GoldMoney’s Founder James Turk interviewed at Baird & Co. by ITN’s London Tonight Show on 2nd June 2009.
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Investing in the art market
CNBC High Net Worth: The Suite Life from 8.15.08 featuring The May Fair Hotel in London
Duration : 0:3:34
Blue Star Jets on CNBC High Net Worth
Aired on Friday March 14th 2008. Gurbaksh “G” Chahal interviews with Jim Goldman on CNBC’s show High Net Worth.
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Tinsley Mortimer interviewed by Wendy Furrer on CNBC’s “High Net Worth”
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12 future of private banking
http://www.globalchange.com Future of private banking and wealth management for ultra high net worth individuals. Fund management, et creation and fund growth. Portfolio management and managing risk in balanced distribution of ets. High rates of return. Succession planning and how to run family offices. Specialist wealth advisors and independent financial advisors, commissions and fee-based advice. Philanthropy and philanthropic advisory services. Why charitable activities are so important to high net worth families and why most want their own charity foundations. Making a difference, proving added value and real social impact, Applying business principles and measurable outcomes to philanthropy. Venture philanthropy and social entrepreneurs. Making philanthropy work in a disciplined way with formal evaluation and monitoring. Financial disciplines and specialist advisory teams. Video by keynote conference speaker Dr Patrick Dixon, Futurist and author of 12 books on global trends including Futurewise and Building a Better Business.
Private banking, investment banking, wealth management, portfolio, balanced, philanthropy, charitable foundation, social action, advisory services, independent financial, planning, financial, finances, banks, investors, funds, fund managers
Duration : 0:5:54
WHAT IS THE BEST ENTITY?
By Garrett Sutton, Esq. and Kathy Spitzer, Esq.
It’s probably the most frequently-asked question that we hear from entrepreneurs, both experienced and those just getting their feet wet. So, we’ve put together this report to help you make that selection. Hopefully this information will allow you to make a more informed decision about the entity that is right for your business. But don’t despair if you don’t see your business fitting into any of the models set out below – we also offer a service where your business structure is reviewed and you are provided with our opinion as to the best entity in your situation. And, because in many cases, the company structure you choose will be based on how it will pay taxes, our top-level review will have your business plan run past a CPA, to make sure all of your options are reviewed. We can also review your existing business structure and offer our suggestions for maximizing your strategy. A review of entities follows:
Regular, or “C” Corporations (”C Corp”)
A C Corp is a great entity for a beginning business that:
• wants to retain earnings, rather than disbursing them each year;
• may have large start-up costs and expects to have losses in the first few years;
• wants to look for outside investors, and may even plan on going public;
• wants to have multiple classes of stock and sell stock to anyone, anywhere in the world;
• wants the option of providing its owners with tax-free benefits, as well as its employees;
• may have very high-income owners.
The “C” in C Corp is an IRS code section as is the “S” in S Corporations. C Corps came of age in England in the 1500’s, as the Crown’s answer to Fate and Mother Nature. At that time, most business ventures were operated as general partnerships. As general partnerships, these business ventures also featured unlimited liability of each partner, one of the key reasons general partnerships should be avoided. So, that new three-masted schooner you and your partners purchased, outfitted and sent on a trade mission to China for silk and pepper had better not sink, or you and your partners would be personally answering to the bank that loaned your business the money to buy the ship, the creditors that provided you with trade goods to outfit your ship, or to your families, if it came from your own pocket.
Unfortunately, both Fate and Mother Nature intervened frequently, and the losses were staggering. In an attempt to keep business moving, the English government invented the Corporation, which existed as its own entity, distinct and separate from each shareholder who had invested into it. The partners (now called shareholders) were liable only for the money they invested. Creditors now had only the Corporation to sue, and not the shareholders – so if the Corporation had no assets (or it did, but they were resting at the bottom of the ocean) those creditors were out of luck. (And thus the insurance industry was born, but that’s a different story.)
