Custodial Investment Accounts

A custodian account is opened by one custodial individual for the benefit of a minor. This is considered a fiduciary account where the adult makes all financial and investment decisions on the account.
The account is subject to the UGMA - Uniform Gift To Minors Act or UTMA.

Custodial accounts with a financial advisor or brokerage firm are under state laws. These accounts are normally used for children of estates, education investments and other circumstances or services.

Custodial Investments

Securities and investment made in the account are done for the benefit of the minor. All transactions must be done in a cash account. No margin trading is allowed.

Securities can include: Stocks, Bonds and Mutual Funds.

A financial advisor will normally work on a percentage of the total net assets managed in the custodial account. A commission is not used for advisory work. This means if the investment advisor is earning a fee on the assets, the planner can charge commission on the trading services by transaction.

A custodial account can be a wise choice if the minor has significant money to their name
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Corporate Bonds - Convertible Corporates

Corporate debt that is backed by the full faith and credit of the issuing company are known as debentures. Corporate debentures are rated by companies for credit quality. You can buy investment grade or speculative bonds.

Secured copororate bonds are backed by an asset or collateral. When a bond is secured, it is backed by collateral. That collateral could be cash, securities, real estate or equipment.

Corporate bonds can be callable by the issuer. Call dates can be placed on the bond and this allows the company to redeem the bonds early beginning on set dates and at set redemption prices. This is normally not a good feature for investors, because an issue is normally called when interest rates are low - lower than your coupon rate. The main reason debentures or bonds in general are called, is because the issuer wants to refinance their debt at a lower rate. When this happens, the investor is faced with having his money (par) returned early, but the higher paying bond is no more. To make matters worse, interest rates are lower in the market, so finding a suitable replacement will be difficult, if not impossible. Callable bonds to pay a higher yield though, so for some the risk is worth it.

Convertible

Some bonds issued by corporations are convertible into common stock of the issuing company. This conversion feature acts as an incentive for the bondholder. The company is hoping the investor eventually converts into the common stock of the company. The investor finds convertible corporate issues attractive, because they have an option to buy stock in the company at a fixed conversion price.

Converting a bond is based on par value and the fixed conversion price that appears on the bond. The conversion price is not the price the stock is purchased at. So, it is unlike a "Stock Option". The time to convert is the investor's choice. An example:

A customer owns ABC convertible bond that is selling in the market at $1040 or $104, the common stock is selling at $54 and the conversion price is $50. The investor would like to convert, but will only do so when the stock value is trading above the bond value. "Parity" would occur when the bond and stock are equal. The first thing you must find out is the amount of shares the customer is entitled to. We get that by dividing the conversion price into the par value of the bond ($1000). $1000 divided by 50 equaly 20.

The investor can convert out of the bond into 20 shares of stock - no more no less. The stock is currently trading at $54, so the the stock value is found by multiplying 20 (shares) by $54 (stock value), which equals $1080. $1080 is above the bond selling price of $1040, so converting at this time would meet the customer's objectives of converting only when the stock value was above bond value or "above parity".

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Defined Contribution Corporate Plans

401 k accounts are a type of defined contribution account.

A corporate retirement plan where the employee contributes a defined amount based on earnings or other factors. It is a tax qualified retirement plan. Eventual investment and retirement value of the account may be transferred or rolled over into another corporate plan.

These are different from defined benefit set ups where the amount put in by and for the employee is packaged with years of service, salary and other factors to calculate a monthly benefit. Contribution retirement accounts are taken out, transferred or people can do a rollover.

The years of service and amount of contributions will effect the account balance and asset allocations are a factor in the performance of the investments and rate of return. This is also true in defined benefit corporate retirement plans.

Contribution plans like 401k's and group IRA accounts are much more popular than benefit arrangements nowadays. With much of the workforce employed with small business or non union type companies, the need for providing a fixed monthly benefit at retirement and calculating that benefit over time is less appealing to a company when a 401k or other employee controlled plan is easier for the company.

Many people feel it is because of the growing aspects of defined contribution plans that less people are saving enough money in their retirement accounts.

Retirement Planning Help or Questions

If you are an individual with a retirement account or 401 k and need assistance with in service distribution or other transfer rollover questions, American Investment Training can help.

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Annuity Account Payout - Annuities and Payments

Variable Annuity Plans

Annuities that pay a fluctuating payout or rate of interest to plan holders. The contributions made into the annuity are invested into a separate account of actively managed common stock.

Investing Accounts

During the variable annuity’s accumulation phase, the contract owner selects the variable subaccounts to which his or her premium is allocated and the amount or percentage allocated to each. The owner chooses the variable subaccounts and percentages at the time of contract application.

Annuity Payment Options

Life Annuity: This annuity will continue for life. When the person dies, the payments end. These annuities produce the fastest payout, but carries risk to other dependents.

Period Certain: This annuity covers the life of the person, but will carry a period (ie: 10 years) where if the person dies before that period - a family member can get the payments until the period date.

