Financial Planning - What's it All About?

By Arianna Capital

Most families do not have a good sense about the relationship of the size of their assets and what they are trying to accomplish in their lives. Once we help the client identify what they are trying to accomplish and if they have the resources present to meet those resources peace of mind abounds.

To do this we spend much more time talking about what the client wants to accomplish in life. We spend time getting to know what the details of their lives are. We want to know what they like so that they can keep getting what makes them happy while cleaning up some of the inefficient portions that they do not need to hold on to any longer. We also put together a team of experts to contribute knowledge and experience into this peace of mind plan - as we like to call it. Make sure your financial adviser understands you well enough to put together a holistic plan made for your unique life.

By analyzing key areas of estate planning, tax mitigation, business models, charitable gifting, and much more we are able to simplify our clients' lives to make for a better today and a better tomorrow.

Advisors Really Can Help!

By Ramin Baranpourian

Before becoming a wealth manager I had to ask myself - "Is this really an area in the world that I can make better and add value to peoples lives, or should I just continue to medical school where I know that I will make a difference for others?" As it turns out there is overwhelming evidence that independent fee only advisers with passively managed funds can do wonders for a client's goals. Combine the previous with successful financial planning techniques and one has a solid solution for a client's life. In previous posts we have pointed out that active management, private equity, hedge funds, venture capital, and more are sub par investment experiences for clients. That was the first bit of research that helped me see that I could make a difference. The second bit of insight and the subject of this blog has shown even more solidly that advisers are necessary for successful wealth management and goal realization. In other words, an adviser is worth his keep as they help point the client in a positive direction towards a client's said goals.

(CLICK TO ENLARGE)

This chart shows that DFA advisers (Arianna Capital) with passively managed strategies succeed much more often than indexers that try and do it themselves. They also outperform actively managed funds by a land slide. So, if your adviser uses active techniques, or if you are an indexer that likes to do it yourself think about looking into a change that serves your future.

Chart reference -

Hebner, Mark. "Investors Success With Capturing Return With and Without Advisors." Index Funds Advisors Blog. Web. 10 Sept 2011. .

Anheuser Busch & the Billion Dollar Question

By Arianna Capital

Back in the 80’s Anheuser-Busch had billions of dollars in their pension plan. With their seemingly limitless resources, Augustus Busch III and his investment committee decided to hire the best stock pickers and market timers on the planet. Three to five years later they found that these active managers had failed to beat their respective benchmarks – they had no investment skill; they couldn’t add value. Appalled, Augustus Busch III and the committee reversed their earlier decision and fired all the managers deciding to instead buy the simple benchmark, better known as index funds. Now, if Augustus Busch III had received our unique offer perhaps he would not have found himself in such a quandary.

Our Complimentary Financial Review

Because of our commitment and passion to help people become smarter and better informed investors, we have decided to offer complimentary financial reviews for portfolios of $300,000 dollars or more regardless of whether you choose to work with us or not.

We know that education, understanding, and discipline are key components of a successful investment experience. Also, we understand that recent times have been challenging for investors and that some have gotten off track by making emotional decisions due to stress and uncertainty. We look forward to helping you improve your investment portfolio and make educated decisions in the future.

About Arianna Capital Management

We strive to build a lasting relationship with you —to understand your needs and empower you to accomplish your life goals. We believe this strong relationship is the key to aligning your wealth with your values and providing the financial solutions you need to realize your vision. By utilizing the science of markets and strong academic ties to the likes of the University of Columbia, Yale, Dartmouth, MIT, University of Chicago, Nobel Laureates, and our experienced team we are able to add value to your financial health.

That is the Arianna solution – a solution that offers a level of personal service and investment solution unmatched in the industry.

Scott Wisniewski and Ramin Baranpourian are the Co-Founders of Arianna Capital Management. We benefit from the experience and knowledge of a team of 4 Certified Financial Planners, 1 Chartered Life Underwriter, 2 Masters in Business Administration, and 3 Juris Doctors. Cross-generational families, successful business owners, executives, lawyers, and doctors, both young and old in various stages of life have entrusted our team with their wealth management. More than 400 families with over $500 million in assets are benefiting from our team’s highly personalized process of managing wealth to help achieve our client’s unique life goals.

We ask people three questions:

Do you know your returns, your fees, and allocation (risk)?

Most likely, the answer is no.

