Do your clients face higher taxes?

Ben Stein, in his latest New York Times column, praises the good life that high incomes make possible. But he's also concerned:

On my way back [from the Yale Club], two young men accosted me in front of Rockefeller Center. They told me they were recent Yale graduates who were making a great living working at hedge funds. They told me that their boss made $100 million a year trading currencies, and that there were dozens like him making more money than I could imagine. (I have my doubts, but that's what they said.)

Suddenly, as the men happily walked away from me, I had a vision. Here we all are under the gorgeous crystal dome of prosperity, drinking, making money, eating swordfish, changing money at the temple, showing off ourselves to others, bragging — and all of it, every bit of it, is made possible by the men and women who wear the uniform.

Every bit of it is done under the protection of the Marines, the Army, the Navy, the Air Force and the Coast Guard, serving and offering up their lives for pennies. And we're also under the protection of the police and the firefighters and the F.B.I., who offer up their lives for nothing compared with what others make trading money on computer screens.

"It's fine that there are rich people," Stein acknowledges. "It's even fine that there are superrich people."

But if they are superrich, they derive special benefits from life in the United States that the nonrich don't. For one thing, they can make the money in a safe environment, which is not true for the rich in many countries. It is just common decency that they should pay much higher income taxes than they do. Taxes for the rich are lower than they have been since at least World War II — that is to say, in 60 years.

* * *

Whatever rationale there may have been in 2001 for lowering their taxes is long gone. It's time for them — us, because it includes me — to pay their (our) share.

For the record, high-income Americans already fork over the bulk of U.S. tax revenue. That's one insight to be gained at a web site recommended by Randy Cassingham, Nationmaster.com.

Look here to see how the share of tax paid by the 30% of U.S. taxpayers with the highest incomes compares with taxpayers in other nations around the world.

Look here to see how relatively little the poorest 30% of American taxpayers pay.

Moral: In Scandanavian countries and others where both poverty and $100-million incomes are rare, average citizens of necessity have to bear a larger portion of the tax burden.

But let's also remember that even poor Americans are wealthy beyond the dreams of avarice by world standards. Look here at how GDP per capita varies around the world.

Vickie Victorious

For those who are interested, here's more detail on the U.S. Supreme Court's unanimous decision in Marshall v. Marshall (thanks to POC for suggesting the headline for this post).

Our story thus far: Vickie Lynn Marshall, a former topless dancer and the 1993 Playboy Playmate of the Year using the name Anna Nicole Smith, met oil billionaire and former Yale Law School Assistant Dean J. Howard Marshall II in October 1991. She was in her mid-20s, he was approaching 90. Following a courtship of more than two years, the couple married on June 27, 1994. J. Howard lavished gifts upon Vickie, promised her a trust fund, and apparently ordered his attorneys to begin the paperwork for the trust. Unfortunately for Vickie, J. Howard’s estate plan (a living trust coupled with a pourover will) did not yet include her when he died on August 4, 1995.

Vickie’s attorneys publicly asserted that J. Howard’s youngest son, Pierce, had engaged in forgery and fraud to prevent the promised gift to her from her husband. When Vickie filed for bankruptcy in California, Pierce asserted that he had a defamation claim against her for the statements, a claim that should not be discharged by the bankruptcy proceeding. Vickie responded that truth was a defense against the defamation claim, and filed a counterclaim for Pierce’s tortious interference with her expected gift. The Bankruptcy Court heard the case and awarded Vickie $449 million in compensatory damages and $25 million in punitive.

Meanwhile, back in Texas, following a jury trial the probate court declared J. Howard’s will and trust arrangement to be valid.

Pierce next sought federal District Court review of the Bankruptcy Court judgment, arguing that the federal courts were without power to resolve the matter because of the “probate exception” to federal jurisdiction. The District Court rejected that argument, but held that adjudicating the tort was not a “core proceeding” of the Bankruptcy Court. Therefore, the District Court reviewed the case de novo.

Compensatory damages were reduced to $44.3 million, as the Court found J. Howard had promised Vickie half of the appreciation in the value of his assets from the date of their marriage (not half the value of all his assets). However, with overwhelming evidence of Pierce’s “willfulness, maliciousness and fraud,” the Court awarded an equal amount as punitive damages.

