Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

As was briefly mentioned yesterday with regards to stock equity positions, one analyst recently compared the returns of the S&P 500 against hard assets such as gold and silver (discussed later in this series). His research strategy was to model an investment starting in 1981 where the client would invest $1,000 each year in either the S&P 500, silver or gold at the average price for that year. The returns from the stock portfolio would be reinvested each year in the model. Additionally, the model showed a $1,000 contribution was made each year. [1]

The analysis provided the conclusions that investing in “stocks had been much more profitable in the first 20 years.” For example in the year 2000 the equity index holdings illustrated in the model provided for a 879% greater asset worth as compared to the price of gold and a 774%  increase over the price of silver.

However, since 2004, “precious metals have begun to quickly make up ground and, helped by S&P 500′s 57% crash during the last recession, silver managed to slightly surpass stocks in 2010”.  Interestingly, on “April 28, 2011, when the price of silver was near its peak, silver was a clear winner with a value of $233,917 and a compounded annual return of 11.8% compared to S&P 500′s $173,400 and 10.3%, and gold’s $115,889 and 8.12%.” [2]

The race is tight however, the silver market in particular is known for its volatility which was is still an ever present consideration. The conclusions drawn by the study include, in part, that “the magnitude of compounded rates of return depends a lot on the window of time” that the investor selects.[3] This conclusion is similar to those presented by other investment strategy such as those presented by Sethi (see previous section).

As the S&P 500 strategy may very well reflect, some investment commentators are questioning old models that may no longer be the right path for many investors.

Moreover, as one commentator notes, the traditional approach of selling stocks as retirement age approaches may not necessarily provide the best wealth management solutions. The traditional approach is to “typically tell those near retirement to move to safer asset classes. But stocks are not risky so long as they are selling at reasonable prices, according to [some] research.” [4] The commentator notes what wealth managers should be advising clients to look to valuations and timing to dictate asset class allocations.  In addition, the commentator suggests that “young investors can afford the risk of stocks because they have time to recover from price crashes.” [5] However, it may also be contended that a loss in value of assets caused by price devaluations in the market have a significant negative affect on long-term earnings given time value of money calculations. In other words, “this loss is greater for young investors than it is for any others (because young investors have more time ahead of them in which the compounding returns).” [6]

Nevertheless, as Warren Buffett notes, his investment strategy has never changed, it has always consisted of the motto—investment in companies that are undervalued is a large consideration to successful financial growth.[7]

Finally, there may be tax advantages to using the equity index model over the purchase of precious metals. Generally dividends are subject to special tax treatment and thus provide additional benefit. For detailed tax treatment of dividends see TaxFacts: Dividends.

Tomorrow we continue our series with Corporate Debt and U.S. government investment.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] See Sergei Barna. The Best Long-Term Investment: Gold vs. Silver vs. S&P 500. Seeking Alpha. May 20, 2011. http://seekingalpha.com/article/271054-the-best-long-term-investment-gold-vs-silver-vs-s-p-500. Last Accessed 5/29/2011.

[2] Id.

[3] Id.

[4] Rob Bennett. “The Bull Market Caused the Economic Crisis.” http://knol.google.com/k/the-bull-market-caused-the-economic-crisis#. Version: 26, Last edited: Apr 22, 2010. Last Accessed 5/29/2011/

[5] Id.

[6] Id.

[7] See generally, “Understanding Financial Statements with Warren Buffett”. Advisorfyi.com. Posted December 1st, 2010. http://www.advisorfyi.com/2010/12/understanding-financial-statements-with-warren-buffett/. Last Accessed 5/30/2011.

Brokers’ disciplinary histories are now prominently displayed for the web savvy public; they’re no longer filed away at the Financial Industry Regulatory Authority (FINRA), where only the most diligent investors will find them. FINRA has made your disciplinary history freely and easily available to the public by launching a web-accessible discipline database.