The average person knows next to nothing about their financial portfolio. It’s not just the average person. Take a Harvard graduate in the Finance department at Exxon Mobil—they don’t know either. We know this because we have asked them. What does that tell us? There is a problem with transparency and simplicity in the financial industry. Investment managers hesitate to provide complete information to their clients. The industry confuses people. Many investment managers claim they know when the market will rise and fall or which stocks to pick. In fact, powerful academic evidence suggests that picking stocks or timing markets is next to impossible and will actually leave you worse off. Unfortunately the average investor is unaware of this compelling research that has existed for several decades, and their investment experience shows it.

Many of these same investment managers have high costs, high taxes, low performing funds, and take unnecessary risk. So, what is it that keeps clients around? We believe the answer is the current perception built on trust, lack of financial knowledge in the school system, pumped up media reporting, and past experiences with their current managers.

Furthermore, our society is not proficient at proactively identifying and fixing problems as we have noticed with diminishing fossil fuels and growing health care costs. As this relates to portfolios, we have seen people shy away from a complimentary analysis simply because they are afraid of leaving their comfort zone to take a look at their financial health. Conversely, we have seen people take advantage of this analysis to rid themselves of cancerous spots in their portfolios and heal themselves financially in order to accomplish their life goals.

So, get proactive and confident— let us take a look at your financial health.

Excellent podcast of David Booth and Eugene Fama

Excellent interview of Dimensional Fund Advisors Co-Founder's, David Booth and Eugene Fama at the University of Chicago Booth School of Business on iTunes Podcast (Click the #1 podcast).

To Lease or To Own - That is the Question

By Scott Burns

It is usually better to purchase than lease. There are several reasons for this.

• First, leasing commits you to operating cars in their early years of maximum depreciation. Since depreciation is the single largest cost of operating a car (by far), it means you’ll never get to have years of low depreciation costs.
• Second, leasing commits you to operating cars for relatively short periods of time. So you will be making repeated sales tax payments as you move from car to car.
• Third, leasing commits you to having a significant interest cost built into the operating costs of the car.

You can understand this by checking a regular exercise on the cost of car ownership done by AAA, the American Automobile Association (http://www.aaaexchange.com/Assets/Files/200948913570.DrivingCosts2009.pdf ).

By purchasing a car new (or a recent model used car), you can drive it long enough to reduce the average depreciation and have zero interest expenses because you’ve owned it long enough to have the loan paid off.

Basically, you’ll have the lowest cost of transportation by owning a car for a long time. Doing that has gotten easier as cars have been built to higher standards of durability— 100,000 miles used to be an old car, but it isn’t today.

Are there any exceptions to this? Yes, but they are rare. There have been periods where some luxury car manufacturers have offered lease deals that would be lower than the cost of ownership for the period of the lease.

Social Security Modernization: Part 3

By Scott Burns

Which of these tax bills would you rather pay?

a. $0
b. $610
c. $2,004

This is not a trick question. The historical role of taxes as the price of civilization notwithstanding, most people will go for answer (a) because most of us have a deep inner belief that taxes are best when paid by someone else.

In fact, (c) is the amount a nicely Solvent Senior would pay on 2009 income from various sources under current tax law. The other answers, (a) and (b), are what the same Solvent Senior would pay if there were such a thing as an honest politician. I got these figures by doing some woulda-coulda testing for a reader who wanted to know how the taxation of Social Security benefits affected his tax bill. I thought you might like to know.

The retired couple had combined Social Security benefits of $50,000 a year. They get this much because both worked and both earned and contributed more than most people. They also had $12,000 in pension income, $15,000 in IRA distributions and $12,000 in Roth IRA distributions. So their total retirement cash income is $89,000.

That’s a nice total. Lots of retirees and working stiffs would happily change places with them. Even so, they are among the 52 percent of retired couples who derive at least 50 percent of their income from Social Security. They are a long way from Fat City.

Now let’s look at the three possible tax bills.

Current Law. Under current law, $12,000 of Roth IRA income isn’t counted. But their other $27,000 of pension and IRA income causes $12,800 of their Social Security benefits to be added to their taxable income. This gives them a taxable income, before deductions and exemptions, of $39,800. After the standard deduction, elderly deduction and two personal exemptions totaling $20,900 their taxable income is $18,900. Their federal income tax bill is $2,004 the TurboTax program tells me.

