Archive for the Investment Management Category

Life Settlements – a Good Investment or no?

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Life Settlements - a Good Investment or no?A life settlement is the sale of a life insurance policy by the owner to a third-party, typically for cash in an amount greater than the surrender value (why else would a person sell their life insurance policy?). The buyer assumes ownership and pays the premiums necessary to keep the policy solvent. Upon the death of the insured, the buyer of the policy receives the death benefit.

Generally speaking, life settlements are an option for policy owners of high net worth who are over 65. Independent estimates report that one in five policies in this group has a market value exceeding the cash value offered by the insurance carrier.

The market for life settlements started out on a rational basis. The original business plan for life settlements was to purchase unwanted or unneeded policies as an institutional investment from policyholders over 65 whose health had deteriorated more rapidly than the aging process would indicate. This primary factor established the mortality arbitrage necessary to make the purchase price higher than the policy’s surrender value.

Are life settlements a viable investment?

There are a number of pitfalls policyholders must consider before selling their policies, but if you are in the market to purchase life settlements, it’s important to consider a few details. First, the life settlement market has become quite active, indicating that the industry has convinced itself these life insurance policies are mispriced. As the industry has developed, it’s begun eying the policies of healthy insured individuals and labeling them as attractive targets as well.

Life settlement brokers have begun purchasing policies and repackaging them. These packages are then sold to small institutional and individual investors with the original message: these are unwanted policies from policyholders who are at least 65 years old and in unexpectedly deteriorating health. Unfortunately, all of the packaged policies may not adhere to the investment model.

This is what some in the industry refer to as ‘dumb money’ because the investors don’t know how to analyze the investment potential and they don’t understand that an accurate assessment of life expectancy is critical to this particular investment’s success.

Our Conclusion?

While the life settlement businesses started out as a worthy secondary market for limited situations, the market has gotten out of control. Huge, often hidden, fees and commissions have been assessed to these life settlement package investments. Add that to the misplaced understanding that these policies are all great investments and you have a poor reason to invest. In many cases, the insureds should not be selling their policy until it is about to terminate, and investors shouldn’t become owners of another person’s life insurance policy.

Update Jewelry Insurance to Reflect Rising Gold Prices

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Update Jewelry Insurance to Reflect Rising Gold PricesIn the past ten years, the price of gold has nearly quintupled and some experts are warning of another price bubble – one similar to the inflationary mania that impacted high-tech in the ’90s and the rise in residential real estate less than ten years after. Other experts are certain that gold has a strong position near $1,200 per troy ounce and could continue to rise into 2014.

While the dramatically rising prices for gold and other precious metals has helped many investor portfolios, it’s important to consider the impact on your jewelry. Adjusting your insurance to account for the higher prices is necessary – otherwise, you could be in for an ugly surprise if it has to be replaced due to loss or theft.

For those owning valuable jewelry collections, the price spike in gold has sparked an increase in prices of other precious metals, including silver and platinum. While most investors know the price of gold on any given day, they are far less likely to be aware of how the price of gold and other precious metals is affecting the value of their own jewelry collections. Gerald Escobar, principal of Asset Archives, recently indicated they had seen clients under-insured across all categories of valuable collectibles, including wine, fine art, antiques – and yes, jewelry. According to Escobar, clients who don’t proactively manage their valuables can be under-insured up to 40 or 60%.

  1. The first step in updating your jewelry insurance is to get an updated appraisal.
  2. Then, you’ll want to update your insurance coverage.

Update Appraisals

Clients need an updated inventory of their valuables if a loss occurs, and they should keep multiple photographs of their collections in a bank safe deposit box and at home. Accurate inventory record-keeping is vital to determining exactly what was lost and to obtaining an accurate claim settlement. An independent appraiser can be invaluable in determining current replacement value for your articles, including providing adequately detailed descriptions.

Update Coverage

With updated appraisals in hand, review your insurance policy to ensure you have adequate coverage. For exceptional items that were scheduled on a valuables policy, the value stated in the policy should be updated to reflect current replacement cost.

