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Third Quarter Update

By Daniel Harris, RIA, Sunday October 9, 2016


The Markets


Commodities and emerging markets stocks have dominated 2016.  South America has had one of the best years of all major classes.  Alternative investments have been amongst the worst performers in this market. 


Here is a chart of market returns of major asset classes so far in 2016:












The Economy




Real GDP has fallen over the last year and currently the economy is growing at about 1.6% as of the last reading.  This is down from about 2.6% from this point last year. 



Growth is slowing in the economy but still remains positive.  The leading economic indicators for the US show 1.40% expected growth, down from 1.53% at this point last year. 


However, the California economy is a different story.  Our economy is red hot with growth near the top of the range as you can see below.



Unemployment and inflation adjusted wages


The unemployment rate continues to drop rapidly having fallen from around 9% in 2011 to around 5% today.  The labor market is as tight as it has been in the last decade.  Consequently, wages are growing at about 1% above the rate of inflation so families are doing better.



Corporate Profits


The only bad piece of this picture is corporate profits.  Corporate profits peaked around the 4th quarter of 2014 but they have been rebounding a little bit this year.  Nonetheless profits are down about 7% from their peak two years ago. 




Legal and Tax Update


Limitations on discounting for lack of control and marketability in family limited partnerships


The IRS and the Treasury Department are in the process of challenging the use of family limited partnerships with no bona fide business purpose in order to pass down assets at a discounted level from parents to children especially on your deathbed.  The government is in their comments period and are expected to make a decision by the end of the year or early 2017. 


The word on the street is that acceptable discounting levels have dropped as the IRS has brought more scrutiny on these types of transactions.  In the past where you may have been able to get away with a 30-40% discount for lack of control and lack of marketability, now you probably can’t get away with more than 20-30%. 


If you are considering doing these and want to know how to navigate the rule changes I recommend talking to attorney James Siegel at Seltzer Kaplan in San Diego or your accountant if he or she has some experience in this field.


The real issue is when people wait too long to do these and do these transfers on their death bed as the IRS has a major problem with that as they’ve discussed in their technical memoranda.


California’s Transfer on Death Deed looks great for the public


I haven’t written about the Transfer on Death Deed for some time but I recently attended a seminar where estate attorneys took their best shot at it.  There were about 200 of them in the room so I think I heard every complaint out there.  Here is what I took away from their attacks on this new instrument:


1) You can’t use it if your client is currently hallucinating.

2)  Cricket, cricket (there was no #2).


I didn’t know this but there is actually quite a bit someone can do when hallucinating (see Anderson v Hunt) including amend your will or trust or even create a new will.  The standard is simply that you can’t be hallucinating specifically about that piece of property, the person you are giving it to or the idea that you are transferring property.  But the fact that you believe you are a roadie for the Grateful Dead doesn’t disqualify you of being of sound mind for the purpose of making a will or a trust amendment.


However, one thing they can’t do while hallucinating is sign a contract, which requires that you are actually of completely sound mind at the time you sign it.  You cannot sign a transfer on death deed because that is technically a contract and a contract requires that you are of sound mind.  This isn’t an issue for most 30-40 year olds who are the perfect people for this instrument in my view. 


That was pretty much it.  The other requirements I’ve already discussed previously namely you


1) Must name all beneficiaries by name (example: Joe Smith, my son, and Mary Smith my daughter)

2) It works for residential dwelling of 1-4 units only and not other types of property

3) The form is provided in the statute and reasonable completion of the form is required and not exact compliance

4) It has no effect until the second spouse dies

5) You have to record it at the county (same as transferring property to a living trust).


The main alternative is a short living trust, which only has one advantage – it’s private who the beneficiaries of the trust are but that privacy can cost you $2k upfront and much more on the back end since most living trusts are irrevocable and require quite a bit of work after the first spouse dies.  I wouldn’t be surprised if it cost you $10k to keep it from the public that you are transferring your house to your children if you pass away. 


