Archive for January, 2012

Missing MF Global Customer Funds May Have ‘Vaporized’

Jon Corzine still doesn’t know where the money is, and it seems nobody else does either.

A “significant amount” of the missing $1.2 billion in MF Global customer funds may have been “vaporized,” the Wall Street Journal reports, citing “a person close to the investigation” into the missing funds. The money could have gotten lost during chaotic trading leading up to the brokerage firm’s bankruptcy filing.

Yet only one week before the brokerage collapsed, MF Global’s CFO sent an email to Standard & Poor’s saying the company had “never been stronger,” according to Bloomberg.

Some officials reportedly believe that despite public claims to the contrary, the firm was growing more concerned about its European bets, employees dipping into customer money and using it to unfreeze assets at banks and meet demands for more collateral, according to the WSJ.

The report comes nearly two months after former MF Global CEO Jon Corzine, once chief executive of Goldman Sachs, told a Congressional panel “I simply do not know where the money is.” The firm filed for bankruptcy in October, after risky bets related to the European debt crisis compromised its position. Corzine resigned shortly after the bankruptcy and the company laid off more than 1,000 workers.

The bankruptcy filing also spawned investigations by multiple federal agencies into allegations that the firm misused hundreds of millions in customer funds. In addition to Corzine, the company’s CFO and COO also told lawmakers that they don’t know where the missing funds are. Some of the missing money may have been found at a British JPMorgan Chase in November, according to The New York Times.

That hasn’t stopped the government from acting. Roughly two months after the extent of the firm’s collapse was made clear, the Commodity Futures Trading Commission, a federal regulator tasked with overseeing the derivatives market, approved “the MF Global rule” in order to avoid similarly improper uses of client money in the future, according to The New York Times.

Even if the rest of the money turns up — a prospect that seems unlikely — Corzine’s reputation may never recover. The former New Jersey Governor, Senator and CEO of Goldman Sachs has become somewhat of a pariah on Wall Street since the meltdown. Some of his former employees created a pinata featuring a photo of him at a holiday party and President Obama gave back tens of thousands of dollars of campaign donations from Corzine.

Source: Huffington Post

Posted by Steven Maimes, The Trust Advisor.


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Do You Have What Baby Boomer Investors Are Looking For?

Advisors take note: there are 77.6 million Baby Boomers and another one turns 50 every 8.5 seconds.

Clearly, the number of American investors approaching retirement is on the rise — and this is the biggest opportunity of all time for advisors who know how to meet their needs.

For today, let’s leave the retirees out of the equation. I want to concentrate on the younger cohort of Baby Boomers who still have some time until retirement and are still very much in the accumulation stage of their financial lifecycle.

These people are currently 46 to 55 years old. As they look to transition their portfolios to the distribution phase, many will look for a new advisor. Or, if they elect to stay with their current advisor, they may be looking for an expanded or modified set of services to meet their new needs.

Either way, there are several points to keep in mind:

1. Complexity is the name of the game.

At this stage of life, investors have many commitments and a complex set of circumstances and needs. Over the years, they have amassed more obligations — and more assets. They need higher-powered legal advice. They need more sophisticated accounting expertise. They need a more detailed financial plan.

Serving these clients can reward a team effort. As the lead advisor, you can provide the investment management core of the offering while playing quarterback as part of a larger team that provides services according to its areas of specialty.

It’s essential that you communicate with clients that there is a coordinated plan to help them meet their investment and retirement objectives — with a leader (you) providing direction and oversight and key players providing the vital services and expertise to provide the nuts and bolts.

2. Provide all the key services that can be categorized as “Financial Management 101.”

This involves ensuring the daily cash flow and engaging in the day-to-day planning that enables your Baby Boomer clients to run their lives. They know their lives have gotten more complicated. Simplicity is what they’re really looking to you to provide.

Ask your clients if they would like you to help them with:

* Planning for living expenses for clothing, food and shelter

* Bill paying

* Caring for pre-college children, college-age children, graduated post-college kids who are living back at home

* Insurance requirements

* Accumulating retirement savings

* Wills, trusts and after-life planning

Yes, even high-net-worth clients need to plan and make choices in these areas. Or if they do not need to make choices, they would still like to have the day-to-day irritations off their plate and on yours.

3. Extend your services to cover special situations that you don’t see every day, but that can be pivotal.

Do your prospective and current Baby Boomer clients have special circumstances? Might they do so in the foreseeable future? Now is the time to let them know that you can provide extraordinary service to help them cope with less universal challenges.

You can help them meet the needs of parents who live with them and/or depend on them for some form of financial support.

Many people have special needs dependents, which can be a very costly obligation in terms of money, personal time and commitment. Life planning is vital here, or your clients could spend their life savings in this category and have nothing left for themselves.

Caring for a sick spouse restricts the entire household’s ability to generate income and draws from existing resources. Financing this care is crucial, and when framed in these terms, the conversation goes far beyond any abstract “long-term care planning” bullet point on your brochure.

Divorce and child support can easily complicate any household’s finances.