Top insurance companies offer valuables policies with a little extra protection for their clients, including:

  • Valuables policies with built-in buffers against market value appreciation. The additional coverage is a cushion in case market appreciation causes the coverage to be too low at the time of loss. For this buffer to be adequate, however, it must be periodically updated.
  • Valuables policies with built-in annual inflation adjustment. Of course, when gold prices are quintupling every ten years, their standard 2 or 3% increase simply isn’t enough protection. So, even with this protection, you’ll want to make periodic updates.
  • Some home insurance policies include higher sub-limits, such as up to $10,000 for jewelry, but these may still be inadequate if you own a gold bracelet originally purchased at $4,000 ten years ago, which is now appreciated to $16,000.
  • Many insurance companies allow grouping of similar valuable items, such as wine or art collections, to be covered under a blanket policy. With this approach, you would set a coverage amount for the entire collection without having to estimate the value of each and every item, making the overall policy easier to manage.
  • Valuables coverage also has the advantage of no deductible.

While you may need to increase coverage for your jewelry and other valuable items, you can manage the cost of your insurance by changing storage locations. It’s much cheaper to insure jewelry that is stored in a bank safe deposit box rather than at home. Clients with valuable jewelry that is infrequently worn should consider keeping those items at the bank. Use is on a limited basis, but that may well fit your needs anyway.

Finally, once you have updated your valuables coverage, consider scheduling a reassessment every three to five years as a rule of thumb.

What does it cost to own a mutual fund? More than you’d like.

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How can investors know the real cost of a mutual fund?Executive Summary of article:

  • “… the average investor can’t begin to get an understanding of the costs due to the lack of information.”
  • Studies show that the average mutual fund costs between 2% and 3% per year.

According to Morningstar, Inc., most U.S. stock funds pay an average of 1.31% of assets to the portfolio manager each year in addition to other operating expenses. Other costs related to the buying and selling of securities are not reported in the expense ratio and those expenses can make a fund 2-3 times as expensive as advertised.

What exactly are the costs of owning a mutual fund?

There are four primary costs that affect a mutual fund’s price. These are:

  • Bid-ask spreads. These represent the gap between the lowest price at which a seller is willing to sell and the highest price the buyer is willing to pay. When the fund does a lot of trading on less-liquid holdings, such as small stocks, these costs can add up quickly.
  • Broker commissions. These are the commissions paid to the brokers who operate the fund. The SEC requires three years of these costs to be disclosed in a fund’s statement, but the SEC does not require them to be factored into the expense ratios.
  • Market-impact costs. These last two are often the largest component affecting trading costs. They occur when a large trade changes the price of a security before the trade is completed.
  • Opportunity costs. Opportunity costs occur when the impact of a trade inhibits a fund manager filling an order on their desired terms.

This results in either a less-favorable price or fewer shares transacted.
While it’s very important to look at the expense ratio before purchasing a mutual fund, it’s also important to understand that that number is not going to capture all the costs.

What do the experts say?

Richard Kopcke, an economist at he Center for Retirement Research at Boston College recently co-wrote a study about the fees and inherent trading costs of retirement funds, such as 401(k)s. Kopcke’s study reviewed the 100 largest U.S. stock funds held in retirement plans as of December 2007 and found that annual trading costs averaged from 0.11% in the quintile with the lowest costs up to 1.99% of assets in the quintile with the highest costs. The median was 0.66%. Kopcke’s conclusion was that the average investor can’t begin to get an understanding of these additional costs due to the lack of information.

Another study updated last year by Richard Evans, associate professor of finance at the University of Virginia’s Darden School, put the average trading costs of thousands of U.S. stock funds at 1.44% with an average of 0.14% in the lowest quintile and 2.96% at the highest. Evans’ conclusion was that high trading costs tend to have a negative impact on fund performance. On average $1 in trading costs decreased net assets by 46 cents in this study.

Stephen Horan, head of professional education content and private wealth at CFA Institute, a non profit association of investment professionals estimates that trading costs for stock funds total 2-3% of assets annually although conservative reported estimates put these costs closer to 1%. According to Horan, these transactional trading costs are very real and unfortunately, the expense ratio just does not capture all of the costs.

