Category: IHT Articles

How To Serve HNW Small Business Owners During Times of Volatility
Advisors must be able to offer practical support to high-net-worth business owners who confront a volatile environment just as they are about to make a deal.
By Steven Dudash
May 29, 2019

Original Article:

Over the years, small business owners have emerged as ideal clients for independent advisory practices. Not only do entrepreneurial synergies exist that tend to make such individuals easier to work with, but many also occupy the stratified air of the high-net-worth segment.

While serving this niche can be rewarding, even exhilarating in some instances, it’s also hard work, requiring specialized expertise that doesn’t often come into play for other clients. This is perhaps best underscored when it comes time for the client to sell their business.

For an overwhelming majority of small business owners, the entity is by far their most valuable asset, used to fund most, if not all, of their retirement. This can create complications even during the best of times. But what about when markets are rumbling, like they have recently in the wake of renewed concerns about a prolonged trade spat with China?

Advisors must be able to offer practical support to high-net-worth business owners who confront a volatile environment just as they are about to make a deal. Here are some top considerations:

Utilize dollar-cost averaging. As suggested above, whether a business is worth $5 million or $50 million, it will likely make up the lion share of the owner’s net worth. The temptation over the last decade or so, when markets enjoyed near-uninterrupted gains, was to take the entire windfall and convert it into stocks.

Though that approach flies in the face of dollar-cost averaging, a fundamental financial planning precept, many advisors did it anyway. With double-digit annual returns having been the norm in the wake of the financial crisis, they hesitated to push back against clients who wanted to be more aggressive, wary of getting second-guessed down the road about perceived unrealized gains.

Dollar-cost averaging exists for a reason: Clients may not benefit from the highest of the highs, but they won’t get punished by the lowest of the lows, either. Take the guesswork and emotion out of the market. Don’t plow a lump sum into the markets and instead make investments gradually, which will shield clients from risk.

Clients should always be ready to sell, even if they have no plans to do so. Business owners typically have a pretty good idea of when they want to sell, with the timeline sometimes based on their age or reaching certain revenue/profit milestones. Whether they are prepared to sell their business when that time comes is another story altogether.

Advisors, therefore, should encourage such clients to prepare for their exit years in advance to guard against the possibility that market risk could erode the value of their business. We’re currently beginning to see this in financial services.

For years, advisors have been hesitant to sell their books of businesses, thanks to the upward trajectory of the markets. Their practices were escalating in value and, for some with recurring fee-based revenue, life was too good to quit. However, as the investing environment started to face hurdles late last year, their valuations took a hit, and the outlook could have changed.

The problem, though, is that many have not prepped for exit, meaning the realities of the market at any given time could wield outsized influence over a sale process. The same principle applies to countless industries across the country, whose fortunes could take a turn based on a declining economy or a micro-event cutting into their revenues (i.e., a microbrewery that has seen their aluminum costs rise as a result of tariffs). Always have an exit strategy, because you’ll never know when you’ll need to use it.

Communicate how much a client will need to maintain their current lifestyle. Let’s say a client comes to you and says they are about to sell their business for $25 million. On the surface, that sounds like a lot of money—and in most instances, it is. Yet, many business owners who have adjusted to a high-net-worth lifestyle will be surprised that an amount like that won’t take them as far as they think.

They have car payments, a couple of mortgages, a country club membership as well as food, entertainment and leisure costs, to say nothing of a child’s college and their own medical expenses. Additionally, they have service providers, including financial advisors, lawyers and accountants. These obligations accumulate quickly and could be exasperated by the fallout of a volatile market.

Make sure business owner clients know what it will take for them to preserve their current lifestyle, not just now but for the next 30 to 50 years (keep in mind, this wealth, in some instances, is intended to last for generations). If there’s anything we know about the high-net-worth segment, it’s that they are loath to make do with less. Many would prefer to work a few extra years.

Volatility is the norm, not the exception. While concerns about trade are driving the most recent ups and downs, an entirely different set of considerations could spark investor anxiety in the future—and complicate the exit of a small business owner in the high-net-worth segment. Be prepared to help your clients when that happens.

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IHT is proud to announce that we have been named as one of the top 300 RIAs in the United States by the Financial Times

Link to full article here

Methodology of the report here

 

 

Steven Dudash, Featured in Forbes on September 21, 2017 Read the article here

 

Steven Dudash, Featured in Forbes on August 16, 2017

Read the article here

by: Loren Fox and Michael Ferraro

This fourth edition of the FT 300 assesses registered investment advisers (RIAs) on desirable traits for investors.

