Black Shoe Blog

Traditional IRA vs. Roth IRA

If you actively follow the wealth management industry, you’ve probably recently considered converting your traditional IRA to a Roth IRA. That is because of a new rule which allows investors to convert 100% of their traditional IRA to a Roth in 2010, without income limits or marital requirements, paying tax on the conversion in 2010 or splitting it between 2011 and 2012 (Rice, 2010).

Before anyone seriously evaluates whether these new development may be advantageous to them and their financial situation, they should first possess a complete understanding of the difference between a traditional and a Roth IRA. This article hopes to help investors gain an understanding of this difference. Forthcoming articles will address the conversion issue in further depth.

Traditional IRA’s

Investors can make contributions to a traditional IRA on a pre-tax basis, only paying taxes on those funds when taking distributions from this account during retirement. This is advantageous because 1) tax dollars are leveraged across the life of the account, allowing assets the opportunity appreciate that would have otherwise been paid to the government, and 2) retirement distributions are generally taxed at a fairly low rate, as retired individuals may be placed in a lower tax bracket than they were during their careers. One of the important concepts to grasp is that the individual will, at some point, be forced to take distributions, unless of course they pass away before the age at which it is required. For most people this is 70½ years old (The United States Internal Revenue Service, 2009). If they do pass away before reaching this age, the IRA is left to a beneficiary as named in their estate, and distributions are not required until that person reaches the set age.

Roth IRA’s

Roth IRA’s are funded after tax, but are not taxed again upon distribution—the opposite of a traditional IRA. Converting a traditional, which has not yet been taxed, to a Roth, allows investors to pay tax at their current rate on the converted assets, which will then be distributed tax-free during their retirement. Unlike with a traditional IRA, those holding a Roth are not ever required to take distributions. Since the government has already received taxes on this money, they have no incentive to mandate distribution requirements (Weiss, 2006).

Qualified Funds

There is an annual ceiling on the amount of pre-tax dollars an investor can contribute to their traditional or Roth IRA. Every pre-tax dollar contributed to the IRA up to this yearly maximum is considered “qualified,” as it is eligible for special tax treatment. After reaching the yearly limit on qualified funds, an investor can contribute additional funds, which are taxed twice (before contribution and upon distribution regardless of the account type), and are thus considered “non-qualified.” Many investors shy away from this practice, as the need to segregate qualified and non-qualified funds can create confusion.

Conclusion

These three terms represent the foundation for understanding individual retirement accounts. The bevy of factors to consider when evaluating whether a conversion from a traditional IRA to a Roth warrant more than one article in this medium. Hopefully you have developed a basic understanding of these terms, and are thus on your way to being able to make an informed decision about Roth conversions. As always, we recommend you consult with your financial advisor before making any decisions which may affect your financial future.

We are available at info@fogelneale.com if you have questions on this or any other financial planning issue. Please check back for a further exploration of Roth conversions, coming soon.

Ralph A. Fogel – Chief Executive Officer

Fogel Neale Wealth Management, LLC

The information and opinions in this communication were prepared or are disseminated by Fogel Neale Partners LLC and/or its affiliate: Fogel Neale Wealth Management, LLC (together, “Fogel Neale”). This communication is not an offer to buy or sell any security or to participate in any trading strategy. Under no circumstance should this message be construed as providing individually tailored investment advice. Fogel Neale recommends that investors independently evaluate particular investments and strategies.

Works Cited:                 

Rice, A. D. (2010, January 31). Roth conversions: The gamble of a lifetime. Retrieved February 13, 2010, from InvestmentNews.com: http://www.investmentnews.com/article/20100131/REG/301319982

The United States Internal Revenue Service. (2009, October 1). Retirement Plans FAQs regarding IRAs. Retrieved February 18, 2010, from IRS.gov: http://www.irs.gov/retirement/article/0,,id=111413,00.html#8

Weiss, D. M. (2006). After the Trade is Made. London: Penguin Books Ltd.

 

The Brokerage Model: An Inherent Conflict of Interest

In the latter part of his piece “Out of Hibernation”  (Abelson, 2010), Barron’s reporter Alan Abelson cites a recent poll which shows that bankers are currently less popular than both lawyers and politicians. In a time of heightened skepticism and public disappointment with the government, this is quite a statement. Abelson goes on to talk about legendary investor and Chairman of GMO Jeremy Grantham’s recent letter to investors.

