Friday, March 30, 2007

Can Brokers Learn the Fiduciary Hip-Hop?

Under the SEC's so-called "Merrill Lynch Rule," brokers could charge asset-based fees without observing the fiduciary standards required of registered investment advisers.

In a 2-1 decision, a U.S. Court of Appeals has decided the SEC goofed.

Said the president of the Financial Planning Association, "After seven years of contentious debate, a court of law has rejected the SEC's untenable argument that it could exempt Wall Street from the fiduciary duties of the Investment Advisers Act of 1940."

Thursday, March 29, 2007

What the Rich REALLY Want

Remember when Volkwagen bought the car division of Rolls Royce, only to discover that the license to make and sell Rolls Royces actually belonged to BMW?

Poor VW was left with naught but the Bentley name to work with. So they did, and Robert Frank, in this post to his WSJ Wealth blog, cites their success as a lesson in how actually to market to the rich:
1. Create an amazing product and service experience that no other car maker offers.

2. Price that amazing product high.

3. Watch the profits roll in.
How strange, Frank observes, that the rich are endlessly surveyed. Why does their craving for quality and service seem as mysterious as the pronouncements of the Federal Reserve? His good advice:
Spend less time trying to divine the mysterious workings of the millionaire mind and more time creating the best product [or service] in the world.

A $100 million oversight

Walter C. Anderson pled guilty to fraudulently evading $100 million in income taxes, the largest individual tax cheating in history. Tax Notes Today ($) now reports that, although Anderson has received a nine-year prison term, restitution of the tax money can't be ordered "thanks to sloppy work from Justice Department prosecutors."
Channing Phillips, spokesman for the District of Columbia U.S. Attorney's Office, acknowledged in a phone interview with Tax Analysts that prosecutors had mistakenly listed the wrong statute in the agreement. The judge still may have been able to order restitution as a condition of probation, but prosecutors included no probation clause.
Apparently the civil recovery channel is still open to the IRS, but one wonders whether there may be additional U.S. Attorneys who need to be fired. Oddest detail of all: Anderson was represented by a public defender!

Wednesday, March 28, 2007

Brooke Astor's Bold Investments

Tony Marshall, Brooke Astor's son, claimed to have done well investing her portfolio, turning $19 million into $80 million or more.

Sure enough, an inventory of Mrs. Astor's estate last fall, reported in The New York Times, shows investable assets totalling $79.5 million.

Her asset allocation looks much more aggressive than that of the average multi-millionaire, not to mention the average 105-year-old.
Hedge funds and private equity 59%

Stocks 30%

Bonds 10%

Cash and equivalents 1%
For comparison, Northern Trust's 2007 Wealth Survey found the average asset allocation for those with $10 million or more was 40% stocks, 15% cash, 11% bonds, 11% private equity and 2% hedge funds, plus allocations to real estate and commodities.

Hedge funds, however, are a structure for pooled investing, not an asset class. The Times reports that Mrs. Astor had $20.6 million in a hedge fund that invests in equities. That suggests that over 50% of her investable wealth actually was allocated to stocks.

Monday, March 26, 2007

Secret Wills of the Royals

What sex scandal did Buckingham Palace seek to cover up in 1910 by requesting that wills of members of the royal family be kept secret?

What happened to the hoard of jewels known as the Grenville inheritance?

Did Princess Margaret leave a legacy to an illegitimate descendant?

The Guardian tells tales of mistresses, indiscretions and cover-ups.

Watch Those Discreet Swiss Banks

Swiss-based global giant UBS may pursue the merely affluent through its U.S. brokerage operation, but smaller Swiss banks remain focussed on the really rich, The New York Times reports. And not just the European rich:
Switzerland is known for its banks, some of them now global giants . . . . But it is the smaller, more discreet banks that are changing the most these days.
[Pictet et. Cie.] once limited its investments to stocks and bonds — heavy on the bonds — but now has $10 billion of its clients’ assets in private equity and $15 billion in hedge funds.

From Geneva, a centuries-old fortress that has long protected the financial assets of the world’s wealthy, Pictet and other private banks have transformed this secretive Alpine cloister of “little” neighborhood banks into a more aggressive haven for the global elite.