How can this be happening in these times?

One reason trading expenses are unreported is due to the complexity. That complexity leaves fund companies in disagreement about how to calculate the costs. Even fund experts have trouble coming up with estimates that are similar.

Of course, another reason is that fund firms aren’t all that anxious to disclose their costs either. The SEC tries to revisit this issue every few years, but it still hasn’t come to a conclusion or established a set of rules.

All of this leaves investors in the dark about the true cost of their mutual funds.

Where are we on the disclosure debate?

In 2003, the SEC indicated to Congress that trying to include all trading costs in the expense ratio would produce a number that was not comparable, and it would vary from fund to fund. There simply isn’t an agreed-upon methodology on how to quantify implicit transaction costs such as market-impact costs. Therefore, requiring fund managers to disclose total trading costs would result in investor confusion.

While nearly everyone agrees that investors are entitled to and should have that information, until the methodology is developed there will be a lot of larger companies who pay trading-cost consultants to estimate their trading costs, but midsize and small investment managers who can’t afford to pay accountants will continue to wait for the methodology to be developed.

Get Clues from the Turnover

Meanwhile, investors can get clues from a standard albeit imperfect measure of how much trading the fund is doing. This is called the turnover, and it shows at what rate stocks are being replaced in the fund. This is an imperfect measure because some stock funds that have a lot of new money coming in don’t have to sell to generate cash. In this case, their turnover rate would be zero even though the fund is likely buying a lot of stocks.

Last year, the SEC voted to require fund companies to disclose one year of turnover and move that information to the front of a prospectus. Turnover of more than 100% can indicate that the hidden trading costs may be on the high side. Of course, there can be a number of factors that impact turnover during a given period and turnover can vary over time. Still, it’s a clue as to the hidden trading costs that are undisclosed.

Funding College – should you go private or federal?

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Funding college - should you go private or federal?An unlikely change resulting from the recent Health Care and Education Reconciliation Act of 2010 relates to the federal student loan program. Beginning the first of July, 2010, all student loan lending through the Federal Family Education Loan Program (FFELP) will originate from the federal government’s Direct Loan program. This means that private banks will no longer be able to make government-backed loans to students and their families. The intent is to streamline the process, which was often confusing and sometimes misused by dishonest lenders.

What difference will the changes make?

The process of applying for college loans is now simplified into a single system. You won’t have to shop around to find a lender offering the most competitive rates and loan rate terms. Remember the 2007 student loan scandals, which revealed that lenders were providing university kickbacks to be on a ‘preferred lender’ list handed out to students and parents? Well, those are long gone.

It’s important to remember too that private educational loans also often came with variable interest rates, no caps, high origination fees, and less flexible repayment terms – all features the Stafford loans were designed to eliminate.

So what’s the College Loan Process now?

The process won’t change – students and parents will fill out the Free Application for Federal Student Aid (FAFSA) to apply for Stafford loans, which are unsubsidized loans made directly with the federal government. Interest rates are fixed at 6.8% (the same as in 2009-2010) and no credit check is required.

Stafford loans have limits:

  • freshman can borrow no more than $5,500

  • sophomores can borrow no more than $6,500

  • upper-class undergrads can borrow no more than $7,400

  • the lifetime cap remains at $31,000

When your student reaches these limits, parents can apply for a Parent PLUS loan, which is also available through the FFELP (the federal government). The rules on PLUS loans are slightly different, however. Parents are required to pass a credit check and sign a promissory note. The interest rates on PLUS loans is now fixed at 7.9% (reduced from the previous 8.5%), which is great for parents.

How does Repayment work now?

The new health bill also contains some provisions for future repayment of college loans that will help low-income borrowers. Borrowers taking out student loans on or after July 1, 2014 can choose a repayment plan that is income-based, with an accelerated duration of 20 years instead of 25.