On appeal, the Ninth Circuit Court of Appeals reversed, holding that despite the framing of the issue as a tort, the underlying cause of action was so closely related to probate that the probate exception stripped the federal courts of jurisdiction. A unanimous decision by the U.S. Supreme Court now restores Vickie’s access to the federal courts, holding that the Ninth Circuit was wrong to read the probate exception so expansively. “Vickie seeks an in personam judgment against Pierce, not the probate or annulment of a will,” writes Justice Ruth Bader Ginsburg for the majority. “No ‘sound policy considerations’ militate in favor of extending the probate exception to cover the case at hand.”

Concurring, Justice John Paul Stevens would have gone further, eliminating the doctrine of a probate exception to federal jurisdiction altogether. “I would provide the creature with a decent burial in a grave adjacent to the resting place of the Rooker-Feldman doctrine.”

However, the story is not over yet, not when a $1.4 billion estate is at stake. The parties next return to the Ninth Circuit to explore Pierce’s arguments concerning claim and issue preclusion and whether Vickie’s claim was “core.”. Stay tuned.

The Rukeyser legacy

Louis Rukeyser died yesterday. If Ronald Reagan was "The Great Communicator" in the White House, Lou was surely The Great Communicator of Wall Street (from the safe distance of Owings Mills, MD).

All who wish to communicate effectively about investing and wealth management can learn from Lou's success on TV and the lecture circuit. His AP obituary quotes a primary lesson:

"We have in America a bad tendency that things have to be either serious or fun. Whereas in real life, this isn't true. The teachers we all remember in high school and college were not the ones who put us to sleep."

We'll miss Lou's irreverence. Recently, for instance, a Member of Congress had an idea for a really cool Flat Tax. His flat tax would be different, he said, because it would have three progressive tax rates!

With Lou gone, who will give such creativity the attention it deserves?

Lou also made TV starlets out of people we would not have gotten to know otherwise. John Templeton, for instance. And James Grant, whose obituary of Lou is in Tbe New York Times.

Compromise likely on estate tax

From today's Washington Post, an indication that Republicans will be willing to settle for half a loaf of estate-tax relief:

Arizona Republican Sen. Jon Kyl said he was proposing a compromise because those who favor permanently repealing the estate tax -- who are mostly Republicans -- were unlikely to win. "We do not have the votes," he said.

* * *

Kyl argued for a compromise that would set an exemption amount at $5 million for an individual and $10 million for a couple, indexed to inflation. He said the estates that are taxed should be taxed at the same rate as capital gains, currently 15 percent.

The case against the estate tax

Tasted a Milky Way lately? It probably didn't seem much different (except in size) from those you had as a kid.

Perhaps it was even comparable to the first Milky Ways, dreamed up by Fred Mars back in 1923. Those were the days when most drug stores had soda fountains, and Fred thought of the Milky Way as a portable chocolate malted.

Today's Snickers bars aren't bad, either. Why else would the Scots love to deep-fry them?

Even products developed by others but now owned by Mars Inc. seem to have held up pretty well. The last Dove bar I sampled certainly wasn't as big as the original, but it tasted good.

Maintaining quality from generation to generation is a distinguishing characteristic of the best privately-owned companies. Even when family-owned businesses grow immense, as Mars has, they march to a different drummer.

To an unfortunate extent, publicly-held companies are now in the business of manufacturing quarterly earnings as specified by Wall Street. Family-run firms can stick to the business of making stuff, like candy.

Plenty of consultants have marched into Mars Inc. over the decades, peddling ideas for increasing quarterly earnings by cutting corners here and there. ("You guys don't need to use all that real chocolate. With this new additive, you can save a bundle, and few customers will ever notice the difference.")

The Mars boys (Fred's grandsons) have felt free to tell such consultants to close the door on the way out. Could the CEO of a publicly-traded company be equally upstanding? Possibly, but only at his peril. Eventually the consultants would start comparing notes and realize they had enough ideas for bulking up profits, at least temporarily, to take to a private-equity fund or corporate raider. Pretty soon, goodbye CEO!

The Mars family is one of the infamous 18 wealthy families cited in Jim Gust's recent post. Like other families on the list, they're too rich to be worried about the dollar cost of estate taxation. They're seeking to stay in business, even though their family businesses have gotten awfully big.

Tech businesses are a special case. Microsoft isn't the sort of business one would try to keep in the family. I'd guess that Steve Jobs felt the same way about Pixar and Apple.

