Archive for September, 2017

Securing Your Family Legacy

Posted by Melissa Olszak, CFP®, CFA®

A Smart Approach to Passing on the Family Foundation

There are always stark differences between parents and their children. These differences are what make your children unique individuals; however, when you don’t see eye to eye, it can create some turmoil.

Passing along a family foundation to the next generation doesn’t always go smoothly, which may be because the priorities of the second generation can be different from those you have fostered over the years, or because your children simply aren’t interested in being involved in the foundation.

While there are potential roadblocks to passing along a family foundation to the next generation, there are ways around them that can keep your foundation intact and flourishing into the future.

The Importance of Preserving the Family Foundation – How it Relates To Your Legacy

A family foundation is one that is funded by members of a family and run by a board comprised of at least one of those family members. Outside of certain tax, legal and investment incentives, the key benefits of a foundation are the ability to control donations and to have a significant impact on the causes and initiatives that matter most to the family.

Family foundations also offer the ability to establish a legacy for a family and provide the family with a means to foster continued family relationships, while also passing on family values and knowledge. This approach works well if the family remains involved and passionate from generation to generation. But without the right setup to stand strong against disputes or disagreements, there runs the risk of the foundation falling apart.

Here is what you need to know to begin the conversation with your children and grandchildren, and prepare your foundation for the future.

  1. Involve younger generations early and openly.

If you want your children and grandchildren to be involved in the foundation into the future, it’s important to prepare them early. This preparation should include informing them about the core missions of the foundation, and educating them about why the foundation’s initiatives are meaningful. Having this dialog early on allows time for discussion and a sharing of ideas or concerns, which helps diffuse any potential disagreements or conflicts going forward.

Especially if you have young adults who would become involved, it is always good practice to prepare them for the act of a philanthropic lifestyle or at a minimum expose them to that lifestyle to see if they share the same passion for it. (At the same time, you get the benefit of exposing them to a world of investments, and tax and legal requirements, which can be a great learning opportunity for younger generations). Regardless of whether they become a board member or officer, they can always be charitable if they understand the benefit of giving.

  1. Establish roles and involvement.

If you’re actively running your family foundation, you’re making the decisions as to how the funds are used today. When making efforts to prepare the next generation, there are two important elements to consider:


  1. Be open-minded.

One of the many reasons the infamous Rockefeller Brothers Fund has remained so successful over so many generations is the family has been open-minded about, among other things, looking outside the family for board members, and about the ideas and initiatives of new or existing members.

Non-family appointees can be considered if there are individuals you trust highly and who have been heavily involved in family affairs over the years. They may also be considered if the family members are not as financially sophisticated and want a professional to help them with the investment, tax and legal requirements of managing a family foundation.

Avoiding Conflict Among Family Members

Because there can be differing ideas between you and your descendants, it’s important to be flexible and allow everyone’s opinions to be out on the table. There are some primary issues that can arise when discussing passing on the family foundation, but these issues don’t have to spell trouble for the foundation.

It is always wise to work with a financial advisor to help you sort through these situations, as they can provide clarity and act as a mediator to work through these conversations and decisions. Here are some possible scenarios:

You believe you know best as to the direction and activity of the foundation and are unable to agree with a younger generation taking things in a new direction.

In this scenario, your advisor might suggest you spend the foundation’s resources in your lifetime so you can see the impact you feel strongly about while you are still alive. However, if the goal is to pass on a family legacy, it is a good idea to sit down with your heirs and talk things through. If you’re able to be open and understand their motivations for the foundation’s future, you may discover they are not much different from yours, or you may discover that while they are different, they are still something you feel comfortable with the foundation supporting.

The younger generation is busy or lives far away and has difficulty putting in the time to get involved.

In this scenario, you could design the trustee provisions such that a child or further descendant could temporarily resign from serving for the foundation and re-engage in the future when they can devote more time to managing the charitable initiatives. Another option is to use technology to help support remote meetings, which allows family members living in different places to still connect regularly while reducing a travel burden. You could also design the foundation so each child could have discretion over a certain amount of the annual distributions, and therefore could support local community initiatives that are important to them and that foster their continued engagement.

