"Synthetic" Mortgages

Strategic Credit Solutions

 "Synthetic" Mortgages

Wealth Advisors are often called upon to guide their HWN or UHNW client families through the home acquisition process.  Cash or the traditional bank "mass market" mortgages (with HWN client features) are the most often used methods of financing such a purchase.
Continuing my discussion of Strategic Credit Solutions as alternatives to the norm that can create measurable Economic Benefit for the client, this post will illustrate a solution I call the "Synthetic Mortgage" (click on any highlighted text). Synthetic in that it can be structured in term and repayment to look and act like a traditional mortgage while typically costing the client far less and creating the opportunity to maintain investments that would otherwise be liquidated to cover the "lender required" down payment.  This Economic Benefit can be quantified based on unique client circumstances.
Research shows that Americans hold their homes, on average, about seven years and refinance those they hold longer even more often than that.  On average second and third homes are typically held for even shorter periods.  That said,  even HNW or UHNW clients often think only in terms of 15/30 year fixed rate loans.  Even when opting for a shorter term "adjustable rate" mortgage, the loans' closing costs and origination fees create an unnecessary economic burden for the HNW or UHNW client.
When Advisors observe this client behavior (real estate purchase) suggesting a Strategic Credit Solution may add value to their relationship.
The Synthetic Mortgage strategy I discuss in this linked presentation (click here and then "download" for best viewing) can be structured as a stand alone credit facility or as an advance under the "Family Bank" strategy I will discuss in my next
post.  As part of the Family Bank strategy multiple generations within the family, all with different income levels and tax requirements, may benefit economically from facility structural variations designed to take advantage of each generation's needs. 

 Your past "likes" and "comments" have been most welcome and appreciated.  I look forward to more. 

Don't hesitate to contact me directly for deeper discussion on how my approach Strategic Credit production can drive your Private Wealth Division's profitable growth.  

Mark S. Johnson
404.909.5167

"Insuring" GRAT Success

 

  

Strategic Credit Solutions

The key to stimulating borrowing by Wealthy Individuals is showing each client the Economic Value to be gained by the use of a Strategic Credit. The credit strategy described here will provide Grantors with the means to stay "Fully Invested" while creating or maintaining the ability to effect a "Asset Substitution" that will prevent Grantor Retained Annuity Trust (GRAT) failure and potentially maximize beneficiary value.

Under current tax law wealthy individuals often use Grantor Retained Annuity Trusts to maximize the Economic Value transferred from one generation to the next. When the asset that represents that value is low basis publicly traded stock the success to the strategy and amount of value transferred is subject to the vagaries of the public markets. The use of a Strategic Credit Solution can aid those individuals in exercising their power of “asset substitution” under Internal Revenue rules to effectively “insure” that value will remain to be distributed to its beneficiaries at it maturity. Here, I’ll not detail the rules for, or the circumstances under which, the use of GRATs is recommended. I leave that to the trust professionals.

But, if/when the decision to use a GRAT is made, having cash available to effect an IRS allowed asset substitution at the point in time the client deems appropriate during the term of the GRAT is beneficial on several fronts. The use of cash to effect the substitution will remove any potential for valuation questions related to the assets substituted as well as return low basis shares to the Grantor’s estate.
For “fully invested” individuals cash substitutions can best be done through the grantor’s use of a Strategic Line of Credit specifically structured for this purpose. This will insure that the Grantor has cash available when needed to effect the asset substitution at anytime during the GRAT term.

This Presentation Link (click and make sure to click "open" when the PowerPoint loads) leads to a brief Power Point example, based on actual market values and interest rates, for a theoretical client who owns a large position in Exon Mobil.  It illustrates how use of Strategic Credit can aid the Grantor in his quest to maximize the value of a Generational Asset Transfer achieved by the use of a GRAT.  I hope you will take a look . . .
  
Your past "likes" and "comments" have been most welcome and appreciated.  I look forward to more. 

Don't hesitate to contact me directly for deeper discussion on how my approach Strategic Credit production can drive your Private Wealth Division's profitable growth.  

Mark S. Johnson
404.909.5167

What the heck is QEB?

