Corporate Malfeasance vs. Fiduciary Standards

As corporate malfeasance becomes more and more obvious to the citizens of the world, your neighbor, my neighbor, the neighbor’s neighbor are all “Mad as Hell and not going to take it anymore!” How long can we all stand by while these corporate fat cats get to take huge risks without any real risk to them or their company?

I am all for free markets, but as history as shown time and again, greed can get in the way of civility. And as much as I dislike politicians trying to control more and more of our lives, we have to have someone keeping things in check.

Something floating around in the Wall Street Reform package is a standard of fiduciary behavior. The bill that emerged from the Senate Banking Committee in March calls for a Securities and Exchange Commission study on whether broker-dealers who provide investment advice should meet the same fiduciary obligation as investment advisers. An amendment written by Sen. Robert Menendez, D-New Jersey, and Sen. Daniel Akaka, D-Hawaii, would replace the Senate provision with one from the House bill. That provision instructs the SEC move ahead with writing a universal fiduciary standard for investment advisers and brokers giving advice.

Now a moderate Republican has entered into this hotly debated topic. Sen. Susan Collins, R-Maine, plans to offer an amendment on fiduciary standards that could be more sweeping than a controversial proposal in a House bill passed last year.

An aide to Ms. Collins said that specific language for a specific amendment has not yet been drafted. But at two hearings last week, Ms. Collins indicated that she may favor imposing fiduciary requirements on broker dealers for both retail and institutional investors.

I strongly encourage you to write to your representatives both in the senate and the house, and tell them to pass a bill with these standards.

In case you are not familiar with Fiduciary Standards, you can read more here.

Here is my firm’s (and my personal) pledge:

1) I will always put the client’s best interest first — ahead of my own and that of my firm and its employees. As defined by federal law, I will act as a fiduciary.

2) When selecting investments, I will act as the client’s agent, seeking the best investments at the best prices at all times.

3) While neither I nor anyone can promise superior investment returns, I will provide impartial advice and act with skill, care, diligence and good judgment.

4) I will provide full and fair disclosure of all important facts, including my compensation from the providers of the products and services I offer, as well as all fees I pay to others on your behalf.

5) I will fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

Compare that with your investment advisors’ personal and corporate pledge. In fact, copy this pledge onto another document, and ask him or her to sign it. If they won’t, you should take your money and run, don’t walk, to someone who will.

About the Author:

Roger P. Simard, CFP®

Roger P. Simard is the founding principal of  Genesis Financial Advisors, LLC and Genesis Tax Advisors, LLC. He heads the firm’s corporate and personal financial planning practice and oversees all operations. Mr. Simard concentrates his work in the fields of financial planning, real estate investing, tax planning, and portfolio management. Mr. Simard is a Certified Financial Planner™ and has over 19 years of experience helping individuals and businesses achieve financial success. Mr. Simard was a speaker for The Prudential Spirit of Community Awards, a nationwide youth recognition program honoring secondary school students for outstanding service. He is a frequent speaker and radio guest on business and taxation issues and successful investment strategies and has been quoted in the Personal Real Estate Investor Magazine.

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Your Own 401(k) Plan (updated)!

I am asked often why I encourage clients to pursue establishing a self directed 401k plan. To put it quite simply, it is best plan available for the self employed.

If you can qualify for a self-directed 401(k) plan, you will enjoy more flexibility, lower overall costs, and the freedom to have real control over your retirement plan. You can choose which account to fund: your before tax contribution or your after tax Roth account contribution, without the income limitations imposed by IRAs.

You do not have to use a custodian or third party administrator, and that can save you thousands of dollars in custodial fees over the life span of your plan.

And,  you can borrow directly from your self directed 401(k) plan, pay yourself interest, and use that money for virtually any reason (subject to IRS requirements and provisions).

Here is a brief overview of the main differences between these two types of plans.