But most people are pretty comfortable that their names are on deeds at the county and as a result I fully expect the Transfer on Death Deed to replace the vast majority of living trusts in California over my lifetime.  The Transfer on Death Deed covers the one asset most people previously had to go through probate without a trust and now that this deed does it automatically, quickly, and almost for free I think those $2-$3k living trusts are going to start selling a lot less well to customers. 


I’ve never minded the living trust for the right customers (a) those with step children (b) those with out of state property (c) those above the $10.9 million estate tax limit (d) those with other assets above $150k that don’t have another transfer mechanism (like a farm). 


Clients are actively calling their lawyers about these instruments and I really think they are the future.  I’ve seen how wonderful the transfer on death accounts are in the brokerage world in quickly moving assets while avoiding lawyers and probate and I think the state has really done something good with these Transfer on Death Deeds which basically do the same thing.  After 160 days, the property basically goes to the beneficiaries without meaningful costs or involvement of the courts.  That’s perfect for families without conflicts.

The most widespread lie in the industry

By Daniel Harris, RIA, Saturday October 8, 2016


The most widespread lie in the financial industry is that diversification is a free lunch.


Here are some interesting takes on it from investors who have had a long track record of success – long enough that survivor bias probably doesn’t really explain their outcomes.


The meaning of Warren Buffett’s quote and his background


“Diversification is protection against ignorance.   It makes little sense if you know what you are doing.”  Warren Buffett


Warren Buffett hardly needs an introduction but basically this is a guy who took no more than $70 million in earned income and converted it into $60 billion.  To do this he had to compound money at around 20% a year for 40 years – an incredibly tough task for anyone to do. 


To convert back to numbers a normal person can understand – if you had $100k at age 30 and never invested another dime, at 20% growth a year this would grow to $146 million by the time you were retirement age.  That’s what Buffett did.


Although he doesn’t speak much about it, Buffett and Berkshire Hathaway have an accurate but somewhat less common view on diversification.  They believe that the opportunity costs of excessive diversification are huge because as you diversify you go down in quality and reduce returns. 


Although they don’t highlight it – Berkshire Hathaway, the insurance company, is substantially more equity oriented and less diversified than most insurance companies.  They consequently have much higher returns and have been able to grow more as a result while taking less long-term risk.  Personally he is far less diversified as well, which in the long term is less risky than being very diversified. 


By risk I mean the risk of not achieving your goal.  Diversification can decrease your chances of reaching your goal while reducing the movement of portfolio prices.  I thoroughly reject the definition of risk as reducing how much portfolio prices move because I don’t think that accurately reflects most people’s most important goals.


I’m not advocating that you take Buffett’s view but I think 40 years is long enough to throw out the idea of survivor bias and it’s worth considering why the most successful capitalist in America views diversification in a different way than many in the financial industry do.


For me this is a battle of credibility – the rich and successful don’t look at diversification the same way that the less rich and the less successful look at it.  You can come to your own conclusion but for me, I pay attention to what some people did differently that helped them be successful.


The counterargument to this is guys like Taleb, the guy who wrote the Black Swan which basically says since you can’t empirically rule out the fact that it could be luck you can’t learn anything from people who are more successful than you are.  I think that’s a nice view for a professor to take but for those of us who live in the real world we learn from our more successful peers all the time and while it may not be scientifically perfect the stuff actual works pretty good in my experience.


The meaning of David Swensen’s quote and his background


“The behavioral benefits of diversification loom far larger than the financial benefits” David Swensen


David is the long time chief investment officer of one of the nations most successful endowment funds.  The important thing to know about David is that in a lot of his portfolio his firm uses index funds which is something that neither Buffett or Lynch actually do. 


David’s point is really worth looking at – he basically says that the financial benefits of diversification are quite low (which they are) but if it keeps you invested that’s a good thing. 


The other thing that can keep you invested is a good investment advisor and the financial benefits of one of those can be quite high.  The point is to realize that diversification isn’t that great of a long term financial move (it may have a net negative effect) past the point that it keeps you invested.  However, if you could a less costly way to stay the course (like hiring an advisor) you’d likely end up with more money, in my view.


