I Think I’m Going to Gig!

Headline:  It might make you want to Gig

Date: 2/15/2021

Body : I recently started my own LLC as a side gig, so I was very interested to read this article in the Penny Hoarder 4 Major Trends Every Gig Worker Should Expect in the 2021 Economy (thepennyhoarder.com)

Most of it is about California, and Prop #22, but it raises a good set of questions.  Most important: What is the Gig Economy and can it help me?

What Is the Gig Economy?

Everybody probably has an intuitive idea of what the gig economy is.    The gig economy is the Uber or Lyft drivers you can summon almost at will, or the delivery drivers who deliver food and meals to us.    Or, there are the people who will watch your pets for a weekend.    Gig workers are all around us and they are here to stay.

The workers like the arrangement because it is so flexible.   The companies that coordinate their activities appreciate that they are not employees; They are instead independent contractors.    If they were classified as employees, the firm could assign them shifts and duties, and be specific on how they carry out those duties.  In recompense, the firm is then required to extend to them benefits, which can be very expensive.   As independent contractors, the individual worker determines when they work, how long they work, and even which jobs or fares they pick up.  Additionally, they can decide to only do the gigs that speak to them on a personal level.  In a study reported in the Harvard Business Review, one subject summed this up by saying, “ I can be the most I’ve ever been myself in any job.”

Others like the arrangement of a gig because of variety.  If they were the corporate employee of yesteryear, they could probably count on doing the same thing, day in, day out.   But, as a gig worker, they will often have to take on a variety of tasks, and some people really value that highly.   Moreover, in a gig setup, people are more often working with a variety of different customers and vendors.   Many people appreciate these networking opportunities.

Some people suggest that this isn’t fair, as the independent contractor does not get the insurance and other benefits offered by an employer.  As a result, many of these working age professionals have had to take on multiple roles in multiple companies to support the lifestyle that their families were accustomed to.

Is it a big deal?

In a word, yes.   Experts suggest that almost 33% of American adults are already involved in some sort of gig activity.   And it is growing.  Per BLS data, in 2005 only 2-4% of workers were  involved in the gig economy.   In the U.S., the gig economy was already developing, but the pandemic kicked it into overdrive.     Many people were laid off or had their hours reduced drastically, and had little choice but to work from home, at least a little.  Technologies such as Zoom, and other conferencing software made this change more feasible.  Given these technological capacities, it is not that surprising that McKinsey did a study of these workers and found that many of them were knowledge workers.

Criticisms of the Gig Economy

There are some criticisms of the Gig economy:

1.  It is much harder to develop a worker to be truly successful within the company since the fluidity of the labor force does not often lead to long-term relationships with customers or vendors.
2. Depending upon the type of gig work, the time and place of work can be a major detriment to the worker.
3. Because people have to focus so much on getting that next gig, there can be psychological damage to these workers.   Even a prolific author was quoted as saying, “You become your work. If you write a good book…it’s really great, and when you don’t achieve it, you have to accept…that failure might define who you are to yourself.”  This level of psychological stress can be damaging to health.

Can the psychological stress be countered?

It can be countered to an extent, but to do so, one must form purposeful connections.   Once found in the corporate environment, people have to manufacture these for themselves now:

1. Place–> The successful gig worker in a knowledge field has to often change at least a piece of their home environment; Supplies must be close at hand and distractions must be mediated.  In the HBR article, one software engineer compared his home workspace as a fighter cockpit.
2. Routines–> The routines of getting up in the morning, responding to e-mail, drink a cup of coffee, make some calls, have lunch, write a document in the afternoon.  Whatever the rhythm of the office, people need to re-create at least a piece of that in the home environment.
3. Purpose–>Income and activity levels can vary all over the place for gig workers.   What allows them to feel some level of peace is that, in choosing the gigs they respond to, they are defining their selves more definitely.   This sense of purpose is a powerful antidote to the doubts that can precipitate out of an unpredictable income stream. 
4. Person–> People who need, people.   Are the luckiest… OK, I’ll stop.   But, social isolation can be terrible for the psyche, and the body can respond very badly too.  People don’t seem to respond well to the finding real peers and commiserating with them.   It would seem that the most successful gig workers look at their already-existing network and communicate with friends who are in related fields.

OK, I’m hooked.   How do I get started in the Gig Economy?

The gig economy is really about finding your own niche.   Perhaps you really like writing.   In that case, you might be able to help people write their own resumes’.   Perhaps you really like dogs.   Maybe you can become a dog walker, either working for a company (there are several online companies) or you can do this for neighbors.  Whatever is your “thing” find a way to do it, and make money from it.  Whatever you do, be sure to stand out in that field and over-deliver.  When you keep a dog at your house, text the owners sometimes with a picture of their pup doing something cute.    If you shovel driveways and walks, maybe you can shovel a small picture into the snow left over.  Whatever you can do to personalize your brand (in a pro-social manner, of course) the better your business will be.

Over time, people will have heard from friends and neighbors about your excellent professional service, and referrals from others will encourage new customers to try your service.   Then, you can really begin to enjoy the fruits of your labor.

Whatever it is that you decide to do, and however you decide to differentiate yourself, know that this could take significant time.   For myself, I have a full-time job, I figured that copywriting would be a part-time gig, to do when I had several spare hours.  What I didn’t budget for (time or money) was that it takes significant amounts of both to start even a side business.  Just getting my LLC license was tricky.   The application got rejected once because the signature didn’t exactly match the “registered agent” on Line #4.   I had written my first, middle and last names, but, I signed the form using only my middle initial.  Be prepared to run into regulatory walls that might seem exceedingly dumb.

The Verdict.

Gig work can be used to allow for extra income on a very flexible  basis.  But, you have to remember that the gig economy is a little like the Old West.   There are very few restrictions on it and some people can get impressively rich.  But, if not careful, one can easily be duped into doing a large variety of excellent work for pay that is not commensurate with your professionalism.  I say, give it a “yellow light” and proceed, with caution.

REFERENCES

Gig Economy Definition (investopedia.com)

The 4 Things You Need to Thrive in the Gig Economy (hbr.org)

Working in a gig economy : Career Outlook: U.S. Bureau of Labor Statistics (bls.gov)

22 Of The Best Deals From The Massive Wayfair Presidents’ Day Sale (forbes.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

What if my Broker goes Broke?

Headline: What happens if your Broker… well… goes Broke?

Date: 2/8/2021

Body:   I was listening to an article on NPR, and one of the listeners called in and asked, essentially, “What happens to my money if my broker goes BANKRUPT?”   Given the business situation right now (in the throes of the pandemic, and taking a small breath between 2 potentially VERY different Administrations) this seemed like a pertinent question.   The speaker gave a very brief answer, but it seemed important enough for me to take a deeper dive.

OK, first thing first

Breathe, please take a breath.  Your money is most probably secured by a number of safeguards.

So, what is happening behind the scenes?

First, you should realize that the federal government (SEC) has set up rules that these companies have to follow.   For example, these companies  need to keep a certain percentage of their assets liquid in order to account for the occasional market hiccup.  So, even if you have to pull out what seems (to you) to be a large amount of money, you’ll likely be just fine.  Also, with a 401(k), any of the qualified employment plans are covered by the ERISA laws, which are governed by the Department of Labor, so they have a whole other layer of protection.  In addition to the SEC and possibly the Dept. of Labor, FINRA is watching the activities of individual brokers within each firm.   So, there are a lot of watch dogs on this beat.