Because C Corps exist as their own entity, a C Corp will file its own tax return. As we explained earlier, a C Corp’s earnings will be taxed at a relatively low rate on the first $50,000 in taxable income. But you must be aware that forming one or more C Corps and putting a portion of your money into each company, with the idea that each C Corp will fit into the lower, 15% tax bracket won’t work. If you wind up owning more than 50% of one or more of those companies you have formed to disburse your wealth, the IRS will tag all of those companies as being part of a control group, and ramp their taxation rates back up towards a 38% rate. Control group status only applies to C Corps though, so be careful to plan a proper mix of entities into your wealth-planning structure.
A C Corp has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corp can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits. This is not the case in a flow-through entity, such as an S Corp, LLC or LP. In each of those cases the entity may write off the costs of the benefits, but any employee/shareholder who owns more than 2% of the entity will pay taxes on the value of their benefits received. So, if having the maximum deductions and all of the employee fringe benefits on a tax-free basis is important to you, a C Corp may be your entity choice.
C corporations are great for a business that sells products, has a storefront and employees, and may or may not have a warehouse where it keeps its inventory. C Corps don’t work well businesses that want to hold appreciating assets, such as real estate, because of the tax treatment on the sale of these assets.
But the most often-cited disadvantage of using a C Corp is the “double-taxation” issue. Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders, as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates.
There are many things you can do to avoid the double-taxation scenario. Structure the C Corp so that there are no profits left over — use all of the write-offs and deductions allowed by the IRS to reduce the C Corp’s net income. Offer great benefit plans! Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway. And it may be that in the big picture, the savings on one side outweigh the additional taxes paid on the other side.
The decision as to what entity is best for you really does, in so many cases, hinge on taxes, and that is why, with any corporate-related decision, you are wise to seek the advice and assistance of a good CPA.
Some quick things to note on C Corps:
• They can have an unlimited amount of shareholders, from anywhere in the world.
• For Nevada and Wyoming corporations, officers and directors can reside anywhere in the world;
• They can have several different classes of shares.
• They are the most widely recognized business entity in the world, and are the premier entity for going public.
In Nevada and Wyoming, nominee, or stand-in, officers and directors can be utilized and bearer shares can be issued, adding extra levels of privacy.
Sub-Chapter “S” Corporations (”S Corp”)
An S Corp is a great entity for a beginning business that:
• will provide a service;
• does not have significant start-up costs;
• will not need to make major equipment purchases before beginning operations;
• will make a sizable amount of money without a great deal of effort and expense; and
• expected growth of no more than 75 shareholders, who will all be people who living in the United States or who file a U.S. Resident tax return.
An S-Corp is structurally the same as a C corporation (i.e., it has officers, directors and shareholders), but with one key difference. An S Corp files an election with the IRS, called a Form 2553, that provides it with a flow-through tax structure as found in entities such as partnerships and limited liability companies. That means, the company’s income (and corresponding expenses, write-offs and deductions) will flow through to its shareholders, and be split among them according to each shareholder’s ownership percentage. The S Corp’s taxes will actually be paid by its shareholders, at their individual tax rates, and in proportion to their individual ownership percentages.
From a taxation standpoint, an S Corp is a great fit for a company that offers a service, because in many cases the revenues can be split and paid to the shareholders in two categories: salary and passive earnings. A flow-through tax structure means that the profits and corresponding losses, deductions and expenses are divided up among the shareholders, in proportion to their ownership percentages, and reported on each shareholder’s personal income tax return. Therefore, if your income from an S Corp is split into two streams, salary and passive, each stream will be taxed differently. Your salary stream will be subject to both income tax and payroll taxes such as medicare and social security. However, the passive income stream will be subject only to income tax. So, by taking a reasonable salary from the S Corp your tax bracket would be lower than if you were take your entire share of the earnings as salary, and the remaining share would flow through to you as passive income, and would also be taxed at this lower rate.
An S Corp is also a great entity for businesses with low start-up costs, that do not have to purchase a significant amount of assets to begin operations. For example, buying a working laundromat would be an excellent choice for an S Corp. You are purchasing a turnkey business – it’s already operating, and you aren’t going to be laying out significant cash to get it up and running. So, you will have a pretty good income stream immediately, and that income stream can best be disbursed to you and your partners, if any, through the S Corp structure. Two other great matches for an S Corp are network-marketing and Internet-only businesses. In each case, the business is likely to have no storefront, low operating costs, and probably doesn’t maintain a warehouse. Most network marketing and Internet-only businesses drop-ship from their suppliers directly to the end consumer when they are delivering products at all. Again, as these can be high-income, low cost operations, they work great in the S Corp structure.