For generations, Europe’s wealthy journeyed through mountains and valleys to quietly stash their money with Switzerland’s bankers, famed for taking their secrets to the grave. Now the Swiss can be found throughout the world, selling more sophisticated investment vehicles to attract high-net-worth individuals, mostly multimillionaires.
Competition isn't a one-way street:
As Swiss bankers penetrate markets abroad they are facing like-minded competitors from elsewhere in the world. Dubai and Singapore have cultivated sophisticated private banking hubs, offering discreet financial services and a tax haven aimed at luring away wealthy clients. And just as the Swiss have moved overseas, foreign banks like Citibank have flocked to Switzerland. Geneva, once a sleepy lakeshore town, now has branches of 100 foreign banks.

Speaking of Citibank, when the news broke that Citigroup was planning to shed thousands of jobs, Citi CEO Charles O. Prince was in India, talking to thousands of his employees:
Citigroup, like other global banks, has been expanding its outsourcing in India beyond consumer services like bill payment, to include highly skilled areas like research, investment banking and credit analysis of non-Indian companies and deals.

Citigroup has over 600 such employees in India, and it is growing that number gradually.
All told, Citi has around 32,000 employees in India. It's not known how many additional hires will be made as a result of downsizing Citi's U.S. work force.

Citi may find it easier to hire private bankers in India than in Switzerland. judging from the first Times article linked above:
In Geneva, bankers paid to create an institute at a university to train private bankers. The long-term goal foresees the banks helping finance as many as 50 chairs in finance at Swiss universities. Already, recruitment drives have taken them to the United States.
Just another indication that those hoping to make big money should go to work serving those who already have it.

Saturday, March 24, 2007

Merrill Anderson's first newsletter

The great trust marketing salesman, Merrill Anderson's Sam Heitzman, offers a suggestion:

When my eyes got too blurry to continue with "Animals in Translation" this morning I picked up Town and Country. This was a celebratory issue marking the 160th year of publishing same. Our record is not as great but in our business it has been outstanding. So something like:

This April, Town and Country magazine is celebrating its 160th year. That is an incredible feat. We have not done quite that well, as our company has only been in existence since 1934 but in April, 1944 our monthly investment and trust newsletter was first published.

Our first customer was the First National Bank of Kansas City, MO. Our second customer, Mercantile Trust Company of St. Louis, MO. Times have changed and so have our franchisees. Our Kansas City customer is now Country Club Bank and Trust and in St. Louis the newly formed Central Trust and Investment Company is using our newsletter.

We are very pleased to have our newsletter used for 63 consecutive years in the show me state!

I found that first newsletter in our archives. However, we published it in March, not April. Sure enough, First National Bank of Kansas City, Missouri was the sponsor. Here it is:

(Click on the image to enlarge it.)

The page one article of that newsletter involved a question of intestate succession—point being that everyone needs a will. Page 2 reported on the Revenue Act of 1943, while page 3 discussed the economic implications of impending end of WWII, a framework for urging the continued importance of living trusts.

There's an interesting history lesson in these archives.

Teeing Off on Trusts and Wealth Mangement

Tiger's threatening to win the World Golf Championship yet again. But the real golf action takes place up in Orlando, where the ABA Golf Tournament kicks off Sunday at 8 a.m. at the Hyatt Regency Grand Cypress.

After the golf comes the Wealth Management and Trust Conference, where various aspects of the long transition from a service culture to a product sales culture will be discussed and scrutinized.

As we noted a year ago, separately-managed accounts are on a roll. Wire-houses dominate the SMA business, and the field of packaged fee accounts in general.

Can you name all eight types of packaged accounts? For a helpful guide, see this research summary from Tiberon Strategic Advisors.

(Who knew that annuity wrap accounts existed? They don't seem to be catching on, which is reassuring.)

Incidentally, Charles "Chip" Roame of Tiberon is on the program at the Conference.

Friday, March 23, 2007

"Your demise guaranteed or we pay the tax"

Professor Beyer reports an excellent estate planning spoof.

Financial Savvy Peaks at Age 53

According to research by four economists, reported in yesterday's Wall Street Journal, the ability to make sound decisions about personal finance seems to peak around age 53.

The middle-aged strike better deals on home-equity loans. Even by age 46, those signing up for credit cards offering "Zero percent on transferred balances for six months!" may be savvy enough to realize they can't use the new card for six months.

(Reason: Payments for new charges on the card would reduce the zero-rate transferred balance, not the new, high-rate charges.)

Older people in the study, like the young, seemed less savvy. Question is, can you compare an 80-year-old who has to take out a home-equity loan (presumably without the ability to pay it back from earned income) with a garden-variety, middle-aged home-equity borrower?

