Monday, October 24, 2016

Who Gets the $7 million townhouse?

The Horatio Street townhouse 
Back around the time young Bob Zimmerman moved to New York and legally changed his surname to Dylan, Bill Cornwell and Tom Doyle moved into an apartment in a West Village townhouse on Horatio Street. Cornwell later bought the building, and there they stayed. Although gay marriage was unthinkable half a century ago, the two men became a well-known couple in the West Village.

In 2014 Cornwell died at age 88. His will left his personal possessions and his townhouse to Doyle. But the will is invalid, signed by only one witness – New York State requires two. So Cornwell died intestate. Nieces and nephews will inherit. Could Tom Doyle lose the only home he has known for over five decades?

Not without a fight, writes Attorney Arthur Z. Schwartz:
Tom has come to my office and we have come up with a plan. While New York never recognized common law marriage, Pennsylvania did until recently. Bill Cornwall and Tom Doyle vacationed there a number of times, and New York Courts will recognize common law marriages if they would be recognized in a state where a couple visited, even if the visit was brief. I have made Tom Doyle’s rightful claim to 69 Horatio Street. It is a claim born of love and the cruel refusal of New York to recognize gay marriage for so many years.
Could the plan succeed? In any event, the moral of the story is that Bill Cornwall should have shaped his estate plan sooner and better.

Wednesday, October 19, 2016

Are Actively Managed Funds Worth the Gamble?

The rise of passive investing – index funds and such – has triggered a series of Wall Street Journal articles. The rise seems unstoppable:
[F]or the last 10 years… between 71% and 93% of U.S. stock mutual funds either closed or failed to beat their closest index funds.
The Journal gives two prominent mutual fund leaders the thankless jobs of defending stock pickers. 

Capital Group's Tim Armour cites in-house research indicating that "active funds with low expenses and a substantial amount of the manager’s own money invested in the funds on average beat their benchmarks 89% of the time over 10-year rolling periods." 

Michael Roberge, co-CEO of MFS, refers to a study showing that bold fund managers willing and able to hold their favorite stocks for long periods do better than average. 

Both Armour and Roberge also hint that active managers may be able to limit losses by timing the market. And both point out that stock returns in the foreseeable future are expected to be below par. If so, investors who bank on index funds to provide the same growth they have enjoyed since the Great Recession will fall short of their goals. 

So why not gamble and buy active?

Saturday, October 15, 2016

Alternative Assets Blur Annual Returns

The average university endowment has about half its money in alternative assets – real estate, private equity, hedge funds, whatever. Over 70 percent of Yale's endowment is in alternatives. As this article from  the Yale Daily News points out, calculations of these endowments'  annual returns cannot be precise. Five or ten years returns are a better guide to actual performance – and over those time periods, Yale looks pretty good.

Thursday, October 13, 2016

Quiet Old Firm Launches Marketing Blitz

Brown Brothers Harriman, an old-time Wall Street partnership, shed its securities underwriting and sales units when Glass-Steagall came along. As a private bank it has gone about its business quietly – until last month. To my surprise, this ad greeted me on the last page of The New York Times news section. The following Sunday, BBH ran a two-page spread in the Times magazine. Banner ads popped up online, directing viewers to the BBH web site.

The web site, content rich, offers briefings on services, staff bios and  generous helpings of articles from three publications – for investors, business owners and women – arranged by issue and sorted by subject. Under "Wealth Management and Trusts" is this exemplary article on spousal access trusts. (The design of these trusts undoubtedly guards against the risks associated with spouses who plan to become ex-spouses. Even so, spousal access trusts must be grist for at least one financial thriller.)
From 2010 to 2015, according to Spectrem data reported in Penta, the number of households with investable assets of $20 million to $100 million grew by more than 105,000. That's a 64% increase. Over a million households now have investable assets of $5 million or more. Among those with $5 million but less than $10 million, many should cross the $10 million threshold as their business and real estate wealth gets transformed (bring on the Gatorade barrel!) by liquidity events.

As wealth managers gear up for the growing market now emerging in the top financial tiers of the nations's 124.6 million households, they may find BBH's marketing blitz worth studying. 