Paul Newman, the Sage of Westport and founder of the remarkably successful Newman's Own, is unabashedly pro-tax:

“For those of us lucky enough to be born in this country and to have flourished here, the estate tax is a reasonable and appropriate way to return something to the common good. I’m proud to be among those supporting preservation of this tax, which is one of the fairest taxes we have.”

Why isn't Paul worried about keeping Newman's Own in the family? Maybe he doesn't have to worry. The value of a business rests on earnings. Newman's Own has never earned a cent, save what goes to charity. Can't we at least argue that the estate-tax value of the business should therefore be zero?

John and Forrest Mars, you and your sister just might have found a Plan B!

Anna Nicole Smith wins a day in federal court

In a unanimous decision authored by Ruth Bader Ginsburg, the U.S. Supreme Court has reversed the Ninth Circuit Court of Appeals in the Anna Nicole Smith case. To review, Anna's 89-year-old husband allegedly had promised her a trust to take care of her for the rest of her life, but the arrangements were not completed before his death. She was not provided for in his will.

When Anna declared bankruptcy in California, her stepson, E. Pierce Marshall, brought an action alleging that her comments about his attempts to grab control of his father's estate amounted to defamation and alleging that his claim would not be discharged in bankruptcy. Anna asserted truth as a defense, and brought a counterclaim for tortious interference with her inheritance. She won.

Note that her claim wasn't against the estate--if it had been, she would likely have lost, because the federal courts don't normally do probate law. But they may entertain lawsuits such as Smith's, the Supreme Court now rules.

Closing the gender gap

Men are catching up, reports National Center for Health Statistics according to this NY Times piece. The life expectancy gap has shrunk to 5 years, and could close completely in 50 years. Given that men often marry younger women, there would still be more widows than widowers.

Any implications here for trust marketing?

Remember the Beardstown Ladies?

The Wall Street Journal does, and we can always use a reminder that investors in general, not just the pros, tend to fib about their stellar returns.

In 1983, when 16 Beardstown ladies, average age 70, started the Beardstown Business and Professional Women's Investment Club, they did so partly because they were sick of being told by men that they shouldn't worry their pretty heads about stock-buying and finance and such.

They weren't the world's first women's investment club. But they are arguably the most famous – not that you could have predicted that by watching them from the start. They were hardly throwing around LTCM money, after all; each member kicked in $100 of seed money and added another $25 a month thereafter. They invested in companies they knew. When Wal-Mart moved to town, they noticed its parking lots were always fuller than Kmart's, so they bought the stock. One member had a Medtronic pacemaker installed and bought the device maker's shares from her hospital bed the next day.

And they were successful. They were recognized as one of the National Association of Investors Corp.'s "All-Star Investment Clubs" for six years running. CBS put them on the "This Morning" show in 1991 and again the next year. In 1993, they were commissioned to make a video, "The Beardstown Ladies: Cooking Up Profits on Wall Street." That led to more TV appearances, which led to a book, published in 1994, called "The Beardstown Ladies' Common-Sense Investment Guide," which included stock-picking tips and recipes.

* * *

In fact, their publisher, Walt Disney's Hyperion, raised hopes that the average person could be very successful, indeed -- and that's how the trouble began. Their first book's jacket claimed the group had averaged 23.4% returns annually from 1984 to 1993, nearly double the Dow Jones Industrial Average's returns during the same period. But in 1998, Chicago magazine noticed that the group's returns included the fees the women paid every month. Without them, the returns dwindled to just 9%, underperforming the Dow. An article in the Wall Street Journal led the ladies to hire an outside auditor, which proved they had indeed misstated their returns.

The fall was abrupt. Time magazine (kiddingly) suggested they be jailed. Hyperion was sued and took the Ladies' books out of print. Four years ago, it settled the case by offering to swap any Beardstown book for other Hyperion titles, including "116 Ways to Spoil Your Dog," by Margaret Svete and "I'm Not Really Here," by comedian Tim Allen. Only used copies of the Ladies' books are available now, on Amazon.com and eBay, often for pennies.

Who did those ladies think they were, fibbing like that? Hedge-fund managers?

The rich are fighting for estate tax repeal

I've been struck by the fact that high-visibility billionaires such as Bill Gates Sr. and Warren Buffett have been very vocal about keeping the estate tax. Forces in favor of repeal have appeared to be largely the affluent but not super-rich business owners and farm families.

