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Wealth Management

IS PRIVATE PLACEMENT LIFE INSURANCE THE PERFECT PRODUCT FOR GLOBAL HNW FAMILIES

By Louis Zuckerbraun, Managing Director, GMG Insurance 

 

Everyone wants to know that their family will be okay after they die and will do whatever they can to ensure that. That’s as true for high net-worth individuals (HNWIs) as it is for anyone else. But in an age where families are spread across the globe, leaving the kind of legacy you want can be incredibly complicated.

One product that could make things a great deal more simple is Private Placement Life Insurance (PPLI).

Originally conceived in the US, PPLI is rapidly gaining traction across Europe. Not only is it more efficient than traditional forms of life insurance, allowing the investments within the policy to hold many more types of assets and asset classes, it can also be a useful way to overcome specific issues such as management and control, beneficial ownership and substance.

 

PPLI explained 

While PPLI is gaining popularity across the globe, it’s still a relatively unknown product set, even among the HNWIs it would most benefit. It’s therefore worth looking at exactly what PPLI is.

Effectively an investment wrapped inside an insurance policy, a PPLI policy’s cash value depends on the performance of the investments within it. These investments can include hedge funds, mutual funds, and other potentially lucrative assets. Ultimately, it’s down to the policyholder to choose what kinds of investment they’d most like to have, meaning that they have a lot more freedom than they would with an ordinary life insurance policy.

Depending on the jurisdiction, a PPLI policy can also provide significant tax savings. In the US, for instance, the Internal Revenue Code treats insurance differently than it does investments. So, by packing an otherwise taxable investment in a tax- free policy, investors can reap big rewards on the investment, as well as the death benefit, tax-free.

 

Louis Zuckerbraun

Going global 

But PPLI policies aren’t just beneficial from a tax perspective, they’re also useful for anyone with a global family.

A PPLI policy is generally by nature a globally focused vehicle. So, for instance, approved banking partners and advisors in Switzerland can work with US persons, to provide an investment vehicle that has a global focus.

The policy would purchase global funds and be managed by a global advisor who is outside the US but understands the US market. This makes it perfect for anyone who wants to diversify from traditional United States Dollar denominated investments but wants to maintain tax compliance and work with international advisors.

This solution works very well with a global family who may have, as an example, a child studying in London, or with international businesses, and who wish to build exposure globally in a tax efficient and US compliant manner.  An international PPLI policy would be very beneficial to the family.

Further, the policy can be denominated in Swiss Francs, US Dollars or Euros depending on the needs and strategies of the policy owners or beneficiaries and still pay tax efficiently to the US persons.

These features also mean that a PPLI policy can be a useful replacement for, or supplement to,  a family trust, especially if a tax authority is unlikely to accept the trustees as the legal owner of the assets held in the trust.

 

A clear choice 

With more and more families living in different geographies, a PPLI policy is therefore an option that should be playing a much bigger role in the mainstream. It provides an accepted and compliant solution to the planning challenges faced by ultra-high net worth and high net worth families.

While life insurance, in general, provides a mechanism for estate tax planning, asset protection and investment flexibility that cannot be beaten by any other compliant tool,  PPLI provides the flexibility and protection that informed high net worth families increasingly require.

If you’re looking a purchasing a PPLI policy, however, it must be managed by professional insurance and legal advisors who understand the product.

 

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Wealth Management

TWO TO TANGO? MARKET DATA AND OPINIONS IN INVESTMENT MANAGEMENT

MARKET DATA

Sebastien Lleo is Associate Professor of Finance and Head of the MSc in Risk and Financial Technologies at NEOMA Business School (France)

 

Analyst views and expert opinions matter. They are an invaluable complement to market data when it comes to formulating relevant capital market expectations and to strengthening risk management models and practices. But watch out for behavioral biases!

“Garbage in – garbage out!” Every investment management professional has heard the warning that poorly formulated capital market expectations will get portfolio optimisers to produce inefficient, unrealistic, and even outright dangerous portfolios.

Thus, considerable efforts have taken place to turn available economic and market data into accurate capital market expectations. These lead to the development of slick statistical methods, effective econometric techniques, and powerful machine learning algorithms.

Opinions can also be an invaluable source of insights to construct accurate capital market expectations.