Joint and last survivor annuity: This can cover several members to get payments after the main annuity holder dies. This is slower payout, because there are other names on the account.

Variable annuity contracts must state clearly how the dollar amounts of variable elements are determined and that the amounts may increase or decrease.

There is also a 10 day period from the date the contract is signed for the investing individual to cancel the agreement.

Fixed Annuities

ISA Accounts - Retirement Individual Savings Accounts

The following explains the fundamentals and benefits of opening up an ISA. As with other qualified retirement plans that are tax qualified, they can be used by many people looking to save more for retirement.

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The Tax Advantages of an Individual Savings Account (ISA)

The successor to the TESSA, the ISA (or individual savings account) provides a government regulated savings scheme for encouraging individuals to save rather than spend as a means of economic and financial control. By encouraging saving in the economy, inflation can be kept at a sustainable and manageable level, particularly where the economy is otherwise performing well, and the ISA has proven to be an invaluable asset for maintaining economic stability in this way. But what exactly are the tax benefits of the individual savings account, and how do they work in practice for those looking to stash some extra money into savings?

Monetarist economics revolves around the basic idea of controlling the amount of disposable income available and the money supply in an attempt to curb or stimulate economic growth as the particular economic climate demands. One means of doing this is to try to encourage the general population to hold onto their money for longer, rather than the excessive spending that can push up inflation and put pressure on the economy. The ISA works by encouraging those with excess cash to put it aside without having to worry about the associated tax burden. Payments into an ISA are tax deductible from income, and the interest accrued within the ISA is also tax free. In fact, the capital gains from an ISA are also tax free upon withdrawal, which ultimately makes it a valuable way to make money from your money.

Under normal savings schemes and taxation principles, paying money into an account cannot be deducted from your taxable income, meaning you still have to pay tax on the full amount include the sums paid into your savings as if it were income earned. However, by turning this on its head and allowing a deduction, savings can actually help reduce the direct tax burden, and so by encouraging saving in this type of account by reducing the amount of tax the saver has to pay. Secondly, the fact that the money in the savings account is allowed to earn money through investment tax free make it a prudent way to store your money and allow it to work for you, rather than the tax which is deducted at source from income earned in a regular savings account. Finally upon withdrawal from the account, there is no tax to be borne, leading to an all round attractive investment proposal for those with the disposable income to afford it.

Savings can be a great way to earn money from excess cash, and provide you with the resources to see you through for that rainy day. Within your annual personal savings limit, the ISA can be the best possible way to make a decent return on your money through high-yield low risk investments. Whereas normally one is liable for tax on the totality of his income above the annual allowance, the individual savings account allows you to make the most of your money whilst also saving from the tax implications of having excess income.

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Self-Directed IRA/401K Fees -- What Gives?!

It is fair to say that any of us, regardless of what we do for a living, need and should be compensated for our livelihood. This goes for any facilitator, administrator or custodian of self-directed IRA and 401K accounts. In many cases, not only is a client paying for the services rendered, but also the expertise of the individual or firm providing the service.

However, with the plethora of individuals/firms providing services in the arena of self-directed IRA and 401K accounts, there are some unique differences in the amount of fees charged for these services. Please note that this article is not intended to call into question what fee structures are being utilized, but to educate individuals on some salient points related to these fee structures.

First, as a reminder, there are practical differences in services rendered by facilitators, administrators and custodians which may significantly justify a particular fee structure. One must determine if the level of services warrants certain fees. For a refresher on the differences between facilitators, administrators and custodians, please review a previous Fulcrum Investment Network blog.

For the buying public, I recently investigated the fees of two administrator companies to determine the costs associated with establishing a self-directed IRA or 401K. In fairness, the information provided herein was confirmed with both companies. Note: an interesting point. Both of the companies, while not personally establishing a SD 401K, will "farm it out" to a third party and prefer not to do 401K plans accordingly.

To draw a conclusion, one must understand the hypothetical parameters utilized in comparing costs and fees, etc. For this article, the following hypotheticals were used:

$500,000 -- amount to be transferred from a "traditional" custodian to the new company (administrator). Investments Owned by the IRA/401K -- 4 (two real estate holdings and 2 mutual funds). Assets Held -- All 4 assets were held for the year and then sold at the end of the plan year. $50,000 -- amount in liquid, money market account within the IRA/401K.

Company A

Account Set Up Fee (Initial Fee) $ 50.00

Investment Transaction Fees $ 800.00 ($100.00 per asset transaction, both purchase and sale)

Annual Account Maintenance Fee $ 1,000.00

Minimum Total First Year Fees $ 1,850.00

Company B

Account Set Up Fee (Initial Fee) $ 50.00

Investment Transaction Fees< $ 800.00 ($100.00 per asset transaction, both purchase and sale).

Annual Account Maintenance Fee $1,850.00

Minimum Total First Year Fees $2,700.00

Wait (Wait #1), that's not it!