If age 53 or thereabouts is the age of reason for managing credit, could it also be the age of reason for investors? Does the age of reason last longer for investors than for debtors? The Journal asked three distinguished oldsters.

Gerard Roche, 75, says he hired an investment adviser soon after turning 50 because "my cognitive skills weren't as sharp or intense." Mr. Roche also implies that he doesn't worry much about his portfolio's performance. (Clone that man! He's the perfect wealth-management client.)

Raymond Troubh, 80, disagreed. "Experience is a far better teacher than relative youth. . . ."

John Bogle, Vanguard's co-founder, also feels he's as sharp as ever. Investing is different from dealing with personal credit, Bogle suggests. Investing you learn from hard experience. Dealing with credit requires the ability to uncover a series of new and hidden hazards. (When everybody catches on to the zero-rate-on-transfers scam, card issuers will move on to some intricate new ploy.)

Support for the notion that experienced investors don't outlive the age of reason comes from Northern Trust's Wealth in America 2007. Somewhere around age 53, active investors tend to settle down and become buy-and-holders. Even in old age, they probably don't return to active trading.

Wednesday, March 21, 2007

The Car-Crazy Hedge Fund Managers of Greenwich

Number of motor vehicles registered in Hartford, CT, population 124,387:
Under 48,000

Number registered in Greenwich, CT, population 61,972:
About 66,000

The Wealth Report at called attention to the Hartford Courant article containing those fascinating data.

How did Greenwich end up with more cars than people? Well, hedge fund tycoon Paul Tudor Jones II owns 15. Steve A. Cohen and his wife make do with 13.

We're not just talking Corollas and Civics. The roster of Greenwich-registered vehicles includes:
  • 3,769 BMWs
  • 3,474 Mercedes Benzes
  • 931 Porsches
  • 94 Ferraris
  • 90 Bentleys
  • 65 Aston Martins
  • 40 Maseratis
  • 39 Rolls-Royces
  • 4 Maybachs
  • 1 Lamborghini
As Robert Frank of The Wealth Report points out, that means one out of every ten residents of Greenwich owns a BMW or a Mercedes.

Hedgers aren't the only car-crazy people in Greenwich. Designer Tommy Hilfiger and family own 20, including a million-dollar Enzo Ferrari!

Tuesday, March 20, 2007

Another Survey Looks at the High Net Worth Market

Not to be outdone by Northern Trust, whose wealth survey we mentioned recently, Fidelity has conducted a survey of millionaire investors.

As reported here, Fidelity finds (as did Northern) that about a third of millionaire investors are self-directed and have no hired or commissioned adviser.

A new business opportunity? Maybe. But if you believe Northern's findings, your chances are better if you're a traditional broker, and you'll probably need the benefit of a referral:
Traditional, full-service broker firms remain the provider of choice for millionaires. Forty percent of millionaire investors consider a full-service brokerage to be their primary provider, up seven percentage points from the previous year. Online or discount brokers are a distant second as primary provider. Relationships, in the form of referrals or a previous relationship within the firm, are the key reason for beginning the relationship with full-service brokers and most other providers.

Millionaire investors have complex needs and embrace advice, as nearly six in 10 can best be described as “advisor-oriented,” meaning having either a collaborative or discretionary relationship with their primary advisor. Nearly one-quarter prefer to use an advisor as needed for selected financial events, but do not have an ongoing advisory relationship. Two in 10 millionaire households are primarily selfdirected.

Monday, March 19, 2007

It's not about the money

Arthur Brooks asks in today's Wall Street Journal ($) What's Wrong With Billionaires? He rejects the stereotypes of greed, of wealth acquisition as a kind of arms race among the upper classes to see who can own the most.
These explanations for the acquisitive tendencies of the world's billionaires (and all the rest of us, for that matter) are convenient for social critics and tax collectors, but they ignore an explanation that doesn't reflect quite so poorly on the rich: What people hunger for is not money per se, but success at creating value. Money just tends to come along for the ride.

Interestingly enough, that's the perspective that we always try to inject into our newsletters!

Sunday, March 18, 2007

Watson case update

Last month I wrote about the strange case of a woman claiming to be IBM founder Thomas Watson's granddaughter by reason of adoption. In that status she would be entitled to a share of a substantial trust created for his grandchildren. The unusual element in the story is that the woman, Patricia Spado, was the lesbian lover of Watson's daughter, adopted by the daughter even though Spado was the older partner. They broke up a year later.