Tuesday, October 11, 2016

Warren Buffett's Shocking Income Tax Rate

Donald Trump defended his $916 million tax loss by suggesting other billionaires, including Warren Buffett, used the same tax-cancelling strategy.

Not so, Buffett declared. He has paid federal income tax every year since 1944. In 2015 Buffett paid tax of $1,845,557 on an income, after deductions, of $6,086,237.

That works out to a tax rate of over 30%.

Aha! He doesn't pay at a lower rate than his secretary after all. No, but he probably never did. His much-publicized calculation included payroll taxes.

Saturday, October 01, 2016

Trump's Tax Loss Was Really Yuge

Any resemblance between a $916 million tax loss and a real loss, especially in the real estate business, is purely coincidental. Still, who wouldn't enjoy 18 years of tax-free income?

Tuesday, September 27, 2016

Yale Beats Harvard, But . . .

Yale's endowment eked out an investment return of 3.4 percent for the fiscal year ending last June, handily beating Harvard, whose endowment lost 2 percent.

Many endowments suffered negative returns in fiscal 2016. Untutored amateurs who simply invested in a S&P 500 index fund did better, making about 4 percent.

Like the rest of us, university endowments are learning that we live in interesting but difficult times. After necessary expenditures, Yale's fund actually shrank during fiscal 2016.

Remember the good old days, when Yale boasted an annualized ten-year return of almost 18 percent?

Sunday, September 25, 2016

Does Inheritance Lead to Inflation?

From Breaking the Silence on the Inheritance Boom, Prudential's sponsored content on The Washington Post site:
Over the next 30 years, a wealth transfer of nearly $58 trillion is expected to change hands from baby boomers to younger generations in the form of inheritance, according to a recent study from the Boston College Center on Wealth and Philanthropy. ••• The enormous wealth transfer will give the next generation more money to spend, leading to increases in higher education tuition, insurance premiums and housing prices.
Not so long ago, it was the baby boomers who were expected to inherit incredible sums. It didn't trigger inflation.  Will the millennials' Great Expectations have greater impact?
When marketing online, content is king. Prudential is a new customer for The Washington Post's Brand Studio. Other financial types using the Post's marketing platform include Citi, Goldman Sachs, JPMorganChase and, briefly, T Rowe Price. Mostly their content highlights their good works. Prudential's offering is more akin to an online newsletter article.

Wednesday, September 21, 2016

Harvard is bringing up the rear

Today's WSJ has an interesting piece for money managers:  Harvard's Money Troubles is the headline in the print edition, slightly changed online.  Harvard comes in third worst in the Ivy League annualized return over the last 10 years, 7.6% versus Yale's 10.0%.  They can't seem to keep their investment chiefs anymore, and if you read all the way to the end of the article it turns out that raiding other schools for talent isn't working either.  MIT's endowment chief passed when he was approached about moving to Harvard, for example.

The article doesn't mention it, but the real trouble started in 2005, when many ignorant Harvard alumni were incensed that their legendary investment manager, Jack Meyer, was paid $7 million for his services one year.  By comparison, comparable private sector managers were paid $251 million at the time.  The alumni effectively forced Meyer's resignation.  JLM commented here, and I followed up four years later here.  Looks like the lesson still has not been learned.

 Fortunately for Harvard, their alumni are willing to increase their giving to make up for lackluster investment performance.  Harvard launched a $6.5 billion capital campaign in 2013. They crossed the $7 billion mark in gifts and pledges last June 30, and the campaign will continue to June 30, 2018.

That amount of charitable giving leads to a shortfall of roughly $2.8 billion in federal income tax collections, depending upon your assumptions of the donors tax situations.  (Charitable deductions plus capital gains taxes avoided by giving appreciated property.)  It also suggests that about $3 billion in federal estate and gift taxes will be avoided.  Harvard has roughly 10,000  undergrad and graduate students.  So that is a federal subsidy of $280,000 per student at Harvard, whose endowment comes to $37.6 billion.  What do you suppose the tax subsidy for the endowment is worth?  Meanwhile, one presidential candidate wants to reduce the cost of public colleges to zero.

Something is wrong with this picture.