Whether the easy accessibility of the information is a positive or negative will depend on a broker’s history. Those with a clean record will undoubtedly benefit from the easy accessibility of the information and the ease with which clients and prospects can canvass their record and compare it to others. Those with a negative history, whether deserved or not, may now find themselves on the defensive with prospects more often.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FINRA complaint and disciplinary procedure in Advisor’s Journal, see FINRA Rule 45-30: Expansive New Complaint Report Requirements (CC 11-96) & Broker Bonus Arbitration Bottleneck Forces FINRA to Reconsider Arbitrator Qualification Standards (CC 11-08).

Why is this Topic Important to Wealth Managers? Today we present the first part in a series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

Read most investment strategies published in recent time and nearly all will reflect both a constant (but variable) fundamental element, risk. Take for example Harry Markowitz and his ground breaking, Nobel prize winning work regarding risk in investment strategy with the Modern Portfolio Theory. As the great Yale Professor John Langbien states, “the most fundamental thing that has happened to the investment process [includes] the development of the Modern Portfolio Theory…the scientific understanding of risk/return relationships and the importance of diversification of portfolios.” [1]

Wealth management and investing in tough economic conditions is thus based on the same or similar methods and principles as those used in bullish times. The pillars that Langbein refers to, risk/return relationships and risk diversification, can be applied to client situations to help better ensure their financial success. This series is intended to present wealth management techniques and products as applied to today’s economic environment.

The current financial outlook is not great. High levels of unemployment continue to burden the financial system, and the national debt and deficit are a major concern. Changing demographics, Social Security and Medicare, Madoff and the increased cost of living… the list goes on and on. As one commentator notes, “in today’s economic environment, it’s more difficult than ever to implement an accurate long-term financial blueprint.” [2]

Now more than ever, wealth managers are being sought to review and update financial plans as many investors and individuals are less certain about their financial choices and decisions. Clients are seeking wealth managers’ expertise regarding asset level protection and growth.  What advice can you provide to your clients regarding wealth management in today’s economic environment?  Presented below is a discussion of investment approaches and how they may relate to current financial market conditions.

Corporate Stock/ Equity

The traditional view of the equity stock markets has since changed since the financial collapse in 2008. Many investors that sought a “buy and hold method” were negatively affected when markets took a dive. Now, some commentators are strongly advocating a more actively managed model based on indicators. Timing is the key to their models.

Rajiv Sethi, an economics professor at Columbia University, has noted that “market timing based on aggregate P/E ratios can be a far more effective strategy than passive investing over long horizons (ten years or more).” [3]

On the other hand, some advocate the long-term strength of the financial markets. Tomorrow we will present, in example, the S&P 500 returns as compared to other investments. Additionally, we will continue our series on “Wealth Management in Today’s Economic Environment”.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] See Tim Hatton. “The 27 Prudent Investment Practices for Financial Advisers, Trustees and Plan Sponsors”. Bloomberg. At 25. 2005.

[2] Ken Morris. “Consider Holistic Approach to Financial Planning and Investing”. The Oakland Press. 1/31/2010. http://www.theoaklandpress.com/articles/2010/01/31/life/doc4b6100694a71c496761710.txt. Last Accessed 5/29/2011.

[3] Rajiv Sethi. “The Invincible Markets Hypothesis”.  February 14, 2010. http://rajivsethi.blogspot.com/2010/02/invincible-markets-hypothesis.html. Last Accessed 5/29/2011.

It’s a given that most of us want to extend our lives as long as possible. But our ever increasing life spans can create problems for pension funds and others that depend on us dying to keep their books balanced.

Pension funds face severe longevity risk. If pensioners live longer than expected, payouts from the funds could exceed the estimated cost of keeping the funds solvent. Worldwide, $17 trillion of pension funds – $23 trillion in assets – is exposed to longevity risk.

But the big banks—including Goldman Sachs, JPMorgan Chase, and Deustsche Bank—are coming to the rescue by packaging that longevity risk and selling it to investors; and they’re counting on investors being interested in gambling on death.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance contracts in Advisor’s Journal, see IRS Guidance Provides Safe Harbor for Policies Maturing After Age 100 (CC 10-51).

For in-depth analysis of pension plans and other qualified employee plans, see Advisor’s Main Library: O – ERISA – FAQs.

