The Great Divide

My blind date's name was Paula. Mutual friends knew that she and I were both recently divorced. And they knew that we were both somehow in the world of finance. So they figured we'd hit it off.

What the heck. After my last date with the gym teacher - 90 minutes on the finer points of field hockey and the virtues of stomach crunches - I looked forward to meeting a woman with whom I might be able to discuss more interesting things like, um, beta and standard deviation.

Tuesday afternoon my date and I met for lunch at the Greek diner up by the mall. We chose a booth in the back, opposite the video poker machine. Paula asked me about my kids. I asked about hers. "Where do you know Jean and Marc from?"... "How long have you lived in Allentown?" Then on to careers.

Paula called herself a "financial architect," and she explained that her job was "to help people build a solid foundation for a safe and secure financial future." That sounded impressive, but when the alliterations and euphemisms gave way, just about the time our food arrived, it turned out that Paula sold life insurance and full-load mutual funds. On commission.

Me, as I told this gal, I'm a strictly fee-only kind of guy. From the day I first decided I wanted to be a financial planner, there was never any question about it.

"Oh," said Paula, lifting a forkful of Greek salad to her mouth. "I could never charge a fee. I want my clients to keep all their hard-earned money for themselves." I looked for a glint of humor in her over-mascaraed eyes, but there was none. Could she be for real? I fantasized how Paula would look with iceberg lettuce and feta cheese...oh, nevermind. I kept my thoughts to myself - or at least I didn't share them verbally - and took another nibble of my chicken gyro.

According to the Financial Planning Association (FPA), about a quarter of all planners, or at least of FPA members, are "fee only." They do not take commissions. That's me. I'm new to the field, still in school, having just recently signed on as an advisor rep with a strictly fee-only firm. The other three-quarters of FPA members do take commissions, as do, of course, all stockbrokers, insurance salesmen, and annuity hawkers. That's my date.

The two camps - us and them, Paula and I, the commissioned and the uncommissioned - well, we tend not to like each other very much. In fact, sometimes the feelings run deep. All this was new to me when I decided to get into the business not long ago. The degree of mutual animosity, the contempt, and the sanctimony can all be rather astonishing.

One fee-only planner I know, a guy named Frank, has been in the biz for many years. Says Frank of commissioned planners: "They are lowlife scum. I absolutely hate them." Atop his desk Frank keeps a little porcelain statuette of three pigs rolling in mud. "I keep it there to remind me of what I never want to be," he says. Another fee-only planner I know, Chris, says, "How can they possibly sleep at night? I could never sell my soul like that."

In Paula's world, there's apparently no less loathing. Fee-only planners are seen, so I understand, as elitists, unsympathetic to the unwashed masses who can't afford out-of-pocket fees, or whose meager portfolios are of no interest to fee-only firms. Among some financial planners, I'm told, fee-onlies are seen as losers, without the spine to compete in the commissioned world, perhaps not even smart enough to pass the Series 7. Ouch.

One guy I know, Charles, is president of a financial-planning group that sells stocks, bonds, options, you-name-it, all on commission. He sees fee-only planning as an impractical niche. "You fee-only guys have this holier-than-thou attitude, and it is, quite frankly, ludicrous," Charles says to me. "The majority of financial products in America are sold on commission. Are you going to tell me that by restricting my product options to only no-commission products that I'm benefiting my clients? C'mon, Russ."

C'mon, Charles. Wake up and smell the coffee futures, I'm inclined to say, but, as with Paula, I bite my lip. It doesn't matter how many products you have to offer, Chucky, you're always going to be inclined to offer the ones that pay you the big, fat commission. After all, little Johnny needs braces, and teenage Jennifer is hankering for her own car.

Oh, there I go. In truth, I may have been swayed by guys like Chris and Frank to assume the worst. But maybe there are commissioned planners out there who can be objective. Maybe Charles is one. He certainly seems like an honest guy. I'd like to give them all the benefit of the doubt. I'd like them to give me the benefit of the doubt. Give peace a chance. Okay? Let's all be friends. But lovers? Hmmm.

