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INVESTMENTS- December 2003
But like the old saying goes, the more things change, the more they remain the same. In other words, the investors’ old rules still rule, such as having a significant portion of your portfolio in bonds to protect your investments if the market declines. “In the last three years or so is that there’s a lot more interest in conservative investing,” said Rick Lyon, senior vice president for wealth management at National City Bank in Lexington. “You now have people coming to banks and bank trust departments that have the reputation for being conservative investors.” Lyon and other wealth management professionals maintain that smart wealth management professionals must think long-term. Complementing the old investment rules is a new approach to wealth management that most banks seem to be taking. Instead of a single person managing a client’s wealth, large and regional banks are assembling entire teams of experts at local levels to work in wealth management. A team approach Besides diversity, Grant currently recommends a 65 percent to 35 percent balance of stocks to bonds in an investor’s portfolio. He’s also proud that his clients have generally been able to avoid the severe losses experienced by many investors over the last two years. “We have been building individually managed portfolios for our clients, rather than depending on mutual funds to provide the diversity in an investor’s portfolio. Our goal is to keep the investment dollars balanced over a diverse spread of business sectors. Investing in mutual funds doesn’t always accomplish that.” The role of the bank in wealth management has evolved quickly over the last decade. Rather than having a single person managing funds for a few select clients, a bank’s wealth manager is more likely to be the leader of a team of specialists, each an expert in his or her field of stocks, bonds, estate planning, insurance and taxation. “Our goal is a holistic approach,” says Barry Hickey, senior vice president and wealth management team leader for BB&T’s Central Kentucky region. “My job is to quarterback a team of professionals working together on behalf of our client. Our job is to get all the resources of BB&T behind our clients.” Hickey’s that his bank has teams of professionals working with the bank’s customers to ensure a successful wealth management scenario. “We’ll bring in our asset management team to look at investment needs, an insurance team to look at insurance needs and other professionals as needed. We look at the different situations our clients are in, such as executives with stock options; we look at tax strategies; and we look for ways to help individuals with large amounts of stock to maximize their financial situation. “Frequently, we work with family business owners looking to pass on their company to the newest generation. We concentrate on small businesses. Medical practices are a large percentage of our business – this has been most of our market.” This ‘point man’ approach seems to succeed with a number of banking institutions. “I’m not always the expert in every single field of wealth management, but I have clients that think I’m the smartest guy in the world because of our outstanding group of professionals,” says Tom Watts, a wealth management advisor at Fifth Third Bank in Lexington. “Here, we have wealth management advisors. We are trained and continuously updated with a solid knowledge to identify investment and wealth management opportunities. Then we have experts in very specific areas; for example, a team who develops financial plans for our clients. One gentleman I work with here is both an attorney and a CPA. Another of our experts helps us deal with insurance issues. A great wealth management advisor really has the ability to bring top level experts to the table. “For example, tax experts can shave tens of thousands of dollars off of a tax bill. To be able to do that takes an expert who has made a full-time job out of studying tax law. While I don’t manage client portfolios, we rely on our full-time portfolio managers who handle stock and bonds. They watch the market continuously on behalf of our clients. My job is that of a coordinator. But I have some very powerful resources behind me.” Portfolio management “We’ve seen far less erosion in our trust accounts than you’ve seen in the marketplace,” Lyon says. “The main trend I’ve seen is bank holding companies acquiring local and regional banks. The strength they bring is the roster of experts they have in wealth management. Being able to offer the services this group of people has reaches well beyond the smaller banks’ capabilities in this area. “One other major trend we’re all seeing in this industry is that one used to see bank trust departments set off by themselves. There was very little sharing of clients with that institution’s other departments. In today’s environment, we don’t call them trust officers, they’re investment and management professionals. They go out on joint sales calls with our private bankers. It’s definitely more of a team approach.” “That trend really applies to large bank holding companies,” Lyon agrees. “At National City, we don’t turn anybody away because their account management needs are too extensive.” “Using mutual funds has been a trend our bank has not participated in,” Lyon adds. “It’s definitely a trend among larger bank holding companies and also smaller banks. A number of them are putting their clients primarily in mutual funds. In other words, when you come in with a half million to set up a trust, the investments come into mutual funds. When you do that, you don’t need local investment managers. But, we believe this is not good for the client, so we have local investment managers who are still sitting down with clients and selecting individual stocks, bonds and investments.” At BB&T, Hickey’s team uses a similar method. What’s more, the ‘mix’ its bankers recommend between stocks, bonds and other securities has proved to be very stable and profitable. “We still like the approach we take in both good and bad markets,” he explains. “We look at a client’s needs and examine their assets in regard to the amount of risk they’re comfortable with. Allocation between stocks and bonds drives return. There’s been no need to change. That approach has been effective in any kind of market. We’ll give you returns at or above market on the good side of things and protect you from massive losses when the economy isn’t doing well. “Our approach for most of our client base is stocks and bonds. We will use mutual funds for international markets, but we like stocks and bonds. We’re not an index buyer – we’re usually among the 15-20 percent of investment firms that outperform index funds. We do not give our clients a list of ‘stocks to consider.’ Our portfolio is based on an allocation of stocks in each of several economic sectors. It’s the research we do on the top that counts. We’re not looking at three or four companies in which to invest, but 30-40 within a sector. This philosophy has given us a lot of happy clients.” At National City, a relatively new approach has been taken to protect the wealth of Kentucky’s medical professionals. “There’s been a greater need for professionals in this community, especially doctors and some lawyers,” Lyon notes. “They risk being sued and need a greater degree of asset protection. Large asset holding companies now set up trusts in states providing maximum protection, where in the past you had to go offshore to do that. We have the ability to set one up in Delaware, but manage it here in Kentucky. Delaware is the most wealth-friendly state in the U.S. Because of its favorable corporate laws, it’s become a good place for trust administration.” While most large banks have become a one-stop shop for wealth management, each company stressed that they do not practice law. In estate planning procedures, most have good working relationships with attorneys throughout the region. “In the case of trusts and living wills, we don’t do the legal work, but we do the planning,” Lyon explains. “We figure out what their needs are and work with their attorney if they have one. If they don’t, we’ll help them select an attorney.” Each wealth management expert interviewed emphasized that, as their profession has changed the customer has benefited. More experts, technology and up-to-the-minute research is available now than ever before in the field of managing money. The client now has a healthy range of choices he or she can make in maintaining and building upon existing wealth.
The Final Payment: Preserving Your Legacy Chances are you have accumulated some degree of wealth: securities, real estate, or possibility a closely held family-owned business. However, you face the reality that one day your family will deal not only with your death, but also with your death taxes. The estate tax is real. If you do nothing, your estate could be cut in half due to taxes. So how do you protect your hard-earned assets? The basic estate plan So, $3,000,000 in assets may be sheltered using basic trusts. Any tax on assets in excess of this amount can be deferred until the death of the surviving spouse because all gifts, transfers or bequests between spouses are not subject to gift or estate tax. This tax must be paid later at a rate of approximately 50 cents on the dollar. Be sure the assets have been split between both spouses to ensure the $1,500,000 in assets may be sheltered, no matter who dies first. If this is not done, it will be very costly. Currently each parent can give a gift of $11,000 annually to each child and grandchild without using any of your $1,000,000 lifetime exemption for gift taxes. Though the estate tax exemption goes up to $1,500,000 in 2004, the gift tax exemption stays at $1,000,000. Consider lifetime charitable gifts to eliminate the assets from your estate and gain additional income tax benefits. Just remember that for gifts, the tax basis does not change. In other words, if you inherit property you usually get a setup on the basis to fair market value, but when you receive a gift, your tax basis is the same as it was when the donor owned the property. To save even more
Remember above all, that even after you have done all this, there still may be tax due. How to make the final payment The tax on the family business may be able to be paid over a 15-year installment period and the IRS may finance it. With good planning, the stock in the family business may be redeemed tax-free to cover any taxes and administration costs associated with the estate. These methods may help avoid selling the business. The key to good planning is to start early, and update the plan regularly. Communicate your goals and desires to the executor or trustee who will administer this plan when you are not here. When you are gone, your family and your employees will thank you for building a plan that works. — Michael B. Mountjoy, CPA/ABV and Dennis L. Thomas, CPA, JD, LLM-Taxation Claude Hammond is a staff writer for The Lane Report. Back to December Issue The Lane Report is a trademark of Lane Communications Group. All other trademarks are the property of their respective owners.
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With the economy making a tenuous comeback after the tech wreck and terror plots, those wishing to hold on to their money and build their wealth have had their share of challenges. Just a few short years ago, it seemed that money was being made hand over fist with investors pouring heavily into hot IPOs and Internet investments. All the old rules for wise investing seemed to be broken as the Dow zoomed upward towards the 10,000 mark, with no sign of slowing down.
Grant also advises his customers to consider all the available market products, not just the products offered by any one bank. “That’s one of the real advantages our advisors offer,” Grant says. “Our managed account allows our advisors look at a wider variety of investment products and fund managers than most banks. We don’t limit our customer portfolios strictly to PNC products.”
Banks that manage investment portfolios seem to fall into two categories. Some have encouraged their wealth management clients to use mutual funds in their portfolios. Others direct their clients’ money directly into stocks and bonds themselves.