Features SDIRA Individual 401(k)
Contribution Limit (2013, thereafter adjusted for inflation in $500 increments, or as otherwise stipulated by the IRS) $5,500 to age 49, $6,500 age 50 and above $17,500 (plus $5,500 age 50 and above) pre-tax contribution and a total of $51,000 (plus $5,500 age 50 and above) allowed between employee election and company contributions and/or profit share
Employer Matching Contributions Not Allowed Your business can match 100% of employee deferrals
Profit Sharing Allowed Not Allowed Your business can profit share in addition to, or in place of, matching contributions
Roth Provisions A separate Roth account must be established and will have its own additional custodian costs A separate Roth account can be established and will have its own additional bookkeeping requirements –  no additional custodial costs
Roth Contributions Contributions can be very limited – $5,500 in 2013 but not allowed when AGI is above certain levels Up to $17,500 after tax, with no income caps: employer contributions and profit share must be pre-tax however
Roth Rollovers rollovers allowed from one plan or custodian to another Rollovers generally not allowed into the plan
Roth Conversion Conversions from traditional IRA to Roth IRA are allowed without income limitations Conversions from pretax account to the Roth account are allowed without limitation within the plan!
TAXATION – UBIT/UDFI (Unrelated Business Income Tax/ Unrelated Debt Financed Income Tax) UDFI applies to leveraged transactions UBIT applies but with certain exemptions. UDFI does not apply to leveraged real estate
Purchase Shares in a “S” Corp Not Allowed Allowed
Government Reporting Requirements Recommended Yes, more specifically form 5500-EZ is an annual requirement, other reporting may be required depending on investment choices
Loan Provisions Not Allowed Allowed, with certain pay back requirements and specific limits on amounts available
Tax Credits for low-income individuals Not Allowed Allowed, up to 50% of first $2,000 with certain income limits (see IRC § 25B)
Lease-back property purchased by plan Not Allowed Allowed, but with certain occupancy limits
Purchase of business Allowed, but no “s” corps Allowed, UBIT will apply outside of any exemptions

Imagine having the ability to save up to $17,500 after tax into the Roth account in your pension plan. Your growth, distributions, and death benefit are all tax free.

If you believe taxes will be rising over the course of your working career, paying taxes now and receiving tax free income in retirement is going to serve you and your very family well.

For more information contact the author at

About the Author:

Roger P. Simard is the founding principal of Genesis Financial and Real Estate Services, LLC, Genesis Financial Advisors, LLC, and Genesis Tax Advisors, LLC. He heads the firm’s corporate and personal financial planning practice and oversees all operations. Mr. Simard concentrates his work in the fields of financial planning, real estate investing, tax planning, and portfolio management. Mr. Simard is a Certified Financial Planner™ and has over 19 years of experience helping individuals and businesses achieve financial success. Mr. Simard was a speaker for The Prudential Spirit of Community Awards, a nationwide youth recognition program honoring secondary school students for outstanding service. He is a frequent speaker and radio guest on business and taxation issues and successful investment strategies and has been quoted in the Personal Real Estate Investor Magazine.

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Do You Qualify for this Tax Credit?
            November 6th 2009: Congress just extended and added more eligible buyers to what started as the $8,000 first time home buyer tax credit.  This credit was due to expire November 30. This extends the likelihood of stimulating the housing market as more people are eligible for these credits.
             The existing tax credit of $8,000 was for home buyers who have not owned a primary residence in their own name in last three years. It now offers a $6,500 tax credit for move-up home buyers. 
            The example from Certified Mortgage Planning Institute explains the credits this way: a $6,500 credit can apply to investors choosing to buy a move-up and rent an existing home. They can move out of an existing primary residence, provided they have lived there for five consecutive years in the last eight, buy a new house  and rent the previous home used as a residence.
            “If Jane purchased a home in 2002, lived there for 5 years as her primary home and moved out in 2007, and turned that home into a rental property she is eligible under the move-up tax credit,” says Gibran Nicholas, Chairman of the CMPS Institute. ”This tax credit based on the fact that she lived in the same residence as her primary home for at least five consecutive years out of the past eight.”
            “The tax credit applies to homes purchased under a binding contract for less than $800,000 before May 1, 2010 and closed by July 1, 2010,” Nicholas said. ”It works kind of like a gift certificate that can be redeemed for cash. You simply file a form with the IRS right after you buy your home, and the IRS will send you a check for the full amount of your credit.”