Spado is pressing her claim, reports the New York Times today. The article provides a bit more background on the legal arguments, but not much in the way of new facts. Except, perhaps, for this ironic twist. Spado claims to need to money to care for her biological mother. Evidently the adoption didn't really severe the original mother-daughter relationship after all.

Saturday, March 17, 2007

Trusts: a View from Ireland

Dating from the time of the Crusades, the Trust is the oldest, the most enduring, and one of the most flexible and useful, creations of the Common Law.
Celebrate St. Patrick's Day by visiting the trust services page at Bank of Ireland.

You might want to borrow some good Irish prose about choosing a corporate trustee:
When should you involve a Professional Trustee/Executor?

In making this assessment, one has to evaluate costs and benefits. A professional Trustee/Executor's costs would have to be justifiable in terms of the value they add to a situation. This added value is most evident where a mix of the following factors apply:
Where asset values are substantial it will be critical to ensure that the requisite professional skills are available.

Certain categories of assets bring added complexity to the task of administering them for example, Marketable Securities, Real Property.

Very often, a core requirement will be to appoint a Trustee who can be relied on to act objectively and impartially. This is particularly important where a balance has to be struck between the interests of different beneficiaries. For example, life tenants will require an income stream, while remaindermen will focus on capital appreciation. This can have a significant bearing on investment and distribution policy.

Trusteeship is a fiduciary capacity which involves risks and responsibilities, which lay Trustees tend to be reluctant to assume. The higher the asset values, the more significant this consideration.

A professional Trustee, particularly if it is a corporate entity, will endure. This is a key factor where a Settlor's plans will be required to span several generations. Confidentiality and security are also assured.
If Bank of Ireland looks particularly impressive, it's because the building once housed the first Irish Parliament.

Friday, March 16, 2007

Wealth In America 2007

Credit Geoff Considine at Seeking Alpha for calling attention to Northern Trust's second survey of relatively wealthy Americans. Would-be wealth managers couldn't ask for a better introduction to the high-net worth market.

They'll learn, for instance, that folks with $10 million or more don't invest like folks with only $2 or $3 million. It's the wealthier group that's into private equity, hedge funds and other alternatives to blue-chip stocks.

Does this suggest that the SEC's proposal to bar investors with less than $2.5 million from access to hedge funds is unnecessary?

Northern's survey also reveals how investments (and attitudes) vary according to a high-net-worth individual's age.

No surprisingly, the survey indicates full-service brokers are far and away the investment adviser of choice for those (about 60%) who seek advice.


Recent prevailing wisdom suggests that inheritance is no longer a significant source of wealth in most cases. But those surveyed for Northern seem to be doing pretty well as heirs:
Slightly over one-third of millionaire households (35%) have received a sizeable inheritance. Their inheritances average in excess of $200,000, with nearly 25% valued at $1 million or more.
* * *
Expectations for future inheritances are relatively strong among millionaire households. About one-quarter expect to receive a sizeable inheritance, averaging close to $850,000.

Should the SEC Save the Gotrocks from Themselves?

As we noted last year, in his 2005 Berkshire-Hathaway letter Warren Buffet fretted at how assorted investment advisers and consultants were picking on the family he called the Gotrocks. Things went from bad to worse, wrote Buffet, when the investment helpers turned into higher-priced "hyperhelpers:"
The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume.
Now, Robert Frank notes in the WSJ Wealth Report (subscribers only), the Securities and Exchange Commission proposes to save some of the not-so-rich Gotrocks from themselves by upping the wealth required to be an "accredited investor" in hedge funds. As Frank notes in his Wealth Report blog, the change is fairly drastic:
To invest in hedge funds today, investors need to have $1 million in net worth (including the value of their primary residence), or income of at least $200,000 for individuals or $300,000 for households. The SEC has proposed raising the bar, requiring investors to have $2.5 million in investible assets.
Frank includes a link to the mostly indignant comments the SEC has received from various Gotrocks family members.

Thursday, March 15, 2007

Estate tax regulatory projects

At a meeting of the D.C. Bar Taxation Section's Estate Planning Committee earlier this week, an attorney Treasury's Office of Legislative Counsel previewed near-term guidance priorities, reports Tax Notes Today ($). Watch for new Regs. on
• section 2053, post-death events;
• value of retained annuities under section 2036 and 2039;
• section 2642, qualified severance of a trust;
• charitable lead trust forms;
• transfer tax aspects of 529 plans.
Plenty of newsletter fodder when these projects come to fruition.