Grantham sympathizes with the frustration toward bankers and the money management industry, discussing his disagreement with the notion that financial innovation boosts economic growth. He states that with all of the product innovation in the industry “clients can’t easily distinguish talent from luck or risk-taking.” He goes on to state that “the client world pays up precisely in proportion to how bamboozled it is by unnecessary complexity, which among other negatives is what the fancy new instruments were offering: confusion doubt, and bamboozlement.” Grantham’s mention of the fees associated with financial innovation is pertinent to individual investing. At this point, most of us know the story about how some financial institutions create complex products which the average investor cannot necessarily comprehend. But it is not only the most complicated of products that may be more expensive than an individual investor realizes.

Asset managers at brokerage firms who do not charge management fees will instead charge a commission for each trade made on your behalf. Also, they may recommend you purchase investment vehicles which carry fees and expenses unique to those products. And if the trades are executed or the products are offered by that broker’s institution, those commissions, fees and expenses go into the firm’s and your broker’s pocket.

Now there is certainly another side to this argument—investors ultimately care about the bottom line, not necessarily how their financial professional got there. If your realized returns are impressive (net of fees and expenses) then who really cares if your broker and their firm made out well too?  One could go so far as to argue that a broker knows their own funds best, and can do best by his or her clients by investing in these funds on their behalf.  

That being said, there is a problem that good performance cannot erase. The problem is that brokers recommending their own products have an inherent conflict of interest.  However much faith we choose to put in our money managers (and the popularity poll would seem to indicate not much), we can only assume that people tend to act in their own self interest. If a product is suitable to your financial situation (which does not imply best fit), and it earns your broker a commission, well, the brokerage model has worked just as it was designed to.

Thus, the only way to avoid the complex (if not impossible) process of trying to gauge your money manager’s intentions and good faith is to ensure that their incentives are aligned with yours. In doing so, consider whether you want to invest with a brokerage firm or a registered investment advisor (RIA).

RIA’s charge only a fee for their services (except when working with institutions or very wealthy investors), and will never charge you a commission. They instead charge you a fee equal to a percentage of the assets they manage for you. Your advisors’ monetary interest are therefore in line with your own, as they bill you more if the value of your portfolio grows, and less if it falls. As the client, you may bear the commission associated with an individual trade, as well as any fees and expenses carried by an individual product. The difference is that RIA’s, as they do not offer any of these products themselves, can be unbiased in selecting investments on your behalf. Also, they may be less tempted to generate a large number of trades (and thus commissions), as there is no incentive to do so. Generating a large number of trades can negatively affect their performance numbers when it comes time to account for fees and expenses, and those commissions go to a broker, not the RIA firm.

In trying to decide if a firm’s interests are aligned with your own, considering the difference between an RIA and a brokerage can be one means of evaluation. As an investor, it is your job to thoroughly evaluate the person and firm you would like to manage your affairs. Keep an eye out for further discussions on the conflicts of interest inherent in the brokerage model, as it is becoming an increasingly common topic within the national conversation.

-Ben Ryan, Analyst

Fogel Neale Wealth Management, LLC

 

Works Cited:

Abelson, A. (2010, February 8). Out of Hibernation. Barron's , pp. 11-12. http://online.barrons.com/article/SB126541392867041567.html

The information and opinions in this communication were prepared or are disseminated by Fogel Neale Partners LLC and/or its affiliate: Fogel Neale Wealth Management, LLC (together, “Fogel Neale”). This communication is not an offer to buy or sell any security or to participate in any trading strategy. Under no circumstance should this message be construed as providing individually tailored investment advice. Fogel Neale recommends that investors independently evaluate particular investments and strategies.

Where Wall St. Meets 5th Avenue: Reality and Perception of Fashion in Finance

This week’s eye-catching cover of Investment News (Shidler, 2010) focused on an issue pondered more often in the Garment District than on Wall St. — what should financial advisors be wearing?

Famous caricatures of the financial sector big-shots (think Gordan Gekko from the 1987 film Wall St.) feature pinstripe suits, suspenders, and long, slick hair. Despite how the industry is often portrayed, few people in financial services actually embody this stereotype. However, as success in this industry is so often based on perception and trust, the way financial advisors present themselves is important. Dress, manner of speech, appearance of the office, demeanor of support staff—all of these can negatively or positively affect a firm’s ability to bring on new clients. And while over time, performance will be the ultimate metric by which firms are evaluated, any disclaimer you read will tell you that “past performance is not necessarily indicative of future results.” Check any mutual fund prospectus or wealth management marketing materials you have; if it mentions performance, that sentence (or one very similar to it) will be there. (If not, call their regulator).

