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One Granddad Favors Custodial Funds Over 529s

Another way to save for college

ERIN E. ARVEDLUNDPublished Wednesday, January 22, 2014, 1:08 AM

Grandparents, there’s another way to help pay for college – we thank Harry Miller of West Chester, a faithful Inquirer reader who called to explain his preferred savings vehicles when planning financially. He uses custodial accounts set up at a brokerage firm to save for his grandchildren’s education.

The financially able and extremely generous Miller gave us the details on how he helped his daughter and two grandchildren save and pay for college. Rather than investing in traditional 529 college savings plans, he is socking away the money many years ahead of time using the Uniform Gift to Minors Act.

The UGMA established a simple way for children or grandchildren to own securities without a lawyer to prepare trust documents. You manage the money for your children or grandchildren. Currently, the gift limit is $14,000 per child annually.

Miller set up brokerage accounts for each of his grandchildren, ages 2 and 4, and is giving $14,000 per child per year for their college education to the accounts. He’ll have given each child about $250,000 by the time they are ready to matriculate at age 18.

“The growth effect of the stock market should average 7 percent a year on top of the front-loading effect” of giving the money directly, he says, so he anticipates the accounts could grow to more than $250,000 by the time the grandchildren are ready for college. He also pays the taxes out of the account each year.

“I prefer this method to 529s, which differ depending on the state and the fees,” he says. We asked which mutual funds these custodial accounts are invested in for that stock market growth. Among them are the following: Fidelity Spartan Extended Market Index Fund (FSEMX); Fidelity OTC Portfolio (FOCPX), which invests in more small and medium-size companies and in the technology sector; Wells Fargo Advantage Discovery Fund (STDIX); the Yacktman Fund (YACKX) and Yacktman Focused Fund (YAFFX); Oakmark International Fund (OAKIX) and the Loomis Sayles Bond Fund (LSBRX).

Remember, the custodian controls the assets until the minor reaches a certain age, usually 18 to 21, depending on the state.

“Often, the only people in a position to help financially are grandparents,” he adds.

I asked Harry Miller if he’d take me on as his adopted granddaughter. I am available!

When Your Art Becomes an Asset

When art is more than just a pretty picture

Published Monday, January 20, 2014, 1:07 AM

When is art an asset? When it provides future benefit, and when you sell your art and make money.

Financial advisors are taking note of the bull market in art. In December, a Francis Bacon painting, Three Studies of Lucian Freud, sold for $142 million, the most expensive artwork at auction.

Freeman’s auction house in Center City will host a panel of art and tax experts on Thursday, including Antiques Roadshow appraisers Alasdair Nichol and Scott Isdaner, managing member of Isdaner & Company CPAs. They will address tax and estate implications of owning, selling and donating art. These determine the value of your asset for you and your heirs.

“I’ve been a collector of works on paper for 30 years, so I love art,” said Isdaner. “But if you build a valuable collection, it can be taxed heavily when you die, and your heirs may not have the cash to pay the tax. Often, if they don’t donate to a museum, heirs are forced to sell to pay the estate tax.”

What are some factors in determining value? The artist is key. Andy Warhol, for example, is among the world’s top sellers. Other factors are provenance, the rarity, and, of course, the sales history, according to Anita Heriot, president of Pall Mall Advisors. She spoke at Freeman’s last autumn for Abbot Downing, the private wealth-management division of Wells Fargo.

In a recession, certain types of art tend to fall in value, such as decorative arts, furniture, and what she called “second-tier” paintings. “Blue-chip” paintings, on the other hand, retain their value, much like blue-chip stocks, she said.

Chinese and Russian billionaires have entered the global art market, pushing prices to stratospheric levels.

“Asians are paying huge prices,” Heriot said, but not for the pieces you might think. “They want to buy back their heritage, that power and grandeur,” she said, and they also pay up for Chinese contemporary art and classic paintings such as Pierre-August Renoir or Jackson Pollock.

The top artists in 2011 by sales revenue? Warhol, and two Chinese artists: Qi Baishi and Zhang Daqian.

A white jade seal, or stamp of the imperial palace of the Qing Dynasty, was found in a Main Line home and valued at $50,000, Heriot said. But at auction, an Asian buyer paid $3.5 million for the one-inch by one-inch piece of jade.


