After the most recent crisis, investors are undoubtedly concerned about potential insolvency issues that may arise with their investment custodian.  Some of my clients have articulated this concern, and have asked whether it makes more sense to consolidate investment assets at one brokerage firm, or segregate accounts by institution as a form of makeshift diversification.  Some articles have been written on the matter, but I find that there is a lack of general understanding in/around the safeguards that have been created specifically to protect investors who hold assets at regulated brokerage firms. 

In arguably all cases, when a brokerage firm ceases to continue as a going-concern, customer assets are safe and able to be transferred to another registered brokerage firm.  Here’s how:

1. Brokerage firms are required to keep customers’ assets (both securities and cash) segregated from their own: the SEC's Rule 15c3-3—the "Customer Protection Rule"—requires customers' cash to be placed in a special, separate "reserve" account. Fully paid customer securities must be kept separate from firm and customer margin securities.
2. Brokerage firms are required to meet net capital requirements to both demonstrate financial worthiness and to reduce the likelihood of insolvency (this allow allows them to be member to the Securities Investor Protection Corp (SIPC): the SEC's Rule 15c3-1—the "Net Capital Rule"—requires brokerage firms to maintain certain levels of their own liquid assets. The minimum net capital a firm must have on hand depends on its size and business.
3. The SIPC protects customer securities accounts up to $500,000, which would come into play in rare cases of where customer assets are missing because of either theft or fraud.

A note on 'clearing' versus 'carrying' firms

It’s helpful to differentiate between clearing and carrying firms.  When you open an account with a carrying brokerage firm, the firm not only handles your orders to buy and sell securities but it also custodies the securities in the account (inclusive of cash).  Because these firms generally hold assets for a a large number of customers, they are required to carry a much higher level of net capital than clearing firms, which limit their activities to clearing and settling trade commitments.

A historical note

Historically, brokerage firms that have faced financial insolvency have handled the calamity in different ways.  Some have been able to find a buyer to stave off indebtedness.  Bear Stearns, for example, was bought by J.P. Morgan in 2008.  Other firms self-liquidate, as did Drexel Burnham Lambert in 1990.  When a brokerage firm self-liquidates, securities regulators, including the SEC and FINRA, work with the firm to make sure that customer accounts are protected and that customer assets are transferred in an orderly fashion to one or more SIPC-protected brokerage firms.

In short, “Is it safer to use multiple brokerage firms to custody my investments?”

No. 

Investors’ assets are separate from the brokerage firm and solely belong to the customer.  A brokerage firm’s failure should not result in loss of customer assets.  If in an extremely unlikely circumstance a client’s assets are lost (i.e., theft or fraud), account holders would be protected by SIPC up to the limits discussed above.  To protect yourself against theft and fraud, choose a well-know brokerage firm that is regulated by the SEC, member to FINRA/SIPC, and that publishes audited financials and statement of Financial Condition by a reputable audit firm.   You may also wish to review FINRA BrokerCheck, a free tool offered to help investors research the background of both FINRA-registered broker-dealers and investment advisor firms.  Lastly, many brokerage firms actually carry  "excess SIPC"  insurance that provide additional protection beyond SIPC's limits through private carriers.  Maximum amounts may vary by firm, but you may wish to seek out a brokerage firm that carries these additional limits. 

While there's no way to completely remove institutional risk from your investment portfolio, I believe that the benefits that arise from account consolidation should outweigh fears of broker malfeasance; especially when you have hired an investment advisor to craft, implement, and manage a comprehensive investment strategy across your varied investment accounts.

I hope this information was helpful.  Please do not hesitate to let me know if you have any questions.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: Jason@rgaia.com

An Introduction to Estate Planning

By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust.

To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek the advice of your financial advisor and personal finance team to help implement the right plan for you.

If you’re over 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

If you’re young and single

If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

If you’re unmarried but committed 

You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you might consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

If you’re married 

For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. A new law passed in 2010 allows the executor of a deceased spouse's estate to transfer any unused estate tax exclusion amount to the surviving spouse without such planning. This provision is effective for estates of decedents dying in 2011 and later years.