Here’s another reason we suggest S Corps for many service-oriented businesses — To avoid being characterized as a Personal Service Corporation, or “PSC” by the IRS. PSCs are C corporations that are classified by the IRS as providing a service, such as consulting, to the general public. Now, as you may know, the United States government, in an effort to boost the economy and keep business working, assesses C corporations with a pretty low initial rate – 15% on earnings up to $50,000. That’s quite a bit lower than you would pay personally, if you were receiving that same $50,000 as salary. And, that 15% rate is also lower than you would pay if your business was an S Corp. So, to head off the anticipated revenue drain, the IRS closed that loophole by designating C corporations that provide services to be PSCs. The additional tax rate for PSC earnings can be a flat 35% or the regular C Corporate plus 15% of the corporation’s undistributed personal holding company income. That maybe higher than you would pay through your S Corp, if you took a reasonable salary and the rest as passive income. And, it’s enough, in many cases, to make the difference between going S Corp and C Corp.
A downside to S Corps is the limitation on who can be a shareholder, and what kind of shares it can issue. There can be no more than 75 shareholders in total, and no-one may take their shares in anything other than their personal names (or in their living trust). So, forget transferring your S Corp shares into an irrevocable trust, limited partnership or children’s trust. And, you can’t have any non-U.S. resident shareholders, either. Everyone who holds shares in an S Corp must file a U.S. resident tax return. And, you can only have one class of shares, which can be confining, especially if your plans include taking your company public or looking for outside investors. If you breach any of these requirements the IRS will strip your company of its S Corp status, and automatically turn it into a C Corporation, which may have a negative tax consequence.
Another downside is asset treatment. Both C and S Corps are not great vehicles if your business will hold appreciating assets, such as land, buildings, stocks, bonds, etc. The tax on them upon sale or upon distribution will be much greater if held in a corporation than if held in a limited liability company or a limited partnership. This is further explained in the book How to Use Limited Liability Companies & Limited Partnerships, written by Garrett Sutton and available at www.successdna.com.
The steps to create a C or S corporation are the same. Articles of Incorporation are prepared and filed, Bylaws are prepared, directors are elected by the shareholders, officers are elected by the directors, and shares are issued to the shareholders. This may sound difficult but we will be there to guide you through it all.
The S Corp Declaration, that Form 2553 we mentioned above, should be filed within 75 days of the incorporation date, so don’t delay if this is how you see your company proceeding. If you don’t file within that 75 day period, the IRS can deny you S Corp status for a full year, meaning that your first year of operations will be conducted at C Corporation tax rates.
The shareholders, directors and officers of the company must remember to follow corporate formalities. They must treat the corporation as a separate and independent legal entity, which includes holding regularly scheduled meetings, conducting banking through a separate corporate bank account, filing a separate corporate tax return, signing all documents related to the business in their official capacity and filing corporate papers with the state on a timely basis. If these steps are not followed, a business creditor may be allowed to “pierce the corporate veil” and seek personal liability against the officers, directors and shareholders. Adhering to corporate formalities is not at all difficult or particularly time consuming. In fact, if you have our affiliate handle the corporate filings and preparation of annual minutes and direct your accountant to prepare the corporate tax return, you should spend no extra time at it with only a very slight increase in cost. The point is that if you spend the extra money to form a corporation in order to gain limited liability it makes sense to spend the extra, and minimal, time and money to insure that protection.
Limited Liability Companies (”LLCs”)
An LLC is a great entity for a beginning business that:
• wants to invest in assets that will appreciate over time;
• is intended to be an estate-planning vehicle to transfer wealth to the next generation;
• wants its owners to hold their interests in the names of other entities or trusts;
• wants to be able to sell ownership interests all over the world;
• wants to provide its owners with flow-through taxation;
• wants to divide up the profits and losses in ratios other than strict ownership percentages;
• wants to protect its assets from creditors;
LLCs are one of our favorite entities to use. They provide both the limited liability protection found with corporations, as well as the flow-through taxation of a partnership. They allow you to divide up profit and loss allocations among the owners in varying ways — and not based strictly on ownership percentages, as is required in C and S Corps. Ownership may be held by individuals, corporations or trusts, and there are no restrictions on where owners live. Annual Meetings are not required but are strongly recommended, both as a good method of communication between the Managers and the Members, as well as establishing that the LLC is a distinct, stand-alone entity. That last point is important, as when corporate formalities are not followed creditors may attempt to pierce the veil of protection of LLCs as well as corporations.
