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Flip Your Family Limited Partnership?

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With the onslaught of new tax laws you may be wondering if you should dissolve your FLP (Family Limited Partnership)? In short: no. If your FLP was formed for the appropriate reasons and was managed properly by your advisor this is no time to dismantle it. As a financial planner The Private Advisory Group strives for efficiency and accuracy of appropriately managing our client’s capital better. By using an FLP we can effectively do this. The following are five commonly used myths to dissolve an FLP. Below are reason why one shouldn’t do this.

1. The cost of maintaining an FLP (bookkeeping, tax returns, legal bills) is too great,

Why Not? Actually the truth is when and FLP is administered properly, there are no costs. Lamentably in an effort to save money and cut corners clients undermine the planning objectives that were the basis for originally setting up the FLP. Any costs should be offset by the benefits that the FLP is currently giving them. For instance, if a particular family has 10 different investment accounts, would they incur more costs with the management of those 10 individual accounts than using one aggregated FLP? If there is a savings using the FLP meaning the savings will be large enough to lower management fees then it’s worth it. Although an FLP requires more management its total costs are not incremental. Finally, what are the added benefits? They include but are not limited to asset protection, control, and avoidance of probate.

2. Dissolution is simple and shouldn’t cost much: just return my shares of the assets.

Why Not? Disturbing securities from an FLP to the partners may not be tax-free if the value of those securities exceeds the adjusted tax basis in the FLP. Your client needs a CPA to figure it out. Also, many FLP’s contain a variety of assets, from interests in a family business to marketable securities. Usually, different family members want different assets. That results in disproportionate distribution and that spells tax complexity.

3. Congress is repealing the gift and estate tax on FLP’s owning passive assets like securities and real estate, so why keep them?

Why Not? It’s a true statement that the Pomeroy bill H.R. 436 would just that. But this bill has been proposed before and hasn’t passes, so perhaps the same is still true and there is a window of planning opportunity. Further, FLP’s should never have been set up only to obtain gift- and estate-tax discounts. All those other benefits are unaffected by the gift- and estate-tax change, even if it does happen.

4. While an FLP can provide some asset protection, it’s not perfect.

Why Not? Few things in this life are perfect. However, this does not exclude the fact that we use them. If an FLP is properly operated and planned to maximize asset protection, It can provide a greater level of protection. There are also different types of risks that an FLP can protect against. Such as, divorce which can annihilate a clients assets. An FLP can help maintain the integrity of separate assets a client might receive, such as gifts or inheritance. FLP’s prevent a commingling of assets.

5. FLP’s are big tax audit triggers. It’s better to get rid of them so the IRS won’t know.

Why Not? Having an FLP interest, especially with discounts for lack of marketability or control, is a gift- and estate-tax hot button. But before you dismantle your FLP, step back. IRS gift- and estate-tax auditors are very sharp folks. If you filed gift-tax returns reporting early FLP gifts, they’ll know about it. Its routine on an estate –tax audit for agents to ask for more than two years prior income tax returns. So unless you dismantled the FLP years before death, its existence will be easy to spot. Most importantly, if you had real nontax savings motives for setting up an FLP, and you administered it properly, why hide?

ref: Martin M. Shenkman. December 2009

Homebuyer Tax Credit – Good, Better, Best

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As congress has struggled to find a solution to fix a weak housing economy some say that the answer lies in giving new home-buyer tax credits. Since July of 2008 congress has given homebuyers an opportunity to apply for this tax credit and it will also be true for 2010. This time around the tax credit will be extended to more affluent homeowners whose tax rates lay in higher income thresholds.  Ida Yarbrough, a CPA in Los Angeles California said, “The additional features create an incredible synergistic effect for new homeowners.” Also in an attempt to free up the credit crunch congress has postponed the deadlines and given breathing room to those who are trying to finance a mortgage.

