Economic Update - January 2009
Given the current economic conditions, we have received numerous emails, phone calls, and in-person visits from many of our clients asking 'what should we do now' and 'how bad is this situation'. The purpose of this communication is to offer our humble opinion of how to best handle your finances moving forward.
In our opinion, the next 10 years will go down as the single greatest transfer of wealth in the history of mankind. This is the greatest time to be alive and seize the opportunities that are in front of us. Franklin D. Roosevelt's quote that "There is nothing to fear but fear itself" is a wonderful way of approaching this situation. Those people who choose to focus on who is to blame for the collapse and/or be scared of the unknown will be kicking themselves later for missing the opportunities. The thing to do is to ask yourself how is this situation playing into your hands, and what is the next great opportunity?
C3 NEWS
We have attracted many incredible clients and partners from around the globe. We have new ultra high net worth clients, and we have been featured as wealth experts, answering financial questions in the recent Nov '08 issue of SUCCESS MAGAZINE.
The reason for our success is that we relentlessly pursue unique opportunities and offer tremendous service to our clients. Here are our latest ideas:
IDEA #1 - Fixed Return on Liquid and Illiquid Assets
In this current asset-rich and cash-poor climate, we offer a unique and highly exclusive way to maximize the value of your assets by earning an extra 9.25% on your CDs, cash, bonds, dormant credit lines, or other fixed income investments, without modifying any aspect of your current investment strategy.
Whether you use cash, an existing credit line, or a fixed investment such as a Treasury Bill or CD for this program, your asset is fully protected with multiple safeguards specifically designed into the structure. This is a fully-transparent and contractual program in which your asset is utilized through a Stand By Letter of Credit (SBLC). Your asset is not compromised, and the program is typically done for 12 or 24 months.
IDEA #2 - Acquire AA Rated Asset(s) with ZERO Out of Pocket Expense or Investment
For those of you who have a net worth of $10M or more, we have a program that has revolutionized retirement planning, estate planning, and wealth building...all in one. You may have already heard about financing life insurance premiums for people in good health over the age of 70. In this program, seniors can have life insurance policies purchased for them, which they own, but are financed by investment firms. The death benefits serve as the primary form of collateral for the loan.
Over the last decade or so, financial firms have quickly realized that financing highly rated life insurance policies is a much more profitable and safer bet than financing real estate. This discovery has never been more apparent than in today's economy.
With so much progress in the premium finance industry over the last decade and specifically, the international investment banking community treating life insurance policies like bonds or notes, anyone who is healthy and wealthy can own both assets contained in a life insurance policy (cash value plus death benefit) and not have to pay the premiums.
Our international banking partners will finance a AA or better rated life insurance policy on you and/or your spouse, and pay all of your premiums, if you qualify with health and net worth. They will use their currency trading platform to borrow funds at 2.25% in Japanese Yen (all in cost, including fees) and maximum fund the policy, investing the funds in either fixed income notes (6% return) or equity indexed policy with a 9.5% or better average rate of return.
For example: The Client receives a $10M policy, and he/she never has to pay the premiums. The cash value of the policy and the death benefit (two separate assets) will serve as the primary forms of collateral for this loan. This loan will be paid off by either the death benefit, the rising cash value, or by selling the policy in the life settlements marketplace (projected to grow into a $160+ Billion industry over the next 5 years).
The client can receive $4.5M of cash inside the policy, and watch it grow at an average rate of 6% to 8% (9.5% - 2.25%). This structure is designed to eliminate risks like interest rate movement, since both the crediting of the account and the cost of the funds move up and down with interest rates, leaving the arbitrage spread stable over time. The investment bank will mitigate currency risk, because they already have positions in all G7 currencies, and they will use their currency platform to manage this for the client. The investment bank simply wants a relationship with the client, which means they want to manage some of your money. If they are funding a $10M policy with $4.5M of cash, they may want you to give them a $600k brokerage account for them to manage. This brokerage account will serve as a secondary form of collateral, which will be released approximately 8 years into the program. If the client wants to maintain their brokerage account with their current broker, that is not an issue within the flexible structure. The clients' broker can simply move the custodianship to our banking partner, and create the win-win-win.
The most important aspect of this structure is to understand that the investment bank is putting up the money to pay the premiums, and our clients have ZERO expenses, and their collateral is less than 15% of the total value of the loan, or approximately equal to one year of premiums.