Many clients in this age group own their own business and it serves as the basis for all — or most — of their net worth. Is the enterprise burdened with debt or other liabilities? Is there a succession plan in place? What happens when your client wants (or needs) to retire?

4. Drill down into the data

Segmenting your business offering into all these areas requires a lot of information at your fingertips.

The risk here is “data exhaust,” a term from the high-tech world where corporate decision-makers breathe too much data and are effectively poisoned.

Your clients want clean, streamlined, purified information about where they are financially.

You need clean information to give them and to ensure that you are always ready to offer them the right service at the right time.

If you’re a Baby Boomer client, would you rather speak to the advisor who sees the whole landscape — with no blind spots, even on assets held by other advisors or custodians — or the advisor who is content to only see what’s obvious to everyone?

The competitive advantage here is clear.

You might also be interested in …

Help Your Clients Better Prepare For the Future: A Discussion with Harold Evensky on Managing Retirement Assets (Complimentary Whitepaper)

Will it be a Baby Boom or Bust For You? (Free Whitepaper)

The Hidden Threat: Why Your Clients Will Leave You When They Retire (Blog post By Stephen Peters, Institutional Sales Director, ByAllAccounts)

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More Advisory Firms Seen Switching to Trust Charters to Ease Regulation

As a hedge against possible FINRA oversight of advisors and re-enactment of the Glass-Steagall Act  in a second Obama term, more RIAs are trading their SEC registration for trust licenses in top trust states.

States like New Hampshire and South Dakota report robust interest from wealth managers, family offices and other advisors looking to offer their clients the benefits of an in-house trust company as a hedge against possible FINRA oversight of advisors and more restrictions on how advisory firms can make money.

State chartered trust companies can do everything an SEC-registered advisor can do, plus serve as trustee and custodian. These privileges were given to both banks and trust companies with the enactment of the National Bank Act.

After a rocky year in the markets, high-net-worth clients are on the move — and advisors looking for a competitive edge are hunting whatever it takes to give those investors everything they want.

And what those investors want, according to the experts, is an easy way to pass their wealth on to future generations as securely and efficiently as possible. In other words, they want an advisor who can help them set up and fund trust funds.

“Clients are constantly seeking greater certainty over the safety, disposition and management of their assets,” says Bob Ellis, a consultant at Fast Track Advisors.

By creating their own captive trust companies, wealth advisors more strongly retain clients.”

That’s the logic that’s driven dozens of advisors to start trust companies across the country in the last few years, with the lion’s share going to the states that combine investor-friendly statutes with advisor-friendly regulatory environments.

South Dakota alone gained about a half dozen public trust companies last year, with more applications in the pipeline. Nevada, Delaware and other top-tier jurisdictions have also been big winners in what research firm Cerulli Associates calculates is a decade-long boom in trust company creation.

“Interest seems to be on the uptick,” says Mark Purpura, chair of Delaware’s state bar association’s banking committee.

“I currently have several trust company formations in the pipeline.”

Becoming the trust advisor

Advisors have gotten so hungry for information on this topic that the Trust Advisor is running an in-depth webinar in two weeks. (Register here.)

But all this interest is really business as usual, says former Nevada banking commissioner Scott Walshaw, who — like Purpura and Ellis — will be a panelist.

“The motives haven’t changed much,” he explains. “What’s changed is that there is more opportunity for people to open trust companies now than ever before.”

Wealth managers still see a trust charter as a way to differentiate themselves in the marketplace, tempt new clients and keep old ones from straying. Read the rest of this entry »

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Poll: Gold Rushes for 12th Year of Gains, Record Seen

Gold’s record-breaking rally of the last decade is set to extend into this year and next as monetary policy stays loose and central banks build reserves, a Reuters poll showed on Thursday. 

Silver is expected to decline for a second year running after hefty price swings spooked investors last year.

The survey of 45 analysts carried out by Reuters in January predicted an average spot gold price of $1,765 an ounce in 2012, 14 percent higher than last year’s average of $1,544. This was itself 26 percent above 2010’s $1,228 an ounce.

Several big banks, including UBS, Morgan Stanley and Societe Generale, forecast the average price would break above the $2,000 level, which would be well above last September’s record $1,920.30. Their predictions highlight the extreme nature of a rally that started in 2001 from an average level of $270.

The Federal Reserve’s pledge this week to keep U.S. interest rates at rock-bottom levels for a number of years and hints at fresh monetary easing are set to fuel further gains in gold as the moves cut the opportunity cost of holding bullion and keep the dollar in check.

But signs of strength in the U.S. currency late last year have unsettled investors, while rising appetite for other assets such as stocks could make trading conditions turbulent.

“If you look at gold’s performance up to mid-year 2011, it was almost a straight line higher,” said Tobias Merath, an analyst at Credit Suisse. “Then we had this period of funding stress and a stronger dollar, and we saw a correction,” Merath said.

“Now gold is tentatively recovering. It is probably resuming its upward trend, but what we believe will happen is that the straight line we are used to will turn into a zig-zag,” he added.