In an LLC, the owners are called “members” and instead of stock, they receive “membership interests” based on the value of assets or services contributed by each member. LLCs can either be governed collectively, by all of its members, or by one or more Managers, who are voted in by the Members and who carry out the day to day functions and business of the LLC. Managers can also be members, or they can have no ownership rights in the LLC at all. Manager may be individuals or entities. An LLC governed by a Manager or Managers is, not surprisingly, known as a “Manager-managed” LLC, while a collectively-governed LLC is called a “Member-managed” LLC. The rules by which the LLC is governed are set out in its Operating Agreement, which is signed by all of the owners.
One of our favorite ways to use LLCs is in connection with real estate investing. Properties held in an LLC are easy to transfer, and incur less tax on a subsequent sale than would be assessed if that same property was held in a C or S Corp. LLCs work well for family asset based entities, where the goal is to increase the family wealth, plan for the future, and maximize tax savings. You can put other things into an LLC, such as day-trading accounts, stock and bonds, insurance policies and annuities.
One of the greatest things about using an LLC is the asset protection aspect, especially in Wyoming and Nevada. Under Wyoming and Nevada law, any creditor who attempts to collect a judgment against someone holding their assets in an LLC is barred by law from seizing the LLC’s assets. That creditor must use a procedure called a “charging order” to recover any monies they are owed. Under a charging order, a creditor receives the right to collect distributions from the LLC when (and if) profits are distributed, but that creditor does not receive the right to vote, or have any impact or control over the daily operations of the LLC. That makes you a much smaller target for litigation-minded individuals.
Limited Partnerships (”LPs”)
Like LLCs, LPs are a great entity for most of the same reasons. They are particularly excellent for use as an estate planning vehicle, because properly structured, they allow parents to transfer wealth to their children tax-free, while maintaining complete control over the assets and the day-to-day operations of the LP. This control continues even after majority ownership has passed, on paper, to your children.
This is because an LP has two types of partners: (1) a general partner who is actively and personally responsible for managing the partnership and (2) limited partners who are passive owners, with no management rights. The general partner can be an individual or another entity, and has broad powers to obligate the LP and manage its daily operations. However, unlike any of the other entities we have discussed, a general partner remains personally liable for the debts incurred by the LP. So, for protection purposes we tend to recommend that you use a C Corp, S Corp or an LLC to serve as the general partner, thus insulating you personally from liability.
A limited partner is ‘limited’ to ownership of his or her limited partnership interests, and has absolutely no control over how the entity operates. Limited partners receive passive profit distributions from the LP. The distributions are taxed at each limited partner’s individual personal income tax rate.
LPs can be a great way for parents to transfer their assets to their children. Using an aggressive gifting strategy, parents can pass along ownership of assets to their children and provide their children with an income stream that will be taxed at their children’s individual tax rate. How to employ a gifting strategy is discussed in detail in Garrett Sutton’s book, How to Use Limited Liability Companies & Limited Partnerships, available through www.successdna.com.
LPs can be an excellent choice for a family with children who may not be mature or capable enough of making good financial decisions. Because limited partners cannot interfere in the daily LP operations, even though they may have majority ownership of the LP assets, the children cannot remove or sell assets from the LP. Even though the general partner may have as little as 2% of the LP interests, it still retains complete control over the LP’s operations. This can be a great way to save your kids from themselves.
Another good reason to use LPs in an estate planning situation has to do with the law. Because LPs have been around much longer than LLCs, the law around how they operate is much more settled. It is very difficult for limited partners to wrest control from the general partner, no matter how high their ownership percentage. Generally speaking, for a general partner to be removed from control takes a finding of fraud or serious misdoings by the general partner.