Congress’ favorite portfolio holdings? The top stock was General Electric

Database releases financial data, investments of members of Congress

Inquirer.com Wednesday, January 15, 2014, 1:08 AM

How does Congress invest? We wanted to find out how our elected representatives invest their assets – and a new study from the Center for Responsive Politics is a gold mine.Among Congress’ favorite portfolio holdings? The top stock was General Electric, with 78 members of both the House of Representatives and the Senate listing the company as their No. 1 investment in 2012, the latest year for which personal financial data are available.

After GE, the most popular investments were the following blue-chip stocks: Wells Fargo, Microsoft, Procter & Gamble, Apple, Bank of America, JPMorgan Chase, IBM, Cisco Systems, AT&T, Exxon Mobil, Intel, Coca-Cola, Johnson & Johnson, Pfizer, Chevron, PepsiCo, Verizon Communications, McDonald’s, Qualcomm, Walt Disney Co., Berkshire Hathaway, and Wal-Mart.

By the way, for the first time, the majority of our elected officials have a net worth of at least $1 million, according to the center’s study. In my own state, the wealthiest Pennsylvania officials include Rep. Mike Kelly (R., Butler) with an average net worth of just over $14 million; Rep. Keith Rothfus (R., Beaver) with $7.19 million average net worth; Rep. Allyson Schwartz (D., Phila.) with average net worth $3.04 million, and Sen. Pat Toomey (R., Pa.) with $2.97 million.

Nationally, congressional Democrats had a median net worth of $1.04 million, while congressional Republicans had a median net worth of almost exactly $1 million. In both parties, the figures were up from 2011, when median net worth totaled $990,000 and $907,000, respectively.

Anyone can access the net worth and top investments of their U.S. representatives and senators at the Center for Responsive Politics website (http://www.opensecrets.org/pfds/).

Private Equity For the Rest of Us: Exchange-Traded Funds

My latest for the Philadelphia Inquirer:

Investing in private equity used to be reserved for the wealthy. Only millionaires who were “accredited” or “qualified” to invest the big bucks had money in private equity – essentially, the One Percenters.

Then, some of Wall Street’s biggest private equity firms went public, such as Blackstone Group L.P. (symbol: BX), Fortress (FIG) and Kohlberg Kravis & Roberts (KKR). (Bain Capital L.L.C. remains private, but gained fame when partner Mitt Romney ran as a presidential candidate.)

But their shares often have skimpy dividends. In many cases, private equity firms that went public paid out the largest dividends to their founders, rather than investors in the underlying funds.

There’s another way the rest of us can get into the private equity game – exchange-traded funds, or ETFs. And one nice surprise is that some offer healthy dividend yields.

There are two main private equity vehicles available to the retail public: PowerShares’ Global Listed Private Equity Fund Portfolio (PSP) and ProShares’ Global Listed Private Equity ETF (PEX).

PSP is the more liquid option, with around $500 million in assets and an average daily trading volume of roughly 300,000 shares.

We found someone who recently purchased PSP. He bought it because of the 13 percent yield.

Dan Weiskopf, founder of Access ET Solutions, in New York, said PSP is one of the “best ETFs in this space, where the structure really favors the investor.”

Rapid ratings index

Speaking of exchange-traded funds, James Gellert, chief executive of New York-based Rapid Ratings, says his independent ratings firm competes with the Big Three agencies – S&P, Moody’s, and Fitch.

Much like the Dow Jones or Standard & Poor’s 500 index fund, Rapid Ratings is in discussions to create an investable index and possible ETF, an alternative to the traditional benchmarks.

As of December 2013, Rapid Ratings’ highest-rated sectors included leisure, transportation, and media, while those with a negative bias included forest products, metals and metal fabricators, and oil and gas producers. Stay tuned for more news on this front.


Today’s NYTimes Highlights My Barron’s Story on Madoff…

JPMorgan Lost Madoff in a Blizzard of Paper

JAN. 9, 2014

Launch media viewer

Bernard Madoff outside federal court in 2009. Federal prosecutors have penalized JPMorgan for failing to report “suspicious activity” in Mr. Madoff’s account at the bank. Louis Lanzano/Associated Press

Did JPMorgan Chase deliberately cover upBernard L. Madoff’s fraud?

The documents released this week by federal prosecutors do not show it did, and I suspect it did not. JPMorgan was penalized for failing to report “suspicious activity” in Mr. Madoff’s account at the bank — the account that took in money from the Ponzi investors and paid out withdrawals.