But according to a new report from Public Citizen much of the push for estate tax repeal has come from 18 "super-wealthy" families who have disguised their actions through creation and funding of business and trade associations.

The effort to repeal the estate tax this year appeared stalled; it will be interesting to see if this new study has political repurcussions.

Sorry, A. G. Edwards. There's a better way to care for nest eggs

A. G. Edwards' nest-egg ad campaign pales in comparison with the original, conducted a half-century ago, not by a brokerage but by a trust institution: Chase Manhattan Bank.

"For a better way to protect your nest egg, talk with the people at Chase Manhattan." The campaign was probably the most attention-grabbing ever conducted to promote trust services.

The ads ran from the 1950's well into the 1960's and seem to be vintage collectibles now. Here's one I spotted on eBay:


Here's a high-resolution version of another. Unlike the owners of A. G Edwards' nest eggs, who are likely to let them roll down the street or allow them to be run through MRI units, the affluent folks of fifty years ago played it safe. They kept their nest eggs securely shackled to their persons.


Wish I remembered what agency did the campaign. Can any senior citizens with sharp memories help out?

The agency did a great job of keeping the campaign going by finding ever more-intriguing, upscale settings. An antique auto show, in this example:

Stuart Lucas: Carnation heir, wealth manager, author

Stuart Lucas has authored what sounds like a serious discussion of managing wealth. You can check him out in a Business Week video. He also has a web site.

His book is called Wealth : Grow It, Protect It, Spend It, and Share It. Follow the link and you can leaf through it. (Don't you love that feature at Amazon?)

How to gain new investment management clients

On CNBC's Power Lunch today, they mentioned that wire-house brokers have a problem. Boomers are increasingly deciding to seek investment help from independent advisers, not brokers. Independent advisers now have an estimated 14% of the market.

Actually, affluent boomers should be flocking to the wealth managers at trust institutions. Reason, the robust list of advantages that Bill Ottinger summerized recently in Trusts & Investments.

Ready, set, memorize!

• portfolio managers who are not driven by the sale of specific products to earn personal compensation

• portfolio managers who are full-time investment professionals, not salespeople pushed to meet sales quotas

• performance-based fees as opposed to sales commissions and hefty bond spreads, i..e., wealth management shares part of the cost risk—“We sit on the same side of the table as our clients.”

• low institutional trading costs for clients on both equities and bonds with no sales commissions, markups, or profit to the bank

• bond selection that is not limited to in-house inventories or the necessity to sell available high-spread bonds to generate sales commissions; the advantage for clients: increased objectivity

• the luxury of ‘staying power’ in portfolios; if portfolio performance is positive, theris no pressure to make trades simply to generate new revenue and sales commissions, so portfolio managers maintain longterm objectivity in managing client assets

• absence of unwarranted risk or speculation in client portfolios, plus the assurance that on-site audits and examinations by external and internal examiners are an annual occurrence

If you're with a community institution, you can offer those advantages with the same personal touch as an independent adviser. If you're part of a megabank, you'll have to work at making your services as human and accessible as possible. Anybody got any tips for success?

Choosing your kid's guardian is hard, but adding a trust may help

In her Fiscally Fit column in today's Wall street Journal, Terri Cullen offers a first-hand report on the difficulty of choosing the right guardian for a child. What if the best choice isn't necessarily the most affluent or financially responsible member of the family?

After some deliberation, Gerry and I decided to update our will and name Melissa and Joe as Gerald's guardians. Still, we worried that they might be in over their heads when it came to managing Gerald's inheritance. Pulling yourself out of a few thousand dollars in debt is one thing; managing hundreds of thousands of dollars in assets over decades of our son's lifetime is something else.

Estate-planning attorney Stuart Schneider recommended that we take the additional step of setting up a testamentary trust -- a trust whose terms are set within a will, and which doesn't take effect until you die. Should we die, assets such as our retirement savings and life-insurance payout, as well as proceeds from the sale of our home and other physical assets, would be held in trust and managed by a family member or another trusted person as trustee. The trustee would decide on a budget for Melissa to pay Gerald's continuing costs, and decide whether requests for larger expenditures make sense.

Terri notes that she and her husband had found it easy to put off estate planning, until September 11, 2001. More than three dozen residents of their New Jersey town died in the World Trade Center.