If your broker goes bankrupt (very rare), it is quite likely that another financial service firm will see it as an opportunity, buy the assets (including your portfolio) and Bob’s your uncle.  All is well, and your account is simply transferred to the new owner.  You are unlikely to see any interruption of service at all.  If there is no buyer for the now, “on sale” assets, there  is SIPC.   SIPC (the government) will insure your account up to $500,000 of securities or $250,000 of cash.  Some people have accounts that are larger than these limits, and you can rest assured that many financial institutions take out extra insurance beyond SIPC, so, these assets are likely insured too. If one is lucky enough to have this issue, one can spread money over several institutions and receive coverage on each tranche of money.    Should it come to a (Wall) Street fight, SIPC has a really good record too.  From its beginning in 1970 to 2017, SIPC fronted $2.8 billion  to help consumers get back $138.7 billion in assets.  In that period, only 349 individuals have not gotten their ENTIRE portfolio back.     But, just the presence of SIPC can be a form of protection.   Said a president of SIPC, “The vast majority of assets are recovered without our funds.”

What does SIPC cover?

SIPC covers many types of securities (e.g. stocks & bonds) as well as other fairly conservative investments.   SIPC does NOT cover futures transactions (usually), and does not cover partnership interests.  Please note that FDIC differs from SIPC in that under FDIC, the entire value of the account is covered   Under SIPC, only the number shares is insured, not the value of the account.  Please note that SIPC does NOT cover loss of assets due to poor investment allocations or decisions.  For this reason, due diligence on your part is necessary before you give money to a broker, and certainly while you have money with that broker.

How to Protect Yourself

First, choose your broker carefully.   Look to see if he/she has any FINRA complaints against them.    Look at the SEC website and see if there are any SEC-actions pending against them.  (This saved my hide.   I was really enthused about potentially working with these 2 entrepreneurs I read about in Inc. magazine.   I looked them up and found that there was an FTC action pending against them.   They came right off my database.) Then, look to see if they are covered by SIPC.   If they are, ask them if they have any coverages in excess of SIPC.  If they mumble, hesitate or rope-a-dope you here, this seems like a red flag.

Once you do decide to place your hard-earned cash in the hands of this broker, be sure to keep organized notes of the transactions that are done.   For certain, you should keep all of the statements sent to you.   Both for tax purposes and in case your broker goes bankrupt, these records are invaluable to regaining your financial position.

So, what should you do if your broker goes bankrupt?

1.  File a claim with SIPC.   There is a period of time within which you must file a claim, so, file it early.   And that paperwork that you so meticulously kept?   That will serve as a wonderful foundation for your claim against the SIPC protection.  Even if your account is being transferred to another broker, follow directions given you by the court-appointed trustee and file a claim.
2. If the court-appointed trustee does not contact you, then you can file your own claim form.   Just visit www.sipc.org and you will find the correct form.
3. If you are not “made whole” by SIPC, you can hire an attorney who can file suit on your behalf.  But this route can be very expensive and take a long time, so be sure to try other approaches.

The Verdict

The long and short of it is that you are likely going to be just fine.   Usually, these bankruptcies are prevented in the first place by federal regulatory bodies or designees.  If there is a bankruptcy or fraud, in the vast majority of cases, the accounts are transferred to another institution and will represent no headache  for you at all.   If it should come down to insurance, SIPC will probably cover the majority of your holdings.  There are other countries where your hard-earned cash might be a waving red flag in front of kleptocrats.    In America, there might be a bull and a red flag, but here, the bolero is protecting both parties. 

REFERENCES

What Happens When a Stock Broker Goes Bust? (investopedia.com)

What Happens to Investments If a Broker Goes Bankrupt? (thebalance.com)

How to protect your money if your broker goes belly up – Sep. 15, 2008 (cnn.com)

SIPC Insurance: What It Does and Does Not Protect – NerdWallet

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

I will Adjust YOU!!!

Headline:  What the heck is a Public Adjuster

Date: 2/2/2021

Body :  Do you know what a Public Adjuster is?  Is it:

1.  A low-cost chiropractor?
2.  A really gung-ho personal trainer?
3.  A financial professional?

If you chose #3, you are right.  I had heard of all kinds of financial professionals, bearing the entire alphabet after their surname.  But, I had never heard of a Public Adjuster.   I would wager that many of you haven’t either.  I was reading an article in the Penny Hoarder, and I was intrigued. What is a Public Adjuster? An Insurance Function Explained (thepennyhoarder.com)

What is a Public Adjuster?

A Public Adjuster is one of these “hired guns.”  But, instead of working as a consultant for the insurance company, they instead work for the claimant.   (Think of a CPA.)   Per one professional:

“We act as an advocate for the policyholder,” says Jodie Papa, president of the National Association of Public Insurance Adjusters. “We represent them to make sure the insurance company is paying the claim properly and fairly.”

 What does an Insurance Adjuster do?

An insurance claims adjuster has 2 important questions that they must answer:

1.  They have to define if the insurance company has a responsibility to pay.
2. If they determine that there is a responsibility, they compute the amount that the claim is worth.

In essence, the adjuster has the responsibility to assemble a case.   To do this, they interview witnesses, read the contract underlying the policy, communicate with legal counsel, and negotiate a settlement.  Often, they are employed by an insurance company, and sometimes if a particular expertise is needed, these companies will hire one as a consultant.   However, sometimes, it is helpful for the claimant to obtain the opinion of their own “hired gun.”   This is where Public Adjusters come into the picture.

Why would one hire a Public Adjuster?

Imagine that you live in Ocean City, MD.  You have a beautiful home, and all of a sudden, there is a hurricane event. Your beautiful home is reduced to a pile of cement block and broken glass. A disaster all the way around. And then fighting for insurance money is the next battle.

“Under the insurance policy, it is the responsibility of the insured to prove their damages to the insurance company, and that is what a public adjuster assists with,” Papa explains. The adjuster prepares estimates, assists with preparing information for additional living expenses, tallies business losses and more, Papa says.

A public adjuster can help with the claims process and paperwork as well as explain complicated items and stipulations. They cannot get more money from an insurance company than the policy allows, but often can get more than an insurance company initially offers.

“Usually, the fees are more than recovered in the process,” Papa says. She cites an example of a recent claim where the insurance company offered her client $17,000 to settle and they ended up settling for $67,000, making her 10% fee worth paying for the client. “That’s just the amount of value and knowledge and looking outside of the box and explaining. There’s a lot of things that the insurance companies don’t volunteer to the insured.”

Using a public adjuster can make things easier, but in the end, it cuts into the amount you end up with since the public adjuster gets paid a percentage of the settlement. That means less money for repairs — so before hiring a public adjuster, make sure you figure out how much you will need to make the necessary repairs.

If you hire a public adjuster, you need to make sure it’s a good fit for you and for your claim.