The third round of tax credits will be slightly different than those in 2009. First of all, all those single taxpayers who annual income is less than $175,000 can now apply for the tax credit. This is up $50,000 from last year where the cap was only $125,000. And if you are filing your taxes joint with a spouse those limits will be raised from $150,000 to $225,000. Second, the tax credit is now available for taxpayers who haven’t owned a home for less than three years. The rule for 2010 is if a taxpayer has lived in a home for the past five consecutive years during the last eight the taxpayer is now eligible for a $6,500 tax credit as well. Lastly, if you are planning to purchase or have purchased a home that is over the sale price of $800,000 the taxpayer is not eligible for the tax credit. Also the time and income limits will be the same for the current version of the $8,000 credit. However, as of right now this taxpayer credit will not last the entire duration of 2010. The credit is most likely to end in June of this year.

If you are a parent or grandparent and you would like to help your loved ones on their first time home buying experience they can claim the advantages of this tax credit. If you have extended a loan to your youngsters who are at least 18 years or older, and claimed as a dependent; they can buy a home and use the tax credit.


Generational Knowledge Transfer

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As children become young adults there are many life skills that are important for them to learn. Whether it be taking more personal responsibility, learning the value of hard work, or finding themselves as an individual I’m sure that we would all agree that there is a particular skill set that they need to acquire before becoming fully independent. Among that skill set young adults need to learn how to manage their own personal finances.

 It’s a fact that the earlier one not only learns, but puts into practice ideas of investing the more financially sound that individual will become in the future. Responsible investing comes with knowledge of money, therefore it would be important to educate the ones we love on how to do this correctly and avoid common pitfalls that too many of us or acquaintances have made.

 A useful way to teach this productively is to create a checklist or a small workbook based on the five topics discussed below. It’s clearly up to you to establish how in-depth you would like to go with teaching the young adult on how to be financially responsible.

 1-Keep an accurate budget. This may be among the biggest challenges for young adults and for our nation in general. Excessive spending and being powerless in the face of debt can have a lasting negative impact on ones future savings and lifestyle. Debt causes unwanted stress and can trigger illness or unwanted situational issues. It is vital to maintain a budget and to be able to physically see how much money is being spent and where it is being allocated. Make sure that when money is earned that you pay yourself first. That is to say that before any bills are paid, the young adult set aside a portion of their earnings to invest or save for the future. This will teach him/her to live off less while building wealth. Once this task of setting aside money is completed he/she should proceed with paying bills and mapping out a monthly budget to anticipate upcoming financial burdens whether it be a prom or a car payment.

 2-Get Organized. Keep all important financial documents in a systemized order. This can efficiently be done in a file cabinet or in a digital database. As young adults practice this fundamental skill it will allow them to easily access all the papers they need currently or in the future. When tax time comes for them, they will be able to instantaneously walk to every document needed. This can save a lot of time and reduce a lot of stress in their early adulthood and later on in life.

3-Consolidate Debt-Destroy Credit Cards. Many credit card companies and loan agencies have made fortunes on 18 year olds because they are uneducated on how credit cards and loans work. There are countless stories of how young adults believe that when they get a credit card it means ‘free money.’ These are the same youngsters who are now adults and are buried in debt. The proper education can help them avoid some of the worst financial scenarios. Teach your youngsters the proper meaning of credit cards and loans; instruct them to be wise and prudent in making large purchases. Show them how interest can either be their friend or worst enemy.  This will save them headaches, sleepless nights, and it will allow them to take advantage of more opportunities. Note: cutting up a card does not ‘cancel’ it. Call or write first.

4-Credit Score. Earlier in my career I worked as a paralegal helping individuals restore their precious credit score. I literally spoke with over 40,000 Americans who had hammered their credit with unwise spending habits. When I spoke with them it was usually because they were trying to purchase a new home or a much needed vehicle for work. Lamentably, with a subprime credit score you can barely finance a Jolly Rancher let alone a vehicle. So educate them on how credit works. There are various web sites such as

5-Prevent Identity Theft. Identity theft can be one of the most personally devastating occurrences for a young adult. When I was in college, one of my best friends had her identity stolen after she shared a social security number. The person drained her bank account and left her stranded with little more than the clothes on her back. Because of her identity getting stolen, she had to quit school and move in with friends and start working two jobs. After two years she finally recovered what she had lost but it would have been much more advantageous if she had kept her social security more exclusive. Make sure your youngster has a paper shredder and help them destroy any other mail documents that might reveal their identity to someone rummaging through their garbage. Also help them learn about purchasing items online. Make sure they only use a secure website or PayPal which acts as an online bank account that has taken many security measures to insure that their customers keep personal information secretive.