What are the types of opinions on financial markets?

Opinions take multiple forms in financial markets. They include analyst views, opinions from political and economic experts, super forecaster predictions, and investor polls.

Moreover, opinions abound on financial markets. Consultancy Quinlan & Associates reported that the bigger banks and brokerages emailed over 40,000 pieces of research every week in 2016, despite continuing job cuts in the financial sector. Social media also contribute to the spread of opinions: according to the financial website Modestmoney.com, there are at least 839 active financial blogs published in English.

Why should I use expert opinions?

Opinions have three key benefits.

First, opinions can be a crucial complement to traditional economic, corporate and financial market data to construct realistic capital market expectation, and keep those up-to-date. This statement is especially true in times of heightened uncertainty, such as market bubbles and financial crises, when traditional data fail to provide an accurate assessment of market conditions.

Second, opinions can strengthen risk management models and practices. Opinions can widen the range of scenarios considered in portfolio optimisation and risk management. Dissenting opinions provide a cornerstone for the construction of meaningful stress test scenarios.

Third, we can use opinions, even when traditional data are not. For example, assessors evaluate insurance claims, and appraisers estimate the value of illiquid assets, such as real estate and collectables, periodically.

How easy is it to collect opinions?

The inclusion of opinions requires extreme care.

Let’s look at analyst views and expert opinions. We all know that not all experts or forecasters are equally accurate. A widely reported study by CXO Advisory Group LLC tracked 6,582 forecasts for the U.S. stock market published by 68 experts between 2005 and 2012. The study found that average accuracy across experts was 47.4%, with individual accuracies ranging from a low of 21% to a high of 68%.

Therefore, investment management teams need to implement a process to guarantee the relevance of the opinions used in their models. This process, known as “elicitation,” is described in abundant literature. The books by O’Haghan (2006) and by Meyer and Booker (2001) are an excellent place to start. Essentially, the elicitation process helps to construct views that are specific, explicit, and structured. Opinions need to focus on a specific variable or parameter, such as the price of a given asset or the mean of a distribution. Opinions need to explicitly provide a mid-point or most-likely scenario, a confidence interval, and to relate the confidence interval to a probability distribution. Finally, opinions need to be structured to provide a transparent and auditable trail.

What are the implementation challenges?

Three main implementation challenges need addressing.

The first and most dangerous challenge is that opinions are often subject to the behavioral biases. Behavioral biases, in particular overconfidence, excessive optimism, conservatism, confirmation bias, and groupthink play an essential role in how finance professionals perceive and process information, and on how they form their forecasts. Recently, in a simulation study, Davis and Lleo (2020) recently found that the presence of biases explained nearly 70% of excess risk-taking. Therefore, it is crucial to debias forecasts before using them in any model.

Second, expert opinion models are Bayesian and therefore require the specification of a prior distribution. We can overcome this difficulty with some original thinking, as with Black and Litterman’ reverse optimisation exemplifies.

Third, aggregating of multiple expert opinions is considered an essential conceptual and computational problem because it requires engineering a joint distribution out of a collection of univariate distributions.

 

How can I integrate opinions in my portfolio selection model?

Currently, several families of portfolio selection models use opinions as input. The best-known and oldest is the Black and Litterman (1992) model, which uses analyst views to generate capital market expectations in a Markowitz-style single-period optimisation framework. This approach has been extensively discussed and developed in a large number of subsequent papers and chapters.

However, the Black-Litterman approach has two fundamental limitations. First, it is static, meaning that it locks portfolio managers into a “buy-and-hold” strategy, ignoring the possibility that portfolio managers may shift their asset allocation as financial market conditions change. Second, it ignores the presence of behavioral biases in expert opinions.

To address the first limitation, Frey et al. (2012) and Davis and Lleo (2013,2020) proposed two closely-related dynamic portfolio management models. Although both models are developed in continuous time, we can transpose them to a multiperiod discrete-time setting.

The second limitation has proved more elusive. At the moment, Davis and Lleo (2020) is the only dynamic portfolio selection model that addresses for behavioral biases.

 

References

Black, F., Litterman, R., 1992. Global portfolio optimisation. Financial Analyst Journal 48 (5), 28–43. Davis, M., Lleo, S., 2013. Black-Litterman in continuous time: the case for filtering. Quantitative Finance Letters. 1 (1), 30–35.