You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die's estate tax exemption, and a credit shelter trust created at the first spouse's death may still be advantageous for several reasons:

1. Portability may be lost if the surviving spouse remarries and is later widowed again
2. The trust can protect any appreciation of assets from estate tax at the second spouse's death
3. The trust can provide protection of assets from the reach of the surviving spouse's creditor
4. Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouse

Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $143,000 annual exclusion, for 2013, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

If you’re married with children

If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets.  You will likely also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

If you’re financially comfortable and looking towards retirement

You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).  You may even consider speaking with your financial advisor about converting some IRA assets to a Roth IRA.

If you’re wealthy but worried about estate taxes

Depending on the size of your estate, you may need to be concerned about estate taxes.  If this sounds like you, I certainly recommend conferring with a seasoned financial advisor. 

For 2013, $5,250,000 is effectively exempt from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.  Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth that are made to grandchildren (and lower generations). For 2013, the GST tax exemption is $5,250,000 and the GST tax rate is 40 percent.  Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.  

If you’re elderly or ill

If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them. 

Advantages of Trusts

Why you might consider discussing trusts with your attorney

• Trusts may be used to minimize estate taxes for married individuals with substantial assets
• Trusts provide management assistance for your heirs.
• Contingent trusts for minors (which take effect in the event that both parents die) may be used to avoid the costs of having a court-appointed guardian to manage your children's assets
• Properly funded trusts avoid many of the administrative costs of probate (e.g., attorney fees, document filing fees).
• Generally, revocable living trusts will keep the distribution of your estate private.
• Trusts can be used to dispense income to intermediate beneficiaries (e.g., children, elderly parents) before final property distribution.  This is particularly important for minors and incapacitated adults who may need support, maintenance, and/or education over a long period of time, or for adults who have difficulty managing money.
• Trusts can ensure that assets go to your intended beneficiaries. For example, if you have children from a prior marriage you can make sure that they, as well as a current spouse, are provided for.
• Trusts can minimize income taxes by allowing the shifting of income among beneficiaries.
• Properly structured irrevocable life insurance trusts can provide liquidity for estate settlement needs while removing the policy proceeds from estate taxation at the death of the insured.

Conducting a Periodic Review of Your Estate Plan

With your estate plan successfully implemented, one final but critical step remains: carrying out a periodic review and update.

Imagine this: since you implemented your estate plan five years ago, you got divorced and remarried, sold your house and bought a boat to live on, sold your legal practice and invested the money that provides you with enough income so you no longer have to work, and reconciled with your estranged daughter. This scenario may look more like fantasy than reality, but imagine how these major changes over a five-year period may affect your estate. And that's without considering changes in tax laws, the stock market, the economic climate, or other external factors. After all, if the only constant is change, it isn't unreasonable to speculate that your wishes have changed, the advantages you sought have eroded or vanished, or even that new opportunities now exist that could offer a better value for your estate. A periodic review can give you peace of mind.amount, whichever is smaller) should review your plan annually or at certain life events that are suggested in the following paragraphs. Not a year goes by without significant changes in the tax laws. You need to stay on top of these to get the best results.

Every five years for small estates: Those of you with smaller estates (under the applicable exclusion amount) need only review every five years or following changes in your life events. Your estate will not be as affected by economic factors and changes in the tax laws as a larger estate might be. However, your personal situation is bound to change, and reviewing every five years will bring your plan up to date with your current situation

Upon changes in estate valuation: If the value of your estate has changed more than 20 percent over the last two years, you may need to update your estate plan.

Upon economic changes: You need to review your estate plan if there has been a change in the value of your assets or your income level or requirements, or if you are retiring.

Upon changes in occupation or employment: If you or your spouse changed jobs, you may need to make revisions in your estate plan.

Upon changes in family situations: You need to update your plan if: (1) your (or your children's or grandchildren's) marital status has changed, (2) a child (or grandchild) has been born or adopted, (3) your spouse, child, or grandchild has died, (4) you or a close family member has become ill or incapacitated, or (5) other individuals (e.g., your parents) have become dependent on you.

Upon changes in your closely held business interest: A review is in order if you have: (1) formed, purchased, or sold a closely held business, (2) reorganized or liquidated a closely held business, (3) instituted a pension plan, (4) executed a buy-sell agreement, (5) deferred compensation, or (6) changed employee benefits.