Money can be a powerful resource if managed correctly. Without the proper education it can spell out a disastrous fate. Remember, a better understanding and richer education leads to more informed decision making. Stress is inevitable but if you help to instill these 5 skills in your loved ones, life will be much more enjoyable for them AND for you.


It’s Your Funeral…

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There are few things in life that are inevitable. One thing is certain. Unfortunately it’s your funeral. Amazingly enough, we spend little time planning about the one thing in life that is certain. After you or a loved one has passed on and the burden is upon those left behind the financial stress can sometimes be unbearable. When my father passed away it put undue tension on our family because death preparations hadn’t been made. This tension could have been avoided if there had been a simple planning session put together beforehand and arrangements made.

In one study, the cost to bury a loved one in 1993 it would have cost that person $2,900. The same expense in 1995 it would have cost $7,100. That’s a 145% price increase.  That was a decade and a half ago. Obviously prices haven’t increased 72.5% per year since 1995, but the price has increased dramatically nonetheless. There is a financial weight to be carried. So how can one go about planning a funeral?

First, preplan, don’t prepay.  Tell your loved ones exactly how and where you would like to be buried or cremated. Decline offers to pay upfront costs in case situations change. In many states there is no requirement for funeral homes to put your money in a safe investment or refund it if you switch venues.  There is also no guarantee that your investment will yield enough to pay for a casket entirely.

Second, just like any large expense in life it’s always wise to shop around. Get a feel for prices and find the best quality for your money. Prices for funeral services and caskets vary by thousands of dollars within the same metropolitan area. Even though you may be familiar with a funeral home nearby don’t settle until you feel comfortable with all the details.

Lastly, even though a death of a loved one is a physically, emotionally, and mentally draining make sure to take the proper amount of time to think things through clearly. Use your predetermined plan and follow it. Let it be your road map. If the proper amount of caution is taken beforehand, the funeral services will go smoothly and there will be less chance that you will be taken advantage of by those that monetize the business of funerals. And more importantly there will be less stress when the day of the funeral comes.


Winning by Not Losing–A Long Term Approach

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Golf Clubs #1

The Holy Grail in the investing world is a manager who is able to repeatedly time the markets—meaning they are fully invested when the market is moving up and fully in cash while the market is moving down. While many have claimed the ability, thus far no person or team of people have been able to successfully get in at the market lows and get out at the market highs on a repeated basis.

Nevertheless, after extensive research we found an investment team (Stadion) that has a proven track record of capturing most of the market upside while missing most of the market downside. Stadion is introduced in greater detail on the Current Commentary section of our website for those interested. (

Over the past 12 years, Stadion has more than a respectable track record. They have a 68% upside capture with only a 27% downside capture. Despite that high standard of performance, Stadion’s management team clearly acknowledges the following shortcomings, which have been borne out over the same 12 year period:

• They are not able, and do not try, to predict the future
• They are not able, and do not try, to pick market tops or bottoms
• They are not able, and do not try, to beat the market in the short term

Their ability to capture most of the good times, and miss most of the bad times rests in their entirely quantitative process where they use the weight of evidence to determine both market exposure and stop-loss parameters. Each data point in their proprietary matrix consists of multiple, complex indicators, which are run daily.

Essentially, the indicators they use measure the fundamental strength of the market, and based on that perceived strength they make calculated decisions about where and how much to invest. The primary weakness of this process is using quantitative approach to measure a qualitative entity. While medium to long term trends are based on fundamentals, short and especially hyper-short term trends are typically based on emotion or other qualitative parameters. Hence, short-term performance can be a disappointment to investor’s who harbor less than realistic expectations.

By design, Stadion’s approach is void of emotion or other subjective inputs, which means they are not subject to short-term, emotional reactions We see this as a positive and use them precisely for that reason. We want them to make decisions based on their calculated analysis of market fundamentals.

