Financial advisors should prepare for both an improved economy and higher taxes, according to the keynote speakers at the IMCA (Investment Management Consultants Association) Advanced Wealth Management Conference in San Francisco this morning.
“We are not going into another Depression, and we are not going to have a double-dip recession,” said Peter Ricchiuti, assistant dean of Tulane University’s A.B. Freeman School of Business. “The economy is getting stronger.”
But the country’s huge deficit problem will inevitably spur higher taxes, in spite of the massive Republican victories in last week’s election, said attorney Andrew Freidman, a Washington-based political and economics analyst who publishes The Washington Update.
Noting that military and entitlement spending account for more than 8o percent of the federal budget, Freidman said “You can’t solve the problem by cutting spending. Sooner or later you have to raise taxes.”
Although the estate tax is not in effect this year, “it is not repealed permanently,” Freidman warned. “It will be back, perhaps on more onerous terms.”
As a result, he urged advisors at the sold-out conference, many of whom work with clients with over $10 million in assets, to consider advising clients to make gifts before the end of the year.
“This is a great year to make gifts,” Freidman said. “Asset values and interest rates are low and at 35 percent, the tax rate on gifts exceeding the $1 million lifetime exemption is low. You may not see that rate again for a long time.”
Higher taxes also meant advisors with ultra-high net worth clients should consider selling long-term capital-gain assets to take advantage of the current 15 percent tax rate and accelerate ordinary income to take advantage of the current 35 percent rate.
Wealthy clients should also consider deferring charitable contributions and converting qualified assets to Roth IRA as well as tax-deferral and exemption strategies such as life insurance and annuities, Freidman said.
Stocks Under Priced, Investors ‘Irrationally Pessimistic’
Advisors should also get in front of a rising economy, said Ricchiuti, a former state treasurer and chief investment officer for the state of Louisiana. “The yield curve tells you where the economy is going,” he said, “and right now we have a very fat yield curve whose slope is up about 265 basis points.”
Buying opportunities are plentiful, said Ricchiuti, maintaining that “stocks are under priced and investors are irrationally pessimistic.” He added, “Investors seem to be virtually ignoring that the economy is improving and corporate earnings are better than expected.” Ricchiuti also warned advisors to be wary of gold and bonds, arguing that they may be “the next bubbles.” Bonds, he said, are “outrageously priced with little room for increases in interest rates and/or inflation.”
And unlike other commodities, Ricchiuti said, “virtually every ounce ever produced is still around and we’re mining more every year. Perhaps the only reason that gold is valuable is that we believe it is valuable.”