Papa has some advice for people looking to hire a public adjuster:

• Check licenses: Public adjusters usually need to be licensed in the state where the loss occurred. Every state has different requirements and some do not require licenses at all.
• Ask around: Get recommendations from others and check with your state’s insurance department.
• Research firms: If the person you are looking at does not have a website or recommendations, they might not be reputable. Some firms have in-house estimators, forensic accountants, engineers and architects on staff.
• Know your rights: Some state insurance regulations set a maximum percentage a public adjuster can charge.
• Interview: Talking with the person you’re hiring to represent you can help you feel if it is a good fit for the best service and price.
• Limit time: If the contract isn’t settled to your satisfaction during a set period of time, you can walk away without owing the public adjuster anything.
• Look for associations: Public adjusters can be members of national or state associations which set standards for the profession.
• Certifications: There are two main certifications for public adjusters: The Certified Professional Public Insurance Adjuster must have been working in the field for at least five years and pass a series of exams. The Senior Professional Public Adjusters must have been working in the field for at least 10 years and pass exams.

Papa advises to be on the lookout for anyone who pressures you into signing a contract. After a disaster, some public adjusters will go door-to-door trying to pressure homeowners into becoming clients, making people think using a public adjuster is the only way to get money from an insurance company.

Other red flags if the adjuster:

• Asks for a deposit or a fee up front. Public adjusters should only get paid when you get paid.
• Makes promises about the amount of your claim before looking at your loss or your policy.
• Licensed just after a disaster. States often relax requirements after a catastrophic event and people enter the field to make a quick buck off of other people’s suffering.
• Solicits business by going door-to-door after a disaster or shows up at your door after a fire.
• Doesn’t return phone calls, emails or texts.
• Requests a large percentage of the claim, usually more than 15%.
• Pushes you toward certain contractors or repair companies.
• Asks you to fake receipts or estimates in order to inflate claims.
• Asks for bank accounts and other personal information.

Before hiring a public adjuster, think about how much of your settlement you are willing to give up in exchange for a potentially larger settlement. If you decide to go it alone, Papa recommends at least reaching out to a public adjuster for some advice.

“Sometimes just when you report a loss, you could be reporting the claim improperly and you don’t realize it,” she says. “So you want to give a public adjuster a call. They can at least offer some free advice that can assist you.”

REFERENCES

Bureau of Labor Statistics (bls.gov)

What Does an Insurance Adjuster Do? | Nolo

Insurance Claims Adjuster Job Description: Salary & More (thebalancecareers.com)

Public Adjusters Help You Nail Homeowners Insurance Claims – Forbes Advisor

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Game OVER?

Headline: Shares and Shares Alike

Date: 1/30/2021

Body:  I was listening to an NPR Program on what happened to the GameStop stock.    People seem to be fairly (understandably) confused.   Let’s take stock, err…umm… I mean look at what happened.

The time was the go-go early 2000s, the place was the United States, thrilled with its new computer and gaming systems.  Young, jet-set high school students would go hang out at the mall, looking and being looked at as they perused the high-end clothing.  The nerds, we went to GameStop.

GameStop was an oasis: a cool drink of Wacky Water within the hot, dry parched wastes of the rest of the mall.    Here we could buy games, strategy guides and gaming consoles, and speak with other people who played games, IRL!!!  It was cool!!  (Radical, anybody??)  Whatever adjective you use, amongst a largish minority of people this store and others like it attracted like-minded young people (mostly men, not always) in their 20s and 30s even.  This would suggest a growing stock price… and you’d be wrong.  For most of the first 2 decades of the 2000s, their stock price was pretty flat.

A weird thing happened, though.   In 2021, there is a GIANT vertical move in stock price (as of this writing, the price per share is $325 when it is normally in the range of $15-$25 per share  (At its height, there was a time during 2014-15 when the share price was in the $40s, but for the past 5 years, the price has been steadily declining.)  So, what happened?  

For the last couple of years, investing gurus have looked around and determined that retail game sellers like these were on their last legs.  As a result, more than one hedge fund short-sold the stock.   “Short-selling” is something you can only, legally, do only on the stock market.   Short-selling is when you borrow shares from somebody, sell them to the market immediately, then after a short period (several months at most) you buy back the shares and return them to the donor.  In this case, you are hoping for the stock to decrease in price quickly because this is how you would make the most  money.

After there have been a few thousand stories about people getting rich “shorting” stocks, somebody on Reddit (a so-called Redditor) made an off-hand remark (likely a meme of some kind) using GameStop as an example.  Thousands of like-minded people read the same material, and all said, “wouldn’t it be funny if…”  Almost certainly on a lark, thousands of investors each bought an insignificant stake in GameStop.    At some point, the thousands of tiny orders began to aggregate the demand and the stock price went through the roof.   Then some other investors saw the trend, and wanted “in” so they invested… and the price went straight through to the exosphere.

Now, remember those short-sellers?   These people might have sold the stock at $40, and many probably assumed that the company would go quietly bankrupt, and no short cover would be necessary.   Instead, the stock price rocketed to rarefied air.   So, they sold the stock at $40 , and very recently, the stock was at just over $5 per share.   If they had covered there (bought the stock back) they would have pocketed the difference, $35 per share.   Not bad!!  But, the Redditors got involved and hugely pumped up the price.   The lucky ones heard the news as the stock hit $164 and ONLY lost $131 per share.   But wait, THERE’S MORE!!!

These investors (often hedge funds and other examples of private equity firms) went even further.    They are leveraged, that is, they were using money that didn’t belong to them in order to make a larger debt.   Some went into debt by 20% or more.    So, even if they are short-covering for only $164 per share, it’s really like $196 per share because they have to pay back the debt.  This is why there are so many loud voices claiming “stock manipulation.”

If it Walks like a Duck, and talks like a Duck, then, DUCK!!

So, the question is, is this stock manipulation?  I am not an attorney, but, I’ll just record my observations.  The definition seems to be working to artificially increase or decrease the share price of a security for personal gain.   Investopedia makes the point that this is an incredibly difficult thing to prove, and there are ways to hide your intentions.

I would like to point out 2 reasons I don’t think anybody will face charges of stock manipulation:

1.  It is incredibly difficult to prove this, made even more so by the fact that the pool of people involved was so large.  Anybody can become a Redditor, and the number of people involved would be VERY difficult to even define, let alone prove.
2. The definitions of manipulation generally revolve around the idea of “for personal gain.”  The comments written on Reddit would argue against this idea of personal gain being an over-arching objective.  (Go ahead, read the Comments yourself.   Decorum prevents me from recording them here.)  They could be lying, but this is difficult to prove (see #1) but I could also easily see the psychology behind this.   Before the vertical move, the stock was under $10 per share.  For less than $1,000 one could easily have had over 100 shares.   Not much movement there.   But, if thousands of Redidtors did this, THAT would run up the price to where it is.  Given the anger on the street ( The 2009 Great Recession, COVID  etc.) I could pretty easily see this happen.

The Verdict

“Pump and Dump” is a scheme as old as time.   For generations now, boiler room operations have bubbled up (sorry) all over the country, only to disappear like vapor. (OK, I’ll stop).   In these operations, somebody buys thousands of shares of a very speculative stock.  Dozens of phone lines would be setup and young people would staff these lines, and talk up a certain stock to a carefully prepared list of potential investors.     When the price was bid up sufficiently, the original buyer would sell all of their shares and make a boatload of money.  Soon after, the boiler-room bosses would disappear.  They have been nearly impossible to find, let alone prosecute.