Such a focus on fundamentals can lead to some short-term anxiety as was the case recently on November 9, 2009 when the S&P 500 was up 2.22% and Stadion’s current allocation was 80% cash 20% commodities. At first analysis, it is easy to be frustrated that they missed the rally. However, as noted in the Wall Street Journal’s November 10, 2009 cover story, the November 9th rally was a “skeptics rally—fed by money managers who feel they must make risky bets in order to keep up with the market, but who don’t like what they see.” We hope you are beginning to better appreciate their time-tested wisdom.

While this ‘skeptics rally’ might continue long enough for market fundamentals to sustain it, we are not sure that is going to be the case. Stadion’s rules-driven approach dictates they avoid emotionally driven rallies and directs instead that they remain uninvested until the broader market measures indicate a more substantiated opportunity for growth. Conversely, during times when market fundamentals conclude additional market upside potential even while there may be an impulsive, unsubstantiated market pullback, Stadion would remain invested and might also miss on the short term.

So while we are confident that Stadion’s objective, disciplined research-driven approach will prove successful over a full market cycle, we acknowledge they will often, by design, lose to the market during the short term. This is especially true with repeated emotional, radical swings up or down like those we have recently experienced. For investors who are more interested in meeting or beating the market on a day-to-day basis, Stadion is not a viable option.

Just as a golfer with a bag full of clubs, each designed for a specific application under specific circumstances, we have manager teams that perform well in specific market conditions based on specific time horizons. Stadion is clearly a more defensive ’club’, and might be the right choice for an investor who would rather not “make risky bets” in order to keep up with the market, (even when they) don’t like what they see.

Filed Under: Stadion

Inflation–The Real Monster

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1984 stampThe United States is running up record high levels of debt. In fiscal 2009, we will increase the debt by more than we did during the last five years combined. We have essentially four ways to service the debt:

1. Spend less
2. Tax more
3. Default on the debt
4. Encourage inflation

In recent memory, there has not been an administration that has even remotely come close to reducing annual operating budgets. Despite the empty promises we hear ever four years, even the most conservative Republicans find ways to spend more and more of our money. So, we can cross the first option off the list, there is no way we are going to pay down the debt by spending less than we currently spend.

Most readily agree increased taxation in one form or another will be in the future. There still is some debate as to what type and how much increase will exist but it certainly seems inevitable. Unfortunately, even with higher taxes it does not look like that will be enough to pay off the increasing debt load.

Defaulting on our debt is not really a viable option. Not only would the US’ defaulting on our debt completely destroy modern banking, finance, and trade on a global scale, it would also likely lead to a war between China and the US.

Inflation makes servicing debt easier because future dollars are not worth as much as today’s dollars. Additionally, in inflationary environments, people need more money to buy goods and services. Salaries typically rise to meet this demand, creating increased tax revenue for the government. So, not only will the government be paying back debt with lower-valued US dollars, but they will have more of them to do it with.

Due to our current national debt, our future will include some combination of increased taxes and inflation, neither of which is ideal, but both of which are inevitable. While it may not seem like it, taxes are somewhat controlable. Inflation, however, is not.

When policy makers want some inflation, like they do now, they use powerful but crude tools to create it. The problem is they are not always able to control how much inflation they get and often overshoot–meaning prices prise higher than they intended. Not bad for our national debt, but it will dramatically impact your quality of living unless you plan accordingly.

Most conservative financial pundits plan on an average of 3% annual inflation. This translates to prices doubling on average every 25 years. Recall the price of a stamp 25 years ago ($0.20) versus the price of a stamp today ($0.44), and you’ll see that on average the 3% inflation rate has held. However, during the United State’s worst inflationary periods prices have doubled every five years. A far cry from countries like Zimbabwe where last year prices doubled, at times, each day, however even a five year 100% increase in prices could have a heart-stopping affect on retirement plans beacuse a 100% increase in prices is equal to a 50% reduction in your investments.

