Captive Insurance
I went to a conference for CPAs last week, and my biggest takeaway was a concept called captive insurance.
This is the concept of a business owner setting up an insurance company to insure the risk of his/her own business. Thus the name captive.
But what’s in it for one to have one’s own insurance company?
Tax Mitigation
It turns out that Congress has created legislation to encourage captive insurance – some would call that a tax loophole. IRC 831(b) states that small insurance companies ($1.2m or less in annual premium income) pay tax only on investment incomes. In other words, they don’t pay tax on premium income.
Can you see the tax loophole here? If a business pays its captive insurance company $1.2m in insurance premiums, the premium is deductible to the business and yet tax exempt to the captive insurance company. Depending on the tax structure of the business, this could mean a tax saving of 40% to 70%.
But tax savings aren’t the only major benefit!
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P2P Lending: A New Asset Class?
Posted on: July 27, 2013
P2P Lending
Last night I was “wasting” time on Google+, when I stumbled upon Joe Udo’s blog where he had written about how he made an 11.3% annualized return with P2P lending. The next thing I knew, it was past midnight and I just had spent three hours eyeballs deep in the subject.
Let me first tell you what P2P lending is. P2P stands for person-to-person or peer-to-peer. P2P lending is the practice of lending to strangers, enabled by technology and the web.
The two leading companies in this arena are LendingClub and Prosper. Between the two of them, they’ve enabled nearly $2 billion of lending between investors and borrowers. However, that still pales to the total US consumer credit of $1 trillion.
I am super excited about P2P lending! Let me tell you why.
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Why You Want a Simpler Portfolio
Posted on: July 22, 2013
When I write a blog post, I like to drive home one and only one point at a time.
In my last blog post, the point I wanted to make was that cost matters. In case you didn’t notice, not only did I reduced my new client’s cost by 85 basis points, I also reduced the number of funds in her portfolio from 39 to 4.
With such a small numbers of funds, is the portfolio diverse enough?
Emphatically yes. In fact, it is much more diversified than the previous portfolio of 39 actively managed funds.
What I use are asset class funds; DFQTX holds all 5000+ stocks traded in the US equity market; DFTWX holds all foreign stocks; DFGEX holds all domestic and foreign REITs and of course VBTIX holds all bonds. With these four portfolios, you are holding all of the world’s productive assets. How much more diversified can you get?
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Is a Fidelity Personal Retirement Annuity (FPRA) a good investment?
A client of mine recently asked me the above question. He is a high-income business owner who makes close to $1m a year and he has used up all of his available tax-advantaged investment vehicles. He is interested in this Fidelity product primarily because it is tax-deferred.
Now let me start out by saying that I love Fidelity. I custody all of my clients’ assets with them. Their advisor support team is fantastic and without Fidelity, I wouldn’t have been able to build my independent wealth management practice. FPRAs are also cheap compared to other variable annuities out there and if you absolutely have to buy a variable annuity, an FPRA is definitely the way to go. But…. I don’t recommend it.
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How I Make a Client 17% Wealthier
Posted on: July 16, 2013
I got a new client recently. The first step I took was to totally redo his portfolio. His old portfolio looked something like this.
Fund Symbol Expense
YAFFX 1.26%
UMBWX 0.99%
TWCGX 0.97%
SGRKX 0.96%
SCETX 1.20%
RYTFX 1.39%
ODMAX 1.36%
OAKIX 1.06%
OAKEX 1.41%
…..
AEMGX 1.31%
Altogether there were 39 funds in his portfolio. I skipped over a bunch in the list above, but anybody who has read my blog for any period of time should be nearly shouting out what’s wrong with this portfolio.
These Fund Expenses are Too High!
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1. Chuck Jaffe of MarketWatch’s, “No Such Thing as Risk Free Investments” informs us that instead of looking for risk free returns, investors should know the risks. To that end, you may want to read “Taking Investment Risks”, which summarizes nine types of investment risks and classifies them into good, bad and ugly. You may also like to read “Managing Investment Risks” which shows you how to “take the good risks, control the bad risks, and avoid the ugly risks.”
2. I read this news, “Investment Banks Eye Hedge Funds for the Masses” with alarm. It is not surprising though after the JOBS Act relaxed hedge fund (marketing) rules, bankers and hedge fund managers can’t wait to go after the average Joe’s pocket. Before you handover your money though, heed David Swensen’s warning, and read “Why You Should Avoid Hedge Funds.”
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10. How Often Do Market Corrections Happen?
9. Variable Annuity Fees You Don’t Know You are Paying
8. Multi-family Office: The High Cost of Exclusivity
7. Do you want to be Morgan Stanley’s production?
6. Portfolio rebalancing is like earning a ‘bonus’
5. Why Asset Class Diversification is Superior
3. Be Careful When Buying a Condo as a Rental Property
2. Profit from Harry Dent’s prediction? think again
1. The High Cost of Fee-Based Financial Advisors
Also see Top 10 in May.
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Is the Sky Clear Enough Yet?
Posted on: June 28, 2013
Wise words written by myself two years ago: “The whole idea of investing only when “the sky is clear” is flawed. When the sky is clear, it can’t get any better; you can be sure another storm is brewing just beyond the horizon.”
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[I wrote this two weeks ago.]
On September 12, a client of mine called me to get out of stocks altogether.