Author: Jesse Mackey [1]

Why is this Topic Important to Wealth Managers? This blogticle represents part two a special series regarding advanced investing with ETFs. Recently there has been much discussion in the marketplace on the use of these tools and thus we present this topic for wealth managers who may consider these investment vehicles for their clients.

The existence of numerous disparate portfolio management methodologies in the institutional investment management world has not slowed the growth in popularity of Exchange Traded Funds (ETFs) and other Exchange Traded Products (ETPs) in the last several years. In fact, possibly the most convincing reason for the enormous popularity and success of ETFs is that they are so versatile. They are not designed for any one philosophy of investment, but can play a role in many different investment methodologies. Presented below are a few examples:

Passive Management Strategic Asset Allocation- For wealth managers and clients that use strategic asset allocation and adhere to a strict “Efficient Markets” view of the financial world, an entire diversified portfolio allocation may be built using ETFs, thereby minimizing costs/expenses to the investor, optimizing the transparency of the investment, and reducing risks associated with specific managers.

Active Management Strategic Asset Allocation- For wealth managers and clients that prefer to use actively managed components for the majority of the strategically allocated portfolio, they may also use ETFs to gain exposures to specific sectors that are not otherwise present in order to “round out” the allocation. They may also choose to use an ETF for the part of the portfolio devoted to the “efficient” markets, while the “inefficient” markets would be covered by an actively managed fund or separately managed account.

Tactical Asset Allocation and Absolute Return- ETFs have gained a great deal of popularity amongst wealth managers and clients that prefer to tactically shift the portfolio in anticipation or reaction to market events or other factors in an attempt to outperform the market. These investors are seeking to outperform (to the downside or the upside) not by selecting individual stocks or bonds, but by having an awareness and specialization in the qualitative/quantitative relationships between different areas of the market. ETFs allow them to have this specialization because they do not need to spend their time in finding stocks/bonds to fill out their allocation and can instead focus on inter-market relationship analysis.

Liability Driven Investing- The highly specific mandates/indexes associated with many ETFs mean that they are an excellent tool for Liability-Driven Investing (LDI). Passive Bond ETFs, industry-specific funds, leveraged ETFs, short ETFs, and the ability to buy/sell options on some ETFs make particularly attractive tools for this philosophy of investment, which focuses on hedging and insuring against risks as opposed to seeking risk-adjusted market returns.

Next week’s blogticles will present a discussion on wealth management and investing in tough economic conditions.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Jesse Mackey is the Chief Investment Officer of 4Thought Financial Group Inc. 4Thought is a boutique think tank created with the base vision of advancing individual freedoms and the human quality of life through economic means. This vision is pursued by applying the firm’s four specialties – Economic Theory and Research; Multi-Contingency Investment Management; Financial Planning for Business Owners and Individuals; and Support for Partner Firms and Advisors. You may contact Mr. Mackey at jmackey@4TFG.com or visit www.4TFG.com.

The Obama Administration’s 2012 federal budget proposal has revived two budget proposals that recent scandals have focused a slew of regulatory attention on private placements. And with examinations of private placements recently being characterized by a FINRA executive as a “major, major initiative,” you’d hardly expect the Securities and Exchange Commission (“SEC”) to consider relaxing rules for marketing private placements.

But that’s exactly what SEC Chairman Mary Schapiro told members of Congress the agency is looking to do.

Speaking before the U.S. House of Representatives Committee on Oversight and Government Reform, Shapiro said that the SEC is going to “take a fresh look” at rules relating to private placements and other securities offerings, both public and private. Specifically, she said that the agency will reconsider the private placement public marketing ban and the 500-investor threshold at which a company is considered “public.”

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of private placements in Advisor’s Journal, see Private Placements Becoming Much Riskier for Firms (CC 11-78) and Private Placements Becoming Much Riskier for Firms (CC 11-78).

Author: Jesse Mackey [1]

Why is this Topic Important to Wealth Managers? This blogticle represents a special series regarding advanced investing with ETFs. Recently there has been much discussion in the marketplace on the use of these tools and thus we present this topic for wealth managers who may consider these investment vehicles for their clients.