In 2008, we learned that projections of acceptable long-term market risk and return include some painfully difficult years. Many have now redefined long-term from 10-20 years to 3-5 years. As noted in a separate posting, we need to learn from 2008 by reevaluating our allocation of investment approaches and asset classes, our perspective of long versus short-term, and our willingness to accept appropriate levels of market risk. However, we cannot drive forward by looking in the rear-view mirror. If we do, we risk hitting inflation potholes that can wreak even further havoc to retirement plans.

In this post, we outlined the inevitable inflationary push that will occur at sometime in the future. The questions of how should this eventuality be addressed, what asset types are inflation resistant, and which ones are to be avoided will be posted shortly.

As Good as Gold

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In an article in Smart Money, Jack Hough recently pointed out that we associate gold with wealth and safety only because its chemical properties once made it ideal for making coins by hand. Gold is incredibly malleable, doesn’t corrode, tests easily for purity, is exceedingly rare and has relatively few industrial uses. It’s perfect for just sitting around and representing value. But that value must come from somewhere, and today that value comes primarily from perception, not reality. Today gold value is primarily driven by fashion and speculation, the latter made easier than ever by companies that that hawk investment funds and comemorative coins.

Before you rush out stake your claim, you need to identify the primary reasons behind your desire to join the gold rush of 2009.

COLECTIBLES–If you are looking for a collectible item that you can pass on to future generations, or one that might improve in value due to excess demand for a unique item, then you would be wise to avoid purchasing anything offered online or in a television commercial. Despite their promised 10-coins-per-household minimum, there is in fact an endless supply of these items, and therefore they hold no value in excess of the current price of the gold used to cast it. If you are looking for something with collectible value, go to a reputable dealer of rare coins and spend your money there.
EMERGENCIES–If you subscribe to some of the doomsday scenarious where the modern banking system as we know it implodes and our society is reduced to a barter economy and you think that gold coins will be a convenient mode of trade, unless you want to be caught looking for someone to break a full-ounce coin to purchase your groceries or toilet paper, you would be wise to consider buying tenth ounce coins instead. Inidentally, that is how the term quarter started. The first quarters were literally an ancient Roman coin cut into four pieces to facilitate trade in small denominations. You might be better off spending your money now on things necessary for survival if the financial world really does implode. Food, water, toilet paper, jeans, Advil, toothpaste, and the like. These are items that you and your family will need anyway, and will more than likely be the primary means of trade in any basic barter economy. Who knows, maybe a Snickers bar will have more intrinsic value to soemone who is really hungry than one ounce of gold.

INFLATION–If your desire to buy gold is as a solution against the inevitable inflation lies around the corner, you would be well advised that without any actual value, gold’s price might soar or plunge during inflation, depending entirely on whether people believe or stop believing the continually perpetuated gold myth. Isn’t it better to own the goods you’ll need to live and enjoy life, or at the very least own the companies that make those goods? Along those lines, the best inflation-fighting investments are stocks. Specifically stock in companies that make, sell, and distribute goods and services that people need including food, medicine, oil, and the like. As prices rise, which is what happens in an inflationary environment, the values of these companies will also rise in direct proportio, which will effectively hedge your portfolio against inflation.

So, while precious metals, mining stocks, and yes possibly even some gold is part of a well-balanced wealth management strategy, it is not the only solution out there and should be managed with some wisdom and forethought.

Filed Under: PRecious Metals

Focus on Fiduciary

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FiduciaryIt’s hard to find the perfect financial professional who will meet your needs. You deserve an advisor who is competent, qualified, knowledgeable, and is compensated in a manner that minimizes conflicts of interest. But, more importantly, the advisor must be held to a Fiduciary Standard, meaning they will always put your interests first. You want to always be sure the advisor is working for you – not for themselves.

Registered Investment Advisors (RIAs) are held to a Fiduciary Standard. By law, a Fiduciary will act solely in the best interest of the client. They must fully disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Fiduciaries will also adopt a Code of Ethics and will fully disclose how they are compensated.

You must be careful to read and understand the disclaimers on marketing and advertising materials offered by a professional. Recent regulations put forth by the Securities and Exchange Commission (SEC) now require brokers and other professionals who are not considered fiduciaries to add the following disclosure:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears, you should ask questions, obtain complete disclosure, and determine if the relationship with the financial professional is in your best interests.