He used a vivid analogy: “The storm is raging; I will wait until the sky clears before I get in again.” The storm he referred to was the European debt crisis. Judging by my many interactions with investors, he is not alone.
This morning, I woke up to great news: the Europeans have finally hammered out a debt deal in which Greece only needs to pay 50% of what they owe to the banks. With this debt reorganization, it looks like we will not have a Greek default (even though this is really a default by another name, but that’s the subject of another piece).
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Last week, I got a panicked phone call from a client of mine, “Michael, my wife bought an annuity a few weeks ago. Now we really regret it. The agent won’t take our call! Can you help us?”
I went to their home to examine the annuity contract. It was actually relatively straightforward; for $100k, they will get $456 per month for the next 30 years, beginning three years from now. My client is 71 years old; he will be getting his last payment when he is 104 years old! By then $456 will probably be worth $56 in today’s money. Not what I’d call the deal of a lifetime.
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The other day, I was invited to visit a multi-family office that only serve super-wealthy families that have $10mm and above.
I was curious what set them apart from my firm, which mostly serves folks in the $1mm to $5mm wealth range.
I came away with one word: exclusivity.
The name
What they do is no different from wealth management, but they call themselves “multi-family office.” Just in case you don’t know what family offices are, they are offices billionaire families set up to manage their own complex financial affairs. A family office serves only one family. By adding “multi-” to “family office,” a wealth management firm can make their millionaire clients feel like they are billionaires.
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Rebalancing your portfolio
Recently, I visited a prospective client in New Jersey. He is currently a client with Fisher Investments, and his advisor told him never to rebalance since that involves market timing.
I have to hand it to this financial advisor for recognizing that market timing is an unproductive endeavor, but he is so wrong about rebalancing that I am compelled to write this article.
Rebalancing is not a market timing activity, it is calendar-driven or condition-driven. For instance, you may decide that you will rebalance your portfolio on January 1st of each year or whenever an asset class allocation is off by 20%.
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Morgan Stanley Smith Barney
I went to a Morgan Stanley financial advisor associate recruitment meeting recently to spy on how they train their new financial advisors.
They have an extremely rigorous 36 month program. New associates are expected to pass series 7 and series 66 license testing in the first 12 months. These licenses enable them to charge both fees and (hidden) commissions. (Comparatively, my series 65 license prohibits me from charging commissions.)
As soon as they get the licenses, they are expected to go into “production.” The firm sets very tough production targets. If they fail the targets, they will be kicked out of the program.
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Why I Am Bullish About The Market?
Posted on: June 9, 2013
I wrote this article in October of 2011 after the market had a brutal summer. I made a bullish call. Since then, the S&P 500 is up 44%. I must say I am less bullish now than I was then.
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What happened to the market in August and September?
Between July and the end of September, markets lost between 13.5% (Dow) and 27% (Emerging markets) depending on which market you are looking at.
I pored through economic data and could not see any marked deterioration in the economy. In fact, on balance, I see continued slow improvements.
Pundits attribute the market tumble to 1) political gridlock in Washington and 2) the European debt crisis. I don’t buy either of these explanations.
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Is this your fund manager?
Securities and Exchange Commission Chairman Mary Jo White supports a new rule that would allow hedge funds to market directly to the public. I think that’s a fantastic idea. Let me explain why.
Between 1998 and 2010, hedge fund managers earned “only” $379 billion in fees. Do you know how much they made for investors?
Before you answer that question, you should be aware that one-third of hedge fund money is channeled through funds of funds. Their managers need their cut too. Between 1998 and 2010, their take was about $61 billion.
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10. How Often Do Market Corrections Happen?
9 Variable Annuity Fees You Don’t Know You are Paying
8. Morgan Stanley Wealth Management Makes My Life Easy
7. Why Asset Class Diversification is Superior
6. Physicians: Qualified Retirement Plan for Asset Protection
5. Lessons learned from three prospective clients
4. The High Cost of Fee-based Financial Advisors
3. Profit from Harry Dent’s predictions? Think again
2. Be Careful When Buying a Condo as a Rental Property
Also see Top 10 in April.
Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.
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I wrote this article at the thick of the financial crisis. I followed his advice and my clients were able to get back even before many other investors. My first client to get even was on Christmas of 2010. The overall market only gets back to pre-crisis level in January of 2013. Here is how I implemented his four point advice:
- Though it was extremely uncomfortable, I kept my clients on their asset allocation plans. In fact, we rebalanced into equity at the bottom of the market.
- We rebalance out of the rallying treasuries to invest in tanking corporate bonds.
- We know the limit of our intelligence, we just keep to our asset allocation plans.
- We only invest in index funds and asset class funds. No actively managed funds were used at all.
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This is based on an interview David Swensen done on Fox News Network.
1. Have a strong decision-marking process
Investing success requires sticking with decisions made uncomfortable by the variance of opinions. In his own words:
Think carefully how it is that you are gonna allocate your assets and stick with it. Too many individuals were excited about the equity market 18 months ago and were despairing 3 months ago. It should have been the other way around. They should have been concerned about valuation 18 months ago and excited about the opportunity to put money to work at lower prices 3 months ago.
2. Sell mania-induced excess, buy despair-driven value
On his favorite area of despair-driven value, David Swensen has this to say:
I think the most interesting area is the credit market. Bank loans are trading at extraordinary low value. High-grade corporate debts, below investment grade corporate debts…
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