Central banks’ commitments to low interest rates are firmly underpinning prices, as is a move in official sector activity in the gold market from selling to buying. Central banks bought more bullion last year than at any time since 1964.

Concerns over sovereign risk in the euro zone, which have even extended to speculation the bloc may break up, sparked heavy gold buying in Europe and elsewhere in 2011 as investors diversified out of European assets. But the support offered by the crisis has faltered in recent months.

“If you are investing in gold because you believe the gold price will go up, you will keep on putting money into it,” said David Jollie, an analyst at Mitsui & Co. Precious Metals.

“If you are buying it as an insurance policy for the rest of your portfolio, once you have a certain amount, do you really need to keep adding to that? I think the answer is, you don’t. Things will have to keep getting worse for you to think you need more gold.”

In 2013, gold is expected to extend its run higher, but the rate of appreciation will again be slower. The average forecast gold price for next year is $1,835 an ounce, just 4 percent above the forecast for this year.


Average silver prices meanwhile are seen easing to an average $33.21 an ounce this year from last year’s median price level of $34.99 an ounce, little changed from current levels.

Investors remain shy of the white metal, which is used in electronics manufacturing and jewelry, after prices slumped by a third in the five sessions after they hit record highs last spring.

“Silver’s violent price moves last year have undermined its investor appeal for the time being,” said UBS strategist Edel Tully. “The market needs fresh catalysts to encourage more participation.”

“We still do not rule out another stab at $50 an ounce. Given our expectation for gold to make new highs in the coming year, we could very well see silver enjoying some spillover benefits. But for this to happen, silver needs to rebuild its investor base,” she added.

“With 50 percent of overall demand accounted for by industrial applications, this could be a drag on silver’s performance.”

Silver’s appeal has been undermined by the decline in the photography sector, which 10 years ago accounted for around a quarter of demand.

By 2010, silver off take by that industry had dropped 64 percent in tonnage terms. Photography company Eastman Kodak filed for bankruptcy protection earlier this month after failing to embrace digital photography.

Silver mine supply has also hit record levels in recent years.

In 2013, the analysts polled see silver prices rising to $35 an ounce, up on their expectations for this year but still well below last year’s record high of $49.51 an ounce.


Posted by Steven Maimes, The Trust Advisor.




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Davos Not for Everyone — Just Ask PIMCO’s El-Erian

I’ve never been to Davos, despite attempts by many over the years to persuade me to go. Don’t get me wrong. I understand that it is a special event for many people, and for many reasons. It is anchored by wide-ranging and engaging agendas, and participants get to mingle with a global cornucopia of important people. It is also the place to see and be seen for heads of state, politicians, academics, thought-leaders, media pundits, CEOs, and movie stars.

The annual meeting of the World Economic Forum in that intimate setting remains one of the year’s hottest tickets, but its organizers want their event to be much more than what it currently is – a big, prestigious talk-shop. They want it to influence policy at the national, regional, and global levels.

Yet, over the years, and in the context of an increasingly unsettled and uncertain world, Davos has not had much impact.

I get a range of responses when I ask attendees why so few, if any, of the interesting discussions that have taken place in those beautiful Swiss Alps have led to change that improves the lives of most people.

Some say the strength of the typical Davos agenda is also a weakness. The topics are overly ambitious. In trying to cover too much for too many, breadth trumps depth.

Others cite the inherent difficulty of distilling the opinions of such a varied group of people into specific action points. This is never an easy endeavor, and it becomes a virtually impossible one when it involves so much wealth and so many egos.

Then there are those who believe that too much time is spent arguing about what has happened – especially when things have gone horribly wrong – and too little time is devoted to what lies around the next corner, and the one after that.

But most of the Davos devotees I talk to say the problem is more fundamental. They say that many of the attendees who truly matter are not interested in the organizers’ higher ambitions, and some are even suspicious of them. In either case, these key players do not want to give up control of their narratives, and they certainly do not wish to delegate any meaningful part of their personal agenda to Davos.

It will be difficult to overcome these obstacles unless Davos organizers make major changes. Specifically, they need to do two things that no one who puts on such events has seemed willing or able to do.

First, they must revise how Davos’s agendas and discussions are structured. To be more productive, more useful, they need to be much less inclusive at some key moments. Very difficult (and highly delicate) decisions have to be made about who to involve in certain meetings and who to exclude. This would require additional (and closely monitored) status levels for participants, which could only be implemented by changing the World Economic Forum’s current role of convener/facilitator into a much stronger one of super-conductor/enforcer.

Second, key participants must truly collaborate – something that has not happened. This lack of collaboration has been particularly costly at a time when the world teeters on the brink of an economic abyss.

Shared interests must come with a greater sense of shared responsibilities. Narrowly focused national agendas must develop greater peripheral vision, and mutual assurances must be supported by credible peer reviews. The probability of these things being done is small, if not de minimis.

I am not happy about this. Given the global changes in play today, there is an enormous need for better coordination and understanding among those who influence developments in critical areas. This world has lost many of its economic and socio-political anchors, and leaders are finding it impossible to keep up with developments on the ground. Suspicion too often displaces mutual trust, which is why this prestigious gathering will continue to fall short of its vast potential.