Wednesday, September 14, 2016

One Hundred Years Old and Still Raising a Fuss

Next to establishing the national park system, the federal estate tax was our government's best idea a century ago. Or was it? According to the Tax Foundation, the estate tax may shave almost one percentage point off GNP over the next decade. 

Harvard's N. Gregory Mankiw asserts the estate tax is unfair:
Consider the story of two couples. Both start family businesses when they are young. They work hard, and their businesses prosper beyond anything they expected. When they reach retirement age, both couples sell their businesses. After paying taxes on the sale, they are each left with a sizable nest egg of, say, $20 million, which they plan to enjoy during their golden years. 
Then the stories diverge. One couple, whom I’ll call the Frugals, live modestly. Mr. and Mrs. Frugal don’t scrimp, but they watch their spending. They recognize how lucky they have been, and they want to share their success with their children, grandchildren, nephews and nieces. 
The other couple, whom I’ll call the Profligates, have a different view of their wealth. They earned it, and they want to enjoy every penny of it themselves. Mr. and Mrs. Profligate eat at top restaurants, drink rare wines, drive flashy cars and maintain several homes. They spend their time sailing the Caribbean in their opulent yacht and flying their private jet from one luxury resort to the next. 
So here’s the question: How should the tax burdens of the two couples compare? Under an income tax, the couples would pay the same, because they earned the same income. Under a consumption tax, Mr. and Mrs. Profligate would pay more because of their lavish living (though the Frugals’ descendants would also pay when they spend their inheritance). But under our current system, which combines an income tax and an estate tax, the Frugal family has the higher tax burden. To me, this does not seem right.
Almost all commenters on Mankiw's column were pro estate tax. Some considered frugality un-American. 

Teddy Roosevelt, godfather of the national parks (and a Republican), advocated a stiff, highly progressive estate tax.  The national parks were a really good idea. The estate tax? That issue is far from settled.

Below, Teddy on a visit to Yellowstone. More early national park photos here.

Wednesday, September 07, 2016

Great Moments in Financial Engineering

From The Wall Street Journal:

"Traditional certificates of deposit offer better interest rates than normal savings accounts for customers who agree to lock up funds for a period of time. Since the 1960s, they have been among the most popular products retail banks offer. Now Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early."

Although the "GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit" proved toxic, a lot of risk-averse investors would welcome an honest product engineered to convert, say, a volatile return on stocks averaging 7% into a CD paying a steady 3.5 or 4%. Possible?

Tuesday, August 23, 2016

A Meltdown for Family Limited Partnerships?

The family limited partnership, Wealth Management declared back in 2000, is the ice cream sundae of estate planning strategies.

By using a partnership to pass portions of a family business, real property or even a portfolio of marketable securities to family members, wealthy donors can generate substantial valuation discounts for gift or estate tax purposes.

Could the ice cream social be nearing an end? That's the threat posed by newly proposed regulations. Some observers think the regs will be finalized before we have a new president in the White House.

Last weekend Paul Sullivan in The New York Times and Laura Saunders in The Wall Street Journal offered briefings on the potential meltdown. Both columns may prove helpful to wealth managers as they urge wealthy clients to enjoy their sundaes before the feds turn up the heat.

Sunday, August 21, 2016

The Collectible Trump

certificate vignette
For $149.95, down from $189.95, you can buy a certificate for one share in Trump Hotels and Casino Resorts, issued in 2004. If Trump wins the presidency, you might make a quick buck.

Wednesday, August 17, 2016

The Dead Hand Lives On

From the WSJ: Dynasty Trusts Make Sense for Certain Wealthy Families.

Weren't the really rich turning toward philanthropy rather than endless wealth preservation? Not entirely. Perhaps hopes for estate tax repeal are fading along with the Republican presidential campaign.

Thursday, August 11, 2016

The Case of the Bloated Retirement Plans

Once upon a a time, 401(k) plans and their ilk seemed relatively simple, with a mere handful of investment options. Sometimes employers even helped to pay plan expenses.

Gradually but inexorably, investment choices proliferated and plan expenses expanded, cutting deeper into participants' returns.

