’s not easy to answer the question, “Which advisers are part of Smith Barney?” For years Smith Barney has been hiring away brokers who focus on high net worth individuals but didn’t want to be part of the private bank–these teams had a structure and style all their own. These teams also use the private bank’s platform and infrastructure. Where do these brokers go? With the joint venture or to the private bank?
Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking [hedge fund] managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds?Investors who were "Madoffed" by their fund of funds are already pondering that question.
If the multimillionaires of Tiger 21 are alarmed, the global financial crisis must be bad. "One of the biggest surprises was how complex the world of finance is," says the group's founder.
Waterford Wedgwood might not be in bankruptcy if Wedgwood's founder were still around. Even Merrill Anderson's newsletters may owe Josiah Wedgwood a debt."Most of the investments I made in individual stocks went bad because managements were lying. They are the source of the information for the markets." His conclusion: "It is even dumber to pay an expert to talk to the liar for you and charge you 1% of your portfolio."
According to the lawyers, their clients believed for more than a decade that they had an account at the Westport National Bank, a division of Connecticut Community Bank in Westport, from which they had received statements for many years. Early last week, they learned their money had actually been entrusted to Mr. Madoff, the lawyers said.The lawyers' clients are said to have received statements from the bank showing charges for custodial and record-keeping fees of 4 percent a year.
In 1999, at the request of an unidentified local company, Westport National Bank replaced another financial institution as the custodian for a number of individuals and entities that were investing with Bernard L. Madoff Securities, [Richard Cummings, president of Westport National Bank] said.
"Nearly all of these individuals and entities had been investing with Madoff long before the Bank was founded in 1998," Cummings said.
The custodial agreement "reflected the fact that each custodial client directed the Bank to give Madoff 'full discretionary authority' to invest the custodial client's funds," he said.
"Each custodial client specifically acknowledged in writing that the client had not relied on the Bank in choosing to invest with Madoff," he said.
The Ragged Neck Division of the Trust and Wealth Management Marketing blog is pleased to announce the appointment of P. S. Oliver Storm as Chief Risk Officer.Can anyone doubt that the demands on people to make reasonably intelligent choices with their money has so far exceeded their wisdom to do it, that maybe we should at least try to figure out some way to close the gap? If many presumably sophisticated Madoff investors were ruined, what chance do the rest of us have?"One lesson of this year," Applebome concludes, "is that these days, no one, even the most financially secure, can afford to be stupid." True enough. But from the times of Tulip Mania and The South Sea Bubble, human stupidity and investing have gone hand in hand.
In the Wealth Report, Robert Frank sees a post-Madoff flight to big-bank investment services. But he says the fleeing investors won't be happy about it:Big banks call it “flight to quality.” But it is more like flight to a lesser evil. You can go to “your guy” and risk losing everything. Or you can go to a big name and risk losing just part of it.What's more, some of the big names may have themselves led clients into Madoff's clutches. Ben Stein in the NY Times tells how a wealth-management team from "a major investment bank" tried to get him to move his money to Madoff two years ago. Was the team naive or greedy?
Some choice.
Posts