Even if nothing really consequential gets done there, Davos will remain a hot ticket, but I will not be going.

By Mohamed El-Erian

– Mohamed El-Erian is CEO and co-CIO of PIMCO

Source:  Reuters

Posted by Steven Maimes, The Trust Advisor.


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Romney Tax Break Rejected as Welfare for Rich in Investor Poll

Most international investors say a tax break allowing private equity and hedge-fund executives to pay lower tax rates than many average Americans isn’t warranted, according to a Bloomberg survey.

As the release of Republican presidential candidate Mitt Romney’s 2010 tax return heats up debate over a 15 percent top rate on so-called carried interest, two-thirds of those surveyed in the Bloomberg Global Poll say the tax break is unjustified. The lower levy helped Romney, former head of Bain Capital LLC, pay an effective rate of 13.9 percent on $21.6 million of income, when the top income tax rate is 35 percent.

Jonathan Sadowsky, chief investment officer at Vaca Creek Asset Management LLC in San Francisco, said he favors eliminating the break because he’s concerned about government deficit spending.

“I’m extremely worried about the debt,” he said. “Somewhere down the line, people are going to stop lending us money.”

About $7.4 million, more than one-third of Romney’s 2010 income, was from carried interest, which is the share of profits that make up most of the compensation for partners in private equity firms, hedge funds and real estate developments. Those fees are taxed as capital gains rather than ordinary income.

Sixty-six percent of poll respondents worldwide said the break isn’t justified, compared with 21 percent who said it is and 13 percent who said they had “no idea.” Among those living in the U.S., 67 percent said the lower rate isn’t justified, versus 27 percent who said it is. The Jan. 23-24 poll of 1,209 investors, analysts and traders from around the world has a margin of error of plus or minus 2.8 percentage points.

Economic Fairness

The survey bolsters the position of Democrats who have pushed for years to eliminate the special treatment of carried interest. Romney’s use of the break has renewed scrutiny as President Barack Obama makes economic fairness a theme in his re-election campaign and studies show that income inequality has grown dramatically over the past quarter-century.

Democrats have won high-profile allies on the issue, including billionaire Warren Buffett, Blackstone Group LP co- founder Pete Peterson and New York City Mayor Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP. Obama invited Buffett’s secretary to the Jan. 24 State of the Union address to highlight the Berkshire Hathaway Inc. chairman’s comments that he shouldn’t pay a lower tax rate than his employees.

Buffett Rule

In the State of the Union speech, Obama outlined a so-called Buffett Rule that would require people making $1 million or more to pay at least 30 percent in taxes.

Democrats are pushing to use repeal of special treatment for carried interest to help finance a payroll-tax break that expires at the end of next month as well as to prevent $1 trillion in automatic spending cuts set to begin taking effect at the end of the year. Republicans have blocked moves to raise the carried-interest rate, saying it will hurt the recovering economy.

Taxing carried interest as ordinary income would produce about $22 billion over a decade, according to the nonpartisan Congressional Budget Office.

Gerhard Summerer, president of DZ Financial Markets LLC in New York, said the lower rate is nothing more than “welfare for the rich,” saying the “average American citizen” gets no such breaks. “No one is advocating confiscating anyone’s possessions, but the fair taxation of income,” he said.

The revenue lost to the Treasury makes it more likely that lawmakers, under pressure to reduce the deficit, will have to cut services to lower-income Americans, said Sadowsky.

‘Misallocation of Capital’

“Who pays for that loss of revenue now that the government is short?” Sadowsky said. “Yup, the lower and middle class. So we have a misallocation of capital and resources from the poor and middle class to the rich.”

The carried interest debate is getting mixed up with an “entirely different” issue of “extremely wealthy people” who are “paying extremely low tax rates, which doesn’t exactly sit too well with a struggling economy,” said Andrew Paolillo, a portfolio manager at Rocky Hill Advisors Inc. in Peabody, Massachusetts, who defended the lower tax rate.

“Carried interest from an investment in a fund is more similar to simply buying shares of a stock than receiving a salary,” he said in an e-mail. “It is earning money from money previously invested, instead of earning money for services rendered.”

‘Scream Bloody Murder’

Christian Thwaites, president and chief executive officer of Sentinel Investments in Montpelier, Vermont, scoffed at complaints that a tax increase would be a blow to the private- equity industry.

“I’m sure they’d scream bloody murder and say this is the end of the world, but I just can’t believe it,” said Thwaites. “There’s plenty of reasons to be in private equity other than just the fact that you get a 20 percent tax improvement.” There are “still going to be pretty decent returns available” even if the tax rate is raised, he said.

Others said they don’t think it makes sense to treat carried interest as anything other than income subject to regular rates.

“It is used to pay bonuses to general partners, and I see no reason why bonuses should not be treated as income,” said Don Lindsey, chief investment officer for George Washington University in Washington.