Since the advent of ETFs (Exchange Traded Funds), these investment vehicles have rapidly grown to account for a significant portion of the daily trading volume on the world’s major exchanges, and by some estimates will account for the majority of trading volume during the next decade. But despite the widespread use of ETFs in the institutional investment world, few individual investors or their wealth managers really have a firm grip on the uses or purposes of these instruments. Although there are many different flavors of ETF, generally speaking ETFs can be described as a mutual fund designed to passively track a specific securities index that can be traded like a stock on an exchange. This leads us to identify several attractive characteristics of ETFs for your clients:

Transparency of Indexes – Most ETFs (though not all) are designed to replicate the performance of a specific index, which is in turn designed to mimic the performance of a specific financial market (i.e., large cap stocks, short term corporate bonds, etc.). As a result, the client is able to achieve direct exposure to the specific area of the financial markets that is being targeted, without much question as to the “style drift” or the management methodology of the underlying portfolio. There is a great deal of transparency and clarity for the investor as to the reason and timing for transactions placed within their ETF holdings.

Lower Manager-Specific Risks- In index-tracking ETFs there is a lower degree of exposure to active manager-specific risks for the investor. Since the ETF is designed to passively follow an index regardless of the positive or negative performance of the underlying securities, there is very little exposure to the risks associated with the potential underperformance of any one active manager, which would otherwise be present with a traditional actively managed mutual fund. The average active manager has a tendency to over-perform the index in some years and under-perform the index in others, whereas the passively managed ETF is intended to do exactly what the index does, and so will not dramatically over or under-perform, by design. However, ETFs do have a form of risk known as tracking error, in which the ETF itself may not exactly replicate the benchmark index, due to a multitude of factors.

Intraday Tradability – ETFs are traded in real time on an intraday basis on an exchange, as opposed to being redeemed daily by the mutual fund company (like a traditional open-end mutual fund). As a result, investors are able to buy or sell the security with greater control over the timing and price. As with shares of stock, investors can place market orders, limit orders, stop orders, etc. This creates opportunities for active management that would not otherwise be available with a traditional mutual fund.

Targeted Exposures – ETFs allow your client to gain targeted exposures to very specific sectors or areas of the financial markets, while still maximizing numerical security diversification to the extent possible within the selected market, and without having to select individual securities (stocks, bonds, etc.). For example, a client could select an ETF that provides exposure to US Consumer Staples stocks, which might have an underlying portfolio of 40-100 stocks that provide access to an entire sector of the economy. This has implications for portfolio management both from the strategic asset allocation perspective, and for tactical asset allocation methodologies.

Low Turnover and Tax Efficiency- One commonly cited reason to consider using ETFs is for the purposes of tax efficiency relative to traditional mutual funds. Traditional actively managed mutual funds may have a high degree of underlying portfolio turnover as a result of the rapid buying and selling of securities. High volume/frequency transactions can produce tax liabilities whether the purchase/sale was ultimately beneficial for the overall portfolio or not. Because ETFs usually track an index, which often will not experience a large degree of change in the components over short periods, ETF turnover ratios are usually very low. In addition, as a result of the “Creation Unit” structure under which ETFs are issued, the holder’s exposure to taxation due to fund redemptions is reduced or eliminated. All things being equal, these features may result in less tax liability for the investor when it’s time to file the return.

Tomorrow’s blogticle will continue our special series on ETFs.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Jesse Mackey is the Chief Investment Officer of 4Thought Financial Group Inc. 4Thought is a boutique think tank created with the base vision of advancing individual freedoms and the human quality of life through economic means. This vision is pursued by applying the firm’s four specialties – Economic Theory and Research; Multi-Contingency Investment Management; Financial Planning for Business Owners and Individuals; and Support for Partner Firms and Advisors. You may contact Mr. Mackey at jmackey@4TFG.com or visit www.4TFG.com.

Dodd-Frank’s whistleblower provisions may be more effective than originally anticipated, but will they lead to increased corporate compliance?

