Archive for the tag 'Business'

Investors Take Advantage of Low Capital Gains Tax Rates

Kurt Brouwer October 22nd, 2007

Whether we are talking about stocks, real estate or a business, one of the enduring themes of long-term investing is to defer taxes as long as possible. Two related factors are causing investors to rethink this tried and true strategy. First, capital gains tax rates are at a historically low point. Second, tax rates may be going up in the next few years. As this article points out, investors are starting to change their behavior [emphasis added]:

Looming Tax-Rate Change Spurs Sales (The Wall Street Journal, October 18, 2020, Arden Dale)

‘Investors may be starting to sell stock at today’s low capital-gains tax rate because they expect it to rise in a year or two.

The standard top tax rate on long-term gains is 15%, but it’s set to rise to 20% in 2011. Many financial advisers believe a Democratic administration in 2009 may raise it even higher — and sooner — and some are urging clients to consider selling off big stock positions now to capture the current rate. Long-term gains are those on investments held for more than a year.

“You should never let the tax tail wag the dog,” says Edmund T. Hyland, global investment specialist at JPMorgan Private Bank, a unit of J.P. Morgan Chase & Co. “But we think there is a window of opportunity with the rate at 15% to maybe be quicker to diversify than you might otherwise have been. We’re encouraging clients who have concentrated positions of low-basis stock to think about this.”…’

This article focuses on sales of stock, but the same issue applies to any appreciated asset such as real estate. Many investors seeking to defer taxes on real estate do a 1031 Exchange which allows them to exchange one property for another without realizing a gain. However, those considering such a move may want to rethink it because higher capital gains tax rates in the future could reduce or even eliminate the benefit of tax deferral. The article continues:

‘…Many tax experts are laying odds that a new administration will move quickly to raise the top rate even higher than 20%, according to David Shechtman, chair of the tax section at Drinker Biddle & Reath LLP in Philadelphia.

The idea of Congress cutting rates seems far-fetched. “Never say never, but it’s hard to imagine that the standard cap-gains rate is ever going to go below 15%,” says JPMorgan’s Mr. Hyland…

‘...Prior tax increases have led to a surge in capital gains being realized ahead of time. After Congress passed the Tax Reform Act of 1986 and the top rate on gains rose to 28%, there was a “surge of recognition of capital gains” in the last months of the year, says Len Burman, director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. “People sold a lot of assets to avoid the increase.”…’

At this point, there is no certainty that tax rates are going up, but I think it is reasonable to conclude that tax rates are not likely to go lower. While I see no reason to sell an asset just to take advantage of low tax rates, I also think delaying a sale just to defer gains is less attractive now because of possibility that capital gains rate will climb in the next few years.


U.S Treasury Letting Dollar Fall

Kurt Brouwer October 10th, 2007

As we wrote in How Far Has the Dollar Fallen? And Why?, the dollar declines when U.S. interest rates decline. And, so far, the U.S. Treasury is perfectly happy with the results. Exports are up and the trade deficit is benefiting as shown in this article by Edmund L. Andrews from the International Herad Tribune [emphasis added]:

‘The dollar is near record lows against the euro and has weakened considerably against several other major currencies, but officials in Washington are reacting with almost contented silence.

Less than two weeks before finance ministers from the Group of 7 leading industrial nations are to meet to discuss economic policy, European officials are grumbling about the weakened dollar because it makes American exports cheaper in world markets…’

The Europeans can grumble all they want, but they know exactly what they need to do in order to reduce the upward trajectory of the Euro versus the dollar. As we wrote in Asia Adjusts, But Europe Just Complains, there are simple steps the European Central Bank could take if it wanted to do anything. The IHT article continues:

‘…Analysts see little mystery in the American position: at the moment, a weaker dollar offers more benefits than a stronger one. The cheaper dollar offers a lift to American exporters by making their products competitive in many parts of the world. And while a weak dollar usually makes imports expensive, import prices have so far climbed less than other currencies’ values because foreign producers have kept prices low to preserve market share in the United States.

“Implicitly, Paulson and the Federal Reserve are happy with a gradual fall in the value of the dollar,” said Nouriel Roubini, an economist at New York University. “They’ll never say they favor a weak dollar, but the benefits to the U.S. in terms of competitiveness are significant.”