Time to exit the bond market?

That's what some of the pros seem to think. As the yield curve comes out of its inversion, investors at the longer end of the spectrum are losing money.

The average long-term-government-bond fund had lost 2.25% in the past four weeks and 4.23% in the past three months, according to Chicago-based Morningstar Inc.

Did you know the Titanic sank on April 15th?

Trivia from today's Wall Street Journal:

"April 15 is officially tax day, but it is also: Leonardo da Vinci's birthday, the day Abraham Lincoln died, the day General Electric was incorporated, the day the Titanic sank and the day that McDonald's served its first hamburger. "

Keep paying until April 26

That's "Tax Freedom" day this year, calculated byThe Tax Foundation. It seems like just two or three years ago that Tax Freedom day was April 16, the earliest date in the last quarter century for fulfilling our obligations to the government.

According to Bruce Bartlett, citing a different Tax Foundation study, 24% of Americans think that the appropriate aggregate tax burden should be less than 10% of person's income. 43% vote for 10% to 20%, and 22% say no more than 30%. Put another way, fully 89% of the country believes that the government claim on family income should not exceed 30%.

Which is just about where the aggregate tax burden is, at 28.5% of GDP.

Ah well, at least we're not quite at the modern record, set in 2000, of a Tax Freedom day of May 3. But if the Congress continues to dither about the Alternative Minimum Tax, that could quickly change.

If things are so bad, then why are they so good?

That's the observation Larry Kudlow concludes this commentary with, linking to a Forbes piece by Rich Karlgard.

Apparently roughly 60% of Americans think that the economy is doing poorly. Which is hard to reconcile with:

• GDP growing at 3.7%;
• unemployment persistently well below 5%, a feat once thought impossible;
• the budget deficit, as a percentage of GDP, is at the middle of the range over the last 30 years.

Karlgard concludes that we're mostly uncomfortable with the accelerating rate of change, a phenomenon that shows no sign of slowing.

Change is certainly a two-edged sword.

An unqualified endorsement

I am the proud new owner of one of the Intel-based iMacs. It is terrific. Front Row, the new application for displaying photos or listening to iTunes, has the bugs worked out, so far as I can tell.

And the Internet seems to go so much faster now.

Unitrusts: a nice idea that doesn't work?

When I read the study linked by Jim Gust in a recent post, Prudent Investing of Trust Assets, I realized I shouldn't have skipped that Statistics course. Still, it looks like the introduction of the reform known as the Uniform Prudent Investing Act in some states had little effect on the more general growth ot stocks as trust investments.

Too bad the authors of the study couldn't find useful data for the 1998-2004 period, when unitrusts began to get more recognition. But I'm guessing the lines on the chart shown here would have simply moved on up, with little divergence, through 1999, then headed down.

I've assumed that unitrusts were a useful idea, expecially in recent years, when both bond yields and dividend yields gave income beneficiaries slim pickings. But that was before I came across this article from last year's Real Property, Probate and Trust Journal, by Joel C. Dobris.

The author's particular quarrel is with the widely-used unitrust withdrawal rate of 5%. Dobris rightly argues that the rate is too high and likely to shortchange the remainder beneficiaries in the long run.

If Dobris writes short articles, this isn't one of them. Even so, give it a read when you have time. He touches on a lot of the psychological quirks that lead investors, and trust settlors, to illogical assumptions.

When she died, was Marilyn Monroe a Californian or a New Yorker?

The answer to that question could be worth millions, as explained in "A battle erupts over the right to market Marilyn."

The reason: unlike copyrights, which are protected by federal law, publicity rights are a creature of state laws, resulting in a legal patchwork. Some states, including New York, refuse to acknowledge or protect the publicity rights of dead celebrities, so they cannot be bequeathed in a will. California does grant postmortem publicity rights, making it possible for heirs to pursue profits for decade

And where was Marilyn Monroe's will probated? New York!

"Sell me a more expensive index fund, please!"

From time to time the Senior Assistant Blogger sounds off about the high expenses imposed on investors. Here's a good reason to pay him no heed, from Mark Hulburt's column in The New York Times:

MANY index funds track the Standard & Poor's 500, but they differ from one another in one major respect: their fees. You'd think that it would be obvious to investors to pick the fund that charges the least. But you'd be wrong.