John Boland, co-founder of Maple Capital Management in Montpelier, Vermont, said “if it looks like a duck and quacks, calling it a chicken does not change the fact it is duck, to paraphrase Ronald Reagan.”

Source: Bloomberg

Posted by Steven Maimes, The Trust Advisor.



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Romney’s Offshore IRA Raises Eyebrows

Like many Americans, Mitt Romney has an individual retirement account. Unlike most Americans, Mr. Romney has between $20.7 million and $101.6 million in it, a big chunk of his fortune.

Experts on estate planning said it is highly unusual to accumulate such a considerable sum in an IRA, an investment vehicle restricted by annual contribution limits. It appears that Mr. Romney’s grew so large mostly because it holds investments in Bain Capital, the private-equity firm he helped start.

Under federal law, Mr. Romney isn’t required to pay annual taxes on the account’s investment gains, and the bulk of his contributions to the fund are likely to have been pretax dollars, IRA experts say. As such, the Romney IRA has enabled the current Republican front-runner to defer paying taxes on a sizable portion of his wealth—although he could face high tax bills when he eventually withdraws the money.

A Romney campaign aide said the tax treatment for his IRA “is the same for Gov. Romney as it is for every citizen of the U.S.”

Several estate-planning experts said they know of others with IRAs of more than $100 million, but they are rare. Typically, they said, that occurs when founders of companies invest in their own shares, which then take off.

Jonathan Rikoon, a lawyer at New York’s Debevoise & Plimpton LLP who advises private-equity-fund executives on estate planning, said Mr. Romney’s reliance on a tax-deferred retirement plan for so much of his wealth could end up costing him. An IRA allows a small immediate tax savings, plus deferral of taxes, he explains. But income from the account, when eventually withdrawn, will be taxed at the higher ordinary-income rate, not the lower capital-gains rate that might have applied if Mr. Romney had held the investments outside the fund.

“It’s probably not a slam dunk” from a tax-efficiency standpoint, he said. But Mr. Rikoon said it is impossible to tell without knowing the rest of Mr. Romney’s estate plan.

Mr. Romney is one of the richest presidential candidates in decades, and his GOP opponents increasingly are trying to turn wealth into a liability. President Barack Obama is expected to do the same if the former Massachusetts governor wraps up the nomination. Mr. Romney’s tax liability has emerged as a debating point in the GOP nominating contest, a proxy for a bigger argument over who should shoulder the nation’s tax burden.

In recent days, Mr. Romney’s rivals have pressed him to release his tax returns. They have attacked him for his role at Bain Capital, the source of his wealth. When Mr. Romney revealed Tuesday that his effective federal income-tax rate had been about 15% in recent years, both the White House and GOP candidates used the number as a cudgel.

Mr. Romney’s investments currently are held in a blind trust, meaning that he no longer makes decisions about individual holdings.

Asked last month about his taxes, Mr. Romney said: “I can tell you we follow the tax laws, and if there’s an opportunity to save taxes, we, like anybody else in this country, will follow that opportunity.”

The Wall Street Journal analyzed Mr. Romney’s latest federal financial-disclosure report, filed in August, to glean clues about his tax strategy.

IRAs were established to help people save money for retirement. They allow some holders to contribute a limited amount of pretax dollars each year to an account. It also is possible, in some cases, to contribute after-tax money. Investment gains generally accumulate tax-free until the holder begins to withdraw money during retirement.

Federal law also typically allows people to roll over into an IRA assets held in a workplace savings account, such as a 401(k) plan, after they leave an employer.

Mr. Romney’s retirement account wasn’t a Roth IRA, on which he would already have paid taxes, according to the campaign aide. He is required by law to begin withdrawing funds from his account beginning in 2017, when he reaches age 70½. Those withdrawals will be treated as ordinary income, which currently is taxed at a maximum federal rate of 35%. (For most Americans, IRAs make sense because their savings are so modest their retirement income won’t likely trigger high tax rates.)

The Romney aide declined to provide a precise value for Mr. Romney’s IRA account. According to his financial disclosure report, it was worth between $20.7 million and $101.6 million. The same disclosure form estimated Mr. Romney’s full wealth at between $84.8 million and $264.7 million. His campaign has said the actual figure is toward the upper end of that range, or $190 million to $250 million.

Mr. Romney reported his IRA produced income between $1.5 million and $8.5 million from the beginning of 2010 until Aug. 12 of last year.

Before he was elected Massachusetts governor in 2002, Mr. Romney’s main private-sector employer was Bain Capital, where he worked from 1984 to early 1999. During that era, the maximum annual pretax amount that could be contributed to an IRA was $2,000, and the maximum pretax contribution to a 401(k) plan was $30,000, including an employer match.

Michael Whitty, a lawyer at Vedder Price in Chicago who advises private-equity executives, said it is impossible to determine from Mr. Romney’s public disclosures how the IRA grew so large. Based on its listed holdings, which include many Bain Capital vehicles, Mr. Whitty theorizes Mr. Romney may have invested in Bain funds through a 401(k)-type plan, or directed some of his Bain holdings into such a plan, which he then rolled into an IRA.

