A Royal Mess!
Most of us don’t get to choose our parents. And while we’re usually grateful for the ones we have, we’ve also dreamed of lives that might have been. What little girl hasn’t dreamed of growing up a princess, living in a palace, riding in a horse-drawn carriage, wearing a tiara? And don’t forget marrying a handsome prince!
Infanta Cristina de Borbon, Duchess of Palma de Mallorca, is the brother of Spain’s King Felipe VI and sixth in line to the Monarquía Hispánica. The Infanta grew up in the Royal Palace of Madrid, where she probably logged a ride or two in a carriage. And yes, she wore her mother’s diamond-crusted floral tiara at her wedding. But she chose a thoroughly modern career, graduating from college, earning a master’s degree in international relations at New York University, and working for UNESCO in Paris. Today she’s a working mom of four children. She’s also — if you believe Spanish judge Jose Castro — a tax cheat, named in a corruption scandal that’s rocking Spanish society.
Cristina’s husband, Iñaki Urdangarin, isn’t a prince. But he’s a former pro handball player and Olympian. (That’s close, right?) Urdangarin, who was named Duke of Mallorca upon his marriage, is accused of embezzling €6 million ($7.4 million) in public funds through the Instituto Nóos, a charitable foundation he ran. Prosecutors say that he organized a series of sporting events for the regional governments of the Balearic Islands and Valencia — and hugely overcharged them.
Cristina hasn’t been accused of participating directly in the fraud. However, she and her husband co-owned a company called Aizoon that received €1 million from the sports foundation, money that she and her husband used for personal expenses like furniture for their house in Barcelona, salsa lessons, and pricey hotel stays. Naturally, there were no taxes paid on those funds. The judge says “There are many indications that Cristina profited from illegal funds on her own behalf, and also helped her husband to do so, through silent cooperation and a 50% stake in his business.” The judge also says that letting Cristina off the hook “would leave the question open and discredit the notion that justice is equal for all.”
So now Cristina faces charges of failing to pay her taxes — quite a comedown for a member of a royal family that used to collect them rather than pay them! If she’s convicted, she could spend the next few years in considerably “common” quarters — no palace, no carriage, and certainly no tiaras. (Of course, that’s less punishment than a misbehaving royal might have gotten a few hundred years ago. Britain’s Henry VIII never bothered imprisoning his ex-wives, he just beheaded them!)
Spain’s monarchy has already suffered a series of PR hits after Cristina’s father, King Juan Carlos, took a lavish trip to hunt elephants in Botswana at a time when Spanish unemployment was topping 25%. So what do they think of all this? Well, back in 2011, when the scandal first broke, they gave the Duke the royal boot from official events. In 2013, they cut Cristina off from the household budget and excised the Duke’s biography from their official website. Most recently, after learning of the indictment, they declared their “complete respect for the independence” of Spain’s judiciary. You’d like to believe the royals are too classy to throw someone under something as plebian as a bus, per se — but that sure sounds like what’s happening!
Stories about princesses always ends with a moral, and this one is pretty simple. Being a princess isn’t all it’s cracked up to be, and there isn’t always a happy ending! So if you want to pay less tax, do it right and call us for a plan. And call your mother! Yes, the holidays are over, but she’d still love to hear from you!
In The Headlines
Shadows in the Sunny December Jobs Report
The drop in the U.S. jobless rate to 5.6%, the lowest since June 2008, is good news and bad news. It is good, in that fewer people who are in the labor market cannot find jobs. It is bad because it is a sign that the economy is getting closer to its speed limit—the fastest it can go without overheating like a car with a boiling-over radiator.
When the unemployment rate gets into this range, it is harder for employers to find qualified workers so they start bidding up wages. Some of that is good, a much-needed catch-up from years of declines in labor’s share of the national income. But the inflation fighters at the Federal Reserve worry that tight labor markets could set off an inflationary spiral.
We are a long way from that right now. Economists, Fed watchers, and workers have been waiting for wage growth to finally kick in, but it is still very mediocre. In fact, average hourly earnings fell 0.2% in December, the first monthly drop since 2012. And last month’s gain of 0.4% percent was revised lower to a gain of just 0.2%.
But members of the rate-setting Federal Open Market Committee (FOMC) are keeping a close eye on the jobless rate in deciding when to raise the key short-term lending rate they control, the federal funds rate, which has been stuck on the floor of zero to 0.25% since the end of 2008. A rise in rates would tend to slow down economic growth.
Members of the FOMC have different estimates of the long-run stable level for the unemployment rate, ranging from 5.0% to 5.8%. In other words, the current jobless rate is well within the range of what FOMC members believe to be the sustainable rate—the one that is as low as it can go without setting off rising inflation.