In fact, this truth was anything but obvious to a group of elite students. In an elaborate simulation created by several researchers, many students at Harvard and the Wharton School of the University of Pennsylvania failed to select the lowest-cost index fund for their portfolios, even when they were all but spoon-fed the right answer.

If the best and brightest at our graduate schools of business can't grasp mutual fund costs, what chance has the average investor?

Financial Advice for the 'Mass Affluent'

Plenty of food for thought in this New York Times article, "Financial Advice for the 'Mass Affluent'."

Some 22 million American households have between $100,000 and $1 million to invest. Many of them will be joining the ranks of U.S. millionaires.

"These investors don't want packaged products, " says financial planner Debra Brede. "They want a tailored suit at a good price. They want value. This segment is so underserved that they are turning to their accountant or insurance agent for financial assistance and they end up getting sold whole life insurance instead of a personalized financial plan."

Many Mass Affluents don't see themselves as Merrill Lynch clients. They're not likely to look up the brokerage or wealth-management people at a large bank, either.

How can these households be provided with the the long-term guidance they want and need?

How can they be served without high fees and commissions that eat up too much of their nest eggs?

What marketing tools can be devised to attract these investors in a cost-controlled manner?

(Hey, nobody said this business was easy!)

The Fed looks at the wealthy. Read all about it

Check out Currents and Undercurrents: Changes in the Distribution of Wealth, 1989-2004 for all you need to know about the size and shape of your market.

Looking for business from the cream of the market, the top 1% of wealthholders? Then you're looking for those with a minimum of $6 million!

Prudent investing of trust assets

In 1994 the Uniform Prudent Investor Act (UPIA) was promulgated, and has since been adopted in 49 states. UPIA includes an explicit duty to diversify trust assets, and provides that a “trustee’s investment and management decisions respecting individual assets are evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”

UPIA applied to existing trusts as well as trusts created after its adoption. If prior law constrained professional fiduciaries and encouraged overly conservative investments, the change in law could have led to a shift in investment strategies as the constraints were removed. Is that what happened?

That’s the question that law professors Max M. Schanzenbach and Robert H. Sitkoff examined in “Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?” (December 2005,).

Study results

The professors crunched data from the Federal Financial Institutions Research Council and the FDIC for the period from 1986-1997, so investment practices from before and after UPIA adoption are represented. These reports break down trust holdings into ten categories. One of these categories includes stocks and mutual fund shares. Following exhaustive statistical analysis, the professors concluded that:

• After a state adopted UPIA, the gross stock investments of trusts increased by from 1.5% to 4.5%, compared to states that had not yet reformed their law.

• Before reform, stock investments averaged 41% of trust assets, and after reform the share rose to 47%.

• During the period studied there was also a strong shift toward stocks independent of the adoption of UPIA, an increase of from 10 to 17 percentage points. This may be attributable in part to the bull market during the study period.

A suspicious will, a not-quite widow, and now—murder!

From the front page of the Portsmouth, New Hampshire Herald comes this story. (Remember, Peyton Place was set in New Hampshire!)

Police suspect Sheila LaBarre murdered a recent arrival at her Epping, New Hampshire farm, inherited from her late "husband," and burned up the body.

While they look for her, a number of questions remain unanswered.

Did the late Wilfred LaBarre really intend to disinherit his kids? If so, why did he leave money for them hidden around his house? And how did Sheila LaBarre find that money if she was off living with another guy?

We'll just have to wait for futher chapters in the saga.

The good news: Millions of Boomers have built High Net Worths on their own

Last year almost nine million U.S. households had a net worth of at least $1 million, excluding primary residence. The heads of most of those millionaire households were under 60. Who says Boomers can't hang onto money?

Saving and investment was the primary source of this household wealth. Only 19% reported having shared ownership of a business or professional partnership.

Two out of every five millionaire households don't yet have an investment advisor. Gentlemen and ladies, start your sales presentations!

The bad news: Most Boomers won't inherit more than chump change

Most Americans born between 1946 and 1964 have little hope of an inheritance, as The New York Times reported recently.

Hundreds of billions of dollars are passing through estates each year, but about 7% of estates account for half the total wealth.

Why Americans save less than nothing (Hint: it's homeland security)

Randy Cassingham's This is True newsletter called my attention to this amazing story, reported by the Providence Journal.

