Atlantic Capital Management

Atlantic Capital Management (115)

Friday, 10 January 2014 00:00

Should You Choose A Family Member as a Trustee?

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For most people, the concept of “estate planning” at its most basic level is usually associated with the process of drafting a last will and testament, which governs the disbursement of assets to beneficiaries after the decedent has passed on. In reality, estate planning often involves more complex scenarios such as the establishment of trusts, which serve two functions: first, trusts generally avoid the probate process, giving beneficiaries faster access to the assets; second, trusts allow for greater control of specific dispensations and access to wealth. Trusts are administered by a third party, called a trustee. Trustee selection is extremely important because the trustee holds the fiduciary responsibility for the trust both during, and after, the benefactor’s life.

As the word itself suggests, there is a significant element of loyalty -- to the beneficiaries, and to the benefactor – involved in being a trustee. In our experience, many people default to naming a family member as a trustee, usually under the assumption that “blood is thicker than money,” and that family members are inherently trustworthy. While this may be true in many cases, we’ve found that like business and pleasure, sometimes fiduciary responsibilities and family members shouldn’t be mixed! If you’re considering a family member as a trustee, think carefully about the following questions.

Does he or she have the expertise to do the job?: The administration of a trust requires specialized skills. Does your family member have the legal, financial, and administrative background to manage the trust effectively during your lifetime, and after you’re gone.

Can a family member be truly impartial AND compassionate?: Will a family trustee have the wherewithal to make the tough, impartial decisions regarding management and dispensation often required of third-party trustees? If you’re leaving behind a lot of assets to a lot of beneficiaries, the answer is probably “no,” and that can sometimes be a recipe for acrimony, lawsuits, or worse. A truly neutral third party, such as an attorney or trust company, can administer the trust without taking a personal interest in the outcome.

Will a family member have the time to do it all?: Administering a trust, particularly after the benefactor’s death, can be a complicated, time-consuming process. It’s reasonable to ask whether family trustees, who have lives of their own (and are likely grieving the loss, as well), have the bandwidth to effectively manage a post-decedent trust. If you leave a small estate…maybe. If not, it’s probably best to name a professional trustee who can devote impartial time and attention to effective administration.

Friday, 20 December 2013 00:00

The Perils of Chasing High Yield

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This month, we take a break from our discussion of more general financial topics to cover a more “technical” investment strategy currently in favor among some money managers and DIY investors: chasing high yield. Simply put, this strategy involves targeting specific asset types such as preferred stocks, “high-yield” bonds, real estate investment trusts (REITs) and other vehicles that offer rates of return that are often much higher than those being delivered by the market in general. You might reasonably ask, based on that definition, why pursuing higher returns for your portfolio could be described as “perilous.” After all, isn’t growth the goal? Our answer, with a caveat, is: yes, strong returns are a good thing, but chasing high yield is often little more than a gamble that the market is wrong. High-yield products exist, frankly, because no one would ever buy them without the lure of the returns they promise to compensate for higher risk of default.

As we’ve mentioned in past articles, helping our clients benchmark their tolerance for healthy risk is one of the cornerstones of our investment methodology. High-yield investment products are inherently high risk. Take preferred stocks, for example. The promise of receiving regular dividend payouts before common stock holders is very attractive to most investors. However, the high-yield trend toward “hybrid preferred” stock carries with it the very real risk that your holdings could be automatically converted to common stock, meaning both a reduction of income AND capital! Careful attention to technical nuances like yield-to-call date is especially important when investing in preferred stocks. If you have the time and the energy to spend in this sort of analysis, preferred stocks may work for you. Otherwise, you’re gambling on a high cash yield that may or may not ever materialize.

High-yield bonds also provide a cautionary tale. As with preferred stock, there is often a reason that the returns on high-yield bonds are so tantalizingly attractive, and that reason is usually linked to the bond’s rating. Issuers often have to offer high returns because the bonds are poorly rated or offer significant risk of default! Without the lure of a high interest rate, very few investors would put their money into these types of bonds. As the old saying goes, “You can put lipstick on a pig…but it’s still a pig.” In our experience, high-yield bonds wear a LOT of lipstick.

Wanting average or above-average returns is fundamental to investing. No one wants to lose money, after all. But chasing high yield is not for the faint of heart, and is often little more than an “educated bet” on market performance. Building a solid investment strategy that focuses heavily on managing risk, allocating assets prudently, and being patient may not have the flash and glitz of chasing high yield, but it will assuredly pay off better than gambling on a sucker’s bet. In this rising interest rate environment, lower your yield to maturity and be patient.


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