Quantifiable Economic Benefit (QEB)

Strategic Credit Solutions

High Net Worth and Ultra high Net Worth Individuals maintain wealth through their family's generations through capital preservation and continuing to accumulate additional wealth through time.  The Economic Benefit gained through any financial solutions employed should be measured against potential alternative solutions.  I've made the point in past posts that many or most HNW/UHNW individuals don't consider the use of a Strategic Credit Solution when making financial decisions.

In my last post I discussed "Observable Client Behaviors (OCBs);" those client behaviors that Family and RIA wealth advisors learn about through their position of trusted advisor with the family.  Often times the financial solution related to many of the actions discovered from these "Observable Client Behaviors (OCBs)" can be aided by the use of a Strategic Credit facility.  The word strategic in the term Strategic Credit relates to the reason or purpose the HNW or UHNW client would use leverage and the credit facility usually differs in term, rate, collateral and repayment from that with which the client might be familiar.  It is not the typical loan or line of credit that most all banks make readily available to these clients.
As part of a financial solution Strategic Credit might be used:

1. instead of the typical loan or line of credit with which the client might be familiar or,
2. the use of portfolio cash or a portfolio liquidation to raise cash or.

"Strategic Credit” will always provide the client with the opportunity to realize “Quantifiable Economic Benefit (QEB)." This economic benefit can be measured and generally be classified in one of three ways; those solutions where Strategic Credit can offer cost savings over the more traditional mass market credit available, those where a tax liability that would otherwise be incurred can be deferred or avoided or those solutions where, by the use of Strategic Credit, the client's cash that would be otherwise utilized in the planned action can be or remain invested over the term of the Strategic Credit’s outstanding.  Many times the Strategic Credit Solution can combine more than one of these benefits.
Becoming familiar with the QEB that Strategic Credit can provide in these circumstances adds a new level to the wealth advisor's capabilities. In partnership with a bank Private Wealth Management Credit Advisory Professional delivery of these credit structures can be a seamless process.

In my last post  I included a chart that delineated some common HNW/UHNW client OCBs.  Follow this link to an expanded chart that shows the Strategic Credit Solution I suggest for each OCB and the source of the QEB potentially derived by employing it.

I think these client behaviors will ring true with each of you. You have likely been asked for help and given advice around each of these situations.   Now you have an additional alternative to help you client consider. 

Please review my past LinkedIn posts at: https://www.linkedin.com/profile/preview?locale=en_US&trk=prof-0-sb-preview-primary-button for more detail on the Strategic Credit Solutions I mention here and don't hesitate to contact me if you'd like to discuss the topic more fully.

Your past "likes" and "comments" have been most welcome and appreciated.  I look forward to more. 

Don't hesitate to contact me directly for deeper discussion on how my approach Strategic Credit production can drive your Private Wealth Division's profitable growth.  

Mark S. Johnson
404.909.5167

Observable Client Behaviors (OCBs)

Strategic Credit Solutions

Family Office or RIA Wealth Advisors are in a unique position.  They are, by definition, in a position of great trust.  According to work published by the CFA Institute, the families surveyed said that the most important attribute they look for in choosing a Wealth Advisor is that they be can trusted to act in the client's best interests.

To fulfill this expectation of trust these advisors must be knowable regarding the many areas important to the overall financial health of the client and their family.  Multi-generational financial planning, tax planning, investment management, insurance management, family governance, risk management, banking advice, and Strategic Credit advice, are all important components of every HNW or UHNW family's financial solution. Wealth Advisors will ofter partner with other professionals whose specific area of expertise enhances the client's ultimate financial solution in all these areas.

With the trust client families afford their advisors, often comes the opportunity to observe the inner workings of family decision making and their resultant behaviors.  Advisors are in a unique position to observe behaviors that have financial impact of the current and, many times, the future generations of their client families.

With regard to the behaviors HNW or UHNW families exhibit, they can generally be classified into two groups.  Those behaviors where the advisor is asked to aid in the decision making regarding the best way to fulfill the clients' planned actions or those situations where the advisor is simply directed to make capital funds available to fulfill actions the client has already taken.

