Your Credit History – wealth and identity

Our recorded credit history is tracked by the three national credit bureaus (Equifax, TransUnion, and Experian) and each calculates a credit score. Though the credit score is a required component for loans it is NOT based on our entire financial history and it may not represent us correctly. It is up to us to ensure that it does. Why is this important? For your wealth and your identity.

Each credit bureau uses an algorithm (model) to generate a number (FICO score) based on your recorded credit history that is, imperfectly, a measure of the risk the system associates to someone with your recorded history. Lenders who depend on credit bureau reports for assessing whether or not to lend, use this score as one measure of your “credit worthiness”. Those with no financial history or less than sterling repayment records are likely to face higher cost loans IF they are able to obtain a loan at all. It is true that loans are available for those with lower credit scores but additional requirements will be imposed, including a low debt-to-income ratio. Even then, the loan will be at a higher rate.

Couples can sometimes be surprised when one partner lowers the expected family credit score. These couples may be effectively managing their financial life and yet obtain a low combined credit score that will raise their cost of borrowing. In most cases, the partner with the higher credit score applies for the loan singly to obtain the best rates (‘excellent’ rates are generally available with a FICO of 780 or higher), while the other partner must rebuild their history.

As time goes on, more and more of our interactions are managed electronically. Hand-in-glove with electronic transactions come ways for us to be identified and verified electronically. It is now more common for our financial identity to be confirmed by using facts found in one of our three credit bureau history records. It is crucial that you know and can recognize all information in each of these reports.

Once you have checked your history thoroughly, you’ll find an annual check-up to be quick and sufficient. Obtaining your credit history and checking it for errors can be completed on your own or with our assistance. If you need to make corrections, let us know or contact the specific credit bureau directly.

Finally, when you are getting ready to take out a loan for a large purchase be sure to first check your credit history (more than three months ahead) – you don’t want surprises.

So how might you be able to improve or maintain your credit score? Here are a few essentials to keep in mind:

  • don’t miss payment due dates – set up automatic minimum payments even if you pay your accounts in full (this will protect against the unexpected)
  • monitor your cash flow – don’t over extend yourself – try not to use more than 30% (better at less than 10%) of available credit (credit used compared to total credit available is called the ‘utilization rate’)
  • don’t apply for a lot of credit from different sources all at once – it can set off major alarm bells and may impede new financial loans for several months
  • if consolidation is indicated, try to keep your total credit the same and never close your oldest credit card
  • installment loans (i.e. car, mortgage) can have a positive impact on your score – be sure your lender actually reports to at least one bureau (some don’t)
  • your credit history can include a lot more than just a car loan or credit card – utility, cable, rent, and cell phone payment history can all be tracked and used either to boost the score or knock it down
  • if retirement is on the horizon, make extra effort while you are still earning to maximize all aspects of your credit history and bolster your credit score
  • if retired, disabled or unemployed restrain your credit card purchases and instead find ways to reduce expenses – it is more difficult to recover from credit card debt when income is limited
  • verify your credit history on a regular basis and correct errors promptly

Credit history is not a statement about you personally but a less than perfect measure to determine ‘credit worthiness’. It is best to capitalize on the rules to obtain the best score possible. Moreover, since credit history is now used to verify identity, it is incumbent on us to ensure the records have captured our information accurately.

Feel free to give us a call if you need help with the process.

Edi Alvarez, CFP®

Understanding Longevity Risk and Your Retirement

The oldest person alive today is Emma Morano of Vercelli, Italy who turned 117 this November. She was born in 1899! Queen Victoria was still on the throne of England and William McKinley was president of the United States. If you’d asked Emma in 1917 if she could imagine living long enough to see 2017, would she have imagined such a long life? Most Americans do not live as long as Emma, but in general we are living longer and healthier lives. The number of centenarians is on the rise. Longevity – long life – can have obvious perks, but also poses a conundrum in terms of finances. To help us plan for longevity we use “longevity risk” to measure the likelihood that you’ll run out of wealth before you’ll run out of life. In our planning we like to ensure that we mindfully set longevity at the right level for each person.

Few, if any of us, have advance knowledge of precisely when our time will come, so questions like this often boil down to statistics. You’ll sometimes hear that the average life expectancy for females is age 83 and age 81 for males, BUT are these appropriate target-end dates for your retirement plan? The truly important challenge is coming up with the best end-dates for retirement that will allow you to enjoy your wealth early while leaving enough assets to comfortably support you later in life.