Now the times are a-changin'. Young investors have learned that the surest way to increase returns is to lower costs. Bewildering arrays of investment choices now draw complaints, not kudos. Latest sign of the times: a federal lawsuit aimed at employee retirement plans sponsored by Yale, N.Y.U. and M.I.T.

Like previous litigation aimed at corporate plans, also steered by attorney Jerome J. Schlichter, the new suits allege that the schools' plans incur needlessly high administrative expenses and offer investment choices that are mindlessly numerous and sometimes inferior to lower-cost options. (Do N.Y.U,'s employees really want to put their nest eggs into variable annuities?) M.I.T. also draws criticism for choosing New England's investment titan, Fidelity, as plan provider. (Fidelity's CEO has served on M.I.T.'s board of trustees.)

Participants in 401(k) plans and their non-profit equivalent, 403(b) plans, need all the cost-cutting help they can get. Still, older alumni may feel a tinge of sympathy for institutions that find themselves behind the times.

Related post: In deluge of Funds, Investors Sink or Swim

Monday, August 08, 2016

The NY Times Looks at Wealth-Shielding Trusts

Nevada is the star of this Times story. Here in New Hampshire, we resent being called a "wannabe" in the wealth-sheltering business.

Comments on the article are mostly unkind to the 1%. Yet as one commentator observed, there's little reason for jealousy: 

"I don't know too many happy wealthy people or lawyers, and I know a lot of wealthy people and lawyers."

Saturday, August 06, 2016

A Rosy Future for Tax-Exempts?

From 1991 (just after Congress had raised taxes) comes what may be the prettiest ad ever created for municipal bond funds.  The copy is equally rosy: 

"Taxes…You already pay them on your income. Should you have to pay them on your investments as well? Such anxieties dull the joy of having money. Before long life's little pleasures begin to suffer."

If investors suffer from higher taxes next year, will munis bloom? Or could rock-bottom interest rates lead Congress to decide that municipalities and states no longer need a federal tax subsidy?

Friday, August 05, 2016

Monday, August 01, 2016

Saving and Investing For College

Why tolerate byzantine financial-aid rules that discourage families from saving and investing for college costs? What if families could put aside as much as possible and still qualify for student loans as needed?

Good idea? Sheila Bair, former chair of the FDIC and now a college president, thinks so. See her WSJ op-ed.
Bair's column drew a curious assortment of comments: some pertinent, others blaming student aid for soaring tuitions. A few illustrate the value of The Bill of Rights: Americans are free to offer their opinion of articles without actually reading them. 

Friday, July 29, 2016

Here is the cost of current corporate tax regime

From TaxProf Blog.

Interestingly, those with the largest tax deferrals are well known for support of Democrats.

Thursday, July 28, 2016

MIT beats Harvard, nearly catches Yale

This linked story is a year old, but it includes 8 years of returns.  For 2015, MIT earned 13.2%.

I give them $50 every year, and for that I'm in the "1861 Club."  More than 44,000 alumni donated in the fiscal year that closed June 30.  Average donation was over $1,600, so I'm a little bit light on that score.

They just sent me a thank you note, which is what got me looking at their endowment.

Tuesday, July 26, 2016

Financial Literacy 101

Young Americans typically lack numeracy and come up short on financial literacy. Parental advice gets no respect. Could the answer be third-party guidance?

A math major we know recently took a new personal finance class offered by her college. She rated it Excellent and passed along slides outlining the course.

It covers about what you would expect, with added emphasis on on topics – education loans, subsidized health insurance – of special concern to new grads. Students are introduced to basic accounting (income statement, balance sheet, net worth), banking, retirement plans, credit cards (use as charge cards only), taxes, insurance and goal setting.

Because most new grads will start out poor and in debt, the course encourages inconspicuous consumption, as advocated by Mr. Money Moustache and – new to me – the Frugalwoods.

Investing receives substantial coverage. Students are encouraged to keep it cheap and simple:  Avoid brokers. Buy mutual funds, not stocks. Buy no-load funds, preferably index funds, from the fund company. Choose funds with an expense ratio of no more than .35%.

As investors, most new grads will have little to work with. The course encourages them to look on the bright side:

"If you were to take only one thing away from this class it would be to understand the time value of money.
"Compound interest is a very powerful concept. It is the single greatest advantage that young people have over old people."