Wednesday, March 14, 2007

Sex and the Defined-Contribution Plan

The Senior Assistant Blogger's wife is virtually perfect, but she does watch Family Feud.

Yesterday one question was, "What might you do to make taking a bath more sexy?"

Get your significant other to join you was the number one answer.

Other answers included scented oils and candles.

The next guy in line was hard up to add to the list, until he thought of the lubricating jelly his wife used. Something with a "K" in the name.

"So what would make a bath more sexy?" the MC repeated.

“401(k) Jelly.”

Jack Bogle on PBS

The transcript of Jack Bogle's interview on Nightly Business Report yesterday is now online. Sample:
Just in the period I've been in this industry, which is now 55 years, I've seen us go to an industry focused on stewardship to an industry focused on salesmanship. I've seen an industry where management was the highest value to an industry where marketing and accumulating assets under management is the highest value. I've seen mutual fund portfolio turnover go from 16 percent a year to 100 percent a year.
Point to ponder: Neither Vanguard and its index funds nor Nightly Business Report are conventional, for-profit ventures. Yet both are unmatched in their fields.

Greed is surely good. Pity that the resulting craving for short-term gain mitigates against excellence.

Should Tax-Saving Schemes be Patented?

“To the extent that anything positive can be said about [tax strategy patents],” Gigi Sohn wrote last fall, “it is that these patents are so jaw dropping that it might actually cause some movement in the stalled attempt to reform patents in Congress. Seems like the accounting and tax legal professions may soon join their brethren in the tech and financial communities to bring an end to the endless cycle of silly patents that limit innovation and commerce.”

Now that's what seems to be happening, writes Tom Herman in The Wall Street Journal's Tax Report (subscription).
Pressure is mounting on Congress to restrict government issuance of patents for tax-planning strategies. Critics say these types of patents can raise troublesome issues for taxpayers. In addition to checking out whether a proposed technique is legitimate, taxpayers also may need to find out if someone holds a patent on the idea. Otherwise, they could get sued -- as one man was last year in Connecticut. Recently, influential groups of accountants and lawyers have stepped up efforts to limit or ban patents on tax-related ideas.
The American Institute of CPAs has urged Congress to restrict tax strategy patents. Either there should be outright restrictions on issuing such patents or, “at a minimum, taxpayers and tax practitioners be made immune from liability for tax strategy patent infringement.”

More income statistics

JLM beat me to the punch in reporting data from the Winter 2006-2007 Statistics of Income Bulletin published by IRS. Note that despite the fact that Congress keeps patching the AMT to "hold taxpayers harmless" the AMT revenue skyrocketed 66% in just two years. That's partly because even with the patches more taxpayers are being trapped, and those who've long been enshared are finding their AMT liability rising at shocking rates.

Funny, I didn't hear anything about the "Bush tax increases."

More data that I'd like to understand better:

• In 2005, adjusted gross national income rose a whopping 8.9% over 2004, but net taxable income rose 9.5%. Apparently the deductions just aren't keeping up, or the tax planners are getting lazy. The end result was that total income tax collections rose 11.8%, far outstripping GDP growth that year.

• Net capital gains rose by 36.7% in 2005. No one forecast that result. No one would dare to forecast it.

• 124,292 split-interest charitable trusts filed trust information returns in 2005. Charitable lead trusts are growing in popularity, but charitable remainder unitrusts continue to be the most common charitable trust type. As a group charitable trusts did really well in 2004, as total net capital gains reported by CRTs increased by 119.2%, and total net income increased 67.4% from 2004 to 2005.

A ten-year archive of Statistics of Income, including the Winter 2007 issue, is available from IRS here.

Tuesday, March 13, 2007

Hundreds of Thousands Make a Million!

Is this a great country, or what? Certainly ultra-high incomes are proliferating. Forbes reports on the latest data here:
A new Internal Revenue Service report shows the rich have been getting richer, and more Americans can properly be called rich.

According to the just released data, 240,000 tax filers reported an adjusted gross income of $1 million or more in 2004, up 33% from the 181,000 millionaire filers in 2003.