In retirement planning, the variation in life expectancy can range quite dramatically and yet we find that client expectations generally fall into two categories, (1) those who want to make absolutely sure they don’t outlive their wealth, and (2) those who have a definite expiration date in mind, say 80 years of age, and believe that planning for life beyond that age is simply not relevant or realistic. The latter are often operating on some assumption based on, for example, both parents dying in their late 70s or not long after retirement.

At the risk of sounding morbid, but with the goal of having your retirement plan more fully represent your expected end of life target date, I want you to consider three facts that most often cause people to underestimate their longevity (in turn, this may help you understand why we sometimes encourage you to increase your target-end date):

Life expectancies that are often quoted may not be relevant since they are often calculated at birth. Life expectancy on reaching age 60 or 65 should be much higher than those quoted at birth since some will die before they reach this age. In fact, life expectancy for a 65-year-old, non-smoker is much higher. As an example, a 65-year-old female of average health has a 50% chance of reaching age 88 (see the table below) but once she reaches age 88 she has a much higher chance of reaching age 95.


  1. Life expectancy is often calculated using mortality rates from a fixed year instead of projected to future expected mortality rates. Social Security Administration (SSA)’s period life tables are based on real mortalities in any given year. Though valuable, since they are real, they underestimate the observed trend for increased survival. As mentioned above, we perceive our survival based on our own anecdotal experiences. The question to ask ourselves, is this correct or is this an underestimation?
  2. Finally, we find that the population on which longevity risk calculations are based may not be appropriate. If we work with an aggregate US population life expectancy (as does the SSA period life tables) we must include a correction for socioeconomic and other factors that are known to impact mortality rates and could underestimate our lifespans. To-date there is evidence to indicate a positive link between income, education, long-term planning, and health. Yes, someone who plans and prepares appears (statistically) to live longer.

In case it is still not clear – let me explain. When planning retirement projections, the length of retirement greatly impacts planning choices (planning for 20 versus 45 years may require different strategies given the same wealth). Considering your specific longevity risk necessitates that we prepare for the contingencies that apply to you. There may be good reasons to target a lower longevity, but for most we will likely need to include, at the very least, a reasonable adjustment for expected increased longevity. This often means distribution of existing assets and thinking about end-of-life questions (a topic most prefer not to address too closely). If you are expecting a longer life, consider accumulating a pool of longevity assets (like some are doing to cover for potential Long-Term Care contingency) or purchasing a longevity annuity (this asset would only be used if you live past a certain age and, therefore, accumulate what are called mortality credits that can provide a good income late in life, but would be lost if you wind up passing sooner).

Obviously, estimations are just that, estimations. Still, a thoughtful scientific approach ought to be the foundation for retirement projections, never speculation or conjecture. Like Emma, some of us will be blessed with a long life, even inadvertently. One way or the other, I want all of us to feel that we’ve had a life well spent, and that will depend largely on how well we’ve planned for possible contingencies in your life.

This educational piece was drawn from my work with clients,, the Social Security Administration period life tables, and a recent academic publication by Wade D. Pfau, Ph.D., published in The Journal of Financial Planning, November 2016, vol 29, issue 11, pp 40.

Edi Alvarez, CFP®

What makes a portfolio “good”

What are the ingredients of a good portfolio?

If you do a little research, you will likely discover the three characteristics or criteria of a ‘good’ portfolio: (1) it should be diversified, (2) uses indexes, and (3) keeps costs low. All valid characteristics, to a point. In reality, this amounts to an over simplification that tells only part of the story. Applied to a poorly constructed portfolio, these characteristics will not help you create a good portfolio and you will not feel the confidence you need to see you through a market downturn. So, what is the best recipe for a ‘good’ portfolio—one that doesn’t cause you anxiety and keeps you up at night while generating long-term reasonable returns?

Here is my list of five ingredients for an effective long-term portfolio:

1.      HAS A STRATEGY. First and foremost, your portfolio should follow a strategy that you believe will be effective. You need to understand and believe in it enough that you can allow it to capture value over time (while others are off chasing the latest trend). At AIKAPA we use a global investment strategy that leans towards value (rather than growth) allocations.