What the documents do show, however, is a huge bureaucracy where employees stuck to their own silos and did not communicate well with others. Suspicions were there, but so were profits, and the profits seem to have outweighed any other concerns. Many people simply filled out and filed forms, oblivious to what those forms might, or might not, indicate.

And, in a way, that may be more troubling. If clear crimes had been committed, then people could go to jail and a lesson would be taught. But there is no evidence that anyone acted with impure motives — assuming that we accept that making money is a proper motive. A combination of turf wars and incompetence combined to facilitate the biggest Ponzi scheme ever.

My favorite disclosure in the documents is that JPMorgan had a requirement that a “client relationship manager” certify every year that each client complied with all “legal and regulatory-based policies.” This was no doubt viewed as a tiresome and routine requirement, both by the bankers who did the certifying and by the people in the compliance department who collected the certifications.

“In March 2009,” we are told in a “statement of facts” agreed to by the bank and prosecutors, the Madoff relationship manager “received a form letter from JPMC’s compliance function asking him to certify the client relationship again.”

Evidently, whoever sent out that letter did not read it after a computer generated it. Or perhaps that person had somehow missed the report that Mr. Madoff had been arrested on Dec. 11, 2008. That would not have been easy. In the month after the arrest, The New York Times printed 15 front-page articles on the Madoff fraud, and it received exhaustive coverage everywhere else as well.

Another highlight is that on June 15, 2007, JPMorgan’s chief risk officer refused to increase the bank’s exposure to Mr. Madoff’s fund — more than $100 million at the time — to $1 billion. Mr. Madoff had made it clear that he would not allow JPMorgan to perform due diligence on what he was doing with investors’ money.

“We don’t do $1 bio trust me deals,” the risk officer wrote in an email, using what was apparently his abbreviation for billion.

But 12 days later, that risk officer approved going up to $250 million in Madoff exposure. In the meantime, Mr. Madoff had agreed to talk with him but not to allow any new due diligence. Joseph Evangelisti, a JPMorgan spokesman, says the risk officer “relied on the current and past due diligence of our markets and credit risk units, as well as our broker-dealer group” in approving the quarter-billion-dollar exposure.

So we have no fewer than three parts of JPMorgan voicing confidence in Mr. Madoff. That does not sound good, but Mr. Madoff fooled a lot of other people, too. At least the risk officer did not approve the full $1 billion.

Soon after his first decision — the one saying the bank did not do billion-dollar “trust me deals” — the risk officer heard from another bank executive that, as he put it in an email message sent afterward to top JPMorgan Chase executives, “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” He asked that someone “google the guy” to find a negative article he had been told about.

In response, a lower-level bank employee conducted a search for the article but could not find it.

The article the bank could not find was published by Barron’s in May 2001. The article, “Don’t Ask, Don’t Tell,” by Erin E. Arvedlund, noted Mr. Madoff’s secrecy and said it appeared to be impossible that Mr. Madoff’s stated strategy had produced the reported profits. But she did not raise the possibility that it was a Ponzi scheme. Instead, she speculated that perhaps he was using information garnered about pending stock market trades handled by his brokerage firm to front-run those trades. Mr. Madoff’s denials are included.

thanks for the shout out!

JPMorgan’s Sweetheart Deal with DOJ

Due diligence was crucial in Madoff, other investments; JPMorgan “failed miserably” says DOJ…

Published Wednesday, January 8, 2014, 2:01 AM

Wall Street, it seems, is capable of doing business with criminals – like JPMorgan Chase & Co. did with scam artist Bernie Madoff. So it is critical to do your own due diligence when giving money to a new manager.JPMorgan agreed Tuesday to pay $2.5 billion in fines to Madoff’s victims and regulators for ignoring the red flags related to the $65 billion Ponzi scammer.

Despite warnings, JPMorgan continued to invest in Madoff’s secretive hedge fund up until just a few months before the criminal mastermind’s 2008 arrest. E-mails between top compliance executives reveal worries about “too-good-to-be-true” investment returns by Madoff. But JPMorgan Chase was generating millions of dollars in revenue annually from Madoff’s bank account, so the bankers continued doing business with Madoff.

Jeff Brenner, however, saw it coming. The founder of Maragell L.L.C. in Haddonfield, and an expert forensic investigator, Brenner was asked by a potential investor to look into Madoff.