Geoffrey Rehnert, a former Bain Capital partner who helped found the firm in 1984, said in that era it had a 401(k) plan that allowed employees to invest pretax dollars in its deals.

Mr. Romney’s aide said that the candidate “accumulated his IRA holdings through annual contributions, rollovers of sums in other retirement plans, and successful investments.”

Under current tax law, anybody investing an IRA in a private-equity fund, as Mr. Romney did, would likely incur a hefty special tax on “unrelated business income,” also known as UBIT. This tax, assessed at a maximum 35% rate, is meant to discourage tax-exempt entities such as an IRA, pension plan or endowment fund from unfairly competing with for-profit, taxpaying entities by operating a business without paying taxes on it. Investing in a partnership that uses debt to buy companies would trigger the tax, experts said.

It isn’t known whether Mr. Romney paid UBIT. His filings suggest use of a strategy involving offshore funds sometimes employed to avoid it, according to several experts.

One method used by tax lawyers is to have the IRA invest through an offshore affiliate of the private-equity firm, known as an offshore blocker corporation, which in turn invests the same money in the private-equity partnership. The tax is avoided because the IRA technically is investing in the offshore corporation, not in a private-equity partnership.

Tax experts say that might explain why Mr. Romney’s IRA includes holdings in Bain entities based in offshore locations, including one Cayman Islands entity that Mr. Romney listed as having a value between $5 million and $25 million.

Michael Knoll, a University of Pennsylvania law professor, said using offshore blocker corporations to avoid UBIT “is a form of tax planning that happens all the time.”

Asked about the offshore investments in Mr. Romney’s IRA, his aide said they were “in compliance with rules created to keep it tax deferred, just like it was intended to be.”

Source:  Online WSJ

Posted by Steven Maimes, The Trust Advisor.


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Romney Would Be the Wealthiest President in U.S. History

Today’s release of Mitt Romney’ tax return for 2010 makes clear that if he becomes President of the United States, he would be among the richest individuals to hold that office.

Romney reported adjusted gross income of nearly $22 million. Of that, $8 million was interest and dividends. In this current economic environment of low interest rates and minimal dividends,  an $8 million haul alone implies assets in the range of $200 million to $250 million. That’s in line with previous estimates and his own candidate’s financial disclosure statement, which lists broad ranges.

All in all, a pretty good stash. But in relative terms, Romney if elected would not be tops in presidential wealth. To see our list of the 10 richest U.S. presidents, click here.

For our money, George Washington wins hands down. In the largely tax-free environment that characterized colonial America, the Father of His Country was considered one of its richest residents, a product of his shrewd business sense, a marriage to a wealthy widow and several inheritances. He benefited from an older brother’s marriage into a powerful family, while early work as a surveyor helped give him a keen understanding of land.

His Mount Vernon plantation grew to 6,500 acres, and he had other acreage in Virginia and what became West Virginia. Washington ran farms, started businesses and owned lots of slaves. Indeed, in their 1996 book, The Wealthy 100: From Benjamin Franklin to Bill Gates–A Ranking of the Richest Americans, Past and Present, Michael Klepper and Robert Gunther ranked Washington 59th, ahead of later-day moguls like J. Paul Getty, Microsoft cofounder Paul G. Allen and Ronald Perelman. The authors’ ranking methodology used estimated net worth as a percent of the gross national product at the time.

Romney’s millions don’t even earn him runner-up status on the Forbes list of the Richest People in America. Our pick for No. 2: Herbert Hoover, perhaps the last true businessman to be elected (and, given the Depression that ensued on his watch, maybe not such a great reason to choose a business leader). Nearly two decades before taking office in 1929, he was earning $2.5 million a year in today’s dollars from the mining business. That’s far less than Romney’s 2010 income, but the U.S. economy was a whole lot smaller then. It’s our opinion that Hoover relatively was wealthier. He served as president without pocketing a salary.

The pre-presidential Thomas Jefferson gets our bronze and probably also places ahead of Romney. Due primarily to inheritance, Jefferson was considered one of the richest in his native Virginia. It was after he left office that his income was not commensurate with his spending. He essentially died broke.

But we put Romney ahead of our No. 4, John F. Kennedy. While some authorities have ranked JFK higher, we think not. Most of the family wealth resided with his tycoon father, Joseph P. Kennedy. Joe and his wife, Rose, outlived JFK, who thus did not receive an inheritance.

What about the current occupant of the White House? Barack Obama started out life relatively poor and was raised in a broken family with little access to significant wealth from family or other sources.  Yet he entered the Oval Office in 2009 having collected royalties from two well-received books, Dreams From My Father and The Audacity of Hope. His lawyer wife, Michelle, had been a high-paid hospital executive. Their 2006 tax return showed a gross income of $1 million. For 2009 their gross income was $5.6 million, with most of that coming from book royalties. (The $1.4 million Obama was awarded along with the Nobel Peace Prize was donated to charity and, under a special tax provision, wasn’t included in the Obamas’ 2009 gross income.)