Tuesday, July 12, 2016

SBBI coming back

For never explained reasons, Morningstar discontinued publishing the Ibbotson SBBI Yearbook this year.  When I called them to order my copy and learned this, I said, "I am certainly sorry that Morningstar bought the rights to this book, only to abandon it!"

I was not the only complainer. This email arrived today:

Dear SBBI Customer:When we discontinued the Ibbotson SBBI Classic Yearbook earlier this year, many of you contacted us to express your displeasure about losing this valuable resource. In response to your feedback, we have partnered with Duff & Phelps to continue to make the yearbook available in printed form. 
Duff & Phelps, which will compile the data and produce the book, will distribute the 2016 Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook through Wiley, which publishes its other valuation titles. This book will release in August 2016, and future editions are expected.

I haven't yet decided whether to buy it, or wait for next year's edition.  It also will be distributed through Amazon and others.

Morningstar remains inscrutable.

Thursday, July 07, 2016

Charity Navigator Lists Fake Philanthropies

Directing money to worthy causes draws increasing attention in wealth planning. First step should be to separate the worthwhile charities from the worthless. Charity Navigator has compiled a list of more than 30 fake charities, annotated with suggestions of worthy alternatives.

Sunday, July 03, 2016

Can Robo Advisers Save Investors From Themselves?

Betterment and other online investment services make investing easy. Novice investors define their goals and time frame. The robo adviser puts their money in a mix of ETFs expertly calculated to best meet their needs. Couldn't be simpler: set and forget.

"Forget." That proves to be the hard part. Novices tend to assume investing requires market timing. When Betterment briefly suspended trading during the Brexit market scare, some of its investors were exhibiting distressingly short-term behavior.

"Sell low, buy high." Mutual fund investors lose around 4 percent per year trying to predict swings in stock prices. How can robo advisers help their customers avoid the same fate?

Monday, June 27, 2016

1932: A Bank Advertises Free Investment Adivice

From the January 20, 1932 issue of The New York Times:

The correct advice, of course, would have been "Don't buy, SELL!" After the Crash of '29, the Dow rebounded by 30% in 1930. Then stocks began to slide toward oblivion. By the summer of 1932 the Dow would be 89% below its pre-Crash high. To recover from such a loss, one would have to watch one's portfolio go up by 825%.

Wednesday, June 22, 2016

Monetizing the House, the Old-Fashioned Way

Sarah Purcell's house
When Sarah Wentworth Purcell's husband died in 1776, she became a gentlewoman in reduced circumstances. To generate income she took in roomers.  Today, writes Amy Zipkin in The New York Times, Airbnb and other rental sites enable retirees, predominantly women, to monetize their homes in the same way. (Yes, everything old is new again.)

Short-term rentals generate extra money without requiring the homeowner to take on new debt. No home equity loan. No reverse mortgage. In addition:

Rentals may allow the homeowner to remain in a house tbat's otherwise unjustifiably large for an empty nester. Arranging rentals keeps the homeowner healthily active. And the homeowner meets a stimulating stream of new people, perhaps including visitors from around the world. She might even get to know someone who's about to become famous.

Sarah Purcell did. In 1777 one of her roomers was a Scot waiting for his ship to be built nearby. The ship was the Ranger, and John Paul Jones became our nation's first navel hero.

Sarah's home still stands in Portsmouth, New Hampshire, now known (sorry, Sarah) as the John Paul Jones House.

Wednesday, June 15, 2016

$10 Million is the New $5 Million

If $5 million is the new million, other measures of wealthiness also need adjusting.

Sure enough, this year JP Morgan raised the threshold for obtaining its Private Bank services from $5 million to $10 million. Bessemer Trust and others already have a $10-million minimum.

Most private banking clients at Morgan won't be effected. They have over $10 million. Half have $100 million or more.

Although most of us would happily settle for $10 million, it ranks low on today's wealthiness scale. The average S&P 500 CEO makes more than that every year. Certainly someone who used to have $100 million and lost all but $10 million doesn't feel rich.

Friday, June 10, 2016

A Better Store of Value?