So if you’re in the market for a financial advisor, what should you do? Evaluate performance numbers which may not hold up, or pay attention to the aesthetics? The answer is that every investor is different, and you should find an advisor whom you trust and enjoy working with. As a wealth management firm, we believe that professional dress can only positively affect our firm’s operations, as well as others’ perception of us and our services. I ask my employees to dress in a thoughtful and detail-oriented manner, taking the same pride in their appearance as they do in their work.

At the end of the day, being too well dressed can come off as intimidating or conjure up images of the stereotypical Wall St. crook (again, think of Michael Douglas as Gekko). To me, the perfect advisor is approachable, dressed in a neat and detail-oriented manner, intelligent, trustworthy, and capable of helping you achieve your financial goals. If you find yours lacking in one of these areas or are generally uncomfortable speaking to them, it may be time for a change.

Eric Immerman – Director of Operations Fogel Neale Partners, LLC

The information and opinions in this communication were prepared or are disseminated by Fogel Neale Partners LLC and/or its affiliate: Fogel Neale Wealth Management, LLC (together, “Fogel Neale”). This communication is not an offer to buy or sell any security or to participate in any trading strategy. Under no circumstance should this message be construed as providing individually tailored investment advice. Fogel Neale recommends that investors independently evaluate particular investments and strategies. Works Cited:

Shidler, L. (2010, February 1). Suit? Khakis? Financial advisers ponder the power of pinstripes. Investment News , pp. 1,33.

 

IT Spending in Wealth Management: The Need for a Closer Look

As of late, the financial services industry has seen a greater emphasis on the integration of information technology solutions focused on streamlining the process of wealth management. Articles last month on Finextra.com (Finextra.com, 2010) and in Investment News (Janowski, 2010) reported on research predicting an increase in IT spending among financial institutions both domestic and abroad in 2010. Why should this matter to investors?

Purchasing sophisticated software helps firms not only streamline operations and reduce costs, but allows them to consistently provide a higher level of client service to you, the customer. Customer Relationship Management (CRM) software, for instance, reminds your adviser when it’s time to schedule your portfolio review, helps to manage important financial documents, and even displays anniversary and birthday reminders!

CRM software was rated the most important area of investment among advisers in January’s survey conducted by Investment News. We see this as indicative of a move towards higher levels of client service, and are pleased that the industry is recognizing the need for such. However, we encourage investors to closely evaluate the technology systems in place at any prospective wealth management firm.

If you are in the process of selecting an adviser or firm, ask to see a demonstration of their CRM or portfolio management systems. Firms can boast that they employ “proprietary” software, but this term does not necessarily imply sophistication. Whether their systems are proprietary or purchased from a third-party, firms which are confident in the functionality of their software should have no problem providing you with such a demonstration.

-Eric Immerman

Director of Operations – Fogel Neale Partners, LLC

The information and opinions in this communication were prepared or are disseminated by Fogel Neale Partners LLC and/or its affiliate: Fogel Neale Wealth Management, LLC (together, “Fogel Neale”). This communication is not an offer to buy or sell any security or to participate in any trading strategy. Under no circumstance should this message be construed as providing individually tailored investment advice. Fogel Neale recommends that investors independently evaluate particular investments and strategies.

Works Cited:

Finextra.com. (2010, January 7). Wealth management IT spending to pick up in 2010 - Celent. Retrieved February 2, 2010, from finextra.com: http://www.finextra.com/news/fullstory.aspx?newsitemid=20925

Janowski, D. D. (2010, January 25). Adviser rate top technology concerns. Investment News , pp. 23, 29.

Andrew Neale Featured on TheStreet.com

Fogel Neale's own Andrew Neale recently contributed to a podcast featured on TheStreet.com. The podcast focused on commodities, President Obama's bank plan, and other hot topics that are currently moving the market. Click on the link below to hear the podcast in it's entirety.