This seems to be a high-tech, social-media version of the pump and dump scenario, but for one thing: the dump seems to be missing.  There is almost nobody dumping the stock in any quantity.  So, there seems to be no provable crime here.  But, the people who got “caught out” have more than some political clout, so, it seems likely that the SEC will launch an investigation; If I had to guess, however, the very risk-averse SEC will likely not  take on any large-scale prosecutions.

I would make a further guess, too. Given the massive impact of social media, this will not be the last version of this story. The stock prices for many companies are still relatively low, and there seems more than enough “dry powder” in the market to artificially set off an explosion. While it can launch one’s portfolio VERY high, it can also set ablaze many years of patient saving and growth. Be very careful. If you see something “trending” do your own independent homework. If it’s truly worth its weight in gold, it will not turn to lead within a week.

REFERENCES

Manipulation Definition (investopedia.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

The little furry that could lead to fury.

Headline:  The little furry that could lead to fury.

Date: 1/29/2021

Body : I was just talking to a friend who has a wonderfully cute older Golden Retriever, named Maggie.   Maggie always wags her tail, brings you toys… and has cancer.  I got to see 1-2 of the bills for the canine oncologist, and it’s a good thing that he bought health insurance for Maggie.  I saw this related article in the Penny Hoarder Here’s How to Find the Best Pet Insurance for Your Needs (thepennyhoarder.com), and I thought it might be worth some reflection. 

How does pet health insurance work?

Pet insurance works very much like health insurance for humans.   Each month you pay a premium.  When you go for service, you pay at the point of service and then file a claim for reimbursement.   Your insurance applies the deductible and then sends you a check for the amount they agree to pay.  (Usually this seems way too small, but in pet insurance, this is often 70%-90%.)  Just as in human health insurance as your deductible goes up, your premium goes down.   It is all very similar.

What is not similar are the brands of insurance.   Generally speaking, there are 2 flavors of pet insurance: accident & illness and “accident only” policies.  The “accident & illness” policies cover both the acute, emergency treatment needed by a pet when they experience trauma, and the more chronic problems that come with illness.   But sometimes (often when you have older pets) insurance companies offer “accident only” policies with no other option.

Is there really a problem?

In a word, yes, there is a problem.   Per a 2014 study conducted by the North American Pet Health Insurance Association, less than 1% of cats and dogs are covered by such a policy.   The direction is positive though: in 2008, only 680,000 policies existed and in 6 years, the number of policies have more than doubled.  By 2019, more than 2.5 million pets were covered by some type of policy. (Just as a point of comparison, property & casualty insurance policies normally increase less than 5% per year.) Pet insurance is one benefit that many companies are finding to be very attractive to prospective employees.

 Things to consider

One of the top insurance products has a major restriction: There are sometimes few locations.  One plan offers wellness plans for your pet (makes sense: Encourage the humans to take good care of the pets and there will be fewer claims.)  One even offers something similar to a Flexible Spending Account, just like human health care.   So, as you can see, each policy is likely to have unique benefits and costs.   Interestingly a well-known animal welfare group offers a 10% discount for you second pet.  As it turns out, there is even one insurer who supports complimentary treatments including chiropractic care and acupuncture.    All of this variability makes it so important to read the contract carefully.

Although pet insurance only covers the cost of vet services for accidents and illnesses, many providers also offer a paid add-on rider that will reimburse you for the cost of common preventive and routine care, like annual vaccines and checkups.     This is uncreatively called a “routine-care rider.”  Some insurance providers also offer the option of a wellness rider for an additional fee.   When one pays this additional fee, chiropractic care, acupuncture and other alternative treatments are covered, in an effort to keep your pet healthy, and claims not to be substantial.   In fact, some companies also offer discounts on coverage if few claims are made.    (In some cases, these discounts are “stackable” to a certain extent, so you can qualify and get benefit from more than one discount at a time.)

Finally, please be aware that there is often a waiting period before benefits can be claimed.   Often, you have to have the insurance for 14-30 days before you can file for any benefits.   This prevents people from getting pet insurance just before getting an expensive diagnosis.

If you want to soar with the eagles, you have to cluck with the chickens.

The optimum time to obtain pet insurance is when your canine or feline is very small.   Companies charge much less for animals that are younger and probably not facing aging-related disorders.  Additionally, pre-existing conditions will often disqualify your pet from being insured, so, insuring them early will make this less of a problem.

How Much Does Pet Insurance Typically Cost? 

According to one report, the average accident and illness premium for a dog was about $585 a year in 2019, up from $566 in 2018. (Cats are less expensive to insure than dogs, with an average accident and illness premium of $350 in 2019.)  Pet insurance can vary a lot from company to company, and even breed to breed.   (For instance, German Shepherds will very often have hip problems that exhibit problems later in life.)  Please note that your zip code can also make a difference in price.   For a minor Midwest town, as compared to a major East coast city, the premium nearly doubles.

Saving money is very important, so it makes sense to do your homework carefully.  Compare several plans and carefully read the contract behind each so that you are not comparing apples to oranges.  (You can download sample policies from each insurance provider.  Beyond this, you have several other options to save money:

1.  Consider getting an “accident only” policy.   This will minimize the premiums and routine pet care (paid out of pocket) averaged less than $250 per year, according to the American Pet Products Association.
2. You can start an “emergency fund” for your pet.  In essence, with this option, you are opting to self-insure.   If you do this, and have difficulty paying a related bill, the Humane Society can be contacted.  The staff at the Humane Society will often have a list of organizations that can help you.
3. Ask your vet which vaccine can be foregone.   For example, the ringworm vaccine is very expensive and not that effective in avoiding a relatively minor condition.  So, it might make more financial sense to skip it, and accept the risk.
4. Be vigilant for parasites.  When playing with your dog or cat, pay attention to any new and unexplained bumps that might indicate ticks or other parasites.    To avoid most parasites, there are products that can be brushed into the fur, or installed into a collar.
5. Spay or neuter your pet.   Doing this can help control the out of control pet population (and avoid potential disagreements with your neighbors.)  But, there are also health benefits to your pet.  If you need help funding the spay or neuter procedure, you can contact the ASPCA, which offers many low-cost or no-cost opportunities to get this service completed.
6. Adopt your kitten or puppy.   Often the shelter will already have done the spaying or neutering, and you will not be asked to pay for it.   Furthermore, most of these wonderful cats and dogs have received many of their required shots, further minimizing your cost.

How are they doing in other states?

California has a pending bill that would require pet insurers to provide additional disclosures to consumers.  Particularly, some of these insurance companies use the services of a third-party administrator, and the presence of this “stranger” can confuse and anger the policyholders.   The pending bill would require these insurance providers to be much more upfront with the consumers about how day-to-day operations are done.

REFERENCES

Best Pet Insurance Companies for 2021 (thebalance.com)

Is Pet Insurance Worth the Cost? – Consumer Reports

Is Pet Insurance Worth It? | Kiplinger

PIN-OP-19.pdf (naic.org)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

A nice TAN can be sexy!!

Headline:  Almost everybody likes a nice TAN.