One reason that the jobless rate is this low is that during the long slump, many people simply dropped out of the labor force. The employment-to-population ratio—i.e., the number of employed people as a share of the adult population—has dropped from 63.4 in 2007 to around 59.2 currently.
If more people went back to work, it would ease the pressure in the labor market, allowing the expansion to continue longer. But it is not happening much. Part of the drop is the aging of the baby boomers. Another part is an increase in disability. Many people who dropped out may never come back. That is the dark side of the drop in the unemployment rate.
Will Apps and Wearable Tech Replace Gym Trainers?
Turning to smart devices for exercise advice is a growing trend, one that is posing a challenge to high-end gyms. With so many do-it-yourself digital training devices on the market, some question whether personal trainers and gym memberships will suffer from digital assistants offering fitness tips with the click of a button.
Smart devices that prod users to get off the couch and burn calories are becoming big business. Global shipments of wearable fitness devices are projected to have come in at $70.2 million last year, according to Gartner, with other estimates projecting it to be a $30 billion market by 2018. Smart wristbands made up the largest segment with about $20 million in shipments. There are more players piling into the market for fitness-oriented devices like Jawbone, Fitbit, and Nike’s Fuelband. On-demand streaming workout providers such as IAC Interactive’s Daily Burn are also bringing guided exercise into the home. Underscoring how influential the segment has become, wearables and home fitness devices were well-represented at this year’s International Consumer Electronic Show.
As consumers increasingly go high-tech for their workout needs, the question has been raised: will fitness-minded folks stop paying for live trainers to pump them up? Not anytime soon, as Harvey Spevak, President and CEO of Equinox Fitness tells us, “There is absolutely no replacement for hands on expertise and experience,” he said. “We think this is all additive and complementary because our population—the luxury consumer—wants the information to better inform how to train when they’re with us and even when they’re without us.” Spevak argues the rise of digital in the fitness industry represents an opportunity more than a threat. As a larger population adapts smart devices to their workout, it will boost interest in people who want to get fit, and make it easier for them to track progress.
That may explain why the high-end gym is embracing the trend. Equinox—which operates pricey health clubs in nine U.S. states and in Toronto and London—was the first national fitness chain to partner with Apple when it launched its Healthkit app in June. Equinox integrated its own digital platform with the tech giant’s health tracker. “What most people don’t know is how to use that information,” Spevak said. “We can track our members’ information. Starting this year we’ll start giving them customized information around what programs and services are better suited for them.”
In addition to Apple’s HealthKit, Google is targeting the space with Google Fit for Android devices. Samsung is integrating wearables and software with its now under-development Simband and S.A.M.I. platform for app developers. “In the future, consumers will be able to integrate the data from most wearables into a single account where their data can be analyzed using cognizant computing to provide useful insights to wearers,” wrote Angela McIntyre, research director at Gartner, in a recent report.
However, fitness tech is not the only challenge health clubs are fending off. They are also grappling with higher rental costs in expensive metropolitan markets like New York and San Francisco—two of Equinox’s largest urban markets. Rents are up in virtually every market across New York City, said Jeff Roseman, Executive Vice President with Newmark Grubb Knight Frank Retail. The brokerage has represented Equinox subsidiary Blink Fitness in leasing deals. “Some markets are up 10%, some are up 25 to 30%,” Roseman said in an interview.
At least for now, higher rents are not dissuading gyms from expanding, from 50,000-square-foot fitness clubs down to 2,000-square-foot boot camps, Roseman added. Indeed, these markets are looking attractive to some operators. Last month, 24 Hour Fitness announced that it had acquired 32 gyms from Bally Total Fitness in cities including New York, Denver, and the San Francisco Bay area. “The good news for most of them is they can take what is not necessarily prime retail space. They don’t need to be on the corner of a main avenue. They don’t need to be on a ground floor,” Roseman said. “They tend to be very creative in the space that they take and that’s born out of necessity.”
Citations
1. http://buswk.co/1yRom2o – BusinessWeek
2. http://www.cnbc.com/id/102321853 – CNBC
The Good News Is . . .
• The December employment report showed that payroll jobs advanced 252,000 after jumping a revised 353,000 in November. Analysts had projected a 245,000 gain. October and November were revised up by a net 50,000 jobs. The unemployment rate decreased to 5.6% from 5.8% in November. Production jobs jumped in December, led by construction which advanced 67,000 in December after a 20,000 increase the month before. Manufacturing employment increased 17,000, following a jump of 29,000 in November. Mining rose 3,000 in December, following a 1,000 boost the prior month. Private service jobs gained 173,000 after a 294,000 jump in October. The latest increase was led by professional and business services. Government jobs increased 12,000 after rising 8,000 in November.
