Category Archives: wealth

How to lose $150 million

Boris Becker

We have written a lot about planning and investing.  But there’s nothing quite as instructive as learning from mistakes.  Learning from others’ mistakes is less painful than making our own mistakes.

This sets up an example of financial mistakes I learned about recently.

Sometimes the most surreal things happen. For example, anyone who remembers the 1980s’ tennis prodigy Boris Becker may be shocked to learn that last month, in a London courtroom, Becker was declared bankrupt.

After winning Wimbledon and countless other tournaments, Becker’s personal fortune was estimated to have reached $150 million. So how could this have happened? How could he have gone from $150 million to zero, and what can we learn from it?

Sports figures often find that they have developed “posses,” hangers-on who encourage extravagant lifestyles.  Fame and fortune at an early age lead to a number of personal mistakes.  These are often combined with poor investment decisions.  In the case of Becker they include things like Nigerian oil companies, and “… a sports website, an organic food business, and more notably, a planned 19-story high-rise in Dubai called the Boris Becker Business Tower, whose backers went bust in 2011.”

This is a special problem for people who become wealthy in sports and entertainment.  Too often they turn their financial lives over to agents who get them involved in complicated schemes that go sour.

The key to gaining wealth and – most especially – for keeping it is: keep it simple.  During 30 plus years of investing the biggest mistakes I have seen made is people getting involved in complex deals, partnerships, and relationships that they don’t really understand.

We provide education for our clients on investment strategy and develop portfolios that allow people to keep what they have earned.  Don’t be like Boris Becker.

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Even the “rich” can’t afford retirement.

Investment Approach

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires.  There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month.  To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement.  Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people.  How well is the person earning over $200,000 a year going to do in retirement?  The issues that even these so-called “rich” face are the same:  increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget.  But once retired, that salary stops.  That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments.  At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan.  He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs.  Once the basics are determined, they can plan for their “wants.”  This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues.  Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy.  The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

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Buy a Paper Mill Heiress’s Greenwich Mansion for $5.5 Million

The seven-bedroom house sits on 10 acres.

 

Having recently inherited her mother’s house in the same community, Zelinsky is selling her old home for $5.495 million. The buyer of the 6,100-square-foot house (that measurement doesn’t include a partially finished basement) will benefit from Zelinsky’s family’s connection to the property and its surroundings.

 

Just in case you wanted to know what you could get if you had the money.  The grounds need some work.

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Living like the Earls of Downton Abbey

Want to live in grand country house in the English country side?

Some of these homes have been divided in apartments.  Here’s Apley Park.

 

 

Mr. Wentworth’s six-bedroom apartment, set over three south-facing floors, is one of 17 units on the property and located in the main building, called Library House.

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The Liquidity Trap – Or How to Lose $4.5 Billion

Liquidity is defined in the Dictionary of Finance and Investment Terms as “the ability to buy or sell an asset quickly and in large volume without substantially affecting the asset’s price.”

In layman’s terms it means being able to get to your money quickly and without a major loss.  Liquid assets are things like checking accounts and money market funds.  They can also include mutual funds and stocks in large companies that trade on a major stock exchange, although in times of severe financial stress even these may see major price swings.

But there are lots of things people own that are not liquid.  The typical family’s home is a large part of their wealth.  Homes are not liquid; they can’t be sold quickly and converted to cash in times of need.  What a home can be sold for is a guess; something that millions of people learned when the housing bubble burst in 2008.  Families found that the value of their home was tens, even hundreds of thousands of dollars less than their mortgage.

Besides a home, many stocks are not liquid.  Shares in small companies with a few shares outstanding may not be liquid.  Even the very wealthy are finding out that the liquidity trap can turn them from billionaires to paupers in short order.  Forbes Magazine listed Elizabeth Holmes, the founder of Theranos,  as America’s richest self-made woman last year with a fortune estimated at $4.5 billion.  The most recent listing gave her net worth at zero.  The reason for this is fairly simple.  Her net worth was based on the value of one stock: Theranos.  The stock was not publicly traded and if she had tried to sell some of it the share price would have plummeted because it would show a lack of confidence in the future of the company.

So when Theranos ran into serious problems Holmes could not get out and her fortune literally disappeared into thin air.

The average person can avoid the liquidity trap by following a few simple rules.

  1. Do not put too much of your personal wealth in things – like homes – that can’t be easily sold.
  2. Do not put too much of your personal wealth in one stock. You do not want your net worth to evaporate because of poor decisions by corporate management.
  3. Smart investors spread their financial assets widely.  Realizing that they cannot accurately predict the future, they own stocks and bonds, domestic and foreign.  If they don’t have the means to diversify using individual stocks and bonds they use mutual funds or ETFs.
  4. Get an advisor. Most smart people use professionals when they need medical, legal or financial advice.

For more information, contact us.

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Slow and steady wins the race

Tortoise-and-the-Hare

 

We have all heard Aesop’s Fable about the race between the tortoise and the hare.  The hare, convinced that he was much faster than the tortoise, took time out for a meal and a nap.   When he woke up he realized his mistake but the tortoise crossed the finish line first.

It seems that this fable is especially true about how people grow rich when investing.   There are some spectacularly wealth people who got that way virtually over night – we have all read about them – but the vast majority of the “High Net Worth” (HNW) people –  those with at least $3 million in investable assets – did it the tortoise way.

The interesting thing about these HNW people is that they rose from the poor and the middle class; they did not inherit their wealth.

A study by Bank of America and U.S. Trust found that 77% – more than three quarters – of their clients grew their wealth slowly.  83% said that they grew rich by making small wins rather than taking large risks.  They grew their wealth by careful investing and avoiding major losses.