To ensure a list of established companies with substantial expertise, we examine the database of RIAs registered with the US Securities and Exchange Commission and select those that reported to the SEC that they had $300m or more in assets under management (AUM). The Financial Times’ methodology is quantifiable and objective. The RIAs had no subjective input.

The FT invited qualifying RIA companies — more than 2,000 — to complete a lengthy application that gave us more information about them. We added this to our own research into their practices, including data from regulatory filings. Some 725 RIA companies applied and 300 made the final list.

The formula the FT uses to grade advisers is based on six broad factors and calculates a numeric score for each adviser. Areas of consideration include adviser AUM, asset growth, the company’s age, industry certifications of key employees, SEC compliance record and online accessibility. The reasons these were chosen are as follows:

• AUM signals experience managing money and client trust.

• AUM growth rate can be a proxy for performance, as well as for asset retention and the ability to generate new business. We assessed companies on one- and two-year growth rates.

• Companies’ years in existence indicates reliability and experience of managing assets through different market environments.

• Compliance record provides evidence of past client disputes; a string of complaints can signal potential problems.

• Industry certifications (CFA, CFP, etc) shows the company’s staff has technical and industry knowledge, and signals a professional commitment to investment skills.

• Online accessibility demonstrates a desire to provide easy access and transparent contact information.

AUM comprised roughly 65 to 70 per cent of each adviser’s score, while asset growth accounted for an additional 10 to 15 per cent.

Additionally, the FT caps the number of companies from any one state. The cap is roughly based on the distribution of millionaires across the US.

We present the FT 300 as an elite group, not a competitive ranking of one to 300. This is the fairest way to identify the industry’s elite advisers while accounting for the companies’ different approaches and different specialisations.

The research was conducted on behalf of the Financial Times by Ignites Research, a Financial Times sister publication.

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By Steven Dudash

The NBA Finals began last night, with Stephen Curry’s Golden State Warriors taking Game 1 from LeBron James and the Cleveland Cavaliers 113-91 in Oakland. It’s the third consecutive time the teams have met on basketball’s grandest stage. The highly anticipated matchup caps an otherwise forgettable playoff season, which thus far has been marred by key injuries (San Antonio’s Kahwi Leonard and Boston’s Isaiah Thomas) and noncompetitive contests (nearly every game involving the Cavs and Warriors).

While last year’s memorable Game 7 set post-Michael Jordan television ratings records, should this series also go the distance, we’ll likely see similar numbers again, but in this hyper-commercialized world, it’s not just Cleveland and Golden State facing off, it’s also a battle of the brands, with James and Nike on one side, and Curry and Under Armour on the other.

On paper, this is a mismatch. Nike, with the help of its subsidiary Jordan Brand, not only dominates the basketball shoe segment but controls over 51% of the broader US athletic footwear market, according to NPD Group, a data analytics firm that studies consumer trends. Under Armour, by contrast, makes up only 2.5%. Still, it wasn’t too long ago when Under Armour seemed poised to narrow that gap, perhaps not enough to close it but enough to become a meaningful threat to the strength of Nike’s position.

What happened? Let’s go back to the beginning of 2016: Under Armour had endorsement deals in hand with Curry, the reigning NBA MVP, whose team was in the midst of a 73-win season, as well as Jordan Speith, who the year before flirted with golf’s grand slam, winning the Masters and U.S. Open before narrow misses at the British Open and PGA Championship. If the duo weren’t the two biggest sports stars in the country at the time, they were surely two of the hottest, pivotal in a world in which ‘trending’ is so important.

Then three things happened that blunted Under Armour’s momentum. In April, Speith, pursuing his second consecutive Masters title, coughed up a five-stroke lead on the back nine, punctuated by a quadruple bogey on Augusta National’s famed 12th hole. While still competitive, Speith just hasn’t been the same player since, and golf, desperate for a way to juice television ratings and fill the void left by the absence of Tiger Woods, has felt the collateral damage.

Roughly two months later, Golden State famously blew a 3-1 series lead in the Finals to James’ Cavaliers, something that no other team had ever done. The Warriors became an internet meme, and Curry, the subject of overwhelmingly positive press attention and unrelenting fan adulation for nearly two years, came under enormous criticism for being badly outplayed by Cleveland’s Kyrie Irving in the series.

