Client Bulletin Select Dec 2017

What’s Inside

Pros and Cons of Asset Management Fees
Win With a Roth IRA Reversal
Year-End Thank You Gifts From Business Owners
Tax Calendar

 

Factoid : Pet Purchases

Pet industry spending in the United States during 2016 set a record high at $66.75 billion, led by food ($28.23 billion), veterinary care ($15.95 billion), and supplies and over-the-counter medicine ($14.71 billion).

Did You Know ?

Individual standalone long-term care insurance sales declined nearly 60% from 2012 to 2016. Premiums fell from $550 million to $228 million. During that period, new premiums for life and long-term care insurance combination policies increased from $2.4 billion to $3.6 billion.

 

Source: LIMRA

 

Article: Pros and Cons of Asset Management Fees 

 

A transition is underway within investment firms. Increasingly, the people you hire to manage your money don’t refer to themselves as brokers or stockbrokers. Instead, they’re now financial advisers, financial planners, or financial consultants.

 

The titles may not be important, but the method of compensation can be crucial. Traditionally, brokers were paid by commissions. When you bought or sold stocks or certain mutual funds, you paid money to the broker. That’s still true for some investment professionals.

 

However, many financial advisers are reducing or eliminating commission income in favor of fees; therefore, the money you pay these advisers does not depend on the trading you do. Various types of fees may apply, but an “assets under management (AUM)” approach is probably the most common.

 

With AUM, you pay a fee to the adviser that’s based on your portfolio value.

 

Example 1: Nora Collins has a $500,000 portfolio that’s managed by a financial adviser. The adviser has a 1% AUM fee. Thus, Nora pays $5,000 (1% of $500,000) a year to the adviser. If her portfolio increases to $550,000, Nora’s annualized fee would increase to $5,500; if her portfolio drops to $450,000, the fee would be $4,500, and so on. (Many advisers reduce AUM percentages as portfolio size increases.)

 

Common interest

 

Advisers who favor the AUM method may contrast it with the traditional way of paying commissions on trades. Some brokers have been charged with “churning” clients’ accounts—trading heavily to boost their income, even if there was no good reason to do so. With AUM, churning isn’t an issue; Nora will pay the 1% fee no matter how many or how few trades are made.

 

Instead, AUM supporters assert they are on “the same side of the table” as investors. The better these advisers perform, the more money clients will have and the more fees advisers can collect. Investment losses, on the other hand, will decrease AUM fees. So, advisers charging this way have ample incentive to perform well.

 

After all, if Nora sees her account grow by $50,000, she probably won’t mind paying an extra $500 to her adviser, will she?

 

Getting your money’s worth

 

Those reasons have merit, but there are possible drawbacks to paying AUM to an adviser. For instance, the amounts involved may not be inconsequential. Nora might be paying $4,000–$6,000 a year to her adviser, depending on investment results. 

 

Will Nora be getting value for her money with a truly personalized investment plan? Will her adviser help her reduce the tax impact on her investment activity? Will he or she advise her on which investments go inside her 401(k) plan and which go into taxable accounts? Ultimately, it’s up to Nora and other clients paying advisers by AUM to decide if the investment advice they’re receiving, perhaps supplemented by other financial planning, is worth the money they pay every year.

 

In addition, some investors may not have easy access to advisers who charge AUM fees.

 

Example 2: Mark Lane invests largely in real estate and has relatively little in stocks, bonds, or mutual funds. Advisers who work on an AUM basis may have a minimum portfolio size for clients, so Mark won’t qualify. 

 

The same is true for Mark’s sister, Kathy, who runs a small business and puts most of her spare cash back into the company. However, Mark and Kathy both have some investment assets that could benefit from astute advice, as well as a substantial need for personal financial guidance.

 

Other options

 

Besides AUM, what alternatives do you have for investment management? You can do it yourself, if you have the time and inclination, by choosing no-load mutual funds and perhaps paying discount brokerage commissions for selected securities transactions. Another possibility is to work with an adviser who still charges commissions, if the total of those commissions is less than an AUM fee.

 

Some financial advisers work on a retainer basis for clients such as Mark and Kathy, who have significant net worth but relatively little in the way of liquid assets to manage. The retainer typically is based on the adviser’s estimate of the time necessary for financial planning. The retainer might be high for a new client, reflecting considerable planning, but then drop in subsequent years until an event such as a business sale requires more effort again. 

 

Hourly fees and flat fees for an upfront financial plan also may be among possible modes of compensation for financial advice. Some advisers will offer a combination of compensation arrangements to suit a client’s needs. For investors, the key is to get complete disclosure of an adviser’s compensation method and periodically confirm that you’re getting value for the amount you pay.

 

Download Full Article

 

 

 

 

Factoid[Office1] : Pet Purchases

 

Pet industry spending in the United States during 2016 set a record high at $66.75 billion, led by food ($28.23 billion), veterinary care ($15.95 billion), and supplies and over-the-counter medicine ($14.71 billion).

 

Did You Know[Office2] ?

 

Individual standalone long-term care insurance sales declined nearly 60% from 2012 to 2016. Premiums fell from $550 million to $228 million. During that period, new premiums for life and long-term care insurance combination policies increased from $2.4 billion to $3.6 billion.


 [Office1]Email

Include a Factoid section in your next client email, then copy and paste this item.

 

Image tip: Include a photo of a domesticated animal in your posts.

 

Twitter

#Factoid: In 2016, the #Pet industry outspent the food industry by 136% in $Billions. That’s a lot of kibble! #Pets #Trivia

 

Facebook/LinkedIn/GooglePlus

Factoid:  That’s a lot of kibble.

In 2016, the pet industry spending in the United States set a record high at $66.75 billion. That’s 136 percent higher than the next industry—food. [link to newsletter] #Factoid #Trivia #Pets

 [Office2]Email

Include a “Did You Know” section in your monthly email and include this tip.

 

Image tip: Consider a graph with a declining arrow.

 

Twitter

Individual, standalone LTC #insurance decreased 60% since 2012. But new premiums …  [link to newsletter] #DidYouKnow #Business

 

Facebook/LinkedIn/GooglePlus

Long-Term Care Insurance Declined—New Premiums Increase

Did you know? Individual standalone, long-term care insurance sales declined nearly 60% from 2012 to 2016. Premiums fell from $550 million to $228 million. During that period, new premiums for life and long-term care insurance combination policies increased from $2.4 billion to $3.6 billion. [link to newsletter] #DidYouKnow #Insurance #Business 

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