The Real Story

Ralph Fogel Provides Market Commentary For Bloomberg.com

U.S. Stocks Fall Most Since October Amid Curbs on Banks, China

By Elizabeth Stanton (Bloomberg.com) Jan. 23 (Bloomberg) -- U.S. stocks declined for a second week, sending the Standard & Poor’s 500 Index to the biggest drop since October, as banks plunged on a White House proposal to limit financial risk and China moved to cool economic growth. JPMorgan Chase & Co. and Morgan Stanley slumped more than 8 percent as President Barack Obama called for limiting speculation to prevent another financial crisis. Exxon Mobil Corp. lost 4.4 percent and Alcoa Inc. tumbled 14 percent on concern Chinese demand for commodities will slow.

The S&P 500 erased its 2010 gain, retreating 3.9 percent to 1,091.76 for the week after closing at a 15-month high on Jan. 19. The Dow Jones Industrial Average fell 436.67 points, or 4.1 percent, to 10,172.98. The Nasdaq Composite Index decreased 3.6 percent to 2,205.29. “It’s a one-two punch,” Ralph Fogel, head of investment strategy at Fogel Neale Partners in New York, said of the curbs on Chinese growth and Wall Street firms. “In the end it’s going to have the same impact -- less flow of money into the marketplace.” The three-day, 5.1 percent tumble to end the week was the biggest decline for the S&P 500 since it sank to a 12-year low in March. The VIX, an index of volatility known as Wall Street’s “fear gauge,” jumped 55 percent to 27.31 over the period, its largest gain since 2007. Uncertainty over whether Federal Reserve Chairman Ben S. Bernanke will win Senate confirmation for a second term beginning Feb. 1 even with Obama’s backing undermined investor confidence, traders said.

Barbara Boxer of California and Russ Feingold of Wisconsin said they will oppose Bernanke. Positive Surprises Stocks fell even as most companies releasing fourth-quarter results beat analyst estimates. Of 62 companies in the S&P 500 that reported earnings, 46 were better than the average analyst estimate, according to data compiled by Bloomberg. A record nine-quarter earnings slump is projected to have ended in the fourth quarter with a 73 percent increase in S&P 500 profits. More than 130 companies in the index are scheduled to release results next week, including Apple Inc., 3M Co. and Microsoft Corp. Treasuries rose, sending yields lower. The benchmark 10- year note’s yield dropped to 3.61 percent from 3.67 percent. The S&P 500 still is up more than 60 percent from a 12-year low in March, with a valuation of about 14.2 times the combined operating earnings forecast for its companies this year. Bank Retreat JPMorgan, the second-largest U.S. bank, and Morgan Stanley, the world’s biggest brokerage, led financial companies in the S&P 500 to a 5.2 percent drop. Obama asked Congress on Jan. 21 to bar banks from proprietary trading solely for their own profit and sponsoring private-equity and hedge funds. Obama in June proposed an overhaul of U.S. financial regulations to fix lapses in oversight and risk-taking that helped push the economy into a recession in 2008. The economy grew in the third quarter for the first time in more than a year, and may have expanded at a 4.6 percent rate in the fourth quarter, the fastest pace in four years. That’s the median estimate of economists surveyed by Bloomberg for the Commerce Department’s first estimate of the fourth-quarter growth, to be released Jan. 29.

Exxon Mobil, the largest U.S. energy company, fell 4.4 percent to $66.10. Crude oil slumped 4.9 percent to a one-month low amid speculation China, poised to overtake Japan as the world’s second-largest economy after the U.S., will raise interest rates to keep economic growth from igniting inflation. Commodity Prices Alcoa, the biggest U.S. aluminum producer, tumbled 14 percent to $13.40, the biggest drop in the Dow average. Aluminum, copper, lead, nickel and zinc declined after China guided three-month bill yields higher for the second time in two weeks. Also scheduled for next week are reports on new and existing home sales in December and January consumer confidence, and the Fed’s Jan. 27 meeting on interest rates. Regional banks in the S&P 500 advanced after Fifth Third Bancorp and KeyCorp, Ohio’s biggest lenders, reported fourth- quarter losses that were smaller than analysts estimated. Fifth Third climbed 6.5 percent. Keycorp rose 5.4 percent. IBM fell 4.8 percent to $125.50, its biggest weekly drop since March. The world’s largest computer services company said sales of business services fell 2.8 percent in the fourth quarter as its customers reined in costs. Kraft Food Inc. fell 5.8 percent to $27.87 after Cadbury Plc of the U.K. accepted its $19.2 billion takeover bid. Health-care stocks fell 1.9 percent as a group, the smallest drop among the 10 industries in the S&P 500, after Republican Scott Brown won a special election to the Senate. Brown’s victory cost Democrats their 60-vote supermajority, imperiling legislation to overhaul health care. To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: January 23, 2010 08:00 EST

Fogel Neale Partners Featured on The Wall Street Journal Financial Advisor Blog

Wealth Boutiques Acting As Change Agents

By Thomas Coyle

Investment adviser Fogel Neale Partners is out to help the working affluent make the most of their money in financial markets that some, including firm co-founder and portfolio manager Andrew Neale, see as likely to post only modest gains for years to come.