During that same doomed trip to the Finals, Curry’s signature shoe, the Curry 2, was released to negative reviews, with the footwear widely panned as ‘chef’ shoes or – even worse for a brand that desperately needs young consumers – something dads, boring dads at that, might wear. Interestingly, the shoes sold well, but in hindsight that was likely due in part to the novelty factor, with many opening their wallet almost ironically, in much the same way that ugly Christmas sweaters become popular during the holiday season. The Curry 3s, released at the beginning of the 2016-2017 NBA season, were a commercial disaster for Under Armour, and it’s hard to believe that the ridicule foisted upon the previous version of the shoe didn’t play some role in this outcome.

Fast forward to today, and Under Armour’s stock has been the worst performer in the S&P 500 this year, down more than 30%, and the company’s run of 20 consecutive quarters of year-over-year revenue increases has come to an end. In fairness, the fact that Under Armour’s two biggest endorsers suffered humiliating, public meltdowns combined with the drab design of the shoes themselves aren’t the only factors weighing down the company.

The once-hot athleisure trend has fizzled, impacting all athletic apparel companies, including Nike, and there has been a spate of sporting goods retail bankruptcies, many involving close Under Armour partners, such as Sports Authority. But it’s hard not to think about what may have happened had Speith and the Warriors held on, and Curry’s shoe been more aesthetically pleasing.

Yes, the Warriors could win this series (they are significant favorites in Las Vegas) and another NBA title next year and another one the year after that, but even if this happens, it won’t change things substantively for Under Armour. The company’s window of opportunity was last year, when all the stars seemed aligned. Also, with Kevin Durant now with Golden State, Curry is no longer the single face of the franchise.

So what’s the key lesson for investors? Companies reliant on fashion trends and influencer endorsements can only control so much. In particular, how endorsers perform is not manageable by any company at the end of the day. When two high-profile, high-cost endorsers flame out spectacularly in the span of 70 days, it creates lastingly negative images, and it’s only natural that will adversely impact the bottom line.

 

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1031 Exchanges Increasingly Attractive as Real Estate Prices Climb

By: Miriam Rozen

Published: April 24 2017, 9:22am EDT

Section 1031 of the IRS Code may seem like an arcane — and perhaps even unnecessary — subject for an adviser to be expert in. But now that property prices have risen to pre-2008 levels in most parts of the nation, it is essential to know about 1031 exchanges, according to Steve Dudash, president of Chicago-based IHT Wealth Management.

“If you are not able to hold conversations about like 1031 strategies with your clients, you are obsolete,” Dudash says. “You won’t have a job in five or 10 years.”

Knowing about 1031 exchanges is especially valuable for an adviser with clients who own rental real estate. Under this section of the tax code, clients can defer the federal government’s recognition of capital gains on the sale of a property if they buy a comparable property — one rental home for another, for instance — within a prescribed time period.
Only recently, as real estate prices have risen nationwide, have 1031 exchanges re-emerged as an extremely useful tool, Dudash says. When clients had properties that were underwater, capital gains taxes were not even a hint on the horizon, he says.

The attractiveness of 1031 exchanges might be amplified if proposals for a flat tax become serious. If such a proposal were to be enacted, clients’ capital gains may no longer be taxed at preferential rates but rather would fall into ordinary income brackets, according to Chad Smith, a wealth management strategist at HD Vest investment Services in Irving, Texas. “It could be changing very much over the next year and capital gains could be taxed at ordinary income rates,” he says.

OFFSETTING HANDSOME GAINS
But even under current tax laws, 1031 exchanges are an attractive tool for advisers in an economic environment in which clients are realizing significant capital gains. “It’s always handy,” says Lisa Detanna, a senior vice president and managing director for Raymond James Global Wealth Solutions Group in Beverly Hills, California.

According to Detanna, a client will call and say, ‘Oh, by the way, I’ve sold a property.” In some cases, this can lead to a scramble to find a place to exchange. For just such situations, Detanna turns to a banker whose institution has the designation to act as “a qualified intermediary” in 1031 exchanges.
1031 exchanges are an attractive tool for advisers, says Lisa Detana of Global Wealth Solutions Group.
1031 exchanges are an attractive tool for advisers, says Lisa Detana of Global Wealth Solutions Group.