“We went out to check Madoff’s auditors, Friehling & Horowitz,” Brenner said, referring to a small company in Rockland County, N.Y. “It was a two-man shop in a mall. One of the accountants [David Friehling] spent most of his day at the gym. There was no staff for a $65 billion hedge fund? I told [a prospective Madoff investor] it was stupid to invest.”

The client ended up investing anyway, and losing millions of dollars, Brenner said.

Friehling pleaded guilty in 2009 to fraud charges, and is cooperating with prosecutors. Horowitz had already retired and died shortly after the fraud came to light.

“Our 2006 investigation of Madoff raised numerous red flags,” Brenner explained. “While Madoff’s fraud was enormous, at its heart it was an affinity fraud. People who knew him – or who trusted their advisers, who in turn knew Madoff – invested their money without applying the same level of scrutiny as they did when purchasing other investments.”

No matter the manager, conduct your own due diligence, Brenner advised.

“Start by gathering documents, not just the prospectus, but from third-party sources like financial news outlets, former investors, lawyers, and bankers,” Brenner said. “Call everyone and ask questions.

“If the investment is opaque or it just doesn’t make sense, do background checks into the history of the principals regarding past businesses, investment track record, regulatory enforcement actions. We uncovered a hedge fund manager driving a $200,000 car and traced its ownership to an undisclosed affiliated business. It may be the current investment opportunity is just another in a series of failed strategies, or worse, the lifeline to pay off debts from an earlier scheme.”

Want to Sell Your Treasuries Back? Try 1 of 4 Phone Numbers

if you thought it was tough filing your taxes, There are Four (4) Different Phone Numebers To call if you need information about buying or selling treasury bonds.

TreasuryDirect Please email or write to us
Legacy Treasury Direct 1-800-722-2678
Electronic Services for Treasury Bills, Notes, and Bonds 1-800-722-2678
Treasury Inflation-Protected Securities (TIPS) 1-202-504-3550 (NOT for savings bonds inquiries)

U.S. Savings Bonds

For General Inquiries

TreasuryDirect – Electronic EE and I Bonds
Paper Savings Bonds 800-553-2663

For Financial Institutions

General Paper Savings Bond Inquiries 800-553-2663

Stick with 5-Yr Treasury: Janney Fixed Income Strategist

Odds are that bond rates will rise in ’14

Inquirer.com  January 1, 2014, 2:01 AM

Do you care about the bond market and interest rates – that is, where are bond prices going and when will rates start rising? Then it’s time to start shifting bond portfolios. Go defensive, because odds are that rates will rise in 2014.

So says Guy LeBas, Janney Montgomery Scott’s chief fixed-income strategist. He predicted that with the Federal Reserve changing gears, “rates will continue to rise. But it’s not just whether rates rise that matters, but how fast and how far they go.”

The Fed wants the rise to be gradual to avoid shocking the economy, although rate moves are not fully under the central bank’s control. The Fed also is one of the Treasury market’s biggest bondholders, owning 18 percent of the $11 trillion Treasuries, LeBas added.

Janney recommends sticking with five-year Treasury bonds, which are yielding 1.73 percent. Interest rates have to rise by 0.50 percent for an investor to lose money on a five-year Treasury, LeBas estimates.

There are “speed limits” on potential economic growth, including U.S. demographics, low household formation, and a lack of investment in real-economy innovation, he added. Monetarily, the next several years will be defined by the Fed’s attempts to accelerate growth through these speed limits.

“The end of [quantitative easing] doesn’t mean the Fed gives up stimulation,” LeBas said. “Under [new Chairwoman Janet] Yellen, we expect alternative ways they will communicate expectations of what they’re going to do in the future.”

Fiscally, investment is being stymied by long-term uncertainty on tax policy.

So, interest rates are headed up, but probably not as high or as fast as Wall Street predicts, LeBas added. Janney’s “highest case” for 10-year Treasury yields over the next few years, given levels of inflation, is just 4 to 4.5 percent.