Monets and Warhols stowed in free-port warehouses serve as stores of value for the world's superrich. But where's the fun in owning art you can't look at?  Rare stamps have long served as a superior form of tangible wealth – easy to store, easy to hide, easy to carry across national borders.

Stamps have a parallel quality to fine art," says Charles Hack, who collects both. Like art, rare stamps sometimes have noteworthy provenances.

The inverted Jenny, for example. This now-famous stamp was the Bureau of Printing and Engraving's second attempt to print postage in two colors, The first try hadn't gone well. Printing of the Jenny apparently went better, except for mishaps where the plane was printed upside down.

Colonel Green
Purchased by a prescient collector for face value, a sheet of 100 inverted Jennies passed to Colonel Edward H.R. Green, son of Hetty Green, The Witch of Wall Street. After numbering the stamps in pencil, 1 to 100, the Colonel separated the sheet into 25 sets of four.

In May one of the inverted Jennies sold for $1.35 million. Another, shown above, recently turned up in a stamp collection that an Irishman inherited from his grandfather. Thanks to Green's numbering, it was identified as one of a set of four stolen from an American Philatelic Society convention over 60 years ago.

Instead of a seven-figure bonanza at auction, the Irishman has to settle for a $50,000 reward.

Wednesday, June 08, 2016

Can Wall Street Be Saved From Itself?

Sitting around waiting rooms needn't be time wasted, it's a chance to catch up with last month's magazine articles. Did you miss this Time cover story, based on Rana Foroohar's Makers and Takers: The Rise of Finance and the Fall of American Business? Take a look. We may be hearing some of its themes repeated during the election campaign.

Even staunch believers in unfettered capitalism may nod in agreement with observations such as
An IPO—a mechanism that once meant raising capital to fund new investment—is likely today to mark not the beginning of a new company’s greatness, but the end of it. According to a Stanford University study, innovation tails off by 40% at tech companies after they go public, often because of Wall Street pressure to keep jacking up the stock price, even if it means curbing the entrepreneurial verve that made the company hot in the first place. 

So that's why Yahoo is for sale

Merrill Anderson's corporate website has been hosted by Yahoo ever since we created it. They had a division that catered to small business--they handle our corporate e-mail also.  They generally provided acceptable service.

Until last week.

Our website went down without explanation.  Getting through to a person there takes 2 hours on hold.  Initially they said our site was infected with malware and their engineers were working on it. No explanation as to how they allowed the malware in the first place.  They promised that the site would be back up in 24 hours.

This week the story changed.  They are offering to do nothing at all, we are on our own for finding and removing the malware.

So we're assessing our alternatives.  My understanding is that the small business division we work with was spun off by Yahoo some time ago.  The successor company is obviously interested only in collected fees from existing customers, not expanding or improving the services.  Your suggestions for a successor are welcome.

In the meantime, if you need to learn more about Merrill Anderson's products and services, contact Sirvydas Vebra at, or call us at 203.377.4996.

PS.  Because this blog is hosted by Google, I'm pretty confident that we won't have a problem with it.

Monday, May 30, 2016

Connecticut's Golden Geese Cash In

New Jersey's Tax Problem is that a few taxpayers make so much money they become golden geese – the State treasury can scarcely get along without them.

It's happening in Connecticut, too, as Jim Gust commented.

Bridgewater Associates headquarters, Westport, Connecticut
Connecticut's golden geese include Ray Dalio, the founder of the world's biggest hedge fund. Last year Bridgwater's chief enjoyed an income of $1.4 billion. Two of his lieutenants each made $250 million.

With immense incomes comes king-size clout. The State of Connecticut has come up with $20 million to discourage Bridgewater Associates from moving out of state.

Tuesday, May 17, 2016

The Case of the Dixfield Cats

In a modest trailer in Dixfield, Maine live a lucky group of homeless cats – lucky because they are looked after by the Dixfield Cat Ladies.

Twelve years ago one of the Cat Ladies died. She left most of her estate, about $150,000, for the creation of a corporation or trust "for the purpose of providing shelter, food and health care for abandoned and unwanted cats in the Town of Dixfield."

Are the Dixfield cats living in luxury and organic catnip? Not yet. Predictably, bequests to animals produce more snarls than purrs.