Date: 1/27/2021

Body: Many people invest a crazy amount of money to achieve a nice, even tan. The tanning industry is almost $3 Billion per year.  Good to know, but, this is not the tan I am speaking of.   The TAN at issue stands for a Tax Anticipation Note.  The TAN is an interesting beast.   This security is floated by a municipality (usually a city or county) in an attempt to achieve some level of revenue before the taxes are actually collected.   When the taxes are collected, these notes are paid off, with some degree of interest.  Not too many people know about these investments, and one might have to look carefully for them.

What Is a Tax Anticipation Note (TAN)?

A Tax Anticipation Note is a debt security used by a state or local government to obtain funds for an emergent  program or project.   These debt securities will be paid back from tax receipts, usually within one year.  The agreement between the issuer and investor typically includes:

• First Claim:  when tax revenues are obtained, the resources are to be used to pay back the note before using the money for any other purpose.
• Project / Expense:  the debt is collected for a specific purpose, and the funds cannot be diverted to pay for any other project or expense.
• Maturity: There is a definite date at which this debt must be paid back.  Remember, the indenture underlying the notes is essentially a contract.  Consequently, this date cannot be changed.

For instance, a City might have a major river next to it, with a large bridge across it.   If this bridge is damaged, it has to be fixed quickly, or the economic activity of the city could be significantly decreased.   In this case, to fund the repairs of the bridge, the City would float a tax anticipation note (the interest rate is usually quite low because the term is quite short.)  This interest is generally paid by offering the notes at a discount: When they are redeemed, they are paid off at face value.   The difference is effectively the same as interest.  (a zero-coupon bond, sort of.)  Even though the interest rate is quite low, it is tax exempt on both the State and Federal levels.

This sounds like a great boon to a cash-strapped local government.   Why is it not used all the time?

The financial circumstances of a city or town are not constant.   There are boom times where there is plenty of tax revenue.   At other times, there is a disruption in the business landscape, businesses either die or move, and there is much less revenue as a result.   The TAN will help smooth out the pattern of this funding.   In consequence of this funding though, they face a few considerations:

The financial circumstances of a city or town are not constant.   There are boom times where there is plenty of tax revenue.   At other times, there is a disruption in the business landscape, businesses either die or move, and there is much less revenue as a result.   The TAN will help smooth out the pattern of this funding.   In consequence of this funding though, they face a few considerations:

1.  The notes WILL mature on the maturity date, and they MUST  be paid off.   This puts the municipality in somewhat of a fragile position.
2. Monies received upon issue of the TAN must be used first for that particular project.  If there are remainder funds, these can then be invested for other purposes.

Said another way:  In return for obtaining their money early, the municipality must give up a degree of financial freedom.  TANs are one of several types of anticipation notes that state and local governments can use to fund a short-term need; others include Revenue Anticipation Notes (RANs), Bond Anticipation Notes (BANs) and Grant Anticipation Notes (GANs).

How can I invest in these vehicles?

Sorry to say, folks, but the homework required is quite extensive.   But, if I were looking for a TAN to invest in, I would do something like the protocol below.  (Please note, I live near Rockville, MD in Montgomery County.)

1.   I would make a list of the municipalities that might be using the TAN as a type of financing.  In my case, that list would include MD, Baltimore, Annapolis, Montgomery County, Prince George’s County, Anne Arundel County, Wheaton and Rockville.
2. Each government mentioned has a finance function of some type.   You can call somebody in this function and ask them about any such opportunities to invest.   Alternatively, each government mentioned has a good website, and you can do research on your own.
3. When you find an opportunity, there is usually a Public Meeting concerning that TAN, and the Public is invited to attend (they rarely do) or they might offer a recording of this session on their website.
4. Once you make a selection, there will be instructions on how to invest in the TAN on whatever website you found the initial information.  First though, ensure that you read the indenture and understand what you are signing up for.

I found a great example within the New York Law.  A few things are noteworthy:

1. The Note, this time a Bond anticipation note, is legally restricted to fund only one purpose.
2. “The faith and credit of the issuing unit are hereby pledged for the payment of each note issued…” This appears in the second section.  In essence, remember, this is a government.  They can levy taxes, they have a law-enforcement division and they have a motivation to stay independent from the level of government above them.  The upshot of this is that the risk of this investment is quite low (related to the very low level of interest.)
3. The details of the presentation of the note are laid out in detail.   The terms have to be spelled out explicitly, and New York Law determines which public officials need to  sign each security.
4. Something I did not know, this NY Law area allows either Public  or Private Sale of this TAN.   Wait, this is important.    The question is, “Who benefits?”  The idea is that any project, the Public should equally benefit from this expenditure.  But, it can also be Privately-done sale.  Though pretty rare, this raises the possibility of government funding of a project that could benefit just a few.        

The Verdict

This could be a good investment, if it is part of a balanced portfolio.   When you do find an opportunity, please do your homework and review all paperwork.   This is generally a safe investment, but, you must exercise care.   Also be aware that there are usually other opportunities for investment that could provide you with a MUCH better rate of return.                                                            

REFERENCES

Tax Anticipation Note (TAN) Definition (investopedia.com)

Tax-Anticipation Note (TAN) (money-zine.com)

Article_9.pdf (ncleg.gov)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Can I See Your Credentials?

Headline: Do You Have Credentials?

Date: 1/24/2021

Body : I was reading over my past blog posts and it occurred to me that I might have been using some bad language.   NO, not THAT bad language, rather, I might have been using financial credentials in a manner that is unfamiliar to you, and I never really looked closely at what they mean.    To be sure, there are about 1,000,001 different credentials out there; t can really help one feel confidence (or motivation to change advisors) if one knows what the long string of letters after the surname, really means.

OK, let’s start with some of the ones you most likely have some exposure to.

Attorney–>To be certain, attorneys come in several flavors.  Very often, in the financial realm, you might find tax attorneys, eldercare attorneys, probate attorneys; The list goes on.  But, there are several broad distinctions of attorneys that can come in handy to know.

These professionals know the law and how it applies to their individual cognate areas.   They have gone through 4 years of Undergraduate education, 3 years of Law School and have passed the State Bar Exam.  After this, they get the initials J.D. after their surname.   No, this does not denote “Juvenile Delinquent” though some might qualify.   J.D. stands for “Juris Doctorate”, and they sometimes use “Esq” after their surname, instead.  “Esq.” stands for “esquire.”   In the financial realm, they can help you setup many arrangements like estate plans, partnership agreements, Wills and Advanced Directives.  On a whole, despite the many jokes made at their expense, they are an honorable and indispensable group of professionals.  Most important, almost anything you tell them has to be kept confidential, under penalty of law.

CPAs–> “CPA” stands for Certified Public Accountant.   These professionals do all types of accounting-related duties.     In Private Industry, they keep track of expenses and revenues, report results to executives and are in charge of reporting to outside agencies (e.g. the IRS).   In Public Accounting, these professionals are most often encountered  when filing taxes, though they are in other areas, such as financial planning, and the like.

These professionals also have to go through a rigorous education, there is the CPA Exam (dreaded by all), and then, they are required to do Continuing Professional Education hours.   Currently, in MD where I am licensed, one has to maintain 80 such hours each 2 years, and be able to justify all 80 taken.    They are licensed by the State, and usually members of the AICPA, which does a lot of education and is a HUGE endorsement for a CPA firm.