Though Paulson has primary responsibility for American exchange rate policy, Federal Reserve officials have also made it clear that they are not worried about imminent inflationary dangers from a weaker dollar.

The Fed chairman, Ben Bernanke, recently told a congressional hearing that the dollar’s value remains strong in other ways. “The value of the currency can also be expressed in terms of what it can buy in domestic goods — the domestic inflation rate,” Bernanke said in response to questions about the dollar from Representative Ron Paul, Republican of Texas and a long-shot candidate for the Republican presidential nomination. Noting that inflation remains low, Bernanke suggested that the dollar’s weakness was not a source of concern to the Fed.

Democratic lawmakers, who have been quick to attack the Bush administration about most other economic policies, have said almost nothing about the currency’s decline.

To at least some European officials, worried that the soaring value of the euro will hurt European exports, the American silence has been thunderous…’

Silence is golden in this case. The Fed and the U.S. Treasury are working together to manage the economy and keep economic growth on track. They are also doing their best to deal with long-term problems such as the trade deficit. In my opinion, we are lucky to have such solid economic leadership.

Hat tip: BrothersJuddBlog

Chuck Jaffe — MarketWatch Column on Financial Advisers

Kurt Brouwer October 8th, 2007

Chuck Jaffe at MarketWatch pens an interesting column on financial advisers, what they charge, what their minimums are (on average). By way of background, when he uses the term financial adviser, he is referring to a fee-only registered investment adviser (RIA). An investment adviser typically concentrates on investments only. The term financial adviser is used by many to refer to an RIA firm that manages investments for clients, but also offers broader services (such as retirement planning, financial planning and so on). Financial advisory firms typically must register with the Securities and Exchange Commission and follow guidelines as to how they practice. The term fee-only refers to a firm that charges clients a fully-disclosed fee based on assets in the client’s account. Some firms charge fees based on the client’s entire net worth, although this is a pretty small minority [emphasis in the original]:

Every shred of evidence on the subject suggests that record numbers of consumers are looking for help in managing their money. But very little of that research gives consumers an insight into how financial advisory practices actually work, an insight that is important when it comes to getting both good help and good value for your money.

So when Rydex AdvisorBenchmarking, an affiliate of the company that runs the Rydex family of mutual funds, issued its 8th annual study on registered investment advisers, consumers working with advisers or considering the need for help should have taken some notice…

…If you have a financial adviser or are thinking of getting one, here are the stats you should have noticed from the Rydex AdvisorBenchmarking study, and what you might draw from them:

…The average account minimum, according to Rydex AdvisorBenchmarking, is now $408,000, up from $345,000 a year ago…

In terms of account minimums, this average seems low to me. Most firms I know of have at least a $1 million account minimum. I know that sounds high to many who are struggling to build up their investment portfolio, however the account minimum is also tied to the fee schedule used (the average fee schedule starts at 1% of assets per year) and to the services provided.

...Advisers raised their assets-under-management fees for the first time in three years, with more than 70% of the firms polled saying they hiked prices.

The average fee for assets under management is now a flat 1.0%, according to the Rydex survey. If you ask most consumer advocates for the level of fees they think is appropriate, the industry has now reached it; as a general rule, anything north of 1.0% of assets under management is pricey.

While there are times and reasons why an investor might pay more - including someone starting with a small amount of assets paying a fee that declines as their wealth grows - it’s hard to justify fees above this level, especially with mutual-fund expenses or annuity costs or other charges ultimately layered on top of the base fee.

Maya Ivanova, research manager for Rydex AdvisorBenchmarking, pointed out that many registered investment advisers are changing their pricing structures, finding ways to increase costs without necessarily hiking the base assets-under-management fee. “They’re charging a retainer or charging for specific products,” Ivanova says. “It’s important for investors to know exactly how they are paying and what they are paying for.”…

Advisers believe that trustworthiness is the No. 1 reason they are being chosen by customers.

There’s no surprise here, except that advisers were not asked the flip side of this, namely the reasons why they lose customers.

