Today, Acrimoney is pleased to introduce Grove O'Rourke from Sachs, Kidder, and Carnegie.
Grove manages about $2 billion in total assets for wealthy families. He's seen it all inside his investment bank. He'll be joining Acrimoney for a new guest series: What Would Grove Do? As a regular on our blog, Grove will discuss market events, trading lingo, and how to work with financial advisers.
On June 10, 2009, The New York Times reported that authorities are indicting seven executives for selling tax shelters. Acrimoney believes, however, the article contains broader implications for understanding investments. Even if you've never seen a tax shelter.
Acrimoney: Thanks for visiting, Grove.
Grove: Glad to join your team.
Acrimoney: Nobody's ever heard of Sachs, Kidder and Carnegie. Before we review the NYT article, can you tell us more about your firm?
Grove: You'll hear plenty this September.
Acrimoney: Oh?
Grove: That's when the novel, Top Producer, goes on sale.
Acrimoney: Hey, wait a minute. You're a work of fiction?
Grove: I prefer to think of myself as an amalgamation of the good guys in finance--advisers who put their clients' interests first.
Acrimoney: Then, you can give us an insider's view?
Grove: With no fear of Wall Street retribution. What's somebody going to do, delete me?
Acrimoney: Okay then. We know tax shelters were all the rage from 1994 to 2004. What did you tell your clients?
Grove: Shelters are more toxic than Chernobyl. You remember the 1986 nuclear disaster in the Ukraine?
Acrimoney: Do we ever...
Grove: According to the NYT, the tax shelters charged fees equal to a "percentage of the tax savings."
Acrimoney: What's the problem?
Grove: It violates Rule Number One--never bet against the IRS. The returns from tax shelters all come at the expense of Uncle Sam. It's like picking a fight with the umpire.
Acrimoney: You said these investments were more toxic than Chernobyl. What tipped you off?
Grove: Fees.
Acrimoney: Too high?
Grove: So high, in fact, they triggered Rule Number Two--investment fees over 2 percent are a red flag.
Acrimoney: Two percent fees are too high for any investment?
Grove: Every rule has an exception. But I'm a careful guy when it comes to my clients. And the truth is, I start scrutinizing fees well before they hit 2 percent.
Acrimoney: How much were the tax shelter fees?
Grove: 4.5 percent.
Acrimoney: You're kidding.
Grove: It gets worse. On COBRA, one of the shelters named in the NYT article, investors paid nonrefundable fees of $1.06 million and signed nondisclosure agreements before they could view documents.
Acrimoney: Hang on. They paid $1.06 million up front? Before they could "examine the merchandise?"
Grove: Danger Will Robinson. Or, "Buyer beware," for those who didn't watch much television in the 1970s.
Acrimoney: Wait a minute. Are you making up these details?
Grove: You can't make this stuff up--
Acrimoney: Hey, that's our line.
Grove: If you don't believe me, click here to see my source: Bitten by a COBRA?
Acrimoney: You have two rules. Are there any others?
Grove: Rule Number Three--watch out for Wall Street's kitschy acronyms. They sound smart. But they're usually shorthand for manufactured products with big fees and questionable value. The tax shelters in the NYT article, for example, included COBRA and SOS.
Acrimoney: COBRA is an acronym for a tax shelter?
Grove: Most people think of health insurance when they hear COBRA. According to the US Government, COBRA stands for Consolidated Omnibus Budget Reconciliation Act of 1985. That's a mouthful.
Acrimoney: But there's a different COBRA?
Grove: One tax shelter used COBRA as the acronym for Currency Options Bring Reward Alternatives.
Acrimoney: That's ridiculous.
Grove: SOS stands for "Short Options Strategy." But I prefer "Sack of..." Just kidding.
Acrimoney: Hey, can you Save Our Shekels?
Grove: You bet. Next week, let's talk about how to communicate with financial advisers.
Acrimoney: That's it for today. Grove, thanks for joining us on Acrimoney.
Grove: Wouldn't miss it for the world. I look forward to guest blogging.