Moreover, those with an adjusted gross income of at least $328,049 in 2004 (1% of all income tax filers) reported 19% of all adjusted gross income in 2004, up 2.2 percentage points from 2003. They paid 36.9% of the income tax, up from 34.3% in 2003.
But that old AMT just keeps rolling along. The "minimum tax" brought in $9.5 billion in 2003, $13 billion in 2004 and, by preliminary estimate, $15.9 billion in 2005.

Serving Family Executors as Agent

Canadian trust companies are beginning to promote their services as agent for individual executors, this article from the Edmonton Journal notes.

Are any U.S. trust units finding it worthwhile to do the same?

‘Forever’ Stamps: a Good Investment?

You'll never get rich speculating in those new Presidential dollars mentioned by Jim Gust.

Will the Postal Service’s new Forever Stamps be a better bet?

Probably not, says Allan Sloan in this column.

Saturday, March 10, 2007

A Nest Egg in Winter

Yikes! Daylight Savings Time starts tonight! Better admire this 1963 Chase nest egg ad before the pond melts.

As was customary in those days, the copy emphasizes relief from investment cares:

Just ask Chase Manhattan's Personal Trust Division to take over post-haste. You'll immediately rid yourself of such details as stock rights and record keeping, call dates and coupons.

What's more, eminently qualified nest egg specialists, will, at a word from you, act as your Executor and Trustee, advise you on your investments, or plan your estate with you and your lawyer.
The sales pitch had appeal because prudent investors kept their securities in a safe deposit box, not in a potentially hazardous brokerage account. Rights offerings to stockholders were indeed common, and bond calls did have to be watched for. And, of course, there were those dratted bond coupons, which actually needed to be clipped and presented for payment at the bank.

Friday, March 09, 2007

Would You Name a Bank Trustee if it “Maxed Out” Your Kids?

Banks, especially big banks, don't get much good press. Today is no exception, as you'll see from The Washington Post's review of “Maxed Out:”
Maxed Out," a film about the consumer debt crisis, might as well be ripped from the headlines, in light of last week's stock market plunge (blamed in part on too many mortgages sold to high-risk home buyers). But here's the man-bites-dog part: This factoid-filled, talking-heads documentary -- by a business school graduate -- turns out to be amusing. And enlightening. And positively riveting.
* * *
"Maxed Out," often uses grim humor to deliver the bad news: that banks routinely seek out the young, poor and chronically late-paying; that they're in cahoots with other powerful forces in government and business (such as the burgeoning field of debt collection); and that no one -- especially lawmakers whose biggest contributors come from the financial services industry -- seems to care. Particularly galling in this respect is Julie Williams, the acting U.S. comptroller of the currency and chief bank regulator, who delivers Orwellian apologies for the industry she's supposed to be overseeing. . . .

Thursday, March 08, 2007

"You have six months to live"

As bad as that news would be, it's probably way too optimistic, according to this entry at Professor Beyer's blog. In a recent study, doctors' mortality estimates were correct only 20% of the time, and they were too optimistic in 63% of the cases. They overestimate patient survival by a factor of from three to five.

So the point is, when you hear that prediction, you don't actually have six months left to finish your estate planning!

Wednesday, March 07, 2007

Wealth Management Tidbits from Around the Globe

What should show up the the mail the other day but Private Wealth Management 2007, from the UK firm Campden Publishing Limited. Lots of glossy ads, but some content worth noting as well. For instance:

Foreign trusts in America

Kent Lawson, San Francisco tax accountant, notes that trusts may now be structured as foreign for US tax purposes yet appear to most people "as American as apple pie."
All it takes is giving a nonresident a single substantial decision-making power. For example a trust is foreign if it has a non-resident protector who can replace the trustee. Thus, a trust can have Delaware law as its proper law and be administered by a financial institution in Delaware and still be classified as foreign.

Freedom from wealth

Charles A. Lowenhaupt, Saint Louis wealth manager, asserts that bundling family wealth for management by a family office doesn't suit all families, especially as new generations arrive.
Currently our firm is helping a family ‘unbundle’ its wealth in its fourth generation. That fourth generation is in their 50s and 60s. The unbundling will cost a great deal in taxes and administrative fees and make wealth management much more expensive and less effective. Yet, the senior members are exuberant. Each feels that a huge burden had been lifted — one characterised herself as ‘a bird being freed from a cage’.

In my experience wealth frequently stays bundled not for the good of the family but to support the family wealth steward. We have more than one client who needs to keep the family's wealth bundled to support the family office and staff — all of whom provide the family wealth steward companionship and a feeling of importance.