Under a typical 1031 exchange scenario, a client who owns rental real estate sells the property but the proceeds initially go to such a bank, which is prepared to serve as a qualified intermediary or, as it is sometimes called, an accommodator. Under the IRS rules, the seller of the rental property then has 45 days to identify a “like” property and 180 days to purchase it, using the proceeds that have been kept with the qualified intermediary.

Although an intermediary adds an expense, the tax savings may be much greater. The exchange can help postpone taxes on highly appreciated properties that clients want to sell but don’t want to add to their tax bill.

“Some will charge a flat fee, and some charge a percentage of the sale price,” Detanna says. But, either way, “it’s nominal when consider how much you are saving by delaying the taxes.” Indeed, the tax saving put her clients in “a whole different arena” in terms of their purchasing power for a new rental property. “The delay of taxes lets you build wealth,” she says.

DEFINING ‘LIKE’
The exchanges are possible in a variety of circumstances because of how broadly the tax law defines a “like” property. There is tremendous flexibility in the term. “It doesn’t have to be apartment to apartment,” Detanna says. “You can switch to a duplex or exchange to a strip mall. It doesn’t have to be residential.”
The attractiveness of 1031 exchanges might be amplified if proposals for a flat tax become serious, says Chad Smith of HD Vest.
The attractiveness of 1031 exchanges might be amplified if proposals for a flat tax become serious, says Chad Smith of HD Vest.

For Smith, 1031 exchange strategies have enabled him to help clients who are “tired of being landlords.” For such clients, Smith has frequently recommended that they consider limited partnerships that own rental real estate. These partnerships aim at providing turnkey solutions for investors who don’t want to look for another sole-ownership property or haven’t been able to find one yet. But when evaluating limited partnerships — sometimes structured as tenancies in common — advisers should approach the proposals with skepticism, Smith says.

“Our firm works with only two vendors” of such vehicle, he says, in order to do business only with firms in which it has confidence. Even then, his firm hires an outside counsel to review any new investment packages the vendors offer. “We are very, very cautious,” Smith says.

“That turnkey option is not right for everybody,” he adds. “It needs to fit into their overall plan and their income needs.”

For her part, Detanna generally steers clients away from the turnkey 1031 investment vehicles. “There are lots of negatives associated with these,” she says. “You have no control; general partner fees are usually high. You are in a partnership maybe with 35 other partners and you get very little information about them or the management of the assets.”

ESTATE PLANNING
On the other hand, one-to-one 1031 exchanges are valuable for clients’ financial planning and, in particular, estate planning, Detanna says. “If the patriarch and matriarch have multiple rental properties and the adult kids don’t have the bandwidth to be in the property management business, 1031 options are something we would generally discuss,” she says.

Sometimes, since the heirs will get the step-up in property values when they inherit rental real estate, the best option is to wait and allow them to sell it and avoid more expensive strategies, Detanna and other advisers says.

At IHT Wealth, Dudash says his first question to clients considering a 1031 exchange is “What is your purpose?” By knowing their end game, he can help them figure out if such an exchange makes sense in their circumstances.

Sometimes, a 1031 exchange strategy can help with multigenerational planning. A rental property owner can make an exchange to buy a home for an adult child or an elderly parent who then pays rent. This can be an attractive option because no one has to pay capital gains taxes. But, Dudash cautions, often the family dynamics overwhelm whatever rental payment structure is devised and relationships turn sour. “It doesn’t always work out,” he says.

Another scenario in which a 1031 strategy might help, as long as clients have two years of lead time, is in financing a summer home or future residence. If the clients have a rental property, they can sell that and exchange it for a home in a vacation spot of their choice and then rent that vacation property for two years, so they satisfy the IRS’ requirements for the 1031 exchange. After that, the place is theirs to enjoy forever after — no capital gains tax payments required.

But the devil is in the details. According to Alan Soltman, a CPA with Merlis, Soltman, Green & Associates in Los Angeles, who works with Detanna, the IRS will not challenge that the dwelling qualifies as a like exchange under 1031 if it is leased at least 14 days at a fair rental in each of the first two years after the exchange.

But if the clients use the home during the two-year holding period, limitations apply. For a 1031 exchange, the property owners’ personal use cannot exceed the greater of 14 days or 10% of the total number of days the property was rented at a fair market price, Soltman says.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. The strategy discussed may not be suitable for all investors

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