Your family has experienced a loss, a rift, or another significant change that has caused some upheaval on the foundation board.

In this scenario, your financial advisor would likely tell you to find an individual (it could be someone in the family or a professional wealth counsellor), who could act as a neutral party to help keep things on an even track through difficult times and help guide the family foundation back to a healthy organization and something family members can take pride in fostering for future generations.

When embarking on the process of securing your foundation for the future, the most important thing to keep in mind is to remain true to your values, whether that is to support certain types of charities or simply to use the family foundation as a means of furthering family continuity and legacy. There are distinct reasons why your family has chosen to set up a foundation, and those reasons should govern your decision-making and your approach to others’ ideas.

Again, working with a financial firm like Lake Street that is skilled in high net worth family office advisement will ensure you can work through the multitude of scenarios that could occur, to secure your family’s legacy for decades to come.

Equifax Data Was Breached–Now What?

Posted by Melissa Olszak, CFP®, CFA®

What You Need to Know–and Do–to Keep Your Information Safe

Even in a world where information is more accessible than ever before, it remains shocking and can feel quite violating to learn personal data at a major organization was breached.

The recent data breach at Equifax, which may have affected as many as 143 million US consumers, was a quick study in how vulnerable our information is, and how easy that fact can be to forget.

Even if you were not a victim of the breach, you likely have questions about protecting your information. Here are some actions you can take today to help keep your personal information safe.

  1. Establish Online Logins

If you have any accounts, such as a credit card or cell phone plan, that currently do not have online account access attached to them, you should create that online access immediately. Having password-protected online access for each of your accounts helps prevent someone else from setting up an account on your behalf with your stolen information.

  1. Set Up Dual Verification

Most online accounts offer added security features such as dual verification, which requires you to provide a second form of identification to log in, such as a code texted to your cell phone. You should also take advantage of other security features like alerts or notifications for any questionable activity.

  1. Monitor, Monitor, Monitor

You can never be too vigilant about the activity happening on your various credit or bank card accounts. The more often you review your statements and activity, the sooner you will notice if something is amiss. While many card companies send alerts when suspicious behavior occurs, don’t rely on those notifications to take the place of your own assessment of your card activity.

You should enroll in a credit monitoring service, such as those offered by any of the credit bureaus (Experian, Equifax, TransUnion) or other providers, such as LifeLock. Look for a plan that has ongoing credit monitoring across the three credit bureaus, provides alerts when changes are made, and offers resolution assistance in the event of identity theft.

  1. Be Inventive with Security Questions and Passwords

We all know how easy it is to forget our passwords, and therefore how tempting it is to create something easily remembered, such as “password.” But the first rule of password security is to use letter and character configurations that are unique and hard to guess. The same rule applies to security questions. Consider providing an answer that doesn’t match the question to ensure no one could guess it. Hacker technology is advanced, and the more security you put in place on your end, the harder you make it for them.

  1. Enact a Security Freeze

In response to the breach, Equifax has made known to its customers the option of placing a security freeze on their file with all 3 credit agencies to prevent misuse. This is a measure you could consider if you believe you have been the victim of identity theft. Security freezes are an effective way of preventing an identity thief from opening new accounts in your name.

To place a freeze, you must contact each of the 3 credit bureaus. Enacting a security freeze typically requires you to provide your name, address, date of birth, social security number and other personal information. Fees vary based on where you live, but are commonly between $5 and $10. It is also important to understand the instances in which you may need to lift/remove a security freeze, and how to accomplish this with each credit bureau.

  1. Implement a Fraud Alert

A fraud alert will notify existing and potential creditors who access your credit file that you are a victim of identity theft. It requires anyone accessing your credit report to contact you before authorizing any requests or modifications to your credit line.

A fraud alert will only remain on your credit file for 90 days.