An LP is governed by a formal Limited Partnership Agreement. Because an LP provides a great deal of flexibility, the written limited partnership agreement can be drafted to tailor the business and family planning requirements of any situation. There are very few statutory requirements that cannot be changed or eliminated through a well drafted limited partnership agreement.
The same great asset protection and charging order procedure we outlined in the LLC section also applies to LPs. If you are sued personally and you own LP interests, a creditor cannot reach into the LP and seize its assets. However, if the LP is sued directly, its assets could be subject to seizure and sale. If you are intending to use an LP to own and operate rental real estate, then make sure you put a comprehensive insurance policy in place to protect you and the LP’s assets from potential claimants.
We hope this overview has been helpful. For further information, or to arrange a consultation with one of our attorneys, please call 1-877-297-5399.
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Taxation: Nevada and Wyoming
A common misperception is that by forming an entity in Nevada or Wyoming you won’t have to pay any income tax on the entity’s profits, no matter where you are located.
First of all, business entities pay federal income tax, regardless of where they are. Secondly, they pay state taxes generated in a state where business is conducted.
However, depending on the type of business, Nevada or Wyoming is an excellent place to form your entity. Both states have minimal tax obligations and reporting requirements, great flexibility in company operations and excellent privacy protection. For example, if you operate a company that provides consumer goods and merchandise, forming your entity and warehousing your products in Nevada can reduce or eliminate state tax obligations.
How much you can reduce or eliminate depends on the type of entity you use and where you live. For example, if you have a flow-through Nevada entity such as an S corporation or an LLC and you live in New York, your profit distributions will have to be reported on your income tax return and will be subject to New York taxes. Operate that same entity as a C corporation however, and it would not pay state income tax on its profits. But, anything being distributed to you either by way of salary or dividend would be subject to New York taxes.
In many cases, from a strictly tax-oriented point of view, you won’t save money by forming a Nevada or Wyoming entity, because you will be required to register that Nevada or Wyoming entity in your state of operation and its earnings will then fall under that state’s taxation laws. Use the “substantial nexus” (or physical presence) constitutional test to determine whether or not your entity will be required to pay state sales, income or other taxes.
“Substantial nexus” is defined as meeting any one of the following criteria, and entities failing this test are generally not required to pay state income taxes:
• Owning or leasing property in the state
• Having an employee in the state (that includes you)
• Engaging an independent contractor within a state to solicit sales in that state
If you meet any of these criteria, then your Nevada or Wyoming entity will be required to register to do business in that other state, and its earnings will be subject to that state’s income tax laws and regulations. However, United States Public Law 86-272 prohibits states from taxing businesses where activity in that state is limited to soliciting sales of tangible personal property, provided that all orders are sent to a separate state for approval and all goods are shipped into the state via common carrier. So, for example, if you have an Internet website selling goods all over the United States and shipped from Nevada, your entity may beat the substantial nexus test. Be careful though – you will be considered an employee (thus failing the test) if your involvement in the entity is not passive (i.e., you do nothing but let the checks come in). And, even though you may beat the substantial nexus test, it applies only to state income taxes, and does not apply to sales/use taxes or any other state taxes.
If your entity fails the substantial nexus test, you have two options. You can either form a Nevada or Wyoming entity and register it to do business in another state, or you can form your entity directly in the state where it will be considered doing business. There are some great benefits to forming an entity in Nevada, as follows:
Privacy. Nevada and Wyoming do not provide shareholder information to the IRS. Nevada also allows the issuance of “bearer” shares, allowing for maximum anonymity and privacy. In addition, nominee officers and directors can be provided to further enhance privacy. Nevada law is very protective of the corporate veil and will rarely breach it and attack the owners personally where companies are in good standing and have maintained minimal corporate formalities, such as the preparation of annual minutes.
Flexibility. Directors, officers, shareholders, managers, members, general and limited partners do not have to live in or hold meetings in Nevada or Wyoming. Foreign nationals may own and operate Nevada or Wyoming corporations from outside the United States (with the exception of S corporations). Telephone meetings for directors and shareholders are permitted. One person may hold all director and officer positions, and directors and officers do not have to be stockholders. Corporate bylaws can be made or expediently changed by Directors. These and other favorable features of Nevada and Wyoming corporate law provide for great corporate flexibility and ease of maintenance.
