Saturday, June 30, 2007

Biased Investment Advice is Costly

More than two years ago, the Securities and Exchange Commission found that many pension consultants had business relationships that might cloud the objectivity of their advice.

Did it really matter?

Yes, according to this item from the news wires:
The Government Accountability Office found that pension plans using consultants considered by federal regulators to have undisclosed conflicts had annual investment returns 1.3 percentage points lower than those whose consultants did not have significant conflicts.

Friday, June 29, 2007

Is your income tax rate higher than Warren Buffett's?

Warren Buffett says he wants to pay more taxes. At a fundraiser for Hillary Clinton, according to the Washington Post (registration required), Buffett complained that tax rates on the "rich" may be less that those on the middle class.
"Buffett cited himself, the third-richest person in the world, as an example. Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent."
That must be an unusually well-paid receptionist for Omaha. According to the article, Buffett claimed to not have invested in any tax shelters—and I suppose it is true, most people don't consider tax-free municipal bonds to be tax shelters. But it's his muni-bond income that helps bring Warren's total tax rate down so much.

Although Buffett may say he wants to pay more taxes, his actions tell another story. His philanthropic gifts last year to several foundations were all explicitly conditioned upon the foundations maintaining a tax-exempt status, so as to avoid all gift taxes on his tranfers.

Thursday, June 28, 2007

Hedge Clipping

John Cassidy has written a long (and probably entertaining) article on the phenomena known as hedge funds for The New Yorker. You can read along with us here.

“Super-rich get wealthier faster”

But can they afford to retire in style?

Newspaper reporters persist in calling mere millionaires "super-rich." Understandable, given the size of most reporters' paychecks.

Fact is, as Jonathan Clements points out his latest Wall Street Journal column (subscribers), "A million dollars isn't what it used to be."
Sure, it's still enough to pay for a comfortable retirement, and it will put you among the richest 2% of American adults. But it won't put you in the lap of luxury -- and for that you can thank inflation, the current decade's housing boom, and the long rise in stock and bond prices.
According to the World Wealth Report prepared annually for Merrill Lynch by Capgemini (downloadable here, but registration required), about 9.5 million individuals worldwide have investable assets of at least $1 million.

The super-rich are a much, much rarer breed. You could fit all the citizens of the world who have $30 million or more into one of our bigger football stadiums.

Wednesday, June 27, 2007

Supremes to settle the 2% rule for trusts

On June 25 the U.S. Supreme Court agreed to decide whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuits are split. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue, and the docket order is here.

Tuesday, June 26, 2007

What is the Mental State of a Hedge Fund Manager?

Tough question, what?

Especially tough if you read our March post about one hedge fund manager who sought a hired gun (metaphorically speaking) to rape his former paramour.

The now ex-hedge fund manager (aka Alleged Perp) has been released from a Connecticut jail to seek therapy and evaluation in New York. Will he return? Here's the update.

Friday, June 22, 2007

T-Shirt and Shorts? You Must Be Really Rich

In Thorstein Veblen's day, the rich were so insecure they dressed in finery most uncomfortable. How else to show that they weren't manual laborers?

In today's Wealth Report (subscription), Robert Frank observes that the tables have turned:
As one Palm Beach banker who serves the rich told me recently: "The wealthy wear T-shirts and shorts every day, because they've earned that right. We work for them, so we wear suits."

Thursday, June 21, 2007

What's Next? Wal-Mart Wealth Management?

In today's Washington Post, Robert Samuelson reports on a quiet revolution:
It's one of those vast social upheavals that everyone understands but that hardly anyone notices, because it seems too ordinary: The long-predicted "cashless society" has quietly arrived, or nearly so; currency, coins and checks are receding as ways of doing everyday business; we've become Plastic Nation.
The beauty of Plastic Nation, as reported in today's New York Times, is that you don't have to be a bank to be a bank. You can be Wal-Mart.

Wal-Mart money centers already cash checks, sell money orders and offer Discover cards. Now they'll take "demand deposits" via prepaid debit cards.

Possibly coming soon: home loans, car loans, etc.

Wal-Mart's debit card is targeted at the low end of the financial market — folks without bank accounts. But the company is known to seek more upscale customers for its clothing and housewares. Don't be surprised if Wal-Mart's money centers expand to include sellers of insurance and investment products.

Trust services may take a little longer.

Tuesday, June 19, 2007

The Secret of Perpetual Wealth

Rich families seldom stay rich: "Shirtsleeves to shirtsleeves in three generations." Taxes, ill-advised speculations, spendthrift heirs — all take their toll. What's more, Oliver Wendell Holmes pointed out back in 1860, "it is in the nature of large fortunes to diminish rapidly when subdivided and distributed .

 . . . "[A great fortune] splits into four handsome properties; each of these into four good inheritances; these, again, into scanty competences for four ancient maidens . . . ." 

 Holmes acknowledges one exception: a group whose fortunes seemed never to diminish. A "harmless, inoffensive, untitled aristocracy" he calls them: The Boston Brahmins. But although Holmes babbles on about good breeding and such, he never discloses their secret. What "special means" did these Brahmin families employ to remain permanently in the upper crust? Surely there was more to it than going to Harvard. 

 There was. The "secret" was so open it became embedded in New England folklore, remembered (though seldom practiced) well into the 20th century. 