Peter Lynch’s quote and his background


“When you ask a bank to handle your investments, mediocrity is all you’re going to get in a majority of cases” Peter Lynch


This is something I’ve heard repeatedly as a joke in the legal circles I run in.  They repeatedly say that with corporate trustees and by extension professional fiduciaries will end up with half your money if you set up a trust for them and let them manage it long enough.  They say it as a joke – but I’ve heard it enough that it makes me think it is the truth.  That’s why I never advocate corporate trustees unless there is a true fight in your family.


These trustees use what I would consider to be excessive diversification and high fees.  It’s not a crazy idea because it helps them cover their tail and they do a lot of work with families that are at war with each other.  I’d probably do the same thing if I were in their shoes.  But if you don’t have all out litigation – these types of excessive diversification are very costly to the beneficiaries and the owners of the assets.


Peter Lynch is before some people’s time but he was an enormously successful mutual fund manager that helped Fidelity grow over time.  He retired a long time ago but he often had pearls of wisdom for the public. 


See what Peter was saying, which is ultimately been true in my observation is that if you follow the rules of diversification that some firms advocate you are going to have dramatically less money than you otherwise would. 


Why is diversification presented as a free lunch?


Diversification is presented this way, in my view, because some people who don’t want to do any work as an advisor and yet would still like to be paid a nice fee.  They want to win even if you don’t and they need to come up with a reason why they should.  Their favorite reason is “risk reduction” because it has no universal meaning and no one knows how to evaluate it (or them).  Hopefully you won’t fire them if they are “reducing risk” because that sounds like a prudent thing to do even if it isn’t clear what exactly they are doing.


A frequent argument is that money is easier lost than gained.  That’s actually not true.  It’s pretty hard to lose money over the long term in the markets so long as you invest reasonably and don’t put all your eggs in one basket.  This is a fact that most people don’t know – the stock and bond markets in the US have never produced a negative total return for more than 8 years since 1926 – even in the Great Depression.  It’s always possible that they could produce a longer negative return in the future but the truth is the markets have historically been a lot less risky than people assume.


What people don’t assume is how diversification can hurt you – but if you do too much of it or do it wrong it can easily you cost you $300k to $400k in gains that otherwise could have had in your lifetime.  That’s why lots of diversification is no free lunch – for some long-term investors it is one of the most expensive investment choices they ever make.


So my advice is to diversify thoughtfully and don’t do it in a flippant way.  If you want to know how your current diversification will likely impact your long-term outcomes you know where to find me.




What is the wealth management process and comprehensive financial planning?


By Daniel Harris, RIA, Friday October 7, 2016


Many people, when they first meet me, are confused about what exactly I do.  We all come to the table with preconceptions of what a wealth manager or financial advisor is. 


The most common preconception I run across is that I “pick stocks” which isn’t really true.  In fact, helping clients select investments is a small part of an overall process. 


At its core wealth management is where the overlapping circles of growth of your investments, protection from the people who want your money, and efficient use of tax, legal and insurance systems.  Thinking of these parts as a whole is key and I often take that role. 


Why do I take that role instead of your lawyer or accountant?  The primary reason is that I don’t charge by the hour.  So a huge chunk of our time invested in these things doesn’t cost you any more money.  For the more complicated stuff you go beyond our expertise and you’ll be working directly with a lawyer, accountant, or insurance agent and use their counsel.  We never have had to say anything negative about accountants but we do sometimes steer clients towards certain lawyers and insurance agents who we believe will actually will act in your best interest and not use their superior knowledge of the system to rip you off.


Now I want to be clear I don’t know how to draft your trust so I won’t be writing or reviewing the language in your trust.  If you have a problem with the IRS or FTB or you want to pursue a nonstatutory tax strategy I don’t do that either because I don’t have access to information from IRS audits like an experienced CPA does.  I also won’t be telling you what insurance company’s to buy from if you are higher risk candidate and smoke a lot of marijuana since my expertise on insurance is confined to healthy people with low risk factors.  But any advice my firm gives about financial issues is always done in the context of our extensive knowledge and awareness about tax issues, creditor risks, expected investment returns and insurance products.  Our focus is on the whole picture and that is what wealth management and comprehensive financial planning really is.