Asia — the Klondike of private banking

Justin Ong and Wei Lii Khoo, writing from Singapore, report that the rapid growth in the number of wealthy Asians has created a severe shortage in the number of private bankers needed to serve them. “Given current wealth creation trends, industry players have estimated that up to 10,000 private bankers will be required by 2010 in Asia and the Middle East (excluding Japan).” That's a tall order:
Banks are taking the easy way out by poaching relationship managers, often entire teams in order to start up their business. This situation of musical chairs in unhealthy for the industry, detrimental to client's long-term interests, and leads to an upward cost spiral that may be potentially unsustainable should the relationship team under-perform.

Banks are also converting retail and mass affluent bankers into relationship managers and mid-career hires from outside the industry to meet staffing demands. In all these instances, training and quality issues are critical.
Private Wealth Mangement is available online (lots of registration required) here.

Tuesday, March 06, 2007

MyCFO: the Backstory

Who named the Harris multi-family office? we asked last fall. Turns out Bank of Montreal, Harris Bank's parent, paid handsomely for the name myCFO. After today's report in The Wall Street Journal, it may feel it was overcharged.

The original myCFO, conceived as a wealth management operation, was the idea of James H. Clark, co-founder of Netscape. Financial backing came from John Doerr, “dean of Silicon Valley venture capitalists” and others.

Wealth management seems to have been a hard sell. But tax shelters were a hot commodity among Silicon Valley's new rich:
MyCFO's main tax shelter, sold to 17 clients, was called Cards, for Custom Adjustable Rate Debt Structure. Each involved an ostensible 30-year bank loan to a foreign party for $50 million to $100 million. MyCFO's client then assumed the loan and, after some complex swapping of collateral, claimed a loss for tax purposes of nearly the full amount of the loan. Others besides myCFO also marketed Cards.

The IRS in March 2002 ruled Cards invalid. Largely as a result, myCFO sold its name and client list and liquidated its tax business.
Reportedly, Bank of Montreal paid $30 million for the myCFO name, list of clients and certain other assets.

Democrats may "redirect" the Bush tax cuts

Ways and Means Committee Chair Charles Rangel has generally rejected the idea of repealing the "Bush tax cuts" of 2001 and 2003. On the other hand, he doesn't want to make them permanent, either. This Tax Notes Today ($) item suggests that the new operative verb for the Democrats may be "redirect." They don't want to increase overall levels of taxation, but they do want to excuse more of the middle class from tax liabilities, "redirecting" tax relief from the high to the middle income levels. Specifically, they may increase taxes on "the rich" to try to address the monstrous mess that the Alternative Minimum Tax has become. Says New York's senior Senator Charles Schumer, "We have had tax cut after tax cut after tax cut for the very wealthy. Instead, we want to redirect tax cuts to the middle class."

This is the usual politcized tax nonsense, of course. The "Bush tax cuts" included the creation of a 10% rate bracket and other features aimed at the lower end of the income spectrum that have resulted in a tremendous increase in progressivity in federal income tax collections, with an increasing share of the payments coming from the highest earners. What's more, the positive economic effects of the 2001 and 2003 tax reforms have been downplayed or ignored by the Democrats, and, more surprisingly, by the press.

But the Republicans really aren't much better. We routinely read that the reason the AMT is hitting more and more taxpayers is that was never indexed for inflation, as if that was some silly oversight during a long-gone Congress. The truth is more far complicated, and perhaps a bit ugly. Because large a portion of the Bush tax cuts were aimed at the middle class, large numbers of families had their tax burden brought down below the AMT threshold. And this was not accidental, the phenomenon was explicitly taken into account in scoring the tax cuts. So there really has been a significant upper middle class population segment that hasn't had much benefit from these tax changes.

Why would the Republicans be deliberately duplicitous? Could it be that the majority of AMT collections come from the blue states, with their higher state and local tax burdens?

Free Week at the American Banker

If you'd like to browse the resources at the American Banker Online, go to this Free Week Registration Page. Until March 9 you will have unlimited access to current and archival material. I'm hoping to free up some time myself for browsing later in the week.

Monday, March 05, 2007

Hedge Fund Manager Tries to Have Mistress Abducted?

According to a press release, Anchor Point Capital was founded by Tim Crowe and Albert Hsu in June 2005 and “offers thoughtfully designed and professionally managed fund of hedge funds and custom hedge fund design and management services to institutions and family office clients.”