2010 Graduate – current repayment rules
$40,000 in student loans
standard 10-year repayment schedule
6.8% interest rate
= Graduate pays $460/month

Post 2014 Graduate – new repayment rules
$40,000 in student loans
standard 10-year repayment schedule
6.8% interest rate
married with a child
earning less than $27,000 (150% of poverty level)
= Graduate pays $160 per month and any unpaid balance is forgiven after 25 years.

Note! These changes do not affect current borrowers.

Should You go with a Private Loan?

It depends. First, many parents expect their children to assume some of the debt related to their higher education and, in that case, your student should fill out the FAFSA which will entitle them to Stafford Loans and their relatively easy terms.

After that, if you want to borrow in your own name, you should generally consider the PLUS loans because of the relatively low interest rate (7.9%). If you prefer to borrow educational funds for your children from a bank where you have a personal relationship, you may be able to get a better interest rate than those offered by the PLUS loan program.

A word of caution, however: many private student loans have typically held variable interest rates in the past. While some private lenders are returning to the incentives they abandoned during the credit crisis, it’s important to understand the terms before you sign the loan agreement.

Of course, it’s important to remember that saving for your child’s education comes after saving for your own retirement and security needs. Losing sleep over how to pay for college pales in comparison to losing sleep over how to pay for your own retirement.

So, the most important rule is to take care of your own needs first.

The Gold Bugs are Biting (again)

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Gold dollar signAs worries about the European debt crisis mount, many investors are still looking for investment safety. Gold has always been seen as a hedge against all kinds of economic woes, and as you’re probably aware, gold prices usually surge in times of crisis. True to form, gold prices have jumped 15 percent since February and are nearly double the prices of late 2007.

The recent surges in gold buying are encouraged by a host of fresh advertising hawking gold on television, and through the internet and telemarketing companies.

So, is it time to start buying gold?

Not so fast. Of course, we all know that much of the current hype is designed to prey on the public’s fears of inflation while promoting gold as a safe and valid method of hedging against financial losses. That explains why some of the most popular gold funds have attracted large numbers of new investors and their dollars within the last year. But, it’s important to recognize that while gold does benefit from being classified as a ‘hard’ asset, which is different from securities or paper currency, it is still extremely volatile as an investment.

Some of the most significant price drops in gold have occurred quickly after the largest financial crises, including the inflation crisis of the 1970s. Specifically, in 1976, gold prices started to rise from a low and peaked at $850 in January 1980. Shortly after, the price quickly fell below $500 and continued a long slide, finally bottoming out at $263 in January 2001. That’s a relatively short time frame for such dynamic price changes.

Still, some investors feel that owning the precious metal is like ‘money in the bank’. Whether you want to invest in gold or not, there are a number of ways to do it safely. We can’t emphasize careful investing enough and we’re here to help you do do just that so your financial wealth will be available for you down the road.

Just for the record, ‘cashing in on the gold rush’ is just another investment illusion.

Filed Under: PRecious Metals

Minding the Safety of Your Bonds

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Image of bank vault door One of the easiest mistakes to make with municipal bond investments is to take a ‘set it and forget it’ approach to your investment. The perceived security with regard to municipal bonds has led many investors – and unfortunately, some of their financial advisers as well – into taking this approach. Let’s talk about some things that we can do to mind the safety of your municipal bonds.

Just like minding your health, let’s commit to regular checkups.

Some of the most risky bonds are ones that meet their payments only when the issuer sees economic growth. With economic growth effectively stalled for the most part, dozens of municipal bonds have defaulted in recent years specifically because the housing developments were never finished. Debt prediction based on growth is very tricky to get right even in a healthy economic climate. It’s downright impossible in this economic climate.

Let’s also commit to sticking with the basics.

Not all municipal bonds are equal when it comes to repaying investors. Bonds issued by established government entities are usually safer overall because when the issuing government gets into financial trouble, it has the ability to cut expenses or raise taxes to pay back the debt. Of course, this depends on whether their tax base – the local community – is able to sustain their current taxes, as we talked about in No Quick Turnaround, but it’s important to recognize that while tax payers will gripe about the taxes, they aren’t likely to suddenly stop paying them as long as they are employed.

Let’s commit to doing our own homework too.