Upon changes in the estate plan: Of course, if you make a change in part of your estate plan (e.g., create a trust, execute a codicil, etc.), you should review the estate plan as a whole to ensure that it remains cohesive and effective.

Upon major transactions: Be sure to check your plan if you have: (1)received a sizable inheritance, bequest, or similar disposition, (2) made or received substantial gifts, (3) borrowed or lent substantial amounts of money, (4) purchased, leased, or sold material assets or investments, (5) changed residences, (6) changed significant property ownership, or (7) become involved in a lawsuit.

Upon changes in insurance coverage: Making changes in your insurance coverage may change your estate planning needs or may make changes necessary. Therefore, inform your estate planning advisor if you make any change to life insurance, health insurance, disability insurance, medical insurance, liability insurance, or beneficiary designations.

Upon death of trustee/executor/guardian: If a designated trustee, executor, or guardian dies or changes his or her mind about serving, you need to revise the parts of your estate plan affected (e.g., the trust agreement and your will) to replace that individual.

Upon other important changes: None of us has a crystal ball. We can't think of all the conditions that should prompt us to review and revise our estate plans. Use your common sense. Have your feelings about charity changed? Has your son finally become financially responsible? Has your spouse's health been declining? Are your children through college now? All you need to do is give it a little thought from time to time, and take action when necessary. 

As always, please do not hesitate to contact me with any questions pertaining to this article or your own financial planning needs. 

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

According to the College Board, the cost of higher education has been steadily increasing by a rate of 6% annually.  Have you considered what the college cost for you child or children might be?  There are various college costing calculators online, I like using both the US News Net Price calculator as well as the savingforcollege.com online college cost calculator.  Both will give you a quick general sense of what you can expect to shell out for your child's college education.  Let's do a quick analysis using my oldest son as an example.   

The calculator asks for my son's age, 2.  It asks for the current price of tuition at my selected school, 39,122 (I'm using the current out of state tuition cost from my alma mater, the University of Michigan - Ann Arbor).  You can use the following link to look up a specific school and find a breakdown of relevant tuition costs.  It also asks how long my child will be attending, 4 years, and on a full time basis.  

There are some other inputs this particular calculator asks, and for this example, I'm going to assume that I wish to cover 100% of the total college cost by the time my son finishes school, that I have $0 currently saved for this goal, that college costs will continue to rise at 6% annually, and that I am able to earn a 6% after-tax per year.

The result: my oldest son's college education will cost $434,765.  Quite the expense!

So what is a 529 and does it make sense for me?

A 529 plan is a tax advantaged investment vehicle in the United States, operated by a state or educational institution, and designed to encourage and help families set aside funds for future college costs.  It is named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996.  There are two types of 529 plans, prepaid and savings plan. The prepaid plans allow you to pay tuition at the current price and attend in the future. The saving plans invest in stock and bond funds.  The big flaw with the pre-paid plan is that one never truly knows what school their child will attend.  By contrast, the savings plan is far more flexible.

What are the key 529 benefits?

1. State tax benefit:  Many states offer tax deductions for 529 contributions, you can see what your state offers here.  In New York, where I reside, contributions to a New York 529 plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing New York taxable income. 
2. Federal tax benefit: The actual distribution of funds to pay for college costs are tax-free.  This assumes that the government will keep it this way.
3. Transferability: If your child declines to go to college, the fund can be transferred to other qualified members in your family, even to the parents.
4. Estate planning considerations:  Grandparents looking to contribute to their grandchildren's education can contribute up to $14,000 ($28,000 for married couples) per child, tax free, every year.  Additionally, a grandparent can contribute a lump sum in one year and elect to treat the contributions as if they were made ratably over five years instead of all in one year.  This strategy enables the contributed money to benefit from additional years of compounding.
5. Financial aid calculation benefits:  A 529 saving accounts held in the child's name is treated as the parent’s asset, similar to the way a custodial account is treated.  Since only 5.6 percent (or less) of the 529 is used in the expected contribution calculation used in financial aid decisions, this is particularly good news for families seeking financial aid.
6. Automatic investment options: This is actually a pro and a con.  You can set up automatic contributions and investments so you don’t have to worry about them annually, but they are often paired with sub-par age-based funds.  This feature provides added convenience, but at the cost of higher fees and inferior performance. 