“We’re cautiously optimistic, but we think the easy money has already been made,” says Neale, referring to the 60% run-up in the broad equity market between mid-March and year-end 2009. “Now people are just going to have to get used to lower returns, lower than [they were] between 1982 and 2000.”

The notion that the baby boom-fueled bull market of the 1980s and 1990s is over may be well founded, and understandable in light of demographics, but it’s cold comfort for successful working boomers who were getting set to retire when the latest slump hit 2 1/2 years ago.

New York-based Fogel Neale, which has been in business for about nine months, targets prospective retirees and other successful, self-made people–business owners, professionals, rising corporate executives–with a few million dollars to invest and an understandably jaundiced view of financial advice.

The firm’s answer to the product push typically used by big-name firms is to create bespoke portfolios adjusted to the risk tolerance, goals and time lines of each client, and predicated on all-proprietary asset management, he said.

In other words, it looks a lot like an old-line capital-management firm, the sort of outfit that thrived in the times when financial markets were characterized by comparatively subdued returns.

In addition, unlike wealth-management firms that burst out of the gate with big expansion plans, Fogel Neale is “trying to grow at a very controlled rate” using its principals’ resources rather than tapping outside investors, though Neale is quick to say that’s a matter a preference rather than ironclad policy. Just as the firm would tap outside managers to fill a gap in its own expertise, it wouldn’t say no to outside investors under the right circumstances.

Fogel Neale takes a two-pronged approach to recruiting advisers: welcoming experienced practitioners and, unusual for a small firm, running its own training program to groom financial-service neophytes. To date, the firm has recruited two established advisers, expects to hire a third, and sees five to seven training-program graduates springing into action this year.

Neale expects that his firm will be managing around $100 million by the end of 2010.

Another investment-management firm taking aim at clients who see bull-market investment paradigms falling away in favor of approaches that combine customization with penny-pinching is San Francisco-based Structural Wealth Management, which manages approximately $330 million.

In recent months, five-year-old Structural has helped private and institutional investors who wish to park cash on the sidelines to do so safely and cheaply by taking its rigorous approach to equity and bond management and applying it to, of all things, certificates of deposit.

Structural bypasses middlemen and deals directly with the banks that issue CDs, an approach made possible only because of internal overlay processes and an innovation that more than makes up for its fee, according to the firm’s chief investment officer, Joel Hornstein.

Structural’s CD-management fee starts at 25 basis points and declines as investment amounts increase. Though a large CD wholesaler’s 20 basis-point fee would appear to have that beat, Structural’s direct-to-issuer approach nets the investor 55 basis points to 85 basis points that the middleman would have swallowed.

Though a desire to stay clear of volatile equities has fueled the interest in Structural’s approach to cash management, keeping cash reserves isn’t just a flavor of the month, according to Hornstein. “Liquidity is crucial to proper portfolio management,” he says.

FOGEL NEALE UNVEILS WEALTH MANAGEMENT PLATFORM

NEW YORK – January 18, 2010 – After decades of “white-shoe” firms dominating Wall Street, a new wealth management advisor emerges as the first “black- shoe” firm – for the investor with significant income, not necessarily wealth.

“White shoe firms define wealth for investors; we encourage them to define it for themselves and we work to achieve their financial goals,” Ralph Fogel, partner and chief strategist at Fogel Neale.

The firm provides comprehensive financial planning and wealth management services. Our wealth management services are billed as a percentage of assets under management. Wealth management fees are billed quarterly in advance to the client.

“Baby Boomers, dual-income families and retirees were on course to start distributing assets before 2009 came along, said Andrew Neale, partner and portfolio manager at Fogel Neale. “We founded our firm to address the challenges such investors are now faced with...delaying retirement and focusing on accumulating more assets.”

Fogel Neale intends to provide investment research to its clients. The firm will expand its research and analytics to provide research on global economic data. They also expect to expand into insurance products as well as become a provider of fully comprehensive tax strategy advice.