Often times the the financial solution related to many of actions discovered from these "Observable Client Behaviors (OCBs)" can be aided by the use of a Strategic Credit facility.  The word strategic in the term Strategic Credit relates to the reason or purpose the HNW or UHNW client would use leverage and the credit facility usually differs in term, rate, collateral and repayment from that with which the the client might be familiar.  It is not the typical loan or line of credit that most all banks make readily available to these clients.

As part of a financial solution Strategic Credit might be used:
1. instead of the typical loan or line of credit with which the client might be familiar or,
2. the use of portfolio cash or a portfolio liquidation to raise cash. 

"Strategic Credit” will always provide the client with the opportunity to realize “Quantifiable Economic Benefit (QEB)." This economic benefit can be measured and generally be classified in one of two ways; those solutions where Strategic Credit can offer cost savings over the more traditional mass market credit available or those solutions where, by the use of Strategic Credit, the client's cash that would be otherwise utilized in the planned action can be or remain invested over the term of the Strategic Credit’s outstanding.

Becoming familiar with these OCBs can put wealth advisors in a unique position of offering and demonstrating the QEB that a tailored Strategic Credit Solution can provide. Below is a chart outlining a few of these OCBs. I think the client behaviors will ring true with each of you. You have likely been asked for help and given advice around each of these situations.

As this blog progresses, I will post Strategic Credit Solutions that can be used when these OCBs arise and describe how each solution has the potential to provide the client with QEB.

A Few Observable Client Behaviors Examples

Purchase of a Residence or other Major Asset; e.g., Planes, Yacht, Equip	Asks for help to find the “best” purchase money mortgage  in the market
Refinancing the Debt on their Primary or Second Home	Asks for help to find the best refinancing alternative that may include “cashing out some of their equity”
Making a Private Equity Investment	Asks for cash withdrawal from their investment accounts (which often times leads to need to “re-balance” the accounts to replenish the cash allocation)
Funding the Capital Needs of Family Members or Family Investments Entities	Asks for multiple cash withdrawals from their investment accounts (which often times leads to need to “re-balance” the accounts) or you are asked to arrange  multiple market rate loans to family members or family entities
Has Obtained Non-Mortgage  Debt in the Past	You learn about debt that originated possibly before becoming a your client or from a local banking connection
Operates a Commercial Business that has Debt Financing Needs	You learn that the business borrows commercially to fund its operations
Uses GRAT’s to Pass Estate Value to Future Generations	Has had GRATs fail because the per share value declines from its height during the GRAT term before termination to less that its contribution value  or has simply been able to pass less value on in a successful GRAT because of  the assets’ market value declines from it zenith during the term
Now Owns or is Contemplating the Purchase of High $ Life Insurance	Is funding or plans to fund future premiums through “gifting” or family "loans" to an Irrevocable Life Insurance Trust

Don't hesitate in calling or emailing me if you like to discuss the topic further.  

Mark S. Johnson
Strategic Credit Solutions
404.909.5167
mark.johnson@strategiccreditsolutions.com

Increasing Bank Wealth Managment Divisions' Net Interest Income

This blog will be dedicated to discussing ways that bank's (both domestic and international clients) Wealth Management and Private Banking Division leaders can significantly increase "net interest income" revenue. 

 My first post "Stimulating Wealthy Individuals Borrowing" sought to outline the opportunity.  Subsequent posts will be aimed at the techniques Wealth Advisors and Private Bankers can develop to realize this revenue gain while, most importantly, providing their clients with economically beneficial alternatives to to the Wealthy Individuals typically approach to their financial solutions.

I will explain the key concepts of Observable Client Behaviors (OCBs) and Quantifiable Economic Benefit (QEB) in detail and I will suggest Strategic Credit Solutions that provide the QEB I'll describe when clients exhibit these certain behaviors. This benefit may manifest itself as cost savings over more traditional forms of credit, reduction or deferral of many types of taxation or in revenue that would not otherwise be available to the client. 

keys to maintaining and increasing wealth will be discussed

So stay tuned and feel free to comment.  Your observations and experience will make this a better resource.  Argument or support, both are welcome and the discussion will be stimulating.

Mark Johnson

Strategic Credit Solutions
mark.johnson@strategiccreditsolutions.com
404.909.5167