Given the economic implosion where trillions have been lost in personal investments and wire houses are boarding up like ice cream shops in January, high-net-worth clients are looking to their accountants and wealth management advisors to help preserve their investments amidst roller-coaster swings in the markets.Compounding their concern over the economic malaise, high-net-worth individuals now also have to worry about the potential affects of President-elect Barack Obama's tax and economic policies.
"Obama is expected to take a more regulated, Clinton-esque view on family limited partnerships and close any perceived 'loopholes' that currently allow clients to transfer assets to minimize their tax burden," according to Phil Tortorich, a tax attorney who specializes in estate planning law as a partner at Katten Muchin Rosenman LLP in Chicago.
Despite the formidable challenges, many financial experts are asking their clients to be patient and not to act on impulse. "They are concerned about the market dropping and what do you do in an environment like this," said Michael Bekas, a CPA and tax partner at Marks Paneth & Shron in New York. "We're being asked for strategies that they can use to maximize their wealth. What would we recommend they do in order to take what they have today given the current financial situation and be able to do something that will give them a springboard to grow back more than what they had before?"
Many firms are receiving more frantic calls from clients looking for advice on what to do and whether to pull out from the market altogether. "Clients are extremely concerned, and the reason they are concerned
is because the assets that are deemed to be safe, such as municipal and corporate bonds, have diminished pretty significantly, some as much as 30 percent," said Peter Traphagen, a partner at Traphagen Financial Group in Oradell, N.J. "We've never seen this in history."
"It's very hard to make rational decisions when emotions are running this high," added Norm Mindel, a CPA, CFP and financial advisor with Genworth Financial Investment Services. "So what you are trying to do is explain why we are doing what we are doing and the reason we are doing it."
The two fundamental questions to ask a client, he said, are whether they believe capitalism still works and if there's a risk premium for investing in equities. "You can't go in and out of the market, especially with this kind of market volatility."
Lisa R. Featherngill, a CPA/PFS and director of financial and estate planning at investment consultant Calibre in Winston-Salem, N.C., said that her clients have been asking a common question - do they have enough money left after the hit from this market?
"For the ultra-affluent, this is a great time to consider wealth-transfer strategies," said Featherngill. "Values are low and interest rates are low, making GRATs [grantor retained annuity trusts], installment sales and charitable lead trusts attractive. Act before year-end, since the laws may well change next year."
For affluent individuals, Featherngill recommended updating their financial plans and assessing their retirement plans. "Can they still retire when expected?" she asked. "Do you need to change your spending habits in order for your assets to sustain your lifetime?"
FIND THE RIGHT TOOLS
Bekas also advises his clients about GRATs, charitable remainder trusts and charitable lead trusts, but adds the caveat that they don't always work. "If it's not handled right, or if the investments don't perform like you would expect them to, you may not win. You may not get anything, but you may in some cases be no worse off than if you did nothing," he said. "But if invested properly, there are major savings for people and a passing of wealth for the next generation with a minimization of transfer taxes." He also suggested that clients consider a Roth IRA.
"The beauty of the Roth IRA is that if you let it run for five years and once those five years are done [any time after turning 59-1/2], you can take money out of the Roth IRA and there is no income tax," Bekas explained. He added that currently, only people who earn under $100,000 can convert a regular IRA to a Roth IRA. But for 2009 and 2010, there are new regulations out that allow a conversion from a regular IRA to a Roth IRA regardless of your gross income. "You have to pay the tax, however, on the money that is rolled over to the Roth IRA."
"Let's assume I have a regular IRA that has $1 million but it is now down to $650,000," he said. "I can take the $650,000, roll it into a Roth IRA. I'm going to pay tax on the $650,000, but I'm going to be able to pay the tax over two years. Then the Roth IRA will continue to run for a very long time. ... There is a significant benefit. It's the silver side of the cloud of the decline in the markets."
Mindel agreed that the economic environment offers some unique estate-planning opportunities with closely held businesses or real estate.
"The lower valuation allows for more effective gifting or sales to younger family members," he said. "[There are] techniques from everything such as a direct gift, to using limited partnership interest, to using a qualified personal residential trust - a device for transferring a home or vacation home to the next generation. All of these devices are dependent on getting someone to appraise something that is not liquid. It's challenging: Because people feel poorer, they are not inclined to be generous from a gift point of view, but from an estate-planning point of view, this might be a good time."
Mindel also said that some affluent investors, especially retirees, are creating different "buckets" of money to deal with the economic turmoil. One bucket would consist of short-term bonds that would be spent down over the next five years for living costs, Mindel explained. The second bucket would be a traditional blend of stock and bonds for growth with the idea that it would grow over the five years and be used for the next 15 to 20 years of living costs. The final bucket might be an annuity that guarantees income for the rest of their life.
Investing in long-term care is another strategy, even for individuals with cash on hand who may think it's not needed.
"The higher costs of long-term care, coupled with depressed stock portfolios, make long-term care insurance seem far more attractive," Mindel said, pointing out that the odds of nursing care destroying a portfolio are statistically higher than the bear market doing it. "Even the affluent are realizing that shifting the risk to an insurance carrier makes more sense."
For high-net-worth clients at Rochdale Investment Management in New York, a personalized portfolio is built around each individual's sense of volatility. Not surprisingly, investors' major concerns are to decrease that volatility and preserve their capital.
"If we were to say to a client, 'We are going to mail you four things you can do to help you reduce your volatility or address these crazy markets,' they would get the list and say, 'Great, I don't know which one applies to me and how to go about implementing them,'" said Garrett D'Alessandro, a CFA and the firm's chief executive and president. "Each client looks and is different and you have to provide the benefits that apply to them."
Still, D'Alessandro said that the No. 1 strategy used among his clients is having a disciplined stop-loss price or order that will protect profits that have already been made or prevent further losses, on a portion of the more aggressive stocks in a client's portfolio.
Said Mindel, "If you are going to try and manage a portfolio and make it last the rest of their life, the greatest challenge is focusing clients on five and 10 years, and not what is going on in the next 24 hours."
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