Our client receives a massive death benefit, which they never have to pay for, a rising cash value that will be used as additional retirement income, and we can even roll in up to $50k of estate planning fees into this structure.
Lessons Learned
One of the lessons here is that equity in publicly traded companies is not a safe investment, for those of us who did not learn this lesson in 2000-2002. The stock market can and does lose up to 50% of its value, and even some of the nation's "strongest" companies can lose 95% of their value. This is because their value is based on nothing concrete, just future hypothetical projections. Most traditional advisors simply like to paint this picture with a different stroke of the brush. There is no collateral when you invest in a publicly traded company, and that is why the vast majority of truly sophisticated investors simply do not invest in mutual funds or stocks as a long term strategy.
C3 clients are advised to think and invest like the top 1%. They are encouraged to only invest in something that offers fixed returns or highly rated collateral. C3 clients invest in the stock market using maximum funded equity indexed life insurance contracts, so they can earn an after tax ROI average of 8.5%. 95% of the funds are invested in AA or better rated fixed income bonds or notes and the other 5% is invested in call options on the stock market. When the market is up, our clients will earn up to 17% on their investment. When the market is down, the options may go worthless, but the bonds will provide enough income for the portfolio to earn 1%. A positive 1% is a lot better than a negative 40%.
The top 1% of hedge fund managers have been employing this asset allocation structure for many years. They may place 80% of their assets into fixed income, highly rated securities, and then leverage the other 20% of their assets to swing for the fences. If they are wrong, then they cut their losses short, and let the fixed income return on the safe 80% give them a small return for the year. When their leveraged bets are right, the portfolio has a fantastic overall return. By not placing all of their eggs into the risky basket, they do not ride the rollercoaster like the average investor or like the average fund manager (the other 99%).
Another lesson is that keeping money inside of your real estate is not a wise idea. Real estate equity is not liquid, not safe from loss, and offers ZERO rate of return. We had advised our clients to leverage their homes to the max, pull out their valuable equity, and stuff that equity into maximum funded life insurance policies with strong insurance carriers. Maximum funding is when you invest maximum premiums by IRS guidelines, and purchase the smallest death benefit possible to reduce the cost of insurance. In this way, the over-funded cash value grows tax free, and the cost of insurance is equal to roughly 1/3 of what you would pay in taxes on a similar investment over a 20 year period. Our clients wrote off the interest on the mortgages against their income, and stopped funding their IRAs/401ks beyond their employer's match. Their monthly costs stayed the same and they received the same tax deduction, but they accomplished something far more important. This sophisticated maneuver enabled our clients to keep the hard earned wealth they had built up by buying real estate properly. When the real estate market tumbled, our clients did not lose their money, since it was now safely placed into life insurance policies. If the economy hurts them and they lose their jobs and income, they can simply sell their home (even short sell their home) and rent for a while. Additionally, their money is liquid, safe and secure inside their life policies. If a creditor or litigator comes after our clients' assets for any reason, they can switch the ownership of the policies to a Trust, and then change it back after the issue is solved.
Today, most of the loans our clients were able to get into with little money down are no longer available, and those clients who decided to leave their wealth inside their properties simply do not have that money any more. It is gone. If they still have equity in their properties, they may not be able to access it, since the current lending environment has temporarily collapsed.
We have always advised our real estate investor clients to purchase their real estate with as little money down as possible, and to separate each investment inside of a separate LLC. This has also proven to be a wise method in both good and poorly performing markets. The less money down, the more assets our clients control for the same dollar invested. The less money was invested, the less risk to our clients if the investment does not work out. We have always advised our clients to place their serious funds inside of principal protected investments, and to take risks with a very small portion of their portfolio.
When the economy heats up, the leveraged real estate and the equity indexed structure creates an outstanding and balanced return. When the economy is slowing, like it is now, the principal protected portion of the portfolio will create the necessary liquidity to take advantage of unique opportunities, and only a very small portion of the portfolio is at risk. With this type of philosophy, our clients' portfolios are impervious to bad economic conditions and perfectly positioned for good economic times.
MOVING FORWARD
While what is going on in our economy is unprecedented, our government has the tools and the expertise to get our economy on track. This country will come out of this slowdown stronger than ever before. The only question is whether we can take advantage of this situation. Our job here at C3, is to ensure that you do. Feel free to contact us with any questions or clarifications.
9/1/09 - Risk v. Reward
4/1/09 - Economic Update
1/1/09 - Success Magazine
CPA Workshop coming this fall!