Favorable Capitalization. Nevada allows you to issue shares for cash or services provided to your entity. Nevada also allows you to issue shares for services yet to be provided, unlike many other states. A Nevada company may purchase, sell, hold or transfer shares of its own stock, another benefit not available in all states.
Low Annual Maintenance Costs. Nevada and Wyoming have minimal reporting and annual maintenance fees. The Secretary of State requires that a $125 List of Officers and Directors be filed once per year along with a $100 business license fee, for an annual fee of $225. Wyoming’s annual fee is $50. As such both states are excellent low cost locations for asset protection
Things You Cannot Do With A Business Entity
There some things that you cannot do with business entities, and which are illegal in most states. The three major illegal uses for business entities are as follows:
1. Fraudulent Conveyance. A fraudulent conveyance is a transfer of assets made intentionally, or found to be intentional, in an attempt to avoid creditors, spouses or judgments. If you have already been served with court documents, or anticipate that you may be sued, or may be the subject of divorce proceedings, you cannot transfer your personal assets into a business entity to avoid having them seized.
For example, you hold a duplex in your own name and a tenant is injured when the roof collapses. The tenant retains an attorney and you receive a letter notifying you that the tenant is claiming damages against you for his injuries. You had been meaning to transfer title of the duplex to your LLC, and decide that now would be a good time. Unfortunately, the matter does not settle and when it goes to trial, the tenant’s attorney makes a claim that you fraudulently conveyed the duplex into the LLC to protect it from a valid claim. In addition to finding you at fault for the tenant’s injuries, the Court also rules that by transferring the duplex into the name of the LLC after you had been notified of the tenant’s claim, you have committed a fraudulent conveyance. The Court rules that the duplex must be transferred back into your name, and the tenant allowed to attach their judgment against it. The Court also fines you for your attempt to avoid the judgment by conducting the transfer in the first place.
2. Medicare Fraud. Medicare fraud occurs when individuals transfer assets into the name of a business entity in order to reduce their personal income or conceal their assets to pass income and net worth tests for Medicare eligibility.
For example, your parents are retired, and living on a small, fixed pension. They also hold several real estate properties, which have a combined value of $1.5 million. Your father’s health is failing, however, and your mother is anticipating that his medical expenses are about to increase dramatically. Although your parents live on a fixed pension and qualify for Medicare on that basis, by adding in the value of their real estate holdings, they become ineligible. Your mother is wondering how she will keep up your father’s medical expenses on their pension, and is anticipating having to sell at least one of the properties to make sure there is enough money to cover them. You feel that if your parents formed a Limited Partnership with a corporate general partner, and transferred all of their real estate holdings into the Limited Partnership, the assets would no longer be in their name. Without having the assets in their name, they could then report their pension income on their Medicare application and qualify for benefits. This type of transaction is considered fraudulent and is prohibited.
Medicare fraud is a federal offense, which can result in severe monetary penalties.
Please bear in mind however, that there is a difference between Medicare fraud and proper estate planning. Estate planning is a strategy to minimize the tax burden on your estate, and to ensure that you are able to transfer a maximum amount of wealth to your heirs with a minimum tax payment to the federal and state governments. The best way to avoid a possible claim of Medicare fraud is to make sure that estate planning begins early, and while everyone is in good health.
3. Money Laundering. Money laundering happens when the proceeds of crime are funneled through a business entity in order to create the appearance of legitimate income. For example, a drug ring forms an LLC to purchase real estate properties. The members use a regular corporation as the Manager of the LLC, and use the proceeds from sales of drugs to purchase their membership interests in the LLC. The LLC then takes the money received from its members and purchases luxury real estate on Martha’s Vineyard.
This is money laundering, which is a criminal offense at both state and federal levels. Parties convicted of money laundering can face jail, monetary penalties and the seizure and sale of assets bought with the proceeds of crime.