Part 1 of 3: Investment Productivity


I bring this up first because the general public consistently underestimates the value of productive investments.  It’s pretty easy for a guy like me to take your standard 25 or 35 year old and use what I know about investments to likely add $700k or $800k to their lifetime bottom line net of my fees.  The reason is that investments are hard and complicated and constantly changing.  Even if other advisors like your lawyer or CPA understand asset allocation and those issues they likely are not familiar with all the options are available today in each market, what the expected returns are and what the risk is.  It’s sort of like the tax rules – I know them – but I don’t know how the IRS interprets them always and that’s why you go to a CPA if you want to do the more productive stuff in the tax code.  The money is made in the nitty gritty of investments and not the asset allocation (despite what you’ve heard).  It’s also a ton of work and no one has the time to learn these details, in my experience, unless they are absolutely passionate about the field or this is their primary practice focus area.


The $700-$800k likely lifetime improvement in outcomes isn’t because I’m a genius – it’s that I’m working in a system that is enormously productive if you use it right.  People routinely turn a few hundred thousand dollars of savings into a couple million with the right advice and decision-making.  However, people who don’t have this information usually only end with a few hundred thousand.  The market value of this information is immense so much so that a $1 investment in it can easily pay back $14 or $15 over its lifetime.  To say it pays for itself, when done right, is a huge understatement. 


Now of course, I can’t and don’t guarantee returns and the future can be different from the past.  But what I want to hammer home is that the economic value of this information can be phenomenal when you put it into practice.


Good enough doesn’t work in investments – it needs to be objectively good.  Otherwise you really are selling yourself short.  So this is a very key focus for me and my firm as I always want my clients’ savings to be productive over time and I never want them to settle for predictably bad outcomes just because they kind of want to be lazy.  I’m usually very good at encouraging them to do things that will likely make them more productive and will hopefully put that extra $800k or $2 or $3 million in their pocket by the time they retire.


You may assume that my clients take more “risk” than others.  I don’t believe that they do.  Risk is very poorly understood in investments in part because you actually have to do some real homework to understand risk.  Most people in the media are too lazy to look up the facts or to run the calculations – but our firm does that kind of stuff.  The important thing to remember is that risk is situational and personal.  What a risk is to you is not necessarily a risk to someone else.  Also, what is a risk in your retirement account is totally different than what is a risk in your housing down payment fund.  We spend a lot of time talking to our clients about risk but also just telling them the truth about it, which few other advisors seem to be willing to do in our experience.


Part 2 of 3: Protection from Creditors and the Taxman


There are two main creditors for people who save their money: the taxman and your opponents in the legal system. 


Good wealth management involves a lot of attention to the tax consequences of all your decisions.  Moreover, it involves actually running the numbers on your projected tax liability based off historical experience and a series of reasonable assumptions.  For example, if taxes are 3% lower than historically was the case this should play a role in your projections. 


Investment, legal, insurance and tax decisions should be made on a net basis which means that you calculate what you’re actually expected to actually take home net of all costs. Then you try to maximize your take home number using the tools (investment, tax, insurance, legal) so that you have the best expected outcome that you could possibly have.


Creditor protection is also very important too but it’s field specific.   While creditor issues must always be thought of it’s important to actual historical experience when calculating the trade offs.  For example, you can set up a trust to protect yourself from creditors but the trust will probably cost you 1-2% a year to operate.  If you have a tiny risk of getting of getting sued above your policy limits the trust doesn’t make sense.  Often insurance is the cheapest way to pool risk, but certain investment structures and legal instruments can back you up to ensure that a 100 year flood type of creditor claim won’t wipe you out. 


Making reasonable assumptions about risk and then mitigating those risks in the most cost effective way possible is a key part of the wealth management process at our firm.


Part 3 of 3: Efficient Use of the Financial System and other advisors


The third part of the system is the biggest trap for most investors.  Most people intuitively understand that they benefit when their money is productive and they lose when they pay unnecessary taxes or when they are too exposed to creditors.


The most difficult part is to identify whom you can trust in the financial system – because the field is full of wolves in sheep’s clothing.  We try to protect you against this by working with the same people over and over again who we believe are reliable and will act in your best interest.  Our repeat business can be a huge deterrent to bad advisor behavior.