“We would peg 4 to 4.5 percent as the settling area for 10-year Treasury yields and 5 to 5.5 percent as the settling area for 30-year Treasury yields, but it could take until 2016, when the Fed starts hiking short-term rates, to see those levels,” LeBas said. See his  2014 Outlook here: http://www.janney.com/File%20Library/Fixed%20Income/Janney-2014-Macro—Fixed-Income-Outlook–12_10_13-.pdf

One Thing’s For Certain…Fed’s Taper Removes Uncertainty

Your Money: Fed’s bond tapering good news for investors

ERIN E. ARVEDLUND Inquirer.com Monday, December 30, 2013, 2:01 AM

Investors should celebrate that the Federal Reserve is finally getting out of the investment business. Why? Because it provides some certainty.”The announcement of tapering turned an uncertainty into a certainty. That is always good news for equity investors,” said James M. Meyer, who writes the note to clients for the Boenning & Scattergood investment firm in West Conshohocken.

“When investors are unsure what to expect, they tend to expect the worst,” said Ed Kohlhepp of Kohlhepp Advisors in Doylestown. “Investors are right to cheer now as the biggest, clumsiest bond buyer in history starts cautiously easing away from the auction table.”

Starting in January, the Fed will taper its bond buying to $35 billion in mortgage-backed securities each month (versus $40 billion previously) and $40 billion in Treasuries (versus $45 billion), citing better job markets and the economy as the reason. At the same time, the Fed will leave key interest rates unchanged until after unemployment falls below 6.5 percent and inflation rises to 2 percent.

But for bond investors, the central bank’s decision to taper is more complicated.

Federal Reserve Board economists believe the U.S. recovery is self-sustaining, and the central bank has managed to separate tapering from interest-rate change in the minds of investors. So where are rates going?

“Almost everyone I talk to is wondering about interest rates,” said J.R. Rieger, vice president of fixed-income indices at the S&P Dow Jones Index. “Even my taxi driver told me not to buy bonds!”

Why? Because as interest rates rise, bond prices fall, making them less attractive.

Big mutual-fund firms are complicating the bond markets because they are forced sellers, due to retail investors’ cashing out.

“The flight from bonds has forced mutual funds to sell. That means when Fidelity sells, it has to sell its bonds, and Vanguard is not able to buy because they have to sell bonds as well,” said David Kotok of Cumberland Advisors in Vineland.

That creates bargains in the bond space.

“We resist this notion that the bond market is headed for an absolute debacle in 2014. We particularly favor the tax-free municipal bond,” Kotok said. “When a high-grade, long-term, tax-free yield of 5 percent is obtainable in a very low-inflation environment, investors who run from bonds and liquidate will look back, regret the opportunities they missed, and wonder why they did it.”

Want to invest in a young person? Now you can, via Upstart.com

Your Money: Upstart lets you invest in young entrepreneurs

Inquirer.com Tuesday, December 24, 2013, 2:01 AM

Michael Olorunnisola (right) is an entrepreneur seeking to build an education start-up. Raymond Tran is helping him with the project.

Michael Olorunnisola (right) is an entrepreneur seeking to build an education start-up. Raymond Tran is helping him with the project.

Have you ever wanted to invest in a young person – invest in him or her as you would a stock or a bond? Basically, investing in the person’s future value?

Now you can, via a website called Upstart.

Dave Girouard, Upstart’s cofounder and CEO, was formerly president of Google Enterprise, and dreamed up the idea of backing young people financially.

Rather than invest in a company, Upstart backers invest in young people, like University of Pennsylvania 2012 graduate Michael Olorunnisola.

Olorunnisola and other students raise capital they need from individual backers to retire their student debt and get their start-up companies off the ground. In exchange, the new graduates share a small percentage of their personal income over five to 10 years with their backers.

Olorunnisola, for his part, is an entrepreneur seeking to build an education start-up that “aggregates the free resources of online education to streamline access for students and professors alike,” he explained. “I plan on testing the product over the course of summer 2014, and launch in September 2014, for the next school year. I’m still working on the development, and plan to undergo testing in the spring and summer.”

Student debt can be a career-limiting obstacle – especially for would-be entrepreneurs. For many, debt and day-to-day living expenses hold them back from pursuing their dreams.

Upstart investments works like this: Potential backers browse young people by school, area of study, or career interest, and read about their unique goals and backgrounds. To be funded, each Upstart must raise a minimum of $10,000.

Olorunnisola tapped Upstart to raise $10,500 to fund his education start-up, with long-term hopes of bringing those resources back to Nigeria, his homeland. He worked with student computer developers at Penn, and they fleshed out the initial stage of his website.

Other students and graduates of local colleges are involved with Upstart. Information about them can be found at: www.upstart.com.

If you want to invest for a real return, know where and how your money is being spent, and would feel good doing so, check out Upstart.


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