• Constellation Brands, Inc., a leading premium wine, beer, and spirits company, reported earnings of $1.23 per share, an increase of 11.8% over year-ago earnings of $1.10. The firm’s earnings topped the consensus estimate of analysts by $0.09. The company reported revenues of $1.5 billion, an increase of 6.8%. Management attributed the company’s results to the exceptional on-going momentum for its beer business.
• Ireland-based insurer XL Group said that it had agreed to acquire the Catlin Group in a deal that values the Bermuda insurer at $4.2 billion. The deal, would bolster XL’s property and casualty insurance and reinsurance portfolio, and create a combined company worth more than $12 billion. The combined entity will be a leading global specialty and property catastrophe insurer which will be better positioned to respond to the changing dynamics that are impacting the broader insurance and reinsurance markets.
Citations
1. http://bloom.bg/1bidM2T – Bloomberg
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1DKMrXO – Constellation Brands, Inc.
4. http://nyti.ms/1w80HUC – NY Times Dealbook
Planning Tips
Tips for Evaluating the Hidden Costs of Actively Managed Funds
As the New Year gets underway, you might be considering investing in an actively managed mutual fund. Most investors evaluate the cost of owning a mutual fund by looking at its expense ratio. However, there are four “hidden” mutual fund fees that are not captured in the expense ratio of which you should be aware. All costs, whether published or hidden, can act as a drag on your ability to grow your nest egg. Below are some guidelines to help you better understand these hidden costs.
Transaction costs – Mutual funds and exchange traded funds (ETFs) are regularly buying and selling shares of companies that the funds own. And just like you have to pay a fee to buy or sell a share, so do mutual funds. Of course, they are buying on a much larger scale than you are. That helps them keep their costs lower on a per share or per transaction basis. Even with economies of scale, transaction costs really add up. And they are not factored into the expense ratio. Many experts put the average fund transaction cost at 0.5%.
Cash assets – Actively managed funds often keep a fair amount of the money invested in cash to cover redemptions and other expenses. Actively managed funds keep, on average, about 5% of their assets in cash. How does that affect your returns? There is a premium for equity over and above cash. In other words, you expect the return on equities over a long time period to exceed the return on cash. If a fund has 5% in cash, over the long term, it is going to cost you about 0.3% in lower returns.
Sales load – There are really two different kinds of sales loads. The first is loaded funds, where you have to pay a 5% fee to buy into the funds. The 5% sales charge goes to the brokers, who get commissions for selling you the funds. The percentage of funds that charge loads today is lower than it used to be. The sales charges are lower, too. Today, they’re typically around 5%.
Tax efficiency – Actively managed funds, by and large, are less tax efficient than index funds. If your money is in a 401(k) or an IRA, that does not matter. However, if you have money in taxable accounts, it can be important. Actively managed funds buy and sell shares more frequently than do index funds. These transactions occur for various reasons, primarily the result of the fund’s manager moving in and out of stocks in an attempt to maximize returns. This turnover makes actively managed funds less tax efficient than index funds. You can use MorningStar to see a fund’s pre-tax return and the tax-adjusted return. MorningStar actually calculates a tax-cost ratio for each mutual fund to give you a sense of how bad the tax hit will be for that mutual fund based on many factors; primarily capital gains because of the constant buying and selling.
Understand the long term cost to your wealth – Assume a 1.12% expense ratio for the average actively managed mutual fund. Add to that all the hidden fees discussed above, and it adds up to 2.27%. On the surface, 2.27% does not seem like that big a deal. But let us assume that stocks return 7%, a modest assumption based on historical data. If you lose 2.27% in an actively managed fund to all these fees, it will consume 33% of your total return over a lifetime of investing. This is the magic (or horror) of compounding. With these fees, you are losing 2.27% every year, but you are also losing the interest or growth you would have enjoyed had you not lost the 2.27% to begin with. In one year or even five years, that may not be a big deal. But in 10 years, it starts to hurt. In 20 to 30 years, as this problem builds up, it has more and more impact. And, you end up losing almost 33% of your returns.
Citations
1. http://bit.ly/1tWtgKv – Fidelity.com
2. http://onforb.es/1BTTJa3 – Forbes
3. http://cfa.is/1xQb2tn – CFA Institute
4. http://bit.ly/1xQb6cA – DoughRoller.com
5. http://to.pbs.org/1xafL4b – PBS Frontline