What are the problems with 529 plans?

1. Limits on reallocations: You are only allowed to reallocate funds once per year in a 529 plan.  While this may not be a huge problem for individuals with long-term horizons, it does present limitations in active management of these funds.
2. Limited investment options:  Depending on your state, you may be limited to only a few investment choices in the particular 529 plan, including age-based or target-date funds.
3. Restrictions and penalties for improper withdrawal:  The earning portion of money withdrawn from the 529 that is not spent on college expenses will be taxed at ordinary  income rates, an additional 10% federal tax penalty will be assessed, and there may be the possible recapture of any state tax deduction at the time of withdrawal. 
4. Suitability: Depending on your financial circumstance, you and your advisor may have other and often more sophisticated planning tactics in mind.  A 529 plan is not a one-size fits all answer to college savings.  

Be sure to speak with your financial advisor about whether a 529 would be suitable for you.  In general, I recommend that individuals max out their retirement contributions first before contributing money to a 529 plan.  I also suggest that these plans tend to get the "most bang for the buck," when large initial deposits are made to the account (ex: a grandparent makes a lump sum deposit as party of their estate planning).  This front-loaded outlay enables the 529 account to benefit from maximum compounded interest, as discussed above.

I hope this information is helpful to you.  Please contact me with any questions or to discuss how a 529 plan might fit into your own financial plan.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

I've discussed the various compensation models that financial advisors use. An understanding of these models is clearly helpful when trying to select an advisor or create your personal finance team, but what about the true impact to you and your portfolio's performance? Do you feel that you have a clear sense of what your investment costs amount to? Are you using a full-service broker or insurance agent to help you invest? If so, you're almost certainly paying too much.

Let's examine mutual funds. These funds are used heavily by large brokerage firms because of the high fees that are generated by them and the ease in which brokers can allocate client accounts. Most broker-sold mutual funds come with a variety of commissions and fee's that are often overlooked by the client. With exception of the trading costs which are listed on your brokerage statement, these other fees are not reflected seperately on the brokerage statement. As a result, many investors are clueless as to the true amount they are spending.  Here are some of the most common additional mutual-fund fees:

Front-end loads: These are commissions to investment intermediaries as sales commissions upon the purchase of the mutual fund. These sales charges are not part of a mutual fund's operating expenses.  In mutual funds with separate classes of shares, these fees  are found within Class A shares.

Back-end loads: These sales charges are used with mutual funds that have share classes, and are assessed upon sale of the mutual fund. These commissions are paid to a financial intermediary as a sales commission, and like front-end loads are not included in a fund's operating expenses. In mutual funds with separate classes of shares, these fees are found within Class B shares.

Level-loads: These sales charges are not assessed at purchase or sale, but rather applied annually as a fixed percentage of a mutual fund's average net assets. Unlike front-end and back-end sales charges, these 12b-1 fees are included in a fund's operating expenses, and are present in class C shares of a mutual funds that have separate classes of shares.

12(b)1 fees: The annual marketing or distribution fee of a mutual fund paid as a reward to selling fund shares. There are many critics of these particular fees as it is currently believed that commissions paid to salespersons have nothing to do with enhancing the performance of the fund -- the initial premise for the creation of this type of fee.

Management and administrative fees: to compensate the funds investment advisor for investment portfolio management and administrative fees not included in the funds' "other expenses" category.


Trading costs: the cost of buying and selling securities through your broker. These fees can range significantly from broker to broker.

While I like to give advisors the benefit of the doubt, I am constantly surprised that most stockbrokers, so called 'wealth advisors'/'financial advisors' with large brokerage firms, and insurance salespersons are unable to provide clients with a clear picture of how much they are paying in total investment costs. I suspect that the reason these individuals are unable to provide such detail is that they probably don't know the answer, and may not have the adequate information  information accessible to provide an reasonable response.  To calculate the true investment costs paid, one would need to review the investment prospectus for every product in a portfolio, calculate the total cost for each, add sales fees based on each transaction in the account, and then include the asset-management fee charged separately (and usually on a quarterly basis).  