2.      IS DIVERSIFIED. Select a diversification that represents your strategy and provides exposure to asset classes that behave significantly different from each other. In AIKAPA’s portfolio we are diversified across equities (that include large and small US and non-US equities) and across bonds, each global asset class providing opportunities to capture value. Using the chart below, you can compare global asset classes and how their volatility and returns differ from each other.


3.      IS LOW-COST/HIGH-QUALITY (i.e., often an index fund). Implementing your diversified strategy needs to be completed using low cost, high quality securities. Use of baskets of securities (such as proven index funds) to represent chosen asset classes in your portfolio will permit the needed diversification while eliminating the risk associated with the failure of any one company (mutual funds or exchange traded funds are the baskets we use for your portfolio).

4.      IS LOCATION SENSITIVE and TAX MINDFUL.  Being mindful and “tax sensitive” when purchasing securities and locating them in the appropriate type of account can result in higher NET gains. Tax free, tax deferred, and taxable accounts should hold securities that will provide needed diversification, but will also yield the best AFTER tax returns. This approach is termed asset LOCATION selection. Taxable accounts are particularly valuable in the short and long-term but should hold assets that will not dramatically increase personal tax liability (particularly for those already in the higher tax brackets). As an example, two similar US Small capitalization funds can create very different tax liability simply by the level of “turnover” inside the fund. This turnover is often caused by frequent trading by the fund managers and can significantly reduce after tax net returns.

5.      IS REGULARLY REBALANCED. Finally, we have rebalancing of a portfolio. Rebalancing by conventional wisdom is what enhances your long-term returns by periodically selling what is overpriced (over-valued) and buying those that are underpriced (under-valued). The reality is not quite that simple. Automatic rebalancing software, for example, is tempting owing to its simplicity, BUT can lead to high turnover and reduced gains. Keep in mind, rebalancing has at least two different purposes. Rebalancing across unlike return assets (for example between equities and bonds) will result in a decrease in long-term returns, while reducing volatility (or risk). Yes, you trade some upside to reduce the downside. On the other hand, rebalancing between similar return assets (such as, between equity funds of large and small capitalized companies) will capture gains and lead to enhanced long-term returns as long as you don’t trade too often.

Assuming you’ve got all the correct characteristics in place, a ‘good’ portfolio ensures you’ve got adequate exposure to the market while assuming a measured level of risk, tax sensitivity, and an appropriate degree of rebalancing.

At the end of the day, a good portfolio can only succeed if you believe in the strategy and, most importantly, allow it to perform as designed over the long-term. To do this you, you must be certain that it is a good portfolio for you.

Edi Alvarez, CFP®

Financial Decisions: Taming unhealthy habits

I’ve always been fascinated by how and why we continue with habits (behaviors) we know to be intrinsically out of line with what we want. There’s plenty of literature to explain the biology, particularly related to marketing and Artificial Intelligence (AI), that illustrate how our brains make decisions. I wrote an article some years ago on the science behind financial decision making (“Taming Our Irrational Brain,” Association for Women in Science Magazine, Summer 2009, Vol 39, No 3). If you’re interested in the science you may find it a good place to start. In summary, I think understanding how to change our decision making process begins with a deeper understanding of ourselves.

Choosing among competing options is a fundamental part of life. Historically cognitive processes or reflexive stimulus-driven automatic reactions. To deal with the massive and complex number of choices we face on an ongoing basis, individuals use multiple “systems” that offer tradeoffs in terms of speed and accuracy, but can optimize behavior and decisions under different situations. We shift quickly from “use your head” to “go with your gut” making daily decisions heart wrenching. This clutters the brain and adds uncertainty to decisions – making decisions stress-filled.

Ideally we would have automatic behaviors that keep us aligned with our planned (cognitive) objectives. I believe that sustainable change has to be linked to a simple consistent and believable process that can support you during stress-filled times. Though there are different approaches to creating these behaviors I will focus on Charles Duhigg’s three-step process for changing habits (he refers to them as CUE-REWARD-ROUTINE) and add my own thoughts as we go along. Obviously, my focus is on developing healthy financial habits.