Pocket Credentials

Please excuse my poor attempt at humor.    These “Pocket Credentials” though usually less onerous than the qualifications listed above, do have rigorous standards.  In alphabetical order, here is a list of the more common professional credentials you might find.   Please be aware, licensing regulations do sometimes vary state-to-statee

CFA–> The CFA designation stands for “Certified Financial Analyst.”   This is a challenging course of study with 3 levels of testing on cognate areas including: accounting, economics ethics, money management and security analysis.  (Each exam requires over 300 hours of preparation time, and usually, fewer than 50% of students pass each level.)   To receive the charter, the prospect must also have 4 years of relevant professional experience in investment decision making.  After successfully passing all 3 “levels” of the exam process, the CFA is held to a high ethical standard by the issuing authority.  These professionals can be found in many different financial fields.   One study, by the CFA Institute, found these professionals in the following fields of study:

• 13% Research Analyst
• 9% Corporate Financial Analyst
• 8% Accountant or Auditor
• 7% Consultant
• 5% Risk Analyst/Manager
• 5% Relationship Manager/Account Manager
• 5% Credit Analyst
• 5% Portfolio Manager

CFE–>CFE stands for “Certified Fraud Examiner.”   This person is hired by a company to do a forensic examination of their books and procedures, and determine where the potential for fraud is.  If hired after a theft is suspected to have occurred, they are charged with the responsibility to do interviews of all employees of the company.  The examiner is trained to do interviews in concentric circles.   First, they speak with employees suspected of no wrong-doing whatsoever, to get a feel for normal policies and procedures.  With this understanding, they approach people who should’ve seen or known about the fraud, and often get these people to confess that there was a fraudulent scheme, and often get details including the upper level managers or executives involved.   Then, in the final interview, the examiner has all of the details and confronts the miscreant with details to confirm.  (I have taken the exam, and it is quite difficult, requiring hundreds of hours of preparation.)  A CFE must have GREAT technical skills in reading journal entries and financial statements, and match this with significant “soft skills” of interviewing and rapport-building. 

CFP–> CFP stands for “Certified Financial Planner.”  They too have strict educational requirements, rigorous testing and an ethical requirement to the issuing authority.   But, the CFP has something more, too.   They are held to the “fiduciary standard” which requires them to act in the absolute best interest of their clients, instead of recommending investments that are merely “suitable.”  (This was covered in a previous post.)

A CFP can help you design and implement a Financial Plan, that encompasses: saving for a house, saving for a college education for your child, or saving for retirement.   They do many other things besides.  Some CFPs are generalists and others specialize in one or more subject areas.  These highly educated professionals are charging fees commensurate with their qualifications; in 2018, they would charge on average $1.871 for designing a Financial Plan and $235 for hourly service.   Though their fees can be quite high, if you go with a CFP, you often avoid conflicts of interests you might encounter when dealing with other professionals.  (If they do receive a commission for recommending an investment, they must disclose it.)

EA–> Stands for “Enrolled Agent.”  (I work for the IRS.   It is not uncommon for somebody to retire from the Service, wait the requisite time, and then become an Enrolled Agent.) These professionals have extensive experience having worked for the IRS, and are now empowered to represent clients before the IRS.  After passing their exam, these professionals have to maintain 72 hours of continuing professional education every 3 years.    You might not have heard of this group of professionals, but they tend to be quite knowledgeable.  

RIA–>Stands for “Registered Investment Advisor.”  These professionals are also held to the “fiduciary standard”, requiring them to place the interest of their clients in front of their own interests.    The RIA is required to pass either the Series 65 Exam, or the equivalent;  This exam is administered by FINRA, and tests knowledge of Law pertaining to being an investment adviser.    To achieve most independence, you might want to opt for a fee-only RIA, but this is not the only consideration.   The RIA might only be an adviser, and turn over to somebody else the money to execute your trades.   Be sure to understand the business practices of your RIA thoroughly.  Quarterly, you should receive updates on the ideas in the manager’s plan.  Check the FINRA website for possible violations of law or professional conduct.

The Verdict

Whew!!  I understand you might feel that we just swam through a bowl of vegetable soup!!  I assure you, this is only the “A, B, Cs” of financial professionals.  There are so many more, one’s head can easily begin to spin.   But, the bottom line is this: do your homework.   When you are picking out a financial advisor,

1.  Speak with friends and family to get referrals you can trust.
2.  Understand precisely how the professional is being compensated.
3.  Ask lots of questions until you know that you feel confident that they are a good or bad fit.

Do these things and I suspect that your luck will soon re-emerge.

REFERENCES

Chartered Financial Analyst (CFA) Definition (investopedia.com)

Association of Certified Fraud Examiners – FAQ Certification (acfe.com)

CFP: What Is a Certified Financial Planner? – NerdWallet

Enrolled Agents – Frequently Asked Questions | Internal Revenue Service (irs.gov)

PFS | FINRA.org

What Is a Registered Investment Advisor or RIA? (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Close Enough for Government Work.

Headline:  Close Enough for Government Work?

Date: 1/23/2021

Body :  I was re-reading some of my old posts and noted that I had mentioned a few governmental bodies that regulate investing and finance.   I used their names, and it struck (not too hard, fear not, gentle reader) that it might be useful to define the functions and features of each as they relate to investing.

OK, general overview time.   If you were afraid that your eyes would glaze over when you consider regulation of financial topics… you are in good company.   Largely speaking, Congress doesn’t like these topics either, and will often delegate powers to another agency to regulate things.   Arguably, this might explain the often overlapping and otherwise very confusing jurisdictions of several agencies.   For instance, your car antenna is likely a very straightforward rod, that receives:  When government gets involved, it can sometimes look a bit like this

So, here, in no pre-determined order, are a few of the most involved agencies that are either Federal Government agencies, or maybe not.   More on that as we go.

Federal Government Agencies

SEC Stands for “Securities & Exchange Commission. “  The mandate for this agency is quite broad.  They have been in existence for 85 years now, so they are not a new regulator on the block.   Speaking of “the block” that’s what they regulate.   They regulate the $29 Billion of investing that private individuals do (That represents over 58% of the stock market, so, it’s nothing to sneeze at.)  Their objective is to make sure that all investors are on an equal footing, information-wise, and when there’s an imbalance, the SEC can bring a civil action against an entity.  Broadly speaking, the way that companies and other entities can avoid tangling with the SEC is to disclose information fairly.  There is even an Office of Investor Education and Advocacy.

The SEC, like many other federal agencies, seems to be keen on going digital.  Toward this end, on their homepage is a variety of links to news on their activities.   There is, certainly, a “Strategic Plan” which largely revolves around going digital.   But, for the average investor, I think the biggest news is EDGAR.   It is a clearinghouse of financial disclosures from all public companies.  This resource is REALLY helpful because the Annual Reports of many companies are gussied up with pretty color pictures that take forever to download, and the reports here are literally black and white.  The regular formats help too, as you can quickly get to know what to expect.   The Forms 8-K are also here.   These represent “material’ changes in policy or financial attribute.

IRS Stands for “Internal Revenue Service”.  Everybody loves the IRS, and every citizen’s pulse goes up substantially when they rip open an envelope with their address on it.   Each year, all citizens report to them about the money they made in the calendar year just ended (Form 1040, anybody?) and we are all used to filling these in, or buying software to do it for us.