In our practice we have met quite a few people who managed to turn modest incomes into multi-million dollar portfolios.  We have also spoken with people who took big investment risks only to fail, and have to continue to work long after they planned to retire.

It’s up to each one of us to decide what race we wish to run.  But keep in mind that the odds favor the tortoise over the hare.  And if you have a problem with the slow-but-steady approach to wealth, get a good RIA who will guide you.

 

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Passing $10 million to your heirs tax free

The new estate tax law includes a provision called “portability.”  It’s officially known as the “Deceased Spouse Unused Exclusion Amount.”

Portability allows married couples to capture two estate tax exemptions without having to rely on the A/B Trust plan discussed in previous essays.

An attorney should be consulted shortly after the death of a spouse to make sure that the deceased spouse’s exemption does not expire.

It’s convenient, and does not require separate accounts for A and B trusts.

It simplifies the tax life of the surviving spouse.

And it preserves the step-up in cost basis when the second spouse dies.

For more information, contact your estate planning attorney.

We welcome your inquiries.

Changes in tax law create problems for trusts

The Federal Estate Tax was created in 1916 to help pay for World War 1.  The tax is levied on everything you own or have interests in at your death.  At first, it did not apply to many people but inflation and prosperity began taking its toll.  From 1987 to 1997 the government tax on estates over $600,000 was 55%.

By then, many people who owned a nice home and had savings and investments became worried that a lot of their money want going to go to the government rather than their heirs.  Each person has his or her own exemption.  A married couple has two exemptions.  However, if one died, leaving everything to the spouse, the surviving spouse only had one exemption left.

The legal profession came up with an answer: the A/B Trust otherwise known as the “spousal” and the”family” trust.  Under current law, you can leave an unlimited amount of money to your spouse free of tax.  But you can leave up to $600,000 to a trust that your spouse can use for his or her benefit but is not legally their property.  This is known as the “family trust.”  The rest goes directly to the spouse or to a “spousal trust.”

Then when the surviving spouse dies, the heirs inherit both the “family trust” assets ($600,000) and the surviving spouse (or “spousal trust”) assets up to the $600,000 limit – for a total of $1,200,000 free of federal estate tax.

At a tax rate of 55%, that saves the heirs a whopping $330,000 in taxes.  Everyone thought that was a great idea.  Many estate plans and trust documents were prepared with these issues in mind.  There were some drawbacks with these plans but the estate tax savings overwhelmed all other considerations.

Beginning in 1988 the amount of the exemption that could be passed on to non-spousal heirs was gradually increased.  In 2000 it went to $1,000,000 and for one year – 2010 – there was no estate tax at all.  In 2012 the law was changed and the limit was raised to $5 million and indexed for inflation.  In 2016 the estate tax exemption is $5.45 million and the estate tax rate is 40%.

This means that a lot fewer people will be subject to the estate tax and now are faced with the negative aspects of this approach to estate planning. These include

  • Inconvenience
  • Administrative costs
  • Capital gains taxes

We will address these issues in our next essay.

Questions?  Call us.

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Independent Wealth Managers vs. Wirehouses

If you had the choice, would you rather shop at a boutique or a chain store?  You know what you get at a chain store: pre-packaged products on shelves that meet most of your needs but no personal service.  A boutique provides you with a lot more product selection, a high level of personal service and saves you time in meeting your needs.

The reason that so many people go to chain stores for groceries, hardware and clothing is that they usually offer lower prices. The interesting thing about the financial services industry is that the “chain stores” (the industry calls them “wirehouses”) like Merrill Lynch, UBS, Wells Fargo are not cheaper than financial boutiques.

These boutiques go by other names such as “Registered Investment Advisors” (RIAs) or “Independent Wealth Managers.”   But they are all focused on satisfying their customers, not on the sale.  They are true servants to their customers.  While wirehouses give the impression of size, the are limited to selling the products they have on their shelves.  They can’t suggest you shop down the street for a product that’s better for you.  RIAs are fiduciaries, meaning they put their clients’ interests ahead of their own.  They focus on what’s best for the customer rather than the sale.

According to a survey by Cerulli Associates, over half of the ultra-high-net-worth clients still have their assets at wirehouses or bank trust departments.  That is changing as younger investors or the heirs of the older investors seek the kind of personal service that RIAs and Independent Wealth Managers provide.

If you’re looking for boutique service without paying more for it, contact us.

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You and your Super-Yacht.

The OceAnco – Igor Lobanov Y708 85.60m Superyacht – Superyachts ...

Have you ever glanced at the pictures of the rich and famous having a party on the deck of a Super-Yacht somewhere in the Caribbean or Mediterranean?  Have you wondered what would it cost to party like that?  Well, it is expensive, but not impossible.  You see, they probably don’t own the yachts, they rent them.

In the April 15th issue of Private Wealth, they discuss what it takes.

Lounging in the Caribbean aboard a beautiful, 100-foot superyacht sounds pretty great, but it might be hard to relax when you’ve got a hefty engine repair bill to pay and crew payroll paperwork to review. The annual cost of operating a 180-foot vessel is $4.75 million, or about 10 percent of the yacht’s original cost. With high maintenance costs in mind, ultra-high-net-worth individuals looking to explore the high seas are increasingly turning to charters.…

A week on a superyacht can cost $115,500 to $190,000, on average, the report found, while the average purchase price is a bit more than $10 million …

Of course that puts it out of the price range of all except the ultra-high-net-worth individuals; those with a minimum worth of $30 million.

But the number of ultra-high-net worth people keeps growing and they often decide to rent a yacht or lease a jet rather than buying one.  It’s a business that keeps growing.

And for people who are climbing the financial ladder (or win the lottery), it doesn’t hurt to dream big.

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