All of these fees seriously degrade your investment performance. Take an initial $10,000 investment in a mutual fund that has an 8% annual return on investment, a front-end sales charge of 3% and annual operating expenses of 1.25%. Lets say that you pay a $60 commission to purchase the fund and you pay your wealth manager 1% of assets under management, per annum, for investment management services.

So, you would pay $300 in commission to purchase the fund and operating expenses of $131 throughout the year. At the end of the first year, assuming an 8% return on investment, you would be left with an account value of $10,345. But we didn't deduct the $60 transaction charge nor the $100 in annual advisory fees paid on this particular account.  The net result is $10,185 or a 1.85% return on invested capital. I'm pretty sure we can all think of better ways to generate 1.85% on our money without giving away over 6% of our 'theoretically earned return' to do so.  The math gets even worse when you consider that transactions costs, as well as investment management fees are generally deducted in advance (quarterly, in advance, for investment management fees).

Mutual fund fees are likely only one of the myriad of ways you are overpaying, however. Have you purchased whole-life insurance policies or annuities with their incredibly high mortality expenses and surrender penalties?  What about wrap fees?  The list goes on and I'll certainly tackle these items in a future post.

So how do you invest with more prudence? For starters, I'm not suggesting that all mutual funds are bad, in fact many of them perform quite well. Be sure to review prospectuses carefully and fully understand how fees are being assessed. If you are managing you own money, look for low cost funds. Vanguard offers funds with an average expense ratio of 0.19%, or 83% less than the industry average of 1.11% (source), and do not come with 12(b)1 fees.  If you are looking for more professional guidance and a customized and tactical approach to fit your needs, be sure to work with an independent and fee-only investment advisor who will be sure to keep your portfolio low-cost and true to its intent.

Best regards,

Jason M. Gilbert CPA/PFS, CFF
T: 516-665-1940
E: jason@rgaia.com

What do highly successful people have in common?  Many of their shared traits have been well documented, as have their behaviors and routines.  We've heard of some: waking up early, adhering to a calendar, and making sure to fit in time for exercise.  However,  what about the activities we don’t read about?  I have had the unique luxury of working with some extremely successful individuals in my advisory business and I've observed the evolution ‘the personal finance team,’ as a relatively new and powerful planning strategy.  So what is a personal finance team, and why is it so important to highly successful people?  

What is a personal finance team?

A personal finance team is a small group of professionals who work in collaboration to advise on both business and personal affairs.  This group consists of, at a minimum, a financial advisor, a CPA, and often an attorney.  Occasionally, a personal mentor or business coach is added to the team.

So why build a personal finance team?

Centralize expertise

A personal finance team can centralize all financial decision-making and provide an efficient and effective way to tackle important issues and keep on track with achieving financial goals.

An emphasis on focus

In order to stay focused on productivity, highly successful individuals have come to rely on their personal finance teams to handle critically important financial decisions in their absence.  

A comprehensive viewpoint = better decision-making 

A personal finance team provides for a comprehensive and holistic understanding of financial circumstance which in turn leads to far better decision-making.  Just imagine the value you could derive by having your CPA and financial advisor sit down to discuss a financial strategy for you.

An increased sense of control

Many highly successful individuals are naturally control centric.  They have high conviction in their own abilities, and they find it difficult to delegate responsibly to others.  By building a team of highly skilled and trusted individuals, highly successful people are able to feel more in-control of their financial affairs, and feel that they are making more informed and intelligent decisions.  

So how does one go about building this all-star team?

Understand your circumstance and evaluate your needs

A good starting point is to select a CPA and financial advisor.  You can always add to this core team based on your needs for, say, an insurance broker.  If your starting team is strong, you can always ask them for recommendations.

Always use referrals

I've come to realize, both professionally and in my own personal capacity, that referrals are best.  Ask your family and friends for good recommendations, interview the professionals, and make sure they are a good personal fit.  Can you see yourself talking about every-day matters together?  If you can relate to your advisors on personal matters, it's like you'll be able to discuss business matters.

Find someone who understands business and thinks like a business owner

This is a pretty important point as many advisors (especially CPAs) often fall into the trap of thinking like accountants.  Make sure your advisors understand the specifics of your business and are able to discuss the continuity of your business plan and risks associated with it.  

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
O: 516-665-7800
E: jason@rgaia.com