The IRS is an agency under the Treasury Department, and is very fond of reminding us of how efficient they are  Per their own website, in 2019, they processed over 253,000,000 tax returns and collected over $3 Trillion in tax revenues.  Per the same source, the agency paid just $.33 for each $100 of tax revenue collected.  It is divided into 4 main sections, and you might be surprised to know that one of them focuses on Tax-Exempt entities.   This might seem counter-intuitive to some, but to comply with legislation passed by Congress, the IRS has enacted regulations to make sure that Not-for-Profit entities are in compliance with the requirements from Congress.    This is actually a very interesting agency (though for full-disclosure, I do work for them) because of the breadth of what they do.     On a day-to-day basis, they must make the activities of  “real world” examples of individual and businesses fit into the “boxes” setup by Law.  

CFPB Stands for the “Consumer Financial Protection Board.”

The CFPB is one of the newest “watchdogs”  (a regulatory puppy?) on the block.   It was legislatively sponsored by Senator Elizabeth Warren and others, and seeks to both protect and educate consumers to be more informed about their financial alternatives.  Some opponents suggest that their mandate is overlarge, and the agency should be sutured and shuttered, but repeated attempts have proven ineffective.  The main argument is that all of these functions had previously been implemented by other government agencies.   In return, the CFPB advocates argue that it stands as a very useful one-stop-shop for investors to become empowered by information and representation, if need be.  (The puppy DOES have sharp teeth!!)

Quasi-Governmental agencies

The Federal Reserve a.k.a. “The Fed.”

The Federal Reserve (a.k.a. The Fed) has a long and storied past, complete with a fascinating cast of characters.  While it is functionally independent of Congress, it is inherently tied to politics because:

1.  Each governor is appointed by the President and approved by the Senate.
2. It tries to craft policy that will support the intentions of Congress (as revealed in legislation, largely.)

Its function is to provide stability in the U.S. Economy.  More directly, it enacts policy to: maintain maximum employment, maintain stable pricing and regulate long-term interest rates in the US economy.  Please note that this is a VERY complex charge because sometimes when one objective is enhanced, another can be weakened.

The Fed might have been heard of by some people, in relation to a “lender of last resort.”  Usually when financial institutions want/need money, they trade amongst themselves.   Sometimes, however, they will not lend to each other readily.   This is when the Fed comes in, lending them money, so that they can in turn, lend the money to businesses and individuals.  They enact their policies (largely) by changing the rate at which they will lend.  (You might’ve heard of the Federal Open Market Committee, FMOC.   The FMOC meets quarterly to discuss whether they should change this percentage.   Professionals are paid handsomely to predict what they are about to say, and then translate what they DID say.)

FINRA a.k.a. Financial Industry Regulatory Authority

It seems that the role of FINRA as a quasi-independent agency, is to refer cases of ethical breaches and illegal activities to the SEC for prosecution or litigation.  It is NOT a governmental agency.  In fact it is a not-for-profit, supported by a foundation.   An intelligent person might ask why FINRA exists when there is an active SEC?   The SEC is largely concerned with individual investors, and FINRA is concerned mainly with disciplining brokers and brokerages for their wrong-doings.

It is an active agency, and in 2019 brought over 800 disciplinary actions against brokers, and levied over $64 Million in fines.   They referred over 800 cases of insider trading to the SEC and others.  They offer a lot of educational opportunities both online and offline, and offer a “Securities Helpline for Seniors.”  I happen to know a female attorney employed by FINRA.   I tell you, if all of their employees are as sharp as she is, we have a valuable watchdog represented in this agency.

FASB/GASB These stand for the “Financial Accounting Standards Board” and the “Governmental Accounting Standards Board,” respectively.    Not normally in a list of important agencies, they do formulate the standards that accountants have to follow with respect to reporting revenues and expenses of both private companies and governmental entities, so I consider them vital to the understanding of the regulatory environment.

A word on both of these regulatory bodies.   A brief look at the homepages suggests a more-than-casual similarity of these two bodies.  In fact, they are both supported by the Financial Accounting Foundation.   So, they are both not-for-profit entities.

FASB–> FASB was started in 1973 with the task of establishing Generally Accepted Accounting Principles (GAAP).   This is important because GAAP determines how the companies you invest in, report revenues, expenses and policies of their management.  Changes in GAAP could easily  change your investment decisions.  They derive their authority from the SEC.  (So, quick review, Congress–>SEC–>FAF–>FASB, simple, huh??)  FASB pronouncements are seen as authoritative by the AICPA and State Boards of Accountancy, so it is important.  FASB members are selected by trustees of the FAF to serve up to two 5-year terms.  They are full-time employed by FASB, and must first sever any and all ties with their former accounting firms, until completion of their term. 

GASB–> GASB works in a very similar manner, but focuses on the reporting of municipal governments (read State and local.)   The accounting behind the Federal Government, well, that can and does fill MANY books. 

The Verdict

We appear to be well-represented by agencies that will help us in our investing lifetimes.   All of these agencies and bodies seem to focus on the education of consumers and the federal agencies do also have enforcement powers to use if there is wrong-doing.  The system appears to be quite comprehensive, though it seems pretty efficient overall.  As American citizens, I think we should be proud of our system of Law and Regulation.

REFERENCES

About IRS | Internal Revenue Service

SEC.gov | What We Do

About us | Consumer Financial Protection Bureau (consumerfinance.gov)

Federal Reserve Board – About the Fed

About FINRA | FINRA.org

About the FASB

About Us (gasb.org)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

How Great, Thy Art?

Headline: How Great, Thy Art

Date: 11/21/2020

Body:  I just was scanning Yahoo Finance and I happened upon an article (really a sales brochure) bragging about how easy they make it to invest in art.   The full article can be reached at the following link:

https://www.masterworks.io/?utm_source=yahoo&utm_medium=finance.yahoo.com&utm_campaign=MRT%20Desktop&utm_content=istock6

I don’t know, they might be right about making it easy for you.   But, be careful, I suspect they just made it VERY easy for you to give them your money, too.

One Caveat

Before I give you a list of my concerns in investing in art, please give me a moment to put in a note.   I think that art (very broadly defined) is the hallmark of a free and democratic society.   Art can be drawing, sculpture, perhaps a sound recording, and they can all be evocative (or provocative), and this is essential in any democracy.  In my living quarters, I have several art pieces that I prize highly because of their beauty and the story behind them (art lovers might use the word provenance, sorry.)  Point is: I am about to tell you why not to invest in art.    But, if you love the painting (or sculpture or sound recording) and you have the economic means to legally procure it responsibly, please, support the artist and be proud to display it.

Two Caveat

It might appear that I am picking on Masterworks, unfairly.   If it does, I apologize for that idea.  They are merely a representative of the class of companies that should be researched carefully when making a decision to invest.  I have no competent evidence to hold against them.