Opponents of the whistleblower rules believe the rules are more likely to inhibit compliance procedures than to improve them. The generous Whistleblower provisions have also raised concerns about the already overcommitted SEC being overwhelmed by frivolous claims by employees who view the program as a lottery with multi-million dollar payouts.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Dodd-Frank updates in Advisor’s Journal, see Is Barney Frank’s Resolve to Implement Dodd-Frank Weakening? (CC 11-95).

Why is this Topic Important to Wealth Managers? This blogticle is a follow-up to the discussion presented yesterday on international estate planning considerations for non-resident aliens generally. We have again provided this information for wealth managers with international clients who may have estate tax issues to contend with.

How is a qualified domestic trust (“QDT” or “QDOT”) used between a citizen, resident, or nonresident alien and his/her non-citizen spouse particularly for estate tax planning purposes?

One of the major planning tools that wealth managers will often take advantage of with regards to estate tax for married couples is the use of the unlimited marital deduction. However, when planning for a client with a non-citizen spouse it is important to note that Congress has eliminated the unlimited marital deduction for assets passing to a non-citizen spouse for estate tax purposes.

Nevertheless, property passing to a citizen spouse or to a qualified domestic trust qualifies for the marital deduction. In addition, if the surviving spouse is a U.S. citizen, then the estate of the donor spouse is entitled to the marital deduction even if the donor spouse is a nonresident alien.

The use of a QDT may provide relief to those who are unable to take advantage of the unlimited marital deduction directly.

The QDT was created statutorily by Congress. Its function, like the unlimited marital deduction, is to allow a non-citizen spouse to defer estate tax on the donor spouse’s otherwise taxable assets until the death of the surviving spouse, or until otherwise the QDT loses its status as such.

First, the QDT instrument generally requires that at least one trustee of the trust be an individual citizen of the United States or a domestic corporation.

The trust instrument needs to also provide that no distribution (other than a distribution of income) may be made from the trust unless a trustee who is an individual citizen of the United States or a domestic corporation has the right to withhold from such distribution the tax imposed by this section on such distribution.

Second, if the fair market value of the assets passing, treated, or deemed to have passed to the QDOT (or in the form of a QDOT), determined without reduction for any indebtedness with respect to the assets, as finally determined for federal estate tax purposes, exceeds $2 million as of the date of the decedent’s death the trust instrument must meet the following requirements:

• The trust instrument must provide that whenever the Bank Trustee security alternative is used for the QDOT, at least one U.S. Trustee must be a bank as defined in Code section 581;
• The trust instrument must provide that whenever the bond security arrangement alternative is used for the QDOT, the U.S. Trustee must furnish a bond in favor of the Internal Revenue Service in an amount equal to 65 percent of the fair market value of the trust assets (determined without regard to any indebtedness with respect to the assets) as of the date of the decedent’s death; or
• The trust instrument must provide that whenever the letter of credit security arrangement is used for the QDOT, the U.S. Trustee must furnish an irrevocable letter of credit issued by a bank as defined in section 581, a United States branch of a foreign bank, or a foreign bank with a confirmation by a bank as defined in section 581.

The third and final requirement is that an election under the Code must be applied to such a trust by the executor. [1]

For additional information on this subject see AMAFX: Nonresident Aliens and Citizens of U.S. Possessions.

Tomorrow’s blogticle will present a special series on ETFs.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] IRC § 2056A.

Should insurance applicants and third party investors be allowed to make material representations when applying for life insurance, if they can manage to conceal misdeeds for at least two years? The United States District Court for the Southern District of New York thinks so.

In the latest STOLI case coming out of the federal courts, judge and jury considered whether outright fraud on a life insurance policy application is sufficient to invalidate a policy after the contestability period has passed. The jury and court held for the investor in the $5 million case.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of STOLI in Advisor’s Journal, see STOLI Scheme Lands Insurance Agent in Jail (CC 11-92), New York Court of Appeals Upholds STOLI Arrangement (CC 10-106), & Recent STOLI Case Is a Big Win for Insurers (CC 10-59).