“The income limitation for single tax payers went up from $75,000 under the old rules to $125,000 under the new rules. For married tax payers, the income limitation went up from $150,000 to $225,000. ”This means that more people will qualify for the credit – especially in parts of the country with higher costs of living,” Nicholas said. ”This should help stimulate parts of the housing market that may not have been impacted by the old version of the credit.”
            There are creative ways of structuring your home purchase transaction in ways that maximize the benefits of the credit. Here are a few examples suggested by Nicholas (

  • The credit applies to 1-4 unit homes as long as you live in one of the units as your primary residence – you could live in one unit and rent out the others
  • If two unmarried individuals buy a home, and only one of the individuals qualifies for the credit based on their income or past home ownership status, the individual who qualifies for the credit can claim the full credit. (Note: In the case of married couples, both spouses must qualify for the credit.)

The credit applies even if you have co-signers on your mortgage loan

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No One Cut the Cheese, But It Still Smells

Wall Street seems to be rolling in money again; everyone pats themselves on the back as one year removed from total financial disaster everything is now going to be alright!  As Bill Cosby used to say in his schtick, RRrighttt!

It may be less worse (sic) than it used to be, but much trouble still looms in the global economy, and as the center of the economic universe (at least presently) The USA has a long ways to go to be bailing out the rest of the planet.

An overly optimistic view of supply side economics, and it’s inherent flaws in the very real world of high unemployment, will, at some point, give Wall Street a wake up call. The reduced expenses (through attrition and layoffs) that many companies have are showing up in profits, but not in top line revenue growth. And even if sales of products and services increases, the companies will need to rehire workers to keep up with new demand, even with the substantial productivity gains that US companies have enjoyed throughout the last two decades.

This will dampen profit growth, as demand will remain slower than in past recoveries, and the increased cost of labor will offset any real top line revenue growth.

There are at least 2 more years of a slow economy, in this authors view, due to the extreme amount of global debt, both governmental, and personal, that must be unwound, repriced, repaid, or otherwise written off. Add to that the aging of the Baby-Boomers, and their reduced need for more new “things” and you have a formula for slow economic recovery, in spite of rising middle class populations in China and India.

I recently had a discussion with a Phoenix, Arizona business man. He runs a commercial real estate moving company. He is busier than he has been in years! This sounds like a good economic indicator, doesn’t it? But here is what is happening: companies are downsizing, or going out of business, and they need to move to lower cost, smaller spaces, or just put their furniture  and office equipment in storage, hoping that they can find a brighter day sometime soon. He said my office full of furniture, a pretty nice L-shaped desk and matching file cabinets, could be bought for$100 today. There is that much used (and quality) office furniture out there, so supply far out-strips demand.

We are preaching caution to our investors. Do not be afraid to lock in 2009 profits (it is NEVER wrong to take a profit), and look for new opportunities to buy stocks and bonds when the yields rise (prices drop). Buy residential real estate and other hard assets below replacement costs, wait for economic recovery to take place, and reap the reward of future inflation when it arrives (it will arrive again).

About the Author:

Roger P. Simard, CFP® is the principal of Genesis Financial Advisors, LLC an Arizona Investment Advisory firm. You can view the firms most recent quarterly portfolio performance at

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Arizona Non-Recourse Lending Status to Change

On July 1st, 2009 Arizona Governor Brewer signed into law SB 1271 (a revision to ARS 33-814(g), affecting a lender’s ability to pursue a deficiency judgment post Trustee Sale, i.e. foreclosure). The exemption from deficiency resulting from sale under Trustee Sale is now clarified to be for Trustors (owners) that have occupied the home for at least 6 months, the property has received its Certificate of Occupancy, and the burden of proof is now on the owner to prove that they lived in the home for 6 months. 

The result is that any investors of non-owner occupied Arizona real estate with a loan on it that is sold at auction after September 30th, 2009 will be liable for any shortfall in the total debt owed vs. the net amount paid to the lender after auction. 

Up until now, the lender had no recourse to pursue this shortfall, but was allowed to write down the amount, take a loss against profits, and then 1099 the owner, forcing them to claim this difference between amount owed and amount collected as “income” (imputed income), and pay ordinary taxes on it.

While still an insult added to injury, at least this amount reflected a percentage of the amount, vs. owing the entire difference.

