Archive for category: General

Fixing IRA Transactions with Alternative Assets

Categories: Education and Resources, General, Investment Strategies, Retirement Strategies, Tax Strategies

Do some of your clients hold alternative investments inside their IRAs?  Have they taken RMDs, completed Roth conversions or other taxable events?  If the answer is yes, then it is very likely that they have a problem.  Alternative assets commonly held in IRAs include non-traded REITs, hedge funds, non-traded BDCs, private investment funds and other illiquid investments.  Such assets can be difficult to value which directly impacts the tax consequences of IRA transactions.  All IRA assets must be reported at their fair market value (FMV) for reporting purposes which for most investments means their trading price.  Alternative assets typically do not trade on established exchanges, and thus can cause adverse consequences for IRA owners when reporting taxable events.

For example, take the case of hypothetical client Mr. Stone who is 71 and has a traditional IRA with a purported $500,000 portfolio of non-traded alternative assets.  This is the value used to calculate Mr. Stone’s taxable 2012 RMD of roughly $18,900.  We take it for granted that this is the correct RMD and the calculation was based on the proper asset valuation.  But what if the illiquid alternative asset was still being valued at Mr. Stone’s original purchase cost from five years earlier with no subsequent update since the asset does not have a readily ascertainable trading price?  It is highly unlikely that the fair market value (FMV) is still $500,000.  If it is worth more, then Mr. Stone could face penalties for not taking the proper amount of RMD.  If it is worth less, Mr. Stone took more money from the tax protected environment of his IRA and incurred more tax than necessary.

A similar scenario occurs where clients completed Roth conversions of IRAs holding alternative assets.  If the investments were overvalued, the client reported excess taxable income and paid more tax than required.  If the investments were undervalued, the client could face unpleasant penalties, interest and additional tax.

Alternative assets are generally subject to valuation discounts for factors such as lack of marketability, illiquidity, lack of control, etc.  So luckily, in the majority of cases we find alternative investments to be overvalued for IRA reporting because these applicable adjustments have not been taken into account.  This means clients often stand to benefit by correcting the errors and requesting a refund of the excess tax paid or reduction of RMD penalties and so on.

The process to correct these issues can be detailed and complex requiring specific actions in a specific order in many cases.   Jagen™ offers direct consulting on these types of cases and can work with you and your clients to complete this process and improve IRA results.  Contact our office to discuss particular client cases.

Author: Joe Luby, CFP®

©2012 All Rights Reserved.

Who Cares About the AI Market? You Should.

Categories: Education and Resources, General, Investment Strategies, Wealth Transfer Strategies

Dear Friends & Colleagues,

I had an interesting conversation this week.  The founder of an RIA firm in the Midwest contacted me to discuss the concepts outlined in our latest white paper.  The paper is titled “Acres of Diamonds – How to Double the Size of the Alternative Investment Market” and can be downloaded for free here.  Even more interesting is the fact that this firm does not currently use many alternative investments (AI) in their client portfolios.  Why did they read a report about increasing the AI market?

The title may not be catching for attorneys, CPAs and financial advisors thinking “who cares about the size of the alternative investment market.”  However, once you understand the concepts presented, you will scramble to help increase the size of the AI market.  Many will demand more AIs for their clients specifically for the planning opportunities presented.

The call from the RIA firm this week proves my point.  They read the white paper and wanted to know which AI companies followed the policies highlighted in the report.  Specifically, they wanted to talk to those AI firms about starting to allocate significant client funds to their products!  The piece definitely struck a chord with this advisory firm once they realized the amazing financial and tax planning opportunities for clients holding AIs.

And that’s the point.  Attorneys, CPAs and financial advisors who understand the financial and tax planning opportunities hidden within the AI market demand more of these assets for their clients.  So take a look at the white paper and see if some of the concepts strike a chord with you and how they may fit into your client scenarios.