Making time to review the business section can help us learn whether a bond-financed project is in trouble. While this kind of media attention doesn’t make the headline on our news station, it does show up in the local newspaper. Of course, we can also satisfy our curiosity about a project by taking a first-hand look at it, if it’s close enough to visit, or by making a simple phone call to ask how things are going.

Here at Private Advisory Group, we want to ensure the safety of your investments. By working together, we can keep your funds growing safely so they’ll be there when you need them.

No Quick Turnaround

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City image with traffic The relative security of municipal credit, long seen as a more sound investment than corporate bonds, has been bolstered by the fact that bond investors strictly avoid future investing in a town that defaults on their municipal debt. If the town ever wants to raise money again, it can be very hard and very expensive to do so after a default, and so municipal bonds have been perceived as relatively sound.

There is an understandable lag between the time that economic distress in the communities shows up in municipal finances, and financial advisers and investors have recently begun to see that these once stable investments are starting to look a little shaky. For individual investors, it can be hard to know when a municipal bond is in jeopardy. You have to look pretty hard to find that interest payments are going unpaid. When it finally becomes newsworthy as we’ve all seen the recent media headlines announcing a variety of government-issued bonds, both foreign and at home, it happens when the bond is nearing bankruptcy or default status.

As real estate values steadily plummet and high unemployment continues to rob cities of their tax revenue base, a number of municipalities are starting to renege on their debts. Since July one year ago, 201 municipal bond issuers have missed their interest payments – up from 162 in 2008 and a significant increase from 31 in 2007. While at least some of these failing bonds are not of the caliber most investors want to buy, their failure is still enough to inspire second thoughts among experienced financial professionals.

Municipal bonds can lose value even without a default. In fact, according to Bloomberg (June 2, 2010), Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years.

“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”

If a city or town faces financial difficulties, as so many are now, buyers won’t pay as much for its debt. According to Barclays, nearly 13 percent of municipal bonds that are currently active are trading at less than their face value – this is up from 7 percent before the recession. Rising interest rates can also hurt ‘muni’ bonds, and many believe interest rate increases are coming. While falling prices aren’t a huge problem for investors who hold their bonds until their maturity, those who need to sell a bond may experience an unfortunate loss if prices stay depressed. While no one is predicting a total municipal bond crash the likes of which we’ve seen with the stock market, all of these signs are good reason to pause before investing.

Roth IRA Conversions – Choose your own Adventure

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Roth Conversion crossroads

You’ve probably heard that 2010 is the year of the Roth IRA conversion. With the repeal of the $100,000 income ceiling for Roth IRA conversions and for the first time ever, anyone with any IRA type can convert it to a Roth IRA regardless of their tax filing status. Here’s the important part:

By converting your traditional IRA to a Roth IRA, you are agreeing to pay taxes now on previously untaxed money in exchange for the right to have that money grow indefinitely without further tax obligations.

The question of whether to convert or not is best answered by a comprehensive and personal analysis that includes both tax management and investment management advisers. Further, the decision is usually not as easy as a simple ‘yes’ or ‘no’. Additional factors may affect each investor’s decision, such as:

  • whether to convert the entire IRA or just a part
  • whether to convert today or later (depending on whether you want to pay the taxable amount at one time or over the next two years)
  • and so on

Similar to the choose-your-own-adventure books popular in the early 1980s, the question of whether and when to convert your traditional IRA is an adventure with a number of choices to be made.

When a Conversion Does Not Make Sense

We can make the initial choice of whether to convert a little easier for you by identifying the circumstances in which a conversion does not make sense, and those are:

  • If the IRA funds will be used within 10 years. Converting will not make sense in this situation because there is simply not enough time for the investment growth to compensate for the pre-paid taxes.
  • If the funds are not available to pay the taxes on the conversion. While half of the taxes due can be deferred as late as the filing of your 2012 return, those funds still have to be a available and if they are not, the conversion should not be completed. Taxes paid with money from the IRA will be treated as a distribution too, so unless you are in a position where you can withdraw from your IRA without penalty, then a 10% penalty will be assessed.
  • If the funds in the IRA will be donated to charity as part of your estate plan. Qualified charities can already liquidate the gifted IRA without paying taxes, and donating your IRA increases the value of your donation by your marginal tax rate. Of course, as of today, an IRA can only be donated after your death, not before.
  • If you are concerned about a market crash. If you’re confident the market will repeat the record-setting free fall of 2008, then you should delay your conversion until the market hits bottom. The primary reason is this: taxes are assessed on the value of your account on the day of the conversion. So, from a tax perspective, the lower your account value is on the date of conversion, the lower your assessed taxes.
  • If your are predicting lower taxes. If you project your tax obligations will be lower in the future than they are today, due to a lower tax bracket or other expected changes such as a post-retirement reduction in income, then a conversion now is not a logical choice.

If none of the situations above fit your circumstances, then a Roth conversion might be a valid option. Let’s break down some of the choices you’ll need to make.

How much of the traditional IRA will you need to use and when?

  • If you plan to use some of the traditional IRA funds now and the rest in the near future, then convert only the portion you don’t need for at least ten years. Assuming tax rates remain the same or
    higher, our cutoff for time required to justify prepayment of taxes is 10 years from the date of conversion. If you will need part, but not all, of your IRA funds within ten years then you might choose to convert only the portion you don’t need within your 10-year window.
  • If you plan to use the funds in your traditional IRA after ten years from now, then convert the entire IRA as soon as possible. Converted funds will grow indefinitely with no tax obligations upon withdrawal. If you’re concerned about increasing federal tax rates, then the converted funds will be dramatically more valuable than either the tax-qualified funds in an IRA or the non qualified funds where everything but the initial investment is still taxed.
  • If you do not plan to use or need the funds in your traditional IRA, then convert the entire IRA as soon as possible. If the funds in your IRA are eventually to be passed on to heirs, then converting now has three primary benefits:
    1. The converted funds are not subject to Required Minimum Distributions (RMDs) and will therefore continue to grow until your estate is executed at your death and the funds are distributed.
    2. Distributed funds will not have an associated tax burden upon receipt of the inheritance.
    3. Funds can continue to grow tax exempt, even after distribution to your heirs.

    If you’re planning to convert all or even a portion of the traditional IRA funds, when is it best to time the conversion?

    • If you believe a market recovery will continue on a fairly linear and upward trend, then you will want to convert as soon as possible. While the recovery in 2009 was impressive, the markets are still over 35% off the record highs of 2007. While no one forecasts an immediate return to 2007 levels, if you expect even minimal asset appreciation, then the sooner you convert the better because you will be assessed taxes based on the value of the traditional IRA on the date of conversion.
    • If you forecast impending market adjustments or corrections, then you will want to delay your conversion to as close to the market bottom as possible. Taxes will be assessed on the value of your traditional IRA account on the date of the conversion, so if you expect the future value of your account to decrease, then you will want to wait and convert it when the account value is lower.
    • If you’re planning to convert all or even a portion of the traditional IRA funds, when should you pay the taxes on the conversion?

  • If you are concerned that your marginal tax rate will increase from your 2010 levels in 2011 or 2012, then you should pay the entire tax due when filing your 2010 return. Your marginal tax rate can increase due to changes in the Federal tax code or with an increase in income and either or both can affect your tax bracket. If you’re worried about an increase in your taxes, then you will want to pay the taxes with your 2010 tax return to avoid the increased taxes on your converted funds.
  • If you are not concerned about increases in your marginal tax rate, or if you do not have the funds to pay the additional taxes with the filing of your 2011 return, then you should elect to pay the tax with the filing of your 2011 and 2012 tax returns. If you elect not to pay the tax with the filing of your 2010 taxes,
    you can report half of the converted amount of income on your 2011 tax return and the remaining half on your 2012 tax return. Taxes will still be asses on your marginal tax rate for the year in which you are reporting the income.

If you’re planning to convert all or even a portion of the traditional IRA funds, you’ll need to decide how to invest the converted funds.