We have mutually aligned interest with any CPA, attorney, insurance agent, realtor, property manager that is focused on putting your interests first and we are the natural adversary of any of those people who don’t put your interest first.  That may sound harsh but that really is what we are all about and we find that most of the good providers feel the same duty of loyalty to you that we feel with all of our clients.  So our interests are mutually aligned.


So this is the complete wealth management process: a focus on being productive with the investments, mitigating liabilities and taxes in a cost effective way and working collaboratively with other specialists to do the really complicated work that helps us ensure that you meet your goals and are adequately protected.  That is the wealth management process that we embrace and that is what me and my firm are truly about.

My three favorite probate/estate attorneys and why I like them

By Daniel Harris, RIA, Sunday September 18, 2016


I’ll reiterate by saying there are three situations where you should definitely hire an estate attorney

1) You have more than $5.45 million in assets if single or $10.9 million if you are married and therefore have an estate tax problem  – Jim Siegel’s specialty

2)  You are cost conscious and aren’t a very detailed oriented person and you want a lawyer to review the standard (basically free) estate planning options provided by the State of California, the County Law Library, and the State Bar of California – Irina Sherbak’s strength

3)  You are from a blended family and are concerned about your new spouse directing assets away from your children and towards their children – a good fit for Laura Lamb Nichols




James (“Jim”) Siegel - Downtown


Jim is my favorite estate attorney in San Diego.  He’s grandfatherly, experienced, gentle, patient, fair, a family man, and a former special education teacher.  He is a partner at Seltzer Kaplan, one of San Diego’s top local firms that I highly endorse and he is best for those who need complicated estate planning needs (GRATs, CRUTs, and those above the $10.9 million estate tax exemption or those with closely held business interests that needed to be accounted for in an estate plan). 


Jim is a graduate of UCLA School of law, one of the top three law schools in the state.  He is a smart guy and I’m confident he will act in your best interest.  A guy with Jim’s level of experience will likely cost you $425-$475 per hour.  Jim is appropriate for high net worth business owners and families, as they will get the most value out of his experience, especially with wealth transfer and estate tax avoidance strategies.


You can read more about Jim on his firm’s website here:





Irina Sherbak – Scripps Ranch

Irina is my second favorite estate attorney in San Diego and she is a good fit for most young, price conscious customers. 


Irina is just as smart as Jim but she’s earlier in her career and she’ll do all the things that customers need but most estate attorneys are reluctant to do.  She’ll do your Transfer on Death Deeds, she’ll review your will, and she’ll check your beneficiary designations.  Better yet if you work for a large company she’s probably included in your legal insurance plan so you can pay $20 a month for a year (through the insurer) and she’ll do all your estate work.  If you are paying out of pocket and not through the legal insurance program someone with her experience will probably cost you $250 an hour.  Irina did her undergrad work at UC San Diego.


You can read more about Irina on her firm’s website here:



Laura Lamb Nichols – Downtown SD


Laura is my third favorite estate attorney in San Diego.  I think Laura’s strengths are her strategic thinking and analytical abilities.  I think she would do very well in a case where you needed to protect your children after you were remarried.  She’s also pretty tough and I believe that she would aggressively defend your children’s interest.  Someone with Laura’s experience costs about $375-$425 per hour.  Laura did her undergrad work at USC and went to Cal Western for law school. 


You can read more about Laura on her firm’s website here:



 Disclosure: I like these attorneys and I’d feel comfortable hiring any of them, but you are on your own in making your decisions about who to hire and I have no responsibility to you if it doesn’t work out as you hope.  My opinions of them are based off my interactions with them, the questions I’ve asked them about the law and how honest they were in answering them (I’m a member of the bar too so I can find the law very easily and can tell when a lawyer is lying about the risks or the law) and my analysis of how good their judgment is.  I don’t have a high view of all estate lawyers but I have high view of these three for what I think they are good at.  Of course, I could be wrong and if you use my positive opinion of them to hire them you do so at your own risk and I have no responsibility if it doesn’t work out the way you would hope.

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