Best Regards,

Joe Luby


The Elephant in the Alternative Investment Living Room

Categories: General

Remember the old line about the “elephant in the living room” and how it referred to a subject no one wanted to address even though it was obviously something that should be discussed?  Well, there’s an elephant in the alternative investment (AI) industry living room right now, and he’s been there quite a while.  But in this case, the first firm to start talking about him will benefit by gaining substantial sales!

The elephant is AI share valuations.  Silence.  Crickets.  The third rail in some circles.  Why is the AI industry (asset sponsors, B/Ds and large RIAs alike) loathe to discuss share value in any terms other than offering price or NAV?  Because the FMV of illiquid non-traded assets is typically much lower than either NAV or the current offering price.  This is due to the fact that a true FMV analysis takes into account that a client holding shares of a typical alternative asset cannot convert their shares to cash on any given trading day.  And they certainly cannot convert their shares into cash equal to NAV or offering prices.  Even most redemption programs require the client take a haircut on the price paid to redeem if they are able to redeem at all.

Consider secondary market trading in AI assets.  How do those prices compare to the asset sponsors’ reported NAVs or offering prices?  They are often twenty to fifty percent less than reported NAVs.  However, these prices are more indicative of true FMV since they represent third party willing buyers and willing sellers coming to terms on a price for the asset.

Everyone understands the desire of AI sponsors and selling B/Ds to only deal in terms of NAV and offering price because it’s less scary and doesn’t make it appear they’ve lost money for clients.  The common fear is that showing a FMV substantially lower than the current offering price or most recently updated NAV will upset clients.  However, this type of thinking results in significant lost AI sales opportunity.

FMV is the required value for all tax reporting instances when an AI shareholder engages in some taxable event with their shares.  Thus a low FMV is an attractive feature to clients when a taxable event occurs!  Such taxable events can be Roth conversions, IRA distributions, estate tax calculations, gift and estate tax planning scenarios and more.  AI sponsors and others are so busy making sure they only report NAVs and offering prices that they are in fact harming many clients that could substantially benefit from the reduced FMV figure for tax purposes.  Sure, each individual client can go out and retain their own appraiser to provide a FMV, but the client must bear the cost and administrative hassle.  They or their advisor also must realize that such an opportunity is available.  Many do not.

Therein lays the advantage to the firm or firms that start talking about the elephant before the competition.  For example, an advisor is considering between two similar AI products for their clients.  One firm educates the advisor (and maybe even the client) on the differences in NAV and FMV, highlights the tax planning benefits of knowing both numbers and offers to provide both figures on an ongoing basis.  The other firm gives the same old sales pitch about non-correlated returns, asset diversification and institutional quality management.  Not only will the advisor place the business with the firm that added significant value to his practice and clients, but he will also recommend the client increase their allocation to the AI to take advantage of the extra tax benefits in addition to the investment performance.

Understanding and talking about these additional benefits inherent in many AIs can also increase the number of referral sources for both advisors and the AI sales teams.  Attorneys and CPAs needing tax planning solutions for clients will seek out advisors and AI sponsors that understand these concepts and can help apply them to their client cases.

AI sponsors, selling B/Ds and large RIAs have a unique opportunity to be first in their field to highlight these advantages and use them as selling tools.  The firms that embrace the opportunity as early adopters will reap the lion share of new business before the competition even realizes what is going on.

Author: Joe Luby, CFP®

©2012 All Rights Reserved.


P.S. Shameless sales pitch – Jagen™ has consulting programs designed for AI sponsors, B/Ds and large RIAs that want to be introduced to the elephant and significantly increase sales.  We are only accepting four such clients into our 12-month program during 2012 (program runs twelve months from engagement, not on calendar year).  If you want to be one of the first in the industry to take advantage and increase sales by understanding and marketing these unique opportunities, contact us today.  For more information you can also visit our consulting services page by clicking here.


Joe Luby Shares Essential Financial Information (Washington DC’s Metro Magazine – Part 2 – July 2010)

Categories: General

Joe Luby Shares Essential Financial Information (Washington DC’s Metro Magazine – Part 1 – July 2010)

Categories: General

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