If your Arizona investment property is in foreclosure, it appears there may be a strong reason to avoid any delay in it’s Trustee Sale date. At least prior to Sept. 30th. I would strongly recommend that you consult with a credible real estate and/or bankruptcy attorney, at the very least.

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Your Job Search is Tax Deductable!

Our guest writer this week is Alex Starcevic, an Enrolled Agent with the IRS and principal of Genesis Tax Advisors.

Here are the top six things the IRS wants you to know about deducting costs related to your job search.

  1. In order to deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.
  2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.
  3. You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers as long as you are looking for a new job in your present occupation.
  4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
  5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
  6. You cannot deduct job search expenses if you are looking for a job for the first time.

If the readers have any of your own questions about payroll, taxes, accounting or bookkeeping or would like to hear about new topics each month concerning any tax, please call us at 888-902-9191 ext 205 or email at

You can review the June and July 2009 tax update at

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The Failure of Modern Portfolio Theory

Modern Portfolio Theory, as brought to you by the Pulitzer Prize winning Harry Markowitz, was originally published in 1952.  With later additions by Merton Miller and William Sharpe, its technical market analysis and risk adjusted return theories remain just that, theory, not fact.

The theory is followed, to one degree or another, by most investment professionals.

According to the theory, investors are risk adverse: they are willing to accept more risk (volatility) for higher payoffs and will accept lower returns for a less volatile investment. The theory is simple and elegant, and can lead further into various mathematical proofs and equations, which probably has a lot to do with why it has become so widely accepted.

If you have checked your returns lately, the risk adjusted return your portfolio incurred based on these theories has left you, should we say, wanting.

In this writer’s opinion and experience, cash flow is the driving force in any asset classes’ success or failure. Just watch the markets for one week, and see how the tide turns from one asset class to another based on yields vs. profits (or perceived future profits).

So let’s skip the major formulaic crap and cut to the chase. No, in fact, let’s give up the chase. Chasing perceived multiples, chasing past performance, trusting our corporate institutions to grow larger and larger profits (at any cost), and turn to the truth of what really drives the value of a given asset.

And really, what is it that you, the everyday investor are looking for in your portfolio? We’ll get to more on that later.

Let’s say I own a company that makes widget “A”. I sell these things like crazy! However, my profits are low due to poor pricing, paying too much for supplies, labor, cost overruns, etc.;  generally bad management. Of course all of these data points are going to show up in my public reports. But what is the real tale? My company has poor cash flow. The beta, Sharpe ratio, r-squared, sector, or industry while all indicators, confuse the long term issue. My company’s cash flow sucks!

Compare that with the company with widget “B” with similar sales, but better management. This also company sends you a check every now and then; from 1 to 12 times a year, because of positive cash flow, I the investor get a piece of this company’s action.

Both companies are now for sale. Which one would you pay more for? If both companies have similar outstanding debt, in that moment of purchase, a rational person would buy company B.

Did you need formulas, risk tolerance tests, or some version of portfolio selection to make that decision? Perhaps these are helpful guidelines in developing an overall portfolio, but not in that buying decision of that specific capital asset.

Now, let’s leave the world of Wall Street for a moment and turn to Main Street (such an overused cliché, let’s use your neighborhood instead). In your neighborhood, there are 2 rental homes for sale. On one block a home has a renter paying $500 month in rent. On another, the renter pays $550 per month. Both homes are otherwise identical. To receive a 6% rate of return (Cap Rate) on either house, I would have to pay more for the house that produces the bigger monthly check, i.e. the one with more cash flow holds more value.

And so it goes, with each asset class we examine. Bonds with higher yields than the current market offers sell at a premium. Commodity prices are priced based on demand, or perceived demand, which translates into how much cash flow is in the economy to allow people to want more of that “thing”.

It goes on and on, but it all boils down to the main ingredient in financial success. The “show me the money” rant, so to speak.  Cash Flow.

Now, let’s visit what it is that you are looking for to achieve financial success. Is it a large net worth? They even have advertisements showing people carrying around their “number”. I believe using “modern” or even post-modern portfolio theory is only a small part of selecting your portfolio’s asset choices.

A safer, common sense, simpler, and more systematic approach is to look to grow your cash flow, every year, and then your net worth will take care of itself. In fact it won’t even matter.

The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective. - Warren Buffett

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