Garrett Sutton
http://www.articlesbase.com/corporate-articles/what-is-the-best-entity-90039.html
A big story that made the rounds in the financial media last month was Jim Cramer’s (of the Street.com) statement that some hedge fund managers spread false rumors about a company to large trading desks and the media to drive a stock price lower. He said this practice is illegal, but easy to do “because the SEC [Securities Exchange Commission, the U.S. regulatory body] doesn’t understand it.” Furthermore, the extremely wealthy former hedge fund manager boasted, “What’s important when you are in hedge fund mode,” says Cramer, “is to not do anything remotely truthful, because the truth is so against your view.”
For those of you that remain skeptical about the deceitful practices of investment professionals and firms, perhaps an insider’s admission will finally convince you. Why these stories even make big headlines is beyond me. As a former industry insider myself, I’ve been saying for years that the investment industry is full of investment professionals, everyone from financial consultants to private wealth managers to professional money managers, hard at work weaving the emperor’s new clothes. However, only when a big mouth like Cramer speaks of the dishonesty that netted him great wealth does it attract attention.
For those of you not familiar with the fable “The Emperor’s New Clothes” let me summarize it for you. Long ago in a fabled kingdom, there lived an emperor whose vanity was legendary. Two swindlers, Guido and Luigi Farabutto, knew that they could capitalize on this emperor’s character flaw to make a huge profit. They approached the emperor and told him that they would sew him the finest suits of a very expensive special cloth that would be invisible to anyone that was stupid or of low character. The emperor, fearing that he would not be able to see the clothes, sent two of his men to go see the suits. The men returned, and afraid to tell the emperor they could not see the clothes, told the emperor that the suits were the most beautiful suits they had ever seen.
When the emperor went to see the Farabutto’s, knowing that his servants had been able to see the clothes, he did not want to admit that he could not see the clothes for fear of being considered stupid and of low character. So he proceeded to allow himself to be dressed in non-existent clothes for a parade through town and proceeded to walk through town in his underwear. When he came upon a young boy that pointed at him and said, “But he has no clothes”, only then did the emperor realized that he had been swindled.
It is amazing to me that many investors, even those with millions at investment firms, actually believe that their advisor or their firm has their best interests at heart. In fact, in my list of “101 Reasons Why Managing Your Own Money is the Only Way to Build Wealth” at http://www.smartknowledgeu.com, I’ve given readers 101 reasons why this is very, very rarely the case. Of course, everyone thinks that their advisor or financial consultant is the one guy or gal at their firm that actually cares about their financial security. If only they could spend just one day in the trenches with their advisor, they would 999 times out of 1000, witness a completely different story. I’ll relay another strategy I heard about a top financial consultant at a top Wall Street firm that should get your attention.
This top financial consultant managed many million dollar accounts. The way he would get wealthy investors to trust him was to demonstrate to them his ability to pick stocks that performed phenomenally well. To accomplish this, he would find a very thinly traded stock that historically had been very volatile. He would pay for a list of high net worth clients, call ten people on that list and tell them he was a top financial consultant at his firm. Of course, this would not get the attention of these wealthy individuals because they did not know him from Adam. Knowing they would be hesitant to hand their money to him and begin a relationship with him, he would acknowledge their reservations. He would then proceed to ask them to write the name of this volatile stock that he had researched on a piece of paper. He would then tell these 10 individuals that his stock picking methodology was so good that he was 100% sure that if they invested in this stock, they would make a healthy profit in a short period of time.
Then he would take the next 10 people on the list, repeat this scam, but instead, tell these 10 people that he was 100% sure that they would make lots of money from this stock if they purchased put options on this stock. Then he would wait several weeks until the stock moved 25% or so. If the stock gained, he would call the 10 people that he told he was 100% sure they would make lots of money from buying the stock. If the stock lost 25% or so, he would forget about the 10 wealthy individuals he promised would make lots of money by buying this stock and call the 10 people he told to short the stock. When he called these individuals they were amazed that he was right regarding a stock that they had never heard of, and many agreed to give lots of money to him.