As it turned out, Paula didn't have much to say about beta or standard deviation. But she had lots to say about her commissions. In between bites, she explained to me that she gets to keep a third of the first year's premiums on any life insurance policies she sells. "Business was good after 9/11," she cooed. "Everybody, you know, was kind of obsessed with death."

I started to sorely miss that gym teacher.

"But now business is pretty slow," Paula continued, ejecting an olive pit from between her lips, and letting out a long sigh.

That, I supposed, was my cue to pick up the check. So I took a final bite of gyro, wiped the grease from my lips, and flagged down the waitress. Then I told Paula that I'd had a good time, and I'd be calling her. We both knew that wasn't true. — Russell Wild, illustrations by Bruno Budrovic

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Taxes: To Pay Or Not To Pay
That Is The Question When It Comes To Highly Appreciated Real Estate

With today's volatile real estate market, selling highly-appreciated real estate can seem more confusing than ever. In the past five years, many areas of San Diego have experienced more than 100-percent increases in value. However, owners of highly-appreciated properties should consider their options before just selling. "Even though markets are cooling, substantial gains and great wealth can be realized if the right strategies are used," says Paul Drolson, a certified financial planner and president and founder of Wealth Advisors, Inc., a private wealth management company in Del Mar that specializes in providing integrated financial solutions for high net worth individuals, families, and business owners.

Selling and paying the taxes (15 percent federal long-term gains tax if held more than two years and over nine percent for the state of California) leaves sellers with 20-25 percent less than before the property was sold. Another option is an installment sale that allows for the taxes to be stretched out over a period of time instead of all coming due up front.

Defer and preserve through the 1031 exchange strategy. There are two main tax-deferral strategies available. The first is a 1031 tax-deferred exchange wherein no gain or loss is recognized if the property(ies) is exchanged solely for another of like kind. Capital gains tax is deferred if the replacement property(ies) is of an equal or greater value than the relinquished property(ies) and if all of the exchange funds realized from the sale of the relinquished property(ies) are used to acquire like kind replacement property(ies).

Another 1031 strategy is a tenancy in common (TIC) whereby two or more individuals own an undivided interest in the property. TICs have sponsors who purchase and apply for financing on the property (generally triple net with A-rated tenants). Perhaps the most flexible, this option allows investors to control assets, defer capital gains taxes indefinitely, receive a passive income, and no longer be property managers.

Last, but not least, is the private annuity trust. This strategy allows real estate owners to defer, preserve, and pass the asset on to their heirs. Not to be confused with an annuity issued by an insurance company, this is a trust whereby an owner is able to transfer ownership of the property before the completion of a sale to a buyer. The trust pays the owner for the property with a private annuity arrangement and stipulates that payments from the sale go to the owner for the remainder of their life. The trust then sells the property to the buyer and receives cash for the property. In a typical sale transaction, the seller is required to pay capital gains taxes on the entire value of the property immediately. However, the private annuity contract allows payments to be made in installments over the lifetime of the seller. The seller is only taxed on the payments when they are received, rather than all up front. Sellers are also able to defer depreciation recapture taxes, in which the IRS recaptures depreciation for which the owner had previously received deductions.

The private annuity trust arrangement, in many cases, gives the most globally-beneficial tax, estate, and asset-protection possibilities for real estate as well as other highly-appreciated entities such as stocks, equities, and businesses. In addition to the tax-free pass of assets to beneficiaries, it also offers the often overlooked benefit of protection from lawsuits and creditors. "The real beauty of the private annuity trust is that it allows people to move out of highly-appreciated real estate and diversify, especially at this time in the market," says Drolson, who recommends working with a team of competent tax, legal, and real estate professionals.

Shakespeare, were he living today, would surely reside in the Ranch and would say, " 'Tis nobler to defer." (858/481-4088, www.wealthadvisorsinc.com) — A. Crown