  1. First, we need to acknowledge what it is that we want to change and what it is that we wish to attain. What financial behavior are we interested in changing? We need to visualize what we’d like to see instead of our current behavior.
  2. We must then identify the triggers for this behavior (or “CUEs”). Duhigg suggests that we ask ourselves what we were doing right at the time, who were we with, where we were, and, what we were doing just before the behavior. One of his best examples is when you get up to get a snack in the middle of your work – what were you doing just before you got up? What was your trigger? Some people have similar triggers for spending beyond their budget and, yes, even for making buy/sell decisions on their portfolio.
  3. Next, we must understand what “reward” we obtain from this particular behavior (habit). This step is essential because we need to find something equally rewarding to successfully implement a change in our reaction when we next experience the same trigger. The new reward must be one that is both doable and strong enough to replace the current reward but also in line with our plan. Was the reward for getting a snack really to satisfy hunger, or were we bored, or in need of social interaction or just anxious? For example, consider the person who checks their portfolio every time they feel the trigger. Their reward may be to talk to people about it (social interaction) or it may be boredom (interacting with a different software) or it may be something else. This individual will first need to identify the trigger that prompts them to check their portfolio often and determine what reward they receive for doing this action.To change a reaction to a particular trigger, the goal is always to identify a substitute reward that is aligned with your well-being and your plan. For example, going for a walk alone or with friends, taking up a mental or physical activity that is positive–anything that will actually yield the change you are hoping to make.
  4. Then lock it in, so to speak, by establishing a “routine” around both the triggers and reactions that will make the new habit permanent. If the reward is strong enough, over time it will seem less and less routine, even enjoyable. In our fast moving world more and more decisions are made quickly, even without thought. It doesn’t help that marketers are out to manipulate our choices at every turn even if it means deviating us from our personal wishes (after all that is their job). This imposes a degree of stress if not countered by healthy habits. Ultimately, a well-lived life is all about making daily choices that enhance our chances of achieving the goals we set for ourselves.

It is evident that establishing any new behavior (habit) needs a belief system and a support system that you can reach out to during stressful times to ensure that you don’t revert to the original behavior. I find that for some clients Aikapa has become this support system as they strive to adjust financial habits and align them with their financial plan. It’s our job to help clients remember the reason(s) why these behaviors are important and to help them visualize their financial rewards on an annual basis. We do this through client meetings and by examining savings, investment portfolio and retirement plans.

In short, attaining financial wealth and peace of mind are indeed possible when you can develop habits that work for you. It is our mission to educate and help you build a stress reduced financial life while maximizing your wealth. If you are working on building a new financial habit to support your dreams, don’t forget to include Aikapa as part of your support team.

Wealth – a place for art and wine in your portfolio?

Not long ago I was asked by a client about purchasing a valuable musical treasure. What did I think about taking money from her budget to make such a purchase? What role could it play, she wondered, in her investment portfolio? And just last week I was asked by another client how he could include his valuable wine inventory in his portfolio? Interesting questions, indeed, and not just because they have to do with investing, but because they are a reflection of the deep seated desire in all of us to find some way to make our passions work for us.

As an intelligent investor we must first create a base or foundation on which to build wealth before investing current cash flow into such possibilities. If you think of your wealth as forming three tiers, the first tier, or foundation, consists of good credit sources together with a robust combination of liquid assets and emergency funds. With this tier in place, an investor can withstand market volatility, support ongoing needs and endure any unforeseen emergencies for a period of time. The first tier provides the conditions necessary for building the second tier—a diversified equity and bond portfolio.

The purpose of the second tier is to extract as much growth as possible from the market, while providing a safety-net that respects your risk tolerance. The second tier is intended for your future financial security and must therefore not be exposed to excessive risk (at Aikapa, we believe that the best way to counter market risk is through a diversified global portfolio). Once your finances cover these two tiers, then, and only then, can we seriously consider a third (speculative) investment tier that could potentially offer higher returns in exchange for accepting higher risks. These speculative investments could include art,
musical instruments, wine, coins, jewelry, antique firearms or other collectibles for which you may have a passion and an expertise (though not pertinent to this article, this tier can also include other non-collectible investments).

The beauty of this third tier is that it often feeds your creativity and passion, and so should never be discouraged or dismissed, so long as it comes from a position of knowledge and experience. With time and talent it is possible to build a collection that can grow in value over the years. We have a client that has collected stamps since childhood and has therefore a very valuable asset. These investments can be very lucrative when the market is favorable, but a heavy burden when not.

The risk and expense of collectible investing goes beyond the volatility that we’ve seen with wine and the recent upsurge in artworks, with high-profile purchases like the Gaugin that sold for around $300 million.