I tell you this story because schemes like this, designed to make it appear as though these investment “professionals”, and I use this term very lightly, really know what they are doing, when in fact, they are selling nothing more than emperor’s clothes to you. In fact if you have been reading my blogs for a while now, you know that the strategies of diversification, asset allocation, and low volatility are all just emperor’s clothes as well. Though they may sound great to you, that’s exactly what the very best of all sales strategies accomplish. They are designed so well that they make you feel comfortable and in charge. The very best emperor’s clothes “sell” customers without the customers even realizing that they had been highly selected targets. Just search our “Down the Rabbit Hole” and “Educational resources” articles at http://www.theundergroundinvestor.com to discover why all of the best known investment strategies today are nothing more than emperor’s clothes.
My estimate of the percent of professionals that weave emperor clothes every day to hand to investors is 99%. They weave schemes, marketing strategies, and sales strategies in complex ways so that upon presentation to you, they seem like the finest financial strategies designed especially for you, their finest clients. Only in the end, these strategies leave you financially naked, so much so, that even children with no financial level of sophistication, would comment upon seeing these investors that so willingly let themselves be taken for a ride, “But he has no wealth.”
In fact, just last week, I read this article with statements from the CEO of a firm that handles the accounts of some of the wealthiest people in America about what it takes to truly build wealth. Many of his statements, though emperor’s clothes arguments that most people accept as truth, were so ludicrous that I laughed out loud, knowing that he had been able to weave emperor’s clothes for the top tier of wealthiest clients in America. Don’t get me wrong, it’s not that I believe that everyone in the business is out to scam you out of your hard earned money. There are some truly good, honest people in the business.
However, due to how firms compensate their financial consultants, this much is inevitable. There will come a time, and most likely several times, when a consultant will have to make a choice between you and himself/herself. This means that the consultant will have to choose between doing the absolute best thing for you and doing something not as good for you but better for his or her paycheck. And having been in the business, I know plenty of consultants that chose the latter many times and rarely any at all that chose the latter infrequently.
Always remember Jim Cramer, someone that built an estimated fortune of $100 million by manipulating wealthy clients, stated, “What’s important when you are in hedge fund mode, is to not do anything remotely truthful, because the truth is so against your view.” And when you read Cramer’s statement again, know that this mentality predominates among almost all investment industry professionals, not just Jim Cramer.
J.S. Kim
http://www.articlesbase.com/investing-articles/why-the-vast-majority-of-investment-professionals-are-not-trustworthy-139690.html
Whatever, could a mall in Ahmedabad, or an office complex in Hyderabad, and say a residential township in Baroda have in common? Simple, the answer to all three is that have all been built courtesy of funds put together by rich Non-Resident Indians.
Given the returns offered by Indian real estate, analysts after carefully studying the realty sector confirm investments through informal funds floated by dollar-rich NRIs are very much on the rise. It is surmised by these same real estate analysts that around $600-million may have come in through such investments in the last calendar year alone. Investments through formal channels may easily have been many times more, though exact estimates are not available.
Akhil Hirani, Managing Partner of Majmudar and Co, a Mumbai law firm says: “We get around five or six such enquiries every week, mostly from NRIs who want to put together a fund to build a property, stay through the stipulated lock-in period and then sell and exit.”
Most of the investment, which is usually $10-25-million comes from funds sourced from an extended NRI clan and friends, according to Hirani. Most of the investors, he says, are interested in projects in their native cities, where family or close friends are in a position to oversee their investments.
Several such investments have taken place in smaller cities with large NRI communities, such as, Jaipur, Hyderabad, Vijayawada, Ahmedabad, Baroda and Surat. And, most of the investments are routed through Mauritius, to leverage double tax treaties. Typical investments take place in projects with low costs, and which allow both developer and investor to gain, the former by easy access to capital, the latter from an attractive return on investment.
Over the past three years, investment in Indian real estate has grown rapidly, with annual average returns in smaller cities going up to 50%. A recent study by Jones Lang Lasalle, global real estate consultants, estimates that $ 8-billion of private equity could flow into the Indian real estate over the next 18 to 30-months. And, an Associated Chamber of Commerce study estimates, around 25-million NRIs in a 125-countries are investing in immovable property in India, showing a keen interest in residential properties, rather than commercial ones, according to the study.
For more information on Real Estate Agents, MLS visit Propertiesmls.com
Source: IndiaRealEstateblog
Propertiesmls
http://www.articlesbase.com/real-estate-articles/indian-real-estate-a-lure-for-high-net-worth-nris-113179.html