  1. Implement an Extended Fraud Alert

Like a fraud alert, an extended fraud alert requires creditors accessing your credit report to personally contact you before authorizing any requests to open or modify a credit line. Unlike a fraud alert, an extended alert lasts in perpetuity.

With this type of alert, you will be entitled to 2 free credits reports from each of the 3 credit bureaus, and your name will be deleted from prescreened credit and insurance offers for 5 years.

  1. Take Action Against Fraudulent Activity

If you believe you are the victim of identity theft, you should immediately contact to submit an identity theft report. To request a security freeze or contact the 3 credit bureaus, use the information and links below.




Active or Passive Management? A Closer Look

Posted by Emmett Maguire III, CFA®

There’s no shortage of investment professionals who’ve weighed in on the active vs. passive investment management debate over the years. Most of these points of view approach the question as a black and white, right or wrong proposition. Proponents of active management like to talk about downside protection in bear markets and their abundant experience as long-term investors. Indexing enthusiasts point to the considerably lower cost of passive investing and its notable success relative to active managers in aggregate. My answer to the question of whether it’s better to hire an active manager or go the passive route of indexing is “it depends.”

Successful active investing depends on three distinct conditions. First, there must be an opportunity/inefficiency for an active investor to exploit. Second, an active investor must have the skills necessary to take advantage of and profit from that opportunity. Third, you or your advisor must have the ability to identify the best, most highly skilled active managers. In this article we will discuss the first condition: opportunity/inefficiency.

The objective of active management is to exploit mispriced securities in a given market and produce returns in excess of the market average. In order to do this well enough to justify the fees charged and taxes generated by the active manager, the target market must have ample mispricing to leverage. Theoretically, as the graphic below shows, a larger frequency and magnitude of mispriced securities equates to an attractive opportunity set (what we refer to internally as an excellent “fishing hole”) for a given strategy whereas a low frequency and small magnitude of mispriced securities translates to an unattractive opportunity.

Source: Lake Street Advisors

The point here is that all the investment skill in the world is effectively useless if there aren’t any attractive opportunities to make use of it.

Turning to a real life example, let’s examine the US Small Cap universe, which is often cited as an opportunity rich market for an active manager. The “go to” narrative here is that these stocks are more inefficient because there is less sell side research coverage relative to larger cap stocks, which is true, but does that really matter when there are close to 500 US Small Cap mutual funds1? That equates to a ~4-to-1 stock to investment team ratio across the investable universe of ~2,000 stocks. This ratio also ignores the sell side research coverage as well as hedge funds actively investing in the US Small Cap space. How can that possibly lead to pricing inefficiencies large enough to justify fees and expenses? The answer, as I see it, is that it doesn’t. There is simply too much competition for exploiting the difference between calculated intrinsic value and market prices to justify the fees paid and taxes generated by an active equity strategy in US Small Cap, as typically executed.

The chart above helps illustrate my point. The data is based on 5-year rolling returns calculated quarterly. Over the last ~25 years, the number of managers has steadily grown and the excess return from the median and 25th percentile manager in the US Small Cap space have diminished. Where you once were rewarded with ~4.4% in annualized excess return, on average, from selecting an active manager in the 25th percentile in the 1990s, you now average a small fraction of that at around 1.6% annualized (ten years ending 6/30/2017), pretax. This also assumes that you have selected a manager in the top quartile, a topic we will discuss in a future article. In short, investors and allocators are better off focusing their time and energy on more promising opportunities and employing a passive option in US Small Cap, especially for a taxable investor.


For investors of substantial wealth, it’s not enough to treat the active vs. passive decision as a black and white proposition. Advisors who embrace the shades of gray and understand what it takes to be successful in manager selection can provide their clients with better opportunities to meet their long-term objectives. By starting with first principles and taking a logical approach to capital allocation within client portfolios, we build diversified portfolios combining passive strategies with active managers where the three conditions outlined above have been met. For more on this topic, feel free to reach out. We enjoy the questions and discussion.

1 Per the Lipper Database on US Small Cap mutual funds, there are 494 funds filtered for primary share classes only.