Collectibles require storage, insurance and maintenance regardless of whether there is even a market to buy them (at times they can be highly illiquid). Accurate valuation is also a challenge, since you must actually attempt to sell any given item to determine its fair market value. The market for collectibles is fickle and historic value is no guarantee. What once sold for a good price, may no longer be in vogue.

If we’re to consider a collectible as part of a portfolio, it must be evaluated for
potential future return. What is often overlooked is the cost of bringing an item to market. In addition to the usual insurance, there can be maintenance costs, special storage facility fees to retain value, and fees associated with proving authenticity. There may also be costs for shipping, installations and appraisals. Selling a collectible often incurs a commission. For artworks, auction house fees can range from 10-25%. Finally, don’t forget that tax liability exists on any gain. For collectibles, the federal tax rate is 28%. There is also state tax and, potentially, a 3.8% net investment income tax for those in
higher tax brackets. We estimate that for most of our California clients they would pay 35-43% of their gain in taxes on collectibles, which often comes as a great shock to the uninitiated.

In a nutshell, speculative investments should never be depended upon to achieve critical goals, such as retirement. While many of our clients include collectibles as part of their wealth (and are generally very passionate and knowledgeable about them), it is only as a component of the third tier of their investment strategy. These collectibles, while often extremely valuable, are never an essential part of a core investment portfolio or retirement plan.

If you’re interested in developing a third tier for your investment portfolio let us know and we’ll work together to provide a financial perspective on your plan. We do not recommend developing this tier from a budget unless tier 1 and 2 are already fully funded.

Keeping your personal data private

Personal privacy means clients not wanting specific entities or people to have access to their personal data. Personal information hacked from various databases or revealed through social engineering (i.e., individuals are manipulated or conned into divulging information) become commodities that are sold. Once the data is available it becomes more difficult to stop it from being used. This information can potentially be used to locate people, steal personal financial assets or health care resources, and even impersonate individuals (i.e. identity theft). The best way to prevent identity theft is by preventing the initial access to private personal data.

Some personal information may appear irrelevant but when combined with other information can be sufficient to provide access to your financial or health care resources.

A survey is a common way for criminals to easily collect information about you since we’re all inclined to be helpful. More active methods could include a sham customer service agent with your account number or the last four digits of your social security requesting that you provide additional personal information or make payments. You should be particularly resistant to answering unsolicited questions when you’re in a good mood or when tired. Remember that these are times when we may be more vulnerable to a well-trained manipulator (they can reach us by phone, online, email or even at your door).

When connecting through public networks, through unsecured email, or when using a public computer, or considering a new technology be sure that your personal information is not open for others to steal. At minimum use passwords, logout when finished working on a public browser and erase the browser history.

You might be surprised by the ways that privacy can be violated:

1) Financial identity – fraudulent use of bank or credit cards. The identity may be used to originate loans, get new credit cards, and open new accounts. This will appear in a credit report and in monthly reports.

2) Driver’s license – forged driver’s license can accumulate multiple traffic violations in your name and even result in suspended license, warrant for arrest or increased insurance rates.

3) Social Security and IRS identity – in 2012 the IRS predicted losses of $21B from tax refund fraud alone.

4) Medical identity – phony health insurance claims can result in erroneous diagnosis (a frightening scenario!) based on records that are not part of your health history, not to mention the costs.

5) Child identity – child’s information and social security number thefts are vulnerable since children don’t monitor their reports.

6) Synthetic identity – this is the use of several identifications to create one new person.

7) Online Home Technologies – these technologies by default record information which is fed back to their database.

Keep in mind that a breach today may yield no obvious impact but creates the potential for future use or abuse.

There is much to think about before adopting new technology and divulging personal information. Personal information can be secured, but it requires ongoing care and thoughtfulness which can at times be both challenging and daunting. You need to take the first step by understanding the various risks (which is the goal of this article), determining what you will do and always taking a secure approach before adopting the latest tech “toy.”

Uncloaking Investment Sales Pitches – Dig beyond the pitch

Two weeks ago a client brought promotional material from a stock-picking service and asked if it was “too good to be true”. In October we had a client bring in a booklet titled “Banned in America” providing an opportunity to obtain a “Death of Cash Survival Kit”. These types of sales pitches, along with the advertising practices of some firms, increase anxiety and misunderstanding, contributing little if anything to consumer education. I thought I’d share some of the sales tactics we’ve encountered this year.