  • If you are interested in long-term growth, and you are willing to accept “market” risk for all or part of the funds in your converted Roth IRA, then you should transfer all of your higher-risk investments into separate registration from your lower-risk positions. Converted Roth IRAs can be unconverted and the taxes that have been paid can be reclaimed. So, if the market was to have an unexpected contraction between the conversion and October 15, 2011, then the conversion could be re-characterized, the taxes could be reclaimed, and the IRA returned to its previous pre-conversion status. The key is the entire registration of the
    converted Roth has to be converted. Therefore, if the equity portion of a converted Roth is in one registration and the fixed income portion of a converted Roth is in a separate registration, and if circumstances warranted, the equity account could be re-characterized to save on taxes and leave the fixed income to grow without future tax obligations.

As we discussed in the beginning of this post, there are a host of questions that have to be carefully considered before choosing whether and when to convert. Your best bet is still to work closely with your tax management and investment advisers to ensure that you are first making the right decision about whether to convert or not, and second to make the right decisions

SEC Lawsuit Against Goldman Sachs

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Folded hands waitingOn Friday, April 16, 2010, it was widely reported in the media that the U.S. Securities and Exchange Commission (SEC) filed a civil lawsuit against Goldman Sachs Group, Inc. (“Goldman Sachs”) alleging investor fraud by failing to inform investors that a certain mortgage-based security product was designed with the help of someone who was also betting on that investment to fail.

The Investment Strategies team at Genworth Financial Wealth Management (GFWM), a major backroom resource we rely on for information, reached out to Goldman Sachs to better understand the scope of the inquiry and Goldman Sachs’ position on the issue. In order to provide our financial advisers with as much clarity around the situation as possible, we’d like to share our insights based on the conversations with Goldman Sachs:

  • First, the product in question in this particular lawsuit was created and sold by the Securities Division of Goldman Sachs. This group is a separate division of Goldman Sachs and functionally unrelated to the investment management division that is responsible for the asset allocation models, Goldman Sachs mutual funds, and sub-advisory services provided to some of our clients. Specifically, the lawsuit is brought against the Securities Division and not the Global Tactical Asset Allocation Team who is responsible for the Goldman Sachs’ portfolios we work with – regardless, we are continuing to conduct due diligence on our own and we’ll report back to you what we find.
  • Second, the transaction in question involved a privately structured product that was traded by sophisticated institutional investors. In contrast, the Goldman Sachs Asset Management products and Asset Allocation Strategies we use are delivered through highly regulated institutional channels. Plus, the Goldman Sachs sub-advisory services we employ are primarily in liquid fixed-income securities.

In addition, we’d like to include this statement from GFWM:

“The Investment Strategies team will be meeting with Goldman Sachs at their headquarters in the coming weeks as we accelerate our ongoing due diligence efforts in light of this news. Our due diligence process includes a deep examination of organizational and personnel structures both directly and indirectly related to the strategies provided through GFWM. While we expect and believe this issue to have little direct relevance to asset management services employed at Private Advisory Group, please be assured that we are working hard to stay abreast of the situation. In order to keep you updated, we will be making ongoing assessments of the possible impacts organizationally and of the possible effects on the asset allocation strategies and sub-advisory services being offered.”

Our Opinion

In our opinion, it may be premature to summarily ‘fire’ Goldman Sachs as an adviser until further details emerge and until the charges are either validated or dismissed. The Goldman Sachs’ track record has been solid for many years and in due course, it will become clear whether trusting this icon of Wall Street is justified or not.

Such problems as those currently being faced by Goldman Sachs’ Securities Division is one of the reasons we use a broad, robust platform of investment management teams. At Private Advisory Group, our investment teams give us a high degree of flexibility and coverage. While we cannot predict what may happen with any one firm, our unbiased approach to money management ensures we can monitor these types of events and best determine the appropriate course of action.

As always, we are not encouraged nor required to keep or use any particular advisory firm. Our primary incentive is to ensure that you are implementing the right strategies based on your goals and needs. If that means hiring, or firing, a firm then we can do so quickly, easily and without cost.

Should you have any additional questions or concerns, please do not hesitate to contact us.

Filed Under: Investment Managers

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.


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