Consumers routinely say they are looking for guidance, emotional discipline and an adviser they can trust - and then they fire that trusted adviser the first time there’s a blip in performance…’

Chuck Jaffe makes a good point that investors can be reactive at times in the face of adverse market conditions. And, he is right, investors often do focus too much on short-term performance. But, this is actually a fault of both the client and the financial advisory firm. For example, we all know that long-term performance is critical to investment success and we also know that short-term ups and downs in the markets are generally unimportant. That is, in order to see how an investment pans out really takes several years at a minimum. Yet, as financial advisers we report performance quarterly or even monthly and many investors check their portfolios daily. So, we are all at fault to some extent for paying too much time and attention to short-term fluctuations.

‘…If your reason for hiring an adviser is that you are looking for trust and confidence, ditching that adviser the first time the market works against you is self-defeating. Stay focused on what you wanted from an adviser, which almost certainly will be qualities beyond simple performance; let those conditions - plus performance - determine whether an adviser retains your trust over time…

Trust is a very important factor in a relationship such as attorney, CPA or financial adviser. As financial advisers, we learn a lot about our clients and their goals, their problems, their assets and liabilities and, therefore, trust is very important. The following is an earlier post I did on this issue of the trusted adviser:

Charles Green, author of the Trusted Advisor, has an interesting piece on his blog describing a formula for trust [emphasis added]:

‘…When I wrote (with Maister and Galford) The Trusted Advisor, we introduced the Trust Equation:

T = (C+R+I) / S, where
C=credibility, R=reliabilty, I=Intimacy, and S=self-orientation.

(To be precise, it’s a formula not for trust, but for trustworthiness of the one who would be trusted.)

The numerator factors are pretty clear. It’s the denominator that gets most readers’ interest, and rightly so-it’s the most powerful. On a personal level, we trust someone if their focus and interest is about us: we do not trust them if their focus and interest is about themselves.

It’s why we’re sceptical of used-car dealers, telemarketers, and other stereotypes of sellers-people who clearly want our money, but less clearly have our interests at heart…’

I never really thought of a formula for trust, but I think this one makes sense. The key element is what he calls self-orientation. Is the trusted adviser thinking about your best interests or about his or her personal interests?

In the financial industry, the term fiduciary is the one that best describes the proper kind of self-orientation referred to above. A fiduciary is one who places the interests of the client first. Though this is an obligation, it is also the factor that has attracted many of us to this industry. Many fee-only financial advisers are refugees from commission-based businesses such as stockbrokerage or insurance. As financial advisers, we want to be trusted advisers for our clients and we try to earn that trust by placing their interests first.

Employment Rebounds In September

Kurt Brouwer October 5th, 2007

Brian Blackstone at the Wall Street Journal reports that employment went up considerably in September. In addition, last month’s abysmal report was revised upward to show a nice gain as well:

U.S. employment rebounded last month on robust public education and other service-sector hiring, and August payrolls were revised sharply higher, providing further evidence that while the U.S. economy may slow a bit due to the housing crunch, it is likely to skirt an outright recession.

The figures, which included an acceleration in wage growth, will likely force investors to rein in hopes for further aggressive easing by the Federal Reserve.

Nonfarm payrolls rose 110,000 in September, the Labor Department said Friday. Just as important, August was revised to an 89,000 rise from a previous estimate of a 4,000 decline. That drop had been seen by Fed watchers as a catalyst in the Fed’s surprisingly aggressive half-point federal funds reduction last month, its first in over four years…’

‘…The unemployment rate rose 0.1 percentage point in September to 4.7%.

Average hourly earnings increased $0.07, or 0.4%, to $17.57. That was up 4.1% from a year earlier, suggesting tight labor markets are starting to put some upward pressure on wage growth.

September payrolls topped Wall Street expectations of a 100,000 rise. A report Wednesday from Automatic Data Processing and Macroeconomic Advisers that attempts to track the government figure, as well as recent jobless claims data, had pointed to modest gains in employment.

The report on job growth is very good news that the economy has weathered the subprime lending crisis. Unemployment notched up slightly, but it is still very low by historical standards. Wage growth is also solid and this suggests the tight labor market is having an impact on wages. All in all, I’m very happy with the report and I think it indicates our economy is still chugging along at a good pace.

Update: For the full report from the Bureau of Labor Services, go here