Example 1: The Stock Picking Service

Consider this claim “84% of our stock picks are winners … gained more than 300% in less than eight years’ time … An investment of $100,000 in our portfolio recommendations would be worth $389,414 today. In comparison, the same investment in the S&P 500 index would be worth only $149,970 … outperformed the S&P by 165%”.

Sounds fabulous, doesn’t it?! So, what’s wrong? There is no portfolio. There are only stock picks at the beginning of the 8 year period and no indication of how you would buy the next picks. Since there is no portfolio, they don’t address buy/sell timing, costs, or performance. Usually they have a large number of purchases (beyond the $100K) that must be made before there is a sell order. If you sold any of the original stocks (to make the recommended buys) you would not have the gains quoted. What about the recommendations that didn’t perform? Any picks that do not work may disappear in future reports. In some cases, they might even be “pump and dump” schemes to raise the price of particular stocks before the owners sell them.

But how can they be allowed to make these claims? Most of these offerings are made through “educational subscriptions” that fall short of the definition of investment advice. In fact, they are not required or accountable to any investment regulatory agency.

Example 2: Selection of “hand-picked” Managers

This year we had a new experience with a prospective client who compared our real portfolio performance with a portfolio of investment managers selected specifically for them by another advisory firm. I found it difficult to explain (without appearing self-serving) that the portfolio of ‘hand-picked’ managers with an impressive portfolio return (well above all averages) was a new creation not a proven selection. There was no evidence to indicate that the advisory firm had any talent for selecting managers in the past or that this outstanding performance was not the result of survivorship bias (that is, ignoring under performers and only reporting returns for well performing advisors).

Sometimes it can be difficult to understand or explain the problem of survivorship bias in a ‘hand-picked’ portfolio. At Aikapa, all positions in our portfolio are publicly reported and there is no survivorship bias.

Example 3: Modeled Mutual Fund Portfolio

Some large investment firms love to create model portfolios that have little relevance to a client’s actual (real) portfolio. By model portfolios we mean portfolios in which the securities aren’t specifically identified. Since the securities included in the portfolio are unidentified, there is no way for an independent evaluator to verify if the calculated return provided by the model has any relevance to attainable returns or past history. There is the potential in model portfolios for survivorship bias (any under performing fund can be eliminated and no one the wiser). In addition, the models do not include front, back and ongoing fees. A model portfolio that doesn’t include real large costs obfuscates the performance that the client can expect from their portfolio now and in retirement.

Example 4: Cumulative Return

Although cumulative return presentations are ubiquitous I have been spared seeing client portfolio reports with only cumulative returns – until this year. Cumulative returns are calculated using total earnings without regard for time. Cumulative returns (on their own) are intrinsically deceptive. For example, a 20% return is a good return over two years but a dismal return over 20. If two cumulative returns start at different times then the returns can’t be compared. It is much more useful to report rolling annualized compounded returns for each year than to show only the cumulative return.

Example 5: Purchase of illiquid assets as core investments

Many investment advertisements show private real estate investments as an excellent way for a small investor to quickly grow their entire retirement asset. The presentations illustrate the very high upside potential but often fail to point out the significant change in liquidity and risks compared to a publicly traded diversified portfolio. Unfortunately, several of our new clients experienced the real impact of the downside when the market took a downturn and their real estate projects couldn’t obtain necessary financing. It is during such a crises that a client learns the real meaning of downside risk and how lack of liquidity prevents them from recovering any of their investment. In addition, these sales pitches often forget to outline the increased costs and administration associated with managing such investments.

In short, a sales pitch should never be the sole basis for evaluating how to invest your hard earned money particularly assets already earmarked for your retirement. Do your homework and explore the strategies behind the sales pitches. In all investment decisions let your goals (not the sales pitch) define your target return.

SEC charges former CalPers CEO in Agent Fee Scheme

SEC Charges Former CalPERS CEO and Friend With Falsifying Letters in $20 Million Placement Agent Fee Scheme

According to website Buenrostro (former CalPers CEO) directed placement agent fees to Villalobos through falsification of documents with CalPers logo.  The placement fees paid were at least $20 million dollars.

The letter was a new requirement by this fund company for fees paid to placement agents that assisted in raising funds.

There seems to be no end of leading executives who continue to cross ethical lines to enrich themselves and their friends.  Kudos to the SEC for identifying this action and hopefully, if found guilty, will apply a sufficient deterance to discourage others from crossing over this very clear ethical line.