Allegedly, according to this story in the Stamford, CT Advocate, Mr. Hsu hasn't been spending all his time putting together funds of hedge funds:
According to the prosecutor, Albert Hsu, 43, of 139 Beech Road, New Canaan, posed as [his former] mistress in an Internet listing implying she was a willing participant in a sexual fantasy. In the ad, Hsu provided a list of identifying information for the woman, including her photograph, home and work address and license plate number. He also included details about her routine such as which train she takes to work and which car she usually sits in.
* * *
Hsu was arrested Friday and charged with attempted kidnapping, first degree attempted sexual assault, first-degree reckless endangerment, criminal impersonation, two counts of second-degree harassment and trafficking in personal identifying information. Police searched Hsu's house where he lives with his wife and two children.
Maybe he should have stuck to seeking Alpha.

Mortgage Crisis Threatens the New Rich

Everybody can't manage a hedge fund, but the road to wealth has other entrance ramps. A popular one, in recent years, was selling "borrow now, pay later" mortgages. But this New York Times story suggests the party's over:
Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.

Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure. Many investors are also likely to suffer: Wall Street firms made billions in fees, commissions and trading revenue from packaging and selling subprime mortgages to them as bonds.
Did some of those bonds end up in hedge funds? If so, we may have to knock a few hedge fund managers off the list of Ultra High Net Worth Individuals, as well as some subprime mortgage sellers.

Friday, March 02, 2007

Insider Trading at the Oyster Bar? But of Course

The insider trading case spotlighted in the preceding post probably isn't the last involving hedge funds. The more assets hedge fund managers control, the more eager brokerage firms become to court them.

But other cases surely won't feature such an appropriate venue as the Oyster Bar in New York's Grand Central station. The great hallway outside the Oyster Bar is vaulted even more grandly than the interior. Its remarkable acoustics are legendary. Stand at one corner of a hallway vault, whisper softly, and someone standing at the other end of the diagonal vaulting can hear you clear as a bell.

Thanks to those acoustics, a broker and a hedge-fund manager could converse without looking at each other and from a distance of perhaps 15 feet.

I can see the scene recreated on Law and Order now!

"Mr. Garcia described Morgan Stanley and UBS as victims."

Speaking of looting, the New York Times reports that 13 Accused of Trading as Insiders. UBS and Morgan Stanley are cooperating, but appear to be victims of, well, inadequate internal monitoring of their employees.

The Gotrocks are Back, Dumb and Dumber

A year ago, we called attention to Warren Buffet's essay on the deplorable tendency of affluent investors, the Gotrocks, he calls them, to fall prey to assorted advisers, wealth managers and even (gasp!) hedge fund managers.

In his new letter to Berkshire-Hathaway shareholders, Buffet warns that Wall Street's Pied Pipers of Performance keep tootling away:
The hapless Gotrocks will be assured that they all can achieve above-average investment performance – but only by paying ever-higher fees. Call this promise the adult version of Lake Woebegon. In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: It’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide. For example, a manager who achieves a gross return of 10% in a year will keep 3.6 percentage points – two points off the top plus 20% of the residual 8 points – leaving only 6.4 percentage points for his investors. On a $3 billion fund, this 6.4% net “performance” will deliver the manager a cool $108 million. He will receive this bonanza even though an index fund might have returned 15% to investors in the same period and charged them only a token fee.

The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these “hyper-helpers.” Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.

Thursday, March 01, 2007

Looting the Family Office

The Wealth Report in the WSJ calls attention to this Boston Globe article:
The money manager of New England's wealthy Ayer family has accused a prominent Boston accounting firm of malpractice and other violations for failing to catch a former family employee who allegedly looted more than $57 million from its trust funds.
* * *
The lawsuit is being brought by Essex Street Associates, a Beverly money manager for the descendants of Frederick Ayer Sr., an industrialist who owned factories in Lowell in the late 1800s. In a separate action, Essex Street, which is owned by the Ayer descendants, said its former employee, chief operating officer James F. Doorly, led a "double life" and looted the family trusts of $57 million at least since 1996. The Ayer family said Doorly spent the money on mistresses, a Gulfstream jet, vacation homes, gambling, and lavish international trips.
Maybe the multi-family office (see preceding post) isn't such a bad idea. If the MFO is linked to a bank with deep pockets, a victimized family might even get some money back.