Current Law with indexation of Social Security benefits taxation. When the weasels in Washington decided to tax Social Security benefits in 1983 they knew it would be unpopular. So they finessed the conflict. They set a high threshold that was not indexed to inflation. Basically, they put a slow burning fuse on a bomb timed to go off well after they were out of office. The first threshold number for couples is $32,000. The second is $44,000. Plug those numbers in the Bureau of Labor Statistics online inflation calculator and the inflation adjusted numbers would now be $68,927 and $94,775, respectively.

That’s why I don’t think it’s rude to call these jokers weasels.

If the taxation formula were adjusted for inflation this couple would not have to include any Social Security benefits in their taxable income. Their taxable income would be $6,100. Their tax bill would be $610, and the politicians of 1983 wouldn’t have made President Franklin Delano Roosevelt into a liar. (He’s the one who promised Social Security benefits would never be taxed.)

Under promised Obama law. While a candidate, President Obama offered a “Comprehensive Tax Plan” that included eliminating income taxes for seniors with income under $50,000. Under current tax law, the income before deductions and exemptions for this couple would have been the $39,800 cited earlier. So their tax bill would have been $0 if the President kept his word. The President is being quite fastidious about increasing taxes for those with incomes over $250,000, but he has forgotten his promise to cut taxes for seniors.

Social Security Modernization: Part 2

By Scott Burns

Social Security, the most important social program in America, is also the least understood. Many retirees depend so much on Social Security that any discussion provokes anger. The very young are the opposite— they dismiss it with a cavalier shrug, assuming it won’t be there for them.

Most people know so little about Social Security that they fall victim to “all or none” thinking, one of the most common cognitive errors we make as human beings. This is an observation, not a judgment.

So, after setting off alarm bells for lots of readers last week, I’d like to provide some factual grounding in the realities of Social Security.

Here are the basics.

It is the largest single source of income for retirees. Loss of the benefit would be catastrophic for most retirees. Even very affluent retirees would find their standard of living badly damaged if they no longer received benefits. A recent report from the Employee Benefit Research Institute found that Social Security accounted for 39.8 percent of income for those 65 and over.

The program has lots of money coming in. Employment tax collections in fiscal 2009 were $654 billion and accounted for 31 percent of all federal revenue.

Employment tax collections exceeded benefit payments from 1983 to the present. During those 27 years the surplus was spent by Presidents of both parties and by Democrat controlled Congresses and Republican controlled Congresses. The weasels took our retirement savings and gave us IOUs from the U.S. Treasury. The Social Security trust fund is now nominally worth $2.3 trillion. The only problem: The Treasury has no money to make good on its bonds because our government is already running a gigantic deficit.

And, no, the money could not have been invested elsewhere. First, it would have overwhelmed the private investment markets. Also, holding thobligations of Fannie Mae, Freddie Mac or private companies like AIG wouldn’t have been better.

Paying down existing federal debt is the only way that extra $2.3 trillion would have benefited future retirees. This would have required that the regular budget of the United States was balanced, an event that has occurred only 3 times in the last 50 years: 2000, 1999 and 1960. Then the employment tax surplus could have paid off our public debt, creating room for future borrowing.

The problem is bigger than any single politician. It was not caused by George W. Bush and the Iraq war. He simply made an existing problem more difficult by spending more and taxing less.

We can’t blame it all on the politicians. When Social Security was created in 1935 the life expectancy at birth of American men was about 58 years. It has been growing ever since. It hit 74.9 years in 2005. It costs more to live longer. That’s why the 1983 “reform” that was supposed to fund Social Security for 75 years is underfunded by over $5 trillion only 27 years later.

We can solve the entire problem by reducing our life expectancy. If we live (and die) as they do in Russia, Social Security would have no problems. But most people would prefer to die at 78 rather than 66. We have a problem of success, not failure.

At 78.24 years, the United States ranks 49th in the world for life expectancy according to the CIA World Book. That’s well behind the 79.16 years of Britain or the 81 years of France, where they have the terrible socialized medicine that costs half as much as ours.

It is still good to defer taking Social Security benefits. How can that be? Simple. Even under the worst case scenario— that nothing is done to improve program funding— tax revenues will still cover 76 percent of benefits as far in the future as 2037.

Can your corporate pension do that? Not likely.

Most workers no longer have pensions. Those that do should worry about their funding. Waiting to collect a larger Social Security check is a wash for the program (they’ll pay out more money for fewer years) but it gives workers a larger benefit income. That larger benefit check will also help people avoid spending their life savings while interest rates are held low to benefit the Too-Big-to-Fail-Banks.