This example is for an IRA. The costs for a self-directed 401K increase by a minimum of $300.00 for an annual review of the 401K plan document to ensure compliance.

Wait (Wait #2), want more?? The aforementioned fees do not include any of the following (that a client may or may not utilize):

Domestic or International Wire Transfers; Cashier's or other Official Bank Check; Overnight mail; Returned items of any kind; Reprocessing of incomplete documents; Loan or Mortgage Servicing Set-up and Deman for Payoff; Re-registration of assets; In kind distributions; Partial or Full Termination fees; and, Late fees.

WAIT (Wait #3). Remember in the aforementioned example, $50,000 was left in a liquid, money market account? In the case of these two companies, any funds that are retained in the account and NOT invested into a traditional or non-traditional asset, receive interest. Well, we do know that interest rates vary; however, a client with either of these companies receive 1/2 of 1% interest on that money while not invested. Is this a revenue source for the administrator/custodian? Absolutely. Because while we do know that banks are not paying much in interest on such accounts, my last observation was that they were paying more than 1/2 of 1%. Therefore, the additional interest is retained by the administrator/custodian.

Please keep in mind that the aforementioned example with the two companies is an illustrative example of what is "out there" in the market place. It is not to suggest that these two companies' fees are either the highest or the lowest. It is also not to suggest that their fees are not justified. A consumer must do their due diligence to determine not only their comfort level with any facilitator, administrator or custodian but also know exactly what they are being charged in fees so that they can do diligent shopping of services.

If one are interested in self-directing, do it! Just be thorough in your due diligence. The amount of fees you pay does make a difference not only to you and your pocket book but also to your ROI (return on investment). No one wants to see their ROI gobbled up with fees.

John R. Park is President of PGI SelfDirected (www.pgiselfdirected.com) and co-founding Partner of Fulcrum Investment Network (www.fulcruminvestmentnetwork.com).

IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out

Self-Directed IRA & 401K Accounts -- This is Self-Directed??

Many of us remember our first "dive" into the municipal swimming pool or lake. Once we overcame the trepidation of diving head first into the expansive body of water, did we dive in completely or just halfway?

The same is true with self-directing your retirement assets. While your plan must be established and continually adhere with all IRS and Department of Labor regulations, the code in no way prevents a fiduciary (e.g., you, yes it can be you) from controlling all aspects of the plan. This is true provided the fiduciary is not "self-dealing", which is expressly prohibited. A fiduciary can only act in the best interests of the retirement plan, and may not personally benefit.

So, if that is the case, why do most individuals believe that other individuals or entities must "do" everything for you after the self-directed plan is established? Well, the answer is lack of education on the part of the self-directed participant.

Once a self-directed plan is legally structured, an individual can have full control of their retirement assets and be the fiduciary of this plan. Practically speaking, what this means is:

1) Ease of Investing with no Time Restrictions -- What if the self-directed participant wanted to make a timely investment only to find out that the custodian/administrator was going to need 10 days to process the request? One might argue that if that self-directed participant had control of their own money, the time restriction, in that example, is cut approximately 10 days!

2) Execution of Transactions -- Whether it is paying maintenance fees, repair fees, taxes, mortgates, etc., ficudiaries CAN execute the same transactions, and at no cost to the plan (remember this is the participant's OWN retirement assets). SIMPLE ENGLISH -- does a self-directed participant want to pay fees every time they want a transaction executed for something they can do themselves? This, by the way, can cost a participant hundreds of dollars a year in transaction fees.

3) Savings With Account Maintenance Fees -- Other than what a participant's bank may charge as a monthly checking account service fee (e.g., $0 - $15), is there any reason to pay a custodian/administrator fees for account maintenance?

4) Having NO Account Balance Fees -- Many custodians/administrators charge the participant MORE in account balance fees as the participant grows their retirement assets. Does this make any sense to anyone? Kind of like your broker.....the more tha balance grows in your account, the more they make!

5) "It's Your Money" -- Tying into Items 1-4 (above), bottomline is that most individuals (wait, maybe 100% of the people), if they can, would rather have their hard-earned retirement assets in an account that they actually can control and be personally responsible for. Why pay someone else to deposit your retirement assets when you can control them yourself?

Self-directed participants are concerned with the following:

1) Establishing a self-directed plan that meets all IRS/Department of Labor regulations;

2) Security of their assets:

3) Growth of their assets: and,

4) The ability to control their assets (if they didn't want control, why self-direct in the first place?).

As a result, once the self-directed participant receives assistance with Item #1 they, as fiduciaries of their own retirement plan, can take control of Items 2 - 4.

Get educated....remember, with self-directing your own retirement assets, what you don't know can cost you...a lot.


John Park is President of PGI SelfDirected (www.pgiselfdirected.com) and co-founding Partner of Fulcrum Investment Network (www.fulcruminvestmentnetwork.com).

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