Running up debt has become such a dominant theme of national policy that individual Americans who don't follow suit are now suspected of treason.

All the poor guy did was try to pay down his credit card debt. That Un-American activity was sufficient to ID him as a potential terrorist. Presumably, Dubya, Dick and Rummy figured Walter Soehnge was recharging his available credit so he could buy a plane ticket and crash into the Washington Monument.

I sure can see why Walter was "madder than a panther with kerosene on his tail."

Looks like it's time for a career change, folks. Get out of wealth management and into debt counselling!

Why worry about inflation? Because it's creepy.

Consumer prices barely budged last month. For the twelve months ending in February, the CPI crept up a mere 3.6%.

Somehow, inflation in real life doesn't seem that tame. Wondering why, I consulted the list of price changes recorded by The Wall Street Journal in its year-end reviews. Here's a sampling of price changes from 2000 to 2005:

Big Mac DOWN 4%

Pair of jeans UP 4%

Midsize auto UP 9%

Funeral UP 16%

Movie ticket UP 22%

Unleaded gasoline UP 49%

Year in college (Penn State) UP 54%

Single-family home UP 55%

Day in hospital UP 87%

Clearing clogged sink (Roto Rooter) UP 138%

For some of the above, obviously, inflation has done more than creep.

To be fair, a Big Mac isn't the only item that costs less than it did five years ago. Prices of laptops and TVs have come down, too. But the proliferation of technical gadgets has probably cancelled out any net advantage for many families. Ringtones, iPods, iTunes downloads and assorted other teenage necessities were luxuries or unobtainable five or ten years ago.

Even 3.6% inflation can get nasty in the long run. The other day on the radio, a financial planner was urging 40-year-olds with no savings to start investing enough to give them a $1-million retirement fund by age 65. That won't be easy, and it may not be adequate.

If inflation creeps at an average rate of only 3.6%, their million will have no more buying power than $415,000 or so has today.

The Dow hit five-year highs this week. Is it on its way to the stars?

To celebrate the Dow's resurgence, you and your clients might enjoy tackling the question Warren Buffet posed in his Berkshire-Hathaway shareholders letter:

Q. Between December 31, 1899 and December 31, 1999, the Dow
rose from 66 to 11,497. Guess what annual growth rate is required to produce this result.

A. The Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23. But I’m willing to settle for 2,000,000 . . . .

To hedge-fund investors, those red flags still look green

Troubles at Atlanta Hedge Fund Snare Doctors, Football Players, The Wall Street Journal reports. Which proves that wealthy doctors and millionaire footballers are just as colorblind as investors in various other hedge funds, like Bayou, that now exist only in painful memory.

Fund manager Kirk S. Wright said he generated returns of 27% per annum, the Journal notes:

In hindsight, there were many red flags at International Management: unusually consistent high returns, vague descriptions of investment strategies, aggressive marketing, no auditing, and secretive behavior by the manager. The firm's demise comes as hedge funds, which are lightly regulated investment vehicles for institutions and wealthy investors, face new SEC registration requirements that have stirred a debate about how much oversight is necessary.

Elsewhere in the news today, it was reported that a new miracle drug might cure those addicted to gambling. Do you suppose hedge-fund investors could negotiate a discount if they offered to buy the stuff by the case?

If proprietary funds can't make the cut, what's next?

Today the Riverwalk Golf Club in San Diego hosted the premier sporting event of the year for trust and wealth managers: the ABA Golf Tournament.

Tomorrow, golf bags and plus fours will be out of sight as the 2006 Wealth Management and Trust Conference settles down to business. As in recent years, one high-priority topic will be "open architecture." Clients don't like the idea of being tied to a bank's proprietary funds. Judging from the Conference program, neither do beneficiaries: sometimes they get mad enough to sue.

Citigroup and Merrill Lynch have already sold or spun off their proprietary funds. Major banks are expected to follow suit.

What's next? A recent Barron's cover story (only available to paid subscribers, alas) spotlights separately-managed accounts. Investors in separate accounts own actual stocks, not units of a comingled fund. Separate accounts offer tax-management advantages, plus the opportunity for some customizing, such as no tobacco stocks. SA's can be used as core holdings or, like hedge funds, as niche products.

