Wealth Management
(New York)
Here is a tough fact for anyone to consider: 70% of wealthy families will lose their wealth by the second generation, and 90% will squander it by the third, according to a study by the Williams Group wealth consultancy. That means parents are fighting an uphill battle in trying to educate their children/heirs on how to manage finances. It sounds very simple to say, but education and learning the value of hard work from an early age are the best ways to ensure a successful continuation of wealth. Three top tips for clients are: be open with your family about wealth, its creation, and continuation; educate your family members about wealth creating/growth strategies; and put a lot of care into tax planning to avoid inheritance tax pitfalls.
FINSUM: Many people struggle with how to talk to their children about money, but as is often the case, the most difficult things to do are usually the most important ones.
(New York)
Asset allocation as it has traditionally been conceived has taken a beating over the last few years, and especially since the start of the pandemic. The old 60/40 allocation model has been cast aside for years, and investors are using many new techniques to allocate, such as factoring. However, one easy-to-implement and effective way to think about allocation is the balance of active and passive investments one holds. Active investments, when well done, can offer long-term outperformance. However, they also have more significant risks. Accordingly, this can be the risk/upside portion of a portfolio, while passive strategies, which are almost by definition more diversified, can be more of a hedge.
FINSUM: This not only makes sense in equities, but this consideration about active vs passive holds across different asset classes as well.
(New York)
Rollovers are obviously critical to almost all advisors, yet many don’t have seem to have gotten the memo: rollovers are changing significantly. The big change stems from the fact that Biden just let the new Trump era fiduciary rule go into effect, which was unexpected. According to the new rule, rollovers count as fiduciary advice. This is counterintuitive for many, as one leading industry lawyer, Brad Campbell from Faegre Drinker, commented “People have made the argument that rollovers cannot be fiduciary advice because it’s a one-time recommendation”. Here is the full analysis: “If you and the participant that you’re recommending rollover to, even though you advised them to do the rollover now, when you entered into that arrangement to give that advice, did both of you intend that you would meet again in the future to give more advice? To actually manage the assets or advise about managing the assets in the IRA? … If the answer is yes, we both intend to meet in the future, then DOL views it as an anticipated ongoing relationship. In other words, the beginning of an advice relationship that is fiduciary from the initial advice”.
FINSUM: This is pretty clear once you understand the logic, but on the surface it is a little hard to discern. Because no one expected this rule to actually go into effect since the election, many seem to be unprepared.
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(Washington)
Reg BI has been in the spotlight recently. With incoming SEC chief being grilled by Congress before potentially being appointed, there is a lot of anticipation about where things might be headed. Some think Gensler will move quickly to alter Reg BI, while others (including us), think that he might move slower because of potentially more pressing issues like meme stocks and bitcoin. However, one change that may come quickly is a simple but important one: changing the regulation’s name. There is a loud call for the SEC to change Reg BI’s name because many say it is “grossly misleading” since it is not a true fiduciary rule. Gensler could potentially make this change much more easily than actually modifying the rule, so it makes sense this could be an immediate measure to appease critics.
FINSUM: What we find interesting here is that calls to change the name are not just coming from fiduciary rule advocates and the like, but also from brokers. The latter seem to be having some trouble with the clients thinking they are fiduciaries when they aren’t, which can then lead to big blowups/lawsuits.
(New York)
While yields have been rising over the last few weeks, the reality is that they are still near historic lows, and far below the level most retirees need in order to earn decent income, especially given how risky bonds currently appear. So, in this very difficult environment annuities have emerged as a good option, but how to take best advantage of them when rates are so low? There are a few options, but the best one is “laddering”, or buying multiple annuities over time in order to not commit your entire pot of capital at a time when rates are so low. Additionally, some annuities offer dividend payments on top of regular payouts, which can provide extra income.
FINSUM: One of the big worries right now is putting a big pot of money into annuities, only to see rates and payouts rise in a couple years. Hence laddering is good strategy.
(New York)
If there were ever a product built for steady retirement income, it is fixed annuities. With the big decline in fixed pensions, fixed annuities have become a must-have option for many retirees who need guaranteed income. They are the simplest annuity—principal and income are guaranteed, but rates are fixed. In other words, the insurance company is bearing the risk, so they get the upside, but the customer gets peace of mind. Therefore, the basic utility of annuities is to support everyday income in retirement. There are other uses too, especially in the current market environment. For example, “Right now, some fixed annuities make an attractive alternative to both bonds and CDs in a portfolio, due to the principal guarantees and interest rates offered”, says one financial advisor at Stack Financial Services.
FINSUM: The most important thing to remember is that annuities have utility in most portfolios, but they should only ever be just a portion of a portfolio. They suffer from illiquidity and are very susceptible to inflation, but they also have guarantees that no other asset class can offer.