Stock Broker–No
Insurance Agent–No
Registered Representative–No
CFP Practitioner–Maybe
Financial Planner–Maybe
Registered Investment Advisor–Yes


How a financial professional is compensated also raises the question of whether they have your best interests in mind. You can judge for yourself by simply looking at the following three dominate models of compensation:

Fee-Only Compensation – This model minimizes conflicts of interest. It is the required form of compensation for independent Registered Investment Advisors. A Fee-Only financial advisor only charges for his or her advice and/or ongoing management. No other financial reward is provided by any other institution, which means they do not receive commissions on the actions they take on the clients’ behalf. Compensation is based on an hourly rate, a percent of assets managed, a flat fee, or a retainer. In essence, Fee-Only financial advisors sell only one thing – their knowledge.

Fee-Based Compensation – This form is often confused with Fee-Only, but they are distinctly different. Fee-Based advisors earn part of their compensation from fees paid by the client. But, they may also receive compensation from commission products they are licensed to sell, thereby creating the potential for conflict of interest between the interests of the client and the financial professional dispensing the advice.

Commissions – There is an inherent problem when an advisor who is compensated solely through commissions faces a conflict of interest between the interests of the client and the financial professional dispensing the advice. A client looking for unbiased advice cannot be sure that the investment they purchased was truly in their best interest or was the most profitable product for the advisor. Clients must make an informed decision before engaging an advisor who is compensated solely by commissions. Many may be well intended, but by virtue of their employment and/or the manner in which they are compensated to dispense advice (i.e. commissions), the potential for conflict remains constant.

Our Registered Investment Advisor oath is as follows:

Fiduciary Oath
• I shall act in good faith and in my client’s best interest at all times.
• I shall provide written disclosure to my client of any conflicts of interest that may compromise my impartiality or independence.
• I shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.

Filed Under: Investment Management

Winning by Not Losing–Implementing their approach

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I thought you’d have interest in this reallocation alert issued by Stadion, one of our managers.

Soon after the start of June, we noticed a change in market dynamics. The succession of higher highs, higher lows and the climb of support through resistance changed its tune. Our indicators, which had been steadily increasing in a positive level, started a descent toward a negative reading. All of our equity exposures were removed following their respective stop loss thresholds being met during this pullback.

Our first reduction in equity exposure came on June 19, as XLB (Materials Select Sector SPDR) hit its stop loss level. A further reduction in equity exposure occurred a few days later on June 23 when our large cap market holdings of SPY (SPDR S&P 500) and DIA (Diamonds Trust) hit their respective stops loss levels. As the market continued its negative trend for the month of June, the remaining equity exposure was removed with the sale of XLP (Consumer Staples Select Sector SPDR) on June 26 as it hit its stop loss level.

Current market action calls for a position of safety which will either be rewarded by further declines, or turn into a “whipsaw.” While whipsaws are frustrating, we have no reservations about re-initiating equity exposure if dictated by our Model. Making money during the good times is nice, but only if you can protect it in the bad times.” Etc. Etc.

As of today they are 100% in cash waiting for the right time to get back in.

It is always great to see them actually do what they said they were going to do. And, given the fact the S&P is down 4.5% since Stadion decided to go back to cash, they are definitely winning by not losing!

Winning By Not Losing–A Disciplined Approach

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It’s true that no one can predict the stock market, but it is possible to know when conditions are favorable for making money—and
when they’re not.

Stadion’s three-part management approach allows us to do just that.

First, we use our quantitative investment model to assess the market’s risk level at any given time. Our model is built on several proprietary indicators that use internal market data and price trends to determine when we have an edge or when we need to be defensive. This weight-ofthe-evidence approach determines how much exposure Stadion investors will have to equities at any given time.

The second step in our tactical asset allocation process is making sure our portfolios are overweighted in the asset classes that are doing well and underweighted in asset classes that are out of favor.

The final step in the process is our objective, well-defined sell strategy. We do not hesitate to shift our portfolios to more defensive positions when market
internals weaken and intermediate price trends turn negative. Our safety measures may occasionally cause us to miss some market gains, but they are critical in helping us avoid devastating losses.

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