 Ready to learn the secret of perpetual wealth? Return with us now to those golden days of yesteryear. Boston, before the Civil War. Out from Harvard Yard strides a brand new graduate . . . . 

 Meet Waldo 
Waldo, the new grad, has only one regret. His mother did not live to see him get his diploma. With her untimely death Waldo has become beneficiary of a family trust fund. He recently received his first year's income, $3,000. (Perhaps $80,000 or more in today's dollars.) What's Waldo going to do with all that money? What any right-thinking new college grad would do: Spend it! 

 Off goes Waldo on a grand tour of Europe: London, Edinburgh, Paris, Rome . . . . We catch up with him in Florence. Ah, Firenze!

Strolling from the Ponte Vecchio toward the Pitti Palace, Waldo is startled to see a familiar figure advancing toward him — his aunt Josepha, with a teenage girl in tow.

 "Land sakes!" his aunt exclaims. "Look, Emily, it's my favorite nephew. "Waldo, you remember my goddaughter, don't you?" 

 Waldo doesn't. But he will never forget her. Emily is the comeliest, sunniest, most enchanting creature Waldo has ever laid eyes upon.
* * *
Waldo returns to Boston determined to get serious. He rents cheap lodgings near Beacon Hill, finds a job and resolves to woo and one day wed the enchanting Emily. 

 Waldo lives on his scant earnings. His trust income he saves. All of it! No income tax in those days. In a few years, interest on the accumulating income payments augments Waldo's earnings sufficiently for him to start wooing Emily in earnest. 

 We're happy to report that Waldo does get the girl. But here we'll leave his personal life to focus on his finances: Waldo continues to bank his trust income checks, year after year. By the time he attends his 25th Harvard reunion, his accumulated trust income has grown into a personal fortune equal to his trust principal. You could say he has cloned his wealth. So now you know the secret of perpetual wealth. The Boston Brahmins, it was said, were so frugal they lived on the income from their income.
* * *
They sure don't make Trust Fund Babies like they used to.

Monday, June 18, 2007

Retail Giant Will Remake U.S. Trust

Can a mass-market bank known for service via 800- numbers move its services to the wealthy up-market? Today's NY Times discusses the challenge faced by Bank of America with its acquisition of U.S. Trust.

The new "U.S. Trust, Bank of America Private Wealth Management" will be introduced in the fall with an ad campaign crafted by Hill Holliday.

The United States Trust Company in 1890,
when trust companies aimed to be perpetual.

One of the lesser ads Merrill Anderson produced
for U.S. Trust in the 1960s.

Circa 1960, the young turks at Merrill Anderson lobbied in favor of creating a short, modern logo for our most prized client: just US Trust.

It took quite a few years, and probably a few changes of ad agencies, before the client finally broke down and agreed to such informality.

Sunday, June 17, 2007

How the Crown Rewrote Diana's Will

From a story in the U.K.'s Telegraph:
In her original will, drawn up in 1993, the princess [Diana] had stipulated that both princes would be entitled to their entire share of the capital on reaching 25.

But details of the will were changed by a variation order granted by the High Court on Dec 19 1997 - three months after her premature death in a Paris car crash. In a highly unusual move, the executors made both her original will and the new one public.

The key changes, which were designed to protect the young princes, included a clause that raised the age at which they could ask for the capital in full to 30.

The changes also ensured that the princes were only allowed small amounts of the income - the interest accrued - at the discretion of the trustees before their 25th birthdays. But, on reaching 25, both could receive the full amount of income without any restraint from the trustees.

Friday, June 15, 2007

Custody Accounts

The other day an American Banker headline proclaimed that venerable Bryn Mawr Trust obtained a third of its revenue from wealth management and hoped for even more.

Judging from Bryn Mawr Trust's attractive web site, custody accounts for investors receive marketing emphasis. A well-crafted sales pitch appears in the latest issue of their trust newsletter available online. You can view it here.

"In short," the article concludes, "Bryn Mawr Trust’s Custody Division serves the need for a security guard, financial secretary, bookkeeper, stockbroker, and general housekeeper, with faithful adherence to investor directives and with timely and accurate processing of all transactions."

Nicely said.

Question is, do today's High Net Worth Individuals worry about timely crediting of dividends? Do they fear their brokers will go bust, forcing them to battle with the SIPC to get their assets back?

In short, are custody accounts still a viable product in the 21st century?

Thursday, June 14, 2007

Keeping a Business in the Family

The odds are stacked against the family that wants to keep a business going for a second or third generation. Death taxes, rising real-estate prices, disinclined heirs, sibling squabbles . . . the obstacles are many and varied.

How delightful, then, to learn that Brandman's, the paint store we patronized when I was a kid, is celebrating its centennial in Norwalk, Connecticut.

Is it just coincidence that one of the last remaining real (that is, non-tourist) businesses in Portsmouth, New Hampshire is also a paint store?

F. A. Gray's somewhat dated web site boasts that the business is 102 years old. The date of founding, however, is listed as 1902, which makes Gray's 105.

Questions for trust officers:

What's the oldest family business is your marketing area?

What's the oldest family business with which your fiduciary team has been involved as executor or trustee?

(Extra credit if said business smells of turpentine.)

Tuesday, June 12, 2007

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?

Sunday, June 10, 2007

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.


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.

Friday, June 08, 2007

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."

Thursday, June 07, 2007

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?

Wednesday, June 06, 2007

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.

Monday, June 04, 2007

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

Friday, June 01, 2007

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.