As of Dec. 31, Barrons's notes, assets in retail separate accounts rose to $678 billion, 18% above the total a year earlier. That surge followed a 16% increase in 2004. Major wirehouses have been the big distributors of separate accounts thus far, but Barron's sees banks gaining a 10% market share by 2010.

Separate accounts tend to have high minimums, though they're coming down. And they tend to be pricey, with average annual expense of 1.7% by one estimate. But these days, even mutual-fund expenses approach 2% on average.

The lower cost alternative? Exchange-traded funds. Independent investment advisers are discovering they can use a handful of ETFs and low-cost bond funds to produce efficient portfolios simply. And annual expense is minimal. Barron's notes that the iShares Russell 3000 (IWV), a popular exchange-traded fund, has an expense ratio of 0.20%.

What's your institution doing?

How wealth managers rebut Buffet

Warren Buffet is a great communicator but an awful poster boy for the premise that investment managers are a waste of money. If you looked at his latest letter to Berkshire-Hathaway shareholders (see previous post), you saw the evidence.

In the long run, like from 1965 through last year, Buffet hasn't just beaten the market, he's trounced and trummeled it:

Berkshire-Hathaway average annual return: 21.5%

S&P 500 average annual return: 10.3%

Buffet's record demonstrates that some people really can produce superior long-term returns,

Can these superior performers be identified? Yes, at least if you're Yale's David Swensen. Over 20 years, the managers he chose for Yale's endowment racked up a 16% annual return.

As long as people like Buffet and Swensen exist, affluent investors will hope for above-average returns. And they'll be willing to pay for investment advice.

Wealth managers (and especially Hedge Hogs) receive a Buffeting

When Yale's great investment manager, David Swensen, wrote an earnest but dull book about the high cost of employing generally useless vendors of market-beating techniques, most investors didn't read it.

When John Bogle, Vanguard's patriarch, rants about high investment costs, he draws only limited attention.

But Swensen and Bogle are communications amateurs. The Oracle of Omaha is a pro.

In his letter to Berkshire-Hathaway shareholders, Warren Buffet turns his skills to the subject of "How to minimize your investment returns." Better read it. A lot of your clients and prospects will be reading it, too.

Buffet argues that investors are destined to receive returns substantially below the theoretical averages because they repeatedly shoot themselves in the wallet.

To visualize these self-inflicted wounds, Buffet asks us to imagine that a single family, the Gotrocks, owns every business whose shares are available to investors.

Collectively, the Gotrocks enjoy a return equal to the earnings of their businesses, less taxes. Individually, various members of the Gotrocks clan figure they can do better. So they hire a helper, a broker. When the helper does nothing but cost them money, they hire another helper, a money manager to tell the broker what to buy. And when they realize they're even worse off, they hire a financial planner or consultant to help them pick the right money managers.

What fools these mortals be, says the Oracle:

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.

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. Calmed by this explanation, the family decides to pay up.

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).

What can you promise new wealth-management clients?

A savvy trust-company exec once told me that affluent investors won't let you manage their money unless you promise them results. That's a problem. Most investment promises aren't worth the hot air required to make them. But the trust-company exec had a solution:

"O.K., I tell the guy. Give us your money to invest, and I promise we'll lose it more slowly than you'd lose it yourself!"

That's still a pretty safe promise to make, according to Mark Hurbert's column in The New York Times:

MOST mutual fund investors have only themselves to blame if their portfolios seriously lag behind the market. That is the conclusion of a new study that says the typical investor has an atrocious sense of timing.

People tend to dump mutual funds just before the funds enter several-year periods of above-average performance, and to buy funds that are about to sag. In fact, the study found that the performance of most fund portfolios would improve markedly if the owners just left well enough alone.

The study, "Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns," was conducted by two finance professors, Andrea Frazzini of the University of Chicago and Owen A. Lamont of Yale.

Lamont and Frazzini note that some investors do seem to be Smart Money when it comes to picking a hot mutual fund, one that will do well for the next quarter. But in the longer run, "individual investors have a striking ability to do the wrong thing. They send their money to mutual funds which own stocks that do poorly over the subsequent years."

The Dumb Money pays a significant cost for moving out of stock funds they consider "cold" and moving to those they consider "hot." They probably cut 1% or more off their annual return. And that's in addition to the 1% or more by which managed funds tend to lag the market because of annual fees and expenses.

When you help HNW investors avoid being Dumb Money, you do them a service.