His 2010 return wasn’t nearly as flush as Romeny’s.  Adjusted gross income was $1.7 million. But that didn’t include perks like free housing and transportation. Obama today is probably worth about $10 million, with the potential for a lot more after he leaves office, whenever that is.

What about the rest of the remaining Republican field? Newt Gingrich reported 2010 income of $3 million. But almost all of that appears to have come from the labor of himself and his wife, as opposed to existing investments that form the bulk of Romney’s wealth. We reckon Gingrich at $5 million. That’s also where we put Ron Paul.   By far the poorest candidate is Rick Santorum. We figure maybe $1 million–barely what a lot of people have in their 401(k) accounts.

But the current field–on both sides–proves this: Despite two centuries of campaign rhetoric touting identification with the common man, the simple fact is that no truly poor individual ever has become president of the United States.

Only four United States presidents actually were born in log cabins, Abraham Lincoln being the most famous. By the time he and the other three, Franklin Pierce, James Buchanan and James A. Garfield, entered the nation’s highest office, they shared one trait with its other 40 occupants: All had achieved a certain measure of financial prosperity.

Most of the wealthiest presidents came from distinguished families and had the benefit of inheritance, trust funds or access to family money besides whatever they accumulated on their own. Think the two Roosevelts, Theodore and Franklin.

Only a handful of the wealthier presidents could be said to be self-made. Hoover was one. Lyndon B. Johnson started out with humble origins but had achieved sufficient economic means from his Texas broadcast holdings by the time he reached the White House.

More recent U.S. presidents have been far from the poorhouse but, in our judgment, were not among the top 10 while in office. The two George Bushes, for example, grew up in privilege, attending Ivy League colleges and later benefiting from their own entrepreneurial efforts before entering elected politics. The elder Bush founded and sold an oil company while the younger Bush profited from the sale of the Texas Rangers, which he co-owned.

Like Obama, Bill Clinton came from a hard upbringing that included a missing father. But prior to winning the presidency, Clinton had been the long-time Arkansas governor and his wife, Hilary Rodham Clinton, a partner in the state’s largest law firm. After leaving office in 2001, Clinton reaped millions yearly from book royalties and lecture fees; he probably has never been richer than he is now.

Despite Clinton’s rewarding post-presidency, rich presidents have sometimes encountered financial problems after their service. Besides Jefferson, James Madison also fell from financial grace and died awash in debts.

Our evaluations take into account a number of factors, some of them admittedly subjective, including opinions of historians. To help adjust for two centuries of inflation and even deflation, we also look at a president’s worth compared to the economy of his day.

Source:  Forbes

Posted by Steven Maimes, The Trust Advisor.



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Frustrated Investors Are Firing Advisors Who Don’t Provide 360-Degree Service

Big opportunities for wealth managers looking to gain referrals and add to their assets — as long as they can keep their current clients happy.

Years of Wall Street scandals, fiduciary failures and a sagging market have gotten under the skin of wealthy Americans.

According to a recent survey, a full 60% of investors are currently considering firing their advisor and 44.7% have already terminated a relationship with an advisor in the past — interestingly enough, the exact proportion giving referrals.

These numbers reveal that if advisors are looking for an average of 16 new clients this year, they’re going to get them from each other — and that they’ll have to fight for every prospect.

“A lot of advisors get clients from referrals, but over 25% of the investors surveyed surprisingly said that their advisor had never asked them for a referral” explains Barbara Kotlyar of ByAllAccounts, which co-conducted the survey with Paladin Registry.

“This represents a huge opportunity for advisors who are confident in their practice to gain more business using their existing clients and networks by simply asking for an introduction or a referral.”

Earn your clients’ loyalty and then meet their friends

When asked why they terminated the relationship, the top 5 reasons investors gave were:

1. Poor performance
2. Too expensive
3. Slow response times
4. Lack of accessibility
5. Inadequate reporting

The data reveals that what differentiates winners from losers in today’s advisory market is the ability to overcome the fragmentation your clients feel.

A typical wealthy family can easily have three or four advisors, several bank accounts, interests in one or more business entities, trusts, IRAs, other qualified savings vehicles and even a brokerage account or two.

The statements come in at different times and are usually a month or two behind the news, so they always feel a little disoriented and off-balance.

Click Here for Full Survey

They need a quarterback, a head coach, someone with one eye on breaking developments and another on the long term.

They want what ByAllAccounts calls “holistic” service and other firms are calling “integrated” or “household-level” advice.

And as it turns out, 98.3% of the investors who get that all-inclusive perspective on their finances are happy with the level of service they’re getting, and 85% of them say there’s a zero percent chance they’ll fire their advisor this year.

Those figures are admittedly extremely high, but other components of the survey support the conclusion: advisors who can give their clients a top-down view of all their assets and liabilities retain their clients a lot longer, inspire more confidence and get more referrals.

Retention generates revenue as well as growth

And of those investors who are sticking around, 25.8% are being increasingly stingy with their referrals, arguing that their current advisor simply “haven’t earned” the right to get an introduction to their friends, families and professional colleagues.