Introduction to the hazards of nontraded REITs as a real estate proxy

Nontraded REIT (real estate investment trusts (REITs))

Nontraded real estate investment trust are having difficulty based primarily on debt load and poor occupancy. A sharp decline in tenant occupancy has hammered this REIT: Tenant occupancy of the REIT’s retail properties was 69% at the end of last year, compared with 92% at the end of 2008. Investors in this Cornerstone Core Properties REIT Inc. were told this month by the company that the shares, once valued at $8, are now worth $2.25 – plunging nearly 72%.

The Cornerstone REIT raised only $172.7 million between 2006 and 2009, making it a relatively small player in a marketplace in which the largest players have raised and deployed billions of dollars. Still, other nontraded REITs or real estate funds sold by REIT sponsors recently have seen dramatic declines in value, eating away at investors’ portfolios and making life difficult for the brokers who sold the products.

Another example at the end of December, when investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010. And the Behringer Harvard Opportunity REIT I Inc. saw its estimated value decline to $4.12 a share at the end of last year, from $7.66 a year earlier.

ETNs (as ETFs) are they a good idea in your portfolio?

ETNs (as ETFs) are they a good idea in your portfolio?
Opinion expressed by Edi Alvarez, MS, CFP

Unlike an exchange-traded fund (ETF), an ETN (exchange-traded note) is your uncollateralized loan to investment banks. The banks promise exposure to an index’s return, minus fees. The draw is that, many (but not all) ETNs are taxed like stocks, regardless of the ETN’s true exposure not as ordinary income. These benefits could be a godsend for a hard-to-implement, tax-unfriendly strategy. You might think that you can have your cake and eat it, too.  Did we learn nothing from the bail out?

In fact, ETNs are dangerous tools in the hands of ‘professionals’ and a disaster for the unsuspecting public. They are one of the easiest ways individual investors and advisors unwittingly enter into contract relationships with vastly more sophisticated investment banks. It is hard to believe that in the midst of ‘financial regulation’ that ETNs (unlike mutual funds and most exchange-traded funds) are not registered under the Investment Company Act of 1940, or the ’40 Act, which obliges funds to have a board of directors with fiduciary responsibility and to standardize their disclosures. ETNs, on the other hand, are weakly standardized contracts. Where an ETN investor should fear what s/he doesn’t know, s/he instead is gulled into thinking s/he understands the risks and costs s/he bears.  If you can’t get yourself to read the prospectus carefully and analyse the fee structure caveat emptor.

The ETN is a fantastic deal for banks. An ETN can’t help but be fabulously profitable to its issuer. Why? They’re dirt-cheap to run. They’re an extremely cheap source of funding. More important, this funding becomes more valuable the bleaker an investment bank’s health – they can have their cake and eat it too! Finally, investors pay hefty fees for the privilege of offering this benefit. Believe it or not this isn’t enough for some issuers. They’ve inserted egregious features in the terms of many ETNs. The worst appear to insert a fee calculation that shifts even more risk to the investor, earning banks fatter margins when their ETNs suddenly drop in value (examples include DJP and GSP but there are many more).

The above fees scratch the surface. Other examples of investor unfriendliness follow:  UBS’s ETRACS (AAVX and BBVX etc) have a 4% levy on top of the 1.35% fee called event risk hedge cost.  Barclays’ iPath (BCM, etc) add 0.1% fee futures execution cost.  Also an additional 0.5% index calculation fee charged for Credit Suisse’s Liquid Beta (CSLS, CSMA, etc).

When many players in the industry behave in ways that signal they can’t be trusted, it raises questions about all ETNs. What a shame. The best ETNs could be useful tools, fulfilling their promise of tax efficiency and perfect tracking but none of these do.

The ETN product creators have gotten away with such investor-unfriendly behavior by free-riding the goodwill conventional ETFs have created as simple, low-cost, transparent, tax-efficient products. Understandably, many investors have taken for granted that the ETNs’ headline fees are calculated just like expense ratios, that “gotcha” fees are not facts of life. Given how publicly accessible ETNs are I recommend that most stay away from them.


The above is my opinion based on readings and triggered by the excellent article in Seeking Alpha article by By Samuel Lee on March 23, 2012 – Exchange-Traded Notes Are Worse Products Than You Think