Davis, M., Lleo, S., 2020, Debiased expert forecasts in continuous-time asset allocation. Journal of Banking and Finance. 113.

Frey, R., Gabih, A., Wunderlich, R., 2012. Portfolio optimisation under partial information with expert opinions. International Journal of Theoretical and Applied Finance 15 (1). O’Hagan, A., 2006. Uncertain Judgments: Eliciting Expert’s Probabilities. Wiley.

Meyer, M., Booker, J., 2001. Eliciting and analysing expert judgment: a practical guide. ASA-SIAM Series on Statistics and Applied Probability. Society for Industrial and Applied Mathematics.

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Wealth Management

AN ULTIMATE GUIDE TO TURNING YOUR EARLY RETIREMENT DREAM INTO A REALITY

EARLY RETIREMENT

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ.

 

This article is for all those who are counting their IRAs, 401 (k), self-directed 401k and other retirement planning options to enjoy that late-life freedom as early as 45 or 40. Financial freedom at 55 has become a thing of the past because today it all depends on your ability to take the right decisions. If your 9 to 5 life has left you drained and you are serious about an early retirement, here are 8 ways to coach you from scratch:

  1. Free yourself from the vicious circle of debt

The first step to securing an early retirement is getting yourself free from debt. If you do not wish to enter your early retirement with any financial lags or large payments that can eat away a massive chunk of your modest savings, you need to increase your cash flow by clearing all your debts. Paying off your mortgage or lease early will help you divert the funds into a Roth IRA or other retirement savings.

 

  1. Start living a frugal life

Rick Pendykoski

Saving is the only way to increase the cash flow as your career progresses and this can be done by controlling your expenses. It does not mean giving up on all your desires but only requires you to live a frugal lifestyle. A few compromises and you can save a significant amount which will eventually bring you closer to your early retirement dream. From giving up on your expensive memberships and cutting down your HVAC usage to making a few compromises in your lifestyle and sacrificing a few golf games, your day-to-day frugal acts will free you from your cubicle and give you the freedom to retire early.

 

  1. Be open to the idea of changing

Prioritize between your wants and your needs. This will help you break free from the shackles of your tiring nine to five schedule. Enjoying life to the fullest sounds like a great idea to most of us, but it also means that you are losing on the real joy of retiring at 40 for momentary happiness. If fancy dinners and long drives in luxury cars mean more to you, an early retirement is obviously out of your reach. Mindful spending needs major lifestyle changes for which you may need to give up on stylish clothing, lavish parties, exotic vacations and more. This is only possible if you change your perception of conventional societal programming which demands that you give up on your desires of bigger houses and new cars. It calls for a complete mind shift from spending to saving.

 

  1. Take a head start with a high-paying industry

It is possible to retire well before you turn 60 if you are working for an industry that pays really well right from the start. A good-paying job plays a critical role in paving your path to a financially independent future. You too can enjoy a retirement of rest and relaxation if you are willing to take up personal responsibility in professional life. Getting closer to your goal of early retirement requires you to be self-sufficient early on in life.

 

  1. Automate 50% of Your Annual Income to Retirement Savings

Allocate as high a percentage of your annual income as possible to pay up your previous debts, pending bills, leases, and loans. Once you are done with of all these, automate your income towards retirement savings. You can start with 30% and raise the bar every year as your income increases. Every time you get a raise, increase the amount you add to your retirement reserve.

 

  1. Be sure to invest in a 401 (k) plan

Many employers are offering 401 (k) plans where you can invest a certain amount of your income and your employer makes a matching contribution to bolster your retirement savings.

 

  1. Stick to a frugal lifestyle

You need to revamp your investment plan as your career keeps progressing. What you want to achieve – an early retirement is an extraordinary goal and so your efforts should be focused on living frugally. Always keep a rewarding retirement at the top of your mind and you will remain motivated to keep the passion alive and pursuit kicking.

 

  1. Invest in an IRA

An IRA is a preferred and popular choice for retirement savings. You can consult an experienced and reputed financial advisor to guide you in selecting right IRA. An IRA will allow you to enjoy tax benefits if you choose to retire early. It will get to where you want faster than you think.

 

Start investing right away and make your retirement the best phase of your life.

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