Since almost half of all investors still find their advisors via referrals, advisors with ambitious growth plans absolutely must make sure their current clients are happy.

Retention comes first, then growth. If clients aren’t incredibly enthusiastic about what you’re offering, find out what they actually want.

You might be able to give it to them. Then, when they’re feeling good, ask for those referrals.

Success breeds success, and as Barbara Kotlyar has discovered, it’s paying off in the here and now.

“Advisors with the ability to monitor and advise on assets that aren’t under their direct management are charging for the service,” she says.

“The 401(k) or other account stays right where it is, but they’re asking the client to pay between 50 and 100 basis points on those assets. And they’re getting no push back at all.”

Scott Martin, senior editor, The Trust Advisor

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Steve Jobs Doll Dead On Arrival after Showdown with Family and Estate Managers

Case highlights importance of defining intellectual property in estate plans. Apple won this round, but the disposition of “personality rights” may be stickier than many advisors would like. Posthumous publicity is not protected in all states.

When a Chinese company came out with a Steve Jobs doll a few weeks ago, we weren’t surprised to see Apple’s lawyers shut it down very quickly.

After all, the top estate planners we talked to had already warned us that Jobs had probably been very careful to assign control of his distinctive likeness when he knew that his cancer would end up killing him.

That control included archival footage and even the right to re-edit previous public appearances into “new” Apple product announcements or endorsements.

“Given his private nature and the tremendous value of his image, he almost certainly assigned his rights of publicity to his trust or some other corporate entity,” notes Bernie Vogel, CEO of Silicon Valley Law Group’s estate planning practice.

The Jobs family seems to have used that legal framework to apply “immense” pressure on Hong Kong toy maker In Icons, which was going to sell the dolls for $99 apiece.

And since Apple reportedly owns the right to sell commercial products that bear the names of employees, simply naming the doll after Jobs was asking for trouble.

Publicity, privacy get hazy after death

But estate planners may have a bit more trouble ensuring that their clients are similarly protected from posthumous “tributes” may not have it so easy.

In a majority of states, control over publicity ends at death, but there are exceptions.

Jobs’ home state of California voted in 1999 to extend the right to profit from a celebrity’s public image to 70 years after death — a provision designed to protect the estates of stars like Fred Astaire.

Before the people at In Icons gave in and canceled their doll, they argued that Jobs wasn’t a movie star, so they could do what they like.

That’s not quite true, the publicity gurus say. All you need to be covered is to be famous enough for your likeness to have commercial value when you were alive.

Jobs definitely qualified as this kind of “personality,” as the very existence of this doll demonstrates.

His appearances on Apple’s behalf, for example, made billions of dollars for the company’s shareholders, and an unauthorized product dilutes that personal brand.

Assigning that brand to his heirs is possible because he was a celebrity and there’s actually a material interest to pass on.

For most people — even high-net-worth clients — there may not be a brand to pass on. In that scenario, the estate wouldn’t even be able to fall back on rights of privacy, since the dead are currently not entitled to that.

That’s probably the most disturbing aspect of this.

If you’re not famous, the Hong Kong doll maker can do whatever it wants with your image.

The only thing holding them back is the lack of a profit motive.

Protect what can be protected

The Jobs case highlights the importance of spelling out the intangibles in a trust or other testamentary document.

Sure, a lot of estate planners are content to assign the real property and the liquid assets, especially if there aren’t any patents or literary assets.

But intellectual property adds up to a lot more than copyrights and patents that can be held in trust for future generations or sold to a corporate buyer.

Every one of your clients has correspondence to protect, photographic archives, diaries and notebooks.

Ordinarily, access to those more personal documents passes to the family, but why trust your clients’ wishes to posterity?

With Jobs, for example, the personal papers were almost certainly locked up, Silicon Valley lawyer Bernie Vogel tells me.

Otherwise, the action figures could only be the first wave of trouble for the notoriously media-shy technology guru.

“There are tell-all books, unauthorized movies to worry about,” Vogel explains. “Addressing the ultimate disposition of the raw materials and who gets access can make those projects more difficult and less likely to interfere with your client’s wishes.”

Vogel says he’s doing a lot more work with his clientele to get their intangible wishes on record.

Naturally, he’s in California, so they can benefit from that state’s posthumous publicity laws.

But even in states that don’t recognize these rights after death, the law can change, so it’s good to have a clear statement of your clients’ wishes on file.

New York, for example, has been pushing to protect its celebrities’ images for a few years now, while places like Indiana have enacted rules that prohibit anyone from making money off any dead citizen’s image for a full century.

Taking the struggle to the fans

If nothing else, an estate can use the statement to influence public opinion and show the world that a product is out of line with the wishes of the deceased.

The company that was making the Steve Jobs doll maintains that they “have not overstepped any legal boundaries” and could theoretically sell the toys tomorrow if they wanted to do so.

However, given the strong protest from the Jobs family — who know better than anyone what Steve would have wanted — it’s likely that diehard Apple fans would have stayed away anyway.

Scott Martin, senior editor, The Trust Advisor. Jerry Cooper and Steven Maimes contributed to the research.


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