My Chief Concern is…

I guess my first concern is in the actual verbiage, “invest in art.”   Art CAN be expensive, and it CAN feel like an investment, even if you LOVE the piece of work.   But, in my estimation, you should only purchase the object d’art if you LOVE it.   As an investment, the art market is terrible.   Most of the time, the market value remains almost stable or decreases, and you end up losing money when you do sell it.  If it hung proudly in your home for 20 years, and you incur a 15% loss, you are not so unhappy, because you LOVED seeing it.   But, imagine if it was a piece of art that you really didn’t like much, but, the famous artist is nearing the end of their career, and you might make a large profit when you sell it. I suspect you’d be significantly upset by that loss in capital value.  This is why you must buy only what you love: really, it’s about your mental health and perception of beauty, they might say.  (Perhaps happiness of a partner; This too, must be carefully considered.)

To my mind, the foregoing is plenty to keep me from spending a lot on art.   But, the article in question provides reasons why you should consider investing in their service, under a banner “How does it [Masterworks] work?”  For the record, Masterworks sells art and fractional interests in art.  I will go through some of their “How it Works” section with them:

1.  “We Purchase Blue-Chip Art.”à 2 problems here, just offhand.   Firstly, who is to say what is “Blue Chip Art?”   Experts (real experts) can easily disagree, and if the learned experts can argue, laypeople like myself can EASILY (perhaps fractiously) disagree.  Second, even if agreement on “Blue-chip-ness” can be reached now, who’s to say if the same judgement will be made when you sell your interest years later?
2. “Anyone can Invest”–>Yes, anybody CAN invest.   The question that remains open is, “Should THIS PERSON really be the one who invests?”   This is not so clear.
3. “Management Fees–>Ah, here lies the rub.   They are not offering services for free.   So, to make a profit, you have to figure into your calculation the management fees that will eat away at your potential profits.   And, please remember, most art that does increase in value will not appreciably increase until the artist is dead.  Bottom line is that Masterworks (or other Firm) will be receiving your checks for “management services” for potentially, a very long time.
4. “How do I monetize my investment?–> This hearkens back to the earlier lines of my post.    You never really know what pieces will become valuable, and even if you did, you would never have a clue of the timeline.

A few Other Observations

In a cursory scan of the FAQ, I am able to find a few things more that tend to make my antennae twitch:

1.  Masterworks (like many other similar entities) is a Delaware-based LLC.   To be sure, there are thousands of reputable Delaware-based LLCs, but the business laws in Delaware are famously… err…um… flexible.   So, when thinking of making a potentially volatile investment, through a potentially volatile entity, it seems like using a stack of many barstools to get to the second level of a building.  It can be done, but the chances of a fall are significant.
2. I give them praise because they list the risks of investing in art.  But, I feel it necessary to highlight 3:
   1. They admit that the assets are “highly illiquid.”  So, finding a willing Buyer is often not feasible.
   1. “Issuers are totally reliant on Masterworks.”
   1. “Masterworks has potential conflicts of interest.”

The Verdict

Caveat Emptor!!!  (in Latin that means, “Do your Homework carefully!!”)

FIN

P.S. I was just listening to the TV several days ago, and I saw a Masterworks advertisement, so, this entry is still quite relevant. It also makes me realize that the profits that they make (and take from you) MUST be sufficiently large to afford expensive TV advertisement.

REFERENCES:

Council Post: Investing In Art: An Introduction For The Skeptic (forbes.com)

Does Investing in Art Make Financial Sense? (thebalance.com)

How to Buy Art: The Smart Way to Invest – Bloomberg

A New Way to Invest in a Million-Dollar Painting | The Smarter Investor | US News

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

HSAs can be a Lifesaver, for Some.

Headline: Health Savings Accounts can be a Lifesaver… for Some.

Date: 1/17/2021

Body  Don’t let a discussion of Health Savings Accounts (HSA) tie your stomach up in knots.  I started reading the following article on Investopedia and developed a healthy appreciation for them: Health Savings Accounts: Advantages and Disadvantages (investopedia.com) They were developed in an attempt to control healthcare costs(on the theory that people would be using their own money) but might not be your best move.

Normally an HSA is used in conjunction with a High Deductible Health Plan.   (This is a plan with very low premiums, but if you do get ill, you have to pay to a relatively high level before the insurance kicks in.)  To use the HSA, the high-deductible plan must be the only health insurance you have, except for dental and vision coverage. 

You might have heard of Flexible Spending Accounts, well, the HSA is a completely different species.   In this arrangement, money placed into the account is often not taxed, and unlike the FSA, if there is any money leftover in the account, it simply rolls over to the next year.     If you used the FSA, any money left in the account at the end of the plan year (over a small threshold amount) would revert to your employer to use for administration.

What are the Advantages of the HSA?

The nice thing about the HAS is that there is a long and growing list of products and services that qualify as medical expenses.   In fact, as a result of the CARES Act of 2020, OTC medications now count as valid medical expenses.  Additionally, these HAS accounts are highly portable, so, if you change jobs the account travels with you to your new job.

Convenience is also a plus of these accounts.  When you open an HSA, you get a debit card that you use for your medical expenses.  If you do use a different form of payment, you can pay yourself back from funds within the HSA.

Contributions are normally deducted from your paycheck before Federal Tax is computed, so, these funds are tax free at the Federal level.  But, because these funds do not appear in the Federal income number, they also escape taxation at the state level.  These contributions for any tax year can be made until April 15^th of the following year.    Any interest earned on the account is minimal, but is also tax free.  (In fact, your interest is so de minimis that you will not even be able to afford the fees associated with the HSA with the interest that it generates.)

In a related manner, withdrawals from these accounts, if used for medical purposes, are not taxed.   But, these accounts do allow one to withdraw money for investments as well.  If the withdrawal is used for this purpose, the withdrawal will be taxed, and if under 65 years of age, there will be an additional 20% penalty.   OUCH!!!  Now, I REALLY DO need some health care!!!

What are the Disadvantages of the HSA?

Because you have a High-Deductible plan, it can sometimes be difficult to put together the cash for a costly medical intervention.   There are regulatory requirements for the minimum deductibles, but the ones offered by most plans are significantly higher.   For this reason, some people might put off a medical procedure that could get worse and significantly impair their health.

The contributions to the HSA are limited to $3,550 per year for individuals and $7,100 per year for families.   But, if you are over the age of 55, there is a $1,000 catch-up contribution allowed (just like an IRA.) 

The additional wrinkle in getting an HSA is that you have to maintain receipts and other documentation to prove that the expenses covered were medical expenses.   This could come up if you are audited by the IRS.

It should also be noted that the funds from the HSA usually cannot be used to pay the premiums related to the High-deductible plan.

If I do decide to open an HSA, how do I do it?

If you do find that the HSA is a good idea for you, finding a good one can be complex.  The first thing to remember is that if not used for medical expenses, this account becomes an investment vehicle.   So, one must be aware of all of the considerations with these accounts, like: administrative fees, ease of access to funds and your other options.  Further, it is not unusual for a financial institution to stop charging the administration fees when your account reaches a certain balance. 

The Verdict

The HSA is sometimes quite attractive.   But, if you are expecting a high degree of medical expenses, it is perhaps not the best option.  In view of the high degree of portability and the low level of premiums, it seems that these plans would be more attractive to younger people who are more often changing employers and more likely to be healthy overall.

REFERENCES

Health savings accounts: Is an HSA right for you? – Mayo Clinic

What is an HSA? – NerdWallet

How to Set Up a Health Savings Account (HSA) (thebalance.com)

HSA: What is a Health Savings Account? | The Motley Fool

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.